what would Hayek say?

Austrian economist Friedrich Hayek (1899-1992) was famously a foe of central planning, and fan of free markets. Nonetheless, Tufts University economist Amar Bhidé is convinced that Hayek would oppose the way free financial markets now operate.

For Mr Bhidé, Hayek’s attack on central planning was an attack on the lack of local information available to central planners when making their decisions. Soviet bureaucrats sitting in Moscow, for example, could not possibly know enough to dictate to farmers in individual fields about how to plant their crops.

Mr Bhidé contends that, similarly, when financial markets are made more liquid, so that they can carry more volume, harmful and distortive homogenisation becomes inevitable. “To make anything liquid, you have to impose on it a certain collectivisation akin to central planning,” he argues. “You have to treat essentially different people as if they are the same.”

Mortgage markets could not be possibly be so liquid if every trader took account of all the factors that make each borrower and each mortgage different, he contends.

The solution should be to accept a small and illiquid local market for trading mortgages. But instead, banks decided to rely on modelling. “Stick it all into a computer model which has been designed by someone far away, exactly like a central planner, and it spits out a rate for everyone.”

John Authers, “Hayek’s attack on central planners can fit markets too“, Financial Times, 23 December 2013.

John Authers is the FT’s senior investment columnist

Amar Bhidé is Professor of International Business at the Fletcher School of Law and Diplomacy in Medford, MA (USA). His paper, “The Hidden Costs and Underpinnings of Debt Market Liquidity”, Columbia University Center on Capitalism and Society Working Paper No. 79 (November 2013) can be downloaded at SSRN.

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