Feb

What Would Hayek Do?

Bruce Caldwell, Hayek scholar and editor of The Collected Works of F.A. Hayek, has a recent piece at Heritage offering his and Hayek’s views on our current and enduring recession depression.

In Ten (Mostly) Hayekian Insight for Trying Economic Times, Dr. Caldwell examines a number of economic insights which help explain why after 34 months after the collapse of Bear Stearns significantly elevated unemployment remains a concern.

The ten themes are as follows:

Theme #1: The Business Cycle Is a Necessary and Unavoidable Concomitant of a Free-Market Money-Using Economy.

Theme #2: The 1970s and Why Keynesian Economics Was Rejected

Theme #3: Some Regulation Is Necessary…

Theme #4: …But a Lot of Regulation Is Fraught with Problems and Will Make Matters Worse.

Theme #5: The Economy Is an Essentially Complex Phenomenon for Which Precise Forecasting—on Which the Construction of Rational Policy Depends—Is Ruled Out.

Theme #6: In Any Complex Social Order, Any Action May Have Both Good and Bad Unintended Consequences.

Theme #7: Basic Economic Reasoning Captures What We Can Know and Say About the Essentially Complex Phenomenon That We Call the Economy.

Theme #8: The Cry for Social Justice Is Both Misguided and Dangerous.

Theme #9: The Basic Hayekian Insight—Freely Adjusting Market Prices Help Solve the Knowledge Problem and Allow Social Coordination.

Theme #10: The Basic Public Choice Insight—More Often Than Not, Government Cures Are Not Only Worse Than the Disease, but Lead to Further Disease.

Dr. Caldwell explain these themes in some detail. It is an excellent piece for anybody looking to understand how government has sabotaged the recovery.

One quibble with Dr. Caldwell’s article. He writes

But even more fundamentally, the Austrian perspective counsels politicians to do nothing at a time when all their instincts are to show voters that the government is doing something.

In later years, Hayek proposed that the Fed be done away with and that the competitive issue of private currency by banks be put in its place. Hayek proposed that the Fed be done away with and that the competitive issue of private currency by banks be put in its place. This alternative has been trumpeted by certain present-day Austrian economists, and such ideas need to be more widely disseminated and debated. But for those who do not want to go into the intricacies of alternative monetary regimes, it is simply important to recognize that the Austrian message was not popular in the 1930s, is not popular today, and will never be popular. Rather than argue directly for it, perhaps a better strategy is to warn of the dangers of Keynesian economics. [emphasis mine]

It’s unclear what Dr. Caldwell means when he says “the Austrian message was not popular.” The 1930′s Austrian message was to resist the urge of fiscal stimulus (i.e. increased spending) and allow interest rates to rise – in the parlance of today that amounts to “do nothing,” a phrase used by Dr. Caldwell himself. The 1970′s Austrian message was to denationalize currency (and abolish the Federal Reserve), an intriguing idea with merit and theoretical soundness, but practically unimaginable at the present juncture. Because he explicitly writes “the 1930′s Austrian message,” so I thus read his sentence as follow: “The Austrian message to do nothing was not popular in the 1930s, is not popular today, and will never be popular. Rather than… a better strategy is to warn of the dangers of Keynesian economics.”

Milton Friedman, no fan of Austrian economics and no believer in the Austrian Business Cycle Theory, spent an entire career warning of the dangers of Keyesianism. For his life’s work we unquestionably are a better nation. Unfortunately, his rejection of the Hayek explanation of the business cycle and Hayek’s recommendation for government to “do nothing” (arguably, Hayek probably would have promoted the reduction of government spending and a commensurate reduction in taxes), led him advocate monetary interventionism. We see this in the policies of Fed Chair Ben Bernanke, a Friedman acolyte.

Competent and honest economists must continually inform and remind the public of basic economic fallacies and their multifarious manifestations in public policy. It may be true that it runs counter to human nature to dutifully stand by and watch a stock market implode and unemployment spike as the inevitable result of government induced credit expansion. However, Dr. Caldwell should remember that another one of Hayek’s main themes was that basic human instinct must be tempered by learned and inherited moral traditions; and that it is these moral traditions that give rise to civilization by allowing trade to flourish and the division of labor to expand beyond a single village or small town. Abstaining from large scale intervention as a futile therapeutic – or better yet, foregoing the use the narcotic of false credit in the first place – should be no harder than learning not to steal from one’s neighbor, or not resort to react violently, as a 2 year old would, to unpleasant circumstances one finds himself among. We do not accept barbarism on the street; why should we accept it in Congress?

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