Hayek: The Road to Stockholm

...One probably does not—it is enough, to understand that some arose more spontaneously than others...

...The turn is a pessimistic one...

...Prosperity fueled by cheap money tends to enlarge the economy's capital stock unduly, causing an inevitable cyclical downturn...

...Acting on their own, armed with knowledge (mundane, certainly, but no less important for that) available only to them, free men direct society unconsciously...

...Fittingly, therefore, he begins with the tenet of human ignorance —ignorance, that is, at the top...

...Hayek and Myrdal, it has implicitly acknowledged that the important questions about man and his government remain unsettled...

...It was only through a re-examination of the age-old concept of freedom under the law, the basic assumption of traditional liberalism, and of the philosophy of the law which this raises, that I have reached what seems to me to be a tolerably clear picture of the spontaneous order of which liberal economists have so long been talking...

...The problem with this argument, so prevalent in Hayek's writing, is practical...

...His defense of what the past has wrought is not the defense of prescription, however...

...Hayek, declaring that "all major crises have been caused by inflation," spoke of the dangers of government intervention and warned that permanent remedies would require "some substantial unemployment...

...Hayek has steadily advanced this understanding...

...Chief among these, of course, was Keynes and his General Theory...

...Myrdal, speaking to reporters in New York, called for gasoline rationing and a return to wage-price controls—"a aptly ernment program with teeth," as he aptly described it...

...The choice does little to quiet the heresy that economists despise consensus...

...Together with Ludwig von Mises, he has shown us anew the genius of markets...

...The Royal Swedish Academy of Sciences, in October, conferred the 1974 Nobel Prize in economics jointly upon Gunnar Myrdal and Friedrich A. Hayek...

...A second distinction is that between the purpose-free law of liberty, laws that apply universally, with no aim but to serve justice, and the purposeful rules of legislators—those that direct people and institutions toward -fixed social goals...

...In effect what the Royal Swedish Academy has done is to bestow its high honor upon a scholar who has spent the better part of his life arguing against the very collectivist trends toward which the academy is thought to be in sympathy," the paper said of Hayek...

...Money, in the borrower's judgment, is relatively cheap...

...Quoting Schumpeter, Hayek writes, "the economic life of a non-socialist society consists of millions of relations or flows between individual firms and households...

...If the two can be said to share anything—apart from prize money totalling $123,000—it is a love for scholarship, boundless energy, and learning that spans the social sciences...

...What of antitrust law and corporate regulation, for example...

...But the importance of money is not that it affects the overall level of prices, Hayek said...

...True, Hayek was skeptical then, as now, of government economic interventionism...

...Hayek, Finer charged, had mounted "the most sinister offensive against democracy to emerge from a democratic country for many decades...

...the structure of production becomes distorted and ultimately the boom collapses...

...The second is the "natural rate," which—to quote Hayek—is that rate "at which the demand for loan capital just equals the supply of savings...

...Alvin H. Hansen and Herbert Tout charged in 1933 that his analysis was too narrowly drawn...

...And if legislatures enacted all law, then they may alter any law...

...After a fashion, man has provided this flexibility for himself...

...It is unlikely that Hayek, decorous yet firm at seventy-six, would agree with the Journal's conclusion...

...Our troubles are not those of "capitalism," he said, but rather of faulty fiscal and monetary management...

...Profits, Interest and Investment (1939...

...For the so-called events of legal history are in truth acts of definite men, or even of a definite man.' " How, then, does one attest to the virgin birth of institutions...

...All institutions of freedom are adaptions to this fundamental fact of ignorance, adapted to deal with chances and probabilities, not certainty...

...It had been by no means evident before then—at least, not to readers of their economic tracts—what politics the two men might secretly have harbored...

...Nor is it the apotheosis of a simpler day...

...Hayek as Economist As graduate students, both Hayek and Myrdal shared the guiding influence of Knut Wicksell (1851-1926), a Swedish economist who saw in the divergence of interest rates an important cause of the business cycle...

...The publication, in 1944, of An American Dilemma and The Road to Serfdom undid what political mysteries lurked in the two men's thought...

...Liberty is a practical virtue...

...Not that he has set out to design free markets, for example, or the natural law that pre-dates legislatures...

...In Constitution of Liberty, Hayek described the "traditional doctrine of liberal constitutionalism...

...Rules and Order, nonetheless, rests on distinctions that traditionalists have long defended: first, between a "grown" order, that which man has evolved despite kings and committees, and an organization, which he has created with specific ends in view (the difference, for example, between markets and the Federal Trade Commission...

...Inflation mounts, as "created" purchasing power courses through the economy...

...With this essay, he has written, "I was led into all kinds of questions usually regarded as philosophical...

...that to succumb to coercion's short-term stability is to mortgage the adaptive powers of freedom...

...Road to Reaction symbolizes the frenzied resistance that such ideas must surmount...

...Now, should we let spontaneity run its course—if the exchange has indeed evolved spontaneously—or outlaw tradition in the name of free-market theory...

...In Hayek's eyes, no question ever yielded more readily to analysis, nor suffered more acutelybefore sophistry...

...Economics, a science less dismal than disputatious, was honored last year in a manner uniquely suited to the times...

...Myrdal, however, was critical of both Hayek and Keynes for not taking proper account of risk and the anticipation of change in business...

...Money complicates matters...

...In fact, Hayek went on to say, there are two rates of interest...

...In Constitution of Liberty, Hayek wrote in identical terms of the law—the set of generalized rules of conduct that "tend to develop from unconscious habits into explicit and articulated statements and at the same time to become more practical and general...

...It is to the credit of the academy that, in honoring Drs...

...But for now, Hayek writes of the just application of reason to human affairs...

...Hayek traces his break from technical economics to an essay he wrote in 1936, titled "Economics and Knowledge...

...What we have inherited—markets, law, and morals, for example—clears the way for still more progress and, perhaps someday, utopia...

...It was these distinctions that W.E.H...

...In noting the economists' contradictory views, the Wall Street Journal praised the judges' liberality...

...Hayek edited, in 1933, a German translation of an early Myrdal study on monetary theory, "Monetary Equilibrium...

...Liberty is essential in order to leave room for the [unexpected]," he wrote in The Constitution of Liberty...

...Rather, he has evolved them...

...If it had been deliberately designed," he continued, "it would deserve to rank among the greatest human inventions...

...The distinction between that which man has evolved spontaneously—for no purpose except general usefulness—and that which he has fashioned outright, to serve a concrete social goal, is crucial, Hayek writes...

...Writing last November in the New York Times, Hayek warned that inflation presents a graver threat than unemployment...

...was] later described by Adam Fergusonas 'the result of human action but not of human design.' " Rules and Order draws heavily on Hayek's thirty-five years of philosophical work...

...Hayek focuses his "tolerably clear picture" of a free society more sharply in his latest book, Rules and Order (1973...

...Tradition, history, and custom grew suspect under their sway: "Morals, religion and law, language and writing, money and the market, were thought of as being deliberately constructed by somebody, or at least owing whatever perfection they possessed to such design," Hayek writes...

...Yet these uncoordinated actions are the lifeblood of progress...

...Constitutions, the Enlightenment's attempt to secure liberty through limited government, have failed, he asserts...

...Businessmen build more factories, buy more equipment, than society can immediately employ...

...Whatever the critical preoccupations of the 1930s, it is clear that Hayek's ideas rose upward from his forebears' foundation...

...There arises a problem of definition...

...A now-standard study by Milton Friedman and Anna Schwartz (Monetary History of the United States) shows that, on the contrary, the Federal Reserve actually aided in contracting the United States' money stock—by a third between 1929 and 1933—and that the contraction was disastrous...

...But what of the New York Stock Exchange, which for nearly two hundred-years has required itsmembers to fix brokerage commissions...

...How do we know spontaneity when we see it...

...Not until the eighteenth century did thinkers like Bernard Mandeville and David Hume make it clear that there existed a category of phenomena which...

...One is the money rate, which depends on the amount of money bankers have to lend, on the one hand, and the demand for loans, on the other...

...New research, not surprisingly, has overtaken some of Hayek's work...

...A strong critical reaction followed that, at first, but served to underline its success, and then the profession turned away to other leaders and interests...

...Joseph A. Schumpeter, writing ten years later, was more favorable...

...Monetary Theory and the Trade Cycle...

...If indignant reformers still complain of the chaos of economic affairs, insinuating a complete absence of order, this is partly because they cannot conceive of an order which is not deliberately made, and partly because to them an order means something aiming at concrete purposes which is, as we shall see, what a spontaneous order cannot do...

...Bank lending, Wicksell believed, distorts the equality between savings and investment that would naturally prevail in a barter economy...

...Ever scrupulous to acknowledge an intellectual debt, Hayek wrote that the Wicksell-Mises theory of interest-rate divergence already offered "the most important elements" of an explanation of the trade cycle...

...For if someone "made" markets, then someone must govern them...

...In short, we have distorted the structure of production...

...Thus, by 1960, the year his massive Constitution of Liberty was published, he could write, "Though I still regard myself as a technical economist, I have come to feel more and more that the answers to many of the pressing social questions of our time are to be found ultimately in the recognition of principles that lie beyond the scope of technical economics or of any single discipline...

...And yet, wrote Schumpeter, "the much greater success of Keynes's General Theory is not comparable because, whatever its merit as a piece of analysis may be, there cannot be any doubt that it owed its victorious career primarily to the fact that itsargument implemented some of the strongest political preferences of a large number of economists...

...Each toiled during the Great Depression on questions of money, interest rates, and the business cycle, and though they worked independently their paths often crossed...

...To be sure, both men are accomplished technicians...

...A "true rationalism," Hayek writes, takes account of what man makes almost in spite of himself, while a "naive rationalism" ignores all but man's conscious achievements...

...With it, the rate of interest—the measure of the usefulness of capital—is not determined strictly by the demand for investment and the supply of savings...

...But it has, of course, been as little invented by any one mind as language or money or most of the practices and conventions on which social life rests...

...that "reason" will not always get us where we want to go...

...Hayek, incidentally, has dismissed his Road to Serfdom, a popular treatment of the dangers of centralized economic planning, as no more than an "incidental byproduct" of this long-range plan of study...

...In Monetary Theory and the Trade Cycle, for example, he charged that American monetary authorities had sought repeatedly to cure the depression by a policy of credit expansion—"with the result that [it] has lasted longer and has become more severe than any preceding one...

...Surely, even the common law was no "mere anonymous tradition," Edward S. Corwin wrote...

...Planning will not work, because no man, no group of men, can grasp the intricacies of economic life...

...and The Pure Theory of Capital—was spirited, though not uniformly enthusiastic...

...It was Hayek's view, of course, that economic planning of any stripe invests government with powers that unfailingly smother liberty...

...Like other members of the "Austrian" school, notably Ludwig von Mises, Hayek emphasized the influence of money on ratios of exchange...

...Notwithstanding, the book was an immediate cause cMbre, inspiring one Herman Finer to concoct a rebuttal titled Road to Reaction (1945...

...What we have done is to represent on a colossal scale what in the past produced the recurring cycles of booms and depressions...

...If bankers allow the money rate to dip below what businessmen perceive as the return on capital, loan demand will rise...

...Granted that the market, in its broadest sense, was evolved and not decreed...

...Note that the money rate and the natural rate need not be equal...

...Hayek, visiting professor this year at the University of Salzburg in his native Austria, is one of the free market's principal champions...

...It is the balance among relative prices that demi-- mines the productive mix of capital and labor...

...The complexity of society and the blurring pace of change demand flexibility...

...They think of the phenomena of legal development as events, as if men were not acting in the bringing about of every one of them...

...Hayek believes in markets because he believes in human ignorance, the hopeless diffusion of economic knowledge among individuals...

...By the end of the 1930s, Hayek and Myrdal had begun to turn away from pure economics to broader social questions, and there they parted ways...

...We can establish certain theorems about them, but we can never observe them all...

...Rarely has a Nobel Prize been better deserved...

...Lecky had in mind, perhaps, when he described the salient error of conservatism as stupidity and that of liberalism as folly...

...On being presented to the Anglo-American community of economists, [Hayek's ideas] met with a sweeping success that has never been equalled by any strictly theoretical book that failed to make amends for its rigors by including plans or policy recommendations or to make contact in other ways with its readers' loves or hates...

...But if a villain was to be found in the dusty pages of his Monetary Theory and the Trade Cycle (1933), it was the ogre of an inflationary banking system...

...The "spirit of the gentleman and of religion," the cornerstone of a traditionalist society, is nowhere present here...

...His faith, a faith in facts, admits little doubt, and certainly none on the subject of man, his government and the economy...

...The mischief of naive rationalism, the hubris of reason, Hayek lays principally to two seventeenth-century philosophers, Rent Descartes and Thomas Hobbes...

...Contemporary criticism of Hayek's major theoretical work—Prices and Production (1931...

...The essay, weightier than its 184 pages might suggest, both reunites familiar Hayekian themes (the rule of law, the wonder of the market) and marks a turn in the author's thinking...

...In the United States Myrdal's fame rests less on economic theory than upon his landmark study of race, An American Dilemma: The Negro Problem and Modern Democracy (1944...

...Hayek as Philosopher As Hayek grew older, he became less preoccupied with the pure theory of economics...

...Hayek, they said, appeared to believe that if money were held neutral, "the disturbances which continually arise from the side of real phenomena"—errors in business judgment, for example—might somehow be overcome...

...With certain nineteenth-century historians of the law in mind," he continued, "Dean Pound voices the legitimate complaint that they will not 'hear of an element of creative activity of men as lawmakers, judges, writers of books, or legislators...

...So, too, with Hayek: one thinks of him first as a philosopher rather than an economist, the author of The Constitution of Liberty (1960) and The Road to Serfdom (1944) instead of The Pure Theory of Capital (1941...

...Rarely have two men agreed on less...

...But at no time have their differences come more vividly to light than in the interviews that followed the Academy's Nobel selections in October...

...Road to Serfdom stands as one of the mosteloquent statements of libertarian principle ever written...

...Six years later, in an English edition of the same essay, Myrdal praised Hayek's analysis of production, saying that in its treatment of "roundabout" or capital-intensive processes of production, Hayek's work outshone that of another rising theorist, John Maynard Keynes...

...He has charted the shoals of planning and bid us sail to freedom's deeper waters...

...Politically, Hayek swam against the stream...

...in the third volume of a scheduled trilogy (of which Rules and Order is the first—and so far the only—installment), he aims to propose some "institutional invention" to salvage matters...

...I am convinced," he wrote of the price system in Individualism and the Economic Order (1948), "that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been proclaimed as one of the greatest triumphs of the human mind...

...to allow a long inflationary boom to bring about a misdirection of labor and other resources into employments that can be maintained only so long as inflation exceeds expectations...

...The rate of interest, in other words, is artificially low, and it stimulates investment that the supply of savings alone, uninflated by bank credit, could not support...

...Nor should we try to direct them, he argues...

...Myrdal, one of the architects of the Swedish Labor Party's welfare state, is an avowed socialist...