Critique of Hayek’s price system

In a previous post, I identified four possible problems with Hayek’s defense of the price system; here, I will focus on the first critique: the absence of law in Hayek’s analysis. As it happens, I am not the first law professor to notice this omission. See, for example, this blog post from 10 October 2015, where I shout out Richard A. Epstein. Among other things, I wrote: “Markets do not exist in a vacuum. Markets require some kind of legal framework, one that respects people’s property rights and enforces their contracts. But where do we get these legal frameworks and rules from? In the case of the United States, we have a Constitution, which is the supreme law of our land. But isn’t a constitution (and law generally, for that matter) a textbook example of human design and not of spontaneous order?”

More specifically, consider the issue of money (pun intended). At no point does Professor Hayek discuss the indispensable role of money or currency in his 1945 knowledge paper. But doesn’t a “marvelous” price system (his term, not mine) imply the existence of some form of medium of exchange, such as the British Pound, the Japanese Yen, or the Mexican Peso? And unless you think Bitcoin or other cryptocurrencies have any real value, doesn’t a stable monetary currency require some kind of central bank or government agency, whether the currency is backed by a precious metal, like the gold standard of yore, or is government-issued, like today’s so-called fiat money?

In fairness to Hayek, volume two of his three-volume magnum opus on The Constitution of Liberty (available here) contains an extended discussion of the role of law in promoting liberty, while his fellow Austrian economist, the great Ludwig von Mises, explains the private origins of money in his classic treatise on The Theory of Money and Credit. In fact, scholars continue to debate to this day whether indispensable elements like money and law are classic “public goods” (i.e. something that requires government intervention and thus some amount of central planning) or whether these things can be organically and voluntarily supplied by private firms. (For a small sample of this masturbatory intellectual back-and-forth, check out Tyler Cowen’s public-good view here versus David Friedman’s “law as a private good” here.)

Rather than try to adjudicate this decades-long debate (an impossible, Quixotic task, in any case), I will refer to Robert Nozick’s influential defense of the night-watchman state in Anarchy, State, and Utopia, one of my favorite fiction books of all time. Even if government is neither necessary nor sufficient for the price system to work at scale (a proposition I find as fanciful as Peter Pan’s “Neverland”), a good government–one that at the very least identifies and punishes aggressors, enforces contracts, and defines and protects property rights–would be nice. Either way, I will identify another important omission in Hayek’s analysis of the price system in my next post: what does he mean by “knowledge”?

About F. E. Guerra-Pujol

When I’m not blogging, I am a business law professor at the University of Central Florida.
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