Durability of the Hayekian worldview shows some ideas never stop having consequences

Hayek (left) from Austrian School favoured the role of markets and was against any form of government intervention in the economy

With the start of October, the world of economics starts to buzz on the prospective candidates for Nobel Prizes in Economics for the year. This year the Nobel Economics will be awarded on 14th October 2024. The year 2024 is special for another reason. It marks the 50th anniversary of the Nobel Prize in Economics to Friedrich August von Hayek.

In 1974, the Committee awarded the prize jointly to Gunnar Myrdal and Hayek "for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena". Even back then, the choice of the two awardees raised a lot of eyebrows as both were as different as chalk and cheese. Myrdal from Stockholm School of Economics favoured government’s role in public welfare. Hayek from Austrian School favoured the role of markets and was against any form of government intervention in the economy.

Assar Lindbeck, Chairman of the Economics Prize Committee (1980-1994) studied the Nobel Prize in Economics from 1968-2007. On the 1974 Prize: he said the following: “This is probably the shared award for which the common denominator of the Laureates’ achievements was the smallest.”

Now both economists were given the award but discussion centred on Hayek. Even today, there are discussions on 50 years of Hayek award with hardly any for Myrdal. Why is this so?

The reason is the economics community was highly divided on whether Hayek should have been awarded the Nobel Prize at all!

Did Hayek really do Nobel-worthy work?

Those that argued in his favour cited Hayek’s fundamental work on business cycles and theory of money. Lindbeck in the same essay noted that Hayek (and Myrdal) used the concepts of aggregate savings and investment to explain macroeconomic fluctuations. They both expanded the scope of their analysis by including larger institutional and political factors in economic development. Hayek also wrote extensively on the role of information in prices. Hayek also debated extensively with Keynes on the role of the State in stabilizing business cycles which became highly famous. So much so, creative economists have created a video of a rap battle between the two.

Those that argued against Hayek questioned his contributions to economics. The Austrian School and its scholars were considered highly heterodox and thus of limited scope.  Moreover, Austrian School was seen as an extension to Adam Smith’s Classical School with no novel theories.

They also argued Hayek actually became popular for his work written for a general audience and public policy. Hayek wrote Road to Serfdom in 1944 which cautioned governments for adopting socialism. The Great Depression and the two World Wars had not just broken the back of capitalism but capitalism was also blamed for the disasters. The world polity was increasingly drifting towards socialism and communism. Hayek while agreeing to the noble intentions of socialism saw how the Nazi regime built on foundations of socialism had done the opposite, of complete control and annihilation.

Hayek’s warnings were obviously ignored as after World War II, the world slipped into the Cold War.

Arguments advocating liberty and humility

Hayek followed Road to Serfdom with The Constitution of Liberty in 1960 where he argued how liberty allows humans to achieve their true potential. Again it was seen as a philosophy/politics book and not really economics.

Apart from the controversy around whether the Prize should have been awarded to Hayek, there was something even more interesting. All Nobel laureates are required to give a ‘Prize Lecture’ on accepting the Nobel Prize. Hayek gave a stirring lecture titled ‘The Pretence of Knowledge’ which has its own history and legacy.

First, Hayek argued how the Nobel Prize gave this huge prestige to the profession of economics similar to that of physical sciences. However, it was highly ironical that the same profession had given economic advice which had led to great inflation of the 1970s.

Without naming Keynes, he thrashes the macroeconomic policy of the last thirty years. There was this thinking that there was a trade-off between unemployment and inflation (also called as Philips curve). If inflation goes up, unemployment declines and vice-versa. Thus, governments could easily switch policies between inflation and unemployment. The governments in order to lower unemployment, had allowed inflation to escape.

Second, Hayek questioned the precision with which these policies were framed by economists. His approach was unlike Milton Friedman (Nobel Prize in 1976) and Edmund Phelps (Nobel Prize in 2006) who argued that inflation expectations had led to 1970s inflation. Hayek argued that unlike physical sciences where one can measure the observations precisely, it is not the case with social sciences like economics. While in economics we have the ‘qualitative knowledge’ of the economic system, we do not have ‘quantitative evidence’ on the system. For instance we know there is an equilibrium but do not know the prices and quantities at which the equilibrium is established.

Third, he questioned the entire idea human knowledge itself which is also the title of his lecture. He said that “if man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible.”  By these words, he in a way questioned the entire edifice of Nobel Prizes themselves which make people believe that the awardees have full knowledge. He ends the lecture by advising that we need to teach students humility else they will end up not just being tyrants trying to control societies but also “destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.”

The comeback years

Post the 1974 award, what transpired a few years later made even the sharpest critics take note of Hayek’s contributions.

In late 1970s and early 1980s, Hayekian ideas made a strong comeback when Margaret Thatcher and Ronald Reagan moved policies towards markets on becoming leaders of their respective countries. And then with the fall of Berlin Wall in 1989 and collapse of USSR in 1990, Hayek and his ideas of economic liberty came to the fore like never before. Large number of economies ushered economic reforms and saw tremendous progress since 1990s. Hayek who passed away in 1992 was not alive to see these developments, but his ideas were there to guide the policymakers.

Even during the 2008 crisis which started in United States seen as a bastion of capitalism, one saw ideas of Hayek coming to the centre. His supporters argued that US had drifted away from being a country that supported and promoted economic liberty to being a highly government driven economy.

Post-2008 crisis, one also saw advent of private cryptocurrencies such as bitcoin which was nothing but a sort of realization of Hayek’s vision to denationalize money.

The 1974 Nobel Prize in economics continues to stir discussion to this day. Hayek’s legacy continues to drive his followers and dissenters alike.