Friedrich Hayek—Economics of Freedom | Economic Game Changers | PragerU

On October 24th, 1929, also known as Black Thursday, the stock market went into freefall. Panic selling continued for the next few days, and years of risky investing with borrowed money quickly unraveled. Fortunes were wiped out and banks collapsed. With no money left to borrow or spend, businesses across the country laid off workers en masse as despair and hopelessness filled the streets. Intellectual elites like John Maynard Keynes pushed for aggressive government intervention to restore economic activity. They would get their wish in 1933. In June of that year, President Franklin D. Roosevelt signed into law the National Industrial Recovery Act, known as the New Deal. It massively increased government intervention in the economy, including spending billions of dollars to prop up farmers through subsidies and price controls, and to create jobs for the millions of unemployed. These jobs included planting trees and building roads, to painting murals and writing screenplays. Supporters of the New Deal believed artificially raising prices and wages would increase demand for consumer goods, helping the economy to improve more rapidly. It was also in line with the prevailing attitude that the government and selected experts should intervene in the economy. This idea was playing out across the socialist East, like Soviet Russia and Nazi Germany, and in the liberal West, like the United States. One Austrian who observed all this with profound alarm was Friedrich Hayek. Today, he's known as a fierce defender of classical liberalism and free-market economics. But after fighting in World War I, he adopted progressive-era ideals, believing, They should put economic planning in the hands of experts. Guided by rational scientific reasoning, they could prevent war and the destruction that comes with it. Then, in 1921, Hayek began working under Ludwig von Mises, initially clashing with Mises' free-market position. It wasn't until after reading Mises' Socialism, an Economic and Sociological Analysis, that he eventually came to agree with his teacher. It's genius. I say genius. Prices aren't arbitrary. They're signals, compressing vast information on scarcity, production, and consumer preference into a number that anyone can understand and respond to. And? And any attempt to control them deprives competition of its power to coordinate individual efforts effectively. My work is done here. Hayek later joined debates against sophisticated socialists and worked with Mises to counter the socialist planning in Europe. Then came the clashes with John Maynard Keynes at the London School of Economics in 1931. Let government do the planning. They're the experts. Zemos certainly are not, Mr. Keynes. To prove that central planning was only a gateway to much bigger problems, he started with something called the knowledge problem. Hayek argued that the knowledge needed to organize a complex economy is dispersed among the decisions of millions of individuals, rather than concentrated in any single central planner. Think about it. Farmers know their soil conditions, shop owners know their customers, and customers know what products they prefer. They are the real experts, not the central planners. Hayek pointed out that only in a free market can individuals efficiently act on that knowledge. Furthermore, they can quickly shift resources when that knowledge changes or evolves. A system based on central planning can do no such thing. But the government experts... Oh, put a cork in his Keynes. Building on the knowledge problem, Hayek saw that crucial social systems emerge naturally, rather than through any central design. Institutions such as language, money, markets, and legal traditions developed gradually as populations experimented and adapted over time. Hayek called this idea... Spontaneous order. It means you can't design society from a master blueprint. Societies function best when they allow people to experiment, adapt, and organize themselves spontaneously. He argued that markets also work best as a discovery process with competition. Some ideas fail while other ideas succeed, and that process helps markets discover what consumers want and what production methods work best. What's more, the coordinating power of the free market is a bulwark against another power, government tyranny. This led Hayek to eventually write his most important work, The Road to Serfdom, written during World War II and published in 1944. It was his warning to the West that giving up its economic soul to committees of experts would lead to the loss of all other freedoms. Personal and economic freedoms had already vanished in Nazi Germany and Soviet Russia. Hayek argued that it was market competition and limited government that made political freedom possible, not massive government bureaucracies. Wake up people! Clear, predictable rules enforced by a limited government are one thing, but central planning requires giving the government incredible power. Do that and you risk losing the very liberties that made us free and prosperous in the first place. After the war, many across Europe and America thought the government efforts that helped countries to ration scarce resources during the war could now be used to fight poverty or protect incomes during a recession. Hayek, however, only saw... Danger! Danger! Danger! Wake up people! You need to see what's happening around you! Through the Cold War and into the 21st century, Hayek lived on through his arguments. Alongside Mises and other Austrians, his work still warns against socialism while defending the relationship between law, liberty, and free markets. Next time, we meet another Austrian, a colorful maverick of a man who made a peculiar proposition about capitalism. Destruction. It is a defining feature of capitalism. Yes, I said it. Destruction. Thanks for watching this episode of Economic Game Changers. Become an expert on economics and financial literacy in no time with more episodes like this at PragerUKids.com. Parents, subscribe today!