This massive tome only takes us through half of Hayek’s life—through his time growing up in Austria, fighting in Italy during WWI, working for Mises in Vienna, moving to the LSE in London, his WWII years temporarily ensconced at Cambridge, and to his move to America at the University of Chicago. The book tightly balances an intellectual biography with the facts of his life—going into great detail of his friendships, his rivalries with colleagues, and his divorce to his first wife. The biography tries to weave how these personal events helped shape his work, his personality, his politics, and his ideology—and vice-versa. Quite early in his professional life, Hayek happily admitted, “In the sense of that Gladstonian liberalism, I am much more English than the English.”
One area of economics that first drew Hayek’s attention was the role of money in the modern economy. “His next step was to identify money as the root cause of cyclical movements, because money is able to disrupt the “tendency to equilibrium” prevalent in the static theory of a barter economy and lead to movements away from equilibrium. As he would later put it, money constitutes a “loose joint in the self-equilibrating apparatus of the price mechanism”…. Hayek drew on Wicksell by identifying the market for saving (or loanable funds) as the main channel where money may enter and disturb the economic system…. The equilibrium or natural rate of interest will be determined by the balance of the supply of (voluntary) saving and the demand for funds for investment purposes. If there are monetary disturbances, however, the prevailing money rate of interest may diverge from the rate in (intertemporal) equilibrium, e.g., when injections of money increase funds, or when money hoarding diverts the supply of funds…. This structure [of newly injected money], created by a depressed money rate of interest, cannot be sustained. Monetary expansion, then, will not produce an everlasting boom, and when the expansion eventually stops, crisis and depression follow. With regard to the sources of monetary expansion, while others like Mises put the blame on the misguided (“inflationist” or “cheap money”) attitude of the monetary authorities, Hayek pointed to the endogenous process of money creation by the banks, in particular in a system of fractional reserve banking.”
Another field that Hayek specialized in was the heterogenous structure of capital goods in an intertemporal system. “It appears that Hayek began his “capital project” almost immediately after arriving at LSE in 1931…. Hayek thought that the analysis in Prices and Production [his previous work] was deficient…. He quickly recognized that the one that he had used in his own book, a stages model that described the structure of production by means of an average period of production, was insufficient to the task…. The capital-theoretic foundations of Prices and Production were restricted to a special case well suited to an economy with variable capital (goods in process), but not to one with fixed capital, that is, durable capital goods generating a continuous flow of output over time. A more sophisticated capital theory would therefore need to allow for a truly general time structure of inputs and outputs…. This dynamic theory of capital would allow capital theory and monetary theory finally to be integrated and together be used to explain the nature and causes of the cyclical fluctuations that afflict market economies…. His [theory] would allow economists to “free themselves of the idea that capital is some homogenous mass, some given quantity of value, which will preserve its magnitude independently of the value of the real commodities of which it consists”…. He criticized the idea (which he attributed to Pigou, but a similar position can be found in Knight) that “there is a quantitatively determined fund of capital, which can be distributed and redistributed in any way between the different lines of production without changing its aggregate value”…. In his view, the capital stock is always composed of a collection of concrete capital goods, so that any adjustment would necessitate a change in the structure of capital, and the process of transition would thus depend on the capital structure inherited from the past…. The “maintenance of capital” must be accompanied by structural adaptations, in the course of which some capital goods would lose and others gain in value…. The capital structure is constantly evolving as the market continually provides new information. In that evolution, capital is rarely either so malleable as to be instantaneously transformable, or so permanent as to be incapable of being applied in a different production process.”
Hayek’s bete-noire was scientism, which he would address in his book Individualism and Economic Order. “The subtitle of the book, as well as the title of part 1, reveal the main theme: that the abuse and decline of reason was caused by hubris, by man’s overweening pride in the power of his own reason. This had been bolstered by the rapid advance and many successes of the natural sciences, which led to “scientism,” the idea that to make the social sciences truly scientific, all that was necessary was to apply within them the already proven methods of the natural sciences. Those infected by the scientistic prejudices believed that were the recipe followed, the scientific reengineering of society along more rational and just lines could begin…. Hayek saw scientism as arising from the intermingling of positivist and socialist ideas that themselves had their origins in eighteenth- and early nineteenth-century France.”
Hayek was self-aware enough to know that his economic methodology was going out of vogue. Nonetheless, he persisted against the Keynesian onslaught. “His decision to present the theory of production before consumer choice theory was “rather unusual.” In discussing his preferred approach, Hayek introduced the term “the economic calculus,” which might also be called “the pure logic of choice” (the phrase that he had used in his 1937 essay “Economics and Knowledge”) or “the theory of simple economy.” He explained that the economic calculus is used to analyze actions that follow from a single coherent plan. The plan may be that of an individual, a firm, a community, a nation, and so on…. [Hayek stated,] “In a way all the economic calculus is concerned with is the classification of goods according to their economically relevant characteristics; not concerned with their physical characteristics but with position in the means-end order…. In brief the purpose of this economic calculus is no more than to provide an exhaustive classification of the objects of economic activity according to their economically relevant attributes.””
Hayek contrasted this with the “multiple economy” in which the plans of many individuals interact. He explained, “As these plans are separate and not necessarily known to the other individuals, as soon as the people begin to act upon them, a new and different problem arises…. Every such experience he [the individual actor] will have, if it is not precisely what he has expected, is a new datum to him…. With his learning about new facts which may possibly lead him to alter his plan, we meet for the first time a true cause bringing about change.” Hayek later summed up, “It is important that from the beginning we look at competition not as a state of affairs in which everybody knows everything but as a process by which knowledge is dispersed and acquired.”
Hayek’s most famous book is probably The Road to Serfdom. It is dedicated to “the socialists of all parties.” This was not hyperbole. Hayek feared that the dangers of socialism could spring from both the political Right and Left. “He acknowledged that it was “a political book”…. He recognized that many well-intentioned people support socialism simply because they admire its aims—“social justice, greater equality, and security”—and do not realize that, in its standard definition, it means “the abolition of private enterprise, of private ownership of the means of production, and the creation of a system of ‘planned economy’ in which the entrepreneur working for profit is replaced by a central planning body.”” Hayek defended the market process with its divisions of labor. “That the division of labor has reached the extent which makes modern civilization possible we owe to the fact that it did not have to be consciously created but that man tumbled on a method by which the division of labor could be extended far beyond the limits within which it could have been planned. Any further growth of its complexity, therefore, far from making central direction more necessary, makes it more important than ever that we should use a technique which does not depend on conscious control.”
Hayek viewed himself as a social scientist who specialized in economics, but delved into history, philosophy, and psychology with gusto. “In Hayek’s view, the social sciences are properly conceived of as being theoretical, individualist, and subjectivist: they provide a theoretical account of how the actions of individuals, which are based on subjectivist perceptions and beliefs, lead to the creation of larger social structures that are unintended, that is, that are the results of human action but not of human design.” On economics, in general, Hayek pronounced, “It is probably no exaggeration to say that economics developed mainly as the outcome of the investigation and refutation of successive Utopian proposals—if by ‘Utopian’ we mean proposals for the improvement of undesirable effects of the existing system, based upon a complete disregard of those forces which actually enabled it to work.”
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