The following article is from the May 31 1999 issue of Forbes. The article was put online for educational purposes only. Please don't copy or print from this page. If you need reprints please contact Forbes

Dismissed by the Keynesians, economist Friedrich Hayek provided an alternative vision that has helped lead the world toward democratic capitalism. To Hayek, intellectual arrogance led the Soviet Union to serfdom.

In His best-known book, The Road to Serfdom, published in 1944, Friedrich Hayek predicted with devastating accuracy the consequences of collectivist societies, the Soviet Union being this century's most conspicuous example. Those who discover the book today, ten years after the Berlin Wall crumbled, may well ask themselves how, with such penetrating analysis available to them, most economists, political scientists, politicians and the CIA failed to see the internal contradictions that doomed the Soviet Union.

There was no shortage of distinguished economists who disagreed with Hayek's central thesis, which was that all collectivist societies-from Hitler's National Socialism to Stalin's communism-lead logically and inexorably to tyranny. As late as 1984, the Harvard economist John Kenneth Galbraith wrote approvingly in The New Yorker magazine that the Soviet economy was making great material progress. His evidence was the apparent well-being of Russians on the street, the rush-hour traffic and the spread of apartment houses. He attributed the success to the fact that, in contrast with Western economies, the Soviet system made full use of its manpower.

Galbraith was in good company. For decades, until its 11th edition, in his best-selling textbook, Economics, MIT's Nobel laureate Paul Samuelson told students that it is a "vulgar mistake to think that most people in Eastern Europe are miserable." (The 11th edition deleted the word "vulgar.") Finally, in 1985, the 12th edition omitted the sentence. In its place is the question whether the economic gains achieved under communism justified the political repression - a euphemism for the tens of millions killed, starved, randomly put in prisons for days and years of torture. Samuelson claims that this cost-benefit analysis is among the most "profound dilemmas of human society."

To Hayek such questions were morally repugnant. He wrote in The Road to Serfdom: "The principle that the end justifies the means is in individualistic ethics regarded as the denial of all morals. In collectivist ethics it becomes necessarily the supreme rule."

Full-scale collectivism did not hold sway in Western economies, but a large measure of government intervention did arrive courtesy of the disciples of John Maynard Keynes. Starting at the end of World War II, Keynesians argued that big government can and should shape policies by looking at the relationships between backward-looking, aggregate numbers such as gross national product, aggregate investments, national savings and others. Within their models, depressions are caused by "animal spirits," that is, when people's mood swings from optimism to pessimism. But-hold your breath-the wise Keynesian politicians and bureaucrats look at the numbers churned out by government bureaus of statistics and know how and when to compensate for the riffraff's mood swings.

Rubbish, said Hayek. In his essay "The Misuse of Aggregates," he showed that the Keynesians' back-ward-looking aggregate numbers like investment and price levels were misleading because business owners do not make investment decisions based on aggregates. He also noted that although individual people certainly make investment mistakes, they do not turn pessimistic or optimistic all at once. Without this pillar, the Keynesian case for Big Government's intervention collapses.

Central to Hayek's theory was his belief that there is no way a handful of bureaucrats can possibly know how to make intelligent spending and investment decisions. Why not? Bureaucracy lacks the deep knowledge that can come only from constant trial and error by millions of individuals over decades and centuries.

To Hayek, as to Adam Smith, decentralized, competitive markets were infinitely more suited to collecting and disseminating useful information than the most powerful computers could ever be. For a political party, no matter how well intentioned, to think it could order things better than the market was sheer hubris.

How can a bureaucracy know how to price chickens, wheat, highways, schools, water, bonds and anything else better than the millions of self-interested human beings who trade daily in these items? Hayek's unambiguous answer: It can't.

Could Soviet planners have created a Microsoft, Toyota or Intel, not to mention Disney's Mickey Mouse? Could anyone have planned the development of such an institution as the high-yield credit market, crucial for financing entrepreneurs and their innovations and creating jobs?

Another facet of Hayek's conclusion that spontaneous, grassroots formations are superior to central direction is now brightly visible on the Internet. The antithesis of central planning, the Net has greatly lowered the cost of creating new markets. The auctions offered by Ebay and Amazon.com, among others, illustrate Hayek's view that new knowledge and discoveries- technological in this case-are quickly dispersed and rapidly absorbed by self-interested individuals trading in the market who use the new knowledge to generate still newer knowledge.

Few things generated greater contempt in Hayek than the Keynesians' beloved Phillips Curve, which embodies the notion that too much prosperity creates inflation, while just the right amount of inflation can create lasting prosperity. Comparing inflation to drug addiction, Hayek argued that it was the great enemy of job creation. As the U.S. economy continues to create jobs and record low levels of unemployment with very low levels of inflation, there isn't much doubt that Hayek was right and the followers of Keynes wrong.

Hayek also foresaw the difficulties into which a quintessentially collectivist program like Social Security would run as it grew from a modest program designed to relieve poverty into a gargantuan Ponzi scheme for income redistribution. But far from preaching anarchism or even radical libertarianism, Hayek, who took customs and traditions seriously, thought government had a positive role to play. He never questioned the state's role in providing a social safety net (although his attackers suggested otherwise).

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Neil Rieck
Kitchener - Waterloo - Cambridge, Ontario, Canada.