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Milton Friedman and F.A. Hayek: Humble Appreciators of Society’s Complexities

In my latest column for AIER – inspired by reading Jennifer Burns’s new biography of Milton Friedman – I argue that Milton Friedman’s formal economics was not quite as far from Hayek’s formal economics as many people believe. A slice:

In place of the Cowles approach, Friedman proposed an approach that he called “portioning.” As Burns describes portioning, it “hearkened to the years before general equilibrium models. Rather than try to capture the whole picture in one model – which Friedman doubted could be done, based in part on his failed alloy at the Statistical Research Group – instead the economist assembled an overarching theory from discrete pieces of economic activity. This portioning approach made economics a useful tool, ‘an engine for the discovery of concrete truth.’”

Reading about Friedman’s strong negative reaction to the “Cowles approach” of general-equilibrium equation building, followed by his preferred “portioning” approach, called to my mind the socialist calculation debate of the 1920s and 1930s. During that debate, Ludwig von Mises and Hayek insisted that no government in practice could possibly gather and process all of the dispersed bits of knowledge that it would need in order to allocate resources in ways that yield economic outcomes superior to those that arise from individuals following prices and other signals generated in decentralized markets. Only by allowing individual property owners the freedom to buy and sell is it possible to generate the knowledge – mostly in the form of market prices – that must be acted on to ensure productive allocations of resources.

These socialists – prominently including, not coincidentally, the same Oskar Lange who would later wind up at the Cowles Commission in Chicago – dismissed Mises’s and Hayek’s argument by insisting, with no evidence whatsoever, that government would confront no serious difficulty in getting the real-world information necessary to make central planning successful.

Mises and Hayek argued for decentralized decision-making – for portioning decision-making power to individual property owners. And the economics that these Austrians did was correspondingly focused on the formation and function of prices and other market signals in individual markets. Mises and Hayek of course explained how markets are interconnected, but these interconnections are successful only insofar as they arise from the formation of market signals that arise whenever individual property owners freely make buying, selling, production, and investment decisions within particular markets.

The details of Mises’s and Hayek’s pre-war debate with socialists differ from those of Friedman’s post-war debate with the economists and mathematicians at Cowles. Also differing in detail are the styles of economics done by Hayek and other Austrians compared to that done by Friedman and other Chicagoans. But more interesting and significant than these differences is what the two camps of market-oriented economists shared – namely, an appreciation for the unfathomable complexity of the modern market economy and a corresponding understanding that economic models constructed in ignorance of this complexity will engender, not an actual ability of government to successfully plan an economy, but only a “fatal conceit” that such planning is feasible.

UPDATE: Someone on Twitter says that I get Hayek all wrong because Hayek accepted Friedman’s and Schwartz’s data. But I never denied or implied that Hayek rejected their data.

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