The War over Hayek’s Intellectual Legacy: A Response to John Gray

According to British philosopher John Gray, economist F.A. Hayek failed to grasp the fundamental inefficiency of capitalism, held to an ahistorical theory of business cycles, misunderstood the Great Depression, and offered policy recommendations that would have been disastrous had any government listened.

Gray offers these critiques in the July 30 issue of New Statesman, in an article on the life, intellectual achievements, and mistakes of the renowned Austrian economist and Nobel laureate. Gray even claims that Hayek’s greatest intellectual rival, John Maynard Keynes, was the better economist of the two.

Gray’s analysis is full of problems.

Hayek on the Impossibility of Central Planning

Gray begins by writing that while Hayek was right in his critical analysis of socialism and central planning, he failed to realize that the same criticisms apply to the market economy.

According to Hayek, central planning is doomed to fail because of the natural limits of human knowledge. For him, the main function of the market system is to provide a method for the fast and efficient transmission of information between individuals, which facilitates economic cooperation. This is possible thanks to the free and unrestricted interaction between supply and demand that forms market prices. The variations in their values immediately signal to entrepreneurs which goods or services and production processes are likely to be more profitable investments. (Hayek elaborates these ideas in his famous essays “Economics and Knowledge” and “The Use of Knowledge in Society.”)

Hayek’s criticism of socialism is based on this theory of the market as a system for the transfe…