WEBVTT 00:00:00.000 --> 00:00:03.020 Welcome back to the Deep Dive. Today we are not 00:00:03.020 --> 00:00:06.080 just exploring an economist. We are really exploring 00:00:06.080 --> 00:00:08.619 the very architecture of how we understand the 00:00:08.619 --> 00:00:10.279 world. Yeah, that's a good way to put it. We're 00:00:10.279 --> 00:00:13.140 tackling a subject that is, frankly, massive. 00:00:13.640 --> 00:00:16.179 We are talking about an intellectual giant who 00:00:16.179 --> 00:00:19.219 just refused to stay in one lane. Completely. 00:00:19.379 --> 00:00:22.620 He spanned economics, psychology, political philosophy, 00:00:23.019 --> 00:00:25.719 legal theory. Even the biological sciences. We 00:00:25.719 --> 00:00:28.000 are talking about Friedrich August von Hayek. 00:00:29.219 --> 00:00:31.120 It is a massive topic. You're absolutely right. 00:00:31.399 --> 00:00:33.240 Hayek is one of those figures who, you know, 00:00:33.240 --> 00:00:35.039 he shapes the way we see the world, even if we 00:00:35.039 --> 00:00:37.539 don't realize it. Right. He is the man who argued 00:00:37.539 --> 00:00:40.759 that knowledge and specifically the limitations 00:00:40.759 --> 00:00:44.320 of our knowledge. is the key to how society functions. 00:00:44.500 --> 00:00:46.380 And he's the reason why people still get into 00:00:46.380 --> 00:00:49.640 these really heated debates about prices, about 00:00:49.640 --> 00:00:52.100 liberty, and even about how the human brain works. 00:00:52.439 --> 00:00:55.039 So our mission today is to really understand 00:00:55.039 --> 00:00:57.420 the man behind these ideas. We want to move past 00:00:57.420 --> 00:01:00.119 the caricatures because, wow, he has been caricatured 00:01:00.119 --> 00:01:01.840 by both the left and the right and get to the 00:01:01.840 --> 00:01:04.239 core of his thinking. Yeah, to get to the actual 00:01:04.239 --> 00:01:06.319 substance. We've got a huge stack of sources 00:01:06.319 --> 00:01:10.159 here. Biographies, academic papers, his own writings, 00:01:10.500 --> 00:01:12.879 historical accounts. We're going to try and extract 00:01:12.879 --> 00:01:14.819 the most important nuggets for you. And what 00:01:14.819 --> 00:01:17.480 I love about this particular deep dive is that 00:01:17.480 --> 00:01:22.659 Hayek isn't just an economist in a narrow sense. 00:01:22.879 --> 00:01:25.819 He's really a philosopher of ignorance in a way. 00:01:25.920 --> 00:01:28.079 A philosopher of ignorance. I like that. His 00:01:28.079 --> 00:01:30.400 whole career was basically built on this very 00:01:30.400 --> 00:01:35.040 humble idea that we know. Much, much less than 00:01:35.040 --> 00:01:36.900 we think we do. Which is a very humble place 00:01:36.900 --> 00:01:39.400 to start for a guy who eventually won a Nobel 00:01:39.400 --> 00:01:42.060 Prize. Right. Speaking of which, that is actually 00:01:42.060 --> 00:01:44.180 the perfect place to start our story. The Hook, 00:01:44.340 --> 00:01:48.439 the 1974 Nobel Memorial Prize in Economic Sciences. 00:01:48.760 --> 00:01:50.500 It was a pivotal moment. I mean, it was maybe 00:01:50.500 --> 00:01:53.099 the defining moment of his later life, but it 00:01:53.099 --> 00:01:56.239 was also a very ironic one. Extremely ironic. 00:01:56.319 --> 00:02:00.299 So picture this. It's 1974. Hayek has been, for 00:02:00.299 --> 00:02:01.879 all intents and purposes, in the intellectual 00:02:01.879 --> 00:02:03.959 wilderness for a while. For decades, really. 00:02:04.120 --> 00:02:06.560 He gets the call. He's won the Nobel Prize. But 00:02:06.560 --> 00:02:08.539 there's a catch. There's always a catch. He has 00:02:08.539 --> 00:02:12.000 to share it. And who does he share it with? Gunnar 00:02:12.000 --> 00:02:14.919 Myrdal. Right. And for those who might not know 00:02:14.919 --> 00:02:18.020 the backstory, Myrtle was a Swedish economist, 00:02:18.500 --> 00:02:21.360 a brilliant man in his own right. But politically, 00:02:21.620 --> 00:02:25.000 economically, he was the anti -Hayek. The complete 00:02:25.000 --> 00:02:28.039 and total opposite. He was a socialist. He was 00:02:28.039 --> 00:02:30.419 the ideologue behind the Swedish welfare state. 00:02:30.620 --> 00:02:33.379 He represented almost everything Hayek had spent 00:02:33.379 --> 00:02:36.240 his entire career arguing against. So Myrtle 00:02:36.240 --> 00:02:38.240 believed in the power of the state to engineer 00:02:38.240 --> 00:02:40.719 society. And Hayek believed that such engineering 00:02:40.719 --> 00:02:44.060 was not only impossible, but incredibly dangerous. 00:02:44.319 --> 00:02:46.439 It's like pairing a diehard carnivore with a 00:02:46.439 --> 00:02:48.919 vegan for a culinary award. That's a great analogy. 00:02:49.219 --> 00:02:51.860 Or like giving a joint award for best transportation 00:02:51.860 --> 00:02:55.740 to a bicycle manufacturer and an oil tanker captain. 00:02:55.840 --> 00:02:58.599 It just seems incredibly awkward. Oh, it was. 00:02:58.840 --> 00:03:01.340 And Hayek knew it. He was actually quite surprised 00:03:01.340 --> 00:03:04.360 by the award. He explicitly suspected that the 00:03:04.360 --> 00:03:06.840 Nobel Committee paired him with Myrtle just to 00:03:06.840 --> 00:03:09.139 balance the political spectrum. So they couldn't 00:03:09.139 --> 00:03:10.680 just give it to the free market guy, not in the 00:03:10.680 --> 00:03:13.979 70s. Especially not in the 1970s, when those 00:03:13.979 --> 00:03:16.539 ideas were so out of fashion. They had to give 00:03:16.539 --> 00:03:18.599 it to the socialists, too, or vice versa. It 00:03:18.599 --> 00:03:20.759 was a political compromise. And the best part 00:03:20.759 --> 00:03:23.520 for me is Hayek's reaction during his acceptance 00:03:23.520 --> 00:03:26.539 speech. Most people, if they win a Nobel Prize, 00:03:26.860 --> 00:03:30.060 would just say, thank you. Cry a little. Bask 00:03:30.060 --> 00:03:33.580 in the glory. But not Hayek. No. He basically 00:03:33.580 --> 00:03:36.099 warns everyone about the prize itself. That is 00:03:36.099 --> 00:03:38.939 classic Hayek. I mean, just quintessential. He 00:03:38.939 --> 00:03:41.560 stood up there and warned about the danger that 00:03:41.560 --> 00:03:43.780 the authority of the prize gives to an economist. 00:03:44.020 --> 00:03:46.240 He's worried about his own influence. He felt 00:03:46.240 --> 00:03:49.379 that giving one person that much prestige would 00:03:49.379 --> 00:03:51.620 make politicians listen to them as if they were 00:03:51.620 --> 00:03:54.379 a god, even on topics where they had no expertise 00:03:54.379 --> 00:03:57.289 whatsoever. He said, and I'm paraphrasing here, 00:03:57.389 --> 00:03:59.210 but he said that if he had been consulted on 00:03:59.210 --> 00:04:00.830 the creation of the prize, he would have advised 00:04:00.830 --> 00:04:03.810 against it. That is incredible. Thanks for the 00:04:03.810 --> 00:04:05.889 medal and the money, but you probably shouldn't 00:04:05.889 --> 00:04:08.009 have given it to me or to anyone else for that 00:04:08.009 --> 00:04:12.469 matter. That is a power move. It really is. And 00:04:12.469 --> 00:04:15.750 it sets the stage for his entire worldview. Skepticism 00:04:15.750 --> 00:04:18.490 of authority. Skepticism of the idea that one 00:04:18.490 --> 00:04:21.300 person can know enough. to fix everything he 00:04:21.300 --> 00:04:23.180 was warning against what he called the pretense 00:04:23.180 --> 00:04:25.339 of knowledge exactly the idea that just because 00:04:25.339 --> 00:04:27.519 you have a metal you can run the world so let's 00:04:27.519 --> 00:04:30.279 rewind to understand this deep -seated skepticism 00:04:30.279 --> 00:04:32.660 we have to go back to where it all began section 00:04:32.660 --> 00:04:36.160 one the crucible we're going to vienna vienna 00:04:36.160 --> 00:04:40.139 in 1899 when hayek was born it was the capital 00:04:40.139 --> 00:04:43.199 of the austro -hungarian empire and it was i 00:04:43.199 --> 00:04:46.480 mean a cultural and intellectual hub Maybe the 00:04:46.480 --> 00:04:48.360 most vibrant in the world at that time. And his 00:04:48.360 --> 00:04:50.339 family wasn't just your average family. They 00:04:50.339 --> 00:04:53.620 were steeped in academia. His father, August 00:04:53.620 --> 00:04:56.379 von Hayek, was a medical doctor and a botanist. 00:04:56.519 --> 00:04:59.259 His grandfathers were scholars. It seems like 00:04:59.259 --> 00:05:01.300 learning was just a family trade. Totally. His 00:05:01.300 --> 00:05:03.360 father was a part -time botany lecturer at the 00:05:03.360 --> 00:05:05.560 University of Vienna. And Hayek actually spent 00:05:05.560 --> 00:05:08.339 a lot of his youth helping his father with botanical 00:05:08.339 --> 00:05:11.439 work, classifying plants, studying their structures. 00:05:11.620 --> 00:05:14.410 He was a science kid. Oh, very much so. He was 00:05:14.410 --> 00:05:16.550 very interested in biology and evolution from 00:05:16.550 --> 00:05:19.649 a young age, reading people like Hugo de Vries 00:05:19.649 --> 00:05:23.170 and August Wiseman. And that biological perspective, 00:05:23.350 --> 00:05:26.149 this idea of seeing how complex systems like 00:05:26.149 --> 00:05:29.449 plants or entire ecosystems evolve without a 00:05:29.449 --> 00:05:32.490 designer, that never really left him. Now, here 00:05:32.490 --> 00:05:34.509 is a detail from The Family Tree that I found 00:05:34.509 --> 00:05:37.110 absolutely fascinating. We talk about intellectual 00:05:37.110 --> 00:05:41.310 giants, but... Hayek had a literal relative who 00:05:41.310 --> 00:05:43.350 was one of the most famous philosophers of the 00:05:43.350 --> 00:05:45.850 20th century. Ludwig Wittgenstein. His second 00:05:45.850 --> 00:05:47.509 cousin. Yeah, his second cousin on his mother's 00:05:47.509 --> 00:05:50.029 side. That is just a lot of brainpower in one 00:05:50.029 --> 00:05:52.750 bloodline. It really is. Hayek's mother knew 00:05:52.750 --> 00:05:55.029 Wittgenstein well. She apparently played with 00:05:55.029 --> 00:05:57.089 his sisters when they were children. And because 00:05:57.089 --> 00:05:59.189 of this connection, Hayek was actually one of 00:05:59.189 --> 00:06:01.649 the very first people to read Wittgenstein's 00:06:01.649 --> 00:06:04.410 famous Tractatus Logico -Philosophicus when it 00:06:04.410 --> 00:06:06.720 came out in 1921. So did they hang out? Did they 00:06:06.720 --> 00:06:09.300 debate philosophy over coffee in Vienna? Not 00:06:09.300 --> 00:06:12.120 exactly. They met rarely. The family connection 00:06:12.120 --> 00:06:14.360 was there, but they weren't, you know, best friends. 00:06:14.819 --> 00:06:18.220 But Hayek said Wittgenstein's philosophy and 00:06:18.220 --> 00:06:20.939 his method of analysis had a profound influence 00:06:20.939 --> 00:06:24.000 on his thinking. How so? Well, Wittgenstein was 00:06:24.000 --> 00:06:26.439 obsessed with the limits of language, what can 00:06:26.439 --> 00:06:29.100 be said clearly and what cannot. And Hayek kind 00:06:29.100 --> 00:06:33.180 of took that rigorous skepticism and... applied 00:06:33.180 --> 00:06:35.459 it to society, what can be known by a central 00:06:35.459 --> 00:06:37.759 authority and what cannot. That's a great connection. 00:06:37.920 --> 00:06:39.779 And they actually ran into each other during 00:06:39.779 --> 00:06:42.040 World War I. Is that right? It is, which is just 00:06:42.040 --> 00:06:44.540 a wild coincidence of history. They were both 00:06:44.540 --> 00:06:47.420 officers serving in the same army. But the real 00:06:47.420 --> 00:06:50.600 influence was intellectual, not personal. That 00:06:50.600 --> 00:06:52.759 brings us to the event that really shattered 00:06:52.759 --> 00:06:55.379 that old world Vienna and forged Hayek's future, 00:06:55.600 --> 00:06:58.220 World War I. He joined an artillery regiment 00:06:58.220 --> 00:07:01.610 in 1917. He fought on the Italian front. He was 00:07:01.610 --> 00:07:04.509 young, just a teenager, and it was brutal. And 00:07:04.509 --> 00:07:06.329 he didn't come out unscathed. The sources mention 00:07:06.329 --> 00:07:08.490 he suffered permanent hearing damage in his left 00:07:08.490 --> 00:07:11.430 ear. He did. But the psychological and intellectual 00:07:11.430 --> 00:07:14.470 impact was far, far greater than the physical 00:07:14.470 --> 00:07:17.829 injury. The war was the catalyst. It changed 00:07:17.829 --> 00:07:20.110 everything for him. Before the war, he was interested 00:07:20.110 --> 00:07:22.750 in the natural sciences, botany, maybe even theater. 00:07:23.290 --> 00:07:25.769 But after seeing the collapse of the Austro -Hungarian 00:07:25.769 --> 00:07:28.600 Empire... Seeing the utter devastation caused 00:07:28.600 --> 00:07:32.040 by bad political decisions, he pivoted. He wanted 00:07:32.040 --> 00:07:34.839 to know why. Exactly. He wanted to understand 00:07:34.839 --> 00:07:37.740 the mistakes that led to the war. He felt that 00:07:37.740 --> 00:07:40.180 the problems of political organization were the 00:07:40.180 --> 00:07:43.000 most urgent thing a mind could possibly tackle. 00:07:43.180 --> 00:07:46.620 He realized civilization is fragile. Very fragile. 00:07:46.740 --> 00:07:49.180 So the botanist became the social scientist. 00:07:49.709 --> 00:07:51.509 He goes to the University of Vienna and he's 00:07:51.509 --> 00:07:53.170 studying everything, philosophy, psychology, 00:07:53.569 --> 00:07:56.829 economics. But there's this one detail in the 00:07:56.829 --> 00:07:59.209 sources that I think is so telling and it's often 00:07:59.209 --> 00:08:04.589 overlooked. The brain lab. Ah, yes. The Konstantin 00:08:04.589 --> 00:08:07.550 von Monaco's Institute of Brain Anatomy. Hayek 00:08:07.550 --> 00:08:10.110 spent time there staining brain cells. He was 00:08:10.110 --> 00:08:12.170 literally looking at the physical structure of 00:08:12.170 --> 00:08:14.459 the brain under a microscope. And this is so 00:08:14.459 --> 00:08:17.199 crucial. It wasn't a distraction. This work on 00:08:17.199 --> 00:08:19.399 how neurons connect, on how the brain organizes 00:08:19.399 --> 00:08:21.860 itself physically, it planted the seeds for a 00:08:21.860 --> 00:08:24.019 book he would write decades later called The 00:08:24.019 --> 00:08:26.579 Sensory Order. So he was already thinking about 00:08:26.579 --> 00:08:29.779 networks. He was. He realized that the brain 00:08:29.779 --> 00:08:32.399 isn't just a camera passively taking pictures 00:08:32.399 --> 00:08:35.740 of the world. It's a complex, self -organizing 00:08:35.740 --> 00:08:37.799 network. Which sounds a lot like how he eventually 00:08:37.799 --> 00:08:40.629 described the economy. Precisely. The connection 00:08:40.629 --> 00:08:42.870 between the neural network and the market network 00:08:42.870 --> 00:08:44.850 is a thread that runs through his whole life. 00:08:45.210 --> 00:08:47.870 He saw that order could emerge from the bottom 00:08:47.870 --> 00:08:50.909 up through the interaction of millions of cells 00:08:50.909 --> 00:08:54.269 or millions of people without a central commander 00:08:54.269 --> 00:08:57.299 telling each one what to do. So back in Vienna, 00:08:57.539 --> 00:09:00.879 he's got these ideas brewing. Who were his mentors? 00:09:01.179 --> 00:09:02.960 He fell under the mentorship of Friedrich von 00:09:02.960 --> 00:09:05.679 Wieser and, of course, the big one, Ludwig von 00:09:05.679 --> 00:09:08.500 Mises. Now, Mises is a heavy hitter in the Austrian 00:09:08.500 --> 00:09:11.100 School of Economics, but Hayek wasn't always 00:09:11.100 --> 00:09:13.639 a free market guy, was he? No. And that's a very 00:09:13.639 --> 00:09:16.480 common misconception. Like many young intellectuals 00:09:16.480 --> 00:09:19.139 of his time in Vienna after the war, Hayek was 00:09:19.139 --> 00:09:21.299 initially sympathetic to democratic socialism. 00:09:21.580 --> 00:09:24.039 Really? Oh, yeah. He found Marxism too rigid 00:09:24.039 --> 00:09:27.059 and doctrinaire. But the idea of a mild socialism, 00:09:27.299 --> 00:09:30.100 a rational, organized society designed by smart 00:09:30.100 --> 00:09:32.860 people, that appealed to him. So what changed 00:09:32.860 --> 00:09:36.620 his mind? It was Mies' book, Socialism, which 00:09:36.620 --> 00:09:39.860 came out in 1922. Hayek read it, and it just 00:09:39.860 --> 00:09:43.059 rocked his world. It completely shifted him toward 00:09:43.059 --> 00:09:45.159 classical liberalism. What was the argument? 00:09:45.460 --> 00:09:48.320 Mises convinced him that socialism, even the 00:09:48.320 --> 00:09:51.159 well -intentioned democratic kind, had a fundamental 00:09:51.159 --> 00:09:54.019 unsolvable flaw in how it handled economics. 00:09:54.240 --> 00:09:56.879 It wasn't just a moral argument. It was a technical 00:09:56.879 --> 00:09:59.179 one. Which brings us perfectly to section two, 00:09:59.340 --> 00:10:03.779 the big idea. This is the core. aha moment of 00:10:03.779 --> 00:10:06.100 Hayek's career, the economic calculation problem. 00:10:06.360 --> 00:10:08.779 This is it. This is the central thesis. If you 00:10:08.779 --> 00:10:11.440 take one thing away from Hayek's economics, this 00:10:11.440 --> 00:10:14.019 should be it. It is the rock upon which his entire 00:10:14.019 --> 00:10:16.299 philosophy stands. OK, let's unpack this, because 00:10:16.299 --> 00:10:17.940 usually when people talk about economics, they 00:10:17.940 --> 00:10:20.960 talk about money or jobs or taxes. Hayek talked 00:10:20.960 --> 00:10:24.139 about knowledge. He did. The problem, as Hayek 00:10:24.139 --> 00:10:27.259 saw it, is that in any complex society, knowledge 00:10:27.259 --> 00:10:30.639 is. It's scattered among millions and millions 00:10:30.639 --> 00:10:33.360 of individuals. Okay, so for example, I know 00:10:33.360 --> 00:10:35.379 what I want for lunch. The farmer knows how his 00:10:35.379 --> 00:10:37.600 crops are doing today. The truck driver knows 00:10:37.600 --> 00:10:40.639 there's a traffic jam on I -95. Exactly. And 00:10:40.639 --> 00:10:42.340 the engineer knows the tensile strength of the 00:10:42.340 --> 00:10:44.820 steel in that truck. The shopkeeper knows that 00:10:44.820 --> 00:10:47.259 her customers are suddenly buying less of one 00:10:47.259 --> 00:10:49.600 product and more of another. Little bits of information 00:10:49.600 --> 00:10:51.899 everywhere. This is what Hayek called knowledge 00:10:51.899 --> 00:10:55.500 of time and place. It's local. It is fleeting. 00:10:55.580 --> 00:10:58.649 It's changing every second. And crucially, it 00:10:58.649 --> 00:11:01.669 is often tacit, meaning people know it, but they 00:11:01.669 --> 00:11:03.950 can't necessarily articulate it or put it into 00:11:03.950 --> 00:11:06.929 a statistic. Like a craftsman. A skilled craftsman 00:11:06.929 --> 00:11:09.570 knows how to shape the wood, but he might not 00:11:09.570 --> 00:11:11.590 be able to write a mathematical formula for it. 00:11:12.009 --> 00:11:14.990 It's in his hands, in his experience. And the 00:11:14.990 --> 00:11:17.330 central planner, the government official sitting 00:11:17.330 --> 00:11:19.710 in a capital city trying to run the economy, 00:11:19.909 --> 00:11:22.870 doesn't have any of this knowledge. They can't 00:11:22.870 --> 00:11:25.659 have it. It's physically impossible for one central 00:11:25.659 --> 00:11:28.820 authority to collect, update, and process all 00:11:28.820 --> 00:11:31.759 this dispersed information in real time. The 00:11:31.759 --> 00:11:34.279 economy is changing every single second. So if 00:11:34.279 --> 00:11:36.139 you try to plan an economy from the top down, 00:11:36.259 --> 00:11:38.100 you're flying blind. Completely blind. You're 00:11:38.100 --> 00:11:40.940 making decisions based on old, incomplete, or 00:11:40.940 --> 00:11:43.720 just plain wrong data. So if the central planner 00:11:43.720 --> 00:11:46.149 can't know everything... How do we coordinate? 00:11:46.509 --> 00:11:49.009 How do the farmer and the trucker and the engineer 00:11:49.009 --> 00:11:51.610 and the consumer all get on the same page without 00:11:51.610 --> 00:11:54.029 bumping into each other? Through the price system. 00:11:54.129 --> 00:11:56.269 And this is where Hayek is just brilliant. He 00:11:56.269 --> 00:11:58.590 didn't see prices as just annoying numbers on 00:11:58.590 --> 00:12:01.629 a tag. He saw prices as a telecommunications 00:12:01.629 --> 00:12:04.230 system. A language. The sources use that analogy. 00:12:04.590 --> 00:12:07.889 Yes. A language. Yeah. Prices are signals. They 00:12:07.889 --> 00:12:10.330 communicate vast amounts of information across 00:12:10.330 --> 00:12:13.169 the entire network of the economy to people who 00:12:13.169 --> 00:12:15.049 don't know each other and will never meet. Use 00:12:15.049 --> 00:12:17.490 an example. Help us visualize this. Okay, let's 00:12:17.490 --> 00:12:19.649 take the famous tin example that Hayek used in 00:12:19.649 --> 00:12:21.909 his paper, the use of knowledge in society. Okay. 00:12:22.149 --> 00:12:25.110 Suppose somewhere in the world a tin mine collapses. 00:12:25.649 --> 00:12:28.610 Or maybe a new and important use for tin is discovered 00:12:28.610 --> 00:12:31.210 in electronics. For whatever reason, the supply 00:12:31.210 --> 00:12:33.909 of tin has gone down relative to demand. Okay, 00:12:33.990 --> 00:12:36.950 tin is scarcer. Now. Does the consumer of tin, 00:12:37.029 --> 00:12:40.269 say a guy who makes tin cans in Ohio, does he 00:12:40.269 --> 00:12:42.509 need to know why? Does he need to read reports 00:12:42.509 --> 00:12:45.450 about the mine collapse in Peru or the labor 00:12:45.450 --> 00:12:48.049 strike in Chile? No, he just sees the price of 00:12:48.049 --> 00:12:51.490 tin went up. Exactly. The price rises. That single 00:12:51.490 --> 00:12:53.789 number contains the summary of all that dispersed 00:12:53.789 --> 00:12:57.490 information. It condenses the disaster, the scarcity, 00:12:57.690 --> 00:13:00.509 the labor issues, the new demand, all into one 00:13:00.509 --> 00:13:03.210 simple segment. And what does he do? Because 00:13:03.210 --> 00:13:06.590 the price is higher. The can maker in Ohio, without 00:13:06.590 --> 00:13:08.149 needing to be told by a government official, 00:13:08.470 --> 00:13:11.750 naturally starts to economize. He uses less tin. 00:13:11.889 --> 00:13:14.190 He looks for substitutes. Maybe he switches to 00:13:14.190 --> 00:13:16.929 aluminum. He recycles more. So the price signal 00:13:16.929 --> 00:13:19.490 coordinated his behavior without him even understanding 00:13:19.490 --> 00:13:22.610 the root cause. Precisely. It turns millions 00:13:22.610 --> 00:13:25.889 of individual selfish decisions into a coordinated 00:13:25.889 --> 00:13:29.090 social outcome. It makes us act as if we knew 00:13:29.090 --> 00:13:31.320 everything. Even though as individuals, we know 00:13:31.320 --> 00:13:33.460 almost nothing. And this was the heart of his 00:13:33.460 --> 00:13:35.700 debate with the socialists, right? People like 00:13:35.700 --> 00:13:38.320 Oscar Lange. Right. In the 1920s and 30s, there 00:13:38.320 --> 00:13:40.379 was this huge debate called the socialist calculation 00:13:40.379 --> 00:13:43.379 debate. And Oscar Lange and others argued, look, 00:13:43.480 --> 00:13:45.399 we have equations now. We have general equilibrium 00:13:45.399 --> 00:13:47.600 theory. We can just model the market. They thought 00:13:47.600 --> 00:13:49.700 they could simulate the market with math. They 00:13:49.700 --> 00:13:52.820 did. They argued, we can solve the equations 00:13:52.820 --> 00:13:55.580 and set the prices ourselves. We'll have a central 00:13:55.580 --> 00:13:58.960 planning board that acts like a market. And Hayek's 00:13:58.960 --> 00:14:01.730 response. Hayek said, you're missing the entire 00:14:01.730 --> 00:14:05.090 point. You can't simulate the discovery process. 00:14:05.409 --> 00:14:08.210 The market isn't just solving a static set of 00:14:08.210 --> 00:14:11.370 equations. It's a dynamic process of constant 00:14:11.370 --> 00:14:13.950 discovery. What do you mean by discovery? You 00:14:13.950 --> 00:14:15.789 don't know what the true costs are until you 00:14:15.789 --> 00:14:17.710 actually try to do something. You don't know 00:14:17.710 --> 00:14:19.730 what people really want until they vote with 00:14:19.730 --> 00:14:22.220 their wallets. Central planning fails because 00:14:22.220 --> 00:14:24.559 it assumes the knowledge is already there, just 00:14:24.559 --> 00:14:27.139 waiting to be collected. But Hayek argued the 00:14:27.139 --> 00:14:29.279 knowledge is created by the market process itself. 00:14:29.759 --> 00:14:31.820 Exactly. It's the difference between a map and 00:14:31.820 --> 00:14:34.340 the actual territory. The planner works with 00:14:34.340 --> 00:14:36.200 the map, which is always static and simplified. 00:14:36.419 --> 00:14:39.460 The market is the territory, alive and constantly 00:14:39.460 --> 00:14:41.820 changing. So Hayek establishes himself as this 00:14:41.820 --> 00:14:44.580 brilliant theorist of knowledge. And in 1931, 00:14:44.740 --> 00:14:47.220 he gets a call. He's invited to the big leagues. 00:14:47.360 --> 00:14:49.940 The London School of Economics, the LSE. This 00:14:49.940 --> 00:14:54.240 was a huge move. Huge. Lionel Robbins, a very 00:14:54.240 --> 00:14:57.139 prominent economist at the time, invited him. 00:14:57.480 --> 00:15:00.320 Hayek arrives in London and he is immediately 00:15:00.320 --> 00:15:03.220 recognized as a leading theorist. He's influencing 00:15:03.220 --> 00:15:05.419 students who would go on to be massive figures 00:15:05.419 --> 00:15:08.019 themselves. People like John Kenneth Galbraith 00:15:08.019 --> 00:15:11.129 and David Rockefeller. But London was also the 00:15:11.129 --> 00:15:14.210 home turf of another economic giant, the man 00:15:14.210 --> 00:15:16.610 who would become his great intellectual rival. 00:15:16.870 --> 00:15:19.289 John Maynard Keynes. The clash between Hayek 00:15:19.289 --> 00:15:21.830 and Keynes is probably the most famous duel in 00:15:21.830 --> 00:15:24.029 the history of economics. It's the Batman versus 00:15:24.029 --> 00:15:26.289 Superman of the dismal science. It really is. 00:15:26.429 --> 00:15:28.929 And the fundamental disagreement was about what 00:15:28.929 --> 00:15:32.149 causes economic depressions, specifically the 00:15:32.149 --> 00:15:33.509 Great Depression they were living through at 00:15:33.509 --> 00:15:35.190 that very moment. Right. They were trying to 00:15:35.190 --> 00:15:37.549 solve the same puzzle, but from completely opposite 00:15:37.549 --> 00:15:39.309 directions. So Keynes had a pretty... Pretty 00:15:39.309 --> 00:15:42.250 clear view. The economy is like a car that has 00:15:42.250 --> 00:15:45.350 stalled. There's a lack of what he called aggregate 00:15:45.350 --> 00:15:48.350 demand. People just aren't spending. So the government 00:15:48.350 --> 00:15:50.690 needs to step on the gas. Exactly. The government 00:15:50.690 --> 00:15:52.850 should spend money even if it has to borrow it, 00:15:52.889 --> 00:15:55.149 print it, whatever. Just get things moving again. 00:15:55.429 --> 00:15:58.429 Right. Demand side economics. If people aren't 00:15:58.429 --> 00:16:01.169 buying, the government should buy. That was the 00:16:01.169 --> 00:16:03.600 Keynesian solution. But Hayek, coming from the 00:16:03.600 --> 00:16:05.700 Austrian school, he saw it completely differently. 00:16:05.940 --> 00:16:08.240 He don't look at the crash. He looked at the 00:16:08.240 --> 00:16:11.179 boom that came before the crash. The party before 00:16:11.179 --> 00:16:13.980 the hangover. That's a perfect analogy. Hayek 00:16:13.980 --> 00:16:16.039 argued that the depression wasn't caused by a 00:16:16.039 --> 00:16:19.120 sudden lack of demand out of nowhere. It was 00:16:19.120 --> 00:16:22.139 the inevitable and necessary consequence of the 00:16:22.139 --> 00:16:24.899 artificial boom that happened earlier. A boom 00:16:24.899 --> 00:16:29.200 fueled by easy money, by artificially low interest 00:16:29.200 --> 00:16:32.120 rates set by central banks. So when interest 00:16:32.120 --> 00:16:34.480 rates are too low, it sends a false signal to 00:16:34.480 --> 00:16:37.559 businesses. A false price signal. It tells them 00:16:37.559 --> 00:16:40.080 to invest in long -term projects, to build new 00:16:40.080 --> 00:16:43.399 factories, to expand. But the real savings aren't 00:16:43.399 --> 00:16:45.440 there to support it. They confuse cheap money 00:16:45.440 --> 00:16:48.000 for real savings. That's the malinvestment. They 00:16:48.000 --> 00:16:50.080 build factories for products nobody really wants 00:16:50.080 --> 00:16:52.480 in the long run. They hire workers for jobs that 00:16:52.480 --> 00:16:54.980 aren't sustainable. And Hayek argued that once 00:16:54.980 --> 00:16:57.179 you've built all these wrong things, you have 00:16:57.179 --> 00:16:59.279 to have a correction. The recession. The recession 00:16:59.279 --> 00:17:02.320 is the economy trying to heal itself. It's the 00:17:02.320 --> 00:17:04.920 process of liquidating those bad investments 00:17:04.920 --> 00:17:08.160 and moving resources workers capital back to 00:17:08.160 --> 00:17:10.079 where they actually belong. So if the government 00:17:10.079 --> 00:17:12.480 steps in with a big spending package to prop 00:17:12.480 --> 00:17:14.940 everything up. Hayek would say. He would say 00:17:14.940 --> 00:17:17.380 you are just delaying the inevitable and making 00:17:17.380 --> 00:17:19.799 the underlying problem worse. You are keeping 00:17:19.799 --> 00:17:22.500 the zombie companies alive. You are preventing 00:17:22.500 --> 00:17:24.859 the necessary restructuring. You are trying to 00:17:24.859 --> 00:17:28.000 cure the hangover by drinking more vodka. Precisely. 00:17:28.059 --> 00:17:30.519 Keynes did not like this theory. To put it mildly. 00:17:30.779 --> 00:17:34.220 We have a famous and very brutal quote from Keynes 00:17:34.220 --> 00:17:36.859 in a review of Hayek's book, Prices and Production. 00:17:37.119 --> 00:17:39.440 He called it one of the most frightful muddles 00:17:39.440 --> 00:17:42.039 I have ever read. Ouch. That's not just academic 00:17:42.039 --> 00:17:44.420 disagreement. That's personal. And he didn't 00:17:44.420 --> 00:17:47.019 stop there. He added, it is an extraordinary 00:17:47.019 --> 00:17:50.619 example of how, starting with a mistake, a remorseless 00:17:50.619 --> 00:17:53.640 logician can end in bedlam. Bedlam. As in the 00:17:53.640 --> 00:17:56.650 famous insane asylum. He basically called Hayek's 00:17:56.650 --> 00:18:00.490 logic crazy. He did. And sadly for Hayek, in 00:18:00.490 --> 00:18:02.109 the battle for hearts and minds during the Great 00:18:02.109 --> 00:18:05.289 Depression, Keynes won, hands down. Well, it 00:18:05.289 --> 00:18:07.609 makes sense from a political standpoint, doesn't 00:18:07.609 --> 00:18:10.789 it? If you are a politician and one economist 00:18:10.789 --> 00:18:13.430 says, do nothing, let the system purge itself, 00:18:13.789 --> 00:18:16.890 it will be painful but necessary. And the other 00:18:16.890 --> 00:18:19.509 guy says, here, spend this money. Hire these 00:18:19.509 --> 00:18:21.529 people. You can save the day. You're going to 00:18:21.529 --> 00:18:24.359 listen to the second guy. Every single time. 00:18:24.559 --> 00:18:28.240 Politics favors action. Keynes gave politicians 00:18:28.240 --> 00:18:31.480 a toolkit to do something. Hayek told them their 00:18:31.480 --> 00:18:33.559 toolkit was the source of the problem. Plus, 00:18:33.740 --> 00:18:37.460 Hayek's own work was just difficult. It was incredibly 00:18:37.460 --> 00:18:40.700 dense. His work on capital theory is notoriously 00:18:40.700 --> 00:18:43.420 hard to get through. Even Milton Friedman, who 00:18:43.420 --> 00:18:46.119 agreed with Hayek politically, later called Hayek's 00:18:46.119 --> 00:18:48.460 book the pure theory of capital unreadable. When 00:18:48.460 --> 00:18:50.680 Milton Friedman calls your economics book unreadable, 00:18:50.700 --> 00:18:52.519 you know you have a marketing problem. You really 00:18:52.519 --> 00:18:56.660 do. So by the late 1930s, Keynesianism just sweeps 00:18:56.660 --> 00:18:59.099 the field. The general theory becomes the new 00:18:59.099 --> 00:19:02.359 Bible of economics. Hayek is increasingly seen 00:19:02.359 --> 00:19:04.740 as a relic. A dinosaur. He tried to fight back, 00:19:04.779 --> 00:19:07.119 right. There was a letter to the Times. He did. 00:19:07.259 --> 00:19:10.799 In 1932, he and Lionel Robbins and others wrote 00:19:10.799 --> 00:19:13.319 to the paper arguing that private investment 00:19:13.319 --> 00:19:16.319 was the path to wealth, not government spending, 00:19:16.460 --> 00:19:18.980 but the intellectual tide was just completely 00:19:18.980 --> 00:19:21.480 against them. But Hayek doesn't just fade away. 00:19:21.579 --> 00:19:24.400 He pivots. And this pivot gives us one of the 00:19:24.400 --> 00:19:27.059 most influential and controversial books of the 00:19:27.059 --> 00:19:30.619 20th century, Section 4, The Road to Serfdom. 00:19:30.700 --> 00:19:33.119 This was a massive shift for him. During World 00:19:33.119 --> 00:19:36.240 War II, Hayek moves away from technical economics, 00:19:36.440 --> 00:19:39.720 equilibrium curves and capital structure, and 00:19:39.720 --> 00:19:42.119 he moves into political philosophy. Why the change? 00:19:42.259 --> 00:19:44.259 What prompted it? He was living in Britain during 00:19:44.259 --> 00:19:46.880 the war, and he saw the intellectual climate 00:19:46.880 --> 00:19:49.799 shifting around him. He saw that even in democratic 00:19:49.799 --> 00:19:52.279 Britain, there was this growing admiration for 00:19:52.279 --> 00:19:54.900 planning, for state control. Because the war 00:19:54.900 --> 00:19:57.680 effort required it. Exactly. The war required 00:19:57.680 --> 00:20:00.940 a centrally planned economy. And a lot of intellectuals 00:20:00.940 --> 00:20:02.740 thought, hey, this works. Why don't we just keep 00:20:02.740 --> 00:20:04.839 doing this in peacetime to solve poverty and 00:20:04.839 --> 00:20:07.440 unemployment? And he also saw a dangerous misunderstanding 00:20:07.440 --> 00:20:11.220 about the enemy they were fighting. Yes. He saw 00:20:11.220 --> 00:20:13.240 that many of his colleagues in British academia 00:20:13.240 --> 00:20:16.400 believed that fascism and Nazism were a reaction 00:20:16.400 --> 00:20:18.920 against socialism, that they were some kind of 00:20:18.920 --> 00:20:22.460 hypercapitalist evil. Hayek said, no, you've 00:20:22.460 --> 00:20:24.940 got that completely backwards. He argued they 00:20:24.940 --> 00:20:27.319 were the same beast cut from the same cloth. 00:20:27.789 --> 00:20:30.490 There were branches of the same tree. That was 00:20:30.490 --> 00:20:32.789 his thesis in The Road to Serfdom, published 00:20:32.789 --> 00:20:37.670 in 1944. He argued that fascism, Nazism and communism 00:20:37.670 --> 00:20:40.430 are all children of collectivism and central 00:20:40.430 --> 00:20:42.789 planning. And the core of the argument is the 00:20:42.789 --> 00:20:45.230 slippery slope, right? It is. He argued that 00:20:45.230 --> 00:20:46.769 if you start with central economic planning. 00:20:47.079 --> 00:20:49.160 Even for very good reasons, like we want to ensure 00:20:49.160 --> 00:20:52.259 everyone has shoes, you inevitably have to give 00:20:52.259 --> 00:20:54.420 the planners more and more power. Why inevitably? 00:20:54.779 --> 00:20:56.500 Because what if people don't want the shoes you 00:20:56.500 --> 00:20:58.299 planned? What if some people want boots instead? 00:20:58.500 --> 00:21:00.460 What if the shoe factory workers want to go on 00:21:00.460 --> 00:21:03.079 strike? The plan requires you to control all 00:21:03.079 --> 00:21:05.700 of that. To make the plan work, you have to control 00:21:05.700 --> 00:21:09.079 people. So economic control leads directly to 00:21:09.079 --> 00:21:11.720 political control. That's the core message. You 00:21:11.720 --> 00:21:14.339 cannot separate economic freedom from political 00:21:14.339 --> 00:21:16.779 freedom. If the government controls your livelihood, 00:21:17.079 --> 00:21:19.700 it controls you. And it destroys the rule of 00:21:19.700 --> 00:21:22.079 law because the planner has to make arbitrary 00:21:22.079 --> 00:21:25.859 decisions to make the plan fit reality. If the 00:21:25.859 --> 00:21:28.539 plan says we need more coal, the planner has 00:21:28.539 --> 00:21:31.059 to be able to force people into the mines. Precisely. 00:21:31.400 --> 00:21:33.680 Liberty is sacrificed on the altar of the plan. 00:21:33.859 --> 00:21:36.480 Now, the reception of this book is a story in 00:21:36.480 --> 00:21:38.799 itself. In Britain, it was popular, but... It 00:21:38.799 --> 00:21:41.380 was paper rationing. It was wartime. They literally 00:21:41.380 --> 00:21:43.559 couldn't print enough copies to meet the demand. 00:21:43.779 --> 00:21:47.210 He called it that unobtainable book. But in America. 00:21:47.490 --> 00:21:49.549 In America, it absolutely exploded. The University 00:21:49.549 --> 00:21:52.230 of Chicago Press published it. But the real kicker 00:21:52.230 --> 00:21:55.690 was Reader's Digest. In April of 1945, they published 00:21:55.690 --> 00:21:58.069 a condensed version. And Reader's Digest back 00:21:58.069 --> 00:22:00.490 then wasn't just some magazine in a doctor's 00:22:00.490 --> 00:22:03.079 waiting room. It was massive. It reached millions 00:22:03.079 --> 00:22:06.299 and millions of households. Suddenly, this dense 00:22:06.299 --> 00:22:08.819 Austrian professor became a household name in 00:22:08.819 --> 00:22:11.480 America. He went on a lecture tour. He became 00:22:11.480 --> 00:22:13.799 a celebrity. He was addressing crowds of thousands 00:22:13.799 --> 00:22:16.740 who were terrified that the New Deal was going 00:22:16.740 --> 00:22:19.259 to turn into American Nazism. And ironically, 00:22:19.500 --> 00:22:21.940 even his old rival Keynes wrote him a letter 00:22:21.940 --> 00:22:24.559 about it. He did. And you'd think Keynes would 00:22:24.559 --> 00:22:27.019 absolutely hate it. But he wrote a letter saying, 00:22:27.259 --> 00:22:29.619 and I'm quoting here, in my opinion, it is a 00:22:29.619 --> 00:22:32.619 grand book. Morally and philosophically, I find 00:22:32.619 --> 00:22:34.539 myself in agreement with virtually the whole 00:22:34.539 --> 00:22:36.420 of it. Wait, really? After calling his other 00:22:36.420 --> 00:22:40.059 book bedlam? Yes. Keynes disagreed with the economics. 00:22:40.240 --> 00:22:42.460 He didn't believe that any step toward planning 00:22:42.460 --> 00:22:45.319 was an inevitable slide into tyranny. But he 00:22:45.319 --> 00:22:47.720 deeply respected the moral defense of liberal 00:22:47.720 --> 00:22:51.150 values. So what was the disagreement then? I 00:22:51.150 --> 00:22:52.829 think Keynes essentially thought, well, I can 00:22:52.829 --> 00:22:54.589 manage the economy without becoming a dictator 00:22:54.589 --> 00:22:57.490 because I'm a good civilized liberal. Whereas 00:22:57.490 --> 00:22:59.369 Hayek's point was that the system of planning 00:22:59.369 --> 00:23:01.710 makes the dictatorship inevitable, regardless 00:23:01.710 --> 00:23:03.869 of how good the intentions of the people in charge 00:23:03.869 --> 00:23:06.990 are. That's a fascinating distinction. So Hayek 00:23:06.990 --> 00:23:09.430 is famous now, but he's also kind of an outcast 00:23:09.430 --> 00:23:11.650 in the economics profession because of the Keynesian 00:23:11.650 --> 00:23:15.210 takeover. So he moves. Section five, the Chicago 00:23:15.210 --> 00:23:19.069 years. In 1950, he leaves London. and goes to 00:23:19.069 --> 00:23:22.049 the University of Chicago. But, and this is a 00:23:22.049 --> 00:23:24.710 big but, he doesn't join the economics department. 00:23:25.009 --> 00:23:27.450 The home of the famous Chicago School of Economics, 00:23:27.650 --> 00:23:30.690 the home of free market thought, and their biggest 00:23:30.690 --> 00:23:33.470 intellectual star doesn't join the department. 00:23:33.710 --> 00:23:36.150 They wouldn't have him. Or rather, the economics 00:23:36.150 --> 00:23:38.390 department at that time was becoming very mathematical, 00:23:38.549 --> 00:23:41.930 very positivist. They viewed Hayek's style as 00:23:41.930 --> 00:23:44.710 old -fashioned, too philosophical, too literary, 00:23:44.910 --> 00:23:48.069 not enough equations. So where'd he go? He joined 00:23:48.069 --> 00:23:49.869 something called the Committee on Social Thought. 00:23:50.289 --> 00:23:52.869 And to add a little insult to injury, his salary 00:23:52.869 --> 00:23:54.950 wasn't even paid by the university. No, it was 00:23:54.950 --> 00:23:57.250 paid by an outside foundation, the William Volcker 00:23:57.250 --> 00:23:58.890 Fund. He was definitely doing his own thing, 00:23:58.990 --> 00:24:00.849 sort of on the periphery. But he was there at 00:24:00.849 --> 00:24:03.150 the same time as Milton Friedman. They must have 00:24:03.150 --> 00:24:06.269 been best buds plotting the neoliberal takeover 00:24:06.269 --> 00:24:08.869 of the world from some smoke -filled room. You 00:24:08.869 --> 00:24:11.130 would think so. But the sources paint a very 00:24:11.130 --> 00:24:13.480 different picture. They were colleagues, they 00:24:13.480 --> 00:24:15.440 were friendly, but they're not close collaborators. 00:24:15.660 --> 00:24:17.059 They worked in different buildings. And they 00:24:17.059 --> 00:24:19.839 had different approaches. Very different. Friedman 00:24:19.839 --> 00:24:22.880 admired Hayek's political work. The road to serfdom 00:24:22.880 --> 00:24:25.740 was hugely important to him. But, as we mentioned, 00:24:25.940 --> 00:24:28.339 he thought Hayek's technical economics was flawed, 00:24:28.539 --> 00:24:31.660 or at least unreadable. Friedman was a positivist. 00:24:31.700 --> 00:24:34.500 He wanted to test theories with data. Hayek was 00:24:34.500 --> 00:24:36.940 more of a philosopher. He thought the most important 00:24:36.940 --> 00:24:38.859 things in economics couldn't be measured like 00:24:38.859 --> 00:24:41.640 physics. While he's in Chicago, Hyatt goes back 00:24:41.640 --> 00:24:46.279 to his first love, the brain. He does. In 1952, 00:24:46.359 --> 00:24:49.609 he publishes The Sensory Order. And this is the 00:24:49.609 --> 00:24:51.710 book that grew out of those days staining brain 00:24:51.710 --> 00:24:54.569 cells back in Vienna 30 years earlier. And this 00:24:54.569 --> 00:24:57.150 book is surprisingly, almost shockingly, ahead 00:24:57.150 --> 00:24:59.569 of its time. It is incredible. He developed a 00:24:59.569 --> 00:25:02.170 model of Hebbian learning. The idea that neurons 00:25:02.170 --> 00:25:04.750 that fire together, wire together, before the 00:25:04.750 --> 00:25:07.470 psychologist Donald Hebb formally popularized 00:25:07.470 --> 00:25:09.230 it. And how does this connect to his economics? 00:25:09.430 --> 00:25:11.289 Because on the surface, it seems like a total 00:25:11.289 --> 00:25:14.109 detour. It's not a detour at all. It's the foundation. 00:25:14.680 --> 00:25:17.839 It's the micro -level version of his macro -level 00:25:17.839 --> 00:25:21.920 theory. He argued that the mind is a self -ordering 00:25:21.920 --> 00:25:24.880 system. We don't just passively receive sense 00:25:24.880 --> 00:25:27.599 data, like a camera. The mind isn't a bucket 00:25:27.599 --> 00:25:31.400 we pour facts into. No. The mind actively constructs 00:25:31.400 --> 00:25:33.819 our version of the world based on the network 00:25:33.819 --> 00:25:35.779 of connections it has built up over time through 00:25:35.779 --> 00:25:39.579 experience. The mind imposes its own order on 00:25:39.579 --> 00:25:42.160 the chaos of sensory input. So the mind is a 00:25:42.160 --> 00:25:44.660 spontaneous order just like the market. Exactly. 00:25:44.839 --> 00:25:47.480 You can't plan a mind from the outside. It has 00:25:47.480 --> 00:25:49.759 to grow and organize itself through interaction 00:25:49.759 --> 00:25:52.619 with the world. This reinforced his belief that 00:25:52.619 --> 00:25:55.539 complex systems, whether they're brains or economies, 00:25:55.779 --> 00:25:58.400 cannot be engineered from the top down. It provided 00:25:58.400 --> 00:26:00.720 the psychological and biological backing for 00:26:00.720 --> 00:26:02.960 his political philosophy. He also wrote the Constitution 00:26:02.960 --> 00:26:05.720 of Liberty in 1960. This was his big attempt 00:26:05.720 --> 00:26:08.279 to lay out the positive principles of a free 00:26:08.279 --> 00:26:10.920 society. It was his magnum opus, in a way. But 00:26:10.920 --> 00:26:13.039 it didn't land with the same splash as Road to 00:26:13.039 --> 00:26:16.180 Serfdom. No. It didn't. It was a heavier, more 00:26:16.180 --> 00:26:19.980 detailed, more academic book. And by the 1960s, 00:26:19.980 --> 00:26:23.019 the world had moved on. The post -war boom was 00:26:23.019 --> 00:26:25.859 in full swing. Keynesianism seemed to be working 00:26:25.859 --> 00:26:29.240 perfectly. Governments were managing the economy, 00:26:29.400 --> 00:26:31.440 and everyone was getting richer. And Hayek just 00:26:31.440 --> 00:26:33.640 seemed like a grumpy old man warning about a 00:26:33.640 --> 00:26:35.859 fire that never happened. That's a good way to 00:26:35.859 --> 00:26:38.380 put it. He seemed increasingly irrelevant. Which 00:26:38.380 --> 00:26:41.220 leads us to Section 6. The wilderness, depression, 00:26:41.519 --> 00:26:44.240 and resurgence. The late 60s and early 70s were 00:26:44.240 --> 00:26:46.940 the absolute low point for him. His health declined. 00:26:47.259 --> 00:26:49.519 He suffered from severe depression. He had gone 00:26:49.519 --> 00:26:51.900 deaf in one ear during the war, and his hearing 00:26:51.900 --> 00:26:53.779 in the other ear was failing. And intellectually? 00:26:54.700 --> 00:26:57.680 He felt ignored. Completely. He felt his life's 00:26:57.680 --> 00:26:59.920 work had been in vain. He was watching the world 00:26:59.920 --> 00:27:02.519 enthusiastically embrace all the ideas he hated. 00:27:02.660 --> 00:27:04.660 And nobody seemed to care about his warnings 00:27:04.660 --> 00:27:07.700 anymore. That is just heartbreaking. To be that 00:27:07.700 --> 00:27:09.559 brilliant and to feel like the world has just 00:27:09.559 --> 00:27:12.599 passed you by. It's a tragic story. But then 00:27:12.599 --> 00:27:17.339 the turning point. 1974. The phone rings. It's 00:27:17.339 --> 00:27:19.339 the Nobel Committee. It wasn't just an award. 00:27:19.460 --> 00:27:22.279 It was a resurrection. His biographer, Alan Ebenstein, 00:27:22.319 --> 00:27:25.140 calls it... the great rejuvenating event in his 00:27:25.140 --> 00:27:28.720 life. Almost immediately, his health improved. 00:27:29.000 --> 00:27:31.480 He became active again. He started writing again. 00:27:31.680 --> 00:27:33.920 And the timing was just perfect because of what 00:27:33.920 --> 00:27:36.740 was happening in the 1970s. The 1970s economy 00:27:36.740 --> 00:27:40.279 was starting to crash. We got stagflation, high 00:27:40.279 --> 00:27:42.500 inflation, and high unemployment at the same 00:27:42.500 --> 00:27:45.240 time. Which, according to the standard Keynesian 00:27:45.240 --> 00:27:47.599 theory of the time, shouldn't happen. Exactly. 00:27:47.980 --> 00:27:49.839 Keynesianism couldn't explain it. The models 00:27:49.839 --> 00:27:53.700 were breaking. But Hayek could. His theories 00:27:53.700 --> 00:27:56.799 about money and inflation and malinvestment suddenly 00:27:56.799 --> 00:27:59.980 looked very, very relevant again. He argued that 00:27:59.980 --> 00:28:01.960 the inflation was the predictable result of all 00:28:01.960 --> 00:28:04.200 that easy money and government spending they've 00:28:04.200 --> 00:28:06.660 been doing for decades. And the politicians started 00:28:06.660 --> 00:28:08.900 listening. We have to talk about Margaret Thatcher. 00:28:09.240 --> 00:28:11.279 The famous anecdote. It's a great story. It's 00:28:11.279 --> 00:28:14.539 1975. Thatcher is the new leader of the Conservative 00:28:14.539 --> 00:28:16.839 Party in Britain. She's at a policy meeting. 00:28:17.019 --> 00:28:19.539 A speaker is droning on about finding a middle 00:28:19.539 --> 00:28:22.660 way, being pragmatic, avoiding extremes. Basically 00:28:22.660 --> 00:28:25.099 advocating for the status quo. And Thatcher was 00:28:25.099 --> 00:28:28.480 not having it. No. She reached into her briefcase. 00:28:28.720 --> 00:28:31.180 She pulled out a copy of Hayek's The Constitution 00:28:31.180 --> 00:28:34.039 of Liberty. She slammed it on the table and she 00:28:34.039 --> 00:28:37.069 declared, this is what we believe. Bam. A declaration 00:28:37.069 --> 00:28:40.029 of war on the old consensus. It's such a cinematic 00:28:40.029 --> 00:28:42.529 moment. And it wasn't just Thatcher. In the U 00:28:42.529 --> 00:28:45.250 .S., Ronald Reagan listed Hayek as one of his 00:28:45.250 --> 00:28:48.789 top intellectual influences. He welcomed Hayek 00:28:48.789 --> 00:28:51.650 to the White House. And perhaps even more powerfully, 00:28:51.710 --> 00:28:54.069 his ideas were spreading behind the Iron Curtain. 00:28:54.109 --> 00:28:56.289 This is maybe the most moving part of his legacy. 00:28:56.630 --> 00:28:59.630 Dissidents in Czechoslovakia, in Poland, were 00:28:59.630 --> 00:29:02.420 reading Hayek in secret. underground editions. 00:29:02.779 --> 00:29:05.160 Those are called samizdat. So they were risking 00:29:05.160 --> 00:29:08.039 prison to read this stuff. They were. Vaclav 00:29:08.039 --> 00:29:10.000 Klaus, who later became the prime minister of 00:29:10.000 --> 00:29:11.940 the Czech Republic, famously said that they were 00:29:11.940 --> 00:29:14.200 all reading Hayek while the Western academics 00:29:14.200 --> 00:29:17.480 were still reading Marx. They saw in Hayek a 00:29:17.480 --> 00:29:20.380 clear explanation for why their own centrally 00:29:20.380 --> 00:29:23.160 planned economies were such miserable failures. 00:29:23.519 --> 00:29:26.400 So he goes from the wilderness to being the intellectual 00:29:26.400 --> 00:29:28.400 godfather of the Reagan -Thatcher revolution. 00:29:29.049 --> 00:29:31.609 But we have to be honest. It wasn't all victory 00:29:31.609 --> 00:29:33.890 laps. There were some serious controversies, 00:29:33.970 --> 00:29:38.190 Section 7, controversies and complex views. Hayek 00:29:38.190 --> 00:29:40.829 was a very complex man, and he held some views 00:29:40.829 --> 00:29:43.730 that, frankly, don't fit neatly into the modern 00:29:43.730 --> 00:29:46.849 libertarian hero box, and some that are deeply 00:29:46.849 --> 00:29:49.670 problematic by today's standards. Okay, let's 00:29:49.670 --> 00:29:52.130 start with immigration and nationalism. Hayek 00:29:52.130 --> 00:29:54.890 was anti -nationalist in principle. He hated 00:29:54.890 --> 00:29:57.369 the my country right or wrong attitude that led 00:29:57.369 --> 00:30:00.670 to World War I. But, and this is a big but, he 00:30:00.670 --> 00:30:02.930 supported Margaret Thatcher's anti -immigration 00:30:02.930 --> 00:30:05.710 policies. Why? That seems contradictory for a 00:30:05.710 --> 00:30:07.690 guy who loves the free movement of goods and 00:30:07.690 --> 00:30:10.589 capital. His reasoning was all about tradition 00:30:10.589 --> 00:30:13.569 and the stability of institutions. He feared 00:30:13.569 --> 00:30:15.589 that if you had too much immigration too quickly 00:30:15.589 --> 00:30:17.829 from cultures that were too different, it would 00:30:17.829 --> 00:30:20.329 trigger a tribal nationalist backlash among the 00:30:20.329 --> 00:30:22.289 native population. So he thought that backlash 00:30:22.289 --> 00:30:24.710 would end up destroying the very liberal institutions 00:30:24.710 --> 00:30:27.430 he loved. That was his argument. He wanted to 00:30:27.430 --> 00:30:30.529 close the borders to save liberalism from itself, 00:30:30.769 --> 00:30:34.630 in a way. But we have to note, the sources mentioned 00:30:34.630 --> 00:30:36.750 he made some pretty offensive remarks about specific 00:30:36.750 --> 00:30:39.609 ethnic groups, Middle Eastern populations, Indian 00:30:39.609 --> 00:30:42.450 students. He claimed it wasn't racial feeling, 00:30:42.549 --> 00:30:45.130 but cultural. But reading them today, they are 00:30:45.130 --> 00:30:47.930 definitely ugly. Then there's the big one, the 00:30:47.930 --> 00:30:51.309 dictatorships question. Specifically, Chile and 00:30:51.309 --> 00:30:54.500 Augusto Pinochet. This is the big stain on his 00:30:54.500 --> 00:30:57.680 reputation for many of his critics. Hayek visited 00:30:57.680 --> 00:31:00.619 Chile twice while it was under the military dictatorship 00:31:00.619 --> 00:31:03.319 of General Pinochet. Pinochet, who overthrew 00:31:03.319 --> 00:31:05.339 a democratically elected socialist government 00:31:05.339 --> 00:31:08.119 and was responsible for the torture and disappearance 00:31:08.119 --> 00:31:10.480 of thousands of people. Right. And while he was 00:31:10.480 --> 00:31:12.440 there, Hayek said something in an interview that 00:31:12.440 --> 00:31:16.019 has haunted his legacy ever since. He said, personally, 00:31:16.160 --> 00:31:18.339 I prefer a liberal dictatorship to democratic 00:31:18.339 --> 00:31:21.410 government devoid of liberalism. Whoa. Unpack 00:31:21.410 --> 00:31:23.289 that for us. That sounds terrible. It does sound 00:31:23.289 --> 00:31:25.089 terrible. And he got a lot of heat for it. His 00:31:25.089 --> 00:31:27.089 argument, and he's trying to be very precise 00:31:27.089 --> 00:31:29.789 here, was a distinction between authoritarianism 00:31:29.789 --> 00:31:32.630 and totalitarianism. What's the difference in 00:31:32.630 --> 00:31:35.950 his view? A totalitarian government, like the 00:31:35.950 --> 00:31:38.690 Nazis or the Soviets, tries to control everything. 00:31:38.910 --> 00:31:42.009 Your mind, your job, your family, your art. There's 00:31:42.009 --> 00:31:44.980 no private sphere. An authoritarian dictator, 00:31:45.259 --> 00:31:47.700 in his view, might restrict voting and political 00:31:47.700 --> 00:31:50.299 freedoms for a while. But if they enforce the 00:31:50.299 --> 00:31:52.460 rule of law and protect free markets and private 00:31:52.460 --> 00:31:54.839 property, they might be a transitional vehicle 00:31:54.839 --> 00:31:57.940 to get back to a truly free society. So he saw 00:31:57.940 --> 00:32:01.359 Pinochet as a necessary evil to stop Chile from 00:32:01.359 --> 00:32:04.119 becoming a totalitarian socialist state like 00:32:04.119 --> 00:32:07.359 Cuba. Yes. He believed a dictatorship could theoretically 00:32:07.359 --> 00:32:10.839 be liberal in the economic and legal sense, serving 00:32:10.839 --> 00:32:13.630 as a temporary bridge back to democracy. The 00:32:13.630 --> 00:32:16.089 backlash, as you can imagine, was massive. He 00:32:16.089 --> 00:32:18.210 was accused of supporting fascism, which is deeply 00:32:18.210 --> 00:32:21.109 ironic given he wrote The Road to Serfdom. But 00:32:21.109 --> 00:32:23.170 he really believed that democracy was a means 00:32:23.170 --> 00:32:25.390 to an end and that end was liberty. Exactly. 00:32:25.430 --> 00:32:28.009 If democracy voted to destroy liberty, he chose 00:32:28.009 --> 00:32:30.650 liberty over the democratic process. It's a view 00:32:30.650 --> 00:32:33.069 that is very, very uncomfortable for most people. 00:32:33.210 --> 00:32:35.329 Okay, then there is his view on social justice. 00:32:35.710 --> 00:32:38.369 He absolutely hated the term. He called it an 00:32:38.369 --> 00:32:41.299 empty phrase, a mirage. Why? What was his objection? 00:32:41.720 --> 00:32:44.440 Because he believed the word justice is about 00:32:44.440 --> 00:32:47.000 individual conduct. Did you steal from someone? 00:32:47.140 --> 00:32:50.539 Did you break a contract? That is a just or an 00:32:50.539 --> 00:32:54.380 unjust act. But society, for Hayek, is just a 00:32:54.380 --> 00:32:56.680 spontaneous outcome of millions of individual 00:32:56.680 --> 00:32:59.720 interactions. It's not a person. It can't have 00:32:59.720 --> 00:33:02.299 intentions. So arguing that the distribution 00:33:02.299 --> 00:33:05.079 of wealth in society is unjust is like arguing 00:33:05.079 --> 00:33:06.839 that the weather is unjust. That's a perfect 00:33:06.839 --> 00:33:08.930 way to put it. A stone falling isn't just or 00:33:08.930 --> 00:33:11.910 unjust. It just happens. And he argued that if 00:33:11.910 --> 00:33:14.069 you try to make the outcome just, which usually 00:33:14.069 --> 00:33:17.150 means more equal, you have to treat people unequally. 00:33:17.170 --> 00:33:19.529 You have to take from person A to give to person 00:33:19.529 --> 00:33:21.849 B. And that destroys the rule of law, which says 00:33:21.849 --> 00:33:23.930 the rule should be the same for everyone. Exactly. 00:33:24.049 --> 00:33:26.009 It requires the state to treat people differently 00:33:26.009 --> 00:33:28.930 based on who they are, not on what they do. But, 00:33:28.930 --> 00:33:31.250 and here's the twist that surprises almost everyone, 00:33:31.710 --> 00:33:34.549 Hayek was not opposed to a social safety net. 00:33:34.750 --> 00:33:37.470 This is the most surprising nuance. and it gets 00:33:37.470 --> 00:33:40.150 lost in the modern political debate. People think 00:33:40.150 --> 00:33:43.190 of him as this hardline, sink -or -swim libertarian. 00:33:43.849 --> 00:33:46.529 But in The Road to Serfdom, he explicitly writes, 00:33:46.710 --> 00:33:49.210 and I'll quote a piece of it, there is no reason 00:33:49.210 --> 00:33:52.690 why security against severe physical privation 00:33:52.690 --> 00:33:55.799 should not be guaranteed to all. He supported 00:33:55.799 --> 00:33:58.160 a basic minimum income or something like it? 00:33:58.240 --> 00:34:00.440 He did. He supported state -assisted insurance 00:34:00.440 --> 00:34:03.099 for the common hazards of life sickness, accidents, 00:34:03.339 --> 00:34:05.859 old age. He didn't want the state manipulating 00:34:05.859 --> 00:34:08.320 prices or controlling production, but he was 00:34:08.320 --> 00:34:10.500 perfectly fine with the state providing a floor 00:34:10.500 --> 00:34:12.619 below which nobody should be allowed to fall. 00:34:12.800 --> 00:34:15.320 He wasn't an anarchist. Not at all. He believed 00:34:15.320 --> 00:34:17.980 the state had a legitimate, though limited, role. 00:34:18.260 --> 00:34:20.480 That's a huge distinction that gets lost in the 00:34:20.480 --> 00:34:23.900 memes. Okay, let's wrap up with Section 8. spontaneous 00:34:23.900 --> 00:34:27.159 order and his final legacy. We've touched on 00:34:27.159 --> 00:34:28.960 spontaneous order throughout, but we need to 00:34:28.960 --> 00:34:31.900 define it clearly. It is the central unifying 00:34:31.900 --> 00:34:34.800 concept of all his work. It is the idea that 00:34:34.800 --> 00:34:37.199 order can emerge from human action without human 00:34:37.199 --> 00:34:39.840 design. The result of human action, but not of 00:34:39.840 --> 00:34:42.019 human design. I love that phrase. It's so elegant. 00:34:42.179 --> 00:34:46.099 It is. Think of language. No committee sat down 00:34:46.099 --> 00:34:47.639 and wrote the English language from scratch. 00:34:48.039 --> 00:34:50.940 It evolved organically through millions of people 00:34:50.940 --> 00:34:52.559 just trying to communicate with each other over 00:34:52.559 --> 00:34:55.260 centuries. It has complex rules. It has structure. 00:34:55.480 --> 00:34:58.440 But nobody designed it. And the common law? The 00:34:58.440 --> 00:35:01.369 legal tradition? Same thing. Judges making rulings 00:35:01.369 --> 00:35:04.030 on specific cases over hundreds of years created 00:35:04.030 --> 00:35:06.610 a vast, coherent body of law that makes sense 00:35:06.610 --> 00:35:09.190 without a single legislator writing a master 00:35:09.190 --> 00:35:11.829 code from top to bottom. And the market. The 00:35:11.829 --> 00:35:14.550 ultimate spontaneous order. And ecosystems in 00:35:14.550 --> 00:35:17.469 nature. Hayek's point was that these systems 00:35:17.469 --> 00:35:20.289 are infinitely more complex and intelligent than 00:35:20.289 --> 00:35:22.650 any individual mind within them. And if you try 00:35:22.650 --> 00:35:24.929 to fix them with a crude tool like central planning, 00:35:25.340 --> 00:35:27.599 You will almost certainly make things worse because 00:35:27.599 --> 00:35:30.099 of your own ignorance. So where do we see his 00:35:30.099 --> 00:35:32.860 ideas having relevance today? The outline mentions 00:35:32.860 --> 00:35:36.179 the 2008 financial crisis. Right. When the housing 00:35:36.179 --> 00:35:38.860 market crashed, interest in Hayek surged again. 00:35:39.280 --> 00:35:41.840 A lot of people went back to his Austrian business 00:35:41.840 --> 00:35:45.559 cycle theory. They said, look, the Fed kept interest 00:35:45.559 --> 00:35:48.019 rates too low for too long after the dot -com 00:35:48.019 --> 00:35:51.780 crash. They created an artificial, unsustainable 00:35:51.780 --> 00:35:55.010 boom in housing. So it wasn't a failure of capitalism, 00:35:55.289 --> 00:35:57.550 but a failure of the central bank distorting 00:35:57.550 --> 00:36:00.210 the price signals. That was the argument. It 00:36:00.210 --> 00:36:02.449 fit his theory almost perfectly. And what about 00:36:02.449 --> 00:36:06.230 cryptocurrency? Bitcoin? Modern libertarians 00:36:06.230 --> 00:36:09.190 view Bitcoin as a profoundly Hayekian project. 00:36:10.070 --> 00:36:12.449 Late in his life, Hayek wrote a book called The 00:36:12.449 --> 00:36:15.800 Denationalization of Money. He argued that government 00:36:15.800 --> 00:36:17.739 shouldn't have a monopoly on issuing currency. 00:36:17.960 --> 00:36:20.500 We should have competition in currencies, just 00:36:20.500 --> 00:36:22.539 like we have competition in cards or phones. 00:36:22.780 --> 00:36:25.000 And Bitcoin is basically that, a currency not 00:36:25.000 --> 00:36:27.340 issued by any state competing in the marketplace 00:36:27.340 --> 00:36:29.639 of ideas. Exactly. It's an attempt to create 00:36:29.639 --> 00:36:32.119 a spontaneous monetary order and escape from 00:36:32.119 --> 00:36:34.760 the central planner of the Federal Reserve. Whether 00:36:34.760 --> 00:36:36.820 Hayek would have approved of the wild volatility 00:36:36.820 --> 00:36:39.139 of Bitcoin is another question, but the principle 00:36:39.139 --> 00:36:41.860 is very close to his later ideas. And we can't 00:36:41.860 --> 00:36:44.860 forget the pop culture moment. The rap battle. 00:36:45.019 --> 00:36:48.579 Fear the boom and bust. The Mercatus Center at 00:36:48.579 --> 00:36:51.320 George Mason University produced these incredible 00:36:51.320 --> 00:36:54.260 music videos. You have two actors playing Keynes 00:36:54.260 --> 00:36:56.820 and Hayek, rapping their economic theories. It 00:36:56.820 --> 00:36:59.159 sounds completely ridiculous, but they are actually 00:36:59.159 --> 00:37:01.519 incredibly educational and very well done. They 00:37:01.519 --> 00:37:03.780 are. I want to steer markets. I want them set 00:37:03.780 --> 00:37:06.960 free. It brought these century -old debates to 00:37:06.960 --> 00:37:09.280 a whole new generation on YouTube. It just shows 00:37:09.280 --> 00:37:11.599 that these ideas are still very much alive and 00:37:11.599 --> 00:37:13.760 still fighting each other. So as we wrap up, 00:37:13.800 --> 00:37:15.860 let's try and synthesize all this. What is the 00:37:15.860 --> 00:37:18.900 single biggest takeaway from the life and work 00:37:18.900 --> 00:37:21.099 of Friedrich Hayek? I think the core message, 00:37:21.300 --> 00:37:23.619 the thread that ties everything together, is 00:37:23.619 --> 00:37:26.320 intellectual humility. Hayek wasn't just an economist. 00:37:26.440 --> 00:37:28.900 He was, as we said at the start, a philosopher 00:37:28.900 --> 00:37:31.400 of human ignorance. His whole project was an 00:37:31.400 --> 00:37:34.570 argument against arrogance. It was. He basically 00:37:34.570 --> 00:37:37.969 said, the world is infinitely more complex than 00:37:37.969 --> 00:37:41.110 your brain can ever understand. Therefore, we 00:37:41.110 --> 00:37:43.690 should build our institutions, like the market, 00:37:43.829 --> 00:37:46.349 like the rule of law, to work with that ignorance 00:37:46.349 --> 00:37:48.769 rather than pretending we can engineer society 00:37:48.769 --> 00:37:52.239 like a machine. We are not gods. We are just 00:37:52.239 --> 00:37:54.619 nodes in a network we can't fully comprehend. 00:37:55.059 --> 00:37:58.760 Exactly. A humble and, I think, profound insight. 00:37:59.039 --> 00:38:00.880 But here's a provocative thought to leave you 00:38:00.880 --> 00:38:03.639 with. Hayek's whole argument rested on the idea 00:38:03.639 --> 00:38:06.019 that no central planner could ever have enough 00:38:06.019 --> 00:38:09.420 data to replace the price mechanism, the knowledge 00:38:09.420 --> 00:38:11.659 problem. Right. The impossibility of the calculation. 00:38:11.760 --> 00:38:15.699 But today... We have big data. We have AI. We 00:38:15.699 --> 00:38:17.579 have algorithms that know what you want to buy 00:38:17.579 --> 00:38:19.760 before you even know you want to buy it. Amazon 00:38:19.760 --> 00:38:22.400 and Google have more data on us than the KGB 00:38:22.400 --> 00:38:25.260 ever dreamed of. That is the big scary question, 00:38:25.320 --> 00:38:27.630 isn't it? In an era of coming artificial general 00:38:27.630 --> 00:38:29.730 intelligence, does Hayek's knowledge problems 00:38:29.730 --> 00:38:32.289 still hold true? Or are we finally building the 00:38:32.289 --> 00:38:34.750 central planner he thought was impossible? Are 00:38:34.750 --> 00:38:36.989 we building a digital god that actually can know 00:38:36.989 --> 00:38:39.730 it all? It's a terrifying and fascinating possibility. 00:38:40.469 --> 00:38:42.929 If the computation cost of all that data goes 00:38:42.929 --> 00:38:46.130 to zero, does the calculation problem disappear? 00:38:46.730 --> 00:38:48.710 Or is there something fundamentally unpredictable 00:38:48.710 --> 00:38:51.610 about human choice and discovery that can never 00:38:51.610 --> 00:38:53.650 be captured in data, no matter how big? Something 00:38:53.650 --> 00:38:56.230 to mull over. Thanks for listening to this deep 00:38:56.230 --> 00:38:58.250 dive into the mind of Friedrich Hayek. Thanks 00:38:58.250 --> 00:38:59.329 for having me. It was a pleasure.