Home > Austrian Economics, Hayek, Keynesian Economics > Wednesday is Hayek Day

Wednesday is Hayek Day


Hayek is one of my favorite dead people. If given the wish to talk to a dead person, Hayek would be right on the top.

Road to Serfdom is still in the Amazon top 10 (#8 down from 7 yesterday).

Russ Roberts, the host of Econtalk, recently had Bryan Caplan on the podcast talking about Hayek and the Road to Serfdom.

Also Dr. Roberts has an op-ed in the Wall Street Journal; Why Friedrich Hayek is Making a Comeback. (That should take you to the un-gated version.)

Dr. Roberts gives four ideas by Hayek that matter as much today as in the past.

First, he and fellow Austrian School economists such as Ludwig Von Mises argued that the economy is more complicated than the simple Keynesian story. Boosting aggregate demand by keeping school teachers employed will do little to help the construction workers and manufacturing workers who have borne the brunt of the current downturn. If those school teachers aren’t buying more houses, construction workers are still going to take a while to find work.

Most Keynesians think aggregate demand as some lump of amorphous blob, D. It’s inherent in the equation they use to model the economy. Dr. Roberts notes that the Austrian school, which is also making a big comeback, says that is the wrong way to think about the economy.

Second, Hayek highlighted the Fed’s role in the business cycle. Former Fed Chairman Alan Greenspan’s artificially low rates of 2002-2004 played a crucial role in inflating the housing bubble and distorting other investment decisions. Current monetary policy postpones the adjustments needed to heal the housing market.

This alludes to the structure of production that is fundamentally different from both Keynesians and Monetarists. This is probably the most popular notion of Austrian economics, End the Fed. Austrians think of the Fed as a central planner. They try to centrally plan the money supply, which is very very complicated. Since men are men and imperfect they make mistakes. When the people making the mistakes are the central planners, their mistakes affect everyone! Where in a pure market economy, they will only screw themselves. Also inherent in the end the Fed debates is the economic calculation problem, which Mises and Hayek showed that central planning is doomed to fail. No one has been able to successfully challenge Hayek and Mises on the economic calculation problem yet, and I doubt anyone ever will.

Third, as Hayek contended in “The Road to Serfdom,” political freedom and economic freedom are inextricably intertwined. In a centrally planned economy, the state inevitably infringes on what we do, what we enjoy, and where we live. When the state has the final say on the economy, the political opposition needs the permission of the state to act, speak and write. Economic control becomes political control.

Even when the state tries to steer only part of the economy in the name of the “public good,” the power of the state corrupts those who wield that power. Hayek pointed out that powerful bureaucracies don’t attract angels—they attract people who enjoy running the lives of others. They tend to take care of their friends before taking care of others. And they find increasing that power attractive. Crony capitalism shouldn’t be confused with the real thing.

Here Dr. Roberts brings up that Hayek was the original Public Choice economist (Okay not the original but one of the first to really write about it.) It’s something that Keynesians don’t ever want to talk about, that Government can mess things up even worse than it already does. Since Government spending is dictated from the Top-down, someone has to make a choice as to who or what gets the money. Since Keynes says that any spending is good, government officials can just as well choose their friends or donors rather than someone more competent, this is what crony capitalism is all about.

The fourth timely idea of Hayek’s is that order can emerge not just from the top down but from the bottom up.

Hayek isn’t the first to talk about emergence, but he did a lot of work on it. Emergence is about letting a thousand flowers bloom, then picking the ones that are the best. The market is inherently an emergent phenomenon. No one is in charge of the market, it’s full of thousand upon thousands of people doing for their own self-interest, rational or not. Some are going to fail, actually most are. Some are going to do bad things, but not all. The ones that succeed do so by either providing for what others demand (voluntary service) or do things better than the other guy (Apples dominance in the phone market, but Androids is trying to challenge that.) Markets depend on competition. When Government stifles competition through asinine rules, regulations or outright favoritism. everyone suffers from what could have been.

Hayek understood that the opposite of top-down collectivism was not selfishness and egotism. A free modern society is all about cooperation. We join with others to produce the goods and services we enjoy, all without top-down direction. The same is true in every sphere of activity that makes life meaningful—when we sing and when we dance, when we play and when we pray. Leaving us free to join with others as we see fit—in our work and in our play—is the road to true and lasting prosperity. Hayek gave us that map.

Despite the caricatures of his critics, Hayek never said that totalitarianism was the inevitable result of expanding government’s role in the economy. He simply warned us of the possibility and the costs of heading in that direction. We should heed his warning. I don’t know if we’re on the road to serfdom, but wherever we’re headed, Hayek would certainly counsel us to turn around.

We have heeded the warning before, back when the economic planning inherent in Keynesian economics brought us the Stagflation of the 70’s. Markets were liberalized, regulations were liberalized and the economy boomed. That can only happen when people are free to make their own choice, rather than some bureaucrat deciding for them. As noted above, more personal freedom means more economic freedom.

I hope Hayek doesn’t just make a comeback. I hope the entire Austrian School; Schumpeter, Mises and Hayek are here to stay!

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  1. yttik
    June 30, 2010 at 18:52

    I prefer Hayek’s theories over Keynesian economics any day, they’re much more logical. Just to over simplify the whole thing and make it about common sense, economies are about nothing more then the simple exchange of goods and services. The reason we recovered from the Great Depression was not because the Gov invested money in bridges and food programs, it was because we went to war. War created a demand and the supply responded. It was a huge infusion of money into the economy, but not the way Keynesian’s imply, it actually allowed people to make a profit, to earn money above and beyond basic needs. When you have extra money, you invest in more production, which creates more of an economy.

    The problem with the stimulus, the unemployment extensions, the health care bill, from an economic standpoint, is that they take from one segment of the population and dole out tiny crumbs to another. Nobody’s going to invest in the economy on an unemployment check, at best they’ll buy some groceries. Nobody being billed for these programs has any money left over to invest in production. Under this kind of a system, you cut everybody off at the knees.

    “The fourth timely idea of Hayek’s is that order can emerge not just from the top down but from the bottom up.”

    Ironic, isn’t it? I’ll never forget the President’s words, “change comes from the bottom up.” Yes indeed it does, so it’s best for the top to move out of the damn way and let us get busy.

    “Hayek never said that totalitarianism was the inevitable result of expanding government’s role in the economy. He simply warned us of the possibility…”

    It certainly leads to a loss of freedom. This is a painful reality for the poor who have “enjoyed” Gov benevolence. People must adjust their incomes so as to not lose benefits, they avoid taking jobs so as not lose their unemployment benefits, they put off starting businesses. They adapt to the dictates in order to survive and often they wind up trapped in poverty. He who holds the purse strings, holds the power.

  2. Seth
    June 30, 2010 at 22:36

    Great post. It’s good to see Russ Roberts emerging as the voice of freedom. Milton carried that mantle for a long time. It’s unfortunate there’s so few out there. Hopefully the Amazon.com sales show that more people are interested in learning the finer points on why freedom works and they’ll be able to articulate those points better within their circles of influence.

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