George Soros spoke about Hayek at a Cato forum today. I didn’t attend, but I did read this excerpt that Politico put up an hour or two before the event. Soros does a pretty good job of slaying a straw man. Hayek’s actual ideas, however, remain intact. As it turns out, the two have a lot in common.
Soros points to Hayek as a believer in perfect competition, and perfect knowledge. That is, buyers and sellers have perfect knowledge of market conditions, can buy and sell in unlimited quantities with zero transaction costs, etc.
Economists commonly assume perfect competition in their models for purposes of simplicity. Soros rightly points out that this is thoroughly unrealistic, and should not be taken too seriously.
The trouble is that Hayek spent almost his entire career pointing out that, just like Soros, he believes perfect competition is a fiction. In Individualism and Economic Order, he points out that if such conditions came true, the world would be static. Nothing would ever change.
Markets change and adapt every day because people are finding out new information and acting on it. If everyone already knew all relevant information, nobody could find out new information. They’d already have it. Perfect competition means a permanent, unchanging equilibrium.
The real world is anything but equilibrated. Therefore, perfect competition does not exist. Case closed.
Hayek’s most enduring contribution is the Knowledge Problem, which is the very opposite of perfect competition. For Hayek, the economy is so complex and so dynamic, that no one person can possibly understand it well enough to direct it.
Distant regulators, no matter how smart, can never have a good enough command of the facts on the ground to come up with a better outcome than the people actually buying and selling in the economy. Everyone has a tiny sliver of specialized knowledge that nobody else has, and they act on it.
The best policies are the ones that let people act freely. Shortages and surpluses are revealed faster. Resources flow more quickly to the people who need them the most. That’s why Hayek supported free markets. He never said they were perfect. He did say they worked better than top-down alternatives because of the Knowledge Problem.
Soros and Hayek completely agree in rejecting perfect competition as a useful guide to policy, and on the chronic instability of markets. Where they differ is that Hayek actually rejects perfect competition more strongly than Soros does.