What One Economist Knew

By Robert P. Murphy 

May 8 marks the 117th anniversary of the birth of Friedrich Hayek, the most renowned member of the so-called Austrian School of economics, who won the Nobel Prize in 1974. Hayek was the “whole package,” as they say, writing the immensely popular book The Road to Serfdom while also writing technical works such as The Pure Theory of Capital. In honor of his birthdate it’s worthwhile to review some of Hayek’s major achievements, which are still relevant today.

Perhaps the major theme running throughout Hayek’s career in formal economics concerned knowledge. For example, in a 1945 American Economic Review article titled “The Use of Knowledge in Society,” Hayek wrote that the “economic problem of society” was not merely one of allocating “given” resources, the way a standard textbook might define things. Rather, Hayek argued that the true economic problem is “how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know.”

This emphasis on dispersed knowledge was one of Hayek’s key contributions to the debate over socialism during the 1930s. Specifically, Hayek argued that one of the key functions of private property and market prices was to allow individuals to communicate information to each other in an economical manner. For example, if a tin mine collapses, then everyone around the world needs to cut back on their usage of tin. Some speculators will hear about the collapse and will push up the price of tin, hoping to profit from their knowledge. It is the rise in price that induces all consumers of tin to consider alternatives; they don’t need to know why tin is scarcer, they just need to know that it is.....To Read More....