Saturday, April 29, 2017

Friedrich Hayek's price theory

Freidrich Hayek (1899-1992) is an influential economist best known for his theory of prices and support for libertarianism. Hayek is also a supporter of the Austrian School of economics. Economist, Bradford Delong says,
The basic problem is that there are three Hayeks: 
the (absolutely brilliant) price-system-as-information-aggregator Hayek.
the (absolutely bonkers) business-cycle 'liquidationist' Hayek.
the (absolutely wrong ) social-democracy-is-evil Hayek.
The first was a genius. The second was a moron--his could never make his arguments cohere either conceptually or empirically, but he kept doubling down on them and wound up in infinite reputational bankruptcy. The third was wrong--I would say blinded ex ante by ideology, others would say proved wrong ex post by events. The problem is that the modern-day Hayekians are by-and-large uninterested in the good Hayek (1), and interested only in the bad Hayeks (2) and (3)...
This post is a collection of quotes from Hayek regarding his main contributions to economics.

Philosophy of economics

"I must confess that if I had been consulted whether to establish a Nobel Prize in economics, I should have decidedly advised against it... The Nobel Prize confers on an individual an authority which in economics no man ought to possess." (Nobel Banquet Speech, 1974)

"This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence." (Nobel Banquet Speech, 1974)

Price Theory

"The misconception that costs determined prices prevented economists for a long time from recognizing that it was prices which operated as the indispensable signals telling producers what costs it was worth expending on the production of the various commodities and services, and not the other way around.  It was the costs which they had expended which determined the prices of things produced... It was this crucial insight which finally broke through and established itself about a hundred years ago through the so-called marginal revolution in economics." (Coping with Ignorance, 1978)

"I don't know what monetarism is... If it means the particular version of Milton Friedman, I think it has because he imagines that he can achieve - ascertain - a clear quantity relationship between a measurable quantity of money and the price level. I don't think that is possible." (Interview with F. A. Hayek, 1983)

Support for microeconomics

"What has done much damage to microeconomics is striving for a pseudo-exactness by imitating methods of the physical sciences which have to deal with what are fundamentally much more simple phenomena." (Coping with Ignorance, 1978)

"I believe it is only microeconomics which enables us to understand the crucial functions of the market process: that it enables us to make effective use of information about thousands of facts of which nobody can have full knowledge." (Coping with Ignorance, 1978)

Critique of socialism

"The more the state 'plans' the more difficult planning becomes for the individual." (The Road to Serfdom, 1944)

"There mere idea that the planning authority could ever possess a complete inventory of the amounts and qualities of all the different materials and instruments of production of which the manager of a particular plant will know or be able to find out makes the whole proposal a somewhat comic fiction. Once this is recognized it becomes obvious that what prices ought to be can never be determined without relying on competitive markets." (Two Pages of Fiction, 1982)

Critique of democracy

"A limited democracy might indeed be the best protector of individual liberty and be better than any other form of limited government, but an unlimited democracy is probably worse than any other form of unlimited government, because its government loses the power even to do what it thinks right if any group on which its majority depends thinks otherwise." (Letter to the Times, 1978)

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