Hayek and Modern Macroeconomics

David Warsh and Paul Krugman try to write Hayek out of the history of macroeconomics. Krugman writes:

Friedrich Hayek is not an important figure in the history of macroeconomics.

These days, you constantly see articles that make it seem as if there was a great debate in the 1930s between Keynes and Hayek, and that this debate has continued through the generations. As Warsh says, nothing like this happened. Hayek essentially made a fool of himself early in the Great Depression, and his ideas vanished from the professional discussion.

Warsh says much the same thing, adding, I am not making this up, a discussion of Hayek’s divorce. Neither Krugman nor Warsh attempt to argue for their positions, it’s all assertion. Both claim that Hayek is famous only because of the Road to Serfdom.

Let’s instead consider some of the reasons the Nobel committee awarded Hayek the Nobel:

Hayek’s contributions in the fields of economic theory are both deep-probing and original. His scholarly books and articles during the 1920s and 30s sparked off an extremely lively debate. It was in particular his theory of business cycles and his conception of the effects of monetary and credit policy which aroused attention. He attempted to penetrate more deeply into cyclical interrelations than was usual during that period by bringing considerations of capital and structural theory into the analysis. Perhaps in part because of this deepening of business-cycle analysis, Hayek was one of the few economists who were able to foresee the risk of a major economic crisis in the 1920s, his warnings in fact being uttered well before the great collapse occurred in the autumn of 1929.

It is true that many of Hayek’s specific ideas about business cycles vanished from the mainstream discussion under the Keynesian juggernaut but what Krugman and Warsh miss is that Hayek’s vision of how to think about macroeconomics came back with a vengeance in the 1970s.

David Laidler exaggerated but he was much closer to the truth than Krugman or Warsh when he wrote in 1982 regarding new-classical macroeconomics:

… I prefer the adjective neo-Austrian… In their methodological individualism, their stress on the market mechanism as a device for disseminating information, and their insistence that the business-cycle is the central problem for macroeconomics, Robert E. Lucas Jr., Robert J. Barro, Thomas J. Sargent, and Neil Wallace, who are the most prominent contributors to this body of doctrine, place themselves firmly in the intellectual tradition pioneered by Ludwig von Mises and Friedrich von Hayek.

Thus, Hayek was an important inspiration in the modern program to build macroeconomics on microfoundations. The major connecting figure here is Lucas who cites Hayek in some of his key pieces and who long considered himself a kind of Austrian. (Indeed, to the great consternation of some of my colleagues, I once argued that Lucas was the greatest Austrian economist of the 20th century.)

One can also judge Krugman’s claim that “the Hayek thing is almost entirely about politics rather than economics” by looking at who other Nobel laureates in economics cite. Is Hayek ignored because he is just a political thinker? Not at all, in fact in an interesting exercise David Skarbek finds that Hayek is cited by other Nobel laureates in their Nobel talks more than any other Nobel laureate with the exception of Arrow. (The top six cite-getters are Arrow, Hayek, Samuelson and then tied in citations for fourth place are Friedman, Lucas and Phelps.)

Addendum: Here is Pete Boettke and Russ Roberts and David Henderson.


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