The Institutions of a Liberal Order According to Hayek

The Institutions of a Liberal Order According to Hayek

June 27, 2021 Off By Felso

Liberalism is a general term denoting currents that embrace individualism, freedom and tolerance in political activity and economic life, primarily where religious beliefs are concerned.

In religious matters, liberalism advocated freedom of conscience, opposed bigotry, and demanded respect for personal beliefs.

He supported the principles of democracy in politics. He has been an advocate for human rights. He defended the equality of citizens before the law and the sanctity of universal suffrage.

Liberals’ place in the currents of political doctrine is between conservatives who desire the continuity of the status quo and radicals who yearn for order change. Liberalism is a doctrine that has emerged from the people and has adopted constitutional power orders that are “with the people and working for the people”.

Economic liberalism advocated the freedom of import, the reduction of customs duties, free competition and opposed the intervention of the state in the economy. “Let them do, let them pass” is a slogan of economic liberalism. The first economists, businessmen and politicians who pioneered economic liberalism are as follows. Adam Smith, Ricardo, Richard Cobden, John Bright and John Struart Mill.

a) Market Structure

The shoemaker, Jones, does not manufacture shoes because he knows he needs shoes. Dozens of merchants (or rather, their retailer) will buy a certain number of shoes at varying prices, knowing that thousands of Joneses, unknown to the manufacturer, want to buy shoes. That’s why the manufacturer knows this, so he produces shoes. (1) The price mechanism is a marvelous thing, as Hayek points out. (2)

The mechanism does not require agreed-upon targets or instructions to be drawn, and directs thousands of miscellaneous goods to the most efficient use combination without any awareness.

The market system is not based on people ‘working hard’ but on producing what other people desire in the right place and time to satisfy consumers and in a manner that least conflicts with the desires of others.

The rewards given by the market reflect the value of a good and the efforts of the individual who supplies that good in the eyes of other people. These rewards are thus an impetus for further activities where other people will also benefit.

Some thinkers, such as Marx, have adopted a ‘labor-value’ theory (used to justify the expropriation of capitalists who appear to put no effort into the production of goods and possibly add no value to them) which claims that the value of the product is determined by the amount of labor put into it. Of course, this is the opposite of reality in Hayek’s eyes. Prices tell the producer how much effort and skill the product is worth putting in, and if you don’t understand it somehow, you will inevitably never be able to grasp the function of the market.

Hayek’s conclusion regarding the allocation of market value is as follows:

It would, of course, be unreasonable to ask for more than the functioning of a system that does not serve a hierarchy of common goals, but in which there are many actors who cooperate with each other in pursuit of each person’s own individual goals, only in this way they can help each other.

The price mechanism is one of the many systems that people learn to use (although not completely) after finding it by accident without realizing it. Competition between producers and, of course, consumers is another essential part of the market process.

b) The Traditional Perfect Competition Model and Hayek’s Criticisms

Economics books usually deal with the concept of ‘perfect competition’ at the beginning. The envisaged advantages of perfect competition are in the arguments of the market proponents; envisioned disadvantages also come from market opponents. In Hayek’s opinion, both are wrong, and many advantages of competition thankfully in no way depend on it being ‘full’.

The traditional model of perfect competition is based on foundations that do not exist outside of a narrow segment of economic life. The basic assumption of the model is the assumption that any strictly defined good or service can be offered to consumers in the maximum amount at the same cost by a large number of producers, and as a result, none of them can consciously determine the price. In this model, every manufacturer that raises its price will lose its customer, and every manufacturer that lowers its price will face a counterattack from its competitors. Prices are therefore as low as possible.

— It is the assumption that all events can be fully known (assumption of complete information) and that there are no barriers to entering the production process.

Hayek criticizes this traditional view not only to the point that it is highly unlikely to occur, but also to point out that the traditional view completely distorts the idea of ​​competition, which is an action rather than a static state. According to Hayek, every economic problem – such as the supply of a good or the discovery of a new use for it – arises because something changes. The study of economics is in this ever-changing