Saturday, March 30, 2013

Lord Keynes — Hayek on the “Use of Knowledge in Society”


Hayek's argument is really at the basis of market fundamentalism, so understanding its shortcomings is important. On the other hand, I would agree with Hayek's analysis wrt to a central bank setting interest rates to manage inflation or to balance employment and price stability, for instance. There seems to be ample empirical evidence to warrant concluding that central banks have failed in this regard at great cost to the economies under their influence.

Monetarism doesn't work. And it appears that it fails in being too loosely targeted. For example, monetary policy, which sets the cost of capital, often distorts asset prices since it looks chiefly at goods prices and in particular at the price of labor with a view to targeting inflation. In this it disregards asset appreciation and the wealth effect it communicates that is based on "fictitious capital," that is, unrealized, "paper gains, supported by credit.

And, as Lord Keynes observes, Hayek's position reflects more the neoclassical equilibrium view than the Austrian view of economic calculation.

Social Democracy For The 21St Century
Hayek on the “Use of Knowledge in Society”
Lord Keynes

3 comments:

LK said...

Thanks for the link!

Some miscellaneous thoughts:

(1) Curiously, the chief complaint of Hayek's own Austrian, Misesian opponents (!) is that his view of coordination via prices requires an economy in "near" or proximal equilibrium. That makes him much closer to mainstream neoclassicals.

(2) Just out of interest, I don't think Hayek ever wanted the central bank to manage interest rates or target inflation. The most he ever wanted was for the central bank to stop the money supply from collapsing (as in Friedman's view).

By the time, you get to Hayek's book Denationalization of Money (1976), his views on monetary systems are as crazy as any Rothbardian.

Bob Roddis said...

By the time, you get to Hayek's book Denationalization of Money (1976), his views on monetary systems are as crazy as any Rothbardian.

Hell has frozen over. We agree on something.

vimothy said...

But you do believe that the government can balance employment and price stability by setting a deficit--right?