The Economics of Friedrich Hayek

247 Pages·2007·0.792 MB·English

by  G. R. Steele (auth.)

The Economics of
Friedrich Hayek,
Second edition
G.R. Steele
The Economics of Friedrich Hayek
Also by G. R. Steele
MONETARISM AND THE DEMISE OF KEYNESIAN ECONOMICS
KEYNES AND HAYEK: The Money Economy
The Economics of
Friedrich Hayek
G. R. Steele
Second edition
© Gerald Steele 1993,1996,2007
Softcover reprint of the hardcover 2nd edition 2007 978-1-4039-4352-1
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First published in hardback 1993
First published in paperback 1996
Second edition published in 2007 by
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ISBN 978-1-349-52217-0 ISBN 978-0-230-80148-6 (eBook)
DOI 10.1057/9780230801486
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Library of Congress Cataloging-in-Publication Data
Steele,G.R.
The economics of Friedrich Hayek / by G.R.Steele.– 2nd ed.
p.cm.
Includes bibliographical references and index.
1.Hayek,Friedrich A.von (Friedrich August),1899–1992.2.Economics –
History – 20th century.3.Austrian school of economics – History.I.Title.
HB101.H39S73 2007
330.15(cid:2)7—dc22 2006044685
10 9 8 7 6 5 4 3 2 1
16 15 14 13 12 11 10 09 08 07
Contents
Preface ix
Preface to the First Edition (1993) xi
1 Introduction 1
Friedrich Hayek 1
Background 2
Hayek’s intellectual contribution 7
The Austrian School 10
Pseudo-scientific exactitude and measurement 13
Hayek’s economics 14
Neutral money 18
Capital 19
The business cycle 20
The international money order 21
Hayek and modern liberalism 22
The revival of Austrian Economics 25
2 The Sensory Order 27
Origins 29
Limits to understanding 30
Connectionism 31
What mind is 34
The adaptation of mind 38
Man and society 40
3 Liberty, Reason and Rules 43
Knowledge and rationality 43
Freedom and the spontaneous order 44
The meaning of liberty 46
Reason, liberty and justice 48
Reason and ‘constructivist’ rationalism 50
The organisation 51
Common law and legislation 52
Democracy and constitution 57
4 Liberty and the Market 61
The primacy of property 61
Neighbourhood effects 62
The industrialised workforce 64
Art, literature and civilised values 65
v
vi Contents
Capitalism and the social order 66
The public sector and the burden of taxation 67
Social welfare benefits 70
Social justice and central planning 73
Liberty, utilitarianism and the free market 74
5 Economic and Social Science 78
The interpretation of information 78
Simplicity and complexity 80
Objective and subjective knowledge 81
Scientism 85
Economic facts and economic theory 89
The economic problem and economic analysis 90
Equilibrium 92
The division of knowledge 95
Levels of economic planning 98
Market coordination 101
The meaning of competition 102
6 The Socialist Calculation Debate 104
Classical economics 105
Marx’s critique of capitalism 106
Capitalism and economic calculation 108
Mises’s counter to Marx 109
Socialism and economic calculation 112
Institutions 116
Freedom and the economic system 119
7 Neutral Money and Monetary Policy 125
Neutral money 125
The concept of neutral money 126
The objectives of monetary policy 128
The natural rate of interest 130
Forced and voluntary saving 131
Keynes: the added dimension 132
8 Capital 134
Capital as a factor of production 134
Austrian capital theory 136
The Ricardo effect 137
The yield from capital investment 138
The diversity of capital 139
Investment, the division of labour and technical progress 140
The dimensions of capital 140
Contents vii
The capital theory controversy 144
Investment, output and the value of capital 145
A capital investment simulation 146
Capital and macroeconomics 148
9 Business Cycles 151
The nature of business cycles 151
Capitalistic methods of production 153
The interest rate effect 153
Bank credit money and the cumulative process of
investment 155
Asymmetry in the switch from short/long to long/short
processes 156
Policy in a business depression 157
The relative prices effect 158
The two effects illustrated 158
New saving and new credit 163
A short digression on Keynes 166
The inevitable slump 167
Hayek’s retrospective 168
Addendum: empirical corroboration of the
Ricardo effect 174
10 International or National Money? 176
A brief history of money 177
Monetary nationalism 178
International monetary transactions 179
A homogeneous international currency 180
The gold nucleus standard 182
Independent currencies 183
Monetary reform 187
11 Market Standards for Money 190
Monetary discipline 190
Money and macroeconomic management 192
Private money 195
Indexation 196
Competition between state currencies 198
The standard 198
Postscript 200
12 Hayek’s Legacy 201
Words and meanings 201
Morality, liberty and intellect 202
Man and society 204
viii Contents
Economics: uncertainty and predictability 205
Effective planning 207
Notes 209
References 218
Index 226
Preface
The broad thrust of the exposition of The Economics of Friedrich Hayek is
unchanged. Although errors have been corrected, it is inevitable that some
were overlooked and that new ones have been added. I hope the writing has
improved. In truth, the writing did not stop. The first edition was simply the
current draft that, having been sent to the publisher, continued to evolve
with further amendment and additions as the mood took.
Plus ça change…Friedrich Hayek is still ‘playing catch up’ in respect of
John Maynard Keynes. Although Hayek was junior to Keynes by sixteen
years and lived for forty-six years beyond the death of his rival in 1946, jour-
nal editors view submissions on Keynes’s economics as of contemporary
interest, while those relating to Hayek are categorised as history of economic
thought! There is another tendency that works against Hayek:
[t]o an economist today, however, only that is true which can be proved
statistically, and everything that cannot be demonstrated by statistics can
be neglected;…the modern fashion demands that a theoretical assertion
which cannot be statistically tested must not be taken seriously and has
to be disregarded. (Hayek, 1975a, p. 6)
Hayek’s economics is too complex to match the easy time-series regressions
of aggregates upon averages that purport to confirm aspects of Keynes’s
macroeconomics.
The manageable disciplines into which science is segregated are artefacts.
Nature is one; and spontaneous adaptation is pervasive. Most significant in
representing Hayek are the artefacts of neurology, psychology and the vari-
ous social sciences; but, in Hayek’s writings, the boundaries are crossed: ‘if
you know economics and nothing else, you will be a bane to mankind, good,
perhaps, for writing articles for other economists to read, but for nothing
else’ (Hayek, 1944b, p. 42). Specialisation within narrowly defined disci-
plines remains a formidable barrier to teaching ‘Hayekian theory’; and that
barrier is buttressed by the ‘stand alone’ mini-modules from which modern
teaching programmes are generally constructed.
Acknowledgement is due to Routledge and the University of Chicago Press
for permission to quote extensively from Hayek’s The Constitution of Liberty.
The content of an early chapter on Hayek’s psychology – the most notable
change in this new edition – draws heavily from a journal article, with per-
mission (‘Hayek’s Sensory Order’, Theory and Psychology, © Sage Publications
ix