The World’s Most (Un)popular Economist

“The curious task of economics is to demonstrate to men how little they really know about what they can imagine they can design.”

–F.A. Hayek

Over the last few weeks, a little-known Austrian economist named Friedrich von Hayek has received more press than he has in the last 65 years. Thanks to the promotion of Hayek’s “The Road to Serfdom” by political shock jock Glenn Beck, this 1944 bestseller briefly became the number-one best seller on Amazon.com. George Mason University professor Russ Roberts also has produced a rap video, “Fear the Boom and Bust,” that pits Hayek against arch rival John Maynard Keynes and has become a viral hit on YouTube. You almost can see the ghost of Friedrich Hayek smiling as failed Keynesian fiscal stimulus programs give way to government austerity programs across the globe.

Unlike most one-trick pony economists, Hayek was a polymath who wore many hats. Nor was Hayek as obscure as the mainstream economics profession has made him out to be. After all, he collected a Nobel Prize for Economics (actually, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) in only the sixth year of its existence in 1974. His name is more recognized than all but a few former winners. And Hayek’s “The Road to Serfdom” — by far his most popular book — was widely read and cited among British members of parliament during the Thatcher era.

Hayek the Economist

Plucked from the bush leagues of Austrian academia to fill a prestigious chair at the London School of Economics in the 1930s, Hayek initially was feted as the intellectual rival to John Maynard Keynes at Cambridge. Much like today, in the 1930s, the global economy was recovering from a credit-fueled depression. Keynes argued that increased government spending that boosts aggregate demand was a key to getting the economy back on track. Even building empty cities — as the Chinese have done recently — keeps the economy from grinding to a screeching halt.

Hayek argued that paying people to build pointless projects is simply wasteful. And throwing fuel on the fire by loosening monetary policy — as the Fed has done — simply kicks the can down the road and postpones the inevitably painful adjustments needed to heal the economy.

Hayek’s solution? Leave things to work themselves out and not print money in a vain attempt to fix what ails the economy. That was not a solution that won Hayek a lot of friends. After all, people want the government to “do something.” It is no surprise, then, that Hayek lost his debate with Keynes, and his professional star fell as suddenly as it rose. Truth be told, Hayek’s rivalry with Keynes was also a clash of personal styles. Keynes was flamboyant and cool, effortlessly brilliant. Hayek, in contrast, gave the impression of a nerdy, rambling ninny.

Hayek the Political Philosopher

Shunted aside by the mainstream academic profession, Hayek wrote “The Road to Serfdom” as a warning to post-war Western governments about the perils of collectivism. He pointed out that, despite fighting on opposite sides of World War II, Hitler’s National Socialists and Stalin’s Communists shared a disdain for individual liberty. In an economy where government plays a big role, the state inevitably infringes on what you do, what you read in the media, and what your children study in school. Economic control morphs into political control. Think of China today, where 300 top Communist party members control the fate of one quarter of humanity — and all but a few hundred of the 11,500 or so Chinese who have a net worth of $20 million or more, are somehow connected to the party.

“The Road to Serfdom’s” popularity sealed Hayek’s fate as a non-economist. Even the University of Chicago, a stronghold of free-market theory — which Hayek joined in 1950 — refused to give him a post in economics, exiling him instead to its recently created “Committee on Social Thought.”

Hayek the Psychologist

Power corrupts and absolute power corrupts absolutely.

–Lord Acton

Permeating Hayek’s work is an important point about human psychology. Politics attracts narcissists more than policy wonks with noble intentions. This leads those in power to develop distorted perceptions about their own importance. Whether it’s the pharaohs of Egypt who declared themselves gods or Adolf Hitler who launched the Thousand Year Reich (1933-1945), politicians with too much power tend to go cuckoo.

More menacingly, the veneer of civilized behavior that separates us from AK-47-toting freedom fighters is thinner than we think. Consider the results of the Stanford Prison Experiment — where Stanford professors arbitrarily  designated certain students “prisoners” or “guards” in a mock concentration camp. The experiment was stopped early because “guards” soon began to inflict humiliating treatment on the “prisoners.” The lesson? Give even educated, psychologically healthy people too much power, and bad things can happen very quickly.

Hayek the Philosopher

Hayek also makes a point about the limits of our knowledge. Recommendations made by the McKinsey consulting firm by people who were straight-A students in school, but never even ran a pizza shop, rarely pan out as advertised. After all, it was Nobel Prize-winning finance theory that gave Wall Street the misplaced confidence to leverage itself as much as it did.

Hayek’s conclusion? You can’t solve complex policy problems by shoehorning them into complex-looking mathematical equations as economists would have you believe. Perhaps being smart is acknowledging that the world is more complicated than what you can jam into a 20-page PowerPoint presentation. And just because you can conceive of an ideal world, it doesn’t mean all you need to do is to appoint a Czar or an expert commission to make it come true.

Hayek’s Lessons

You see Hayek’s lessons permeate every nook and cranny of today’s policy debates. Government spending can’t bootstrap an over-leveraged economy. You can’t borrow your way to prosperity. Beware of the long arm of “well-intentioned” government policies. The idea of a country’s leader shaking down a private company for $20 billion in damages, based on his arbitrary assessment of what is “just,” is what you expect to see Vladimir Putin do in Russia, not the President of United States do stateside to one of the world’s biggest companies. (Constitutional “due process” anyone?) Finally, reality is complex, and we are a lot less smart than we think.

But perhaps some of Hayek’s lessons are finally sinking in. In a rare admission of his own frustration at confronting a problem the government can’t solve, President Obama recently said of the BP oil spill: “I can’t just swim down there and suck out the oil with a straw.”

Welcome to reality, Mr. President. Welcome to the world of Friedrich Hayek.

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  1. #1 by Milan Boran on July 15, 2010 - 2:45 pm

    But freedom is not a dogma and collectivism not a mantra to be mistaken for
    all-healing pills. Too much freedom is as wrong as too little, as expanding
    your freedom so far as to infringe someone else’s is bound to result in
    trouble. It is rather the careful execution of responsibilities that results
    in agreeable measures of freedom, and hence co-existive exchange, and
    ultimately maximum utility.
    For more thoughts on freedom, economics and the future of the global
    financial system, without pointless mathematics, see a recent paper on
    “Market Dynamics & Systemic Risk”
    http://ssrn.com/abstract=1620495
    containing the first ever operationalizable definition of systemic risk.

  2. #2 by Nicholas Vardy on July 16, 2010 - 8:04 am

    Milan

    I refer you to Hayek’s comment at the start of the post…

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