May 8, 2012 – In a new column for the National Post, MLI’s Brian Lee Crowley commemorates Nobel Prize-winning economist and philosopher F.A. Hayek 20 years after his death. The column is based on The Man Who Changed Everyone’s Life: The Ubiquitous Ideas of F.A. Hayek, a Commentary released today by the Macdonald-Laurier Institute.
By Brian Lee Crowley, National Post, May 8, 2012
This year marks the 20th anniversary of the death of Friedrich August Hayek, the Viennese-born Nobel Prize-winning economist and philosopher, who led the intellectual equivalent of the D-Day charge against central planning in the postwar era. His lessons are worth remembering in 2012, especially now that left-wing politicians in France, Greece and elsewhere seem intent on forgetting them.
Hayek’s great adversary was John Maynard Keynes, whose faith in the ability of government economic planners to “correct” the operation of markets inspired generations of disciples in government and academe. In the long run, Hayek got the better of the argument with Keynes. Indeed, his ideas contributed to the fall of the Berlin Wall, and continue to influence economic thought to this day.
Hayek and Keynes were punctilious professional colleagues and scholarly rivals. Yet for all the correctness that characterized their relations — Hayek was, for example, Keynes’s guest when the London School of Economics fled the Nazi bombings to the relative safety of Cambridge — the Austrian could not shake a profound distrust of Keynes.A brilliant economist, captivating teacher, witty conversationalist and bon vivant, Keynes seemed to almost everyone who knew him a Renaissance man and one of his country’s most powerful minds. Hayek found Keynes glib and superficial, but it was Keynes’ intellectual dilettantism that most appalled him. When Keynes wrote A Treatise on Money in 1930, Hayek spent a year carefully analyzing it, and then wrote a devastating review. At their next meeting, Hayek was outraged when Keynes airily said that he now agreed with Hayek, having long since changed his mind. Hayek always regretted that this incident led him to neglect replying to Keynes’ next book. By the time Hayek was alive to the danger, it was too late.
Keynes’ 1936 General Theory of Employment, Interest and Money became the bible of a whole new generation of economists. The Keynesians, as they came to be known, shared Keynes’ own unshakable belief in the ability of clever people, like himself, to smooth out capitalism’s cycles of boom and bust by manipulating the level of demand in a nation’s economy — through, for example, inflationary monetary expansion and public-works programs. Such vigorous actions appealed to a world already in the grips of a devastating depression — far more than the “do-nothing” non-interventionist economics of the likes of Hayek, who counselled letting the economy’s self-corrective mechanisms do their work. To those concerned about the inflationary consequences of his policies, Keynes asserted that inflation was the hallmark of rising civilizations.
Hayek already had showed how the consistent pursuit of Keynesian policies would, in the long run, produce simultaneous inflation, economic stagnation and unemployment. That long run was reached in the 1970s, when economists had to coin a new word, stagflation, to describe a condition Keynesians always had dismissed as impossible.
Keynesian ideas nevertheless became policy in Europe and the United States in postwar efforts to transform wartime planning into peacetime social engineering. Intellectuals believed that mastery of our social and economic life lay in their grasp. Deeply troubled, Hayek set out to expose such rational-sounding claims as a form of bait and switch.
In his 1944 classic, The Road to Serfdom, Hayek warned of the dangers inherent in “national planning.” Although the book temporarily ruined his reputation within academic circles, it earned him popular acclaim.
Ironically, Keynes liked the book, saying: “Morally and philosophically, I find myself in agreement with virtually the whole of it.” However, he told Hayek that while the dangers described in The Road to Serfdom were well-founded, as long as intelligent and well-meaning people (like themselves) were in charge, they could easily prevent things from getting out of hand. Yet part of Hayek’s argument was precisely that even good people would be corrupted or forced aside by the coercion that is necessary to give central planning even a semblance of success. A few years later, virtually every European country had a ministry of planning, and a British Tory prime minister could proclaim without fear of contradiction, “We’re all Keynesians now.”
Hayek’s misgivings about both Keynesian-style demand management and overall social planning, as well as his condemnation of the twin scourges of fascism and communism, stemmed from the central understanding that had caused him to abandon his early socialist convictions: The limits to human knowledge and wisdom.
Hayek’s main point is that all human knowledge, and especially the knowledge available to social planners, is irremediably fragmentary and incomplete. To be successful, planners need what their plans destroy: The signposts offered by freely formed prices reflecting the true state of supply and demand. Only a decentralized system — in which people are free to make the most of opportunities, often known only to themselves, and in which people voluntarily agree to exchange their goods, services and ideas with one another, and in which new information is constantly being discovered and integrated — can achieve the needed co-ordination of all human activity.
To this knowledge-based critique of central planning, Hayek added another element: What we would call today the problem of the irreducible pluralism of values.
Postwar planners envisioned an almost universal consensus on society’s peacetime objectives. Hayek saw that people would not submerge their own dreams and aspirations in the tidy plans of well-meaning bureaucrats. Hayek’s concept of the “abstract order” doesn’t require different individuals to agree on common goals, but rather on basic practical rules governing each person’s behaviour as they pursue their private goals.
Behind the Iron Curtain, Hayek’s ideas, while illegal to publish, were widely influential among opposition intellectuals. He added to his importance in the East by stating clearly how societies based on freely grown institutions manage to have individual freedom and social order coexist, all within a context of prosperity. Samizdat versions of Hayek’s works circulated widely, including readings on cassette tapes.
When the Berlin Wall fell, many members of the opposition who rushed to fill the power vacuum had been indirect “students” of Hayek’s, especially in those countries that were quickest and most vigorous in moving to a market economy and liberal democracy: Poland, Hungary and Czechoslovakia.
The thanks Hayek received were, at first, cruel and dispiriting. But he ended his life a Nobel laureate, Companion of Honour and intellectual godfather of policies that have transformed Western politics and helped to hasten the collapse of communism.
Perhaps — just perhaps — there is something to this business about things working themselves out in the long run after all.
Brian Lee Crowley is the managing director of the Macdonald-Laurier Institute, an independent, non-partisan public policy think-tank in Ottawa. He is the author of The Man Who Changed Everyone’s Life: The ubiquitous ideas of F.A. Hayek, available at macdonaldlaurier.ca.