F.A. Hayek was awarded the Nobel Prize in Economics in 1974. He contributed, among other things, to the theory of prices, business cycle, and money, for which he won the prize. However, several critics call him a “non-economist” or a “repeater” of L. von Mises’s theories. He has long been in dispute with J. M. Keynes.
Hayek understands competition as a process of continually discovering new profitable opportunities by entrepreneurs in the market and considers entrepreneurial discovery an important part of the market process.
What does Hayek base on the theory of capital and cycle, and what makes it different from other authors of the Austrian School of Economics? What is the relevance of Hayek’s business cycle theory? What was Hayek like an economist? Why does he criticize socialism and why it is the so-called “middle way” of a social market economy not acceptable for him? What does the concept of social justice mean to him and why does he criticize it?
Starring: doc. PhDr. Ján Pavlík, University of Economics Prague, Ing. Pavel Potužák, PhD., University of Economics Prague, PhDr. Ján Oravec, CSc., Entrepreneurs’ Association of Slovenska, Ing. Tomáš Krištofóry, doctoral student Erasmus University Rotterdam, Matúš Pošvanc, F. A. Hayek Foundation, Bratislava
Video available in Czech and Slovak, with English subtitles.
Tomáš Krištofóry has prepared useful links for all interested students, scholars and researchers to substantiate claims in the video and for educational purposes.
On Hayek and the Nobel Prize
Supporters of the so called Mises’s branch of the Austrian school say that Hayek was awarded the Nobel Prize in 1974 instead of Mises. See, for example, Jörg Guido Hülsmann: Mises – The Last Knight of Liberalism, (p. 1034): “Mises would never receive the Nobel Prize, but one year after his death, Hayek won it for his elaboration of the Misesian business cycle theory.” They think that the Wieser-Hayek branch of the Austrian school was approved in eyes of public instead of the Bohm-Bawerk-Mises-Rothbard branch (see Hülsmann, p. 476). Hans-Hermann Hoppe, another proponent of this branch of the Austrian school, argues similarly, see for example: Ludwig von Mises and liberalism.
Here are a few necessary comments to these statements:
A) In the 1920s, Hayek developed Mises’s theory of business cycles quite deeper – as Hansjörg Klausinger or Pavel Potužák say today. See Klausinger’s Introduction to Hayek’s Business Cycles, (pp. 7-9). Hayek tended to work in some scientific tradition, opting for an Austrian school, and to work on Mises’s theory.
Potužák points out that Hayek in his article in 1925 already wrote in a long footnote a hint of a newer theory, but claimed that it is an interpretation of Mises’s theory. Hayek’s friends objected that it wasn’t Mises, but he himself, and that he had to further elaborate the theory, which he did.
It became clear that Mises did not actually come up with a satisfactory cycle theory, focusing only on the overall purchasing power of money and the price level.
Hayek argued that in a model market economy, prices should fall over time. Hayek analyzed the course of the business cycle through changes in relative prices, primarily the interest rate, or the price of capital.
and he explained only the rise in nominal interest rates. This has also allowed us to understand the uneven development of individual sectors, which is still common in the business cycle today. He therefore explained the cycle structurally, even at the end of the 1920s.
This means that it was only Hayek’s theory that explained the phenomena commonly observed in the cycle and that Hayek can be considered one of the authors of the business cycle theory. Later, he received an appreciation for this work, including the professorship at the LSE in London, and finally the Nobel Prize. Hayek’s early article is now part of a collection of early works published in English in 1984 by Roy McCloughry.
(See also a review of this book by the well-known Hayek macroeconomist Roger Garrison, including a commentary on Hayek’s first outline of his theory of 1925. See also Tomáš Kryštofóry´s popularization article.)
B) Hayek received the Nobel Prize not only for the business cycle, but also for the interdependence of the economy, culture and institutions. The official rationale for the Nobel Prize for Hayek (and for Gunnar Myrdal) was: “for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena“.
Of course, Mises was aware of the link between institutional, economic, and social phenomena, and it was him who showed Hayek the depth of their relationship. Hayek, even as a young social democrat, was shocked by Mises’ book Socialism in 1922. Hayek as a young Social Democrat at that time refused to understand that good-natured interventions in the distribution of income could also change the entire institutional and economic structure of society, but the Mises cure disturbed him forever.
Since then, Hayek has kept thinking about the context of social, institutional and economic change. However, Mises did not think about social institutions in the category of their evolution. Either we have private or joint ownership, as well as institutions.
Over time, Hayek came to the idea of cultural evolution and the common and mutual evolution of economic and social phenomena, for which he was awarded the Nobel Prize. His gradual evolution of this theory was described by Bruce Caldwell in an article entitled “The Emergence of Hayek’s Ideas on Cultural Evolution“.
C) Hayek had refused to glorify any of the economists with awards like a Nobel Prize. He would not consider to make any difference the fact that he was awarded the Nobel Prize and Mises not. It is known that he has entitled his Nobel Prize Lecture: “The Pretense of Knowledge“. The informal Banquet Speech was more explicit. Hayek said that if he had been consulted whether to establish a Nobel Prize in economics, he should have advised against it.
Already in 1944, long before the Nobel Prize for Economics, Hayek published an article “On Being an Economist”. In it, he said that trying to win awards in economics destroys the intellectual honesty of an economist (published in Trend of Economic Thinking).
In 1978, in autobiographical interviews, asking Hayek whether he was expecting the Nobel Prize, he replied that it was a complete surprise for him. So when we talk about Hayek, we should not say at all cost that he was awarded the Nobel Prize. We should talk about his thoughts for themselves and not for his Nobel Prize. Similarly, the Misesians should not complain about the Hayek Nobel Prize and talk about Mises’s and Hayek’s ideas.
D) Hayek, unlike the members of the Mises’s branch of the Austrian school, explains the increase in the popularity of the Austrian school in the 1970s differently. Both Hayek and the Misesians consider 1974 to be the key year, but in neither interpretation is the Nobel Prize the primary reason.
Hayek considered the return of good health in the spring of 1974 to be a more important factor in the new boom of his work; The Misesians considered as a key factor the conference of young Austrian economists at South-Royalton in June 1974, which Hayek also attended.
There is widespread consensus that the South Royalton Conference was crucial for the new boom of the scientific Austrian School. The main source for this part of history is Karen Vaughn or Murray Rothbard (pp. 217-223). Rothbard, Kirzner and Lachmann, as well as other younger now well established Austrian economists, made the main contributions.
Richard Ebeling writes about the conference and its importance to the Austrian school. According to Roger Garrison, the list of conference participants looks like a guide to the content of Who’s Who in the Contemporary Austrian School: Armentano, Block, Ebeling, High, Lavoie, Moss, O’Driscoll, Rizzo, Salerno, Shenoy, and Vaughn (p. 17).
Bruce Caldwell also writes in the article Hayek’s Nobel that this conference was crucial to the growth of the modern Austrian school after decades of its decline and the dominance of the Keynesians. In an interview in 1978, Hayek said that the current Austrian school in the US is actually Mises’s branch and that they only reluctantly accept him (Hayek) as the second head next to Rothbard.
Regarding Hayek and the further development of his thinking, 1974 was important to him for the return of his health and get rid of depression, which lasted approximately since 1969.
The spring 1974 was quite important to him, meaning it was much sooner than when he learned about the Nobel Prize on 9 October. Caldwell writes about it in Hayek’s Nobel. Around 1969 he was just about to finish his big three-part book Law, Legislation and Liberty, when he was suddenly hampered by poorer health.
By changing Freiburg for Salzburg, he also changed his doctor and a new doctor gave him a treatment for diabetes, to which Hayek later attributed his temporary loss of intellectual energy (Jim Powell: Hayek’s life).
Despite his great desire to complete the book Law, Legislation and Liberty, Hayek decided to publish all three parts of the book one after another, which ultimately his health allowed him to do. Individual parts were published in 1973, 1976 and 1979 and in the meantime he also managed to publish other books and articles, such as Denationalization of Money.
It is precisely in the foreword to the third volume (Law Legislation and Liberty) that Hayek explained that the extended work on the book, which eventually lasted 17 years, was also due to an episode of deteriorated health, and that this deteriorated health was the reason why to publish the book progressively, one volume at a time.
He was thus begging the reader for understanding regarding unsystematic nature caused by the successive publishing of the partial volumes (p. xi, in English). The lack of power to work in the early 1970s later documented the fact that in the article “Liberalism” for the Italian Encyclopedia in 1973 he forgot to mention Lord Acton in the historical review of liberalism (see video interview with Gary North and Mark Skousen, 1:15:30 to 1:17:30 here https://www.youtube.com/watch?v=ZMlyk089rig, the “Liberalism” article was published in New Studies).
In that article, Caldwell also recalls that after “healing” Hayek liked to joke about his health before the audience. He said that “he has already tried old age and that he didn’t like it”.
The rise in professional interest in Hayek and the Austrian school since the 1970s must therefore be attributed not only to the South-Royalton Conference (and certainly not the Nobel Prize), but also to Hayek’s own publication performance.
Thanks to this new scientific production, the next generation of young scientists could make their careers within the Austrian school, and “numerous scientists owe him their careers”, as Norman Barry also expressed in FA Hayek’s article.
The Hayek Nobel Prize helped only marginally in the process of rebuilding of the Austrian school. The Nobel Prize helped spread Hayek’s ideas in a popularizing way, not in professional economics.
However, it encouraged young followers of the Austrian school to pursue their careers as Austrian economists in America. It increased public interest in it and thus financial support for projects such as the project of autobiographical interviews, Hayek’s collected works and Hayek’s archive.
About the Documentary
In the video, we mentioned several of Hayek’s most important discoveries. Recently (on the 24th, June 2019) there was a lecture on this topic in Bratislava by Hansjörg Klausinger, a co-author of Hayek’s biography, whose first volume is due next year.
As Klausinger explained, almost all of Hayek’s discoveries are associated with an argument about the division of knowledge.
As Adam Smith attributes to the discovery of the principle of division of labor and its far-reaching implications for the economy and society, Hayek has expanded this discovery to the division of knowledge. This is generally known.
Less well known is that this argument has appeared at the very beginning of Hayek’s scientific career. It was already included in his first dissertation, written in 1920 in the field of theoretical neuropsychology (on the origin of thought and its order). The text came out in 2017 in the critical edition of Hayek’s The Sensory Order.
As is already known, that Hayek used the argument of knowledge sharing in the so-called dispute over the economic calculation between the Austrian school and market socialists from the environment of the Lausanne neoclassical school.
This dispute has a centuries-old history and its standard history has been written and important contributions have been collected by Peter Boettke in an almost 2500-page encyclopedic form in Socialism and the Market: The Socialist Calculation Debate Revisited, a brief encyclopedic article by Heilbroner, a former proponent of socialism, can be found in the high-quality economic encyclopedia Econlib.
In Slovak, there is an excellent summary of literature on economic calculation of bachelor Petra Orogvanyiová (today Roháčová, wife of Dalibor Roháč) online, but there is also a suitable article by our speaker Matúš Pošvanc, also suitable are the books by Jesus Huerta de Soto (Austrian School; Socialism, economic calculation and entrepreneurship).
The dispute over the economic calculation was also about the fate of the neoclassical economics. Until its inception in the early 1920s, Austrian economists, despite their methodological differences, considered themselves part of the neoclassical mainstream.
In this dispute, however, they realized that their approach, based on the examination of the equilibrium process, was in fact different from the static approach of the neoclassical school. In the Neoclassical school, e.g. The Walras’s general equilibrium model allows modelling and calculation of market prices based on the equilibrium equations of the sub-markets.
Although Walras did not understand this as a guide to central planning of the economy, market socialists, such as Lange and Lerner, extended it to the logical extreme.
Against the possibility of economic calculation under socialism – that is, their ability to offset market surpluses or shortcomings by changing prices – Mises argued that without capital markets they would not know the price of different types of capital, and without the imbalance they would not be able to determine optimal prices for consumer goods. Hayek added the argument of sharing knowledge.
Hayek generally had a tendency towards science, but also to do science within a certain scientific tradition. He found this tradition, after Mises’s appearance in the dispute over economic calculation, within the Austrian school.
For an Encyclopedia article, see this entry, for an excellent introduction to Austrian microeconomics, including Hayek’s dispersed information argument, see Israel Kirzner´s book: How Markets Work. He has contributed not only to Austrian economics, but also to economics as a whole, and is well known for his articles on the division of knowledge.
In his opinion, socialists cannot rationally plan the economy also because the knowledge that feeds the Walras system of equations of general equilibrium is not all the knowledge that is important to achieve by central pricing.
In fact, information that an economist considers “given” in equations is used by individuals by acting in markets. If they do not use them, they will remain unused and the economy will not be as rational as it could be. This way Hayek explains the relatively lower productivity of the socialist economy.
Hayek made this argument in particular in Use of Knowledge in Society (1945), which is his most cited article and one of the most cited articles of the American Economic Review.
In this work, as the speakers in our video pointed out, he illustrated the fact that the market is a means of communication that uses individual information in a cost-effective way: everyone needs to know their little piece of information (their preferences, knowledge of production or sales technology) and then the price itself, nothing more.
Under socialism, a planner would need to have the entire Walrasian equilibrium system, and in it, as input data, all the preferences of all acting individuals and the knowledge of all technologies. Hayek considered this to be ruled out, though it made a good effect as a model.
Our speaker Potužák illustrated Hayek’s theory on an amusing but illustrative example of changing the relative prices of beer and orange juice. If Czechs stop drinking beer and start to drink orange juice more, producers will find out thanks to the reduction of the beer price and increasing of the price of the orange juice. Hayek himself said an example of a change in the price of tin.
Based on this, Leonard Read wrote a great essay I, pencil, one of the best to popularize economics: although the pencil is so simple, no one in the world can actually produce it. He doesn’t have enough knowledge to do it. This should arouse admiration for a system that works as if it had been planned by Walras’ auctioneer, but actually works automatically.
Our speakers have also mentioned an argument that has really been heard in the history of the economic calculation dispute – that although the central scheduler is not able to retrieve all this data, it will once be possible by supercomputers.
However, some knowledge is so-called tacit, unspoken, and can be obtained only if we let individuals to act according to their will. Many consider Hayek to be the founder of the knowledge-based economy for this argument, and they are not far from the truth, as his colleague Fritz Machlup wrote in 1962 based on Hayek’s argument that nearly 30% of the US economy is based on production and knowledge exploitation.
An interesting fact is that Wikipedia founder Jimmy Wales was inspired by Hayek in his idea of a shared encyclopedia creation through the knowledge of individual users.
Hayek’s argument is also appealing to our speakers for his defense of the individual’s micro-world, and that he emphasizes the limits of reason which Kant already knew (accessible interpretation by Ján Pavlík , for the exact explanation based on the theory of negentropy see also Ján Pavlík).
Our speakers mentioned a complaint that “the society is too complex to be organized by the market” and they replied that the Hayek’s answer is that the society is too complex for the state to organize it.
Our speakers mentioned that socialism experienced disturbances in the consumer market. Hayek would explain the socialist shortcomings with his theory of capital, emphasizing that in a functioning economy, the structure of capital is just leading to the production of the optimal amount of consumer goods that consumers are demanding.
But we shall get to his theory of capital in a while. The well-known Hungarian-American economist János Kornai wrote about the socialist economy as an economy of shortage.
In the mainstream, whether neoclassical or Keynesian, Hayek lacks the description of the process of the creation of equilibrium. The Neoclassical school sometimes sounds like everyone is always in balance at every moment.
The difference between the Austrian and Neoclassical approach to equilibrium and the microeconomics-macroeconomics dispute is provided by Jesus Huerta de Soto.
Pavel Potužák, our speaker, mentioned that economics is essentially behavioral economics (he refers to Dušan Tříska). He answered this way to the question of what Hayek would say about Behavioral economics. The answer, according to Potužák, is that, unlike Behaviorists, Hayek said that in the process of acting, market players learn from mistakes.
This is not happening in Behavioral economics, where people repeat the same mistakes. For more on this, Roger Frantz writes in Hayek and Behavioral Economics.
Ludwig von Mises argued that in socialism economic calculation is not possible due to the absence of capital markets. In one of the 1930s reviews, Hayek surprisingly writes that the labor market works surprisingly well in the Soviet Union (published in the book Socialism and War). He meant that they worked surprisingly well compared to the relatively rigid labor market that they had in the West at the time.
It is this problem, according to Hayek, that applies to the idea and ideal of social justice when they are used in a society with a market economy.
As was said in the video, if everyone is to be paid equally, or according to another arbitrary criterion, the factor of labor market will freeze. People will cease to know what to specialize in, what type of work to invest their human capital in.
Hayek asks for the strict meaning and sense of social justice. Hayek also states an important insight that our speakers reiterated that justice is a feature of individual action, not a state in a society. Ján Pavlík puts Hayek’s discussion of justice in the context of philosophical tradition. Aristotle distinguished between distributive and commutative justice.
Commutative justice is the fairness of trade: we agree on what we exchange and we exchange it in reality. Distributive justice entails a single common purpose. A society must have a common purpose and the ability to recognize the individual’s contribution to or share in achieving that purpose.
In this sense, distributive justice can only be applied to small communities, where it is possible and permissible to pursue one common objective and recognize the individual contribution.
A small society may be a prehistoric tribe, a family or a company, but not a large society with a market economy (see also Pavlik´s interpretation of Hayek).
Thus, social justice is for Hayek just an artificial addition to the market and is not compatible with it in the long run. This is the argument of the so-called “immanent criticism” Hayek put forward in the second volume of Law, Legislation and Liberty.
Further discussions in the video were dedicated to Hayek’s relationship with another well-known liberal economist, Milton Friedman.
Hayek (1899-1992), although Austrian by origin, spent most of his fertile period in Anglo-Saxon countries – since 1931 in London, since 1950 in Chicago; he moved back to the old continent only in 1962. It was in Chicago, where Hayek and Friedman met at one university. They both respected each other and faced with a common socialist enemy they placed little emphasis on differences in their approaches.
Friedman, philosophically certainly weaker, cites Hayek in his well-known book on the political economy Capitalism and Freedom.
Friedman owed his advocacy of a liberal economy to Hayek’s well-known book The Road to Serfdom, but not only that. A more attentive reader will notice that Friedman in Capitalism and Freedom quotes an interesting liberal legal historian, A. V. Dicey, specifically his book on the dominion of the rule of law Lectures on the Relation between Law and Public Opinion in England During the Nineteenth Century.
In fact, even before Friedman Hayek himself drew heavily on Dicey in his book Constitution of Liberty, where he focused on the rule of law in the economy and society of that time and published just while he lived in Chicago. Although this is not direct evidence that Friedman was more concerned with the rule of law due to Hayek, citation patterns suggest this.
In Slovakia and the Czech Republic, where we are not abundant in the excess of the rule of law, it is convenient to reiterate Dicey’s definition of rule of law: “rule of law means, in the first place, the absolute supremacy or predominance of regular law as opposed to the influence of arbitrary power, and excludes the existence of arbitrariness, of prerogative, or even of wide discretionary authority on the part of government.” It is on page 120 in the 8th edition (1915) of his standard book: Introduction to the Law of the Constitution.
Hayek quoted Dicey in the Constitution of Liberty (1960) to give a positive answer to the question of what he thinks the society should look like. After his Road to Serfdom, several critics asked him not to just criticize but also to write down his own idea of the state.
How did Friedman quote Dicey? First time in Capitalism and Freedom (1962).
Our speakers agreed that Friedman was a freedom thinker, and he was close to Hayek, although he certainly did not reach his depth. If Hayek is criticized for being a liberal ideologue in some circles today, it is rather Friedman who sounds like he does not have a sufficiently substantiated defense of liberal society.
Friedman’s relative philosophical inferiority towards Hayek is also seen by our speakers in Friedman’s methodological positivism.
In an anthropologically important thesis, Ján Pavlík claims that Friedman does not see man and his actions, remains on the surface, seeks only predictions, and reserves the possibility of false assumptions. He does not take what is inside man. It argues only for a specific prediction. In fact, Friedman’s article The Methodology of Positive Economics has become the most well-known article in the methodology of economics at all.
Hayek, on the other hand – cautiously, because he did not want to disagree too much with Friedman, although he was aware of the dangers of his method – argued that in economics a specific prediction was impossible.
Given the diffuse knowledge and too many variables, it is possible to predict the type or pattern of economic development as the spontaneous order. Hayek’s prediction is so-called Pattern prediction, formula prediction. He talks about this, for example, in autobiographical interviews with James Buchanan.
Ján Pavlík, furthermore, states that Friedman’s positivism derives from Comte’s and as such is scientistic. In other words, to economics, the science of a human, his actions and the social consequences of his actions in the economy, it is not adequate to instill methods developed in other sciences.
Hayek criticized Comte in particular in the last part of the book: Counter-Revolution of Science. In the video, Ján Pavlík deviated from his argument in the book F. A. Hayek and the Theory of Spontaneous Order, where he defended the economic-mathematical method of Friedman’s successor Gary Becker (See Pavlik´s arguments).
In the video, Pavlík says that the version of mathematics used at Friedman’s Chicago School is currently inadequate to study the spontaneous order of the market economy, as well as the biological and economic co-evolution.
With billions of individuals acting in it, the market economy is a complex order and, according to Pavlik, more suitable for its modelling is the mathematical method of the Santa Fe School, which is represented for example by Jan Burian, Michal Kvasnička or Tomáš Cahlik.
Since Hayek received the Nobel Prize, at least in part, for the business cycle theory and the theory of capital, it is not surprising that our speakers did not bypass these topics either.
To begin with, it is worth to mention that Hayek’s macroeconomics, unlike conventional ones is micro-economically based on relative prices. In them he formulated two effects, his main macroeconomic contributions: Cantillon effect and Ricardo effect.
Hayek’s contribution to capital theory has been enormous, albeit partly misunderstood, or even incomprehensible to some. Capital is a structure, a process of maturing production to the consumer goods.
Josef Šíma and his book Market in Time and Space are an excellent source of study of Hayek’s theory of capital and its macroeconomics (without repeating methodological errors of macroeconomics).
As Šíma describes, Hayek distinguished a sustainable and unsustainable structure of capital using a new macroeconomic tool: the Hayek triangle.
Hayek is particularly beneficial in the unsustainable structure of capital. In it, the nominal interest rate differs from the natural one (this is also in today’s new Keynesian models). Industries close to the completion of consumer goods win the fight for resources.
Capital goods with a long maturation period are in deep problems. Thus the potential product itself decreases, as Potužák also states.
Hayek’s economic contributions include integrating the monetary and real economy into the model of the Hayek triangle, thus surpassing the so-called classical dichotomy.
It is worth noting that, despite all the differences in macroeconomics between Hayek and Keynes, the latter inserted a chapter on capital based on Hayek in his General Theory.
Our speakers came to Friedman again in connection with his so-called “Golden rule”, e.g. 2% of monetary aggregate growth per year. Such an autopilot was supposed to prevent the central bank’s discretionary policy, which tended to push on the gas when the economy was already running spontaneously and hold back when it was almost standing.
At the same time, its purpose is to alleviate the economic cycle or changes in the speed of economic driving.
In fact, Friedman’s rule did not function – and for the reason Hayek understood – it is not at all easy to find out which of all of the goods are money and which are no longer money. By changing the monetary aggregate M1 according to the golden rule, the desired effect on the economy did not occur.
According to the speakers, the central bank’s independence is also questionable. The attempt of central banks to “coordinate” monetary policy with fiscal was expressed by Hayek in a brief overview of the monetary history of the world in the book Denationalisation of Money.
One of the speakers, Pavel Potužák, devised or rediscovered (after McCollum) a new rule of monetary policy, the so-called Hayek-Taylor rule: M.V = const. Potužák has formulated this rule in several of his articles. It implies a regime of nominal GDP targeting, or the left-hand side of the equation.
Pavel Potužák says that Hayek later realized that not only the money supply (M) but also the demand for money (V) could change. The big advantage of the Hayek-Taylor rule mode is that we do not need to know the output gap to apply it, as is the case with standard modes. It allows prices to fall spontaneously in a growing economy.
(In history, we experienced an episode of economic growth and deflation in the second half of the 19th century).
Is Hayek anarchist in his proposal of free banking in the book Denationalization of Money? No, but as a 70-year old he reconsidered his views without being internally inconsistent: imagine a world without a central bank. Would it be a world of hyperinflation and currency wars?
Hayek didn’t think so. If banks would compete to produce their own money, and their business would depend on the commercial success of their own currency, they would care about their stability according to their customers’ preferences.
In his opinion, in this competition the currencies with stable purchasing power would win. Potužák asked a question why Hayek did not propose to go to minus, to deflation.
The answer provided by Potužák is that we have to realize that he proposed actually a shift from 10% inflation in the time of stagflation (slow economic growth, higher unemployment and inflation) to zero and that it would probably be difficult and not understandable by others if he proposed a more radical shift from + 10% per annum to -3% per annum, also given the deflationary Great Depression was not yet completely forgotten.
I would add that Hayek’s statements from the book, and later, suggest that when Hayek had the idea that free banking would converge to inflation of 0%, he considered even more than just political considerations. In fact, he was interested in the functions of money, and according to his mental experiment, if in free banking citizens would have the opportunity to experiment and set in motion a competition of individual functions of money, Hayek was convinced that the function of purchasing power stability was the most important.
Hayek is known for his theory of spontaneous order, The Road to Serfdom, but his works on the theory of business cycle and capital are less well known. At the same time, the theory of capital and business cycle is hardly a theory today, as they explain the cycle by exogenous shocks. He is still very inspiring in this, because he has provided a theory – although imperfect, but a theory, nonetheless.
First: his methodology (see Pavlik’s recommendations from the first video), then his early economic work. It’s a big investment, but the reward would be great.
If young economists are inspired by Hayek, they will promote the minimization of state interventions, which are mostly harmful.
- Encyclopedical contribution on Hayek in the Econlib Economic Encyclopedia
- Bruce Caldwell: 10 (mostly) Hayek insights into the hard times of the economy
- David Gordon: Remembering Hayek as a Teacher
Kai Weiss: 5 Big Hayek Thoughts – Reader’s Guide