A Reconstruction and Critique of Hayek´s Theory of Free Market Economy

Abstract

Hayek attempted to explain and justify free market economy (FME) with his knowledge, institutional and evolutionary argument. In his effort to criticize socialism and to revive classical liberalism, Hayek tried to develop his market theory in a different context from neoclassical economics. Through his participation in the Socialist Calculation Debate he came to realize that neoclassical economics with its narrow focus on equilibrium and with its unrealistic assumption of perfect knowledge and competition can be used to justify socialism. With knowledge argument Hayek tried to show that a market economy with its price mechanism is superior to socialism in that the former can better cope with the problem of efficient use of dispersed and implicit knowledge. With his twin idea of spontaneous order and cultural evolution Hayek tried to underpin his justification of FME by arguing that institutional, legal and moral frameworks for the proper working of market economy can be offered by evolution via group selection. Thus FME is a quasi-natural product of evolution if it were not prevented from taking its normal course by government and by false ideas (esp. constructivist rationalism). For Hayek the market economy can exist and function efficiently only as FME, which is demonstrated by his critique of social justice. Hayek s theory of FME reveals affinity of his liberalism to conservatism in that it requires that individuals obey traditional morals without questioning in order to survive. In this sense his evolutionism rather reveals organicist bias than methodological individualism. Furthermore, Hayek did not succeed in differentiating theory of evolution from meta-theory. With his grand theory of order and evolution Hayek tried to establish formal embeddedness in which society follows wherever the economy moves as the only feasible from of economy and society, which, however, cannot be substantiated by his theory.