for release on delivery 1 : 00 p. m. edt november 1, 2019 friedrich hayek and the price system remarks by randal k. quarles vice chair for supervision board of governors of the federal reserve system at “ the road to serfdom at 75 : the future of classical liberalism and the free market ” ninth annual conference of the william f. buckley, jr., program at yale new haven, connecticut november 1, 2019 i am delighted to be back in new haven and particularly to be in the company of so many students interested in thinking rigorously about ideas. and i am honored to be participating in the william f. buckley, jr., program ’ s conference today on friedrich hayek and the future of classical liberalism. 1 over the course of this afternoon, you will hear a series of presentations that put hayek ’ s thinking in the context of contemporary developments and that offer a variety of perspectives on his intellectual legacy. hayek was a prolific — some might even say profligate — thinker. he was at various times, and in various modes, an early neuropsychologist, an epistemologist, a theoretical economist, a political philosopher, a moral philosopher, a philosopher of science, a historian of ideas, a public intellectual, and a social polemicist. this vast range has caused some to undervalue his contributions as an economist, notwithstanding his eventual nobel prize — when hayek moved to the united states in 1950, the university of chicago economics department would not hire him because, as milton friedman said, “ at that stage, he really wasn ’ t doing any economics, ” and paul krugman famously said that “ the hayek thing is almost entirely about politics, not economics. ” 2 others believe his broader thought, while seminal, was inconsistent across these various areas, and hayek himself never demonstrated how it all hung together. in my contribution to the discussion today, i want to examine a particular example of the lasting effect that hayek has had on economic thinking — one pertaining to the importance of freely determined prices for producing efficient economic all of my remarks today represent my own views, which do not necessarily represent those of the federal reserve board, the federal open market committee, or the financial stability board. i would like to thank ed nelson for his assistance in preparing these remarks. see, respectively, cassidy ( 2000 ) and krugman ( 2011 ). - 2outcomes — and consider how hayek

it is important to recognize that this is not a contingent or technological problem. it is not only that the dispersion of knowledge makes it hard to gather, although that is certainly see hayek ( 1945, p. 521 ). see mankiw ( 2017 ). - 6true — but if that were the only issue, then perhaps future advances in technology such as quantum computing would remove that obstacle. rather, as already mentioned, we all know many important things that we cannot articulate ; and many of these things we come to know precisely through our participation in trade and exchange through the market. this type of knowledge ( a ) is by its nature not conveyable to a central planner because we are not fully aware of all we know, and ( b ) would not even exist apart from the social interactions facilitated by the market which a central planner would replace. the flip side of hayek ’ s analysis was that, while there are insurmountable obstacles to economic efficiency via a central plan, an efficient economy may still be obtainable by letting the price system work. to quote mankiw again, hayek ’ s analysis implies that “ markets figure out a way to aggregate, in a decentralized way, dispersed information into desirable outcomes. ” 15 furthermore, this mechanism does not require the government or any one individual to process that dispersed information into a central network or to be able to aggregate the information into a statistical series. it is, instead, sufficient for the proper operation of the price mechanism that the relevant information be embodied implicitly in the economy ’ s multiplicity of prices of individual goods and factors of production. this information is recorded in such prices because they respond to the behavior of individual buyers and sellers in the economy. 16 consequently, as longtime hayek scholar gerald o ’ driscoll has observed : “ what particularly recommends the price system to hayek is the ‘ economy of knowledge ’ with which it operates. it is [ in hayek ’ s description ] nothing short of a ‘ marvel. ’ ” 17 see mankiw ( 2017 ). see also taylor ( 2012, p. 1 ). the process is interactive, with market participants not only influencing prices, but also responding to price signals. see o ’ driscoll ( 1977, p. 27 ). - 7how hayek ( 1945 ) has influenced economics hayek ’ s 1945 paper has had a great influence on subsequent economic research. it has been found to be highly relevant to