The Trend of Economic Thinking of Market and Money: What is the Hayek’s Position on the Issues?
Makoto Nishibe
Graduate School of Economics, Hokkaido University
nishibe@econ.hokudai.ac.jp[Contents]
1. Visions and Public Opinion in Hayek’s “The Trend of Economic Thinking”
2. Hayek’s Transformation of Vision of the Market
3. Modern Worldview of the Market and its Error
4. Hayek’s Position of Vision of the Market
5. Hayek’s Position of Vision of the Money
6. The Relation of Vision and Worldview

1. Visions and Public Opinion in Hayek’s “The Trend of Economic Thinking”

In this article I will focus on the role of worldview (Weltanschauung) or ‘public opinion’ for
diffusing economic theories and thoughts in contrast to that of vision for creating them.
Hayek dealt with the theme in many occasions during his academic career, but I convincethat he was clearly aware of the importance of the issue since his early days because hementioned it in “The Trend of Economic Thinking” when he made an inaugural lecture at
LSE in 1933.

The aspect which I wish chiefly to emphasise is (…) the role played by purely scientificprogress—thegrowthofourinsight

intotheinterdependenceof

economic

phenomena—in bringing about these changes in his attitude to practical problems.(…)
But, in fact, the cause of the great historical changes which I am discussing seems to me
to be of a more subtle kind. It consists neither of a change in the underlying ethicalvaluations nor of a refutation of the validity of certain analytical propositions, but rather
in a change of view regarding the relevance of that knowledge for practical problems. It
was not a change of ideals nor a change of reasoning but a change of view with regard to1

the applicability of such reasoning which was responsible for the characteristic featuresof the popular economics of today. (…) It is probably true that economic analysis has
never been the product of detached intellectual curiosity about the why of social
phenomena, but of an intense urge to reconstruct a world which gives to profounddissatisfaction. This is as true of the phylogenesis of economics as of the ontogenesis ofprobably every economist. As Professor Pigou has aptly remarked: “It is not wonder, but
the social enthusiasm which revolts from the sordidness of mean streets and thejoylessness of withered lives, that is the beginning of economic science.” (Hayek, 1933a,
p.18)

It should be noted that “a change of view regarding the relevance of that knowledge forpractical problems,” viz. “ a change of view with regard to the applicability of such reasoning
which was responsible for the characteristic features of the popular economics of today” is
not “a change in the underlying ethical valuations of the validity of certain analytical
propositions” nor “a refutation of the validity of certain analytical propositions,” viz. “not achange of ideals nor a change of reasoning.” Here Hayek indicated the very peculiar
characteristics of social sciences, especially of economics. He had noticed and warned thatthe object of economics is, unlike natural sciences, social phenomena affected by subjective
cognitions, actual actions and changeable passions of humans, and that economists must beaware that economics is largely affected by popular reputation or public evaluation on theanalytical propositions of a positive science as well as ethical propositions of a normative
science. In other words, Hayek refers to the property of economics involving in itself
self-referential proposition or meta-evaluation in terms of applicability and relevancy topractical problems.

The reason why Hayek could recognize the fact is not because he wanted to gain more
reputation of his economics as a prominent economist, but because he strongly concernedwith the difficulty of realization of liberalism compared with socialism. But, furthermore,because of his acute perception of the peculiarity of economics that depends on influence of‘public opinion’ or popularity, it would be quite difficult to take a nice balance between
intellectual sincerity to the truth and concessions to popular prejudice.

[I]n our field no knowledge can be regarded as established once and for all, and that, in2

fact, knowledge once gained and spread is often, not disproved, but simply lost andforgotten. (…) The result is that in economics you can never establish a truth once and forall but have always to convince every generation anew—and that you may find much
more difficult when things appear to yourself no longer so simple as they once did.
(Hayek, 1944, p.38)

The reason why I think that too deliberate striving for immediate usefulness is so likely
to corrupt the intellectual integrity of the economist is that immediate usefulness
depends almost entirely on influence, and influence is gained most easily by concessions
to popular prejudice and adherence to existing political groups. I seriously believe thatany such striving for popularity— at least till you have very definitely settled your own
convictions, is fatal to the economist and that above anything he must have the courage
to be unpopular. (ibid. p.44)

Hayek thus himself declared paradoxically that he cannot strive for “immediate usefulness”
and “popularity” and “he must have the courage to be unpopular” to maintain theintellectual integrity of the economist.

Caldwell referred to the article “The Trend of Economic Thinking” and indicated that Hayek
despairs over the direction of current “public opinion” that preferred increasing stateintervention in the economy, and that such popular concept of planning had its origins inGerman historical school. Hayek touches upon a number of themes that were to engage him
for the remainder of his career, but it is not a blueprint, but a manifesto or rather a starting
point (Caldwell. 1988b).

I surely admit that this article contains many potential ‘visions’ that would have flourishedto create important propositions and new theories later on, but here I am concerned with thearticle because of his attention to the idea “public opinion” related to peculiarity of
economics in the time of expansion of socialism. In the next section, I will take a look at
Hayek’s transformation of vision of the market. Thereafter, I will examine the role of “public
opinion” in case of rapid propagation of the conventional vision of modern microeconomics
formed even after Hayek’s insightful vision of the market and give some consideration into
what relation between vision and worldview have in “public opinion”.
3

2. Hayek’s Transformation of Vision of the Market

It is common knowledge that Hayek has changed his theoretical and methodologicalpositions a few times during his lifetime, but there is still disagreement upon the number oftimes and contents of his transformations and their implications for Hayek’s whole thoughts
and theories (Caldwell, 1988a, 2004; Fleetwood, 1996; Foss, 1995; Hutchison, 1981; Lawson.
1994).

I have joined the arguments and presented my account on the issue (Nishibe, 2010). I
contend that Hayek’s turn of his market-images is the key factor of his two-timetransformations in 1946 (Hayek, 1946) and 1960 (Hayek, 1960). Hayek’s battle with themarket socialists in socialist economic calculation debate was crucial because it enabled him
to transform his vision of mechanistic market based on equilibrium into the one of market
process with rivalry and discovery in the late 1940s, and further into the other one of aspontaneous order based on social rules of conduct in 1960 and thereafter. Hayek’ssocio-economics since 1960 results not only from his philosophical and methodological turns,
but also from the change of his vision of the market that is a complex of some basic concepts
in theory.

To put it more precisely as to how it developed, Hayek started as an orthodox neoclassicaleconomist to tackle monetary business-cycle theory in view of Austrian capital and interest
theory in 1920s and participated in the controversy on the feasibility of centrally planned
economy in 1930s (Hayek, 1935) initiated by Mises in 1920 (Mises, 1920). He recognizedthrough the debate with such market socialists as Taylor and Lange in 1940s that the visionof mechanical centralized market with an auctioneer of general equilibrium that underlies
the whole theory of conventional economics and forms the hardcore of market socialism is afundamentally defect to mislead the whole argument. Hayek could criticize generalequilibrium theory for the first time when he has become to deal not only with allocation andexchange of scattered knowledge in a society in his famous paper in 1937 (Hayek, 1937a) but
also with discovery and creation of new knowledge through the process of competition
among multiple agents in the market in 1946 (Hayek, 1946). Hayek thus eventually reached
a new vision of the dispersive network of economic transactions.

4It is notable that the transformation involves not only methodology or theory but also vision.
Here ‘vision’ can work as a catalyst to grasp reality and help create a new theory andmethodology in science. The key concept for Hayek to break with general equilibrium andreach a new market image as his vision is rivalrous and discovery competition since 1946,
not subjective and dispersive knowledge since 1937. This break is mainly caused by his
struggle with Lange’s trial and error method. It can be regarded as the practical applicationof Walrasian general equilibrium model with tâtonnement and ‘parametric function of prices’that are supposed to work almost in the same manner with the same theoretical conditions
and the ingenious strategy to make general equilibrium as orthodox pure theory of
economics to endorse market socialism to be feasible in the debate.

It is conceivable that Hayek’s transformation has taken place in a sequence of 1) vision, 2)
theory, and 3) methodology. To put it in general, ontogenesis of a theory would be as follows.
Vision gradually turns into theory. Once theory is established, methodology is abstracted
from theory as meta-theory and it fundamentally determines or constrains the basic
structure of theory. It is often observed that a shift in methodology is not the cause, but theresult of change of theoretical endeavor as substantive scientific activities grappling withreality. Methodology does not transform itself nor automatically create a new theory.

Vision in substantive economics is no less important than methodology, particularly in order
to discover a new finding, create a new framework and improve scientific knowledge ofreality. Vision offers a metaphor, an analogy or an image to activate abduction different fromdeduction and induction, which consists in a cognitive movement from surface phenomena(event / action) in empirical domain to some deeper mechanisms, structures, rules,
tendencies, power or relations. So it is recognized that vision is necessary for scientifichypothetical reasoning that enables creation of new theories or conceptions. Once visiontransforms, it requires a change of methodology in order to present an integrative andconsistent basis of a new theory so that it can formally systemize itself. The vision of atheory as the frame of reference to key concepts in economics, even though they cannot be
expressed in explicit manner in the first place, are not less important than methodology inorder for economics to explore the unknown reality of our socio-economic world.

Hayek’s case of transformation exemplifies the propositions on the relation of vision, theory
5and methodology. He had experienced his philosophical turns through I-III, however, thetransformation in methodology had not taken place by itself. Such particular ‘hardcore’
concepts as equilibrium, competition and knowledge have gradually changed the prevailing
vision of the market that was to be replaced by a new one at some threshold point. The
vision of the market is a complex constituted by those concepts to support a total structure ofa theory, so its change is potentially able to overturn the economic theory as a whole.
Methodological shifts followed these changes in order to build the foundations.

Hayek’s market-image of 'a rivalrous and dispersive discovery procedure for knowledge'
should be a vision for establishing a new theory of the market as a self-organizing complex
system or a ‘spontaneous order’ that is the basic idea of Hayek III after 1960s, whilst Hayek
himself had not accomplished it. Hayek’s vision can still help us create more articulate
theory of the market in reality.

Now I would like to explain the main reason why I must pay special attention to the rivalryof multiple independent ends and discovery of dispersive and unknown knowledge in
Hayek’s market-image depicted in a series of his articles after 1946 (Hayek, 1946, 1947,
1968). This is because modern extensive version of neoclassical economics with developmentof informational economics, and even part of Austrians schools tend to take Hayek’s“Economics and Knowledge” (Hayek, 193a) as an epoch-making breakthrough to a new viewof the market as 'the telecommunications system' and especially to informational economics.
It is plausibly told that Hurwicz (Hurwicz, 1960, 1971), by inheriting Hayek’s vision of themarket, pioneered the notions of incentive compatibility and informational efficiency anddeveloped the theory of mechanism design.

But I doubt that such informational development of economics is largely based on the idea ofa concentrated market with an auctioneer or the parametric function of prices and it has not
built in Hayek’s vision of the dispersive market. This is why I consider that interpreting
Hayek as the founder of informational economics is lack of understanding the essence of his
position on the issue of the market and it is utterly misleading. We had better think that
this is a battle among many schools of economics not for scientific truth and validity but forjustification for the throne and public popularity. The notion of ‘vision’ is not sufficient tounderstand the dynamic process of this kind of phylogenesis of economics. We would come6

back to the point once again when we come up against ‘worldview’ in the next section.

3. Modern Worldview of the Market and its Error

On Hayek’s transformations of vision of the market, we have thus focused on the crucial roleof ‘vision’ of an economist as a creator of new theories because we were interested in theprocess of innovation of economics. Here, in order to consider how new theories of economics
can diffuse among people and give an influence on public opinion and economic policy, we
would like to shed light on the other side of the thing, i.e., the important role of ‘worldview’(Weltanschauung) of the intellectuals as propagators of new theories.

Hayek has paid attention to the peculiar role of the intellectuals. A strong belief prevailed
that the influence of the intellectuals on politics is negligible, but they in fact exercised agreat power of influence by shaping ‘public opinion’ when they performed the role asintermediary in the spreading of ideas. In this respect, Hayek, assuming that socialism won
the victory over liberalism in the year of 1949 after WWII, endeavored to understand thereason why so many of the intellectuals are inclined toward socialism and write out aprescription (Hayek, 1949). His conclusion is that “the main lesson which the true liberalmust learn from the success of the socialists is that it was their courage to be Utopian which
gained them the support of the intellectuals and therefore an influence on public opinion
which is daily making possible what only recently seemed utterly remote.”(ibid., p.237) He
encourages to create “a new liberal program which appeals to the imagination, (…) a liberal
Utopia, a program which seems neither a mere defense of things as they are nor a diluted
kind of socialism, but truly liberal radicalism which does not spare the susceptibilities of themighty” (ibid.)

From our viewpoint of the present time in the 21st century when capitalism has gained agreat triumph over socialism, everything seems diametric opposite in those days. At present,
disillusion of a socialist Utopia prevailed and still remain strong. Market fundamentalism
and globalization, instead of socialism and planning, has gained popularity from many of
the intellectuals. Accordingly, we have to think of the modern trend of economic thinking asdiffusion of the worldview of the market described in popular neoclassical microeconomics
that is fundamentally different from Hayek’s own market-images in many ways.
7

The modern trend of economic thinking is probably composed of the following three
propositions with respect to the market.

(1) The market is the mechanism for efficiently allocating scarce resources to economic
agents by free contract and transaction under the given condition of property relation of
goods and services at the initial point in time unless we can assume a paradise wherelimitless kinds and amounts of goods exist and satisfy all the wants of people.
(2) In order for the market to work well, we endeavor to fulfill the condition for ‘perfectcompetition’ as much as possible by deregulating all industries, clarifying property rights,
minimizing governments and increasing the number of and decreasing the size of agents.
(3) If the perfect competition condition is fulfilled so that the parametric function of prices
can work, the efficient market mechanism is universally and fully usable for formation ofsocio-economic order and mutual coordination of agents’ actions.

We name each proposition as follows: (1) ‘the Definition of the Market by Scarcity’, (2) ‘theCondition for Perfect Competition’, and (3) ‘the Proposition on Market Universality.’ Suchparametric function or signaling function of prices requires satisfaction of such conditions
for perfect competition as: (a) one-price to one-good law holds because prices in a market aretransmitted instantly and with no cost to each economic agent; (b) each economic agent
behaves as a price taker because a large number of small sized agents are assumed; (c) there
is freedom for firms of entry to and exit from industries and no institutional obstacles for
that; and (d) all goods are homogeneous in quality.

In short, the trend of economic thinking composed of (1)~(3) defines and explains the market
as an ideal type of pure price mechanism precisely in the same way as orthodox
microeconomics in modern economics does. It regards the market as a highly efficientmechanistic tool that can function more smoothly if we make it approach the condition of
perfect competition as close as possible. It is notable that perfect competition that enables
parametric function of prices to be workable could be regarded as a normative criterion forevaluating the condition of the market economy in order to determine whether to executeanti-monopolistic competition policy and deregulation. Since the intellectuals as market
fundamentalists stick to the worldview that the ‘free’ market is always desirable because it
8

should function well, while forgetting such highly hypothetical conditions as (2) ‘theCondition for Perfect Competition’, and (3) ‘the Proposition on Market Universality thatspecialists and economists never forget, they can feel strong motivations to advocate thosepolicies by depending upon such a worldview of the market.

When Hayek talks about his own profession as an economist to his students, because he isfully aware of the peculiar characteristics of economics apart from natural sciences, his
remarks sound quite pessimistic tones and describe an economist full of sorrow as follows.

The progress of the natural sciences often leads to unbounded confidence in the future
prospects of the human race, and provides the natural scientist with the certainty that
any important contribution to knowledge which he makes will be used to improve the lotof men. The economist’s lot, however, is to study a field in which, almost more than any
other, human folly displays itself. The scientist has no doubt that the world is moving on
to better and finer things, that the progress he makes today will tomorrow be recognized
and used. (…) I want to consider the more serious cause for sorrow to the economist, thefact that he cannot trust that the progress of his knowledge will necessarily be followed
by a more intelligent handling of social affairs, or even that we shall advance in this fieldat all and there will not be retrograde movements. The economist know that a single
error in his field may do more harm than almost all the sciences taken together can dogood---even more, that a mistake in the choice of a social order, quite apart from theimmediate effect, may profoundly affect the prospects for generations. (Hayek, 1944,
pp.35-36)

The reason why Hayek was so pessimistic to be an economist is concerned with the nature ofknowledge created and obtained in economics. While the discovery and accumulation of new
knowledge in natural sciences directly means progress and prosperity of human civilization,on the other side, more knowledge cannot necessarily ensure advance but might lead to
retrograde movements in economics. A single error in the choice of a social order may affectthe prospects for generations. It can thus do more harm than almost all sciences can do. This
is why economists cannot be confident and hopeful, but rather be fearful, to the future.

This connotation is completely different from that of ‘dismal science’ that Carlyle put to9

economics as a nickname when he describe the character of the correlation between
population and starvation in Malthus’ population principle as "dismal." In case of this, it isthe expression only for a particular type of propositions and prospects with misery ineconomics. But such pessimism and fear as Hayek attributes to economics arises from thegeneral character of economics, i.e. its inclusion of self-evaluation of scientific statements
and proposition of social affairs in economics and its validity and applicability depending on
public perception or popularity of the theory. It is evident that Hayek’s sorrow and fear of
being an economist is much deeper. We should to be fully aware of the unique nature of
economics and social sciences in general.

4. Hayek’s Position of Vision of the Market

It should be reconfirmed that Hayek’s vision of the market after 1946 is largely different
from the conventional vision of the market in modern microeconomics.

Hayek has become to made clear that the knowledge to be discovered through competition in
the market is individual’s “capacity to find out particular circumstances” that cannot be
regarded as ‘given data’. Hayek has already abandoned the view that a market economy
accomplishes efficiency as the result of competition as general equilibrium theory claims.
We require ‘competition as a discovery procedure’ precisely because we do not know data inthe economy nor the results of competition, and competition in the market is the only
available procedure to find out them by utilizing guidance of prices. The results of adiscovery procedure are unpredictable in respect of particular outcomes, neither theattainment of efficient allocation of scares resources nor efficient utilization of knowledge ina state of equilibrium. What we can expect from competition is to improve the chances of
unknown people and to form the general kind of pattern, or the abstract character of theself-organizing order. (Hayek, 1968)

Hayek argues that we must evade the confusion between ‘order’ that the market producesand ‘economy’ in Hayek’s term that correspond to a single organization or arrangement inwhich someone deliberately allocates resources to a unitary order of ends. Spontaneousorder produced by the market is completely different from the ‘economy’ because all themembers of such an economy must be guided in their actions by the unitary hierarchy of10

ends that it serves. The spontaneous order of the market, or the catallaxy, cannot
legitimately be said to have particular ends, it is also not possible to express the value of theresults as a sum of its particular individual products. The concept of an ‘order’ is preferable
to that of equilibrium for the discussion of problems of economic policy. While an economic
equilibrium never really exists, there is some justification for asserting that the kind oforder of which our theory describes an ideal type, is approached in a high degree. This
competitive game is not a zero-sum game, but a plus-sum game where the income of eachmember is determined by partly of skill and partly of chance.

It is quite clear that, while the purpose of “competitive order” is to make competition thatof ”ordered competition” is to restrict the effectiveness of competition. Therefor, any
government policy in order to make competition as effective and beneficent as possible byadopting competition, the market and prices as it ordering principle, rather than absence ofstate activity, is necessary.

The interpretation of the fundamental principle of liberalism as absence of state
activity rather than as a policy which deliberately adopts competition, the market, andprices as its ordering principle and uses the legal framework enforced by the state inorder to make competition as effective and beneficial as possible is as much responsible
for the decline of competition as the active support which governments have given
directly and indirectly to the growth of monopoly. It is the first general thesis which weshall have to consider that competition can be made more effective and more beneficent
by certain activities of government than it would be without them. (Hayek, 1947)”

Hayek also admits that we have to consider which services as sanitary and health measures
the government should provide outside the market and what kind of institutional design ofthe desirable market economy is necessary, which include the market policy, the monetaryand financial policies, the law of property and contract, of corporations and associations,
including trade-unions, the problems of monopolies, taxation, international trade, patent for
inventions, copyright, trade-marks, labour, trade-union policies. We thus observed that
Hayek’s position on the issue of the vision of the market has gradually departed from thegeneral equilibrium theory and reached the point where he recognized the comprehensive
institutional design of the competitive order of market economy supplemented by such11necessary government policies as we have seen above.

5. Hayek’s Position of Vision of the Money

During the course of Hayek’s transformation of his vision of the market, he has also shifted
his vision of money: a) monetary theory of business cycle and neutral theory of money(Hayek, 1931, 1933b), b) fixed exchange rate (Hayek, 1937b), c) commodity reserve money(Hayek 1943), d) competing currencies (Hayek, 1976).

Hayek’s notion of neutrality of money was defined as the equality of the natural rate ofinterest and the money rate of interest. The natural rate is the equilibrium rate to ensureintertemporal equilibrium of consumption and production, viz. the equality of saving andinvestment. Since deviation from neutrality of money as disequilibrium between the naturalrate of interest and the money rate of interest that is initiated by low money rate of interest
and expansion of bank lending by credit creation causes forced saving and cyclicalfluctuation, a neutral money economy is free from business cycles. Accordingly, making
money neutral can prevent from booms and depressions. (Hayek, 1931. 1933b) After the
breakdown of gold standard of international monetary system, he proposed the commodity
reserve money backed by stored commodities that is redeemable to a constant combinationof commodities, instead of bullion, for stabilizing value of money (Hayek, 1943).

The free market orders periodically suffer from fluctuations, in particular, depression andunemployment in the course of business cycles. Hayek, in order to overcome such
shortcomings of the capitalistic market economy, proposed that government or the central
bank should be deprived of its monopoly of the issue of money in order to let private banks
and enterprises to freely issue their peculiar moneys competing each other so that the public
can choose good moneys among them (Hayek, 1976). Hayek believes that such liberalizationof money issue will enable to neutralize money and stabilize the value of money so as toprevent excessive inflation and deflation as the main defects of the present market economy.
This is because discrete monetary and fiscal policies of the government and central bank,huge deficit of finance can be prohibited or restricted. Hayek has tackled the fundamental
problems of the market and money and presented a new evolutionalist institutional designof money by a gardener, different from a constructivist one by a planner that he continues to12criticize. Even though Hayek’s proposition of denationalization of money is somewhat
astonishing to the people with the usual worldview, it is conceivable that his proposal for
institutional design of the market and money and his visions of the market and money aretheoretically consistent because the platform institutions of both the market and money, inview of media design, not mechanism design, are thought to be self-organizing andevolutionary spontaneous order via the principles of variation (innovation), transmission(leaning knowledge) and selection (competition)

6. The Relation of Vision and Worldview

What Hayek has been, even if unknowingly or tacitly, concerned in many writings with bothvision that economists use to create economics and worldview that the intellectuals use todiffuse it must indicate that he had realized the dual aspects of economics as investigationand persuasion since his early days just as Keynes had.

I shall not argue that the economist has no influence. On the contrary, I agree with Lord
Keynes that “the ideas of economists and political philosophers, both when the are rightand when they are wrong, are more powerful than is commonly understood. Indeed theworld is ruled by little else.” The only qualification I want to add, and with which Lord
Keynes would probably agree, is that economists have this great influence only in thelong run and only indirectly, and that when their ideas begin to have effect, they haveusually changed their form to such a extent that their fathers can scarcely recognize
them. (Hayek, 1944, pp.36-37)

The propositions in the passage are true of both Keynes and Hayek especially after their
death. Whether we see vision and worldview them as the source of sorrow/ fear or that of joy/hope might depend on how we conceive and visualize evolution of both economy andeconomics (Nishibe, 2006).

13

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