Brad answers a question raised by Noah with
thoughts on Friedrich and Adam.
I totally lost all self control in his comments section and waste even more pixels by cutting and pasting here.
Before reading this, I tried to tweet the same point you made. However, here I will be contrarian.
1) on the road to serfdom. Science progresses as people develop testable hypotheses, test them and reject them. Like "Leviathan", "The Road to Serfdom" presented a plausible (if pessimistic) hypothesis which turned out not to correspond to reality. I think the train wreck came later as Hayek refused to admit that his clear testable prediction was false. He was careful to make such a prediction (after talking with un-named friends including I'm sure Popper): A country is irreversibly on the road to Serfdom when it introduces capital controls (it's in the book). So the UK is bound to end up like the USSR and Nazi Germany (as was Italy when I arrived here).
Here my point (if any) is that the hypothesis in the Road to Serfdom was actually plausible when it was printed. Based on my first edition of the second volume of "The Open Society and It's Enemies" I am fairly sure that, when first printed, "The Road to Serfdom" included a note asserting that it was printed in accordance with his Majesty's regulations on the use of paper (making Hayek's observation that freedom of the press is not worth much if the state controls the supply of paper both valid and redundant).
In contrast, Hobbes didn't live long enough to see disproof of his claim. If he had lived until 1688, I'm sure he would have argued that the division of power between William&Mary and parliament would lead to the war of all against all. By 1697 or so, he would argue that the UK was enduring a silent war of all against all in which life is poorer, less sociable, more miserable and shorter than it could be under an absolute monarchy. Hobbes was saved from the sad fate of Hayek, because his life was rich, sociable, happy and short enough.
By the way, I never noticed that Hobbes and Hayek had the exact same rhetorical strategy: anything position other than exactly the one I like is on a slippery slope to hell.
I am now going to defend Smith. You note that he discussed things other than relative prices (home bias and the "individuals' non self-interested desires to feel marked out above and superior to others" in which, by the way, I think, "non self-interested" should be "self-interested" Hayek too did not confine his thought to relative prices and only relative prices. The fact that Smith noted other factors (which do in fact exist) doesn't mean he didn't understand the role of markets.
Here I am criticizing your reasoning. You can't prove that Smith didn't consider price signals by noting he considered something else. I agree with you about Hayek and emergent properties of markets, but it is very hard to prove your case, as it is always very hard to prove any idea is original (great men create their predecessors) . To prove it, you would have to show it isn't anywhere in "Wealth of Nations" or "The Theory of the Moral sentiments" or in *anything* written between 1776 and the 20th century.
Over at Twitter, Noah notes that the idea that markets have emergent properties has not influenced economic theory. He is right. The standard approach -- Nash equilibrium -- really is based on utter rejection of Hayek's insight (and I claim Smith's). Agents are assumed to think about everything and to effortlessly find the exact solutions to math problems which don't have closed form solutions. Hayek can be seen as arguing against Walras (and his mythical auctioneer) and (avant le lettre) Nash and his utter rejection of methodological individualism. Noah notes that Nash won (so far).
I suppose one might hope this victory isn't final (a theory based on Nash equilibrium and methodological individualism must be vulnerable based on it's obvious logical inconsistency just as a methodology based on Friedman's methodology and the Lucas critique has the (so far minor) inconvenience that each is exactly the statement that the other is false).
Obviously, I've totally lost control of myself, but assuming no one is reading and noting that pixels (unlike paper) are abundant, I will now add a half-assed effort to critique Hayek. I think he provided an example in which markets are useful. He concluded that markets are always good. This does not follow. You've already added "competitive", "without externalities" and "rational" but this still isn't true -- OLG models can give horrible market outcomes so can a Diamond search model. For your claim to be true "competitive" and "without externalities" must be redefined to mean "such that markets yield highly productive outcomes". The claim can be tautological or false, but the set of exceptions is so vast that the only meaningful true claim is "some examples in which market outcomes are OK in some ways have been found."
Also "highly productive" is a very weak and vague claim -- it isn't even the (uninteresting but false) claim that the assumptions you list imply Pareto efficiency (to get to Pareto efficiency you'd need to add "complete markets" and sell me one unit of the asset which pays one unit of numeraire good if the temperature in your office is between 75 and 75.000001 degress (typo not corrected because it is clearly Freudian, but I digrees)).
Frankly, I think the case for markets is found in the wreckage of the "The Road to Serfdom" train wreck (I agree the train went off the rails, I just think it was still on them in 1945). The case that market outcomes are OK consists of extremely strong assumptions implying extremely weak conclusion. The case that markets are the worst possible way to organize economies except for all the others which have ever been invented isn't so weak.
