Hayek,Mach, and the re-ordering of mind

This paper argues that Friedrich A. v. Hayek's theory of mind and the relation between mental and physical events, most systematically presented in his 1952 book, The Sensory Order, is indebted to Ernst Mach's theory, and, in particular, to his Analysis of Sensations, above and beyond what Hayek himself along with multiple admirers of his work ever cared to admit. By highlighting a number of important similarities between Mach's and Hayek's theories of the psychical/phenomenal and physical world/order, the paper aims to show that key aspects of Hayek's theory of mind can be traced to Mach's theoretical foundations. The paper further argues that some of the criticisms Hayek levels against Mach concern nonessential points, arise from the uncritical acceptance of common misinterpretations of Mach's theory, or are plainly wrong.     

Austrian Economics,Socialism and Impure Forms of Economic Organisation

Modern supporters of the Austrian school of economics maintain that their critical stance towards impure forms of economic organisation - such as the mixed economy - grew out of the arguments of Mises and Hayek during the socialist calculation debate of the 1930s. The paper assesses the two theorists, contributions in the debate and argues that their ideas cannot provide the basis for a general rejection of impure forms of economic organisation. First of all, and contrary to most modern Austrians, who consider the contributions of Mises and Hayek as essentially consistent, it is argued that Hayek's critique of socialism is much more effective than Mises' as it rests on his concept of tacit knowldge and on an evolutionary account of the emergence of capitalist institutions. However, the paper goes on to argue that, if Hayek's critique of state intervention is to have any relevance for contemporary capitalist economies, it must be in a position to show the non-viability not only of a fully centrally planned economy of the Soviet type but also of the mixed economy. It is argued that it is precisely in this that Hayek's evolutionism fails, for his teleological approach is not persuasive in ruling out the possibility of impure forms of capitalism in a manner that is consistent with truly evolutionary - i.e. non-teleological - ideas.     

Cantillon and Ricardo effects: Hayek's contributions to business cycle theory

The distinctive line of argument in Hayek' business cycle theory can be characterized as a combination of the Cantillon effect monetary expansion on the price structure and the Ricardo effect of a shortage of consumption goods on the production of investment goods. This paper compares the original ideas of Cantillon and Ricardo with their adaptation and combination by Hayek. The differences help to expose fundamental problems in Hayek' theory and, more generally, in projects of integrating money and the business-cycle phenomenon with Walrasian general equilibrium theory.     

Can a Dictator Turn a Constitution into a Can-opener? F.A. Hayek and the Alchemy of Transitional Dictatorship in Chile

Commenting on the Pinochet regime, Friedrich Hayek famously claimed in 1981 that he would prefer a ‘liberal’ dictator to ‘democratic government lacking liberalism.’ Hayek's defense of a transitional dictatorship in Chile was not an impromptu response. In late 1960, in a little known BBC radio broadcast, Hayek suggested that a dictatorial regime may be able to facilitate a transition to stable limited democracy. While Hayek's comments about Pinochet have generated much controversy, this paper neither provides a blanket condemnation of his views (he did not advocate dictatorship as a first-best ‘state of the world’) nor tries to excuse his failure to condemn the Pinochet junta's human rights abuses, but instead provides a critical assessment of Hayek's implicit model of transitional dictatorship.     

Keynesian Dominance in Crisis Therapy

The 1930s’ debate about the short-run Keynesian response to crisis and Hayek's critique of its long-run consequences has significant contemporary parallels. This article examines, from a historical perspective, the Keynes–Hayek debate by considering the development of Keynesian economic theory, its ascension and application during financially sound times, the Hayekian critique, the monetary counter-revolution, and the Keynesian renaissance in the wake of the global financial crisis. It is shown that Keynesian fiscal measures prevail over the Hayekian approach in the midst of a crisis leading to rising inflation and public debt, depressed long-run growth and a new crisis.     

Book reviews

Abstract

This article contributes to the literature on the Hayek–Keynes controversy on two points. The first contribution is to show that the question of the micro-foundations of macroeconomics is crucial to understand the Hayek–Keynes controversy. The second contribution is to reveal that Hayek's attack on the micro-foundations issue had a methodological impact on the making of the General Theory especially via the concept of marginal efficiency of capital. The paper concludes that what finally contrasts Hayek and Keynes is the kind of micro-foundations that economists should adopt to explain business cycles.     

The notion of private information in a modern perspective: a reappraisal of Hayek's contribution

Hayek's critical attitude towards Walrasian modelling was based on informational considerations. In his view, a meaningful notion of equilbrium has to deal with the consistency of agents' plans which information is dispersed throughout the economy. He emphasized that only in this context could the role of market prices as aggregators of information be correctly analysed. Recent developments in general equilbrium theory with rational expectations have taken up the issue formally. In this paper, Haek's main ideas about the competiitive mechanism are compared with these recent results. It is argued that Hayek's notion of private information is different from that used in modern equilibrium theory, not only because of its dynamic content, as many critics observed ex post, as is usually in a general equilibrium framework. This issue of whether modern notions of private information, namel that used in conract theory, are good substitutes for Hayek' notion of personal knowledge is also examined in detail. From this analysis, it is possible to conclude that Hayek's notion of equilibrium neither entails Pareto optimality prperties nor full informational efficiency.     

Friedrich Hayek's fleeting foray into 1940s colonial development

Herein we examine recommendations made in 1944 by Friedrich Hayek for the Government of Gibraltar, regarding Gibraltar's future economic prospects. In keeping with Hayek's ideas in The Road to Serfdom, he proposed reducing state-led economic planning in Gibraltar alongside proposals to lift restrictions upon the operation of a free market in rents and labour. Hayek's proposals were rejected by both governments in Gibraltar and London because they were not compatible with the economic planning of colonial economies, inspired by Keynes, and provision of welfare systems in the empire inspired by Beveridge, both dominant ideas during the mid-1940s in government circles.     

Profit Expectations and Confidence: Some unresolved issues in the Austrian/Post-Keynesian debate

Austrian and Post-Keynesian economists both continue to make important contributions to subjectivism in economics. Yet, as the ongoing debate between members of the two schools demonstrates, Austrians and Post-Keynesians have very different views about the possibility of intertemporal coordination in a market economy. This paper returns to the debate between Hayek and Keynes in order to respond to a contemporary Austrian critique of Keynes's theory of expectations. The paper shows that the fundamental difference between the two schools ultimately boils down to the nature of conventional expectations and the question of confidence. If the conventional expectation holds to assume the future will look enough like the present to give investors confidence in their decisions, Hayek's arguments about the possibility of intertemporal coordination merit attention. If, however, this convention does not hold, as Keynes thought was sometimes likely, the self-regulating potential of a market economy is called into question.     

Cognition,competition, and catallaxy in memory of Friedrich August von Hayek

The paper focuses on central elements of the scientific work of Friedrich A. v. Hayek since the 1930s. In a first part, his epistemological position and its implications for his understanding of the tasks of the social sciences are presented as he set them out particularly in theSensory Order (1952). Then, it is shown how his findings in economic theory as well as in the analysis of economic and societal systems are formed by these foundations. His emphasis on the subjectivity and the constitutional limitations of human knowledge is identified as a precondition for the outstanding analytical insights which he gained with regard to the functioning of a market order and the role of institutions in societal development. Furthermore, it is argued that Hayek's enduring campaign for freedom and against the socialist tendencies in welfare states was not simply a matter of personal conviction. It was also the result of his analysis in constitutional political economy which revealed to him that freedom as a normative basis of economic and societal institutions is the key to the explanation of European cultural evolution.     

The Use and Abuse of Environmental Knowledge: A Bloomington School Interpretation of the Canadian Fisheries Act of 1868

This paper will focus on the ambitious plan for regulation embodied in the Dominion Fisheries Act of 1868, a law passed by the Canadian federal parliament in its very first year of existence. The 1868 law was intended to bring the nation's fisheries firmly under the control of officials employed by the new federal government. The paper argues that 1868 law, which was designed to address what would today be called Tragedy of the Commons problems, was a product of the hubris identified by Hayek as "the fatal conceit." The centralized and bureaucratic approach to governing fisheries represented by the 1868 Fisheries Act did not work well because the knowledge that would have been required for successful management of fisheries was highly dispersed. Drawing on Hayek and the Bloomington School, this paper argues that the experience of Canada's fisheries sector in the generation after 1868 illustrates the problems with centralized management Common-Pool Resources. In the 1890s, the centralized approach represented by the Fisheries Act of 1868 was replaced by a more flexible and decentralized system Hayek's theory of knowledge would suggest the reversal of centralization over environmental policy in the 1890s was a positive development that helped Canadians to reconcile the goals of economic development and the protection of the environment. The Hayekian paradigm suggests that control over environmental policy should be devolved downwards to the levels of government closest to resource users.     

The Role of Nonattenuated Rights in Positive Economics: A Critical Appraisal

This article assesses the institutionalist elements of Friedrich Hayek's neoliberal political economy by presenting his views on the entangled relations between the state and markets in capitalism. Through the analysis of Hayek's work, the article contributes to further consolidating the view that neoliberalism is an ideological project of institutional transformation which, despite some enduring myths, has an irreplaceable role for a state with many important functions in a more limited democracy. Markets, for their part, are politically contested social constructions that depend on previous non-market institutions for their existence and legitimation. This paper argues that Hayek's work corroborates this institutionalist claim.     

Hayek’s monetary theory and policy: A note on alleged inconsistency

Challenging the dominant view, we claim that Hayek’s monetary views did not significantly change over his lifetime. The prevalent perception of early Hayek as a money stream stabilizer and late Hayek as a price level stabilizer is attributable to an unjustified normative interpretation of Hayek’s positive analysis. We argue that in his contributions to monetary theory, Hayek took the goals of monetary policy as exogenously given and analysed the efficiency of different means of achieving them. Hayek’s allegedly inconsistent transformation from a critic to an advocate of price level stabilization is explained by a change of issues under his focus, rather than by a change in his positive views. We also claim that Hayek was always aware that every practical monetary policy involves difficult trade-offs and that he was therefore reluctant to impose his own value judgments on what people should strive for.     

Hayek,Friedman, and Buchanan: On Public Life,Chile, and the Relationship between Liberty and Democracy

This article places recent evidence of Hayek's public defense of the Pinochet regime in the context of the work of the other great twentieth-century classical liberal economists, Milton Friedman and James M. Buchanan. Hayek's view that liberty was only instrumentally valuable is contrasted with Buchanan's account of liberty situated in the notion of the inviolable individual. It is argued that Hayek's theory left him with no basis on which to demarcate the legitimate actions of the state, so that conceivably any government action could be justified on consequentialist grounds. Furthermore, Friedman's account of freedom and discretionary power undermines Hayek's proposal that a transitional dictatorship could pave the way for a genuinely free society. It is contended that Hayek's defense of Pinochet follows from pathologies of his theories of liberty and democracy.     

Evolving views on monetary policy in the thought of Hayek,Friedman, and Buchanan

Attempting to find the technically optimal monetary policy is futile if the Federal Reserve’s independence is undermined by political influences. F. A. Hayek, Milton Friedman, and James Buchanan each sought ways to improve the performance of the Federal Reserve. They each ended up rejecting the possibility that technical refinement or minor reforms might be sufficient. After properly accounting for the concerns of robust political economy, each concluded that a fundamental restructuring of our monetary system was necessary. Friedman turned to binding rules, Buchanan to constitutionalism, and Hayek to competing private currencies. We synthesize their contributions to make a case for applying the concepts of robust political economy to the Federal Reserve through the adoption of professional humility, creative thinking, and an emphasis on the politically possible, not the politically acceptable.     

Intertemporal capital substitution and Hayekian booms

Hayek’s business cycle theory portrays monetary expansion and monetary contraction with counterintuitive asymmetry. On the one hand, it suggests that they both change relative prices and cause costly reallocations of production factors. At the same time, the theory predicts that while a monetary contraction causes the economic crisis, the monetary expansion comes with the boom. I argue that what I call intertemporal capital substitution in industries close to final consumption explains why there is a boom in spite of the costly reallocations. More specifically, monetary expansion only gradually increases the demand for nonspecific factors of production by industries that are temporally remote from final consumption. Responding to the expected higher cost of nonspecific factors, consumer-goods industries temporarily increase output and depreciate specific durable production factors faster than they planned.     

Welfare effects of monetary policy in an economy with vertical production and trade: An analysis based on the perspective of local currency pricing

By incorporating the factor of firms' asymmetric price setting behavior into the two-country model with vertical production and trade, we analyze how one country's monetary policy affects the welfare of both countries. We show that an expansionary monetary policy has (i) a beggar-thyself effect if the ratio of the non-expanding country's intermediate goods firms that set their export prices in the local currency is significantly low and (ii) a prosper-thy-neighbor effect in our model regardless of the ratio of either country's intermediate goods firms that set their export prices in the local currency.     

Tobin's Q channel and monetary policy rules under incomplete exchange rate pass-through

This paper focuses on the role of the Tobin's Q channel in a two-country framework in which exporting firms set their prices on the basis of local currency pricing. Incomplete exchange rate pass-through significantly affects the Tobin's Q channel in each country compared with the case of complete exchange rate pass-through. We explore whether different specifications of monetary policy enhance social welfare. Regardless of the degree of home bias, a monetary policy rule that stabilizes domestic asset prices attains preferable outcomes to several alternative policy rules considered in our analysis. Notably, there are large gains from employing a domestic asset price rule when the home bias is large. A monetary policy rule that stabilizes the asset prices of both countries results in worse outcomes. Our simulation results suggest that stabilizing asset prices is important in an open economy with incomplete exchange rate pass-through.     

The empirical relevance of the Mises-Hayek theory of the trade cycle

Austrian Business Cycle Theory (ABCT), as espoused by Mises (1912, 1949) and Hayek (1935), predicts changes in the economy’s structure of production following an unexpected change in monetary policy. In particular, following a credit expansion the theory predicts that: previously idle resources are drawn into the market, previously employed resources are used more intensively, and prices and quantities of goods in the intermediate stages of production decline relative to the prices and quantities of goods in other stages. To test the theory’s implications we employ stage of process data which classify goods by their distance to final consumption. Using this data we run structural vector autoregressions and isolate each variable’s response to a monetary shock. Consistent with the theory, we find that resource use expands on the intensive and extensive margin. On the other hand, we find little evidence of the relative price and quantity effects predicted by ABCT. Since the relative price effects are the distinguishing aspect of ABCT, we conclude that evidence in favor of the theory is, at best, mixed.     

Did Hayek have a monetary theory of business cycles?

Joseph Schumpeter, a careful reader of Hayek, categorized Hayek??s theory of economic cycles as non-monetary. Almost every other source, including Hayek himself, categorized the theory as monetary. The issue turns on the concept of causality being used. The question of what causality concept to apply to complex phenomena has substantive implications for economic theory. A simple concept of causality, appropriate to the study of some physical phenomena, will mislead when applied to complex phenomena. We provide examples of errors in analysis that follow from the wrong choice of a causal paradigm.