And were going to continue our discussion today by reviewing the works of Friedrich HayekJohn Maynard Keynes and Milton Friedman whom i consider to be the three most influential economists of the 20th century and of the three, i really consider hayek to be the most influential. He addressed what i call the Knowledge Problem and this seems to me to be perhaps the most important contribution to economics since the time of adam smith. And this is what hayek had to say. About knowledge he said in economics, theres a problem of the division of knowledge. Which is quite analogous, too. And at least as important as the problem of the division of labor put forward by adam smith. But while the latter has been one of the main subjects of investigation ever since the beginning of our science. The former has been as completely neglected. Although it seems to me to be the really central problem of economics. As a social science the problem we pretend to solve is how the spontaneous interaction of a number of people each only possessing bits of knowledge. Bring about a state of affairs that corresponds to equilibrium. How can we determine what Economic Production should be when knowledge is divided among all of the millions and tens of millions hundreds of millions billions of people in the world. How do we accommodate divided knowledge the answer of socialists at the time as weve discussed and well discuss further today was will government can plan it can make all those decisions. But even if you could entrust government with that power, how would it know what to produce thats the crucial problem. How do you utilize divided knowledge in a society . Heres what hayek also said along these lines. This is from his 1936 sa economics and knowledge. Economics has come nearer than any other social science to an answer to that central question of all social sciences. How can the combination of fragments of knowledge existing in different minds . Bring about results which if they were to be brought about deliberately would require a knowledge on the part of the directing mind. Which no Single Person can possess. Thats the crucial issue. No one individual has this great knowledge. That exists in a fragmented form among all the members of humankind that are part of a market order. No one has that knowledge. And that was what hayek put forward as the great obstacle to socialism. Was that government simply couldnt presume that it would have this ability to concentrate knowledge in a planner who would determine how much of different goods and services should be produced. Thats not the answer. Thats the problem. No one has that knowledge. So how do you create a system in which diverse and fragmented knowledge is utilized . And thats what high ex answer was he says that to show that the spontaneous actions of individuals will under conditions, which we can define bring about a distribution of resources, which can be understood as if it were made according to a single plan, although nobody has planned it. Is the goal of economics so thats precisely what the price profit and private property system. Does it is it allows fragmented and decentralized knowledge to be utilized . Freely fluctuating prices allow for the registration and the communication of the relative supply and demand of all the goods and services that are being produced in economy. Thats the economic problem. Thats what freely floating prices and profits do is that prices register supply and demand and profits direct resources to those who all Things Considered tend to utilize them more effectively than others and then private property is necessary in order to enable the price system and and the profit system to have any sort of effectiveness. So its a brilliant argument and it addressed what had been the primary concern of socialism to that time. The argument of socialism. Was that only if individuals were altruistic enough that then socialism would be possible. The reason why people argue against socialism was socialism was that well, people arent ethical enough to practice concern for others or to have a community of goods hayeks argument was that thats not the issue at all. You could be having a community of saints. Everyone could be completely altruistic. But if you dont have a way to register relative supply and demand then you really wont have rational Economic Activity. And whats fascinating is that when hike put forward these ideas primarily in the 1930s. They werent immediately persuasive and weve seen that throughout this quarter that when ideas are originally enunciated. Theyre not necessarily greeted with universal assent. But over time reality proved to be the greatest teacher of all and as weve discussed when you considered the efficiency of different economies of the United States economy versus the soviet economy this economy of the soviet union or if you looked even a better example east germany versus west germany or north korea versus south korea where you have different systems of Economic Activity, and then you see the results of those systems over years and decades it quickly became clear that a system of free market capitalism is more productive than a system of government control and ironically as weve weve discussed earlier in the quarter the economic productivity and efficiency of socialism in the sense of government control of the economy is exactly what socialist thought was their strongest argument the social them would be more productive than capitalism, but that proved not to be the case. As well discuss a little bit later in class Milton Friedmans work in particular reconceptualizing the Great Depression and putting forward. Its monitor monetary source in in the form of an inadequate policy by the Federal Reserve board in the 1930s in the early 1930s. Was the primary cause of the Great Depression not some inevitable failures of capitalism that had to be accommodated by a greatly increased Government Role in the economy so it took time but but high ex ideas ultimately prevailed and as i said, it seems to me that they are the the fundamental macroeconomic contribution of the 20th century the issue throughout much of the 20th century was will the future of economics be a more command economy direction more government control, or will it be more market a more marketbased system and for most of the 20th century until the 1980s the general view was that the future was going to be more of a socialist system of more government control, but then as a result of the circumstances of the cups of communism Eastern Europe and then in the soviet union and the continuing and continual productivity of a free market system the paradigm of government control quickly shifted and at this point in time the perspective that theres an Important Role for the market in society is as if not more established than the view of earlier decades in the 20th century that the future would be in some sort of some sort of socialist or command economy and direction what i would note too, is that as i stress. Yeah stone. You want to yeah. So hayek did a lot with the socialist calculation question. How much of what he did was built on mises and bombauerks work on the socialist calculation and how much of it was his own extrapolation. Thats a really good question to what extent was hayek influenced by his predecessors in among austrian economists in particular eugene von. Bonba burke and ludwig von mises and as weve indicated the Austrian School of economics was a very important strand of economic theory during the later 1800s and early 1900s together with William Stanley jevons and Alfred Marshall and england and leon. Walrus and alfredo peretto in in switzerland. And carl menger was originally the leading austrian economist. And i would say that hayek was very much influenced by his austrian economic predecessors. Particularly mises mises is really the one who after world war one and all of a sudden the soviet union existed in in Eastern Europe, and thered been the collapse of governments throughout central and Eastern Europe. There were all so for a time other socialist states that were set up in parts and areas of Eastern Europe that didnt last the soviet union was the only regime that lasted and it became a practical question. Socialism really only became an issue after the establishment of the soviet union in 1917 before that. It was all theory there wasnt any socialist country that was attempting to run the means of production and so misus asked the question. Well, how is it going to work . How are they going to know what to produce if you dont have the dont have a rational economy. So i think that particularly that mises influence take a great deal hayek, however, and that provides a segue to our next subject is that hayek . Never considered himself to be a pure misessian and i think that sometimes his thought is an entirely understood for that reason hayek really did think that there was a reasonable place for government in society and it wasnt a comprehensive place or an allencompassing place as socialists believed and he certainly believe that it would be better if government could be provided at a local level rather than at a National Level if there could be private institutions as well as government institutions to dress education and health and welfare, but at the same time he recognized that there is a vital role for government to play both in providing social services and in creating this framework of the market. How do we define Property Rights . How do we enforce Property Rights what institutions are necessary to allow a market to operate effectively as weve seen in our discussion of the Great Depression the absence of federal deposit insurance in the United States led to the collapse of thousands of banks in the early 1930s because of the collapse of the banks the money supply contracted very significantly. There was very significant deflation a great deal of unemployment. Well since the 1930s and the deal of franklin roosevelt, theres been federal deposit insurance in the United States. So individuals dont have to withdraw their funds from a bank if theres some sort of a banking crisis there, isnt that fear of losing of losing your money and therefore we havent had any sort of significant banking crisis since the 1930s such as existed before federal deposit insurance. Well as federal deposit insurance an interference with the market, or does it make the market move operate more effectively and high x argument was that government has an essential role to play both in social services and in establishing the framework for the market. So this is what he had to say. Theres nothing in the basic and this is from his 1944 work the road to surfed him through which he probably became most well known there is nothing in the basic principles of classical liberalism to make it a stationary creed the fundamental principle that in the ordering of our affairs. We should make as much use as possible of the spontaneous forces of society to incourage competition and a Free Exchange goods and services. And to resort as little as possible to coercion, his object of opposition was government control of the economy, not of government providing certain Welfare Services for individuals and government establishing the framework institutions within which this spontaneous action of individuals operates. We want to resort as little as possible to coercion that that principle is capable of an infinite variety of applications. Theres all the difference between deliberately creating a system. Within which competition will work as beneficially as possible and passively accepting institutions as they are. Probably nothing has done so much harm to the liberal cause as the wooden insistence on certain rough rules of thumb above all the principle of laissezfaire. So hayek was in many respects. No dogmatic libertarian and andesis was in terms of jesus really thought theres almost no positive role for government. I thought no government has to create the framework of institutions for the market and as well. He thought there was a significant role for government to play in in those in in the society and providing services. So, he he provided a description of socialism, and i think its important to understand. What hayek meant by socialism because he had a very particular meaning today. We tend to think of a socialist as someone like bernie sanders. They want to see a lot of government that really wasnt. High exdefinition of government he was against a lot of government that thats not the point, but he didnt think it was the same thing as socialism what he meant by socialism was the type of Economic System that existed in the soviet union where government ran the whole economy and made all of the economic decisions as we discussed in our and our in our class on marks that marx really felt that government could do just about everything in the society and in the economy government owned all the land it made all the Investment Decisions it employed most of the people in the society and there was a very limited role for a private system. That wasnt high excuse. Yeah. Weve got a couple questions down here. So it probably want the boom come down again, so eric do you want to ask the first question . Sure, so youre talking about sort of the nuance that of hayeks work in his opinion today. This is sort of seen like this work is seen as like sort of the foundation of the or like the basis of capitalism and why its inefficient system. Do you feel like his more nuanced positions about about like the limitations of what the market can do . So for instance like a prices transmit knowledge throughout a society, but it doesnt transmit it all equally so it may transmit the market for phones or something equally, but when it comes down to necessity goods say like food or housing, it doesnt appropriately transmit those my personal need for housing like does not it cannot be described by my income if im very low income. I cant translate that information how badly i need that to the market. So in your opinion do you feel like a lot of the more nuanced parts of his of his work have been lost and sort of been coopted for to the purposes of say libertarianism or free market capitalism. I do i think thats a good question. Is that has hayeks message largely or insignificant part. Perhaps better not been fully understood and and i agree with that in terms of he did have a much more nuanced perspective and he would not be whats today considered to be a hardcore libertarian although again at the time. When it looked like the whole world was moving towards socialism in the sense of government control of most of the economy that nuance wasnt quite as wasnt wasnt quite as adequately appreciated as it should have been and i felt that a good article would be Something Like or title for a book would be completing the hayekian revolution and then trying to talk about his ideas in the area of in the area of government more generally. Distinct from his views against socialism and again, his definition of socialism is very clear in road to serfdom and its rather limited Socialism Means the abolition of private enterprise of private ownership of the means of production and the creation of a plan economy in which the entrepreneur working for profit is replaced by a Central Planning body. So high x view really was that thats what he meant by socialism. Thats what he was against and that message has to some extent i think been forgotten or lost. So i think its really important that we return to the original hayek and consider his whole view and as i said to me, this is also very consistent with the view of Adam Smith Adam smith. Primarily his greatest concern was he didnt he was against mercantile heism. He didnt think government should run the economy. He again, he thought government should be smaller rather than larger. He thought there should be a large private sector including in the provision of social services, but he wasnt theres no place for government. Thats also similar to hayeks view thats different than contemporary libertarians, and i think that the high ex smith position is in many senses much stronger than the contemporary libertarian position eli. Yeah. Do have a comment question . So you talked about hayek and his adversion aversion to big government, but i was wondering theres specific instances where you said social services, he would permit social services. So i was wondering is there any specific examples he gives where he feels that its appropriate for the government to step in. Sure, thats a really good question. And in fact again that thats a good segue to what i was next going to suggest is that again in road to surf them how it gives a really good description of the sort of government activities that he thinks are appropriate. He says to prohibit the use of certain poisonous substances to require special precautions in their use to limit the working hours or to require certain sanitary arrangements. Fully compatible with the preservation of competition nor is the preservation of competition incompatible with an extensive system of social services. So hes not arguing against theres going to be poor people in a society. Theyre going to be people who need the help of the community. Thats the nature of the universe. You cant wish those people away or you cant assume that they dont exist people often even if they are able most of the time to take care of themselves in the market economy. They may be ill they may be going through a personal family circumstance. Theres many situations that lead people to require the assistance of the community and its to the advantage of the community that those services are provided people are then more productive educ