Friedrich A. Hayek, the 1974 Nobel Prize winner in economics, died March 23 in Freiburg, Germany. An unseemingly quiet man of 92, he was, in fact, an intellectual revolutionary who brought to economics an evolutionary theory of institutions which has shattered the static economic world forever. Moreover, his enduring ideas cross the border of economics and venture into political theory. After all, this was a man who authored more than 30 books and 150 articles on topics ranging from the methodology used in the social sciences to the foundations of constitutional democracy.
As an economist, Hayek initially focused his attention on the development of capital theory, business cycle theory and the origin of money in the industrial order.
But his real legacy, which has touched each of us more than we will likely ever know, centers around a rather simple notion of spontaneous order of societal development. Its implications for politics and economics are immense.
Hayek borrowed the notion of spontaneous order from Adam Smith (remember "the invisible hand" of the market from Smith's Wealth of Nations) and the Scottish natural law philosophers, who argued that society developed from a spontaneous order which was the result of human action but not of human design. Hayek, expanding on arguments advanced by the Scots, wrote that society developed through tradition and reason, concurrently. Both logical and practical, everyday experience influenced man's advancement. The use of reason, however, was not limitless, being bounded by bias held by an individual or group. This meant that society was too complex to be created piece by piece in a strictly rational, logical manner.
Hayek argued that those who misunderstood or disregarded the notion of spontaneous order did so because they incorrectly divided the world into two categories: "planned" (which implicitly means order and purpose) and "unplanned" (which connotes disorder, randomness and chaos). Hayek argued that society, and its most advanced institutionthe market economyfit into neither category and, therefore, belonged in a third group. Each member of this third group would be bounded by rules, have its own order and increase in complexity in a way that would not be fully understood. Hayek's best example of this third group would be our language. No single individual or group thought it up. It has its own rules of grammar, and language continues to evolve as mankind advances. Language could not be described in complete detail even if every computer was dispatched to this use.
The political implications of spontaneous order theory are strikingly evident with the recent fall of the Soviet Union. In fact, Hayek's 1944 book, The Road to Serfdom, foreshadowed what we see and read about daily. No political system could assume, as fascism did on the right and communism did on the left, that men were cogs to be "fit" into the state machine. Tyranny results from government's attempts to plan the workings of daily life.
The implications for the economy are even more striking. First, the very role of government economic planning comes into question, whether the issue is federal funding for highways or the use of taxes to influence investment decisions. It is only the unabashedly "free" market that can generate the signals for producers and consumers to trade. Any attempt by government to regulate prices, impose interstate or intrastate tariffs, or impose quality standards sends conflicting, inaccurate messages that have a discoordination effect in the market. This equally applies to a society like the former Soviet Union that desired complete planning or the local community housing authority that plans what type of homes will be built.
Second, reliance on institutions that were created through government fiat need to be questioned and reevaluated. Hayek, for example, grew increasingly disenchanted with a central bank as the sole authority for a nation's money supply and called for competitive currencies that would eliminate monopoly control. A competitive currency would allow for all types of previously untried services for producers and consumers alike in a more uncertain environment. Monetary institutions would then evolve naturally rather than being artificially created by government.
Finally, Hayek would argue that centrally directed institutions neither have the wherewithal to keep abreast of all the relevant economic conditions of "the particular time and place" and be able to fully understand the information received. This means the policymakers may not be able to know all the relevant information to make decisions or may base decisions on old data no longer applicable. Only a spontaneously created market, resulting from hundreds of millions of valuations by individuals, would ensure economic vitality.
Hayek's legacy of the spontaneous order will, like its own theory, continue to evolve. It will ensure that his life continues to affect us all.
David K. Rehr is vice president of government affairs for the National Beer Wholesalers Association in Washington, D.C., and is a doctoral candidate in economics from George Mason University where he studies Hayek's work.