Hayek wasn’t big on socialism or central planners. Economists always pitted him against Keynes – Hayek as the free marketeer v Keynes the central planner. It all a bit simplistic, as Keynes wasn’t averse to making a tidy profit on the free market. Both economists became the poster boys for opposing economic sides in the later half of the 20thC.
Hayek claimed that profit was a positive function. He believed profit was the signal that told us what we must do to serve the people we do not know.
Hayek’s claim was because socialism assumed perfect knowledge – knowledge of what every individual wanted – that it was bound to fail. It could never precisely predict the needs and wants of the individual.
He felt socialism overlooked modern society – what he called “the extended order” – those that extended beyond or outside the centralised system – who had no means of signalling their desires to the central planners. Therefore, the central planner could never have perfect knowledge and those wants and needs would go unmet – leading to a failure of the system and in time, a collapse of the economy.
Socialists claimed society’s problems were so complex and difficult that only central planning could solve them, and felt that profit was an exploitative function and sent the wrong signal. Socialism was roundly against the profit motive.
Instead, Hayek claimed that a decentralised system – using the knowledge of millions of people – is superior to any centralised knowledge or system. He felt that a central system could never know all the facts. The aggregate knowledge of millions of people was far superior. A free market was a way to aggregate the knowledge of millions.
Hayek saw profit as a positive function – the signal that told us what we must do to serve the people we do not know. He believed that booms and busts were simply necessary corrections – and as a society we would simply have to suck them up and get on with it in the short term for longer term benefits.
Alternatively, Keynes felt profit alone wasn't a clear enough signal, especially in a downturn. He believed the profit motive was important but that “animal spirits” – the aggregate of business interests – could often act against their better interests when confidence in the profit motive was low. At this point business stopped innovating, borrowing, hiring, investing as they feared demand in the market was low and profit scarce – leading to a downward spiral. Keynes argued that some form of central planning – a stimulus of some sort – was necessary at this point to avoid the bust and the collapse of capitalism.
Essentially, this is where they parted ways. Keynes believed in intervention during a downturn (government borrowing and spending) v Hayek’s laissez-faire, letting the market correct itself, no matter how messy the collapse and the consequences.
We've seen how this has played out over the last 80 years. Roughly 40 years of Keynes, followed by 40 of Hayek. One could be considered more compassionate in terms of wider societal suffering in the short term and the other more compassionate to individual liberty in the long term.
Most interestingly was the way these 2 ideologies were applied during the 2008 financial crisis – when we got Keynesianism for individual bankers and Hayek for wider society.