I got interested in political economy to a very large extent because Karl Brunner had started the Interlaken Seminars in Switzerland. There were a lot of people there who were trained in philosophy or sociology. Since my training was in economics, I thought we ought to try to model some of these problems. I began to read Hayek at that point, articularly The Constitution of Liberty. It is a fascinating book, dealing with all the problems of how institutions fit together. I was very fortunate to work with Scott Richard, and later with Alex Cukierman, on trying to model some of these processes. We tried to develop simple models in which there was a government that did something more than provide a public good, or act as if it had solved the planner’s problem. One of the works that influenced me at that time, as I said, was Hayek. Hayek would certainly not try to solve the planner’s problem. He saw life as being a great deal more uncertain and government as being very unlike an optimizing planner.
Where classical and neoclassical economics emphasized the certainty of life, Hayek and the Austrians emphasized the uncertainty of life. That aspect of the Hayekian program had great appeal for me. Karl and I had earlier worked on information and uncertainty as a reason for using money — that is, using an institution such as the medium of exchange. Why not other institutions?
One source of uncertainty is uncertainty about accruing information. These interests led Brunner and me to work on permanent and transitory influences. I did some work using filtering – trying to sort out the nature of these different shocks based on some work by Eduard Bomhoff and his student Clemens Kool.
I was getting interested in political economy at one time and so I would talk to [Karl Brunner] about Hayek, Popper and about the Austrians ..
Q. Had he read Hayek at that time or did you get him to do so?
A. He had read it when he was much younger. I possibly had read it also when I was much younger. But I think its always been my view that certain books strike you very differently depending upon the stage you are and how receptive you are to the ideas. Probably when I read Hayek as a young man with a very strong leftist leaning I did not get interested in the Road to Serfdom or the Constitution of Liberty. I believed that society could reinvent itself in the short-term if necessary. The view that I took from Hayek is the importance of uncertainty, tradition and institutions. Hayek and Popper, who also are very much in that tradition, had a great influence on me sometime in my 30s. I had not read Popper earlier. I felt very differently about Hayek when I read it as a 30 year old then when I read it as an 18 or 20 year old.
Q. O.K., now besides Karl Brunner are there other economists who have had a really major influence on your thinking?
A. Well I mentioned Hayek. There are two ways. One is because of my interest in political economy. The other way is that Hayek was a pioneer in the use of information in economics. One of the papers that Karl and I wrote together that I continue to like was a paper called “The Uses of Money”. In that paper we tried to incorporate information and the cost of information to explain why people use money. One of Hayek’s most basic ideas is that institutions are a way of reducing uncertainty. Man struggles to find institutional arrangements which on average make life a bit more predictable. Our “Uses of Money” is not so much about money as we conventionally think about it, it’s about the idea of a medium of exchange, the function of an institution called the medium of exchange and how the medium of exchange as an institution resolves a part of people’s uncertainty about the future.
pdf: “Interview of Allan Meltzer Conducted by Bennett McCallum on May 14, 1997”. Published as “An Interview with Allan Meltzer”, Macroeconomic Dynamics (1998), 2:238-283.