HAYEKS POLITICAL ECONOMY: ITS RELEVANCE FOR DEVELOPING ECONOMIES

Shankaran Nambiar, Senior Research Fellow and Head, Policy Studies Division Malaysian Institute of Economic Research Kuala Lumpur

Malaysian Institute of Economic Research

Problem of Order

Hayeks central problem in economics: coordination How does spontaneous order emerge? Issue at hand: Millions of different individuals, incomplete knowledge Private property is the cornerstone of an economy. Private production necessary, otherwise therell be no market for production A market necessary for means of production, failing which therell be no prices Without prices, therell be no measure of the scarcity of capital goods and a way of calculating alternative uses of capital goods

Order

Problems with planning: Planning requires that government officials have discretionary power that go beyond formal rules Planning needs high level of agreement that democracy may not be able to deliver Widespread agreement lays foundation for dictatorship Planning leads to officials intervening to correct past failures, causing a slippery slope syndrome

If Not Planning, Then What?

Constituents of a good economy: Respect for private property Rule of law Stable monetary order

Then What?

General rules important They should be predictable, known by all and meted out irrespective of title or position. This allows individuals to learn and adapt their behaviour in a manner that coordinates their activities with others. General welfare should be the objective of government; not specific goals of individuals. Discriminatory laws damage rules of just conduct.

Social Justice

Social justice should not mean specific distributional outcomes or particular distributions of resources. Specific distributions would require intervention, which will result in political decisions that will alter the rules of the economic game. Liberal economics as much concerned with poverty as socialists. (Or, at least they should be!). Liberal economists believe in the power of the market to achieve this rather than interventionism and planning.

Not Neoclassical Economics

Dispersed knowledge used in making decisions. Economic process as one of expectations, decisions, realizations and realignment. Neoclassical economics gives undue emphasis to equilibrium while ignoring the process of discovery.

Conclusion

To summarise, main points of Hayeks economics: Coordination Dispersed knowledge Liberal institutions, rule of law