Why Hayek Matters

Hayek’s “Use of knowledge in society” is often misunderstood. Hayek’s point is not just that prices aggregate dispersed knowledge, but also that the knowledge embedded in prices would not exist absent the market process. Later, in The Constitution of Liberty, he argues that this same idea can also be applied to the study of political and collective choice phenomena. Democracy is not just about aggregating preferences. Absent the democratic process, the knowledge necessary to solve collective problems is not generated. We compare this perspective on democracy to Bryan Caplan’s and Helen Landemore’s theories, and we argue that Hayek’s account focused on “opinion falsification” is richer. Unlike Caplan or Landemore, who adopt a static perspective, Hayek is more interested in the long-term tendencies and feed-back mechanisms. For example, why do Western democracies seem to have gradually moved away from the most deleterious types of economic policies (such as price controls)? Hayek’s conjecture is that the democratic process itself is responsible for this. We connect Hayek’s conjecture about democracy to the broader argument made by Vincent Ostrom, who has claimed that public choice should study not just incentive structures, but also collective learning processes. We believe that this line of research, that is, comparative institutional analysis based on the collective learning capacities embedded in alternative institutional arrangements, merits a lot more attention than it has received so far. The question “Which collective choice arrangements have the best epistemic properties?” is one of the most important neglected questions in political economy.