*co-authored with Craig D. Schlesinger
Attempts to reinforce the certainty of John Maynard Keynes’ economic theories and characterize his critics as illiterate shows a disheartening lack of knowledge while besmirching his greatest intellectual rival and critic: the lesser-known Austrian economist Friedrich A. Hayek. Hardly an illiterate, Hayek won the 1974 Nobel Prize in Economic Sciences and authored the best-selling book, The Road to Serfdom, in addition to other influential works on economics, law, and political philosophy. While we encourage Keynesians to read up on Hayek, we know they wont, so here’s a free lesson…
His differences with Keynes stem from the inevitable knowledge problem suffered by those tapped to centrally plan the economy. No matter the brilliance of technocratic planners, vital knowledge is dispersed throughout millions of market actors, which cannot possibly be attained through central planning committees. Hayek asserted, “The knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”
The two further disagreed about the state in which markets exist. Keynes believed market economies were entities to be managed and controlled. However, Hayek argued markets exist in an organic state, where individuals come together spontaneously, acting on “the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess,” as reflected in a freely moving price system. Prices then serve as the proper indicator of supply and demand signaling to consumers the true costs of goods and services. Market competition serves as the mechanism for accurate coordination of such a pricing system.
Hayek’s counter to Keynesian stimulus further damages the conventional wisdom of economic thought. Claiming that if natural occurrences like adjustments in partiality or technological change alter prices, market actors would in turn be forced to reestablish the mechanisms in which they organize with others in the marketplace. As the price of goods change, re-organization will occur spontaneously rather than artificially. On the other hand, monetary disturbances (i.e. Keynesian stimulus and the flooding of markets with money by central banks) distort signals by creating unsustainable inflation. As a result, central banks cannot continually ‘ease’ markets with printed money, which in turn perpetuates the boom-bust business cycle. These artificial interventions expanding the money supply are a major driver of America’s financial predicament.
As it currently stands, world economic policies continue to move in Hayek’s direction. Since the fall of the Soviet Union, the vast majority of its former satellite states moved from centrally planned economies to free-market systems – creating prosperity previously unseen. Even China, one of the last stalwarts of socialist-style economic planning, significantly opened its markets and realized massive increases in economic growth and wealth as a result. As societies progress, Keynesian economics continually prove ineffective when compared to the spontaneous order of free markets.