hayek v keynes: Don Boudreaux Has Been Re-Reading his Hayek & Keynes

The chairman of the George Mason Econ department has gone back to re-read the classic works of Hayek and Keynes from the 30s and 40s, and reflection on the writings of the two top economists of the last 100 years has inspired some killer op-eds in the popular press.

From the Daily Record, March 21, 2009:

Keynesian economists also fail to understand what the great Austrian economist F.A. Hayek understood; namely, that markets allocate resources by relative prices. For example, suppose consumers’ taste for fish intensifies while their taste for beef weakens. Consumers will then spend more money buying fish and less buying beef. The resulting higher price of fish relative to the price of beef will signal to entrepreneurs, investors and resource owners to produce more fish and to produce less beef. This change in production patterns is precisely what should happen.

Specialized beef producers, though, aren’t so keen on this little piece of economic change. Some workers in the beef industry will lose their jobs.
Would it be a sound economic diagnosis to attribute these job losses to a reduction in total consumer demand? Of course not. Would it be sound economic policy for government to save those jobs by entering the beef market and buying more beef? Of course not, for to do so would divert scarce resources from other uses more valuable to consumers.

Now suppose that an unusual amount of such economic changes take place at one time. The result will be, and should be, that an unusual amount of economic displacement takes place in the short-run as an unusually large number of workers adjust to the new pattern of consumer demands.
Keynesians, however, misread such events as evidence that total demand is too low and prescribe higher government spending. Politicians, ever eager to justify meddling further into the economy, jump on this Keynesian bandwagon. The result is that the normal corrective adjustments in the market are thwarted and government’s power over the private economy grows dangerously.

From the Tribune-Review, March 18, 2009:

Oil exploration and refining, tire manufacturing, steel production, auto-parts making and retailing, automobile insuring, road-building — these are only some of the many industries whose existence is promoted by, and whose existence promotes, automobile manufacturing. Yet no one designed, or even foresaw, this outcome. No one designed how all the many industries’ efforts are coordinated with each other. This outcome evolved into its modern-day pattern through billions upon billions of individual decisions, some bigger than others, but none larger than a tiny part of the total number of decisions that combined with each other to make automobile driving an unremarkable reality in the early 21st century.

Stupendous coordination of millions of individual plans and talents emerged spontaneously — and not only in the automobile industry. The entire economy is a testament to such spontaneous coordination.

The single greatest fact about capitalist society is that the great bulk of it appears to be the handiwork of a master designer but, in fact, is unplanned and even unimaginable before it becomes real and familiar.

Remember this lesson whenever you hear alleged “experts” insisting that only conscious effort by government to “stimulate” demand can save the economy from its current downturn.

Read the whole thing.  This is truly exceptional popular writing.

2 comments to hayek v keynes: Don Boudreaux Has Been Re-Reading his Hayek & Keynes

  • Lee Kelly

    Suppose that almost every entrepreneur decided to start a business creating statues of President Obama, and, moreover, they all managed to get loans to start their businesses. The new president is extremely popular, they reason, so their business is sure to make a profit. So resources that would otherwise be used to produce other goods and services are redirected toward these new Obama-statue factories. Over a a few years, millions of workers are employed in these new factories, providing raw materials for statues, distributing statues to stores, selling other services to these workers, and so on. Whole communities and organisations become entirely focused upon this most important of tasks–creating statues of the Great Obama.

    Eventually it is time for the entrepreneurs to pay back their creditors; the hundreds of millions of Obama statues are shipped to store shelves across the country. All different shapes and sizes, each with the beaming multicultural smile of the U.S.’s new president. And since such large debts with incurred to produce the statues, a considerable price is attached to each. But the crowds are not forthcoming with feverish spending. So many resources were redirected toward creating statues of Obama, that there are now scarcities of food, housing, and medicine. Shoppers look upon their dollars, reflect upon the toil they undertook to earn them, and judge that no statue of Obama is worth it, especially while prices for what they do want have risen so much.

    The entrepreneurs are distraught. They cannot pay their creditors because almost no statues of Obama have been sold; millions sit upon the shelves untouched by shoppers. A great economic catastrophe is upon the nation. A call rings out across the land for something, anything, to be done, and all eyes turn to the man immortalised in so many statues: the Great Obama. After convening with the most respected economists in the nation, He declares that the problem is insufficient aggregate demand. The economy will grind to a halt, He says, unless people get out there and spend, and, if necessary, He will take it upon himself to spend on their behalf. Demand for Obama statues must be stimulated, they say, or else the economy will collapse.

    The U.S. economy has “insufficient aggregate demand” for the same reason that an economy using too many resources creating statues of Obama has “insufficient aggregate demand”. It is the same reason that we do not spend all out money in the first aisle when visiting a supermarket. When the economy is supplying goods and services that people do not want to buy, they hold onto their money until something is produced which they do want to buy.

    This shows up to some economists as a drop in “aggregate demand”. Unfortunately, intoxicated by the pseudo-scientific dribble that masquerades as economics, they suggest a stimulus, which amounts to forcing people to buy the stuff they don’t want. And it makes sense for those who can only see the economy in terms of GDP, since if tomorrow we were forced to spend all our money, regardless of how we value what is received in exchange, GDP would soar! Prices need not even rise, since we could be forced to buy grains of sand.

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Over the years, I have again and again asked fellow believers in a free society how they managed to escape the contagion of their collectivist intellectual environment. No name has been mentioned more often as the source of enlightenment and understanding than Friedrich Hayek’s. — Milton Friedman

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