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Friedrich Hayek on Inflation and Unemployment (NBC's "Meet the Press," June 22, 1975)

Long-term investments are more sensitive to interest rates than short-term ones, just as long-term bonds are more interest-sensitive than Treasury bills. Therefore, he concluded, artificially low interest rates not only cause investment to be artificially high, but also cause "malinvestment"—too much investment in long-term projects relative to short-term ones. He argued that the boom must turn into a bust. Hayek saw the bust as a healthy and necessary readjustment.


The way to avoid the busts, he argued, was to avoid the booms that caused them. Hayek and Keynes were building their models of the world at the same time. They were familiar with each other's views and battled over their differences. Most economists believe that Keynes's General Theory won the war. Hayek, until his dying day, never believed that, and neither do other members of the Austrian school.

Hayek believed that Keynesian policies to combat unemployment would inevitably cause inflation, and that to keep unemployment low, the central bank would have to increase the money supply faster and faster, causing inflation to get higher and higher.

Hayek's thought, which he expressed as early as , is now accepted by mainstream economists see Phillips Curve. In the late thirties and early forties Hayek turned to the debate about whether socialist planning could work. He argued that it could not.

Prize Lecture

The reason socialist economists thought central planning could work, argued Hayek, was that they thought planners could take the given economic data and allocate resources accordingly. But Hayek pointed out that the data are not "given. Rather, each individual has knowledge about particular resources and potential opportunities for using these resources that a central planner can never have. The virtue of the free market, argued Hayek, is that it gives the maximum latitude for people to use information that only they have.

In short, the market process generates the data. Without markets, data are almost nonexistent.

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Mainstream economists and even many socialist economists see Socialism now accept Hayek's argument. Harvard economist Jeffrey Sachs has stated: "If you ask an economist where's a good place to invest, which industries are going to grow, where the specialization is going to occur, the track record is pretty miserable. Economists don't collect the on-the-ground information businessmen do. Every time Poland asks, Well, what are we going to be able to produce? I say I don't know. From his vantage point in Austria, Hayek had observed Germany very closely in the twenties and early thirties, and then moved to Britain.

He noticed that many British socialists were advocating some of the same policies for government control of people's lives that he had seen advocated in Germany in the twenties. He had also seen that the Nazis really were National Socialists—that is, they were nationalists and socialists. His basic argument was that government control of our economic lives amounts to totalitarianism—total government control of our lives. Wrote Hayek: "Economic control is not merely control of a sector of human life which can be separated from the rest: it is the control of the means for all our ends.

On the book's cover, Keynes is quoted as saying: "In my opinion it is a grand book Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in deeply moved agreement. Indeed, Reader's Digest condensed it.

With that book Hayek established himself as the world's leading classical liberal, now called libertarian or market liberal. A few years later, along with Milton Friedman , George Stigler , and others, he formed the Mont Pelerin Society so that classical liberals could meet every two years and give each other moral support in what appeared to be a losing cause.

In Hayek became professor of social and moral sciences at the University of Chicago, where he stayed until During that time he worked on methodology, psychology, and political theory. In methodology Hayek attacked "scientism"—the imitation in social science of the methods of the physical sciences. His argument was that because social science, including economics, studies people and not objects, it can do so only by paying attention to human purposes.

The Austrian school in the s had already shown that the value of an item derives from its ability to fulfill human purposes. Hayek was arguing that social scientists more generally should take account of human purposes.

A Free-Market Monetary System and The Pretense of Knowledge

In political theory Hayek gave his view of the proper role of government in his book The Constitution of Liberty. He discussed the principles of freedom and based his policy proposals on those principles. His main objection to progressive taxation, for example, was not that it causes inefficiency but that it violates equality before the law.

In the book's postscript, "Why I Am Not a Conservative," Hayek distinguished his classical liberalism from conservatism. Among his grounds for rejecting conservatism were that moral and religious ideals are not "proper objects of coercion" and that conservatism is hostile to internationalism and prone to a strident nationalism. In Hayek returned to Europe as professor of economic policy at the University of Freiburg in Breisgau, West Germany, and stayed there until He then taught at the University of Salzburg in Austria until his retirement nine years later.

His publications slowed substantially in the early seventies. In he shared the Nobel Prize with Gunnar Myrdal for his theories of money and his illumination of the "interdependence of economic, social, and institutional phenomena. Many people get more conservative as they age. Hayek became more radical. Although he had favored central banking for most of his life, in the seventies he began advocating denationalizing money. Private enterprises that issued distinct currencies, he argued, would have an incentive to maintain their currency's purchasing power. Customers could choose from among competing currencies, and whether they reverted to a gold standard was a question that Hayek was too much of a believer in spontaneous order to predict.

That is the question that forms the principal issue nowadays in the economic policies of all European and American countries. Perhaps we are already in the midst of a race to reduce the gold content of the currency unit with the object of obtaining transitory advantages which, moreover, are based on self-deception in the commercial war which the nations of the civilized world have been waging for decades with increasing acrimony, and with disastrous effects upon the welfare of their subjects.

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It is an unsatisfactory designation of this state of affairs to call it an emancipation from gold. What has occurred has not been a departure from gold, but a departure from the old legal gold parity of the currency unit and, above all, a reduction of the burden of the debtor at the cost of the creditor, even though the principal aim of the measures may have been to secure the greatest possible stability of nominal wages, and sometimes of prices also.

Besides the countries that have debased the gold value of their currencies for the reasons described, there is another group of countries that refuse to acknowledge the depreciation of their money in terms of gold that has followed upon an excessive expansion of the domestic note circulation, and maintain the fiction that their currency units still possess their legal gold value, or at least a gold value in excess of its real level.

In order to support this fiction they have issued foreign-exchange regulations which usually require exporters to sell foreign exchange at its legal gold value, that is, at a considerable loss. The fact that the amount of foreign money that is sold to the central banks in such circumstances is greatly diminished can hardly require further elucidation. Foreign exchange is in fact unobtainable at the prescribed price, and the central bank is debarred from recourse to the illicit market in which foreign exchange is dealt in at its proper price because it refuses to pay this price.

And this has practically brought international credit to a standstill. Interest and amortization are paid on old debts either very unsatisfactorily or not at all, and, as might be expected, new international credit transactions hardly continue to be a subject of serious consideration.

Here let it merely be pointed out that this policy has much more seriously injured international economic relations during the last three years than protectionism did during the whole of the preceding fifty or sixty years, the measures that were taken during the world war included.

This throttling of international credit can hardly be remedied otherwise than by setting aside the principle that it lies within the discretion of every government, by invoking the shortage of foreign exchange that has been caused by its own actions, to stop paying interest to foreign countries and also to prohibit interest and amortization payments on the part of its subjects. The only way in which this can be achieved will be by removing international credit transactions from the influence of national legislatures and creating a special international code for it, guaranteed and really enforced by the League of Nations.

Unless these conditions are created, the granting of new international credit will hardly be possible. Since all nations have an equal interest in the restoration of international credit, it may probably be expected that attempts will be made in this direction during the next few years, provided that Europe does not sink any lower through war and revolution. But the monetary system that will constitute the foundation of such future agreements must necessarily be one that is based upon gold.

Gold is not an ideal basis for a monetary system. Like all human creations, the gold standard is not free from shortcomings; but in the existing circumstances there is no other way of emancipating the monetary system from the changing influences of party politics and government interference, either in the present or, so far as can be foreseen, in the future.

And no monetary system that is not free from these influences will be able to form the basis of credit transactions. Those who blame the gold standard should not forget that it was the gold standard that enabled the civilization of the nineteenth century to spread beyond the old capitalistic countries of Western Europe, and made the wealth of these countries available for the development of the rest of the world. The savings of the few advanced capitalistic countries of a small part of Europe have called into being the modern productive equipment of the whole world.