Review of Austrian Economics, Volumes 1-10
Note on Hayek's "The Trend of Economic Thinking"
On March 1, 1933, Friedrich A. von Hayek delivered an inaugural lecture at the London School of Economics. The lecture was published two months later in Economica under the title "The Trend of Economic Thinking." In the paper, Hayek despairs over the direction of current "public opinion," which favored increasing state intervention in the economy. He also notes that the concept of planning, then in vogue both in the popular press and among intellectuals in Britain, had its origins in the writings of continental socialists, in particular the German historical school. Though this article is the first published piece in which Hayek discusses such topics as socialism and planning, it has passed virtually unnoticed by scholars of the Socialist Calculation Debate. This would be reason enough for mentioning it. But a closer examination of the article, given what we know of Hayek's subsequent work, reveals it to be an extraordinary document. Hayek touches upon a number of themes in "The Trend of Economic Thinking" that were to engage him for the remainder of his career.
Perhaps most noteworthy is his characterization of the market system. He emphasizes that it is "a highly complicated organism" which takes intense, systematic study to understand (p. 123). He stresses that its institutions emerge "spontaneously," that they are the result of human action but not of conscious human planning (pp. 123, 129, 130). He also notes that attempts to intervene in the market system often bring about unintended results and that usually only those who are trained in economics recognize this subtle point (pp. 122, 123, 128). These points, as well as Hayek's fundamental insight that markets coordinate behavior, can be deciphered in the lengthy passage:
From the time of Hume and Adam Smith, the effect of every attempt to understand economic phenomena-that is to say, of every theoretical analysis- has been to show that, in large part, the co-ordination of individual efforts has been brought about, and in many cases could only have been brought about, by means which nobody wanted or understood, and which in isolation might be regarded-as some of the most objectionable features of the system .... [Early attempts at analysis] showed that an immensely complicated mechanism existed, worked and solved problems, frequently by means which proved to be the only possible means by which the result could be accomplished, but which could not possibly be the result of deliberate regulation because nobody understood them. Even now, when we begin to understand their working, we discover again and again that necessary functions are discharged by spontaneous institutions. (p. 129)
How does one go about modeling such a system? Hayek advocates the use of an individualistic and "compositive" method, whereby the economist, "by combining elementary conclusions and following up their implications ... gradually constructs, from the familiar elements, a mental model which aims at reproducing the working of the economic system as a whole" (p. 128). The same methodology is advocated in his later work, "Scientism and the Study of Society." Other themes from his "Scientism" essay are also present. For example, Hayek labels as anthropomorphic the notion that economic institutions must be planned to be functional (p. 130). He also argues that the popular belief in the "inevitability" of the extension of state control is just another "legacy of the belief in historical laws which dominated the thinking of the last two generations" (p. 134).
"The Trend of Economic Thinking" is the first place where Hayek mentions planning, which he explicitly links with sociatism. His words are biting.
I have discussed planning here rather than its older brother socialism, not because I think there is any difference between the two (except for the greater consistency of the latter), but because most of the planners do not yet realize that they are socialists and that, therefore, what the economist has to say with regard to socialism applies also to them. In this sense, there are, of course, very few people left today who are not socialists. (p. 135)
This passage might well be considered the true opening salvo, at least as far as Hayek's contribution is concerned, in the Socialist Calculation Debate. And what a salvo it is! Not only is planning less consistent than socialism, planners do not even recognize the true nature of their ideas.
Hayek discusses the contributions of the classical liberal economists at a number of points. He notes early on that they had recently been interpreted "under the influence of socialistic ideas" as having been insensitive to social suffering: "But, in fact, nothing could be further from the truth. No serious attempt has ever been made to show that -the great liberal-economists were any less concerned with the welfare of the poorer classes of society than were their successors" (p. 122).
It was but a small step from here to Hayek's later project, undertaken in Capitalism and the Historians, in which the premise of social suffering under the transition to industrial capitalism was questioned. Having defended the classicals, Hayek later notes that many were guilty of neglecting the "positive part of their task." They were excellent at pointing out the limits of government interference, but they should also have indicated the proper scope for government action. Hayek's conclusion that "to remedy this deficiency must be one of the main tasks of the future" (p. 134) is prophetic, for much of his later work was dedicated to explicating the role of the government in a liberal democracy.
Those who have read Hayek's piece, "Why I Am Not a Conservative," will find the following sentence from the conclusion of this article very familiar.
The peculiar historical development which I have sketched has brought it about that the economist frequently finds himself in disagreement in regard to means with those whom he is in agreement with regard to ends; and in agreement in regard to means with those whose views regarding ends are entirely antipathetic to him-men who have never felt the urge to reconstruct the world and who frequently support the forces of stability only for reasons of selfishness. (pp. 136-37)
It may finally be mentioned that Hayek's frequent invocation of the errors of "public opinion" indicates that he considers the direction of popular belief to be a serious matter. He was to respond to this with the publication of The Road to Serfdom, his first work intended for mass consumption. Begun as a pamphlet published in 1938, the book ultimately was to reach a much wider readership through a condensation in Reader's Digest.
What are we to make of this article? It is tempting, of course, to read it as a blueprint for much of Hayek's subsequent work. One can picture the thirty-four-year-old Tooke Professor, in a flash of insight, sitting down and penning this outline of a program he would follow for the next fifty years.
Despite its romantic appeal, I do not think that such an interpretation can be supported. After all, Hayek was to continue to devote his attention to economic theory for another ten years or so. Nor does he anywhere mention the article as significant. Finally, his description of the coordinating role of markets made no reference to the concept of dispersed and subjectively held knowledge. It was not until three years later, when in the midst of the Calculation Debate Hayek wrote "Economics and Knowledge," that that crucial idea began to take form.
"The Trend of Economic Thinking" is not a blueprint. Rather, it is a manifesto and a starting point. It is a manifesto because it is rich in ideas that are not yet systematically articulated. And it is a starting point because, as Hayek was drawn into the Calculation Debate, he was forced to pay increasing attention to the problems he first mentioned in this article. Rather than a blueprint, "The Trend of Economic Thinking" is probably best viewed as a suitable point of departure for explicating the trend of Hayek's thinking.