On the occasion of the 50th anniversary of the Bank of Sweden’s Alfred Nobel Prize in Economics for Friedrich Hayek, we would like to recall the achievements of this Austrian thinker and his impact on the entire democratic world, social sciences, and liberal philosophy.
Economist
At the beginning of the 20th century, there were no separate economic studies yet, so Hayek earned his doctorate in law and political science. After reading Ludwig von Mises‘s Socialism, he began to attend his seminars regularly and became his close colleague at the Austrian Institute for Business Cycle Research, where they anticipated the Great Depression of 1929. This period spawned his scholarly interest in business cycles, which he developed in a series of works until 1945. The most important of these were Monetary Theory and the Trade Cycle (1929), Prices and Production (1931), and Pure Theory of Capital (1945).
It was his interest in business cycles that led the Bank of Sweden to recognize his “pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena.”
Hayek believed that artificially lowering interest rates by the central bank sends a false signal to businesses that the public has more savings than it actually does. This leads to misguided, capital-intensive investments, the products of which they have no customers or cannot be completed because access to cheap money is running out.
Such a cycle, which initially looks like an economic recovery, but which in reality was an artificially inflated bubble, ends in an economic crisis, meaning massive bankruptcies and layoffs. And this is in the best-case scenario because those in power can simply lower interest rates even further and prolong the “inflated bubble,” resulting in an even bigger crisis in the future. This is akin to drinking a wedge for a hangover. It in no way helps the alcohol-poisoned body recover.
Hayek also opposed other manifestations of state interventionism. In the 1930s he participated in a famous debate on the subject with the most influential economist of the 20th century, John Maynard Keynes, and in 1944 he wrote The Road to Serfdom, in which he showed, using the example of the Weimar Republic, how increasing state control over the economy led to socialism in its nationalistic version. The book made him famous in the United States and secured him a professorship at the University of Chicago. During the war, the publisher could not keep up with printing it for all those who wanted it because of paper rationing.
The Nobel laureate criticized not only the interventionism of capitalist states but also the socialist system, which is inherently incapable of dealing with the so-called knowledge problem. Rational allocation of scarce resources requires coordination of the fragments of knowledge dispersed among all participants in economic reality. This can only be done through a system of prices, shaped by freely acting sellers and buyers. If the state decides how much of what to produce, how much should be the costs, and how much of what to sell to whom, the numerical values accompanying all exchanges do not express knowledge about the preferences of producers, customers, and the scarcity of goods. The planner under socialism must issue orders blindly, which ends in unimaginable waste and constant shortages of even the most basic goods.
Philosopher of Science And Epistemologist
The problem of knowledge is also related to Hayek’s thoughts on how the social sciences should be practiced. He opposed neopositivism, which took physics as the model for all knowledge. It is impossible to conduct experiments on large human populations. Besides, constantly acting, free and creative people generate new information all the time, which cannot be put into mathematical models. We can predict exactly how fast an apple thrown from the tenth floor will hit the ground, but it is impossible to predict exactly how market participants will behave in a given situation.
His critique of neopositivism also led him to criticize “constructivist rationalism.” By this term, Hayek meant the belief that the human mind is capable of consciously designing and enacting complex social institutions, and it is not just the central control of the economy, but also law, moral principles, or language. In fact, these institutions emerge spontaneously and evolutionarily over the years in the course of countless human interactions, and no single mind can bring them to life. An urban planner can delineate where the sidewalk should lie, but it is by the paths trodden alongside that one can see how people can move most optimally.
Philosopher of Politics And Law
Hayek advocated a liberal rule of law, in which the rules governing society apply to everyone equally and are predictable to ensure the stability of the system. In the rule of law, it is not the people who rule, but precisely the law, which restrains the inclinations of politicians and protects the freedom of all individuals. Margaret Thatcher was said to have thrown his most important work on the subject, i.e., The Constitution of Liberty, on the table during a meeting of his party and announced, “This is what we believe.”
Although Hayek is sometimes considered by his critics on the political left and right to be an extreme free-marketeer, or even a libertarian, libertarians and classical liberals in turn like to accuse him of having social-democratic sympathies. The truth is that Hayek allowed for more state action than just acting as a night watchman. He believed that the state had the right to collect taxes to meet needs that the market could not meet, and cited as examples countering the effects of natural disasters, running a national statistics office, building roads, or even providing a subsistence minimum for destitute people.
So you can clearly see that he is far from a dogmatic libertarian, but I wouldn’t call him a social democrat, or a leftist. Hayek allows various state activities or unemployment benefits not because of his love for strong state structures or egalitarianism, but simply as the lesser of two evils and some minimal concession to people with less confidence in market processes. If people feel that their need for security is unmet, they will be more susceptible to various extreme ideologies promising them paradise on earth as soon as they hand over absolute power to some demagogue.
The sense of security is, of course, a subjective and time-varying criterion, and there are risks involved. However, in essence, as long as the law is stable, and simple and prevents the introduction of de facto tyranny, we will be able to chase away from sight the bigger threats to freedom than state (local government) sidewalks.
Friedrich Hayek’s life is an inspiring example of love of freedom and reason. Far from fanaticism, able to correct his views and befriend his ideological opponents, he exemplifies for the Economic Freedom Foundation the attitude that made the Western world a little better in the 20th century. Whether in the halls of universities, on the roof of College Chapel in Cambridge putting out fires set by Nazi planes, or at meetings of the Mont Pelerin Society with other Nobel laureates and the greatest liberal thinkers of the time, he always acted in the interests of the entire civilized world. And praise him for that.
However, it is worth recalling his own words, which he said at the Nobel banquet:
“The Nobel Prize confers on an individual an authority which in economics no man ought to possess.”
Also, if we want to take his teachings seriously, we must always, under the influence of facts, be ready to reject those views in which he and other respectable people with titles and awards were wrong. Liberals have something to celebrate, but they should by no means ever settle on their laurels.
Written by Adrian Lazarski
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