Since early this year, when I first set out to study and explain a sampling of famous and infamous economic writings, I had an idea of where I wanted the discourse to go. Our first two overviews, on Smith’s The Wealth of Nations and Marx’s Das Kapital, cover the intellectual godfathers of both capitalism and communism. Our recent piece covers J.M. Keynes’ General Theory, which provides us with some of the most recognizable concepts in economics.
Now we come to Friedrich Hayek, a contemporary and correspondent of Keynes who disagreed with the eminent Englishman about several important points. Many of these disagreements were a matter of perspective and personality; Keynes’ central treatises were composed in the 1930s, at the same time as he advising British policymakers on how to alleviate the effects of the Great Depression. Because of this, his ideas were developed largely on the fly. By contrast, Hayek never held significant policy responsibilities, and his economic models tended toward greater abstraction than the precise formulations of Keynes.
Hayek also spent most of his career in foreign lands. Austrian by birth and German by language, he spent his working years in Britain and the United States. His economic training was far different from Keynes’: his works suggest a deep knowledge of continental Europe’s economic canon, one with which Keynes was hardly familiar. The different starting points of their intellectual journeys partly explained how they came to such different conclusions while observing the same economic phenomena. Note: Keynes vs. Hayek by Nicholas Wappshot is a fantastic overview of the history and substance of the Keynes-Hayek discourse.
To the Chicago school of libertarian-minded economics (such as Milton Friedman), Hayek was Prometheus, bequeathing the precious flame of pro-market theory that could challenge the Keynesian consensus of the 20th century. But to academics, politicians, and “elites” of all political stripes, Hayek is a dangerous Mephistopheles, whose promise of a system that “works” must amount to nothing as it is hardly a system at all—and thus offers nothing of practical value to ambitious or meddling policymakers.
When I was in college, one of my friends showed me a rap battle on YouTube between Keynes and Hayek (obviously not the real people, of course). Through verse after verse of economics-themed lyrics, it seemed obvious to me that Hayek (who I had never heard of before) was getting the better of Keynes, of whom we had all heard. Yet at the end of the boxing match-themed showdown, a referee takes Keynes’ arm and raises it, declaring him to be the winner. As my friend explained, that this seemed incongruous was precisely the point—Hayek had won the war on ideas, but lost the war in the popular mind. Today, even casual students of economics know Keynes, but few have heard of Hayek. It is worth asking ourselves whether Hayek lost the popular debate because of the complexity and unfamiliarity of his ideas, or because the progressive intellectuals and politicians of the 20th century, with ambition to govern and arrogance to pronounce themselves worthy, could not abide the widespread promotion of so rigorous a theoretical challenge to their enlightened despotism.
The Real Economic Debate
My inspiration for this series in the first place was the following epiphany: The intellectual divide between Keynesian and Hayekian economics is even more relevant today than the more basic divide between “communism” and “capitalism”. Allow me to explain what I mean. It will be a long preamble, but as we are about to study Hayek, we would do well to get familiar with precise and convoluted logical structures.
In the strictest senses of the words, communism and capitalism are mere theories that have not been seriously attempted by any society in history. The closest approximations to communism (the USSR, Maoist China, etc.) failed to achieve “true” communism—society did not become more equal, and government did not become redundant. These approximations failed miserably because Marx’s idea of communism was wildly naïve about human nature: once a small set of the proletariat (in practice, usually a set of bourgeois intellectual malcontents) gained political power through revolution, it was foolish to assume they would so promptly relinquish that power for the common good. Instead, they abused it to create systems of oppression that bled their nations white. The economic freedom communism brought was spurious: the political disenfranchisement it brought was unequivocal.
Nor is pure free-market capitalism any more than theory—and it is likely to remain merely theoretical. Nations like the United States can get a bit more gung-ho about free markets than is appropriate—we can easily forget that American industrial power was founded, in part, on high tariffs and theft of intellectual property from Britain. It was only in the 20th century, at the peak of America’s economic dominance, that she emerged as a strong advocate for free trade—just as Britain had been at the peak of her industrial power. Even today, America subsidizes farmers, “renewable” energy, and a whole lot more. In my view, two of three conditions must hold for true free-market conditions to exist:
- No political entity may have any economic relationships with parties outside of that entity. This is either accomplished by forcing existing nations to autarky (no trade), or by organizing the world into a single state.
- Alternatively, trade between nations may occur, but only if carried out with no political interference of any kind from any nation—essentially each nation must abdicate entirely its notion of economic sovereignty.
- No economic group (labor unions, corporations, industries, etc.) within any state may have any political power to impose their will on economic matters in any way.
In modern liberal democracies, these conditions are virtually impossible to hold, thus true laissez-faire economics is at present impractical. That said, the history of the past three centuries would unequivocally show that the approximations to capitalism has so far held more benefits for human flourishing than the approximations to communism—any debate on this matter can hardly be considered intellectually serious. Therefore we lay aside such disputes and strike at the heart of the matter.
Defining Socialism and the Scope of the Debate
One distinction of communism is that the original theory behind it was highly concerned with the distribution of value—as Marx framed it, the gains of employers at the expense of the employed. Logically flawed though Marx’s ideas were, they tend to strike a chord with human nature’s discomfort with perceived injustice and eagerness to blame others. Because these are emotional responses, the debate on Marxism inevitably becomes an emotional one, and often a contentious one.
The debate on socialism as Hayek defined it, however, need not be so. Hayek’s definition of socialism is not distributive, but organizational: he uses the term broadly to refer to government management of economies, regardless of whether the policy objective of such management is related to any concept of “distributive justice”. When Hayek criticizes socialism, he does not do so because he considers economic inequality to be desirable, but because he insists that any centrally planned economic factors are thumbs on the scale, ultimately distorting and poisoning the precarious and miraculous balance of individual interests that makes all markets function. It’s not that Hayek cares which side of the scale the thumb is touching—he calls for a thumbs-free scale entirely.
This, then, frames the debate between Keynes and Hayek. Keynes is supportive (or at least has since been interpreted as supportive) of the principle that governments ought to intervene occasionally (or frequently) to stimulate or even direct the economy. Hayek firmly rejects such a principle.
The Evolution of Hayek, and Plans for this Project
In our study of Hayek, we will simply be taking a sample from his many works. Outliving Keynes by several decades, Hayek wrote prolifically. His early works in the 1920s and 1930s focus heavily on theoretical questions in economics. His later works, from World War II on, are fused with a passionate assault on central economic planning, which he saw as bringing ruin to Nazi Germany and Bolshevik Russia alike. Unlike Keynes, whose evolution generally saw his ideas change over time, Hayek’s work is highly consistent with itself. We will cover the following:
- Monetary Theories and the Trade Cycle (1933): Hayek’s effort to explain why economic cycles are dependent on changes in money and credit supply.
- The “Paradox” of Saving (1929-1931): A refutation of another economic paper, “The Dilemma of Thrift”, in which Hayek claims that saving poses a critical societal purpose only when it is organic or not “forced”.
- Prices and Production (1931-1935): Given in lectures at the London School of Economics, where Hayek gives a comprehensive summary of his economic theory of “stages of production”, and explains its implications.
- The Road to Serfdom (1944): One of his most famous works, it marks the springboard from which Hayek’s economic thinking is molded into political theory; Hayek stridently warns against centrally-planned economies in this piece.
We’ll begin with these in our next post.