The World Systems Project is going to begin with a thorough examination of Austrian economics, starting with Robert P. Murphy’s outstanding “Austrian Economics Home Study Course“. The plan is to blog my answers to the weekly questions, with posts and book reviews tossed in as I go along.
It should go without saying that the following contains ‘spoilers’, and if you intend on doing the home study course on your own you might not want to read further.
1 Why did Hayek receive the Nobel Prize in economics?
For his work on the Austrian theory of the business cycle.
2 Under which Austrian did Hayek actually study?
Friedrich von Wieser, and he also attended Mises’s legendary economics Privatseminar in Vienna.
3 What caused Hayek to abandon his socialist views?
Hayek’s interest in both economics and socialism stemmed from his desire to ameliorate the suffering of the poor. When Mises published Socialism, wherein the great man compellingly made the case that socialist ownership of the means of production would make economic calculation flatly impossible, Hayek was converted to Austrianism.
4 How did Hayek spread the Misesian cycle theory to the English world?
Hayek built on Mises to derive a theory of economic fluctuation based on credit expansions from financial institutions, and this was compelling enough to land him an invitation to lecture at the London School of Economics. There he met such future luminaries as Lionel Robbins, J.R. Hicks, Arnold Plant, George Shackle, and many others. Hayek was able to make the case for the Austrian theory of the business cycle to these people, many of whom gradually accepted his ideas. Through them the core ideas of Austrianism spread throughout the English-speaking world.
5 Name some reasons why Hayek may not have offered a full-scale refutation of Keynes’s General Theory.
Though Keynes and Hayek clashed on a number of occasions in the 1930’s, Hayek was in general reluctant to engage in direct confrontations with his colleagues in economics. And Hayek later claimed that Keynes changed his mind so often there was no real point in working out a detailed critique of General Theory if it was just going to be obsolete in a few years.
6 Which major economists attacked Austrian capital theory?
Two of the most prominent were the Italian Piero Sraffa and the American Frank Knight. For a variety of reasons, however, Austrianism had begun to fade from public view.
7 After leaving the LSE (London School of Economics), where did Hayek teach, and in what capacity?
At the University of Chicago as part of the Committee on Social Thought.
8 How did Mises and Hayek differ in their views on society?
The two men approached the defense of capitalism from very different angles. Mises was a rationalist fond of deductive arguments, while Hayek argued that the market order was better at incorporating diffuse knowledge into price signals and encouraging trial-and-error learning. Mises used reason to arrive at capitalism while Hayek repeatedly stressed the disastrous effects of an inappropriate faith in the power of reason.
9 What is a “Hayekian triangle”?
The Hayekian triangle is a diagrammatical representation of the fact that production is a temporal process requiring a vast amount of coordination between present and future goods and present and future demand.
Investments in capital goods like harvesters, mining equipment, or robots for assembling cars must be made in the present on the premise that people will want whatever those goods can make in the future. Investment in capital goods does not happen all at once, of course, but occurs in various stages; the production of a watch must first begin with pulling the required metals out of the ground, then proceeds to refining those metals somewhere, then moves on manufacturing the precision components which go into a watch, and eventually it must all be assembled (probably in a factory).
Getting all of this lined up so that people ultimately have the goods they want is one of the central problems of a complex economy, and the Hayekian triangle helps to illustrate the issue.
10 Describe some of Hayek’s insights on knowledge.
Hayek was a complexity theorist of some renown who believed that the task of economics was not to understand how an economy allocated scarce resources for diverse ends but how an economy utilized knowledge which was scattered among many different minds and not known to anyone in its totality. Much of the knowledge required to make an economy work is not only not centralized anywhere, and is not only not the kind of thing that is easy to articulate, but may not even be consciously known by the people who possess the knowledge! It is, in other words, tacit knowledge.
Such information is not available to central planners and cannot be made available to them, even in principle. An evolving market, therefore, is the best way to use this information to everyone’s benefit.
On this basis Hayek made a distinction between unplanned order (cosmos) and planned order (taxis). A taxis, like a business enterprise or a bureau, can only deal with problems of extremely limited complexity. A cosmos on the other hand is able to evolve solutions to much more complicated problems — but must be left alone if it is to succeed in doing so.
11 Why did Hayek describe competition as a “discovery procedure”?
Because he saw that markets make use of distributed, tacit knowledge by continuously discovering it. Tacit knowledge is found and utilized when firms hire workers to grow oranges, build houses, or manage teams of people. Moreover, individual people pursuing their own ends cause knowledge to percolate through the economy, showing up in the prices of goods and services.
12 What is a ‘spontaneous order’?
An order that is not planned by a central authority but instead emerges out of many smaller parts as they compete and coordinate. Nobody plans a modern capitalist economy, but one falls out of millions of individuals working, innovating, improvising, and consuming.
13 Describe some of the controversies in interpreting Hayek’s thought.
While Hayek was a preeminent economist squarely in the Austrian tradition he was not simply a follower of Mises. He differed from Mises in his interpretation of the socialist calculation debate: while Mises believed that collective ownership of the means of production made an effective socialist economy impossible, Hayek is thought to have believed it merely made an effective socialist economy really, really unlikely.
Hayek pointed out that there are two kinds of ‘liberalism’: a rationalist variety that derives laissez-faire deductively from first principles, and an English common-law variety that is wary of the over-application of an engineering mindset to economics problems while stressing the organic complexity of social orders. Hayek was mostly a champion of the latter liberalism.
There are those who go further and postulate a similar split in Austrianism itself, with the Hayekian faction emphasizing the diffusion of knowledge and the communicative powers of the pricing system and the Misesian faction emphasizing the effects of government intervention on monetary calculation.
Because Hayek was prolific and characterized his own writings as more exploratory than authoritative there are several different Hayeks one can read from his work. In any case, his was one of the 20th centuries most probing minds and all possible Hayeks are worthy of study.