Keynes is the Easy Way, Hayek is Right

In the attached article the author argues that F. A. Hayek, the great Austrian economist, proved long ago that any effort at stimulus (a Keynesian concept) will fail because such efforts allocate resources in a haphazard and inefficient way. Politicians will make sure funds go to their friends and then when the gaps in the papered over economy become too great the whole system collapses and the government must then “stimulate” more. Which the government is happy to do.

This is what Hayek was talking about (generally) when he famously referred to a “fatal conceit.” The state, composed of ambitious politicians and  bright (but wrong) activist economists, believes that they can engineer an economy to prosperity. History has shown us over and over that this is false (just look at the economy today) but the human tendency to want “do something” is so great we as a species just can’t help ourselves. Keynesian economic philosophy fits this natural tendency nicely.

What is a politician who is elected every 4 years to do? Does he listen to Hayek and the Austrians who say that what we need to do is get out of the way of the economic system and let markets clear (with bankruptcies of companies and layoffs of workers)? Or does he listen to the Keynesians who say that the economic troubles of the present can be addressed effectively by government (the politician likes this), and that the failure to take action could lead to a spiral of economic depression if the politician does nothing?

Of course the politician listens to the Keynesians. They are singing the politician’s tune. Not only should government be more involved in the economy but the goodies of “stimulus” are there to distribute to friends. On top of this, even if things fail (as they always do) the politician can always say, “Hey, At least I did something. Perhaps in light of the fact that prosperity has not burst forth again we can surmise that our original effort was too timid. Here, let me unleash some more stimulus to get me, I mean America, through the next election.”

Hayek’s argument, the right argument, is that there is an order to the universe and that the economy operates in an organic, living way. To jack up the order is foolish and probably disastrous in the long run.

But Hayek’s argument, though I believe it is obviously right, doesn’t have what powerful people want. Politicians want to hand out goodies. Hayek says such actions actually hurt the economy.

Hayek argues that a freer, less centralized economy, is the way to prosperity.  Let markets and prices find their own level, in a way similar to how water finds its own level. To the degree that that prices and goods and labor are free, the time it takes to recover from an economic correction is lessened. Restrict prices, goods, and labor, even if governments do it for the best intentions, and the period it takes to pull out of the mire is extended. This is what we see today.

So Hayek says that we are to do nothing in a depression?

Not exactly. He would probably argue that the best short-term action would be to loosen restrictions on the economy. Reduce red tape. Let interest rates adjust to market levels even if they are higher than the artificially repressed rates manufactured by the Fed.  Let the economy breathe.

But again this means that there are no goodies to hand out, and politicians don’t like that. It also means that these same politicians might be seen as being easy on “business interests” in a time when “business interests” are laying off workers. This could be costly to the politicians in the short run.

Also in the long run relatively few voters are going to say “Boy I sure am glad Senator such and such fought to liberalize the economy during the recession. I sure do like my new job.” Voters just don’t think that way.

Even if this enlightened thought does occur to a voter it is very likely that the politician will be gone from office anyway because he didn’t go down the government goodie route during the economic downturn.

So what’s a pol to do? For a politician the best route is to follow the Keynesians even if it is off an economic cliff. At least he’ll still have a job.

But this is not how things must stay. There are a few hearty souls in government who are beginning to see the light, who see the destruction Keynesian economic philosophy has wrought. There is some hope with this vangard, but they will need our support to break the back of the status quo.

Click here for the discussion Hayek and the current European economy.

*Special note. The guy who plays the security guard at the begining of this great video is Michael Munger, former head of the Duke Economics and Poli-Sci Departments. He ran for governor of North Carolina too.

(http://blogs.lse.ac.uk, 8-21-2012)
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