Hayek and the Nobel Prize

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Originally
appeared in Libertarian Forum, 1974

The grant of
a 1974 Nobel Prize in Economic Science to the great Austrian free-market
economist Dr. Friedrich A. von Hayek comes as a welcome and blockbuster
surprise to his free-market admirers in this country and throughout
the world. For since the death last year of Hayek’s distinguished
mentor, Ludwig von Mises, the 75-year-old Hayek ranks as the world’s
most eminent free-market economist and advocate of the free society.

The Nobel award
comes as a surprise on two counts. Not only because all the previous
Nobel Prizes in economics have gone to left-liberals and opponents
of the free market, but also because they have gone uniformly to
economists who have transformed the discipline into a supposed "science"
filled with mathematical jargon and unrealistic "models"
which are then used to criticize the free-enterprise system and
to attempt to plan the economy by the central government.

F.A. Hayek
is not only the leading free-market economist; he has also led the
way in attacking the mathematical models and the planning pretensions
of the would-be "scientists," and in integrating economics
into a wider libertarian social philosophy. Both concepts have so
far been anathema to the Nobel establishment.

We can only
speculate on the motivations of the Nobel committee in this welcome,
if overdue, tribute to Friedrich von Hayek. Perhaps one reason is
the evident and galloping breakdown of orthodox Keynesian "macroeconomics,"
which leads even the most hidebound economists to at least consider
alternative theories and solutions. Perhaps another reason was a
desire to grant a co–Nobel Prize to the notorious left-wing
socialist Dr. Gunnar Myrdal, and granting one to Hayek out of a
recognized need for political "balance." Thus, in granting
prizes to these two polar opposites, the Royal Swedish Academy of
Sciences cited both Hayek and Myrdal "for their pioneering
work in the theory of money and economic fluctuations and for their
pioneering analysis of the interdependence of economic, social and
institutional phenomena."

At any rate,
regardless of the motivations of the Nobel committee, we can only
hail their richly deserved tribute to the towering contributions
and achievements of Friedrich von Hayek. Hayek’s first monumental
contribution to economics was his development of the "Austrian"
theory of the business cycle, based on the pioneering outline of
Mises. Appearing in the late 1920s, on the basis of which Mises
and Hayek were among the very few economists in the world to predict
the 1929 Depression, Hayek’s two great works on the business cycle
appeared in English as Monetary
Theory and the Trade Cycle
(1933) and the more technical
Prices
and Production
(1931).

During
the early 1930s, when Hayek had immigrated from Austria to teach
at the London School of Economics, the Mises-Hayek theory of the
business cycle began to be adopted widely in England and even in
the United States as an explanation of the Great Depression; unfortunately,
this Austrian theory was swept aside in the jubilation of the Keynesian
revolution (1936) without being even considered, much less refuted
by the statist Keynesians. Now that Keynesianism is crumbling both
theoretically and empirically, the world of economics should be
ripe to consider the Austrian theory seriously again, for the first
time in forty years.

Briefly, the
importance of the Hayek theory of the business cycle is that it
puts the blame for the boom-bust cycle squarely on the shoulders
of the government and its controlled banking system, and, for the
first time since the classical economists of the 19th century, completely
absolves the free-enterprise economy from the blame. When the government
and its central bank encourages the expansion of bank credit, it
not only causes price inflation, but it also causes increasing malinvestments,
specifically unsound investments in capital goods and underproduction
of consumer goods.

Hence, the
government-induced inflationary boom not only injures consumers
by raising prices and the cost of living but also distorts production
and creates unsound investments. The government is then faced repeatedly
with two basic choices: either stop its monetary and bank-credit
inflation, which then will necessarily be followed by a recession,
which serves to liquidate the unsound investments and return to
a genuinely free-market structure of investment and production –
or continue inflating until a runaway inflation totally destroys
the currency and brings about social and economic chaos.

The relevance
of the Hayek theory to the present day should be glaringly obvious,
as any hint of recession causes the government to panic and turn
on the inflationary taps once again. The point is that, given any
inflationary boom, a recession is painful but necessary, in order
to return the economy to a sound state.

The political
prescription that flows from the Hayekian theory is, of course,
the diametric opposite of the Keynesian: stop the artificial inflationary
boom, and allow the recession to proceed as fast as possible with
its work of readjustment. Postponement and government attempts to
stop or interfere with the recession process will only drag out
and intensify the agony and lead to our current and probably future
turmoil of inflation combined with lengthy recession and depression.
The Mises-Hayek analysis is not only the only cogent theory of the
business cycle; it is the only comprehensive free-market answer
to the Keynesian morass of government planning and "fine tuning"
that we are suffering from today.

But F.A. Hayek
did not stop with this monumental contribution to economics. In
the 1940s he widened his approach to the entire area of political
economy. In his best-selling Road
to Serfdom
(1944) he challenged the prosocialist and pro-Communist
intellectual climate of the day, showing how socialist planning
must inevitably lead to totalitarianism, and demonstrating examples
in the way in which the socialistic Weimar Republic paved the way
for Hitler. He also showed how the "worst always get to the
top" in a statist society.

In his brilliant
series of essays in Individualism
and Economic Order
(1948), Hayek pioneered in demonstrating
how socialism cannot rationally calculate because it lacks a free-market
pricing system, particularly since the free market is uniquely equipped
to transmit information from every individual to all other individuals.
Lacking a genuine price system, socialism is necessarily devoid
of such crucial information.

Furthermore,
in the same work, Hayek brilliantly dissected the unrealistic orthodox
model of "perfect competition," demonstrating that the
real world of free competition is far superior to the absurd call
for "perfection" by trust-busting lawyers and economists.
As a corollary, Hayek in this work began a devastating series of
attacks on the mathematical economists’ model of "general equilibrium,"
showing how absurd and unrealistic such a criterion was with which
to beat free enterprise over the head.

In 1952, Hayek
published his superb Counter-Revolution
of Science
, which remains the best attack on the pretensions
of would-be planners to run all of our lives in the name of "reason"
and "science." Two years later, in the very readable Capitalism
and the Historians
, Hayek contributed to and edited a series
of essays that showed conclusively that the Industrial Revolution
in England, spurred by a roughly free-market economy, enormously
improved rather than crippled the standard of living of the average
consumer and worker in England. In this way, Hayek led the way in
shattering one of the most widespread socialist myths about the
Industrial Revolution.

Finally, in
his Constitution
of Liberty
(1960), Studies
in Philosophy, Politics, and Economics
(1967), and Law,
Legislation, and Liberty
(1973), Hayek, among other notable
contributions, upheld the forgotten ideal of the rule of law rather
than men, and emphasized the unique value of the free market and
the free society in creating a "spontaneous order" that
can only emerge from freedom. As merely one of his achievements,
his much anthologized article, "The Non-Sequitur of the ‘Dependence
Effect’," demolished J.K. Galbraith’s The
Affluent Society
in pointing out that there is nothing wrong
with individuals learning and absorbing values and consumer desires
from one another. And in his scintillating essay, "The Intellectuals
and Socialism," F.A. Hayek set forth the proper strategy for
libertarians to follow: the importance of having the courage to
follow the socialists in being consistent, in refusing to surrender
to the short-run dictates of compromise and expediency; only in
that way will we be able to roll back and defeat the collectivist
tide.

We
could go on and on. But enough has been said here to point to the
great scope, erudition, and richness of F.A. Hayek’s contributions
to economics and to political philosophy. Like his great mentor,
Ludwig von Mises, F.A. Hayek has persisted with high courage in
opposing the socialism and statism of our time. But not only has
he unswervingly opposed the current fashions of Keynesianism, inflation,
and socialism; he has – with nobility, courtesy, and great
erudition – pursued his researches to provide us with the alternative
concepts of the free economy and the free society.

F.A. Hayek
richly deserves not only the Nobel Prize but any honors we can bestow
upon him. But the greatest tribute we can make, to Hayek and to
Mises, is to dedicate ourselves to rolling back the statist tide
and proceeding onward to a society of freedom.

Reprinted
from Mises.org.

Murray
N. Rothbard
(1926–1995) was dean of the Austrian
School, founder of modern libertarianism, and academic vice
president of the Mises Institute.
He was also editor — with Lew Rockwell — of The
Rothbard-Rockwell Report
, and appointed Lew as his
literary executor. See
his books.

The
Best of Murray Rothbard

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