In defense of the civil law: a response to Hayek.

Author:Wendt, George J.
Position:Economist Friedrich August von Hayek

Friedrich August von Hayek, a Nobel Prize winning economist, (1) became famous arguing against "central planning." (2) In addition to his work in economics, he wrote extensively on philosophy (3) and law. (4) The latter topic will be the primary focus of this paper.

Understanding Hayek's views on law requires a greater understanding of his background and his views on economics. The next section will explain who Hayek was, discussing his areas of study, his economic views, and his views of the law. This background information proves necessary to understand why Hayek came to the legal theories that he did.

HAYEK'S HISTORY

Hayek was born into a Viennese family of intellectuals in 1899. He attended the University of Vienna earning a doctorate of law in 1921 and a doctorate in political philosophy in 1923. (5) He initially started studying economics to learn how to help the impoverished, (6) which led to his favorable view of Democratic Socialism. (7) His philosophy changed after he read the book Socialism by Ludwig von Mises, a leading Austrian economist. (8) Hayek famously said, "[t]o none of us young men who read the book when it appeared, the world was ever the same again." (9)

Hayek began to take seminars from Mises after reading Socialista. (10) This relationship led to him founding the Austrian Institute for Business Cycle Research. (11) After just a few years, he joined the London School of Economics, one of the most prestigious universities in the world. (12)

While Hayek was teaching and refining Mises' theory of the Austrian business cycle, Nazi Germany took control of Austria, Hayek's homeland. Hayek became a British subject in 1938 because he refused to return home as long as it was under Nazi control. (13) Hayek viewed socialism and central planning as a root cause of Nazism. (14) Hayek and Mises were strong critics of any attempt at central planning as it interfered with the freedom they thought every man should have the right to enjoy.

While at the London School of Economics, Hayek's feud with Lord John Maynard Keynes began. (15) Keynes believed that governmental deficit spending could rescue economies. (16) Hayek, however, believed that deficit spending would only increase the problems of recessions and depressions because their true cause was the inflation caused during the "boom" fight before the "bust." (17) Many expert economic historians consider it surprising that Hayek never wrote a complete response to General Theory, Keynes' most famous and influential book. (18) Hayek never wrote a response because Keynes had a history of changing his opinion, and even more frequently, changing the topic, when Hayek would begin attacking his philosophies. (19) Hayek said he did not see the point in refuting General Theory as Keynes would have just "changed his mind" anyway. (20)

One of the tools Hayek used to dispute "central planning" was authoring his most famous book, The Road to Serfdom in 1944. (21) In its most important chapter, "The Socialist Roots of Nazism," the book openly refuted the claim that fascism was the capitalist reaction to socialism. (22) When Keynes said that he agreed with a large percentage of the book, Hayek shot back, stating that Keynes likely believed this because Keynes was unaware of "how far he had moved away from" classical economics. (23) He continued, stating that Keynes' views "will not be a maker of long run opinion, and his ideas were of a fashion which, fortunately, is now passing away." (24)

In the 1950's, Hayek came to the University of Chicago, but never joined the Chicago School of Economic thought. (25) During this time, he began his expansion into other topics. He started by writing The Constitution of Liberty, which discussed government coercion. (26) After this, he returned to Europe to teach and write at the University of Freiburg, where he began writing Law, Legislation and Liberty. (27) This book took Hayek a great deal of time to write and edit, as he would constantly rework large sections. (28) The book was finally published in a three part series in 1973-1979. (29) In 1974, Hayek won the Nobel Prize in economics for his work, splitting the prize with a socialist economist. (30)

Hayek's Economic Views

Milton Friedman said Hayek's contribution "was to make clear how our present complex social structure is not the result of the intended actions of individuals, but of the unintended consequences of individual interactions over a long period of time, the product of social evolution, not of deliberate planning." (31) This understanding had major implications on Hayek's legal views. Hayek was influenced by the writings of Adam Smith, particularly Wealth of Nations. (32) In this book, Smith's most famous work, he discussed how an individual's actions, although done for self-interest, could lead to the bettering of the entire society, through the invisible hand. Like Smith, Hayek was interested in how the market coordinates itself.

The answer, for Hayek, was the price system. (33) Pricing does something more than just tell you whether something is relatively cheap or expensive. By comparing supply to demand, pricing tells you how scarce an item is. (34) Thomas Sowell, a Stanford University professor, uses the example of beachfront property. The majority of us cannot afford beachfront property because it is too expensive. Hayek and Sowell both dig deeper however, asking why it is more expensive. This property is more expensive because the number of people who would prefer to live on the beach greatly exceeds the amount of available beachfront property. This shortage, or scarcity, causes the price to go up. (35) No single person has set the price. The market has sorted it out with price as an indicator of the scarcity. (36) This theory leads to Hayek's theory of the Austrian business cycle.

The inquiry into the cause of the Great Depression and how to prevent a repeat of it dominated the economic debate and discussion during Hayek's life. (37) Lord Keynes believed that government spending could be the answer to prevent another depression. (38) The government would see the downturn, often referred to as the "bust," and could then flood the market with government spending and stimulus money, providing a dramatic increase to both supply and demand. (39) Hayek argued against this idea using two main attacks. First, demand almost never needs to be increased, as people have more desires than access to limited resources, including time and money. Every person has nearly infinite demand and people figure how best to utilize their scarce resources. Second, this increase in the supply of money and the lowering of interest rates will cause inflation. (40) This led to Hayek's theory that the rise before the fall, often referred to as the "boom", actually causes the bust. (41) During the boom, credit is cheap due to the federally lowered interest rate. This makes credit easily accessible. This distortion of information alters production, and other business decisions, leading to what is often referred to as "mal-investments." (42) These distorted signals cause inefficiencies and lead a great number of businesses and other investments (like real estate) to fail.

Hayek then focused on an individual's knowledge or information. He wrote about this in two articles: Economics and Knowledge and The Use of Knowledge in Society. (43) He believed that each individual only knows his tiny segment of the economy. (44) Central planning will inevitably fail because no individual person can have even a minor fraction of the aggregate knowledge of a society. (45) The ease at which power is consolidated, compared to the difficultly or impossibility of consolidating knowledge, has remained a vibrant topic for economists. (46)

Hayek then turned his interest to how markets reach their equilibrium. This led him to study institutions, instead of the behavior of individual actors. Hayek and the majority of economists believe that people are value maximizing. (47) This means that if given a choice between A and B, people will choose the one that they value greater. (48) Because of this belief, behavior will not affect their decisions, but institutions (which can incentivize or deincentivize) will have a greater effect on the economy, as it affects people's decisions. (49)

Hayek's Legal Views

It is true that some historians have argued that Hayek's views on law were separate from his economic views. (50) However, a great number of people now view this as the next logical step in his understanding of the economy. (51) Hayek, from the time of his initial paper, was concerned with market coordination. The law provides an essential background to understanding this. Also, his infatuation with information naturally led him to law. The law is an interesting way of dispersing information and rules to a great number of people relatively quickly.

Hayek argued that the government should be limited and should create a stable, predictable environment for the economy to grow. (52) Furthermore, he felt that the government must also enforce and protect property laws as well as ensure the enforcement of contracts. (53) For proof of the necessity of property rights he turned to evolutionary biology, stating, "animals have protected their property rights for their society to survive." (54) Therefore, contract rights should enforce the reasonable expectations of the parties. (55) The test formulated by Hayek was whether the parties used and relied on the general customs of the society. (56) Milton Friedman, in Capitalism and Freedom, also endorsed the necessity of protecting contract and property rights. (57)

In Law, Legislation and Liberty, Hayek focused on laws and their creation. (58) He no longer had the distraction of politics, even though the two are necessarily intermingled. (59) Here, he argues for general rules (60) that are evenly applied. (61) The rules must be general, because no legal system...

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