We Are Not All Keynesians Now

Wednesday, September 29, 2010

He was born in the nineteenth century, he wrote his most influential book more than sixty-five years ago, and he’s not quite as well known or beloved as the alluring Mexican actress who shares his last name. Yet somehow, F. A. Hayek is on the rise.

When Glenn Beck recently explored Hayek’s classic, The Road to Serfdom, on his TV show, the book went to number one on Amazon and remains in the top ten. Hayek’s persona co-starred with his old sparring partner John Maynard Keynes in a rap video, Fear the Boom and Bust, that has been viewed over 1.4 million times on YouTube and subtitled in ten languages.

Why the sudden interest in the ideas of a Vienna-born, Nobel Prize–winning economist largely forgotten by mainstream economists?

Hayek is not the only dead economist to have garnered new attention. Most of the living ones lost credibility when the Great Recession ended the much-hyped Great Moderation. And fears of another Great Depression caused a natural look to the past. When Federal Reserve Chairman Ben Bernanke zealously expanded the Fed’s balance sheet, he was surely remembering Milton Friedman’s indictment of the Fed’s inaction in the 1930s. On the fiscal side, Keynes was also suddenly in vogue again. The stimulus package was passed with much talk of Keynesian multipliers and boosting aggregate demand.

But now that the stimulus has barely dented the unemployment rate, and with government spending and deficits soaring, it’s natural to turn to Hayek. He championed four important ideas worth thinking about in these troubled times.

We Are Not All Keynesians Now

First, he and fellow Austrian School economists such as Ludwig Von Mises argued that the economy is more complicated than the simple Keynesian story. Boosting aggregate demand by keeping schoolteachers employed will do little to help the construction workers and manufacturing workers who have borne the brunt of the current downturn. If those schoolteachers aren’t buying more houses, construction workers are still going to take a while to find work. Keynesians like to claim that even digging holes and filling them is better than doing nothing because it gets money into the economy. But the main effect can be to raise the wages of ditch diggers with limited effects outside that sector.

Second, Hayek highlighted the Fed’s role in the business cycle. Former Fed Chairman Alan Greenspan’s artificially low rates of 2002–4 played a crucial role in inflating the housing bubble and distorting other investment decisions. Current monetary policy postpones the adjustments needed to heal the housing market.

Hayek is known for arguing that the economy is more complicated than the simple Keynesian story.

Third, as Hayek contended in The Road to Serfdom, political freedom and economic freedom are inextricably intertwined. In a centrally planned economy, the state inevitably infringes on what we do, what we enjoy, and where we live. When the state has the final say on the economy, the political opposition needs the permission of the state to act, speak, and write. Economic control becomes political control.

Even when the state tries to steer only part of the economy in the name of the “public good,” the power of the state corrupts those who wield that power. Hayek pointed out that powerful bureaucracies don’t attract angels—they attract people who enjoy running the lives of others. They tend to take care of their friends before taking care of others. And they find increasing that power attractive. Crony capitalism shouldn’t be confused with the real thing.

The fourth timely idea of Hayek’s is that order can emerge not just from the top down but from the bottom up. The American people are suffering from top-down fatigue. President Obama has expanded federal control of health care. He’d like to do the same with the energy market. Through Fannie and Freddie, the government is running the mortgage market. It now also owns shares in flagship American companies. The president flouts the rule of law by extracting promises from BP rather than letting the courts do their job. By increasing the size of government, he has left fewer resources for the rest of us to direct through our own decisions.

Hayek understood that the opposite of top-down collectivism was not selfishness and egotism. A free, modern society is all about cooperation. We join with others to produce the goods and services we enjoy, all without top-down direction. The same is true in every sphere of activity that makes life meaningful—when we sing and when we dance, when we play and when we pray. Leaving us free to join with others as we see fit—in our work and in our play—is the road to true and lasting prosperity. Hayek gave us that map.

Hayek understood that the opposite of top-down collectivism was not selfishness and egotism. A free, modern society is all about cooperation.

Despite the caricatures of his critics, Hayek never said totalitarianism was the inevitable result of expanding government’s role in the economy. He simply warned us of the possibility and the costs of heading in that direction. We should heed his warning. I don’t know if we’re on the road to serfdom, but wherever we’re headed, Hayek would certainly counsel us to turn around.

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