(FORTUNE Magazine) – Was socialism a mistake? Friedrich A. Hayek, who won the Nobel Prize in Economics in 1974, asks this question in The Fatal Conceit (University of Chicago Press, $24.95) and answers it simply: yes. Socialist goals and programs, he argues, are impossible to achieve or execute. Worse than that, ''to follow socialist morality would destroy much of present humankind and impoverish much of the rest.''

Socialism's setbacks are hardly news. The system is failing everywhere it is tried. Even such powerful socialist politicians as Mikhail Gorbachev ! explicitly recognize its failures and do not blame them on capitalism. So why did Hayek, who is 89, bother to spend so much of his remaining time arguing against a system whose failures have become so obvious? The answer is that Hayek believes socialist ideals to be alive and well in the minds of Western intellectuals. Most intellectuals, he asserts, are unwilling to wonder whether there is a reason socialism fails. Instead they have searched vainly for a ''truly socialist community'' and become disillusioned with each -- first the Soviet Union, then Cuba, China, Yugoslavia, Vietnam, Tanzania, Nicaragua -- and they search on. Against all factual evidence, these intellectuals hang on to their fatal conceit that the socialist ideal can be achieved. Yet, maintains Hayek, certain facts do prevent attainment of socialist goals. The main preclusive fact -- not exactly a news flash to most business people and economists -- is that in any economy with millions of people, central planning cannot work. To allocate resources as efficiently as the free market does, central planners must have all the information about amounts of resources available and about their possible uses. But, says Hayek, the planners cannot have this information. It simply cannot be held in one mind or in a small number of minds, even assisted by prodigious computing power. BECAUSE the values of resources constantly change, the central planning authority's local managers, who know what resources are available, have no idea what those values are. Therefore no one can make rational economic decisions. Local managers could make good decisions only if resources could be freely bought and sold. But of course central planning precludes a free market in resources. By making maximum use of the knowledge of all, notes Hayek, capitalism -- what he calls the ''extended order of human cooperation'' -- extracts maximum efficiency from available resources and thus benefits those who do not own property as well as those who do. For this reason, Hayek writes, he would rather be without property in a country where private property is allowed than live where all property is collectively owned and operated by the government. In light of this powerful and well-known argument, and the support that decades of events have given it, why on earth do many intellectuals still believe that government direction is superior to the free market? Hayek says one reason is that they misinterpret history. Noting economic progress + achieved centuries ago, they tend to give governments the credit even though close study shows governments had nothing to do with it -- or even, as in the time of the mercantilists, scotched economic growth as they gained power. Intellectuals are misled, says Hayek, because our main heritage from ancient times consists chiefly of documents and monuments, both of which were provided largely by governments. The historical state of markets could not be captured and preserved like an insect in amber to be examined today. Hayek does not settle for simply pointing out socialist intellectuals' mistakes. To try to understand their hostility to business, finance, and trade, he also probes their psychology. In a chapter titled ''The Mysterious World of Trade and Money,'' Hayek traces their hostility to the fact that so much commercial activity simply rearranges available resources without increasing them. The merchant who finds a cheap source of supply that his competitors have overlooked makes money by buying from the low-cost supplier and reselling to his customers. In doing so he creates wealth, for himself as well as for his customers. Yet all he did was rearrange resources rather than physically produce. To most noneconomist intellectuals, trade and other activities that create wealth in this way ''stink of sorcery.'' The argument helps explain the widespread hostility to leveraged buyouts. If LBOs are successful, they move assets to uses of greater value. But to intellectuals (or any others) who observe only the rearrangement, LBOs appear unproductive. SOCIALISM is on the wane, but Hayek argues persuasively that even our language contains a bias toward it. Pro-socialist attitudes, he claims, are implicit in many words and phrases. Because these attitudes are never made explicit, he says, they are never exposed to the possibility of criticism. Example: Karl Marx's substitution of ''society'' for ''government.'' Because Marx's usage is part of the language, writes Hayek, people can kid themselves and others into thinking we -- ''the society'' -- can deliberately regulate the actions of individuals ''by some gentler and kinder method of direction than coercion.'' Hayek wrote this well before George Bush started talking about a kinder, gentler nation, but Bush's phrase illustrates the point perfectly. Bush advocates kinder and gentler government interventions in the economy. Yet new interventions mean new laws, and laws are enforced with government threats to confiscate property or throw people in prison. Kinder and gentler indeed! Hayek's main exhibit of a perniciously misleading word is ''social.'' He finds it the most confusing word ''in our entire moral and political vocabulary.'' Hayek notes that the modern use of ''social'' -- to designate something as morally right -- began only 100 years ago in Bismarck's Germany but has spread throughout the world. He lists over 160 nouns that are often preceded by ''social,'' from ''accounting'' through the dreary alphabet to ''work,'' and every one of them sounds virtuous and uplifting when combined with the magic adjective. ''Social,'' says Hayek, is a ''weasel word,'' one that empties of meaning the nouns that it modifies and thus allows people to smuggle in thoughts for which they do not have to be accountable. As the world becomes more densely peopled, which of the great economic systems, capitalism or socialism, is best equipped to sustain mankind? Hayek's answer is never in doubt, but his argument is striking. ''The modern idea that population growth threatens worldwide pauperization is simply a mistake,'' he says. He maintains that in a free market, expanding population leads to more intensive division of labor, which increases wealth further. The fact that population growth may also reduce average incomes does not necessarily argue against his position. How so? Because, as he argues, ''Everyone who was already there might have grown somewhat richer; and yet average incomes may have decreased if large numbers of poor people have been added to those formerly present.'' These new poor people, he maintains, should still be grateful for the market system, for they would have been unable to exist without the economic opportunities it makes possible. Concludes Hayek: ''If we ask what men most owe to the moral practices of those who are called capitalists the answer is: their very lives.'' THIS REASONING leads Hayek to a radical perspective on the squalid shantytowns surrounding the developing world's fast-growing cities, such as Mexico City, Cairo, and Sao Paulo. Hayek points out that because the inhabitants of these towns live there voluntarily, they must feel better off than when they lived in the countryside at an even lower standard of living. Hayek shows sympathy and understanding for these newcomers to civilization. Give them time, he argues, and they will learn more civilized habits. But prevent them from moving and you condemn them to permanent poverty and even starvation. Hayek begins this book quoting economist Ludwig von Mises: ''If we wish to save the world from barbarism we have to refute Socialism, but we cannot thrust it carelessly aside.'' The achievement of The Fatal Conceit is that it freshly shows why socialism must be refuted rather than merely dismissed -- then refutes it profoundly.

BOX: EXCERPT: Socialist aims and programs are factually impossible to achieve or execute; and they also happen, into the bargain as it were, to be logically impossible. That is why, contrary to what is often maintained, these matters are not merely ones of differing interests or value judgments.