Thursday, 4 July 2013

The Hayek Moment

Llewellyn H. Rockwell, Jr.

Lecturing at the London School of Economics from 1931 to 1950, F.A. Hayek was nicely positioned to counter the rising influence of J.M. Keynes. Keynes's new vision of macroeconomics was a resurrection of old fallacies but with a modern twist: an open call for a consolidated state to manage investment. More than anyone else, and under the pretense of explaining the economic crisis of the time, Keynes gave intellectual credence to the rise of managerial states in America, the UK, and Europe during the '30s and the war. 

Hayek countered with a defense of laissez-faire beefed up by the insights of the Austrian School of economics. He had worked with Ludwig von Mises in Vienna after the period in which Mises first laid out his business cycle theory. The danger of central banks, wrote Mises, is that they exercise power of interest rates, and can thereby distort the production structure of an economy. They can create artificial booms, which either lead to hyperinflation or economic bust. 

Hayek advanced this theory as the alternative explanation for the global depression, and worked mightily all those years to show how the stock market crash was not the onset of the crisis but rather the much-needed liquidation of a preceding boom. He further showed how the actions of the British and American governments were prolonging the crisis. 

In the great debates of the period, it was said that Hayek had lost to the New Economics of Keynes and his followers. It was more precisely true that the Keynesians had won not by having better argument but force of government policy. The Misesians and Hayekians of the time decided that they would fight the battle of ideas and thus sprang up a host of institutions that would continue the work of liberty, despite all political impediments. 

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