“Half a century later, it is Keynes who has been toppled and Hayek, the fierce advocate of free markets, who is preeminent.” —Daniel Yergin and Joseph Stanislaw 1
Last year Time magazine named John Maynard Keynes the economist of the twentieth century for his countercyclical demand-management thesis—that big government is necessary to stabilize an inherently shaky capitalist system. But in the latest biography of Keynes, Robert Skidelsky declares that arch-critic Milton Friedman disproved Keynes’s theory by demonstrating with convincing empirical evidence that market economies were far more stable than Keynes believed, and that government—particularly central-bank monetary policy—is the real source of the boom-bust cycle. “It was as though Keynes had never been,” Skidelsky pronounced solemnly.2
Who should take the place of Keynes to lead economics into the 21st century? Should it be the economics of Friedman, Ludwig von Mises, Joseph Schumpeter, or F. A. Hayek? While all four have much to offer, I favor Hayek. I am not alone. Lately there has been a plethora of books and articles about Hayek, so extensive that an entire Web site, maintained by Professor Gregory Ransom, is devoted to this eminent economist and philosopher. (See www.hayekcenter.org.) For the past dozen years, the University of Chicago Press has published the collected works of Hayek up to volume ten, with another ten expected.
In addition, an excellent biography has just been released, Friedrich Hayek: A Biography, by Alan Ebenstein. It offers a comprehensive look at Hayek’s life and ideas, and even includes some surprises, such as his controversial divorce and remarriage; how his bestseller, The Road to Serfdom, may have cost Sir Winston Churchill re-election in 1945; and the remarkable similarities between Hayek’s and Marx’s theories of crises.3
Hayek’s Political Contributions
What do I like about Hayek? First, Hayek advanced the case for an institutional framework for liberty. In his classic work The Constitution of Liberty, he set out the legal and constitutional system needed to create the delicate balance between liberty and law in a liberal society.4 Hayek rejected central planning by technocrats and emphasized the “spontaneous order” and prosperity generated by individuals using their own specialized knowledge and pursuing their own self-interest. According to Hayek, intervention could only lead down “the road to serfdom,” the title of his most famous book. This book was written during World War II and reflected his pessimism about the future of government and Western civilization. When he wrote chapter 10, “Why the Worst Get on Top,” he had in mind Hitler, Stalin, and Mussolini.
In 1976 he was even more dejected: “Both the influence of socialist ideas and the naive trust in the good intentions of the holders of totalitarian power have markedly increased.”5 Yet, only a few years later, Margaret Thatcher and Ronald Reagan appeared on the scene and under the influence of Hayek and other free-market economists, reversed the tide of socialism and inflation. The worst don’t always get on top!
New Advances in Hayek’s Economics
Hayek’s economics has been both lauded and attacked by his colleagues. Economists have readily incorporated his concept of prices and profits as essential communicators of critical information. They signal where scarce resources should be allocated in the economy, thus creating “order without command.”
But it’s another story when it comes to the “Austrian” theory of capital, the business cycle, and monetary policy. “I am an enormous admirer of Hayek, but not for his economics,” confesses Milton Friedman, “His writings in [political theory] are magnificent . . . [but] . . . I think his capital theory is unreadable. . . . There hasn’t been an iota of progress.”6
But Friedman spoke prematurely. There has been considerable progress in Austrian capital theory. Recent advancements in theoretical Austrian macroeconomics include Roger Garrison’s Time and Money, which deftly compares the flawed models of Keynesian and monetarist theory with the more advanced Austrian theory, and Steve Horwitz’s Microfoundations and Macroeconomics. Both books were published in the past year by Routledge.
On the statistical side, I reported in my April column that the U.S. Department of Commerce’s Bureau of Economic Analysis has recently begun to measure Hayek’s triangle, that is, the total amount of annual spending at all stages of production. This new national statistic, called “Gross Output,” is based on my original work The Structure of Production, an updated vision of Hayekian macroeconomics.7
The Austrian Business Cycle and NASDAQ
The Hayek-Mises theory of the business cycle is also relevant to today’s business cycle and financial markets. Indeed, the most recent boom-bust in technology stocks and the NASDAQ is a perfect example of Hayekian economic behavior. Hayek’s theory predicts that an easy credit policy will create an artificial inflationary boom in the earlier stages of capital and technological development that will eventually and inevitably collapse. “Every period of inflation ends with a crash,” he said. Indeed, that is precisely what has occurred in the past few years on the technology-weighted NASDAQ.
The 1997–99 easy-credit policies by the Federal Reserve pushed the NASDAQ index far above its natural level, and when the Fed stopped inflating, the bubble burst. What goes up must come down.
On a personal note, I had the opportunity to meet Nobel-laureate Hayek twice, once in the late 1970s at the New Orleans Investment Conference and again in the mid-1980s, when Gary North and I visited him at his summer home in the Austrian Alps and conducted what turned out to be his last interview. Even at the age of 86, he greeted us warmly and for three hours spoke masterfully of his career and his contributions to economics. His biggest regret was that his theory of capital had not been pursued. Now all that is changing.
Yesterday’s heresy is tomorrow’s dogma!
- Daniel Yergin and Joseph Stanislaw, The Commanding Heights (New York: Simon and Schuster, 1998), p. 431.
- Robert Skidelsky, John Maynard Keynes: Fighting for Britain, 1937–1946 (London: Macmillan, 2000), p. 506.
- Alan Ebenstein, Friedrich Hayek: A Biography (New York: Palgrave/St. Martin’s Press, 2001).
- F.A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960).
- F.A. Hayek, The Road to Serfdom (Chicago: University of Chicago Press, 1976 ), p. xxi.
- Quoted in Ebenstein, pp. 81, 273.
- Mark Skousen, The Structure of Production (New York: New York University Press, 1990).