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What would Hayek say about our economy?

June 3, 2012

So as the US and world economy continues to slog along, and the Obama administration points the finger of blame everywhere but home, it’s a good time to step back and see what some of our favorite Austrian economists would have to say.  I ran across these “Ten (Mostly) Hayekian Insights for Trying Economic Times” – Adapted from a Heritage First Principles Essay of the same title by Bruce Caldwell.

1.  Recessions are bound to happen.  

Shifts between periods of economic Growth and periods of stagnation or decline are a necessary and unavoidable part of a freemarket monetary economy.  Downturns are not aberrations but rather painful and necessary medicine for restoring equilibrium to the economy.  This insight, however, does not mean that all recessionas are natural:  government meddling in the economy (e.g. keeping interest rates too low for too long) will lead to malinvestment – too many investment projects get started that cannot ultimately be sustained – and columinate in a recession.

2.  Central Planning and excessive regulation sure don’t work. 

The desire to plan and to subject the economy to the rule of experts endangers liberty.  As Hayek succinctly noted:  “The more the ‘state’ plans, the more difficult planning becomes for the individual.”  Hayek argued that central planning, if fully implemented, would lead to disastrous economic results and ultimately to restrictions on political and personal freedoms.

3.  Some regulation is necessary. 

Hayek make it clear that he was not advocating a system of pure laissez-faire, but one with a general system of rules that would enable individuals to carry out their own plans.  Hayek’s contribution was to stress the importance of institutions – a market system, in a democratic polity, with a system of well-defined, enforced, and exhanageable property rights, protected by a strong constitution, and operating under the rule of law, in which laws are stable, predictable, and equally applied.

4.  A stimulus will only stimulate the deficit.

Past experience iwht trying to fine-tune the economy shows that counter-cyclican fiscal and monetary policy and sometimes make matters much worse (as in the 1970s).  Wise politicians would therefore be advised not to meddle, however much their instincts tell them to show voters they’re doing something.

5.  The economy is too complex for precise forecasting.

As Yogi Berra could have said:  “I hate making economic predictions.  Especially about the future.”  It’s not that we don’t know anything, but rather that what we do know reveals the limits of our knowledge, and consequently, of our ability to plan and forecast. When the knowledge problem is joined with other political an economic obstacles, the hope of getting rational policy out of Washington becomes very dim.

6.  Remember the rule of unintended consequences. 

History shows that when trying to realize certain ends – particularly when their achievement involves interfering with the workings of the price mechanism – all sorts of pernicious effects will occur that were not part of the original plan (see #10).  Hayek was not altogether opposed to experimentation and change, but thought that piecemeal change is always preferable to wholesale attempts to remade society anew.

7.  You won’t believe how much you’ll learn in Econ 101. 

While Hayek repeatedly pointed to the limitations inherent in a discipline that deals with a complex system like the economy, the basic principles of economics, scarcity, supply and demand, division of  labor, ect – can explain a lot about the world and help rule out certain inappropriate policy responses (e.g. price ceilings).  A good economics course will therefore help to identify more appropriate policy responses – responses that utilize markets rather than fixing prices or trying to legislate specific outcomes.

8.  Leave social justice out of it. 

Free markets necessarily lead to an unequal distribution of wealth and, just as inevitably, fuel calls for egalitarian social justice, as anyone who’s read the editorial page of The New York Times or perused The Huffington Post knows.  Hayek viewed such cries as misguided an dangerous.  First of all, he denied that justice applies to an impersonal market process; a person’s or an organization’s action may be just or unjust, but the market process is not planned and the Income distribution it generates has nothing to do with justice.  Secondly, the egalitarian demands of those who clamor for social justice violate the principle of the rule of law.  If people differ in their attributes, then different people will necessarily experience different outcomes.  The only way to get similar outcomes for different people is to treat them differently.  Lastly, redistributive schemes presume that we possess knowledge that we, in fact, can never possess (see #5 )

9.  Nothing beats the free market.  

Hayek admitted that is we had more knowledge we could do a lot more to improve the world through planning and regulation.  But we don’t, and in the world of dispersed knowledge we live in much of the knowledge we actually do possess is due to the workings of the market mechanism.  In a world that is filled with unpredictability, where the man on the spot has only his own small but of local (and sometimes tacit) knowledge, market signals provide information on which he can base this decisions.  His decisions, together with those of millions of others, feed into the system to form the prices that emerge.  Bad decisions and mistakes are constantly made, but in a market system, errors made by some are opportunities for others, and the latter’s profit-seeking actions help to correct them.  The self-regulating market system, when it is functioning well, reduces some of the unpredictability that we all face in the economic arena and helps to coordinate our actions with those of millions of others.  It also allows individuals to act on their own local knowledge and thereby allows others to make use of that knowledge even theough they do not possess the knowledge themselves.

10.  As a rule of thumb, government cures are not only worse than the disease, but lead to further disease.

When you consider that bureaucrats have an incentive to maximize bureaucracy, that politicians who seek re-election – and which ones don’t? – have an incentive to increase spending and decrease taxes, and that corporations have an incentive to squeeze out the competition through government conferred advantages, you’ll conclude that the free market remains our best options (see #9).

Hayek wrote “The Road to Serfdom” in 1944, and he stated then:

We cannot blame our young men when they prefer the safe, salaried position to the risk of enterprise after they have heard from their earliest youth the former described as the superior, more unselfish and disinterested occupation.  The younger generation of today has grown up in a world in which, in school and press, the spirit of commercial enterprise has been represented as disreputable and the making of profit as immoral, where to employ 100 people is repreented as exploitation but to command the same number of honorable.

Fast forward to the ’60’s, when the coddled, tuned-out hippie “anti-Establishment” generation ruled and you’ll see the leaders in our government today.  Not surprising when they give support to movements like Occupy Wall Street and eschew total anti-market anti-business policies by governments at all level.

If our leaders followed the above 10 Hayekien principles above, our country and the free world would likely not be in the mess we are in now.  Let’s hope that we can get back on the path soon before the central planners in DC bring down total economic doom.

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