Things All Students of Economics (or just about anybody else too) Should Read
This is a work continually in progress. The pieces are organized according to:
- Economics articles and the economics way of thinking
- “Popular” economics presentations (books)
- Thinking about the size and tyranny of government.
A. Articles and Manuscripts
- The Reality of Markets, by Russell Roberts — what’s the difference between going to the moon and putting an end to poverty?
- I, Pencil, My Family Tree as Told to Leonard Read — this is an extraordinary lesson about how much information is required to produce an object as simple as a pencil. No planner or planning board could possibly have enough knowledge to make a pencil. Further, the story ends with an explanation of why so many people have difficulty “trusting” markets to do the things that governments do – the fear of extraordinary complexity. An audio version (16 minutes) is now online here.
- A Marvel of Cooperation, by Russell Roberts — how order emerges without a conscious planner
- The Tradition of Spontaneous Order, by Normal Barry
- An Inquiry into the Nature of Comparative Advantage and the Division of Labor, by Russell Roberts — what is the significance beyond two people trading on a desert island? Roberts asks, “What does it have to do with outsourcing? What does it have to do with trade in the real world between two nations when the “nation” is not an autonomous agent making decisions but a bunch of individuals trading with another bunch of individuals across a border? How would you describe the central principle of comparative advantage using everyday English? How would that description carry over to a world with many products and many people to trade with? How do prices change the conclusions if at all, when prices are used in trade instead of barter? Does everyone have a comparative advantage in something in a multi-good multi-person world? What does that mean exactly? What if there are lots of people just like me? Do we each have a comparative advantage? Can my comparative advantage change from one good to another as the skills of others change?”
a) Part 1
b) Part 2
c) A very good explanation of how the division of labor works and why we our stanard of living is so high rich because of it
d) Mike Munger’s take on the pin factory
- Folk Economics – an eye opening discussion of why “common sense” economics is so often misdirected. It is a story about why many people think of wealth allocation rather than wealth production. Learn the evolutionary story of why so many peolple misunderstand the real definition of economics – that of the study of wealth creation and positive sum transactions. Here is an excerpt from the abstract: Folk economics is the intuitive economics of untrained persons. It is concerned with distribution, and does not allow for or understand incentives. Folk economic notions evolved in our ancestors in circumstances where there was little in the way of specialization, division of labor, capital investment, or economic growth. It can explain the beliefs of naive individuals regarding matters such as international trade, labor economics, law and economics, and industrial organization. It is important that voters understand economic principles
- Southey’s Colloquies on Society, by Thomas Babington Macaulay, is a wonderful tome about the role of the people and the role of government. Here is the closing passage: “It is not by the intermeddling of Mr. Southey’s idol, the omniscient and omnipotent State, but by the prudence and energy of the people, that England has hitherto been carried forward in civilization; and it is to the same prudence and the same energy that we now look with comfort and good hope. Our rulers will best promote the improvement of the nation by strictly confining themselves to their own legitimate duties, by leaving capital to find its most lucrative course, commodities their fair price, industry and intelligence their natural reward, idleness and folly their natural punishment, by maintaining peace, by defending property, by diminishing the price of law, and by observing strict economy in every department of the state. Let the Government do this: the People will assuredly do the rest.”
- Selected Essays on Political Economy, by Frederic Bastiat, includes two classics, the Law and What is Seen and What is Not Seen.
- Economic Harmonies, by Frederic Bastiat, where he forwards the idea that the interests of mankind are essentially harmonious and can best be realized in a free society where government confines its actions merely to suppressing the robbers, murderers, falsifiers, and others who wish to live at the expense of their fellow men. The gloomy predictions of Malthus and Ricardo are just gloom and doom.
- I would encourage you to read all of Frédéric Bastiat’s Economic Sophisms, but two particularly excellent pieces of his are: What is Seen and What is Not Seen from his Selected Essays on Political Economy which is an extradordinarily well written piece on unintended consequences, including the Broken Window Fallacy; and The Candle Maker’s Petition, a satirical piece highlighting the folly of protectionism and the perils of self-interested politician
- The Economics of Property Rights by Andrew P. Morriss. How systems of property evolve, and why they are essential to allow exchange and to overcome the commons problem.
- Look at all of the wonderful things regulation can do for us! An article from Radley Balko.
- What can be learned from the public and private responses to Hurricane Katrina? Commentary by Mary L. G. Theroux of the Independent Institute
- A brief story about why economics is so BORING … by Don Cox of Boston College
- The Social Responsibility of Business is to Increase Its Profits by Milton Friedman. Should business actively promote the “social good”? This classic explains why it does so by trying to make money. Here is a redux of this issue from Reason magazine.
- A Modest Proposal – by Jonathan Swift
- What Has the Government Done to Our Money? by Murray Rothbard. From the Mises Institute: After presenting the basics of money and banking theory, he traces the decline of the dollar from the 18th century to the present, and provides lucid critiques of central banking, New Deal monetary policy, Nixonian fiat money, and fixed exchange rates. He also provides a blueprint for a return to a 100 percent reserve gold standard.
- Two Steves and One Soichiro: Why Politicians Can’t Judge Innovation, by Michael Munger. Imagine if all of life were determined by majority rule. Every meal would be a pizza. Every pair of pants, even those in a Brooks Brothers suit, would be stone-washed denim. Celebrity diets and exercise books would be the only thing on the shelves at the library. And—since women are a majority of the population, we’d all be married to Mel Gibson. The difference between collective action and individual action.
B. Books and Academic Works
- The Price of Everything, by Russell Roberts. With this book, Professor Roberts has firmly established himself as one of the top economic educators of our time (or any before us). Like the late Paul Heyne, Roberts has dedicated a career to advancing basic economic understanding. And like Heyne, he has done it with grace, sincerity and humility.The Price of Everything is an economic page turner (imagine that!) – and a book that you will wish to read more than once. Roberts faces head on the many difficult questions and concerns of people suspicious of economics and commercial society — corporate greed, price gouging, rapid progress, inequality. In addressing these and other issues, he demonstrates that the major economic question is how to enable individuals to live their lives to the fullest. Sure financial incentives are an important component in the happiness recipe, just as they are an important component in motivating entrepreneurs – but so too are thousands of other motives. These motives vary from person to person, and are wholly unknowable to any one individual – regardless of how intelligent or well intentioned.
With The Price of Everything, Professor Roberts has turned the eponymous criticism of economists on its head – weaving it into a badge of honor each of us — teachers and students — can wear proudly.
- The Ultimate Resource by Julian Simon – for centuries people have been predicting doom and gloom for the earth as population growth will eventually overwhelm the availability of resources. From the writings of Thomas Malthus, to Paul Ehrlich to Al Gore, the drumbeat of doomesday continues. Yet, humanity has not been subjected to the mass starvation and misery they predicted – we are in fact richer than ever before. Why? Julian Simon effectively demonstrates that oil, gold, copper, wood, etc. in and of themselves have little intrinsic value – it is not until human ingenuity is applied do they become resources. Thus, it is actually human beings that are the ultimate resource. The implications of this understanding are far reaching – including the importance of permitting immigration, the free flow of ideas, and of large populations in general. From more people come more ingenious ideas. Simon was a man ahead of his time, who did not grace this earth nearly long enough.
- The Invisible Heart: An Economic Romance by Russell Roberts. A colleague’s review: With THE INVISIBLE HEART, Russell Roberts proves himself to be among the small handful of young economists who excel at communicating sound economic ideas to a broad audience. Communication talent of the sort possessed by Milton Friedman, Thomas Sowell, and Walter Williams is too rare – and getting rarer as economic instruction becomes increasingly abstract. But Roberts proves that not all economists under the age of 50 are incapable of bringing economics to life for a wide audience. Roberts is truly a master at teaching the economic way of thinking – and teaching it in ways that almost anyone will find engaging and compelling. As with his superb first book, THE CHOICE, Roberts here uses the dialogue to convey economic insights. But unlike that first book, THE INVISIBLE HEART touches on an impressively wide array of subjects (rather than just international trade). The reader learns solid reasons to be skeptical of today’s shrieking environmental alarmists – solid reasons to question the effectiveness of government welfare programs – solid reasons for applauding, rather than condemning, corporations who set up factories paying market wages in third-world countries – indeed, solid reasons for even non-economists to think like economists. Most importantly, the reader learns that good economists are the very last people to believe that money is all that matters. Russell Roberts is unequaled in his ability to show that free markets generate not only impressive coordination and efficiency and material bounty, but also an unprecedented profusion of humane results. The market’s invisible hand works side by side with its equally robust invisible heart. This book is an excellent introduction to economics and, more generally, to the philosophy of freedom.
- The Choice: A Fable of Free Trade and Protectionism by Russell Roberts. Here is a good review by Denise Demong: Surely the quirkiest volume in this year’s roundup of the best business books is The Choice: A Fable of Free Trade and Protectionism by Russell D. Roberts of the Olin School of Business at Washington University in St. Louis (Prentice Hall). Stealing a page from Frank Capra, Roberts dispatches 18th century economist David Ricardo back to earth. It’s 1960, and the angel-economist is on a mission–to stop the election of a protectionist President. To achieve his goal, he befriends the chief executive of a TV manufacturing company threatened by imports, transports him to the future, and then shows him what America will be like in 1995, both with and without barriers. Yes, it sounds flaky. But this 113-page defense of free trade “puts the complex macroeconomic issues surrounding the North American Free Trade Agreement and the emerging global economy into understandable terms,” wrote Washington Correspondent Doug Harbrecht. “And it’s fun to read–honest.’
- Saving Adam Smith: One commenter writes, “We all live in Adam Smith’s economic world, but as Jonathan Wight’s wise and witty story shows us, it’s not exactly the world that Smith had in mind. In his lively tale, Wight brings Smith back to remind economics students and readers of all stripe that we are not here to serve the economy, the economy is here to serve the needs of everyone in our society.”
–Joanne B. Ciulla, Costen Family Chair in Leadership and Ethics, University of Richmond
- Economics in One Lesson, by Henry Hazlitt (now available free online) – this classic work was among the first books written with explicit goal of expanding economic literacy. In the spirit of Frederic Bastiat’s “Seen and Unseen”, Hazlitt boils down to thinking of economic problems in terms of their direct effects and unintended consequences.
- Learning Economics, by Arnold Kling – a remarkable non-mathematical approach to economics that focuses on the process of creative destruction, technological progress and unbiased policy analysis. Here is an excerpt from his introduction, “I believe that some of the fault lies with the top graduate schools in economics, such as the Massachusetts Institute of Technology, where I obtained my Ph.D. The focus on mathematical training in these programs is so intense that they tend to produce a sort of idiot-savant, competent only to publish in academic journals. It pains me to see economists for whom expounding economic principles and speaking in plain English are mutually exclusive activities. Ours seems to be the age of the Partisan Hack. Looking over the list of best-selling books or the roster of columnists at top-drawer newspapers, success appears to correlate with mean-spirited attacks and heavy-handed rhetoric. Whatever happened to logical analysis of economic policy designed to illuminate as opposed to rabble-rouse? ”
- Capitalism and Freedom by Milton Friedman – a review from economist William Fleischmann: Nobel laureate Milton Friedman is quite possibly the most brilliant economist in the world today and a man on the cutting edge of libertarian (classical liberal) thought. And in “Capitalism and Freedom” he lays out a basic political philosophy in the classical liberal tradition in the first two chapters of the book and alternately defends and expands upon that premise for the remainder of the work. In much the same way that F. A. Hayek – an ideological predecessor – spelled out his basic thesis in one concise book and then fleshed it out in another, Friedman provides the basics here and fleshes them out in the larger (and somewhat better written) “Free to Choose”. In addition, while not wishing to rehash some of the detailed support for his assertions, he does – through footnotes – provide the reader with opportunity to delve deeper. Given the nature of the subject matter and the expertise of the author, the writing can be dry and may appear difficult to approach, particularly in the initial chapters, but the reader who sticks with it will be well rewarded. Subsequent chapters, largely adapted from lectures by the author, are easier reads. And Friedman avoids, for the most part, the economic jargon that can make works such as this hopelessly confusing to the layman. Friedman is often tagged with the “monetarist” or “supply-side” labels (if you don’t believe me, read some of the other reviews), largely because he believes that these methods of economic manipulation are infinitely preferable to the fiscal manipulation that has been the norm in this country. Those who actually READ this book will find that he advocates intervention by neither means, preferring instead stable monetary growth removed from the hands of either fiscal or monetary interventionists.He provides one of the most succinct explanations of the monetary actions (of the Fed) that created and worsened the Great Depression that I have ever come across, though mentioning only briefly the fiscal policies that subsequently lengthened it considerably: the New Deal and, to a much lesser extent, Smoot-Hawley. This alone makes the work valuable.He goes on to examine a number of things that are now taken for granted in this country (the Welfare State, Social Security, public education, licensing requirements) and asks the question, “Have these government actions made things better or worse?” The record is less than stellar (especially in the subsequent 40 years since this was written). And he proposes some alternatives such as the negative income tax and other alternative roles for government that are, arguably, less intrusive on the liberty of the citizenry.And he uses examples that are easy to follow and understand including one about men stranded on desert isles that is NOT as presented in another review.As an economist, I would say that this work has aged remarkably well. The analysis has clearly not become dated as have those of Galbraith and, to a certain extent Keynes. [Keynes WAS a genius, providing the mathematical and econometric bases for much of current economic thought, but, contrary to the assertion by another reviewer, much of what he proposed should be done by the state has been discredited.] Friedman, for example, was one of the first to advocate a school voucher system, which is only now receiving serious attention.It is noteworthy that a number of economists from the left have criticized Friedman in general and this work in particular. But those attacks (by Krugman, Herman and Diesing, among others) have proven to be, for the most part, without merit.If you accept the basic premise that freedom is vitally important and that the actions of the state should be viewed from that point of view, you will find this work to be invaluable. If not, you will certainly not be pleased. And if you believe the utter nonsense that capitalism is in any way “oppressive”, well, if you can’t see reality…
F.A. Hayek – click HERE for more information on this Nobel Prize winner
- The Road to Serfdom by Friedrich A. Hayek – from the Adam Smith Institute: For over half a century, it has inspired politicians and thinkers around the world, and has had a crucial impact on our political and cultural history. Hayek argues that, while socialist ideals may be tempting, they cannot be accomplished except by means that few would approve of. Addressing economics, fascism, history, socialism and the Holocaust, Hayek unwraps the trappings of socialist ideology. He reveals to the world that little can result from such ideas except oppression and tyranny. Today, more than 50 years on, Hayek’s warnings are just as valid as when “The Road to Serfdom” was first published.
- The Fatal Conceit by Friedrich A. Hayek. The best quote in the book is in an implicit discussion of the social responsibility of business: “Running a family like a business destroys it. Running business like a family destroys it and leads to tyranny.” This is from the Adam Smith Institute: Hayek gives the main arguments for the free-market case and presents his manifesto on the “errors of socialism.” Hayek argues that socialism has, from its origins, been mistaken on factual, and even on logical, grounds and that its repeated failures in the many different practical applications of socialist ideas that this century has witnessed were the direct outcome of these errors. He labels as the “fatal conceit” the idea that “man is able to shape the world around him according to his wishes.
- Individualism and Economic Order by Friedrich A. Hayek – ” We can either have a free Parliament or a free people. Personal freedom requires that all authority is restrained by long-run principles which the opinion of the people approves
- Law, Legislation and Liberty by Friedrich A. Hayek – from the Adam Smith Institute: This volume represents the first section of Friedrich A. Hayek’s comprehensive three-part study of the relations between law and liberty. Rules and Order constructs the framework necessary for a critical analysis of prevailing theories of justice and of the conditions which a constitution securing personal liberty would have to satisfy.
- The Undercover Economist by Tim Harford -Who really makes money from fair trade coffee? Why is it impossible to buy a decent second hand car? How do the Mafia make money from laundries when street gangs pushing drugs don’t? Who really benefits from immigration? Looking at familiar situations in unfamiliar ways, The Undercover Economist is a fresh explanation of the fundamental principles of the modern economy, illuminated by examples from the booming skyscrapers of Shanghai to the sleepy canals of Bruges.
- The Economic Naturalist, by Robert Frank -Driven by a desire to tell stories people won’t soon forget, Frank has students-from freshmen to PhD candidates-ask questions and find answers in what he calls the “economic-naturalist” assignment. Students have to write an essay explaining everyday occurrences and oddities in economic terms. They have churned out papers on everything from why hotel mini-bar prices are so exorbitant to why drive-up ATMs have Braille dots on their keys. Read a story from BusinessWeek …
- Sex, Drugs and Economics by Diane Coyle – need one say more? An unconventional approach with a British perspective. Here is another nice one from her – the Soulful Science.
- New Ideas from Dead Economists by Todd Buchholz – here is a complete review from Don Boudreaux (Economics Department at George Mason and the former President of the Foundation for Economic Education):enjoyed this book. Todd Buchholz gives his readers a good, well-written introduction to most of the major schools of economics. His portraits of the “dead economists” who launched and powered these various schools are excellent, as are his summaries of each of these schools. (Fortunately, not all of Buchholz’s “dead economists” are dead: Ronald Coase, Milton Friedman, James Buchanan, and Robert Lucas, among others, are thankfully still alive.) I will recommend this book to non-economists who ask me for an accessible introduction to economic analysis. Only a few nits are worth picking. One is that, from time to time, Buchholz mentions an interesting fact without providing a reference. For example, in his chapter on Public Choice economic, he illustrates the reality and size of pork-barrel politics by reporting the finding of an (unnamed) researcher who “calculated that for the price of the $200 billion highway bill [enacted by Congress in 1998], the U.S. could literally pave the streets with gold (gold-plating, that is).” I wanted to check out this study, but could find no citation to it. Another nit is that, again in his chapter on Public Choice economics, he should have introduced his readers to the term, and concept, of rent-seeking. A third (and really small) nit is that he mistakenly reports that Thomas Sargent shared the 1995 Nobel Prize in economics with Robert Lucas. Not so. Sargent is not, at least yet, a Nobel laureate. Especially nice are (1) Buchholz’s exploration of Keynes’s attitude toward government, (2) his explanation of the deepest problems with Marxian economics, and (3) his very able treatment of rational-expectations economics. But please don’t read this paragraph as suggesting that Buchholz performs well only in these areas. Again, from beginning to end, this is a very sound and very useful effort.
- Basic Economics: A Citizen’s Guide to the Economy by Thomas Sowell. An accomplished elucidator of economics,Thomas Sowell was born in North Carolina and grew up in Harlem. As with many others in his neighborhood, he left home early and did not finish high school. The next few years were difficult ones, but eventually he joined the Marine Corps and became a photographer in the Korean War. After leaving the service, Sowell entered Harvard University, worked a part-time job as a photographer and studied the science that would become his passion and profession: economics.
- Myths of Rich and Poor by Michael Cox and Richard Alm – because nearly everyone fails to appreciate the importance and social benefits of economic growth – and just how remarkable standards of living have improved in just a short period of time. Would you rather be a “robber baron” in 1890, or an average Joe in 2000? Andrew Carnegie could not even take an aspirin to relieve a headache, nor fetch a cold drink, nor take penicillin to ward off infection, … because none of these were available in 1890.
- The Economics of Life: From Baseball to Affirmative Action to Immigration, How Real-World Issues Affect Our Everyday Life by Gary and Guity Nashat Becker. Criticisms of race quotes, central planning and tariffs. Endorsements of drug legalization and school vouchers. And much more!
- The Worldly Philosophers byRobert L. Heilbroner – Paul Samuelson (Nobel Prize winner) has said that, “Sinclair Lewis’s Arrowsmith inspired several readers to become Nobel laureates in biology. Robert Heilbroner’s new edition of The Worldly Philosophers will inspire a new generation of economists.”
- Murder at the Margin by Marhsall Jevons who said economics is boring. In addition to some of the novels from above, you might try a couple of mystery novels. While Sherlock Holmes uses his instincts, Henry Spearman uses … ECONOMICS!
- A Deadly Indifference by Marshall Jevons
- Discover Your Inner Economist, by Tyler Cowen – this might be the best of what I called the “pop-economics” books in that it is valuable to both non-economists and professional economists alike. It is nicely summarized by Arnold Kling –
Tyler Cowen’s book is for two audiences. Non-economists will learn how to appreciate incentives and scarcity in a variety of settings, including choosing a restaurant or developing a taste for art. Economists will learn how to appreciate the indispensability of emotion in many settings, including our need to feel in control and to over-rate ourselves. The style of the book is relaxed, meandering, and conversational. Think of reading this book as like going to Tyler for a therapy session, except that he practices psychiatry in reverse. You lie down on the couch and listen to him talk about whatever is on his mind.
- The Armchair Economist: Economics and Everyday Experience, by Steven Landsburg – Why is movie theater popcorn priced so high? Why don’t producers that sell out rock-concerts charge higher prices? This and much more …
- Hidden Order: The Economics of Everyday Life by David Friedman – A must read by the self described anarchist-anachronist-economist. Could a country survive as an anarcho-capitalist polity? Perhaps one already has.
- Fair Play, What Your Child Can Teach You About Economics, Values and the Meaning of Life, by Steven Landsburg – from his website: “How should we feel about taxes that redistribute income? Ask how parents feel about children who forcibly “redistribute” other children’s toys. How should we respond to those who complain that their neighbors are too wealthy? Ask how parents respond when children complain that their siblings got too much cake. By insisting that fairness can’t mean one thing for children and another for adults, Landsburg shows that the instincts of the parent have profound consequences for economic justice.”
- More Sex is Safer Sex , by Steven Landsburg
My favorite example of economic reasoning is tucked away in a chapter called “How to Save the World” (p. 209)
Let’s say everyone tipped 25 rather than 15 percent. What would happen? The market for waiters is competitive, and most waiters are paid what they are worth, no more or no less. If customers pay waiters more, employers will get away with paying them less.
My favorite passage on emotions is in the chapter on self-deception (p. 116):
The experts delude themselves too. Ninety-four percent of polled university professors thought they were better than average at their jobs, compared to their colleagues. A survey of sociologists asked each professor how much influence he expected to achieve. Almost half of the sample of 198 expected to become among the top ten leaders in at least one of their specialties. More than half expected that others would read their writings even after their careers had ended. This same group could not identify most of the previous presidents of the American Sociological Society… A few pages later:
The depressed, even though their thought processes are often quite irrational, tend to have more accurate views about their real standing in the world. They are more likely to admit that in various fields of achievement they are no better than average… And near the end of the chapter:
The fiction of a truly objective person would probably be a robot with no emotions and real sense of self–who would want that, either for herself or for others? Nonethless we should all strive to become, at the margin, less deluded on critical issues…
- Imagine a country where almost all women are monogamous, while all men demand two female partners per year. Under those circumstances, a few prostitutes end up servicing all the men. Before long, the prostitutes are infected; they pass the disease on to the men; the men bring it home to their monogamous wives. But if each of these monogamous wives were willing to take on one extramartial partner, the market for prostitution would die out, and the virus, unable to spread fast enough to maintain itself, might well die out along with it.
- Chicagoans are free to move to Nebraska and Calcuttans are free to move to the countryside. The reason they don’t is that for all their complaining, they prefer the crowds. For goodness’ sake, why are rents so high in Manhattan if not because some people have a high value on living near others? Not that New Yorkers will admit it. In one recent survey, 37 percent of New Yorkers said they’d leave the city if they could. Of course, since none of them left the city, and since all of them could, the only proper conclusion is that 37 percent of New Yorkers lie to pollsters.
UPDATE: Here are Tyler Cowen’s thoughts on a Classical Economics reading list.
C. Thinking About Rampaging Leviathan
- Herbert Spencer, “The Right to Ignore the State”
- Robert Higgs, “Diagnostics and Therapeutics in Political Economy,” and then, “Can the Rampaging Leviathan Be Stopped or Slowed?” Answer: not a chance.
- Lysander Spooner, “No Treason, No. 1“. An excerpt, “By what right, then, did we become “a nation?” By what right do we continue to be “a nation?” And by what right do either the strongest, or the most numerous, party, now existing within the territorial limits, called “The United States,” claim that there really is such “a nation” as the United States? … We are, therefore, driven to the acknowledgment that nations and governments, if they can rightfully exist at all, can exist only by consent.
From the Adam Smith Institute:
Hayek’s life and work Friedrich Hayek was the 20th Century’s leading libertarian social theorist. Born in Vienna in 1899, his early writings were on mainstream economic theory, developing “Austrian School” ideas on prices, capital, and trade-cycle theory. He joined the London School of Economics in 1931, and engaged in a long intellectual debate with Keynes over monetary theory. His wartime book, The Road to Serfdom, which traced the roots of totalitarianism back to utopian socialism, became an international bestseller. He went on to define the institutions of a liberal society in The Constitution of Liberty. Hayek formed the view, which he articulated in Law, Legislation and Liberty, that the social order was produced by a complex array of institutions and behavioural norms, which have evolved and endure because they work. The Fatal Conceit of the socialists was to presume that the social order could be easily rearranged; but in fact the rationality of human planners is far more limited than the evolutionary ‘wisdom’ that inheres in the complex rules of the free society. Key concepts in Hayek’s thought
- Markets versus planning. Market exchange works because people value thing differently. The planned economy rests on the unlikely assumption that everyone can agree what to produce, and how.
- Importance of prices. The price system reflects the imbalance of demand and supply, and automatically steers resources to where they are most needed – without the need for planners to discover, understand, and correct the imbalance.
- We’re all planners. We all plan, and we do so on the basis of our own knowledge of local conditions. There is far more useful and current information in this dispersed knowledge bas than could ever be collected in a central planning agency.
- Competition is dynamic. Competition is not a textbook ‘given’ but a dynamic process, in which people constantly search to discover the cheapest mix of resources to produce the most desired outputs.
- Human action but not human design. The social order is like language. It is a product of human action, but not something that we have deliberately designed. It evolves and changes, but endures because it is useful to us.
- Limits to our understanding. Just as language is built on complex rules of grammar that we follow with ease but cannot necessarily articulate, the social order is built on complex regularities in our behaviour – common law, ethics, customs, manners – whose importance we only faintly understand.
- The fatal conceit. The totalitarian disasters that have occurred when utopians attempt to redesign society according to their rational plan shows just how little we know about the workings of the complex system of rules on which the social order is based.