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Thursday, October 9, 2014

Hayek’s “Rejuvenating Event”

How the Austrian economist’s Nobel Prize changed the world

Swedish socialist Gunnar Myrdal was not happy about sharing his Nobel Prize with that Austrian “reactionary,” F.A. Hayek. The so-called Nobel for economics, established by the central bank of the world's leading welfare state, was only five years old in 1974. It had already become meaningless — according to Myrdal — if they were going to bestow it on this apologist for capitalism.

Forty years ago today, the Royal Swedish Academy of Sciences announced that the “Prize in Economic Science in Memory of Alfred Nobel” would be awarded to both Myrdal and Hayek. It would be hard to find a less compatible pair of economic thinkers.

Myrdal was Keynesian before Lord Keynes himself. His biographer would later write, “If his contribution had been available to readers of English before 1936, it is interesting to speculate whether the ‘revolution’ in macroeconomic theory … would be referred to as ‘Myrdalian’ as much as ‘Keynesian.’” By contrast, Hayek was the foremost opponent of the Keynesian revolution.

Myrdal had helped found the Econometric Society, whose original motto was “science is prediction.” Hayek and his fellows in the Austrian School insisted that economics wasn't a quantitative science, that prediction was impossible, and that econometrics was at best a form of history. Where Myrdal wanted the State to use economic science to plan for a more humane tomorrow, the Austrians claimed the future was constantly being renegotiated by entrepreneurs in a dynamic dance with consumers. Not only did the Austrians oppose central planning; they claimed it was impossible!

While Myrdal worked to modernize Western left-liberalism and to strengthen the hand of an enlightened State in the pursuit of progress and social justice, Hayek denied that the idea of social justice had any meaning. He adhered to a more individualist understanding of liberalism, according to which the market needs no external regulation.

As Myrdal saw it, if such a backward thinker as Friedrich August von Hayek could be awarded the highest honor in economics, then the whole institution needed to be abolished.

He was not the only one to object to the prize. Peter Nobel, a great-grandnephew of Alfred, insists that no member of his family ever wanted an economics prize in the first place.

Technically, what is commonly called the Nobel Prize for Economics isn't a Nobel Prize at all. The will of Alfred Nobel, a Swedish armament manufacturer and the inventor of dynamite, established the official Nobel Prizes in 1895. The categories were physics, chemistry, medicine, peace, and literature. There was no prize for economics — until 1968, when Sweden's central bank created and endowed a new prize “in memory of Alfred Nobel.”

Hayek himself, while grateful for the recognition, said he would “have decidedly advised against it,” had anyone consulted him on whether or not such a prestigious award should be given. “The Nobel Prize confers on an individual an authority which in economics no man ought to possess,” Hayek explained in his speech at the Nobel banquet.

This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally.

Hayek was clearly onto something, as we can see when an interventionist like Paul Krugman wins the prize. But as Samuel Brittan of the Financial Times wrote in 2003, the soi-disant Nobel “has not … in the least increased the willingness of policy makers to accept international free trade or reject the 'lump of labour' fallacy — matters on which most academic theorists are agreed.”

When a free-market economist wins a Nobel Prize, the public does not suddenly embrace laissez-faire capitalism, but the Swedish socialist may have been prescient if he worried that honoring the Austrian would somehow hurt economic science as he conceived it. Hayek’s work, then as now, is used as the antidote to Myrdal’s conception of economics — that is, economics as interventionism.

One biographer describes Hayek's Nobel as “the great rejuvenating event in his life.” It rescued him from obscurity — and apparently brought him out of a long emotional depression.

After his bestselling 1944 book The Road to Serfdom, Hayek had been unable to repeat the success. No other book of his would attract a popular readership, and scholars, even those who generally shared his political philosophy, saw Hayek's economic work as obsolete. He had, indeed, left economic theory largely behind to pursue a broader understanding of history, social theory, philosophy, and law.

But after sharing the self-styled Nobel with Myrdal, Hayek's star began to rise again, not just in the West — where he would later receive honors from the British and American governments, and meet with Pope John Paul II to discuss the pressing concerns of political economy — but, much more importantly, in the Eastern Bloc countries.

Milton Friedman (another “reactionary” Nobel laureate, according to Myrdal), wrote:

There is no figure who had more of an influence on the intellectuals behind the Iron Curtain than Friedrich Hayek. His books were translated and published by the underground and black market … read widely, and undoubtedly influenced the climate of opinion that ultimately brought about the collapse of the Soviet Union.

Hayek became infamous with the socialists of all parties, and he is considered an extremist even by many moderates. But he was no purist. He made so many concessions to the welfare state that some are uncomfortable with his prominence within the freedom movement. In a letter to Rose Wilder Lane, Ayn Rand offered Hayek as “an example of our most pernicious enemy.” She also described him as “the kind who do more good to the communist cause than ours.”

In that second assessment, at least, she was obviously wrong. The history of ideas — and the impact of those ideas on actual freedoms in the real world — is complex, nonlinear, and thoroughly unpredictable. And the Austrians are clearly right about the nature of prediction: Who could have foreseen that the central bank of the world's leading welfare state would pilfer the name of an arms dealer and end up resurrecting the career of the leading opponent of socialism and central banking?

Today Hayek is remembered more for his lifelong opposition to all top-down attempts to manage the economy than for his compromises in 20th-century politics. He is remembered for concepts such as local knowledge and spontaneous order — ideas that are more readily evident to a generation that has grown accustomed to the disruptive innovation of distributed networksdigital currency, and the sharing economy.

But we don't need the developments of the last 40 years to vindicate Hayek’s life’s work. Myrdal's outrage in 1974 should have been evidence enough of the Austrian’s importance to the cause of liberty.