Austrian economists Ludwig von Mises (1881-1972) and Friedrich Hayek (1899-1992) eloquently advocated free markets devoid of state intervention. Though they differed in the degree of their opposition to interventionism, both Mises and Hayek developed extensive economic arguments demonstrating why free markets succeed and regulated economies fail. Mises and Hayek understood the free market’s necessity for promoting social cooperation, rational calculation, transmission of knowledge, and a market order far more complex and successful than any deliberate creation of a central planner. Their ideas also imply the free market’s morality in promoting the values of life, liberty, and property.
            Richard Ebeling of the Foundation for Economic Education calls Ludwig von Mises “the most comprehensive and consistent critic of all forms of modern collectivism.” Indeed, Misesian economic theory proves the futility and undesirability of all forms of government coercion over the market economy. A strict deductive rationalist, Mises based his economics on praxeology—the science of human action. By logical derivation from the fundamental axiom that all men act and use means in pursuit of ends, Mises arrived at basic economic laws and used them to demonstrate why the collectivist endeavor must fail.
            Unlike the nationalists and collectivists of the German Historical School—who used statistics to “demonstrate” the need for government economic intervention—Mises did not view society as composed of inherent antagonisms requiring suppression by government. Rather, argued Mises, societies are formed voluntarily, with each member’s interests in mind; each person benefits from division of labor and economic cooperation with others. All economic actors specialize in what they do best and associate with those who might benefit them. If a fully free market exists, each man may work and associate as he sees fit; thus, his best interests are met. State intervention, however, coerces and creates unnecessary antagonisms; under any brand of collectivism, the state sacrifices some individuals’ interests to serve others’.
            Mises identified three critical defects of any system that interferes with free markets. Men are less motivated to work under compulsion than under laissez-faire—since coercion limits their pursuit of their own interests. Moreover, interventionism forces men to conform to the values and goals of those in command—objectives disagreeable to the subjects themselves. Finally, by subordinating some people’s interests to those of others, state intervention distorts or outright destroys the social cooperation so crucial to a sound economy. 
            According to Mises, the view of the market as chaotic and sub-optimal stems from collectivist ideologues’ short-sightedness. Markets are dynamic systems; their short-term fluctuations might temporarily unsettle some participants. However, this is no reason to vilify markets. Their fluctuations are beneficent long-term adaptations to changes in supply and demand for commodities. Markets thereby reallocate resources toward more optimal uses, so that every economic demand eventually comes to be met with a supply, benefiting all.
            Mises grasped the market price system’s indispensability to rational economic calculation. Market prices give consumers information about commodities’ available supply and sellers’ willingness to part with them. Consumers’ reactions to the prices give sellers feedback about demand for the commodities. Through the price system, supply and demand are harmonized and resources employed with greatest prudence.
            A socialist system, recognized Mises, suffers from an irremediable calculation problem. Without a market price mechanism determine what goods consumers actually demand and how much of each good should be produced. The best a socialist economy can do is use “shadow prices” referring to the price system of another country with free markets. This remedy is ineffective, however. Other countries experience conditions and demands different from the socialist country. Furthermore, government regulation in itself distorts market signals of supply and demand, thus rendering impossible socialistic endeavors to fulfill an entire country’s needs through centralized management.            
            Mises understood that a regulation-free market is the only alternative to socialism’s inescapable failures. Partial government economic regulation is a “back door” to socialism; every regulation disturbs the market, accelerating calls for more government regulation. The new regulations, instead of remedying previous government-caused disturbances, only amplify them. Intervention breeds intervention, until the entire society comes under state control—unless its thinkers and leaders step back from the abyss and return to a fully free market. Mises advocated a limited “night watchman” state—supplying only basic non-market services: the military, police, and law courts.
            Like his mentor and friend Mises, Friedrich Hayek championed free markets’ desirability and efficacy. Bruce Caldwell, editor of The Collected Works of F. A. Hayek, reveals that, like Mises, “Hayek was suspicious of aggregation,” a technique mainstream economists used to “show” that certain government policies led to an overall gain in “social utility.” Both Mises and Hayek saw the contradiction in defining a gain in “social utility” through policies that reduced many individual economic actors’ utilities.
          Like Mises, Hayek critiqued socialists’ prejudice that society can be centrally planned by knowledgeable, benevolent managers—a mindset Hayek called “constructivist rationalism.” Hayek’s reasons for socialism’s inevitable failure differed from but complemented Mises’s. Whereas Mises formulated the calculation problem under socialism, Hayek, emphasized socialism’s knowledge problem.
            Hayek’s “The Use of Knowledge in Society” (1945) explained that the knowledge problem arises from discrepancies in individuals’ economic information—which those individuals can effectively harness, but which central planners cannot access. Knowledge about “the circumstances of time and place” is available to individuals actually involved in economic production but not to central planners far from the economic activity. Individuals also possess tacit or inarticulable knowledge that they use in daily life but are unable to communicate to others—especially to central planners. Thus, planners—no matter how intelligent or well-meaning—are faced with a woeful deficiency of information about the activities and needs of the millions of people under their jurisdiction.
            While socialist systems suffer from the knowledge problem, free-market economies do not. According to Hayek, free markets use prices to effectively coordinate information. The price of a good is a convenient indicator of supply of and demand for that good. When either factor changes, so does the price; all relevant economic actors respond accordingly without needing to know every particular reason for the price change. The price system’s efficacy is inextricable from free markets, since markets are—in Caldwell’s words—“both price-determined and price-determining.” Participant individuals’ local knowledge shapes market activity—but market activities’ outcomes themselves shape economic actors’ knowledge and future action. Any intervention with free markets distorts the price system’s role in indicating the sort and number of goods people want. To complement Mises’s insight of prices’ necessity for rational economic calculation, Hayek showed their indispensability to the effective transmission of economic knowledge.
            Hayek also defended the market as a spontaneous order—a system far too complex to have been organized exogenously by a planning entity. Rather, a spontaneous order arises endogenously, through actions of individual participants—each following a set of basic rules. Among the rules for a spontaneous free-market order, Hayek listed well-defined property rights, rule of law, and a liberal, constitutional order.
             Mises and Hayek jointly developed the Austrian Business Cycle Theory, which challenged mainstream economists’ presumption that free markets “naturally” caused “boom-bust” business cycles. Rather, artificial credit expansion by government causes the “boom” phase—deceiving private investors and entrepreneurs into thinking that more capital exists than is truly available. Businesses undertake long-term projects relying on this fictitious capital. Eventually, they perceive their errors and cut unsustainable projects before more resources are wasted. During this “bust” phase, the economy attempts to correct the government-caused damage. Unfortunately, governments tend to intervene further during that correction stage, additionally impeding economic actors’ understanding of true conditions and incentives.
           Hayek differed from Mises primarily in his lesser consistency in advocating limited government. While Mises never compromised his laissez-faire principles, Hayek, in The Road to Serfdom, endorsed government interventions such as antitrust laws and minimal welfare programs for the extremely poor.  John Maynard Keynes, in his 1930s debates with Hayek, capitalized on this inconsistency to advocate even more government intervention than Hayek. Robert Skidelsky of the University of Warwick recognizes Keynes’s legitimate concern about “where to draw the line” in a Hayekian system of limited government. If some government interventions—like antitrust and minimal welfare—are acceptable, what distinguishes them from other unacceptable ones? Keynes was correct that no such differences in kind exist. While Keynes was more consistent than Hayek in supporting interventionism, Mises was more consistent in defending free markets. Mises brooked no piecemeal interventions, however small; he knew that they would inexorably lead to full-fledged socialism.
            Both thinkers saw the free market as a profoundly moral system. Praxeology and economics per se cannot—according to Mises—pass moral judgments, since praxeology studies human action with given moral ends. However, in Human Action (1949), Mises explicitly stated the moral assumption required for praxeology to defend free markets: that life is preferable to death, wealth to poverty. Free markets efficiently accomplish the moral goals of life and prosperity. As the only non-coercive socioeconomic system, the free market affirms the moral principle that each man’s autonomous life is his foremost value. Free markets prevent anyone from depriving him of that value. Furthermore, free markets affirm wealth production’s morality—since one person’s gain is nobody’s loss.
            Hayek understood free markets’ moral necessity for preserving individual political liberty. In The Road to Serfdom, Hayek explained that any economically regulated society tends to progressively restrict political freedoms as well. In planned economies, central managers decide what is produced and sold—which they cannot effectively do without controlling political mechanisms essential to socialist decision-making. In order to plan the economy successfully, central managers would need to eradicate political opposition and ensure that no dissident ideas enter public consideration. Thus, socialism inevitably generates tyranny. Those who value individual liberty of expression should support fully free markets. 
            In demonstrating free markets’ indispensability to efficient, harmonious societies, Mises and Hayek discredited socialist calls for “benevolent” governments to regulate economic affairs. Their work shows laissez-faire capitalism capable of facilitating cooperation, calculation, transmission of knowledge, and order—where any other system fails at all these tasks. These great economists also demonstrated that, of all systems, free markets alone can cultivate the moral objectives of life, liberty, and property.

Lectures Cited:

Caldwell, Bruce. “Friedrich A. Hayek.” Great Economists. Center for Constructive Alternatives. Hillsdale, MI. 30 Jan. 2006.

Ebeling, Richard. “Ludwig von Mises.” Great Economists. Center for Constructive Alternatives. Hillsdale, MI. 30 Jan. 2006.

"G. Stolyarov II is a science fiction novelist, independent philosophical essayist, poet, amateur mathematician, composer, contributor to Enter Stage Right, The Autonomist, Le Quebecois Libre, and the Ludwig von Mises Institute, Senior Writer for The Liberal Institute, and Editor-in-Chief of The Rational Argumentator, a magazine championing the principles of reason, rights, and progress. His newest science fiction novel is Eden against the Colossus. His latest non-fiction treatise is A Rational Cosmology. Mr. Stolyarov can be contacted at gennadystolyarovii@yahoo.com