Why are Hayek’s ideas relevant in a pluralist economics curriculum?

The contribution by the Austrian economist Friedrich von Hayek to monetary theory stimulates a far-reaching debate on the role of the government in monetary management and the effects of alternative policies in regulating the issuance of money. Since the early 1930s Hayek had been concerned about the role of money in the theory of production. Influenced by Eugene Böhm-Bawerk’s theory of capital, Hayek deeply examined the effects of monetary policy on the process of capital accumulation. As regards investment decisions, Hayek considered that an inflationary credit expansion by the central bank can lead to capital misallocation over time caused by artificially low interest rates.

Indeed, the fundamental problem in economics, for Hayek, is that of coordinating the plans of many independent individuals. The main advantage of a competitive economic order, in Hayek’s view, is that rational agents respond to price signals, which convey the relevant information available in the markets, for the purpose of economic calculus. In his view, competition, through the price market system, leads to such coordination. The underlying critique relies on arbitrary interventions related to the presence of the state in economic systems (see, for example, Hayek, 1944). After the Second World War, Hayek discussed the redefinition of the legitimacy of the state and stressed the need to defeat the growing state intrusion in a democratic framework. Besides, he privileged the analysis of the values that shape the interrelations of individuals in a free society. Assessing the practical superiority of the free market dynamics over governments’ actions, Hayek believed that no government can know enough to effectively plan the future path of the economy and society. Further, central banks do not have the relevant information to correctly manage the money supply.

Frederic von Hayek restated the relevance of concepts and ideas proposed by the classical liberal philosophy so as to rebuild the foundations of constitutional governments to face the institutional decay in contemporary societies. As a result, in the 1970s, Hayek proposed the abolition of the government’s monopoly over the issue of fiat money to prevent price instability (see Hayek, 1976). His defense of a complete privatization of money supply stemmed from his disappointment with central banks’ management, which, in his opinion, had been highly influenced by politics. He warned that political interference over monetary policy and price stability is incompatible with social cohesion. At that time, Hayek’s proposal of institutional reform relied on a denationalization of money in the framework of a free market monetary regime where only those currencies that have a stable purchasing power would survive.

In Hayek’s contribution to monetary policy, although employment and price stability are not necessarily in conflict, priority should be given to monetary stability. Aware of the price stability challenges, Hayek strongly highlighted the dangers that arise from monetary financing public spending. Considering this background, Hayek’s recommendation to policy making is the dissolution of “the unholy marriage” between monetary and fiscal policy, which, in his opinion, had formally consecrated the victory of “Keynesian” economics after the Second World War ( see Hayek, 1

Hayek strongly criticized the Keynesian transformation of the discipline of economics. As of the 1970s, he condemned the role of the economists in promoting the engineering of social change through macroeconomic modeling. Under his view, for the Keynesian income expenditure model to work, the economist must know the aggregate level of current consumption, investment, and public spending, as well as the full employment level of output and the multiplier effect. As each step of the analysis presupposes that the detailed knowledge of economic life is available and that the outcomes of each policy intervention will be precise effects on economic activity, he believed that the Keynesian macroeconomic policy was mistaken.

Why do students need to read Hayek’s books? The global crisis, that began in 2007-08–caused a re-examination of the ideas of Hayek in search of answers to the questions of what caused the crisis and how governments may get out of it. On behalf of the economic and social outcomes of the crisis, Hayek’s reading is a must in the economic curriculum in order to engage the students in a pluralist discussion around free market vs. regulation; monetary policy vs. fiscal policy, austerity vs. growth.

In truth, the absence of a deep discussion about Hayek’s ideas in the economics curriculum has reinforced the ignorance of the disastrous social consequences of austerity as a political project in contemporary capitalism.

References

Madi, M. A. C. Dissolving the ‘unholy marriage’: Hayek’s recommendation on monetary and fiscal policy. http://www.eccf.ukim.edu.mk/Article/141

Books to read

HAYEK, F. A. von (1937a) Individualism and Economic Order, Chicago: University of Chicago Press.

———- (1937b) “Economics and Knowledge”, Economica, 4, pp. 33-54.

———- (1944) The Road to Serfdom, Chicago: University of Chicago Press.

———- (1945) “The Use of Knowledge in Society”, American Economic Review, 4, pp. 519-530.

———- (1960) The Constitution of Liberty. Chicago: University of Chicago Press.

 ———- (1976) Denationalisation of Money: The Argument Refined, London: Institute of Economic Affairs.

———- (1973) Law, Legislation and Liberty, Vol. 1, Chicago: University of Chicago Press.

———- (1974) The Pretense of Knowledge, Nobel Prize Speech.

 ———- (1995) “Contra Keynes and Cambridge: essays, correspondence”, in B. Caldwell (ed.), The Collected Works of F.A. Hayek, volume 9, Chicago: University of Chicago Press.

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2 comments
  1. “Why ..(.one must) … read Hayek’s books? The global crisis,
    that began in 2007-08–caused a re-examination of the ideas of Hayek
    in search of answers to the questions of what caused the crisis and how governments may get out of it.”
    Please rephrase the question to: “Why one must read Soddy’s book , “The Role of Money”,
    because Soddy can answer the questions of what caused the crisis and how government may (can) get out of it ?”
    Please also note changes in the following paragraph:
    “Why do students need to read Hayek’s (READ SODDY”S) books? The global crisis, that began in 2007-08–caused a re-examination of the ideas of Hayek (Soddy) in search of answers to the questions of what caused the crisis and how governments may get out of it. On behalf of the economic and social outcomes of the crisis, Hayek’s (Soddy’s) reading is a must in the economic curriculum in order to engage the students in a pluralist discussion around free market vs. regulation; monetary policy vs. fiscal policy, austerity vs. growth.
    In truth, the absence of a deep discussion about Hayek’s (Soddy’s) ideas in the economics curriculum has reinforced the ignorance of the disastrous social consequences of austerity as a political project in contemporary capitalism.”
    Frederick Soddy writings, namely “The Role Of Money”
    (Entire book as a free download) http://archive.org/details/roleofmoney032861mbp

    Fraudulent mortgage loans do not, can not and will not cause “systemic failure”.
    The mortgage system is not flawed because it is based on lending against an asset.
    As long as the lender can reclaim the asset, even if at 50% of its original value, the lender will be able to recover over time. (If at 6%; 12 years.)
    The “suckers” were the Buyers of the MBS’s. The scheme collapsed when they discovered the banks and their insurers no longer could pay back the money they paid for the so-called ultra safe investment. The future interest income from the mortgages was what securitized
    the MBS’s—NOT THE LOANS, hell the banks could not sell them the loans; they didn’t even own the money they printed to make them.
    In order to make trillions of dollars in todays money, they sold and got cash for tomorrows money-the interest income.
    Mortgages were not supposed to be to make trillions of dollars for banks who in turn would make trillions for financial corps, (Profit to be distributed to the top 10%) Money, they were supposed to be using to help people buy homes.

    IT ALL WENT WRONG-when the banks violated their fiduciary duty and abandoned their rights, no their obligation to “protect the asset” To keep the ‘suckers’ buying they gave up the right to foreclose to “the upper tiers” buyers!

    WITNESS : SHEILA BAIR

    “…but they can’t get the mortgage notes written down to affordable levels for contractual reasons….” Quote Sheila Bair , (Former FDIC Chairman appointed in 2006),”How could things have deteriorated so quickly…? In a word, securitization. …Working with a Wall Street investment bank, the issuer packages the mortgages together into ‘pools’ and divides the right to the cash flows of these mortgages into securities that are sold to investors…” (“BULL BY THE HORNS”) THE KEY WORDS BEING, “… the right to the cash flows of these mortgages into securities that are sold to investors…” These contracts allowed the investors to take away the rights of the lenders to modify the mortgages: they sold “the cash flows” for cash . How could they get back the trillions of dollars they already spent so they could repurchase the MBSs ? The Fed would be able to “fix” the modification problem with a simple strokes on a computer: Allow all to stay at market value, with loans at 3% for 40 years,period. 85% would stay, the other 15% would become welcomed ‘short sales’. END OF CRISES, stabilizing the housing industry, saving millions of jobs and even creating more jobs. But if they were to reveal the banks made trillions of profit by selling-future interest income. The banks made a fatal error in that they turned over to the investors all control over the performance of the basic asset..with total disregard of their fiduciary duty- thereby making it impossible for the PFPB to make good on there “representations”. The only way available to the PFPB was to return the trillions they took since it was discovered that not only were they not of “good faith and credit” but also the insurers they paid were also not of “good faith and credit”. Has anyone asked ,why the Fed purchased almost $1 trillion of MBSs instead of the mortgages ? Would the Fed have exposed-we are in a system that is flawed and may result in catastrophic failure.

    WE MUST END: ISSUANCE AND TAXATION OF ISSUANCE OF OUR OWN CURRENCY BY PRIVATE FOR PROFIT BANKS! (PFPB)
    Please feel free to correct any errors and any profound wisdom is welcomed.
    I hope, as one member stated,”… hope more of this blog’s other followers will take the trouble to” … “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha

    WITNESS : BEN BERNANKE

    Former Federal Reserve Chair Ben Bernanke joined practically everyone in America by saying in his new memoir, The Courage to Act, that more Wall Street executives should have gone to jail for criminal misconduct that led to the financial crisis.
    “It would have been my preference to have more investigation of individual action, since obviously everything what went wrong or was illegal was done by some individual, not by an abstract firm,” he wrote.
    “The mortgage securitization process that fed the housing bubble and generated the financial crisis also led to widespread foreclosure fraud, and in April 2011, the Fed, along with the Office of the Comptroller of the Currency, issued enforcement orders against ten major banks over “misconduct and negligence related to deficient practices in residential mortgage loan servicing and foreclosure processing.”(https://theintercept.com/2015/10/06/bernanke-talks-tough-but-was-weak-when-it-mattered/?comments=1#comments)

    VERDICT:
    The private or profit banks have proven they are not trustworthy and will for greed violate the awesome responsibility of safeguarding issuance of our currency and the taxation of that currency.

    Quote Frederick Soddy,”…(I)f it Money is to fulfill its proper role as the distributive mechanism of society. To allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government. ”
    Based upon an opinion by “Justaluckyfool” of the concepts of Noble Laureate Frederick Soddy, “The Role Of Money” (1926,1933)
    Comments by Justaluckyfool ( http://bit.ly/MlQWNs )
    ( “You are always welcome to share, copy, plagiarize, improve, etc..any comments.)
    Read and challenge:
    Frederick Soddy writings, namely “The Role Of Money”
    (Entire book as a free download…)http://archive.org/details/roleofmoney032861mbp

  2. Rhonda Kovac said:

    Excellent post

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