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.


NEWSFLASH: accepting that Hayek was an important economist who's ideas need to be critically engaged does not make you a Hayekian. Just like acknowledging that Marx was an important economist does not make you a Marxist. why is this crap so hard for people...

Because they cannot accept that his ideas had any credibility. They must reject the "other side" so wholly, that it isn't good enough for the other side to be wrong, they must be stupid or evil.

It's not that people think they will suddenly become 'Hayekian', it's that his influence has been vastly overstated on the internet and we are just having a reality check. He's barely mentioned in many undergraduate courses and he was wrong about a *lot* of things, including, to some extent, the efficacy of central planning.

Still, often people he is criticized by show a serious lack of knowledge about his readings. If you criticize somebody, at least verify that your critique is actually in line with what he has written. This paper (by Acemoglu et al) for example shows a profound misunderstanding of Hayek's position: http://voxeu.org/index.php?q=node/3727

"including, to some extent, the efficacy of central planning."

How's that?

Rich countries seem to have big governments and mixed economies far more interventionist than in the 1920s without degenerating into poverty or fascism.

david made a valid point, but my point was that the economic performance of the Soviet Union was not as abysmal as all that. It was growing for a long time, and when it did decline it was for reasons other than Hayek's 'dispersed knowledge' problem.

Unlearning Econ: It appears you have not lived in the Soviet Union, like I have. Soviet Union was a total and unbelievable mess. Soviet Union failed spectacularly precisely because of total failure of central planning. All the growth in the Soviet union was fake, financed by oil exports, and overstated by government bureaucrats in the fake statistics they collected.

Those points seem debatable. Size of government is not synonymous with central planning. For example, the post office is a large entity. But it is large because delivery of parcels to people would exist with or without the USPS and it is also very distributed and not very centrally planned.

Soviet Union liver:

Fair enough - you obviously know a lot more about it than I do. I know reliable economic statistics from the SU are incredibly difficult to collect so I'll take your word for it. Do you have any good reading on the subject?

Hayek never said a mixed economy led inexorably to poverty or fascism, he only explained how central planning made such outcomes more likely.

How bad does the Soviet economic situation have to be to vindicate Hayek? It was certainly far worse than Western Europe, which in turn was still considerably worse than the less-interventionist U.S. -- all as Hayek would have predicted. There's a reason free market reforms swept Europe in the 1990s you know.

And the Soviet Union's economic performance was badly misjudged right through the 1980s in part because of failure to appreciate the application of Hayek's arguments to their situation. It was one of the major reasons Sovietologists were caught off guard when they collapsed.

'It was certainly far worse than Western Europe, which in turn was still considerably worse than the less-interventionist U.S.'

Whoah, slow down. Which period exactly are we talking?

'all as Hayek would have predicted. There’s a reason free market reforms swept Europe in the 1990s you know.'

Yes and it has nothing to do with trying to create general prosperity, and resulted in a financial crisis.

Talking to 'free market' proponents, you'd almost think the crisis didn't happen. Amazing level of cognitive dissonance.

Additionally, a democratic government that spent a lot of resources on "general welfare" coordination problem projects would not probably qualify as "central planning" in the Hayekian sense, where the decision-making takes place at plutocracy level. And as I've been harping on, as our government has moved away from "general welfare" coordination problem projects we are going in just the direction Hayek suggests. Medicare requires mandates. Just because we haven't fallen off the cliff to fascism doesn't mean anything I don't think.

Which "free market" reforms would those be, TallDave?


Huh? Where did you get the notion that free market reforms led to a government-instigated bubble in real estate and a gov't overspending crisis? The delusion there is amazing, and a perfect example of the dynamic Hayek described -- failures by the planners are taken as proof the planners didn't intervene enough, and used to justify even more intervention.

TDJTDB http://en.wikipedia.org/wiki/Neoliberalism#Global_spread

Give me a break, TallDave. You speak about Western Europe but then talk about the Soviet Union? Or was this a mistake?

Surely I did see that the other link mentions the other countries, particularly the Northern European ones, but like most people on your side, you dramatically overstate what happened.

Did you not understand the response without your name was not the response to you? Sheesh.

Are you really disputing there was a wave of free-market reforms in the 1990s? Wow.

The only thing that kept the Soviet economy going at all was the black market.
I suggest this book for a look inside the Soviet Economy:http://www.amazon.com/Meltdown-Economy-Paul-Craig-Roberts/dp/0932790801

When was the last time you heard JB Clark mentioned in undergrad courses? Do you have any idea how many great and important economists are "barely mentioned in many undergraduate courses?" Undergraduate courses aren't a litmus test of the importance of an economist, they're a survey of the major points discussed in modern economics.

This is all, of course, another one of Krugman's smear campaigns. He's losing readers to the Mises blog and Marginal Revolution, so he has to try to paint the libertarian tradition as unscientific. It is par for the course with him.

"He’s losing readers to the Mises blog and Marginal Revolution, so he has to try to paint the libertarian tradition as unscientific. It is par for the course with him."

That's a ridiculous assertion for so many reasons, but besides the point.

Krugman's point, which he flatly states, was that Hayek was more important in the political end of things rather than on the economic end of things.


Is that what he said? Because I also see him stating that Hayek "made a fool out of himself" and that his ideas "vanished", both of which were untrue. I wonder if Krugman's readers would have appreciated to know that Hayek was also an econ Nobel laureate, because Krugman conveniently leaves that out.

Not sure about the 'make a fool out of himself' but Hayek's economics was devastated by Sraffa, Hicks and particularly Kaldor, and was more or less abandoned.

"Krugman’s point, which he flatly states, was that Hayek was more important in the political end of things rather than on the economic end of things."

This is an example of what I'm calling The Tim Tebow fallacy, kind of a vicious strawman cycle. Hayek himself in interviews I've seen is very realistic about the outcome of his debate with Keynes. I don't know who these people are that Krugman and Warsh thinks are saying that AT THE TIME Hayek was winning the popularity contest.

See here:
"Hayek had by the end of the 1940s ceased to target his literature at the established economic community. Twenty years later these ideas had become more tolerable"

Yes, Keynes won the day, and Krugman now wants to head off further acceptance of Hayek by revisionists. The problem with Krugman is that he's about ten times cleverer than his fans.


I'm not sure if you are really responding to me or what you think I meant to say.

Mao's Great Famine: The History of China's Most Devastating Catastrophe, 1958-1962

central planning for dummies

>he was wrong about a *lot* of things

You mean Krugman?

No, Hayek.

"He’s barely mentioned in many undergraduate courses " :

So are modern undergraduate courses not talking about him because he isn't important or is he not talked about because he destroys the statist myths that our government funded school are tasked with teaching?

Yep, that's it. You guys are lone freedom fighters in a statist world full of government funded Keynesian propaganda.

Alternatively, the only reason your ideas enjoy so much prevalence is because they favour big business and have historically had unlimited funding (MP Society, Rockerfeller, Koch, etc.)

Which counties in the world resemble what you think is a good set of plans for education?

I ask this, by the way, as a liberal who isn't opposed to vouchers but is skeptical of their effects.

Did you know Sweden has had vouchers for decades?

Sweden's education policy seems to be used by the right as proof of it being some sort of super free market country. Sweden is Social Democracy working, as are other Scandinavian countries and some Central European ones. Get over it.

OK, you've gone off the deep end now. Can you point to some of these people claiming Sweden is a "super free market country?"

What Sweden's use of vouchers proves is that even countries generally considered well to our left have successfully embraced free market ideas that are being ignored here because of powerful political interests.


"OK, you’ve gone off the deep end now. Can you point to some of these people claiming Sweden is a “super free market country?”

What Sweden’s use of vouchers proves is that even countries generally considered well to our left have successfully embraced free market ideas that are being ignored here because of powerful political interests."

Clearly UE was going for rhetorical effect, but I think his point is kind of obvious: whatever the merits of the reforms that were made, to go to a style of government like that which exists in Sweden would probably make the heads of those on the right in this country explode. Yet, they continue to invoke it, rightly or wrongly. It's just very strange.

Oh, and the voucher system in that country is hardly the paradise the glowing praise from some make it out to be.

TallDave if you've genuinely internalised the idea that the government caused the crisis then there is not a single fact or event that could change your mind about the role of government. For you, government will always be the problem - there's no point trying to reason with you.

TallDave if you’ve genuinely internalised the idea that the "deregulation" caused the crisis then there is not a single fact or event that could change your mind about the role of government. For you, government will always be the solution – there’s no point trying to reason with you.

I expected that response and it was fairly juvenile. The fact is there *are* areas where government has been the problem - drugs, patent law, the police in both the UK and US. There are a couple of crises like in France where government enterprise was the problem, and the 1970s industrial policy in the UK was a massive failure. Politicians are also generally twats. I challenge you to list as many failures of private enterprise without your head exploding.

Attributing the crisis to low interest rates, the CRA or Fannie and Freddie is just being blinded by dogma. It has been debunked so many times it's not even worth it. No matter how the crisis happened, free market zealots would have found a way to blame the government.

On Sweden: I was obviously employing narrative hyperbole by saying 'super'. Any normal person would have seen that and ignored it as idiomatic, but as usual a libertarian finds a tiny point to pick at and distract from the main issue.

'What Sweden’s use of vouchers proves is that even countries generally considered well to our left have successfully embraced free market ideas that are being ignored here because of powerful political interests.'

Sweden's government are quite willing to experiment, which works because its population has high levels of trust and feel safe due to the large welfare states. Many Americans, on the other hand, are worried about falling ill and live paycheck to paycheck, so they would be far less likely to accept new policies like that. And are you kidding about powerful political interests? The most powerful ones are the corporate lobbyists who would make a profit from for-profit schools. Jees, just look at the drug companies.

P.S. please stop using the term 'free market' without quotation marks. There's no such thing as a free market.

Yes, the reflection of your juvenile argument is indeed juvenile.

The real estate bubble was absolutely engendered by the massive influence of gov't in the housing market, to argue otherwise is to argue the intervention did not have the effect the interveners themselves claimed it was having at the time! And to call that idea "debunked" is the height of wishful thinking.

No one holds up Sweden as a free market paragon, "super" or otherwise, your statement is purest nonsense and your defense of it makes it no more sensible.

Seriously? The NEA is one of the most powerful lobbies in the country, if not THE most powerful.

It's interesting that you think private enterprise failures are equivalent to gov't failures -- in fact, private enterprises are supposed to fail, that's the normal function of markets, winners and losers competing. The problem with gov't solutions is precisely that they do not have this kind of competition.

We could talk about the influence of Fannie-held debt and the way they dominated the subprime markets (which has been widely misrepresented by statists) and pushed securitization with the explicit aim of hiding risk to ease credit, but it's really much easier to just go back to the statements made by the planners themselves.

But the bigger problem wasn't even the failed instruments themselves -- it was that the regulators allowed companies to take on systemic risk. These "too big to fail" entities spread moral hazard all over everything, but the regulators like them because a few big players are easier to handle than a lot of little ones. If they were going to bailed out, they should have been broken up as well. To that extent, "deregulation" was indeed the problem, but it hasn't been fixed, so that must not be the deregulation critics are talking about.

And since there were no breakups, the moral hazard is only getting worse. GM was handed to the unions by the gov't, but inventory levels are already approaching failure levels again.

The planners are failing both here and in Europe.

The discussion between UnlearningEcon and TallDave is full of meaningless slogans and false choices.

That is all

"a few big players are easier to handle than a lot of little ones"

And, I should add, provide more profitable post-regulation job opportunities for the regulators.

I think Glenn Reynolds was onto something with his proposal for a 50% surtax on post-gov't earnings.

'The real estate bubble was absolutely engendered by the massive influence of gov’t in the housing market, to argue otherwise is to argue the intervention did not have the effect the interveners themselves claimed it was having at the time!'

Argh I can't do this, it's not worth getting into it again. Even if I accept your arguments it doesn't excuse the massive fraud financial institutions partook in.

'No one holds up Sweden as a free market paragon'

Plenty refer to the idea of Sweden as a Social Democratic nation as a 'myth', claiming that it has more economic freedom than places like the UK. Scott Sumner has done it repeatedly, the ASI have and the Heritage foundation have also used their ef index to support the notion.

'It’s interesting that you think private enterprise failures are equivalent to gov’t failures — in fact, private enterprises are supposed to fail, that’s the normal function of markets, winners and losers competing.'

I didn't point to an example of a single business failing - I was talking about systemic failure, like the one we've just seen.

The crisis: as I said, it's too big to continue talking about here, but I actually agree with half of what you wrote there.

'The discussion between UnlearningEcon and TallDave is full of meaningless slogans and false choices.'

Please point to some actual factual or logical errors to back your statement up.


Nobody serious thinks the government caused the housing or financial crisis, which is decidedly different from saying there was SOME effect.

It's the same sort of thing we see with lawsuits and health care reform: what is a very, very, very small piece of the puzzle--something like two percent of the increase in cost--is made out to be far larger than it is.

the massive fraud financial institutions partook in.

Huh? Who has been charged with this alleged massive fraud you speak of? Are you under the impression Bernie Madoff caused the financial crisis? You certainly have some very strange ideas.

The financial institutions made some bad bets, which would have been nothing more than the normal course of business except that they were now being backstopped by the gov't.

So, your objection is that vouchers' presence in Sweden does not argue Sweden is less socialist than they would be without vouchers? To that I can only say, from your mouth to Obama's ears! Bring those socialist Swedish vouchers here!


No one serious believes "deregulation" was entirely to blame for the crisis either. But it's pretty clear that gov't played a huge role in inflating housing prices and making a bad problem much worse than it would have been.

Try to imagine for a moment a world in which the 1990s saw the gov't respond to the housing with countercyclical tightening instead of more loosening. (Next, try to imagine a world in which Democrats would have allowed that to happen!)

As a direct effect, that's true, but throw in defensive medicine and you're probably up to around 5-10% -- to be sure, still a small effect relative to the price insulation that is the strongest factor driving costs higher (see Arnold Kling's book Crisis of Abundance). But in all three broken markets (healthcare, housing, and education) massive gov't intervention is the commonality, and the problems are generally the ones Hayek would have predicted.

'Huh? Who has been charged with this alleged massive fraud you speak of?'

Nobody! That's the problem.

'Are you under the impression Bernie Madoff caused the financial crisis? You certainly have some very strange ideas.'

Erm, no, but banks sold investors instruments they knew were bad and bet against them. There is telephone evidence of Goldman Sachs saying they're 'fucking over' some guys.

'The financial institutions made some bad bets, which would have been nothing more than the normal course of business except that they were now being backstopped by the gov’t.'

I'm not in favour of bailouts in general, but given the situation do you think just letting the whole thing blow up would have been a good idea?

'So, your objection is that vouchers’ presence in Sweden does not argue Sweden is less socialist than they would be without vouchers? To that I can only say, from your mouth to Obama’s ears! Bring those socialist Swedish vouchers here!'

My point is that Sweden may have for profit schools but that doesn't change the general fact that they are an example of Social Democracy working.

‘Huh? Who has been charged with this alleged massive fraud you speak of?’ Nobody! That’s the problem.


Erm, no, but banks sold investors instruments they knew were bad and bet against them. There is telephone evidence of Goldman Sachs saying they’re ‘fucking over’ some guys.

I agree that is an ethical problem, but I don't think we can extrapolate that to an explanation of a meltdown in the mortgage markets.

I’m not in favour of bailouts in general, but given the situation do you think just letting the whole thing blow up would have been a good idea?

What would have been better is disallowing systemic risk in the first place, and making all bailouts contingent on breakup. I think we agree to this extent that "deregulation" was a major problem, but no one seems to want to fix this..

Goldman paid a $550 million fine related to how they were self-dealing with CDOs. I suspect the only reason no one has gone to jail is because Goldman is full of very smart people who know how to cover their tracks.

".... he was wrong about a *lot* of things, including, to some extent, the efficacy of central planning."
So was Keynes, especially about planning. :-)

It isn't hard. Why would you think it is?

"The Conscience of a Liberal ": An apt title as Krugman indulges.

"...nobody would be talking about his business cycle ideas." But thats just it, people are talking about those ideas. .

I can only imagine the amout of vanity and arrogance it takes to perform this kind of "intolerance-hand-gesture" to a body of ideas different than one's own.

He's not dismissing the ideas themselves. He's saying they are given outsized influence for a different reason: Hayek's politics. This shouldn't be that hard to understand.

Are you sure he's not doing that in order to dismiss the ideas?

I don't know. He doesn't give that much time to talking about Hayek, but then, neither do most people. His blog contains a few entries that mention him, but mostly they are about how he got some things very wrong. My guess is, whatever his thoughts on his contributions to economics, he feels they weren't anything special, which is what he indicated today, and that he's only associated with these ideas, rather than other people, because of his politics.

So, Dr. Krugman... sometimes winners of the Nobel Memorial Prize in Economics have no idea what they're talking about, yes? Duly noted.

So much for avoiding the personal attacks, I guess.

Unlike Krugman referring to Hayek "making a fool" of himself. Not an atypical Krugman ad hominem. A level MR rarely sinks to.

But you get the irony, right? Krugman is fine to use the academic beauty contest as a legitimate measuring stick on the one hand while at the same time acknowledging that it doesn't get everything right.

But you refuse to acknowledge that Walsh's piece is little more than a tissue of attacks, denigrating Hayek. (Note: I'm not defending the divorce. I'm saying in almost every instance, Walsh puts the worst possible spin on Hayek's life or on his accomplishments.)

Denigrating him because of his personal life? Hardly.

Denigrating him because of his unfairly exaggerated influence in the field? Sure, but that's hardly unfair. You might not agree with it, but it's different from calling him a jerk and saying he dresses funny.

"You might not agree with it, but it’s different from calling him a jerk and saying he dresses funny."

Thats roughly what Walsh does.
He attacks him for his married life.

The Robert Skidelsky interview in one of Alex's links is interesting:

"The other great economist of the twentieth century was Hayek, but Hayek disbelieved in macroeconomics; he did not believe it to be a valid science because he was a methodological individualist of a very extreme kind."

Skidelsky also believes Keynes misrepresented the classics. "No classical economist ever believed in the things Keynes claimed classical economics stood for and none of his associates did really."

And when Krugman says “Hayek is not an important figure in the history of macroeconomics” it is typical Krugman sleight of hand dissembling. Of course Hayek is not an important figure in macroeconomics as construed by the macro profession. That's kind of the point.

Let's not underestimate Hayek's significance in the process whereby the Keynes of the _Treatise_ became the Keynes of _The General Theory_, a role lost on folks with no competence in Hayek's work and little competence with Keynes' actual texts (rather than with textbook "Keynesian" constructions").

And people also seem to forget how Hayek played a very significant role in shaping the economics of the three economics who, perhaps as much as Keynes, gave us the "Keynesian Revolution": Hicks, Kaldor & Lerner. Hicks and Lerner without Hayek are unthinkable.

Walsh is a disgrace. Let me summarize the article: "Hayek was a jerk; just look at the way he treated his first wife. Also, he was overrated. Also, his books -- when not flat out wrong -- merely anticipated the work of others. Also, he wasn't really even wanted at U. of Chicago, and had to settle for The Committee on Social Thought appointment. Know-nothings promoted his work, otherwise he'd hardly be known. Also, the work for which he won his Nobel prize wasn't that that significant. I conclude, Hayek was a fraud. Also, he was lucky to live that long. Idiot couldn't even self-diagnose heart attacks."

About the heart attacks and divorce: one was mentioned because it was a serious turning point in his life, the other was the same but also a cause of his isolation, not any particular moral failing. The divorce was specifically mentioned because it led, in part, to him to his professional place in the U.S.

How is it that you don't see this?

TDJTDB is right. I thought the piece was entirely justified in bringing this up. The divorce was scandalous led to Hayek losing even more supporters. The point of the article was historical/social/intellectual - to explain how Hayek's work and life circumvented the mainstream profession for so long.

Besides, every body talks about that divorce. In the biography that Edelstein wrote about a decade ago, he also devotes a lot of time to it, and that was an intellectual biography. To talk about where Hayek ended up and not talk about these historical episodes is ignorant.

My hyperbolic point was that it is not just a piece about the historical/social/intellectual. It is downright ad hominem. That is, it attacks the man in an effort to show that the ideas were and are overrated. I'm not trying to defend Hayek re: his first wife: that would be pretty impossible, though I'm not expecting him to be a moral saint, either. I'm saying that if you look at what Walsh is doing, you'll see someone with who is tarring with a broad brush. Walsh, with little interest in trying to figure out why anyone would read Hayek today, consistently denigrates him.

Did you read the piece? The point of the details of the divorce, which barely go into any specifics, are to establish how he ended up where he taught and why his influence might have been reduced. He's not moralizing about his ethics, but merely saying what happened.

I get the sense that Walsh has assembled an array of facts and arguments designed to show that Hayek and Hayek's works have so many failings that he can safely be ignored, and/or that he's not important enough anyhow. The animus is such that Walsh never even aims at balance or fairness.

Do you think Walsh aims at these?

NB: I'm neither an economist nor a Hayekian. I can recognize a hatchet job when I see one, though.

What would be balance or fairness in this piece?

Lucas's Paradox is brilliant as well. Especially as it destroys any non-institutional explanations of poverty in the third world. In the 1800's there was no Lucas Paradox and poo countries actually had massive capital inflows. Then after the rise of modern socialism we see the Lucas Paradox crop up.

"Hayek is not an important figure in the history of macroeconomics"

Thank God for that!

+1 Most macro is just fiscal legedermain.

There are are two ways to read it, and Krugman is a smart guy. By analogy, you could say that Harry Markopolos was not an important figure in the history of Bernie Madoff and you'd be absolutely right and absolutely wrong at the same time.

We shouldn't dispute his influence in politics, but let's remember, that's a big part, if not all of the reason, he was so influential in economics. Which was Krugman's point, of course.

Yes, to the extent that macroeconomics IS Keynesianism, Hayek did not affect THAT.

...to the extent that Hayekianism opposes what is currently called Keynesianism.

But for that matter, how much does Keynes factor into what modern macros call Keynesianism?

Was there any particular, central idea that can be attributed mostly if not entirely to Hayek, Andrew'?

The question seems to be whether Hayek's return "with a vengeance" in the 1970s was really the product of Hayek's actual influence or if it was the product of new ideas that sought an ex post association with Hayek.

This seems to boil down to a question of intellectual history and I don't find the Laidler passage to be very illuminating: did Robert Lucas and John Muth have Hayek's texts in mind when they first sketched out rational expectations theory? If so, where is the direct evidence of this intellectual lineage? Did Lucas and Muth cite Hayek in their 1960s-era writings or is there clear evidence they were Hayekians at the time? Did they ever correspond with Hayek or trade ideas with him while in Chicago?

Well pointed. Lucas cited Hayek as a rethorical device. Hayek's economics ideas, specially in Prices and Production, are based on Bohm-Bawerk flawed concept of periods of production. The whole idea of a time structure of capital (I do like this idea) vanished from economics. Most economists followed the thinking of John Bates Clark or even Irving Fisher. If you read the work of Clark, you'll see he dismissing Bohm-Bawerk's idea that the temporal structure of capital is important. Note that Wickssell and, later, Georgescu-Roegen called this time structure of capital longitudinal and input-flux/output-point, respectively. But Clark argued that, in equilibrium, the time structure doesn't matter, and he is right. The whole idea of a function of production (even in microeconomics, not only macroeconomics) assumes that the time structure doesn't matter.

In fact, Capital theory was a major theme in the 30's. Hayek even discussed it with Frank Knight and, as far as I Know, Keynes sort of asked Sraffa to criticize Prices and Production, because Keynes himself didnt know in deep continental economic theories (but Sraffa did). What emerged as modern macro was, on one side, the fusion of Clark's (and, later, Knight's) capital theories, and on the other side, keynesian ideas like the ones developed by Hicks. Later on, with the representative agent tradition, some of Keynesian features were discarded. Nonetheless, I think it's a mistake to assume that business cicle theory and representative agent is Hayekian. There is no time structure and heterogeneity in production, which is essential to Hayek ideas. Also, Hayek criticized the thole idea of perfect rationality that later on would be used in modern macro (rational expectations can't be Hayekian, for instance).

So, I think Krugman is right when he says that modern macroeconomics has almost nothing of Hayek economics ideas.

However, Hayek was important in the 30's. He criticized The Treatise on Money and forced Keynes to move on. Take a look at the 16th chapter of the General Theory and try to understand it. It makes no sense at all. But Keynes wrote it because he had to provide a more firm capital theory (he failed, of course) than he laid out in his previous work, and that was severely criticized by Hayek.

Hayek in his later years very much regretted not having devoted more time to macro and having taken Keynes' work more seriously. While I do not ascribe to Hayek's methodological prescriptions for economics as a science, his body of work, stretching from epistemology to social philosophy is an amazing read for any student. It thoroughly demonstrates how economics truly is a social science, and integrates ideas from fields as far as evolutionary psychology. A class on economic history and Hayeks thought in particular sparked my interest in economics, much more than the - admittedly boringly taught - Introduction to Microeconomics, which ideally could have the same effect. I honestly don't get why his work is slandered that often. To anyone who has read e.g. Law, Legislation and Liberty it should be obvious that, while of course being controversial, the man was a brilliant thinker.

"The Constitution of Liberty" is not a book about economics, but it is a stunner - quite enough on its own to justify his reputation as a top man.

By the by, if economics and economists need badly to establish a reputation for integrity, they could always start by refraining from calling their pretendy wee prize a "Nobel" prize. Or even better, they could scrap it in an act of expiation for all their folly and corruption.

Mind you, since Physics has been stuck for at least thirty years, maybe they should suspend their prize until there's a sign of advance again. Or even, revolutionary thought, award it according to the old boy's wishes i.e. for work that confers the "greatest benefit on mankind".

Hayek's 1945 paper (as well as the elaboration of the idea discussed elsewhere) is the real reason why he is respected by most mainstream economists. While Hayek is certainly an important figure in the history of economic thought, he pales in comparison to Keynes. A polished, partisan, well-funded youtube video does not change the fact that the comparison inflates the importance of Hayek.

Russ' excellent videos are much more about the modern debate between those espousing particular "Keynesian" and "Hayekian" views of our current situation than about the men themselves, and given how the second video ends they don't appear intended to leave viewers with any illusions about who is considered more important.

Excellent piece, thanks for sharing.

Can anybody who has read Hayek, a staunch disbeliever in rationality (part of his scientific training was in neurology!) and somebody who, again and again and again, writes that people are shaped by their culture and are not, not, not the culture- and history independent atomicons of neo classical theory, really believe that he was in favor of methodological individualism?

Yes, I can. Hayek was mostly a disbeliever in the rationality of social planners.

As for methodological individualism read first chapter in P&P is where he expresses his skepticism about attempts to ".. establish direct causal connections between the total quantity of money, the general level of all prices and, perhaps, the total amount of production. For none of this magnitudes as such ever exerts an influence on the decisions of individuals."

Tyler writes: "Hayek is cited by other Nobel laureates in their Nobel talks more than any other Nobel laureate with the exception of Arrow."

Does this illustrate Hayek's importance in macroeconomics, or his importance in the politics of economists? Enlightened consumers of propaganda want to know!


Alex also passed my Tyler Turing test upon my first read-thru. Congrats to Alex.

I think Joan Robinson's denial of a prize combined with the 'leanings' of most winners throws up questions about the politics of the economics Nobel.

Mike Huben is the intellectual equivalent of a child molestor.

The Masonomists should wheel Alex out for all Krugman rebuttals.

Talk about a takedown.

What take down?

Milton Friedman himself stated he admired Hayek, but for his politics, not economics.


Hilarious reading from the world's most famous former economist. It seems that as he gained fame as a nobel winner, he forgot that people listened to other economists, or had access to libraries, or ...gasp...the internet. How else could you explain such obviously false nonsense?

When read all the way through, Warsh's piece has a very different tone from Krugman's. It doesn't seem to me that Warsh is dredging up the divorce or the itinerant appointments in order to dismiss Hayek, just as evidence that Hayek was isolated from the economics profession for most of the postwar era and as explanations for that fact. And he's right about that, surely.

The concluding paragraphs, for those who (like Krugman) seem not to have gotten that far:

'That said, it is pleasing to think that Hayek himself may yet turn out to have been a very great economist after all, far more significant than Myrdal or Robinson, when seen against the background of a broader canvas. The proposition that markets are fundamentally evolutionary mechanisms runs through Hayek’s work. Caldwell, of Duke University, notes that, starting with the Constitution of Liberty, “the twin ideas of evolution and spontaneous order” become prominent, especially the idea of cultural evolution, with its emphasis on rules, norms, and decentralization.

'These are today lively concepts in laboratories and universities around the world. “It could have been that Hayek was running a different race, and the fact that he didn’t do well in the Walrasian race was that he wasn’t running in it—he was running in the complexity race,” says David Colander, of Middlebury College. Hayek may yet enter history as a prophet of evolutionary economics, a discipline dreamt of since the days of Thorstein Veblen and Alfred Marshall in the late nineteenth century but not yet forged, whose great days lie ahead.'

All this is very well said yet does not contradict Krugman's point which is that Hayek's ideas are simply not important within macroeconomics. Krugman is right. Milton Friedman rejected Hayek's macroeconomics just as most mainstream economists did at the time and still do today.

In Hayek's 1932 letter to the editor (I think to the London Times), Hayek insists deficit spending even during a serious recession is undesirable because it pushes up the interest rate and crowds out private investment. Empirical evidence has not been kind to this assertion at all.

He also seemed to believe deficit spending CAUSED the problems.


:: because it pushes up the interest rate ::

Isn't that a bit disingenuous? With central banks being able to buy any amount of government debts?

To see what happens when this (for whatever reason) does not happen, just one word... Greece.

What is disingenuous? I provided a link to the primary source document in which Hayek makes this claim. Specifically, Hayek et. al. write the following: "At best they mortgage the Budgets of the future, and they tend to drive up the rate of interest -- a process which is surely particularly undesirable at this juncture, when the revival of the supply of capital to private industry is an admittedly urgent necessity."

Hayek's claim was and is unsupported by evidence and represents a misunderstanding of the economics of a recession in which people hoard large amounts of cash and invest only in safe assets like government bonds.

Additionally, I don't see what Greece has to do with central banks being able to buy any amount of government debt. You must surely be aware that the European Central Bank was not, in fact, buying up any amount of Greek debt when Greece was running double-digit deficits.

:: Hayek’s claim was and is unsupported by evidence and represents a misunderstanding of the economics of a recession in which people hoard large amounts of cash and invest only in safe assets like government bonds. ::

You are pretty much making the Hayekian case. Government bonds draw away the financial capital from the private sector. Which makes the percent rate on those bonds pretty much irrelevant.

:: You must surely be aware that the European Central Bank was not, in fact, buying up any amount of Greek debt when Greece was running double-digit deficits. ::

Yes, but is does for the USA/England where whose low percent rates make your argument.

Curious Bystander, your statement is incorrect. Here is Tyler Cowen on the subject of crowding out. There is little empirical evidence in favor of it, especially in times of low demand. If you want to make your case, you need to show where Tyler is contradicted by the available empirical evidence rather than just doubling down on assertions that are not supported by evidence.

From the link:

:: .. the general lack of a connection between deficits and real interest rates in the United States ::

I guess, you can interpret it as lack of crowding out. If you take the money supply out of the equation and look only at the demand side. Can you see problems with this interpretation? I certainly, can and do.

Tyler, is saying pretty the same, below the words quoted above.

First, it is my humble opinion that Paul Krugman is a partisan hack so I doubt I would find any merit in anything he says even if it did have merit. It is very sad, and he would like to be Keynes, but he is more likely to be remembered in a similiar negative light as Jimmy Carter or the Fed in the early 30's or mid 70's. We can see projection in the quotes. These economist will find that their theories have been discredited. Whether Keynes was economically successful can and has been debated; however, politically he was very successful because it gave power to the people in power and it sounds good. We still hear about how poorly the economy is doing because people aren't spending enough. If stupidity got us into this why can't stupidity get us out of it. It reminds me of my wife's business ethics teacher gave her a poor grade because she postulated that Walmart benefited the rural poor by providing them goods and services they would not otherwise be able to afford. Besides the fact that I do see how it is possible to for a teacher who states they are a socialist to teach business ethics, there are academics who work in their own sound chambers who accuse others of what they are infinitely quilty of to the detrimint of truth and understanding.

Well, he did have that successful career advising Enron.

Oh, we're back to this? I was wondering when this was going to come up. I have to say, I am surprised you held out for so long.

I defy you to give me even one iota of evidence that Krugman did anything wrong, legally or ethically, in this situation.

The theme was stupidity, not illegality.

actually no. he was called a partisan hack.

Yes, partisan hackery was the particular flavor of stupidity referenced re "If stupidity got us into this why can’t stupidity get us out of it?"

The main theory of Hayek proved as wrong as Keynes'. Or was there ever a large scale succesfull reduction of (absolute!) debt during 'good times'? Deficitit spending, on the other hand, was seen a lot, and seldom with a sustainable positive result.

Anwa, to me as layman it seems that in macro economics, the blind pundits are accusing the deaf ones to not hear anthing, and vice versa to not see anything.

UnlearningEcon said: " know reliable economic statistics from the SU are incredibly difficult to collect so I’ll take your word for it. Do you have any good reading on the subject?"

There are many very good books written by Sovietologists (from the 1960s through the 1980s, and confirmed after the opening of the archives by e.g., Mark Harrison, Paul Gregory, the Warwick paper archives, etc) which explore the functioning of the system and its inefficiencies. A few good places to start:

Papers (recent)

Books (older)

(Yes, I self-promoted there a teensy bit)

You know what, this is funny. I know your tag liberty, and I immediately thought of some of your old posts at Econlog when I read the post you're responding to above. Kudos.

Great links, thanks for sharing.

the Hayek thing is almost entirely about politics rather than economics

Pot, meet kettle.

Bingo. I cannot believe I had to scroll this far in the comment thread before someone made this succinct, and self-evident point.

Talk about a bunch of chest beating economists.

Except, Krugman's contributions to economics are known, while, as we are discussing here, Hayek's contributions to economics have been questioned, refuted, then destroyed. Its garbage. His contributions are only to the ideology of Randians.

Seriously, consider the thought contributions to macroeconomics that Friedmanites and Keynesians and NeoKeynesians make to macroeconomiic policy discussions - they offer tangible evidence. Consider what the Hayekians do, quite predictabily, like TallDave up there did, they fall back to "Road to Serfdom" and throw in the "central planning is bad!" hat into the ring and then walk away.

I would suggest that when one's foundation is built on "central planning is bad", logically, it would be difficult to influence the bureaucrats.

Related: Do you think that by being "refuted", one can not significantly contribute to a particular branch of science?

I have heard Economists call their study science.

I don't have a dog in this fight; I try to gather as many sources of information as possible, but Krugman post BDS, seems to take more of a political tack -- maybe it's information bias on my part.

1. What do bureaucrats have to do with it? We're talking about the profession itself. Are the Chicago School economists "bureaucrats?"

2. Yes. If you wanted to make the case of evolution, would you support your point with the arguments of Darwin or of Bill Maher? Maher might even have a point, but his arguments would constitute "bad science" just like Hayak's, it seems to be agreed is "bad economics." Milton Friedman himself said so about Hayak. Hell, Krugman does, at the very least look to Friedman for good economics, and in fact, most of the field does. Does anybody within the Cafe Hayak sphere ever look outside their own ideology, even when the evidence is good?

3. Yes, Krugman has become a bit of a political hack. I'll take that ove rthe number of right-wing commentators that were telling us we were not going into a recession even AFTER Lehman failed, which was over a year after the housing bubble popped. I mean, beyond that, when you still have one side of the spectrum that poo-poohs the whole Iraq war fiasco, the taxes, and then has the nerve to say that entitlement spending is to blame for everything here, what do you expect? What else but BDS a full war assault of idiots?

1. It is difficult to justify macroeconomic positions unless they are implemented in reality e.g. bureaucrats. I hesitated to use the word bureaucrat initially as I thought you'd give that sort of reply.

2. When I point to Einstein and the recent discovery of neutrinos, do you still hold your position?

3. I shall not settle for either.

1. Do you mean policy makers? A bureaucrat is someone with a rote desk job. I know where you are going with this, sort of like how the police will have an interest in not totally eliminating crime else they'd lose their jobs. Its a pretty stupid point though. So someone who enters government with the intent to deregulate would inherently be a regulator because he has joined the government?

2. My understanding is that discovery of neutrinos occurred in a scientific setting. You don't get it. THe point is to prove someone incorrect, or challenge ideas with evidence, not with ideology.

This might ever end.
1. A bureaucrat is a member of a bureaucracy and can comprise the administration of any organization of any size, though the term usually connotes someone within an institution of a government or corporation. If you do not believe in self-preservation, just say so.

2. Yes, and that is my point: science is about investigating phenomena, acquiring new knowledge, or correcting and integrating previous knowledge. One can be refuted and still contribute which is opposite of what you said in your 2nd reply. That's the beauty of it. You do not get it.

Great post Alex. Hayek is certainly overrated by some, but he is vastly underrated by Krugman. I do want to stick up for the Keynesians in one respect viz the microfoundations issue though. The theory of liquidity preference is a vastly more sophisticated microfounded theory of the market for money balances than anything anyone else developed before that theory, and it has stood the test of time with astounding resilience. So Lucas et al maybe moved macro in a more Hayekian direction but they are still indebted to Tobin, Hicks, Keynes, Patinkin and so on for their base case theory of the money market, which no one has seriously proposed replacing to the best of my knowledge.

Sadly, the content on these Keynes - Hayek rap videos is of a higher intellectual quality than found in most Krugman articles

round 1:
round 2:

Actually those videos are a complete misrepresentation of Keynes and are quite clearly biased in favour of Hayek.

How big a stimulus do you want? $3 trillion? think that will make things good?

You can talk about IS-LM all you want...bottom line is he/you believe that a big ole lump of fiscal stimulus provided via government issued debt and confiscation of private wealth will make the economy work better.

I say try it...see what happens....should be lots of fun.

Had you bothered to actually read any of what Krugman has written on this, you'd see he's made the case for a fairly specific level of stimulus. You don't have to agree with him, but to imply that he didn't clearly make his case, over and over and over and over and over and over yet again, is just wrong.

Ah yes, the "reduce U.S. debt to junk-bond status" level of stimulus.

'You can talk about IS-LM all you want'

Putting aside that I don't favour the IS/LM approach, you are essentially saying that we can provide theoretical underpinnings for our policy prescriptions but it doesn't matter to you because you don't like it?

'...and confiscation of private wealth will make the economy work better.'

Please. 'The money has to come from somewhere' is such a joke by now that I can't be bothered to respond formally. Just look up liquidity preference.

You still haven't responded to my main point that the videos are dishonest and biased.

Shockingly, a video produced by Cafe Hayek is pro-Hayek.

My problem is that this is the message economists are sending to ordinary people, and it's dishonest. Karl Smith agrees:



Thankfully, Paul Krugman helpfully points out to us that Keynes and Hayek weren't actually hip-hop stars fighting over the East-Side West-Side turf.

Maybe that says something about his regard for his audience?

I've gotten the impression that Krugman doesn't so much underrate Hayek's influence (outside of which is discussed above, I mean) as wish Keynes' influence was put on the same level, which he feels it isn't. This doesn't mean he won't point out errors, some of them huge; see his archive for that. Of course, he doesn't talk about Hayek that much.

See, when a bunch of Chicago-school guys start saying that Keynes isn't important in the professional discussions I will hold my nose and defend Keynes.

Let's just agree that whoever wins the academic circle jerk doesn't mean anything.

Personally, I think people are going to look back in 50 years and wonder why we didn't spend more time talking about the Rahn curve.

It's not an academic circle jerk. It's about who made particular contributions and how valuable they were. Look at the results for the top citations: while not that different, they aren't all that similar. Can we say that's an indication it's less about politics--surely nobody thinks Stiglitz and Friedman agreed on everything--and more about ideas? Hell, Krugman himself has said on more than one occasion that Friedman made a lot of important contributions to the field, and I doubt they'd agree on much these days.

Hayek provided a liquidity preference theory before keynes, as hayek points out.

How so? Hayek's transmission mechanism from money to interest rates was the Cantillon effect. I.e. people in the bond market get the money first before it disperses more evenly throughout the economy. I don't think you can equate that with liquidity preference. It's more of a mechanical theory as opposed to a portfolio choice theory. That is, it would not have meaning in a representative agent model whereas LP would. Also, the two theories have different implications of accelerationism, as Laidler and others have pointed out.

Hayek might've had something like liquidity preference in mind, or believed it to be in congruence with his own ideas, although I have not found that evident from my readings of his work and I have read a lot of Hayek, though certainly a good deal less than yourself. Hayek certainly did not flesh it out as a portfolio theory with the brilliant, simple clarity that the post-Keynesians managed, which was essential to make it widely understood and widely applicable as a technical tool.

To add one more thing, I like Hayek a lot. Just want to give credit where credit is due here. We probably aren't far apart.

Hayek did not even incorporate the concept of Knightian uncertainty into his theory properly so how you can believe he provided a theory of liquidity preference is beyond me.

You cannot have actually read Prices and Production and believe that Hayek is a precursor of Lucas. Or that the anti-empirical Hayek and Mises are precursors of Sargent. That is too odd to be believed. If Lucas cites Hayek he means his Knowledge Paper, which has nothing to do with his business cycle work of the 1930's. Minsky is closer to that Hayek than Lucas is.

However, the Knowledge paper by Hayek is so against things like rational expectations and representative agent that, again, Hayek is not a precursor of Lucas...

The idea of the market as a discovery process doesn't match well with assumptions like rational expectations, equilibrium and representative agents.

And yet if you followed the links in the post you would see that Lucas opens his paper Understanding Business Cycles by citing Hayek's Monetary Theory and the Trade Cycle.

I know. I read the paper few years ago. That's why I think it's only a rhetorical device...

In the interview Alex links to above, Lucas first says the two most influential economists for him were Friedman and Samuelson. Then when pressed on the matter of Hayek, Lucas says he used to consider himself something of an Austrian but then realized this was a product of his misreading of Hayek's work. This seems to cut directly against the point that the actual writings of Hayek (rather a vision of Hayek that Lucas constructed in his own mind after the fact) were influential in Lucas's academic work.

Moreover, Lucas's paper was written in 1977 but the groundwork for rational expectations macro had been set down in the 1960s.

Greetings from snowy Uppsala.

As I understand it, what Krugman argues is that Hayek never produced any significant theories by the standards that we judge economic theories today, i.e. the standards that Milton Friedman described as "positive economics". In "positive economics" we judge theories through some variant of Popperian thinking, in fact in my view Popper-Lakatos are completely sufficient in describing what virtually all economists that publish in refereed journals have been doing after WW2. By these standards we value theories based on their abilities to make novel, interesting and preferably brave predictions. Economic theories are wrong if their predictions don't correspond to the state of the world and economic research projects (such as the attempt to bulid microfounded macro) are judged by their ability to produce theories that improve our predictions on the state of the world. Additionally, having studied in the two larges Swedish universities, I would say that I have never had even one professor, AP or even phd lab assistant that would disagree that this is the standard by which we judge economists.

In this sense Krugman is right to say that unlike Milton Friedman, Hayek never produced anything noteworthy by these standards. His most striking predictions was that Sweden would collapse into a totalitarian dictatorship (In the very first lines of road to serfdom he says so) as a result of our policies on inequality and that the attempts of the government to stabilize the macro economy through fiscal or monetary means would fail. He was wrong. Milton Friedman would have agreed he was wrong. The Nobel committee would have agreed he was wrong. I too, last time I checked out of the window did not see a country that resembles anything like Hayek's predictions and I, too, humbly agree he was wrong.

On his microeconomic theories, Hayek was not even wrong, because these do not produce any predictions that can be tested. Contrast this with say, Von-Neuman Morgernstern, whose theories produced an avalanche of research focused on whether they sufficiently predict economic behavior. Hayek produced a very interesting analysis of how the economy might work, but since these theories (be they theories on knowledge, co-ordination, market structure etc) do not make any predictions. By the standards of positive economics, they are not even wrong.

The Nobel committee never considered Hayek a macro-economist in the same league as Friedman, Lucas or Hayek and there is nothing I can see in the quote you provided to contradict this. You also concede that Hayek's contribution refers to the way we think about macro-economics. Bruce Caldwell, one of the most notable modern Austrian-apologists too concedes that if Austrians want to be taken seriously by today's economists need to make their theories comparable to the mainstream ones. Finally, it is completely irrelevant who Bob Lucas (or anyone else) cited in his Nobel lecture, much more so his papers are full of rigorous math and tables with P-values, i.e. very, very Popperian stuff and the exact opposite of what an Austrian economist would do. In fact Austrians like von Mises, when they weren't promoting Musolini as savior were busy arguing that wrong predictions are not sufficient grounds to reject a theory.

In my opinion Krugman is right to say that Hayek has always been irrelevant as an economist, as long as you define economics as typically done by your colleagues around the US. Stimulating a debate, participating in a debate and producing an interesting worldview on how to think about economics, is not in the same league as proposing theories that can be evaluated as wrong or not wrong. Hayek rarely did such a thing and when he did he failed miserably.

So your claim that Hayek is relevant as a macro economist is in my opinion invalid, because it pre-supposes a definition of economics that almost all contemporary economist would disprove of. Once you judge Hayek's theories by the same standards that you judge the theories of Keynes, Friedman, Lucas, Krugman and so on, the position that Hayek did anything relevant or not wrong can be safely rejected, at least in my opinion. But I would love to see you argue otherwise. But in your post you do not seem to believe otherwise, please correct me if I am wrong.

Now, I think what Krugman means by classifying Hayek as more or less a political theorist, is that even though he was either wrong or not even wrong as an economist, he had an astonishing ability to produce appealing political arguments, with Road to Serfdom a remarkable example. And Hayek, in addition to being a very competent political theorist, was also lucky. Most political theorist don't ever get to be considered for a handshake with the King. But Hayek was lucky because the Nobel committee found itself in need to balance the prize to Myrdal (and the Nobel committee does balance things, always has, always will), he was lucky because he had the unique privilege to be an opponent of Keynes in the 30s (but in the same way that I would be very lucky if I played an one-on-one basketball match versus Kobe) and above all he was lucky because his political beliefs coincided with what Thatcher-Reagan had to say. But being lucky and being an outstanding political theorist, does simply not rescue Hayek as a macro economist, at least in my eyes, so I have to side with Krugman here.

But why did the Nobel Committe balance Myrdal with Hayek, why not with someone else if they did not belive he has made important contributions to economics? And I guess the AER is also full of faux economists as they included Hayek's "Use of Knowledge in Society" in their list of top 20 AER papers, which indeed contains a testable hypothesis, namely that prices are signals that communicate information about scarcity and therefore central planning cannot match the price system in resource allocation. Information economics has been largely inspired by Hayek's paper, developing, criticising and yes, testing the hypothesis.

Bruce Caldwell, one of the most notable modern Austrian-apologists too concedes that if Austrians want to be taken seriously by today’s economists need to make their theories comparable to the mainstream ones.

I agree. After all, that Austrian/micro stuff is just petty, boring crap that says the same thing over and over: production must precede consumption; TANSTAAFL; value is subjective, yada yada. Where is the uplifting vision of bold, large-scale engineering of society in all that? Only MACRO theory provides the necessary framework to explain how consumption can precede production, bureaucrats and academic economists know the real value of everything (especially labor), if you need more money you just print it, and everybody can live off everybody else.

Actually only labor knows the real value of labor. People who don't have to work for a living rarely understand how expensive labor really is.

As for printing money - only socialists do this. It never happens in the perfect rationality of Darwinian capitalism, where money is always sound, markets never collapse or explode, banks never have to be bailed out, and no one has ever heard of asset bubbles or grinding poverty.

As for Hayek, he was simply used as a mascot to promote Angry Right policies. In the same way dedicated Angry Rightists believe themselves to be fervent devotees of Adam Smith, even though they've never cracked open a copy of The Theory of Moral Sentiments and discovered the appalling appeals to mutuality and compassion therein, the *idea* of Hayek as a political totem of 'liberty' (as it's known, rather disingenuously) is more important than the reality.

The Angry Right needed an anti-Keynes, they sponsored and co-opted Hayek for the job - see the history of the Mont Pellerin society for details - and the rest is tragic history.

Krugman hints at this, but doesn't quite say it outright - possibly because Hayek's practical role has always been to promote a shady and disreputable branch of political and moral philosophy.

Anyone who disagrees needs to explain why Hayek's ideas are still taken seriously - well, semi-seriously - when they fail objective reality testing with such absolute consistency.

That's the Tullock argument, but it's more than a little tendentious. Hayek's prediction for Sweden was contingent, and in fact Hayek's own work was influential in preventing that outcome, and Sweden eventually <a href ="http://en.wikipedia.org/wiki/Sweden#Recent_history" undertook many free market reforms.

Criticizing Hayek this way is too much like saying "Well, you told me I might slip on the ice if I wasn't careful, and I didn't slip, therefore your theory of slippery ice must be wrong."

First, no, Hayek's argument is really clear. Sweden was on the road to serfdom since the early 50s because of policies that promoted equallity, while the reforms didn't come until the 90s. Second, these reforms were not based on an Austrian analysis of the economy but a very very neoclassical one, Hayek was completely irrelevant on how to decide what to do when we had that discussion in Sweden. Want proof? Today our policies in areas such as taxes, welfare state, healthcare and education are more or less what Krugman proposes in "conscience of a liberal". So the "Sweden avoided the crash that Hayek predicted because they followed his advice" hypothesis is wrong, the fact is that Sweden today resembles Krugman's vision, not Hayek's. But we have not collapsed. Hayek's prediction on Sweden is exactly what a wrong prediction looks like and if you want to convince me otherwise you need to do far better than a wikipedia reference. So unless you are prepared to argue that Sweden today resembles more a country that followed Hayek's rather than Krugman's advice, or that Sweden is a totalitarian or failed state, Hayek's prediction is wrong.

But my point was not so much that Hayek was wrong, as that he was not even wrong. Yes, the AER article you mention is a very interesting one, but there are no predictions in it. I.e. there is nothing you could do to refute the claims in it. This is the bar for people like Friedman and Krugman who believe that social sciences should be judged on the same basis as natural sciences, i.e. on their ability to make predictions that correspond to the actual state of the world. The bar is not getting 9000 citations. Now of course there are certain schools like Austrians that claim that non-correspondence among the theory and empirical evidence is not enough to reject the theory. This is my point, that when you say "economists" in the same way that Milton Friedman and Paul Krugman use it, Hayek is irrelevant because he never did "economics" in that sense.

The disagreement is not between left leaning Keynesians and right leaning Hayekians as you seem to assume. It is among "positive", "Popperian" economists left and right versus Austrian economists. Friedman and Krugman represent different political viewpoints but they would have agreed on the issue that Hayek had nothing relevant to say in their economics. In my view the fact that M. Friedman wouldn't let Hayek teach economics in his department even though they more or less agreed politically, is very strong support in favor of viewing the Hayek vs. Keynes issue as an issue between "positive" economics and Austrians rather than an issue between left leaning and right leaning economists.

And this is why I am so curious why Tyler seems to side with Hayek on this one, considering that he usually expresses views in favor of a positive approach in issues that concern philosophy of science. In fact one of my favorite blog posts is this one:
so let's not turn this into another left vs. right debate. There is a question far more interesting. That is, if you believe that Austrian economics (i.e. Economics that state that correspondence of theory and empirical evidence is not necessary or even desirable) pass the bar, why not let non-western medicine pass the bar? If you reject an approach towards medicine because the doctor does not have empirical evidence to support his case, why would you support a school of economic thought that states the exact same thing?

Which part of "contingent" is confusing you? Hayek never says "Sweden must inevitably become a fascist state" he only explains how and why greater intervention makes that more likely. Even the Weimar Republic itself might have avoided that fate absent certain exogenous shocks.

And no, Krugman is not in favor of vouchers, nor of moving 10-20% or of GDP from gov't control to the private sector. Quite the opposite, in fact, see his stimulus prescription. It is pretty silly to pretend the trend is not Hayekian.

"Yes, the AER article you mention is a very interesting one, but there are no predictions in it. I.e. there is nothing you could do to refute the claims in it. " ??? how about these papers : http://onlinelibrary.wiley.com/doi/10.1111/j.1465-7295.1982.tb01149.x/abstract, http://economics.ca/2003/papers/0285.pdf and there are more.

Are you aware of the relationship between Hayek and Popper? The way you have placed them in methodologically opposed intellectual camps seems to indicate that perhaps you are not. I suggest that you look into it.

I would also like to say that you rather assume than defend the proposition that positivism is the only proper method for understanding economic principles. As if deduction had no place in human reasoning. Your post seems to betray a lack of understanding of the limitations in applying Popperian falsification to social sciences. Popper himself was not as confident!

Your argument is either disingenuous or misinformed.

In real science, deduction on its own is *absolutely worthless* - as worthless as any other form of speculation. It only becomes useful when deductions are confirmed by empirical testing.

Even the social sciences try to test speculation at least some of the time.

Economic 'science', on the other hand, is pure pseudo-science. When someone like Steve Keen can point out that fundamental 'facts' like the supply-demand curve turn out to be nonsensical when tested empirically, the fact that economic 'theories' are garnished with differential equations makes the whole pastime an embarrassment.

The reality is that economics uses the pretence of rigour purely as a rhetorical and persuasive device for political purposes.

It belongs with eugenics and phrenology, not with quantum physics.

We have people arguing on this board that Hayek 'proves' that the US is the richest country - which will surely come as a surprise to those of its inhabitants who have no access to workplace democracy, or who have had their homes stolen by predatory lenders, or whose income has remained relatively static while prices have increased and their share of that GDP has falled off a cliff.

Poverty and social inequality literally cause as many deaths as some types of cancer in the US [1] - but apparently this is fine because per capita GDP is a large number.

And *this* is economics, in all its tawdry lumpen-intellectual glory.

[1] http://www.sciencedaily.com/releases/2011/06/110616193627.htm

"In real science, deduction on its own is *absolutely worthless* – as worthless as any other form of speculation."

If your statement is true, then most of mathematics and basic logic is worthless. It is worth debating whether premises are ultimately derived from experience or whether some principles are axiomatically correct. To say that the process of deduction itself is "worthless", however, is extremely foolish.

I actually agree with you that the differential equations and mathematical formalism of economics are a "garnish", or often result from rather unrealistic simplifying assumptions. However, a basic economic idea, such as opportunity cost, does not require a mathematical model. Establishing its basic truth does rely on deductive analysis. Would you care to dispute that? Are you capable of doing so without applying any deductive logic? That would be interesting to see.

I'm curious how much reading of economics you've actually done from primary sources. You do realize that there is a substantial literature on methodology, right? Your post, like that to which I first responded, doesn't indicate much appreciation for the problems associated with applying inductive methods to the analysis of human behavior. Even if you can conduct controlled experiments on humans (which is in itself an imposing challenge), results can usually not be generalized. One problem is that part of the causal chain determining behavior is internal to each actor; thus, isolating all factors (in order to institute the experimental controls) is practically impossible. Another is that when people become aware of what a particular predicted outcome is, they can purposfully take it into account to thwart it.

Pretending that these problems (and others, the above is not exhaustive) do not exist, and just decrying economics because it is not scientific like chemistry would be vain and foolish. In fact, treating social science as if it were a form of chemistry is a misapplication. Ironically, Hayek, the man under discussion here, addressed these issues at length in "Counter-Revolution of Science", which I'm sure you're familiar with, right? 'Cause of course you only criticize the ideas of those you're actually familiar with, n'est-ce pas?

"We have people arguing on this board that Hayek ‘proves’ that the US is the richest country."

I'm not sure what comment you're referring to. I don't see any such simplistic argument, but maybe you can point it out specifically--that is certainly not a quote. You then list the various ills of American society. Yes, they are. But you're rather insinuating guilt in an ambiguous manner than actually making any kind of case, so I won't both arguing about it.

It is evident that you have an axe to grind. Your dismissal of the whole field of economics, at least a couple of hundred years worth of diverse literature, indicates a profound ignorance of the subject. Making such a wild claim just shot your credibility down the crapper for me. Sorry, that's just how I judge things.

Oh, please.

How large were publicly owned companies then and now as a share of the economy? Which deregulation moves were made and to what industries? What is its health care system like? And how much less are they collecting in taxes now?

Were you not able to read the link yourself?

And, of course, it should go without saying that Hayek best explains why the Soviet Union collapsed, and why the U.S. is the richest large country on a PPP GDP per capita basis.

Apparently a newly fashionable notion is that China proves Keynes right, but that ignores the ease of catch-up growth -- there's a hell of a lot more low-hanging fruit between $2K PPP GDP per capita and $5 than between $20K and $50K. They're still just beginning to drag themselves out of a Marxist hell.

These are examples of well-articulated goal-post shifting. Yes, we know that the vast economics literature is an exercise in torturing equations. Yes, we know that the guys who don't highly value that approach don't publish in those journals very often.

By the way, not even being wrong is better than being wrong. Keynes taught that. Yes we know that popularity contests are self-reinforcing. Keynes taught that too.

I like it how TallDave had to qualify "Richest Large Country on a PPP per capita basis". Because, you see, a socialist Norway is richer than US on a PPP per capita basis. Of course, they have oil, but US has land, and lots of other things Norway doesn't have. Or how about Singapore ? Which basically is or was for a long time a dictatorship?

I'd also like to know how many things have gone in the other direction: have any taxes gone up or have any regulations increased?

In a very broad sense, I am more than willing to believe they went too far with taxes and regulation, but are they going in the complete opposite direction? Something tells me no, and yet from the tone of many here, you'd think that they were.

There unfortunately seems to be a too little or very one-sided information on this topic.

Actually, you can pick a couple of smaller states in USA that favorably compare even with Norway. That is no country as rich as Washington or Delaware, for example. Great European countries like Germany are comparable to America's poorest states, like Alabama.

Norway is tiny (like Hong Kong, which is even richer and more free-market, but which I also omitted). What makes sense it to look at the West European average vs. the U.S. average.

BTW, Singapore also has one of the highest economic freedom ratings.

in both Hong Kong and Singapore, 50% of the population lives in subsidized housing and education and healthcare are heavily subsidized. Hardly the Haekian libretarian paradise. Why look at West European average ? Why not look at the fact that there are several countries that, according to libertarian predictions, should be basket cases and they are not. Furthermore, if you start going down the path of singling out US states, let's start with pointing out that Massachusetts is one of the richest states within US and also one of the most socialist.

Bottom line, the prediction that more socialism automatically leads to disaster so far has failed in several important examples. This makes sense because all those places have decidedly free market policies in some areas and socialist policies in others - that is they defy the false choice dichotomies that are always being discussed

In the U.S., something like 90% of people live in gov't-subsidized housing.

At any rate, HK usually heads the economic freedom indices.

Bottom line, the prediction that more socialism automatically leads to disaster so far has failed in several important examples.

And the straw flies everywhere! It's a knockout blow! The crowd goes wild!


The US has oil and gas too. Produced more oil cumulatively than any country on earth.

I don't see how Hayek explains the collapse of the Soviet Union. The information problems were there for all the command period, yet it collapsed only in 1991. Hayek explains why the Soviet Union performed inefficiently, not why it collapsed. It collapsed because oil prices plummeted, and the Soviet economy was dependent totally on rents from oil and gas production (as Russia is now). I don't recall Hayek ever discussing this.

In saying it was "lucky" for Hayek that his ideas coincided with those of Thatcher and Reagan, you are saying it was contingent. But what if they were influenced by him, that is what if his writings caused politicians to lose faith in utopianism and central planning?

What is Popperian about looking out your window and determining the level of 'dictatorship-ness' in the Swedish political landscape? What about soft despotism: can you detect that? Perhaps you are a Swedish political groundhog with special sensors.

Maybe, I'm blinded by the fact that Krugman is a polical hack like Rush Limbau, but what economic theory that Paul won the Nobel Prize for accurately predicted anything is this recession? I mean besides the fact that increased unemployment insurance would lead to higher unemployment.

Wasn't Krugman also lucky in the absolute viriol hatred of George Bush?

I find the same academic biases at work in this response as I find the academics in general. Trying to find examples to prove what you would like to be true instead of actually determining what the actual truth is. I find Martin Zweig and Peter Drucker to be better economists than what is being presented as leading government/academic scholars. From Martin Zweig, higher capital requirements will lead to a contractionary money supply. The government forces the banks to cancel loans to small business, instead of mortgages, inflates the money supply so manufacturers and small business go out of business while bankers get bonuses and money to comply with new govnerment regulations. Peter Drucker - paying someone to do something a dead person could do is a bad investment. Isn't that what all these transfer payments are about? Is the aggregate demand a cause and effect relationship? Should Goldman Sachs get a Nobel Price because their risk management department had the correct formulas to short the housing market?

Are there any economic model on the inherent corruption of centralizing economic power within a central government? I bet there is data from the US, Greece, and Italy.

Are there any economic model on the corrupting effects of centralizing power within the government on academics and journalists? Would Katie Couric make millions of dollars if the policy were made at a county level? If the central government were not involved in trying to control the economy, would Jeffery Sachs, Mark Zandi, or Joseph Stiglitz have the same level of fame or influence? Doesn't this have an affect of the people who choose who will teach economics.

I honestly don't know what to say to the claim that Krugman is in the same league as Limbaugh. I'll try, though, I guess.

"but what economic theory that Paul won the Nobel Prize for accurately predicted anything is this recession? I mean besides the fact that increased unemployment insurance would lead to higher unemployment."

Krugman won his Nobel for trade stuff, so this isn't even a sensible question. It's like asking why a cardiologist isn't as good at finding tumors as an oncologist.

But to the extent that housing was an issue in the collapse and talking about it mattered, Krugman was there. He was also there on the Internet bubble.


And your assertion that increased UI leads to higher unemployment--not in the short-term, but over the long-term (and no, you didn't state this, but this was implied)--is, at best, highly questionable.

As for Krugman hating Bush on a personal level, I don't think this is the case. He goes after Obama in the same nearly obsessive fashion, and while there might be more differences than I think between the two, they are largely on the same side. But in both cases, he's not attacking their moral characters, only their policy inadequacies, as he seems there, and what this causes them to do.

I agree, Krugman's really more in Ann Coulter's league. Limbaugh is more of a conservative populist, Coulter/Krugman are in the "no argument is too tendentious for me!" camp, as his own ombudsman noted.

He was also there on the Internet bubble

Heh, yes, you could say that, but that might not be the best example of Krugmanian perspicacity...

"By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's."

Amazing post. Thank you for your comments.

Did you know that Mydral opposed giving Hayek the Nobel Prize?

Quick fwiw...former Marxist and Nobel Laureate for his work on institutions, Doug North, cites Hayek as, in his opinion, the most important economist of all time.

A lot of Nobel Prize winners do. Hayek's ideas lead to the formation of several schools and methodologies in economics.

"Krugman’s claim that 'the Hayek thing is almost entirely about politics rather than economics'".

Pot. Kettle. Black.

All of macroeconomics is politics - I think in a Venn diagram the macroeconomics circle would be completely subsumed by the politics circle. Charts and graphs, well-reasoned analysis, and even out-of-sample tests, happen to be an excellent way to properly vet your already established political views. But surely economics can never be put on the same ground as science?


The use of knowledge in society - Hayek - Cited by 7932

The following quote tells a lot about Hayek:

“Though I strongly sympathise with the desire to complete
the economic unification ofWestern Europe by completely freeing
the flow of money between them, I have grave doubts about
the desirability of doing so by creating a new European currency
managed by any sort of supra-national authority. Quite apart
from the extreme unlikelihood that the member countries
would agree on the policy to be pursued in practice by a
common monetary authority (and the practical inevitability of
some countries getting a worse currency than they have now),
it seems highly unlikely, even in the most favourable circumstances,
that it would be administered better than the present
national currencies. Moreover, in many respects a single
international currency is not better but worse than a national
currency ifit is not better run. It would leave a country with a
financially more sophisticated public not even the chance of
escaping from the consequences of the crude prejudices
governing the decisions of the others. The advantage of an
international authority should be mainly to protect a member
state from the harmful measures of others, not to force it to
join in their follies.”

F. Hayek (1974, pag. 24) em “Denationalisation
of Money”

Paul Krugman's followers would do well to read Milton Friedman's nobel banquet speech. Here's an excerpt:

It is a tribute to the world-wide repute of the Nobel awards that the announcement of an award converts its recipient into an instant expert on all and sundry, and unleashes hordes of ravenous newsmen and photographers from journals and T.V. stations around the world. I myself have been asked my opinion on everything from a cure for the common cold to the market value of a letter signed by John F. Kennedy. Needless to say, the attention is flattering, but also corrupting. Somehow, we badly need an antidote for both the inflated attention granted a Nobel Laureate in areas outside his competence and the inflated ego each of us is in so much danger of acquiring. My own field suggests one obvious antidote: competition through the establishment of many more such awards. But a product that has been so successful is not easy to displace. Hence, I suspect that our inflated egos are safe for a good long time to come.

Considering Krugman's blog, I must agree with Friedman: the ego of certain Nobel laureates is seriously inflated.

Because he usually brings up his Nobel in every other post? Because Krugman uses his ego more than any of us use it?

Are you actually defending Krugman? He is a blatant hack or idiot.

probably better to point out where he is wrong

I was more concerned with inflated attention being granted in areas outside his competence.

Why is Paul Krugman unable to give any credit to his intellectual opponents? His main argumentation tactic is disdain. I guess that requires less effort and his readers are easily pleased by his antics.

He is able to give credit. Here's one example:

I don’t want to push the religious analogy too far. Economic theory at least aspires to be science, not theology; it is concerned with earth, not heaven. Keynesian theory initially prevailed because it did a far better job than classical orthodoxy of making sense of the world around us, and Friedman’s critique of Keynes became so influential largely because he correctly identified Keynesianism’s weak points. And just to be clear: although this essay argues that Friedman was wrong on some issues, and sometimes seemed less than honest with his readers, I regard him as a great economist and a great man.

It's clear that he doesn't feel it was justified in Hayek's case.


Wait: are you linking to the infamous obituary in which Krugman accused Friedman of "intellectual dishonesty", and saying that it proves Krugman is capable of giving due credit to his intellectual opponents?

Krugman: "And over time Friedman’s presentation of the story [of the relationship between FED's policy and the Great Depression] grew cruder, not subtler, and eventually began to seem—there’s no other way to say this—intellectually dishonest."

Yes - intellectual dishonesty. Read Anna Schwartz' reply for more criticism - http://www.nybooks.com/articles/archives/2007/mar/29/who-was-milton-friedman/?pagination=false

TDJTDB -- did you even read the piece?

Wonderful post, thank you. "Hayek was an important inspiration in the modern program to build macroeconomics on microfoundations. The major connecting figure here is Lucas". That sentence-and-a-half explain so much.

I'm not sure your citation data shows what you want it to show. He may we be cited precisely because doing so is a means sending a political signal.

Economist's and their cat fights.

No, that's wrong. It's an attempt by Krugman to airily dismiss economists whose analysis of the current bust fit better than his own. It's political activism masquerading as economic analysis/catfight.

Nobel Prize winning economist more known for his politics than economics... who are we talking about again?

Paul Krugman is a partisan hack, a serial liar, and a fantastic example of how the halo effect of the Economics non-Nobel Prize has become a sort of shield from having to defend one's beliefs. His sinecure at the NYT only shows how feebleminded he's become.

No, his position at the NYT is not a sinecure. As far as Editorial Writer's for the modern NYT's, he's probably above average. You can draw your own conclusions from there.

I wonder is Paul Krugman becoming more or less respectable in the profession since blogging for the Times? All I can say is that I enjoy Matt Yglesias's blog much more than Krugman's. Maybe his work is too inaccessible to me or maybe I'm just almost never convinced of his arguments. Probably both.

Looking at the macro-reading lists for the top ten economics departments in the 60s, 70s and 80s, I doubt that Hayek's writings would be in the top 100 people cited. Of course departments devoted to Austrian Economics would cite him often, but such departments were not in the top 10. In this way Krugman is perfectly correct in what he said. Hayek is more important to the blogosphere than to academic macroeconomics.

I think you are absolutely correct on every point. If Austrian economists want to be integrated into mainstream economics, they must accept the scientific method. In other words, they must not be Austrian economists.

Oops that comment was supposed to be directed at Orionorbit.

Every time that I have read Dr. Krugman's ideas outside of his textbooks, I am struck anew each time by the feral quality of self-loathing. And every time that I read the Austrians, I am struck by how much my agreement with them has no solid grounds in reason whatsoever. They are wonderful at pulling at my heartstrings, but fortunately I recognize it is a personal failing to base policy upon self-congratulating ideology.

History will not care whether Hayek's economic thinking was worthy of the Nobel or inclusion in mainstream academia. His 'Road' and 'Constitution' assure him a readership for centuries to come, long after most of all the economists mentioned in this long post are long forgotten and no longer cited, including the dark Dr. Krugman.

" He’s barely mentioned in many undergraduate courses and he was wrong about a *lot* of things, including, to some extent, the efficacy of central planning."

Can you cite any evidence supporting this assertion? Hayek was mentioned in many of my undergraduate economics courses (Industrial organization, modern economic thought, International economics and intermediate macroeconomics).

Amazing the amount of both ignorance and hubris here.

Do you really want to compare East Germany with West? North Korea versus South? Hong Kong versus ANY socialized/communist country? I would love to make those comparisons and I think Hayek wins over Keynes in each Case.

You want an example, how about the recession of 1920-1921 versus the decade long one drawn out by FDR and his Keynesian BS? This stuff is not even debatable, his own people said they spent like crazy and nothing happened. We spent 800 billion in 2009 and nothing happened.

The US free market has made 5% of the world population hold about a third of its wealth ( this may be dropping however ).
All of our failures are due to 'really smart people' like Bernake/Congress who try to fix things with magical printing presses and taxes/regulations.
Oil profits? Highly regulated. Finance industry? Highly regulated. Medical costs? High government involvement. I can go on and on.

PS. Krugman isn't nearly as smart as he thinks he is:

Krugman cites David Warsh saying "Friedrich Hayek is not an important figure in the history of macroeconomics." I

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