Wealth

Part 16 - Hayek

https://www.youtube.com/watch?v=SHsCkinrCPE 

Friedrich August von Hayek (1899 - 1992), an economist with a 1921 doctoral degree from the University of Vienna, Austria, was interested in the causes of booms and recessions (trade cycles). He later studied price co-ordination in modern microeconomics at the London School of Economics and, in 1931, he claimed that not allowing money to be regulated by the market process caused economic instability. 

 By 1932, the USA and Britain had abandoned the gold standard where the value of currency was fixed to the price of gold, but many governments tried to maintain fixed currency exchange (pegged) rates until late in the 20th century. 

 Most major economies now use floating exchange rates that are determined by the market demand for each currency. 

He disagreed with John Maynard Keynes's theory that recessions could be cured simply by greater government spending and proposed that business cycles were caused by a central bank's inflationary credit expansion. (An increase in the money supply greater than the growth in the economy generally causes inflation).

In 1944, he published The Road to Serfdom warning that any attempt to centrally plan an economy or to protect citizens from economic change, would reduce free choices leading to serfdom. He pointed out that, contrary to socialists' sincere promises of greater freedom, most research found the consequences of socialism produced similar conditions to those under communism and fascism.

In 1945, he argued that a central bank, as a monopolistic agency, could neither obtain the information necessary to govern the supply of money, nor be able to use such information correctly. He insisted that no planner, in a centrally planned economy, would ever have enough information to efficiently distribute resources. A free market was the only way distribute resources efficiently as the price mechanism automatically matched supply and demand.

In 1937, Hayek reasoned that, in the real world, individuals had only different bits of knowledge, some of which were wrong, and it was impossible that any socialist manager could adjust prices when gluts or shortages appeared. In 1945, he argued that the price mechanism synchronized local and personal knowledge, permitting rapid adaptation to changes in circumstances. 

 The principle of spontaneous self-organization in economics led to his 1974 Nobel Prize.

He moved to the University of Chicago in 1950 where he wrote Law, Legislation, and Liberty. Hayek believed that a good society must use a combination of law and legislation, describing law as a set of rules that emerged unplanned from the interactions of ordinary people and legislation as a set of regulations designed and imposed by governments.

He argued that 'social justice' was an meaningless phrase and there was no point in calling the outcome of the market just or unjust. Translations of his books, in underground and black market editions, greatly influenced intellectuals in the Communist Soviet Union arguably assisting in the collapse of the Soviet Union.

Hayek argued that a good society should have a comprehensive system of social insurance to guarantee people some minimum of food, shelter and clothing, sufficient to preserve health.

He had a key role in inspiring the fields of growth theory, information economics and the theory of spontaneous order. Milton Friedman's popular book, 'Free to Choose' (1980) was explicitly Hayekian in its account of the price system as a way of co-ordinating knowledge. 

In 1988, Hayek attributed the beginning of civilization to private property and explained that price signals were the only way for economic decision makers to communicate in order to solve the economic calculation problem. Hayek considered the free price system as a spontaneous way of exchanging good and services. It had evolved in the same way that languages were created. 

 This idea influenced ecosystem research into complex networks of information with species replacing prices as the visible element.

Government interventions in the free market are usually well-meant but typically cause more problems. For one example. After Super-storm Sandy in November 2012, the mayor of New York, Andrew Cuomo, promised everyone 10 gallons of free gasoline. This immediately caused 4 hour lineups at gasoline stations and left emergency vehicles without fuel. Wage and price controls have also created more problems than they solved.