Hayek’s Thesis Is That Socialism Is a Lethal Scientific Error Resulting from Intellectual Arrogance

Since Keynes’s economic theory has been proven to be incorrect on purely scientific grounds, it is permissible to analyze the factors that made him susceptible to error. The ultimate source of Keynes’s error is captured by the title of Friedrich Hayek’s final book, The Fatal Conceit: The Errors of Socialism (1988). What exactly did Hayek mean by the expression “the fatal conceit”? Conceit is defined as an exaggerated estimate of one’s own intellectual abilities. Thus, the expression “fatal conceit” connotes deadly intellectual pride. As the book’s subtitle indicates, Hayek directs the term to the advocates of socialism. Here then is Hayek’s thesis: socialism is a lethal scientific error resulting from intellectual arrogance. Jesús Huerta de Soto, a leading Hayek scholar, explains:

In the most intimate part of our nature lies the risk of succumbing to socialism, because its ideal tempts us, because humans rebel against their own nature. To live in a world with an uncertain future disturbs us, and the possibility of controlling that future, of eradicating uncertainty, attracts us. In The Fatal Conceit, Hayek writes that socialism is actually the social, political and economic manifestation of humankind’s original sin, pride. Humankind wants to be God, that is, omniscient… . The socialist considers him- or herself as overcoming this problem of radical ignorance which fundamentally discredits his (or her) social system. Hence, socialism is always a result of the sin of intellectual pride. Within every socialist there lies a pretentious person, a prideful intellectual.

—Edward W. Fuller, “Keynes's Fatal Conceit,” Procesos de Mercado: Revista Europea de Economía Política 15, no. 2 (Autumn 2018): 15-16.

The Distortions Created by Central Banks Go Beyond Those Considered by the Traditional ABC Theory; Financial Bubbles and Crashes Can Be Linked to the Action of Central Banks

The Austrian School of Economics has historically put its focus on the relationship between monetary expansions, not backed by a voluntary increase of savings, and the productive structure. Thus, the ABCT [Austrian Business Cycle Theory] has analyzed how monetary expansions distort the allocation of resources between consumer and capital goods, generating periods of boom and busts (Mises [1912] 1981, Hayek 2008 and Huerta de Soto 2009). However, little attention has been paid to the distortions created by monetary expansions on the financial structure of the economy.

In this paper, I will try to describe the different links between monetary expansions and the financial structure of an economy, argue that the financial effects of monetary expansions play a significant role in the development of business cycles, and explain why the distortions created by central banks go beyond those taken into account by the traditional ABCT. Specifically, I will discuss how financial bubbles and crashes can be linked to the action of central banks, through the impact of monetary expansions in the agents’ balance sheets, which generate an excessively fragile financial structure that is, at the same time, reliant on an unsustainable productive structure.

--Rafael García Iborra, "Financial Effects of Monetary Expansions," Procesos de Mercado: Revista Europea de Economía Política 15, no. 1 (Spring 2018): 76.

Say’s Law Applied to a Monetary Economy of n Goods, x1, x2, x3 ,…, xn-1, M, Where M Is the Money Good; Of Course, This Is Precisely the Way Free Markets Work

The principle that has come to be known as Say’s law is considered to be an essential element of classical economics. Properly understood, there are two aspects to Say’s law: 1) there can never be a glut of goods in general; 2) there can be a glut of some goods matched by an insufficiency of other goods. Say himself understood this principle to apply to monetary as well as barter economies. It is the case of monetary economies that is relevant for the purposes of this paper.

Say’s Law applied to a monetary economy of n goods,  x₁,…, x_n-1, M, where M is the money good. Say (1880) maintains that there can never be a glut of the n goods combined; however, there can be a surplus of any subset of the n goods, in which case there necessarily would be a paucity of the goods in the complementary subset. More simply put, there cannot be too many goods in general, but there can be too many of some goods and not enough of others (Sowell, 1972). In such cases, there is a misallocation of resources. Producers have misjudged consumers’ sentiments and produced a suboptimal mix of goods. What is required is a realignment of relative prices such that prices of those goods in excess be decreased relative to the prices of those of which there is a dearth. Of course, that is precisely the way free markets work. The producers of the «glut goods» make actual losses and the producers of «dearth goods» forego potential profits. Their response is to adjust prices altering the structure of prices and reallocating resources more in accord with the desires of consumers. And, it makes no difference if M is the sole good for which there is an insufficiency.

--William Barnett II and Walter Block, "On Say's Law, Keynes's Money, and Post Keynesians," Procesos de Mercado: Revista Europea de Economía Política 4, no. 2 (Autumn 2007): 140-141.