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Caldwell: ...or paving over Iraq. I think Iraq actually is a perfect example of this. You don't just come in and say, "Here are all the institutions that have worked well in the West," and expect overnight changes. That seems to me to be a contemporary example of the sort of hubris he argued against.
Reason: Beyond his critique of wide-scale social planning, what would you say are Hayek's other major contributions to 20th century thought?
Caldwell: Another very important one has to do with the role of prices in coordinating social action where knowledge is dispersed.
As I mentioned, in the 1930s, Hayek was engaged in debates with various types of socialists. The model that was then used to describe how an economic system works assumed that all agents had full knowledge and that [an efficient distribution of goods and services] gets obtained [through various transactions]. Some of the socialists argued that the differences between socialism and capitalism, or the market system, were really about what set of people [made the transactions]. Under socialism, you had planners; under capitalism, you had individuals.
Reason: And the socialists argued that their planners could coordinate the production and distribution of goods and services with less trial and error, more quickly, more efficiently?
Caldwell: That's right, because they would be centrally gathering information. The socialists argued that individual entrepreneurs are just looking over their own markets whereas the planners are taking everything into account.
Hayek said, "Well, wait a second, this does not make sense. Markets do a lot of stuff, but this model does not shed light on what markets do." He zeroed in on the critical assumption of full or perfect information. He said that in the real world, we have millions of individuals who have little bits of knowledge. No one has full knowledge, and yet we see a great deal of social coordination. As Frederic Bastiat said, "Paris gets fed." No one intentionally plans on feeding Paris, but millions upon millions of people get up every morning and get what they want for breakfast. How does that happen? Hayek's answer is that a market system ends up coordinating individual activity. Millions of people are out there pursuing their own interests, but the net result is a coordination of economic activities. And prices are the things that contain people's knowledge.
Mainstream economists have picked up on this and talk about prices as containing information. Modern information theory certainly nods to Hayek as a precursor. He argued that pricing contains knowledge of specific time and place and the man on the spot. Prices contain knowledge that is tacit, that can't really be expressed by individuals. Individuals make actions in markets, and that's what causes prices to be what they are. People are acting in markets. They are not always explicitly saying why they are acting, but they are acting on their knowledge of local situation, the past, and more.
Reason: What about his influence in academic economics?
Caldwell: His impact on things like our standard graduate, or even undergraduate, education has been pretty minimal. However, if one thinks of Hayek as being part of a stream of people making contributions that often do not fit easily into the mainstream but which provide real insights into the workings of the economy--public choice analysis, analysis of property rights, transactions cost analysis, the new institutional economics, evolutionary economics, some variants of experimental economics, maybe even parts of behavioral economics--then Hayek, together with people like other Nobel Prize winners James Buchanan, Ronald Coase, Douglass North (who invokes Hayek's emphasis on getting the right institutions, but also his caution that one cannot just impose them, all the time), and Vernon Smith, are all contributing to an important line of research that has in many different ways had an impact on the mainstream, even if it doesn't show up in the textbooks or the latest working papers.
Reason: What do you think Hayek's legacy in the 21st century will be?
Caldwell: To the extent that the ideas in papers like "The Theory of Complex Phenomena" get developed, that could be a big part of his legacy. He didn't get very far in developing the concept, but it's the basis for his claims that what we can know in the social sciences is ultimately very limited. It holds that pattern predictions are the best that we can often do when it comes to society. He suggested that it's better to provide explanations of the principle by which something works than to make precise predictions of how people will act.
Reason: So he taught us that the starting point of our plans has to be a recognition of the necessary limits of our understanding, that the grand old Enlightenment dream of total knowledge has to be replaced with one that is limited and provisional.
Caldwell: That is a Hayekian theme. One of the things that I take away from Hayek is you can't really prove any of this stuff in a traditional way. What you can do is develop a way of thinking and all sorts of different evidence that ultimately convinces you that this is an appropriate way of looking at this particular type of social phenomenon. I think this is part and parcel of Hayek's method. It's certainly what I took from him in my book.
Understanding the limits of what we can do is an important legacy. And so is understanding that in trying to do too much, we often end up making situations much worse.