 Welcome to the FeeCast, your weekly dose of economic thinking from your friends at the Foundation for Economic Education. I am Richard Lawrence, and we are here again with our esteemed panel, our fantastic, wonderful panel, Brittany Hunter, Dan Sanchez, and Mary Ann March. And today we're going to do something a little bit differently. We're actually going to talk about a figure in history, recent history actually, who's influenced all of us to greater or lesser degrees, influences everything we do at Fee on a daily basis, everything we teach, everything we talk about, his ideas permeate it all. And that is the Nobel laureate economist F.A. Hayek. And we've mentioned his name a few times on our FeeCast. I think spontaneous order is one of those topics that we come back to every now and then, and we always reference Hayek when we talk about that. But we want to dedicate this particular FeeCast specifically to Hayek and everything that he's been able to teach us and how he inspires us to think and maybe be a little more humble on a day-to-day basis. So, Dan, you are our resident knowledge base for these sorts of things. Tell us who F.A. Hayek was. Sure. So F.A. Hayek was an economist. He's from Austria, and so he is considered an Austrian economist. And that doesn't just mean that he was a national. It's a school of economics. So it's a school of economics that goes, it's actually the longest running economic school in history. Like it's the oldest economic school still active. So by school, I mean like tradition, a tradition in economics. So even longer than the classical school, which has kind of been outmoded at this point? Right. So classical is older because the classical school goes back to like David Ricardo in the 1800s. But that kind of died off because then the neoclassical school came and the Austrian school and the Keynesian school and all these other schools came up and took their place. But Austrians are still chugging along. And so when we reference Austrians, again, because you've mentioned, when we say that Hayek is an Austrian economist, it works in kind of both ways for Hayek. But when we say the Austrian school, that basically means he is a member of a school of thought. That's right. That's right. And it's a school of thought that goes all the way back to 1871 when another Austrian named Karl Manger wrote a book called The Principles of Economics. And he really refounded economics on a completely, a lot of things that the classical economists that they were thinking of in terms of economics, he refounded it on a different conceptual base. And so then there were successors. So different Mises was a follower. Ludwig von Mises was a follower of Karl Manger. And then Hayek was a student of Mises. So it's kind of a succession, like passing down the baton. And so we have this tradition, the Austrian school. And there are many members. There are many practitioners. We count many of them at our seminar when we have lecturers come to speak. We count many of them on our website where you write. And so what briefly sets the Austrian school apart before we get into too much more of Hayek himself? Sure. So the Austrian school, the big revolution that Manger had is that he made economics really subjective. The value of a good, the value of this cup, isn't based on how much labor it took to build it. Which was the Marxist belief. Right, right. Marxists and the Marxists got that from David Ricardo. So it got that from the classical economists. This idea that labor is what creates value. Exactly. And Manger really founded it on subjective value. So it's the utility that I get from this cup. So by subjective, you mean differing from person to person? That my value of this cup would be different than yours? That's right. It's different from person to person because it is that one individual's preferences. What usefulness they get from it. Yeah, exactly. And so they pioneered this notion of the subjective value that can only really be ascertained by the individual. That's right. And so they called that methodological individualism. That was sort of their framework through which they analyzed the world through the economy and basically everything related. Right, right. And Mises really developed that methodological individualism to create a view of the economy that really started with the human action of the individual. The individual human choice. That it's those choices that in coordination with each other that create market phenomenon like prices and like interest rates. Which we're going to get to in just a little bit. And so when we talk about economics, we talk about Hayek, we're talking about actually looking at the individual as the primary decision maker in an economy unlike the aggregate. Right, so we talk a lot sometimes in our economics classes about macroeconomics, about how the national or even the global economy works. But the basic unit of analysis for the Austrians, such as Hayek, is the person who makes the decisions. He's the only, or she, the only person who's able to actually act, decide what they want for themselves and pursue that. That's right, yeah. And so the macro, so Austrians have what a lot of economists call macroeconomics and Hayek really contributed to that because like business cycles, like big movements in whole economies, they build the macro up from the micro. And so there's no stark division as there is with main, even today with mainstream economics. You've got your micro textbook and your macro textbook and they're not really related. Somehow you got a time together conceptually, but it's not obvious. Exactly. And what Hayek and Mises did, and especially Mises's human action, is that he built up from like Robinson Crusoe, like an isolated person on an island, just thinking logically about his action and then just adding one more person to that. Okay, if you had two people and they had to exchange, what could you say about the prices that would form between those two? And then adding another person and then building that up to more and more complexity until you have an economy that can have like big ebbs and flows of business cycles. And so it's a much more methodical system of thinking. The Austrian methodology seems kind of intuitive, right? I mean, if you're thinking about how to evaluate an economic system or understand how the- Common sense almost. Almost, almost. So it seems valuable. Well, let's go forward. Let's talk about Hayek because of course, he's the man of the hour. Who was Hayek? Where did he come from? What did he do? Well, he was born in Vienna in 1899, but we tend to think of him as being a Austrian-born British economist. Right, because he spent so much time in Britain, probably due to some small, not very noteworthy events that were happening in Europe at the time. Yeah, just a nasty little world war, that's all. Probably wasn't advantageous for him to stick around in Vienna. Yes, yes. And then, you know, we know him from his 1974 win of a Nobel Prize in Economics, along with his partner Gunnar Meindahl. Forgive the pronunciation. And he delivered a really impressive speech at his Nobel awards ceremony, where he talked about how economists tend to maybe think a little bit too highly about their own ability to ascertain the economy. He called it the pretense of knowledge, and that speech is actually available on our website and actually underneath the description of this video. And so the pretense of knowledge, of course, plays into a lot of what Hayek ends up talking about in later years and between years as well. And in fact, Hayek has a history with Fi as well, because a lot of what he developed in his thought process, a lot of his speeches that he made in the United States, they were done at Fi. He actually complimented Fi a number of times. He called us a guard against intellectual error, because of course, again in the post-World War II world, there were not very many organizations such as Fi talking about why socialism and the general central control of the economy, what they were saying it was a good thing. And Fi stood against that with Hayek and said, well, maybe it's not so much. And we'll talk a little bit more about those ideas in just a little bit. Yeah, it's really amazing how, I mean, Fi and Hayek, they were kind of, when they were pushing back against central planning, it's hard now to remember how isolated they were at the time, because now we have a whole libertarian movement, there's all this free market thinking. It's not completely foreign from the public consciousness. But at the time, especially the New Deal and World War II, liberty was just passe. Because socialism and general control by the government of the economy was all their age. It worked in the war. It ended up winning the war, at least some people say. And so therefore, why not continue it in peacetime as well? Well, we're going to talk about all these ideas and even more after we take a quick break at the Ficast. Welcome back to the Ficast. We've been talking about FA Hayek, which by the way, it stands for Friedrich August von Hayek, which was his full name. He ended up later on only going by FA Hayek when he was writing and speaking. So we've been talking about FA Hayek and his insights into economics from an Austrian school perspective. And one of the things he had one of the most interesting insights on is something that I think all of us here, around the table, everywhere, takes for granted on a day-to-day basis. And that's prices. And he wrote a number of interesting pieces on prices and the way that we regard coordination in the economy. But one of them in particular is an essay called The Use of Knowledge in Society. And we have a link to it right underneath the video. So if you're interested in pulling it up, it's available. But Dan, tell us a little bit about why this was such an important piece for Hayek's legacy. Yeah, people don't usually think of knowledge when they think of prices. But prices really are knowledge wrapped in incentives or signals wrapped in incentives, as Alex Tabarak, an economist, has said. Interestingly, Leonard Reed, our founder at V, that he wrote his classic economics education essay, I Pencil, as basically a popularization of the use of knowledge in society. It's a little easier to read through and it generally tells the same story, which is what? Which is that nobody could make a pencil, basically. No one person, right? No one person can make a pencil because there's so much knowledge that goes into the pencil. When you think about all the different components of the pencil, but all the work that goes into building those components. And then in order to build those components, like you have trucks that are like shipping lumber and you have mines that are mining graphite out of the earth. And so all that mining equipment, what goes into creating those, all of it's connected, all of that is part of making a pencil. Leonard Reed called it just like an infinite amount of know-how. And these know-hows are distributed among the mines of just millions and millions of complete strangers. And so Hayek posed the challenge of how is all that knowledge coordinated? How could that possibly be coordinated, for example, by a central planner? It's impossible. A central planner could not manage that much data. Let's put a pin in it for a second because I just want to make sure we're certain about what we mean by that. We've mentioned it a couple of times, both on this feedcast and previous ones. Central planning is when the state or the government from a top-down basis runs every aspect, or at least some aspect, of the production and distribution and sale of goods and services in an economy. So central planning is like what Moscow did in the Soviet Union when they said, all right, we're going to confiscate all of this private property, all the factories, all the shops, all the various other pieces of the economy. And everyone's going to work for the central government, and we're all going to tell them how many nails are going to be made, how many cars are going to be manufactured, what type of cars. So it's a very, very rigid, controlled type of economic arrangement. But although they were controlling everything, they had no idea what is at the price is at. So they would take the Sears catalog and use that as a guide for how to price things. Isn't that incredible? The Sears catalog was a guide for the Soviet government to figure out how to price things. And for a moment, it might actually work, right? For a brief moment in time, when they're opening the catalog for fall 1947, and they look at how much dresses cost, for example. For that brief moment, you might have some semblance of accurate information. The problem with that is that there's no dynamism to that. There's no ability for that information to adjust, to change. And that's the beauty of prices in a free price system, right? Yeah, it would also take a lot of trial and error. Even if they looked at that dress and thought, okay, ballparking, maybe we're a $100 giver tank or whatever you want to say, there would be no way of knowing that without doing all these different tests, which cost money, which the Soviet Union did not have a lot of extra money to throw around. No, no. Yeah, and a lot of people think of central planning as very rational, and they think of the market as just chaos, because it's like, oh, everyone's just doing their own thing. We should all coordinate this under one boss, and that would be rational. But actually, it's chaotic. It's much more chaotic. And there is an order to the market, but it's, again, a spontaneous order, like Hayek talked about. Well, I'm going to throw this out there because we're going to talk about a couple other examples of where maybe centralized control of the economy didn't exactly work out as planned, but let's go back for a moment and talk about how a free price system actually works, because I think that's pretty important. You can't just set prices arbitrarily. No, but the right price is what someone's willing to pay. There's that subjective value element. So there's also the subjective value. A pencil to me, if I really need a pencil, if I've got an essay to write and I don't have a computer for some reason, and I need a pencil, I might be willing to pay $50 for that pencil. If you don't need a pencil, you won't pay anything for that pencil. So it is so subjective. Yeah, actually, Brittany and I were just in Las Vegas for Freedom Fest, and I personally spent $10 on a toothbrush, because that's what the price of the toothbrush was in the hotel. I needed a toothbrush, and I wasn't willing to go anywhere else. So I paid it. So the toothbrush was a valuable commodity right then and there in Vegas. I valued it at least $10. Yeah, and the consumers, like you guys, are the ones who determine how much toothbrushes cost, because it's what you're willing to pay. So it's sort of like almost like an auction, but even though you're not actually bidding like an auction, basically by looking at a toothbrush and saying, oh, that one's too expensive, and looking at another one, okay, that one, the stores adjust to that, and that determines the value of the toothbrush. And then the makers of the toothbrush, then they use that revenue to decide what they are going to pay for the capital and labor that goes into making the toothbrush. And so it's all connected that the prices of the consumer's goods factor up to all what Manger called the orders of production. And so ultimately our consumer decisions determine what the prices are of everything in the economy. That's a really empowering to the consumer. I think we always think of, you know, oh, consumers need protection. They don't know what they're doing. But there's power in the boycott, right? If I think that all toothbrushes are overpriced and I'm not going to pay $10, I could have put signs outside of CVS and put my foot down, but we don't do that, right? A lot of times we get lazy about it, but the consumer is ultimately in control. Because inaction is a form of action as well. If you decide not to purchase something, then you're giving a pretty distinct signal, clear signal to both the store and the manufacturer that maybe this price isn't right. And that price tells you everything that you don't know. In my case, it was, I don't know how far I'm going to have to go to find a toothbrush. I don't know how much that toothbrush is going to cost once I actually find another one. And I don't need to know because I can just look at the price and make my judgment. Price and profit are also two concepts that are linked together, right? So if you choose to patronize a store to buy a particular type of good, you would assume if the good is priced correctly and that it keeps being stocked by the store that maybe there's an up-end for the company that's actually manufacturing. And so if there is a reason for this company to continue making, let's go with the toothbrush examples, and selling them at a particular price, you would assume that, okay, maybe the company, Colgate, let's just pick one out of the air, is actually turning a profit, right? And that of course is the surplus value that is ascertained or obtained rather by having someone pay for something that cost a lower amount, right? Right, and the profit and loss, that is a very simple signal that entrepreneurs can follow. It's easy to just look at a statement, oh, I lost money this quarter or I gained money this quarter. And they can follow that signal and that signal is based on the adding up of the products that they're selling and the adding up of the cost of the factors that they're buying. And all those prices are boiled down information of all the preferences and all the facts, the facts that people know about these scarce resources. All this data that again is in the minds of millions of different people, all boiled down into one number that you can just do arithmetic with. And so all that complexity can be boiled down to a very simple decision that an entrepreneur can make. It's pretty mind-boggling when you start thinking about it in that way. And it actually reminds me of one of my absolute favorite quotations by Hayek, which he said profit is a signal that we're serving well people who we don't know. Yes. When you think about it in that way, that the reason that a company profits, the reason that it succeeds is because it's actually serving a need for the consumer, serving the needs of strangers that they have no idea might need this type of thing. But they put it out there, they have a price attached to it. If it's right, it'll sell. If it's not, it won't. And then they know that they're serving that, those group of people well. I do want to take a step back for a moment and be the devil's advocate here because a lot of regimes, a lot of ideologies, a lot of people think that we're in the 21st century. We can just why not have a computer figure this kind of stuff out for us? Well, I will give it back to another Hayek quote and say from him that he says, today it was almost heresy to suggest that scientific knowledge is not the sum of all knowledge. And so we find it today. People think that we can just plug all the information we can find into a computer and it will spit out the right answer and to use that as a proxy for all this knowledge that we're not able to bring at least efficiently to one source. But it's just still not that simple even for a computer. Yeah, and it's not just know how, it's know why. It's not just facts about physical goods. It's about facts about preferences. And that can only be manifested by actual decisions that people make. So if the computer has nothing to measure, if people aren't actually doing the exchanges. And the key thing about preferences, of course, is that they change. Yes, yes. They are different from day to day, minute to minute. And maybe not even the same from person to person. There's no way a computer could account for every single one of our individual preferences. It can't do it. And so if our 21st century technology today might have 16 gigabytes of information on what people want, what people need, how much things cost, you can imagine how Hayek was describing all the little bits of knowledge throughout the world contained individually on an individual basis. It's like terabytes upon terabytes and terabytes. Just I don't even know the word to describe it. It's always changing. It's so dynamic and there's so much of it. Well, what's interesting is that what when Hayek first became a free market economist, it was from reading a book by Mises called Socialism. And in this book, it was when Mises first proved that socialism can't work because there are no, there's no profit and loss in socialism because there's no prices, because there's no private property. And Hayek was utterly convinced by this and he started contributing to the battle against, the intellectual battle against socialism. So Mises, his idea was called the calculation problem and then Hayek contributed the knowledge problem. And the socialists really took it seriously at the time. They ignore it now. But one socialist said, oh, we should have, once we have our socialist utopia, we should have a statue of Mises because he challenged us to up our game. He raised this really important issue that we have to solve and we will solve it. Then a lot of them thought they could do it with computers and that kind of thing. But yeah, that just goes to show of how widely, well regarded the Austrian school was at the time. So I've got a quick story about computers and I'm going to mention it as soon as we get back because it'll lead us into the next part of our conversation here. So let's take a quick break and we'll be right back with the feedcast. Oh boy, you know, starting out in the music business or just any business, you have to have the carrot dangling. You have to know what your goals are. I think as anybody goes in without a goal, you're pretty much doomed. This is a family business. Our daughters, our son-in-law, my brother. We can't walk away from this. This is something we pass on. I mean, you're always going to run into the wall. It's just, can you figure out how to go under it, around it, over it? That makes for a longevity of a business. You can't give up. You just don't let yourself give up. Watch Mama Gold Tone and more documentaries about women in business in our How We Thrive series at fee.org slash shows. Welcome back to the feedcast. We've been talking about the limits of science, the limits of high technology when it comes to actually figuring out how an economy should work, what should be made, what prices they should be sold at. And it reminds me of a story from the early 70s in Chile. And this was when there was a dictator named Salvador Allende in power down there. And he actually created an effort. He was a socialist. He created an effort that was called Cyber Sin. And the Cyber Sin effort basically tried to use the highest technology of the early 1970s to figure out how exactly to control an economy. And so they built this control room at the Presidential Palace and it resembles, if you look it up, look up Cyber Sin, it resembles the bridge of the Enterprise. And you guys know how big of a Star Trek fan I am. It looks just like the bridge of the Enterprise. It's got about seven chairs all in a circle so there's no real captain's chair but they're all captains because they all have these buttons on the armrests that allow them to manipulate the economy to figure out all these things that we're trying to explain today through the work of Hayek. And in fact, there was nothing more in this room but a number of sort of slide displays for those old style slides that you would click. And basically the controls in the armrests were basically slide advance slide go back, right? And they're basically all kind of in there the show of information and knowledge getting a little bit of, you know, some some transmissions through fax machines, essentially they were called TELIX machines. But otherwise, it wasn't really doing much. It was all for show and of course the economy of Chile is not functioning well at this moment. The best thing that is attributed to the Cybersyn project is it helped people get food which is important during a strike. But this was an example of the pretense of knowledge thinking that you can actually gather, identify or identify then gather and then analyze in a way that's still relevant for the people these economic indicators these little bits of information that are coming in from all over the economy. And so there have been so many attempts even to this day in this country in the United States we still try to figure out what the correct price is for certain types of goods or services. We're still putting up trade barriers because we believe the price of foreign goods should be higher than domestically produced goods such as steel and aluminum. The cost of rent is too high. Right. So they have rent ceilings. Right. And that has all kinds of other unintended consequences. And so this has been going on for such a long time and continues to this day and the technology still doesn't exist to gather all those little bits that Hayek was talking about when he was talking about the choices the individual makes to influence his or her economy. That Cybersyn project really reminds me of my college days studying the solo growth model which is a model that attempts to describe how capital accumulation works and a purely productive economy. Purely productive economies don't exist. Right. So we're starting off there. Yeah. Right. And so it's all theory and it doesn't work and all of us are left to sort of be at the mercy of whatever theory is in place at the top. I spent weeks studying this model for nothing essentially because had I followed that trajectory I probably was going to be a government interventionist. Yes. It's basically what they call the nirvana fallacy where it's like okay we can abstractly conceive of this nirvana situation and when we measure reality and it doesn't fit with that impossible situation well then obviously government is going to make it closer as if we know that. So we've been talking about the contributions that Hayek made to economics by his work in the Austrian school like all of us there are many different sides and Hayek was also a political philosopher and he was recognized as such and he actually made many contributions on that front as well and Brittany I know you've written a lot about some of his contributions on the political front. Yeah probably the greatest is the road to serfdom. I mean that is the book when you think of Hayek even though we have you know use of knowledge in society the road to serfdom is what was what pops up. Yes. And that book was essentially a dire warning against socialism at a time when people were trying to make sense of World War II. We saw well we I was not alive but people saw you know destruction unlike anything they'd ever seen and they were trying to figure out how someone like Hitler was allowed to come to power and what Hayek did with road to serfdom was brilliant because he did mix both political and economic. It's I wouldn't say it's solely political or solely economic. It also even tackles like the nature of man and evil itself. So some pretty light thing. Yeah pretty light pretty light topics in fact it's Brewer that he wrote it to be a little bit complex even to kind of say like look how smart I am on explaining all this. So it's kind of but it's it's a brilliant book he succeeded. So the preface to the book or the dedication actually says to socialists of all parties and I think this is brilliant because at the end of the day extremes of either side are going to lead to the same road and that's kind of what he's warning about. So he called like the fascists and the and the communists basically birds of a feather. Yeah which we're seeing that now I mean national socialism you know the Nazis called themselves socialists. Yes and that might actually be a surprise to a lot of folks just how direct the Nazis were about their liking for socialism in the 20s and 30s and in the 40s. But what else did this this road to serfdom say what were the the general themes that he was warning against? Yeah my well my favorite thing is constant vigilance and what is past as prologue. So I think there was this this feeling post-World War II we're not going to let this happen again. It can't happen again. And it couldn't happen here. And it couldn't happen here. Right. And Hayek basically says no like we've been inching we've been inching towards at this whole time. What's the analogy you don't throw a frog in boiling water he'll hop right out. But if you put him in boiling water and you slowly turn up the heat the frog won't even know what's happening and that's what happens here. And people in Weimar Germany they probably think didn't think it could happen there. No. Weimar Germany was was a very cultured very urbane city. It was you know the city of and it was the like the land of Goethe and Beethoven and there's great civilization but barbarism can arise even from great civilization. You're talking about the era of Germany right before the Nazis came to power. Yes. So they had no idea that this was right on their doorstep. And I mean World War I played a big role into this obviously it financially devastated Germany but that gave Hitler an opportune moment because here you had people what are we going to do we're starving. Oh OK let me offer a solution to you. You don't even have to think about the solution. I have it pre-packaged I'll take care of it just vote for me and they did. So Hayek actually observed these things. He did. Which is unique for someone who comments on political or economic or even historical topics. And so he basically said when you start interfering as a centralized government you start intervening in these little ways occasionally things begin to get out of control. And Germany I mean that was it was ripe for chaos. So in that particular instance he writes a chapter called how the worst get on top or how the worst rise to power and it's it's brilliant because he kind of goes through through three main things. And the first one is you have you look at these people who go it rise into power and they're kind of I think the word I used earlier was scoundrels they're thugs they're people who are used to using brute force rather than logic so you have that so you know that nothing's off the table they're willing to do just about everything and then when you have those people and they're able to appeal to people who maybe don't have strong convictions and so they're willing to listen to anybody who's loud and angry and that is what Hitler was he was loud and angry telling them how he was going to make it better and then the third reason you find a common enemy and that is we see that happen all the time I mean every party when Obama was an office of the Tea Party it was Obama was the problem right and now Trump is the problem so this happens time and time again maybe it's not as extreme as what happened during World War II yeah but but you know Hayek's words are timeless it rings true forever well and he talks about how with central planning you know people are different and so in terms of positive plans nobody can agree on one plan but they can they can agree about what they're against yes and so it makes it easy for them to define an enemy it's like we don't know what we're for but we know who we're against we're against those people that was Gerbil's main point his head of propaganda was as long as you can have a common enemy then you're golden because everyone everything becomes the scapegoat of on that person you know it's always oh well I'm hungry oh it's that guy oh I know I don't have a job oh it's that guy and it's very easy to manipulate a nation that way and so Hayek is talking about a road to a condition that would be familiar to people who lived a long time ago living in feudalistic Europe and no private property right so serfdom being a serf basically being a cog in the machinery operated and run to someone else's benefit and so there was another title that Hayek played around with before the road to serfdom I did not know this and this was the road to socialism oh it actually was called socialism the road to serfdom got it yeah we have an article talking about some little lesser known facts about road to serfdom and that was one of them and which makes sense because it really was a great sequel to his work on how socialism just doesn't work this how central planning just cannot create a functioning economy and road to serfdom was a sequel in showing not only that but central planning will necessarily lead to dictatorship and it's not just you can't like we talked about last episode you can't just separate personal and civil freedom from economic freedom that if you give the government complete control of the economy that's the complete control of people's livelihoods it takes away preference and they will exercise that to both get rid of your preference override it and do anything else that could potentially stand in the way of what their designs are I think we've seen a perfect case of this in Venezuela where you have the tinkering in the economy and that just begets tinkering around in the larger country and with people's freedoms and you have to have that economic freedom in order to have personal political path and personal political freedom yes and so road to serfdom is available on our website it was actually published at least excerpted in the reader's digest and so it's an accessible piece of literature that I think anyone can really read and get something out of in fact there's also an illustrated version which I know Miriam you've posted on to our Facebook page from a few months ago but this is a easy relatively I mean it's not so easy as to read maybe on the bus but maybe you could and if you can't there's an essential reading guide available on fee.org written by me that is basically me live blogging while I'm reading it and trying to make sense of everything I access and that's called the shortcut to shortcut to serfdom yeah just getting right to serfdom well we took the shortcut to the end of the fee cast just by this conversation so we hope that you enjoyed it we hope that you have a chance to look at everything in the description and all the links and we'll see you next week on the fee cast