Wednesday, January 21, 2009

Two lectures by Hayek on government and economics

First, “Free-Market Monetary System” regarding private money.

When a little over two years ago, at the second Lausanne Conference of this group, I threw out, almost as a sort of bitter joke, that there was no hope of ever again having decent money, unless we took from government the monopoly of issuing money and handed it over to private industry, I took it only half seriously. But the suggestion proved extraordinarily fertile. Following it up I discovered that I had opened a possibility which in two thousand years no single economist had ever studied. There were quite a number of people who have since taken it up and we have devoted a great deal of study and analysis to this possibility.

As a result I am more convinced than ever that if we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject. It is a business which competing enterprise can maintain only if it gives the public as good a money as anybody else. []

Second, “Pretense of Knowledge”, Hayek’s “shocking Nobel speech that explained why the very idea of government [intervening in market¹] in our times is unintellectual, presumptuous, and untenable. He is as critical of socialism as he is of interventionism. He shows that the state is not capable of doing all that it is charged with doing, and why conceding it any role in social and economic management is dangerous to liberty.”

In addition, he criticizes pseudo-scientific approach to economics resulting from erroneous assumption that economics is in essence no different from disciplines like physics.
On the one hand the still recent establishment of the Nobel Memorial Prize in Economic Science marks a significant step in the process by which, in the opinion of the general public, economics has been conceded some of the dignity and prestige of the physical sciences. On the other hand, the economists are at this moment called upon to say how to extricate the free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things².

It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error. It is an approach which has come to be described as the “scientistic” attitude — an attitude which, as I defined it some thirty years ago, “is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.” I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error. []

Both essays are now available in a small, pocket-book edition.

¹ Gotta love anarchists. Hayek may only talk about economics and social policy — they will turn it into a denial of state altogether.

² It’s amazing how these words said in 1974 might as well have been said yesterday. I suppose, “history teaches people that people learn nothing from history”.


shmulie said...

On the first lecture: On its own, the Federal Reserve remains one of few legitimate functions of government insofar as it ties monetary growth to economic growth.

When congress goes crazy with deficit spending and makes up for it by running the money mills around the clock, it is then that government control doesn't look so rosy. But absent the welfare state, controlled spending is not an impossibility. In the nineteenth century a good portion of the decades tallied a surplus.

According to Milton Friedman, and in this Hayek may disagree, the Fed also legitimately functions as a lender of last resort, to prevent a run on the banks. His breakthrough research proved that the depression was a banking failure, and thus to prevent a similar catastrophe the government could temporarily increase the money supply.

shmulie said...

Hayek's wise words can also be taken as a reprimand to anarchists:

Getting dogmatic about economics, especially extending its principles beyond their realm, is dangerous.

And finally, your second footnote:

For an even more astounding economic truth that has prevailed over a far longer time period, look no further than the great bible, Adam Smith's The Wealth of Nations. (1776, I think.)

Crawling Axe said...

Shmulie, see this article from Mises (you can skip through the introductory making fun of language etc.):

Rothbard is an anarchist, but what he is saying makes sense to me. He argues, pretty much, that banks being vulnerable to runs is a good thing, because it prevents them from unwarranted (or bichlal) expanding of credit. So, this keeps banks in line.

Also see this:

I am not much of an expert in economics, unfortunately, to be able to choose between the shittos — what the Austrians are saying makes sense to me, but I haven’t been presented to a strong argument the other way.

I think Austrian minirchists (libertarians who are not anarchists but believe in necessity of a minimal government) hold it that the only function of a government is safeguarding people’s rights. “That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed…”.

I still don’t know how to reconcile these views (which seem logical and most productive to me) with Yiddishkeit.

Crawling Axe said...

For an even more astounding economic truth that has prevailed over a far longer time period, look no further than the great bible, Adam Smith's The Wealth of Nations. (1776, I think.)

When people talk about the floodgates of Chassidus correlating with floodgates of, lehavdil, chochmas chitzoinius, they usually mention industrial revolution, breakthroughs in science, etc. But a breakthrough in economics is no less (and possibly more) astonishing. As one guy said, for millenia people were trying to figure out the best system of economics and maximization of wealth — and finally the British got it.

And the idea is so simple: freedom (with respect of mutual rights, of course). Do no harm.