Highlights from Hayek’s Nobel Prize Lecture

December 24, 2008

Read it here. It’s less boring than I initially thought and Hayek makes some good points. Yes, I am finally getting serious about understanding macroeconomics.

[T]he very measures which the dominant “macro-economic” theory has recommended as a remedy for unemployment, namely the increase of aggregate demand, have become a cause of a very extensive misallocation of resources which is likely to make later large-scale unemployment inevitable. The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labour and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate – or perhaps even only so long as it continues to accelerate at a given rate. What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganisation of all economic activity. The fact is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from re-appearing; not because, as this view is sometimes misrepresented, this unemployment is deliberately brought about as a means to combat inflation, but because it is now bound to occur as a deeply regrettable but inescapable consequence of the mistaken policies of the past as soon as inflation ceases to accelerate.

The key phrase here is “distribution of employment which cannot be indefinitely maintained.” For Hayek, business cycles are caused by bad investments and putting money into sectors for which the underlying demand just isn’t there.

[C]ertainly in my field, but I believe also generally in the sciences of man, what looks superficially like the most scientific procedure is often the most unscientific, and, beyond this, that in these fields there are definite limits to what we can expect science to achieve. This means that to entrust to science – or to deliberate control according to scientific principles – more than scientific method can achieve may have deplorable effects. The progress of the natural sciences in modern times has of course so much exceeded all expectations that any suggestion that there may be some limits to it is bound to arouse suspicion. Especially all those will resist such an insight who have hoped that our increasing power of prediction and control, generally regarded as the characteristic result of scientific advance, applied to the processes of society, would soon enable us to mould society entirely to our liking.

Fantastic. Hence anarchy.

The conflict between what in its present mood the public expects science to achieve in satisfaction of popular hopes and what is really in its power is a serious matter because, even if the true scientists should all recognize the limitations of what they can do in the field of human affairs, so long as the public expects more there will always be some who will pretend, and perhaps honestly believe, that they can do more to meet popular demands than is really in their power. It is often difficult enough for the expert, and certainly in many instances impossible for the layman, to distinguish between legitimate and illegitimate claims advanced in the name of science.

Well, if I’m going to go ahead and believe that Keynesianism is false, I do need some explanation for why it is so popular. Hayek’s is a pretty good one.

I’m still working on understanding Keynes; I must admit that I don’t really understand what he is talking about most of the time. I have not yet decided whether that’s because Keynes is right and I’m dense, or because Keynes’s writing is incomprehensible junk.

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One Response to “Highlights from Hayek’s Nobel Prize Lecture”

  1. grimel Says:

    I get the same exact feeling when reading Keynes – either I’m a moron, or he is.


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