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Monday, March 22, 2010

Applying Hayekian Ideas: Leonard Read and I, Money

In a recent blog post, Peter Boettke argues that in reading F.A. Hayek it is important to distinguish between Hayek and Hayekianism. Because Hayek, as a lifetime learner, did not always apply his ideas as fully he possibly could have, Hayek the man was at times less willing to take the ideas as far as they can be taken.

In this letter dated September 1974, Leonard Read thanks Hayek for inspiring him to write his Freeman article “Those Things Called Money.” In the article Read comes to the conclusion that “if money is to be useful to traders as a medium of exchange then the decisions as to what shall serve as money must be worked out by traders in the market, voluntarily, rather than by governmental edict.” What he is doing is applying Hayek’s idea of spontaneous order to money. As Read says, “When millions of people are free to act creatively as they choose, an unimaginable wisdom is the consequence. To assert that it is a billion times greater than exists in any discrete individual would be a gross understatement.” The same principle operates in Read’s famous essay, I, Pencil: Essentially the market is much better at coordinating the dispersed knowledge then any single planner.  That, in turn, comes straight out of Hayek’s 1945 paper (reprinted in the Freeman in June 1961), “The Use of Knowledge in Society.”

Hayek eventually came to the same conclusion as Read, as illustrated by his 1976 monograph The Denationalization of Money. Still, one can find instances of Hayek arguing the exact opposite. For example, in The Constitution of Liberty, published in 1960, Hayek argues that leaving money to spontaneous forces is not only impracticable but also undesirable. Hayek in 1960 was unable to see what Read saw until later.

It’s useful to point this out, not to impugn Hayek in any way, but to show how important Hayekian ideas are for freedom. Read’s article would have seemed very radical and maybe impractical to Hayek in 1960. Indeed the article probably seems radical and impractical to many people today. This doesn’t, however, make it any less correct. Without Hayekian ideas there would be a much weaker case for market-created money. And with government control of money comes a great chance of runaway inflation and disruptions in the market. So, what we should learn from this is that taking Hayekian ideas to their logical conclusion might just make the world more free and prosperous.

Download the Read To Hayek September 1974 letter here.

  • Nicholas Snow is a Visiting Assistant Professor at Kenyon College in the Department of Economics, and previously a Senior Lecturer at The Ohio State University Economics Department. His research focuses on the political economy of prohibition.