Austrian Economist Friedrich A. Hayek – one whose ideas we should look to

1 05 2011

Friedrich August Hayek (1899-1992 )

The Concise Encyclopedia of Economics at the online Library of Liberty and Economics (http://www.econlib.org/index.html) provides a thumbnail sketch of economist Friedrich A. Hayek (see http://www.econlib.org/library/Enc/bios/Hayek.html).  Following are some key excerpts from their article, with my own emphasis on issues relevant to today’s economic issues of government involvement in trying to manipulate and manage economies, of inflation, and of the roles and economic impacts of the U.S. Federal Reserve system ….

“Most of Hayek’s work from the 1920s through the 1930s was in the Austrian theory of business cycles, capital theory, and monetary theory. Hayek saw a connection among all three. The major problem for any economy, he argued, is how people’s actions are coordinated. He noticed, as Adam Smith had, that the price system—free markets—did a remarkable job of coordinating people’s actions, even though that coordination was not part of anyone’s intent. The market, said Hayek, was a spontaneous order. By spontaneous Hayek meant unplanned—the market was not designed by anyone but evolved slowly as the result of human actions. But the market does not work perfectly. What causes the market, asked Hayek, to fail to coordinate people’s plans, so that at times large numbers of people are unemployed?

One cause, he said, was increases in the money supply by the central bank. Such increases, he argued in Prices and Production, would drive down interest rates, making credit artificially cheap. Businessmen would then make capital investments that they would not have made had they understood that they were getting a distorted price signal from the credit market. But capital investments are not homogeneous. Long-term investments are more sensitive to interest rates than short-term ones, just as long-term bonds are more interest-sensitive than treasury bills. Therefore, he concluded, artificially low interest rates not only cause investment to be artificially high, but also cause “malinvestment”—too much investment in long-term projects relative to short-term ones, and the boom turns into a bust. Hayek saw the bust as a healthy and necessary readjustment. The way to avoid the busts, he argued, is to avoid the booms that cause them.

Regarding the causes of inflation, and how central banks were at least partly responsible for inflationary pressures by their Keynesian-like  economic policies and actions, note the following….

Hayek believed that Keynesian policies to combat unemployment would inevitably cause inflation, and that to keep unemployment low, the central bank would have to increase the money supply faster and faster, causing inflation to get higher and higher. Hayek’s thought, which he expressed as early as 1958, is now accepted by mainstream economists (see the Phillips Curve).”

Hayek penned the book The Road to Serfdom (http://en.wikipedia.org/wiki/The_Road_to_Serfdom) in which be gave a withering critique of socialist-oriented government control of economies. Quoting from Wikipedia…..

“….(Hayek) warned of the danger of tyranny that inevitably results from government control of economic decision-making through central planning, and in which he argues that the abandonment of individualism, liberalism, and freedom inevitably leads to socialist or fascist oppression and tyranny and the serfdom of the individual. Significantly, Hayek challenged the general view among British academics that fascism was a capitalist reaction against socialism, instead arguing that fascism and socialism had common roots in central economic planning and the power of the state over the individual.”

The ideas and philosophies of Hayek would be identified today by many as either classical liberalism (http://en.wikipedia.org/wiki/Classical_liberalism) or libertarianism (http://en.wikipedia.org/wiki/Libertarianism), although many political and economic conservatives would be in strong agreement with much of what Hayek espoused.

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