Friedrich Hayek : biography

Work

The business cycle

Hayek’s principal investigations in economics concerned capital, money, and the business cycle. Mises had earlier applied the concept of marginal utility to the value of money in his Theory of Money and Credit (1912), in which he also proposed an explanation for "industrial fluctuations" based on the ideas of the old British Currency School and of Swedish economist Knut Wicksell. Hayek used this body of work as a starting point for his own interpretation of the business cycle, elaborating what later became known as the "Austrian Theory of the Business Cycle". In his Prices and Production (1931), Hayek argued that the business cycle resulted from the central bank’s inflationary credit expansion and its transmission over time, leading to a capital misallocation caused by the artificially low interest rates. Hayek claimed that "the past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process".

Hayek’s analysis was based on Böhm-Bawerk’s concept of the "average period of production"See the chapter , Heinz D. Kurz and Neri Salvadori, "Piero Sraffa’s contributions to economics," in Critical Essays on Piero Sraffa’s Legacy in Economics, ed. H. D. Kurz, (Cambridge: Cambridge University Press, 2000), pp. 3–24. ISBN 978-0-521-58089-2 and on the effects that monetary policy could have upon it. In accordance with the reasoning later outlined in his essay The Use of Knowledge in Society (1945), Hayek argued that a monopolistic governmental agency like a central bank can neither possess the relevant information which should govern supply of money, nor have the ability to use it correctly.

In 1929, Lionel Robbins assumed the helm of the London School of Economics (LSE). Eager to promote alternatives to what he regarded as the narrow approach of the school of economic thought that then dominated the English-speaking academic world (centered at the University of Cambridge and deriving largely from the work of Alfred Marshall), Robbins invited Hayek to join the faculty at LSE, which he did in 1931. According to Nicholas Kaldor, Hayek’s theory of the time-structure of capital and of the business cycle initially "fascinated the academic world" and appeared to offer a less "facile and superficial" understanding of macroeconomics than the Cambridge school’s.

Also in 1931, Hayek critiqued Keynes’s Treatise on Money (1930) in his "Reflections on the pure theory of Mr. J. M. Keynes"F. A. Hayek, Economica, 11, S. 270-95 (1931). and published his lectures at the LSE in book form as Prices and Production.F. A. Hayek, , (London: Routledge, 1931). Unemployment and idle resources are, for Keynes, caused by a lack of effective demand; for Hayek, they stem from a previous, unsustainable episode of easy money and artificially low interest rates.

The economic calculation problem

Hayek was one of the leading academic critics of collectivism in the 20th century. Hayek argued that all forms of collectivism (even those theoretically based on voluntary cooperation) could only be maintained by a central authority of some kind. In Hayek’s view, the central role of the state should be to maintain the rule of law, with as little arbitrary intervention as possible. In his popular book, The Road to Serfdom (1944) and in subsequent academic works, Hayek argued that socialism required central economic planning and that such planning in turn leads towards totalitarianism. Hayek posited that a central planning authority would have to be endowed with powers that would impact and ultimately control social life, because the knowledge required for centrally planning an economy is inherently decentralized, and would need to be brought under control.

Building on the earlier work of Ludwig von Mises and others, Hayek also argued that while in centrally planned economies an individual or a select group of individuals must determine the distribution of resources, these planners will never have enough information to carry out this allocation reliably. This argument, first proposed by Max Weber, says that the efficient exchange and use of resources can be maintained only through the price mechanism in free markets (see economic calculation problem).