Here are quotes of Hayek followed by commentary.
http://mises.org/resources/4015/Individualism-and-Economic-Order
from chapter 8: Socialist Calculation II: The State of the Debate
the same must be said of the hope that such a socialist system would avoid crises and unemployment. A centrally planned system, although it could not avoid making even more serious mistakes of the sort which lead to crises under capitalism, would at least have the advantage that it would be possible to share the loss equally between all its members. It would be superior in this respect in that it would be possible to reduce wages by decree when it was found that this was necessary in order to correct the mistakes. But there is no reason why a competitive socialist system should be in a better position to avoid crises and unemployment than competitive capitalism.
But at least the decision cannot be made before the alternatives are known, before it is at least approximately realized what the price is that has to be paid. That there exists still so much confusion in this field and that people still refuse to admit that it is impossible to have the best of both worlds is due mainly to the fact that most socialists have little idea of what the system they advocate is really to be like, whether it is to be a planned or a competitive system.
No pretense is made that the conclusions reached here in the examination of the alternative socialist constructions must necessarily be final. ... No one would want to exclude every possibility that a solution may yet be found [a solution to how to implement socialism without destroying the economy too much]. But in our present state of knowledge serious doubt must remain whether such a solution can be found.From Hayek on Hayek: An Autobiographical Dialogue by F. A. Hayek, edited by Stephen Kresge and Leif Wenar (Chicago: University of Chicago Press, 1994)
I have always said that I am in favor of a minimum income for every person in the country.And Hayek in a 1978 interview:
http://blog.mises.org/9657/the-ucla-interviews-with-friedrich-hayek/
At first we all felt he [Mises] was frightfully exaggerating and even offensive in tone [in his 1920 economic calculation paper and 1922 Socialism book]. You see, he hurt all our deepest feelings, but gradually he won us around
Mises’s was a book with which I struggled for years and years, because I came to the conclusion that his conclusions were almost invariably right, but I wasn’t always satisfied by his arguments.Hayek got some other stuff right, but here is where I disagree:
I do not think it is right to "share loss equally" -- men must take responsibility and gain profits or losses on the merits of the ideas/projects they pursue. When another man makes a mistake, I should not share the loss with him. Sharing loss equally is morally wrong and also economically harmful because it is incompatible with capitalism.
I do not think that the possibility of the Government reducing wages by decree is a good thing.
Hayek speaks of the "best of both worlds". He sees the economic consequences of capitalism as ideal, but the morality (or ethos) of socialism as ideal. He is conceding that socialism is the best world in one way. What way does he have in mind? He doesn't fully specify here but I think he has in mind standard stuff about capitalism being too mean and selfish and unfair. Hayek wants to accept capitalism anyway. But that is different from Ayn Rand who does not want to accept capitalism *despite some disadvantage* but whole heartedly. Capitalism is the most moral *and* economical system, not a consolation prize because socialism has a fatal flaw.
When Hayek says "no one would want to exclude" the possibility of finding a way to make socialism work, he is denying the existence of e.g. Ayn Rand. He's in opposition to people with *thoroughly* capitalist values. He must think there is something wrong with capitalism, that there's some kind of valid grievance -- but there is none. He thinks that trying to reform socialism is a reasonable project to pursue, but it is a philosophical dead end.
From the minimum income position we can learn something about why Hayek liked about socialism. He liked the idea of providing for everyone, regardless of their merit, and regardless of his ability to persuade the men he takes the money from to give it as voluntary charity.
The interview touches on another subject which is that Hayek's economic arguments made concessions to socialism too. Mises in 1920 (correctly) argued that socialism makes rational economic calculation *impossible*. Hayek later made *weaker* arguments. Why? Because he thought Mises' criticisms of socialism were "exaggerations". But they were not; Hayek was overestimating socialism. The difference is on the one hand Hayek deemed socialism *inefficient* (a matter of degree) while Mises said that when the State owns the means of production then there is no way to rationally plan economic activity. It's not just inefficient but impossible and attempts will lead to the destruction of society into chaos or syndicalism. (See: http://mises.org/books/socialism/part2_ch6.aspx )
Hayek did accomplish some good but he also told a lot of people that socialism has various merits it does not have. That is dangerous; it slows the spread of correct, principled and fully capitalist ideas like Rand and Mises put forward. He made an effort to understand these matters and did better than most people, and contributed some good ideas. But his positions have flaws including sympathy with the ethics behind socialism, and I think the liberty movement should be careful about who it chooses to represent it. Considerable harm can come from telling people stuff like that socialism with a non-broken economy would be the ideal if it were possible -- as long as people are yearning for *that* we are going to have a hard time persuading them to implement thoroughly capitalist policies.
Because Hayek is seen as a champion of capitalism, but is actually mixed, he's in the dangerous position of giving capitalism a bad name. He misrepresents what capitalism is really like. He lets people say, "even arch-capitalist Hayek would concede that..." And Hayek is no innocent in this reputation. He could have said, "Guys, I'm a moderate with mixed views. Mises is a serious representative of capitalism, I'm just a guy trying to figure things out." If he'd said that, he'd be an OK guy, better than many. But he didn't, so he ended up doing large harm. (And Hayek also did things like claim Mises' economic calculation criticism of socialism was flawed, and that he knew better.)