March 11, 2004

The Road to Serfdom, Happy 60th Birthday

Yesterday I recommended Friedrich Hayek's "The Fatal Conceit." You might be more familiar with his more famous work, "The Road to Serfdom." In that book, Hayek takes on socialism and shows how a belief in economic planning leads, both in theory and in fact, to fascism. I didn't realize that yesterday was the 60th anniversary of the publication of "The Road to Serfdom." It's a happy coincidence. Hayek was an economist from the "Austrian" school, and spent a good chunk of his post-war career in at the London School of Economics, which happens to be the building directly to the left of my new apartment building. Another happy coincidence. You'll hear the term "Austrian" quite a bit if you read the Daily Reckoning, Dr. Kurt Richebacher, and SI. But what does it mean? In short, Austrian economists see that most macroeconomic problems start with the government manipulating the money supply, hence the emphasis on monetary policy. I'll leave it at that for today. But there was a nice article on Hayek in Canada's National Post yesterday. You can find the whole thing here. Here's an excerpt. Emphasis added is mine: In the postwar era, the communist regimes continued to confirm Hayek's warnings about central planning leading to the destruction of both political freedom and economic wealth, but academics remained largely blind to such facts. Meanwhile, the emphasis in the West turned to another profoundly flawed economic orthodoxy, that of "macroeconomic management" via "countercyclical" manipulation of government spending, taxation and the money supply. Its patron saint was the effete Cambridge economist John Maynard Keynes. Hayek was an adherent of the "Austrian School," which had revolutionized economics in the late 19th century by overturning flawed classical theories of value. As a student of business cycles, Hayek -- like the rest of the Austrian School -- believed that the main reason for economic fluctuations was government monetary manipulation, so he could hardly be enthusiastic about Keynes's pretensions (although he and Keynes were friends and Keynes wrote a glowing recommendation for The Road to Serfdom). Yet again, however, Hayek's role was that of Cassandra; Keynes, by contrast, was telling politicians what they wanted to hear. Hayek continued his academic career in the United States and Europe after the war, but it wasn't until 1974 that his star at last began to rise. That year, as Keynesianism's inherent flaws came home to roost amid mounting "stagflation" -- a combination of high inflation and zero economic growth -- Hayek received the Nobel Prize for economics. The fight with socialism, however, was far from over. Comment: Hayek's ideas are going to become important again soon, to a larger audience. Whether it's "indelfation," "stagflation", or some other monetary evil, there's no doubt in my mind we've entered another period of economic paradoxes that only clear thinking and monetary modesty can cure. It starts with ditching the conceit that any central planner knows what's best for an entire economy. That sounds simple enough. But from George Bush to John Kerry, and from George Soros to Alan Greenspan, even policymakers who disagree on what to do all agree that it's the government or the Fed that should be doing it. We can thank Keynes for that conceptual malady. And we can only hope that this latest bout of fever will lead to something healthier on the other side.


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