Posts tagged with: Friedrich Hayek

We live in the information age, or more accurately referred to as the age of “information overload.” Anyone who has a Twitter account knows what I’m talking about. You may feel like you’re drowning in a flood of Facebook statuses, emails and YouTube videos. With information coming at us every which way, how can we process it all? How do we even know it’s true?

Neoclassical economics assumes people act on the basis of perfect information. With all the information that’s out there, this might seem like a good assumption. Dr. Robert Nelson, a professor of environmental policy at the School of Public Policy at the University of Maryland, does not agree with this theory. In his critique of neoclassical economics at Acton University, he said,

Perfect ignorance is a better starting assumption than perfect information.

Rather than perfect information, perhaps we only need “good enough” information. Economist Vernon Smith claims markets converge toward equilibrium by trial and error. Experiments outlined in his book Rationality in Economics show equilibrium can be reached with a limited amount of information. Similarly, Austrian economist Friedrich Hayek argues that prices are sufficient in signaling value and enabling efficient economic decision making.

An experiment conducted by Paul Andreassen in the late 1980s tested two groups of MIT business students to see how information affects stock investments. One group could only see changes in prices while the second group was allowed to read The Wall Street Journal, watch CNBC and consult experts on market trends. Unexpectedly, the group with less information earned twice as much as the well informed group. His analysis suggests the high-informed group was distracted by the rumors and insider gossip from the extra information. The excess information encouraged them to engage in much more buying and selling than the low-informed group because they were confident their knowledge allowed them to operate more efficiently in the market. In this case, price signals and the invisible hand of the market proved more efficient than an overload of information.

In a world that seems to have all the technology and science to answer life’s greatest questions, we realize it is still imperfect and demand more. For example, many believe that overwhelming forensic evidence was enough to convict Casey Anthony of the murder of her daughter Caylee, but the verdict proved otherwise. The jury demanded more than just DNA; they wanted the exact time of death and a stronger motive.  

Information is a necessary prerequisite for belief, but we must be careful not to fall into the trap of doubting Thomas (though we have all been there). Always demanding personal evidence and more proof in order to believe something will only lead to skepticism. A skeptic says he will only believe it if he sees it, but rarely do we ever experience information from a primary source. Should we believe the facts we read in our textbooks? Should we believe what the experts say on the news? Belief always takes a step of faith.

In his encyclical letter Fides et Ratio, Pope John Paul II asks,

Who, for instance, could assess critically the countless scientific findings upon which modern life is based? Who could personally examine the flow of information which comes day after day from all parts of the world and which is generally accepted as true? Who in the end could forge anew the paths of experience and thought which have yielded the treasures of human wisdom and religion? This means that the human being—the one who seeks the truth—is also the one who lives by belief.

In the age of technology and information overload, we should be humbled in our human limitations. Because information is imperfect, it takes a little faith in the invisible hand to reach equilibrium in the free market. But we should not center our faith in free markets because markets are imperfect and will fail as everything else in the world. Information, which is necessarily imperfect, and faith is required in the human pursuit of truth. Whoever knew markets could teach us so much about faith?

From EconStories.tv:

According to the National Bureau of Economic Research, the Great Recession ended almost two years ago, in the summer of 2009. But we’re all uneasy. Job growth has been disappointing. The recovery seems fragile. Where should we head from here? Is that question even meaningful? Can the government steer the economy or have past attempts helped create the mess we’re still in.

John Maynard Keynes and F. A. Hayek never agreed on the answers to these questions and they still don’t. Let’s listen to the greats. See Keynes and Hayek throwing down in “Fight of the Century”.

Blog author: mvandermaas
Thursday, November 4, 2010
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Hayek and Keynes are dropping beats again – this time live! If you haven’t seen the original, check it out here.

Blog author: jcouretas
Wednesday, November 3, 2010
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A new article from Acton Research Director Samuel Gregg published today in Acton News & Commentary. Sign up for the free, weekly email newsletter here.

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A Tale of Two Europes

By Samuel Gregg

The word “crisis” is usually employed to indicate that a person or even an entire culture has reached a turning-point which demands decisions: choices that either propel those in crisis towards renewed growth or condemn them to remorseless decline.

These dynamics of crisis are especially pertinent for much of contemporary Europe. The continent’s well-documented economic problems are now forcing governments to decide between confronting deep-seated problems in their economic culture, or propping up the entitlement economies that have become unaffordable (and morally-questionable) relics in today’s global economy.

While some European governments have begun implementing long-overdue changes in the form of austerity-measures, welfare-reforms, and labor-market liberalization, the resistance is loud and fierce, as anyone who has visited France lately will attest.

No-one should be surprised by this. Such reforms clash directly with widespread expectations about employment, welfare, and the state’s economic role that have become profoundly imbedded in many European societies over the past 100 years. Yet it’s also arguable this is simply the latest bout of an on-going clash of economic ideas which goes back much further in European history than most people realize.

Certainly the contemporary controversy partly concerns the government’s role during recessions. From this standpoint, Europe (and America) is rehashing the famous dispute between the economists Friedrich von Hayek and John Maynard Keynes in the 1930s about how to respond to the Great Depression. Should we, as Hayek maintained, react by giving markets the flexibility they need to self-correct? Or do we prime the pump à la Keynes? (more…)

Blog author: jcouretas
Friday, October 29, 2010
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As America and Europe continue to wrestle with the question of how best to address their respective economic crises, many are looking back to the lessons of history and how they might be applicable to today. Scholars, public intellectuals, and policy analysts are paying particular attention to the economic debates of the 1930s, during which much intellectual wrestling — not all of it pretty — occurred over the causes of the Great Depression and how to best alleviate its destructive effects. Not surprisingly, the writings of John Maynard Keynes and Friedrich von Hayek are among the most heavily referenced by contemporary figures.

Another scholar who wrote extensively on the causes of, and possible solutions to, protected recessions was the German economist Wilhelm Röpke. His thinking was shaped not only by his lengthy formal studies of business cycles, but also the fact that he was extensively consulted by German governments in the late 1920s and early 1930s as the Weimar Republic struggled to stave off political and economic disaster amidst the collapse of banks and skyrocketing unemployment that fed the extremes of left and right. These consultations came to an end in 1933 after the fiercely anti-Nazi (and anti-Communist) Röpke became of the first academics to be purged from the universities by the new National Socialist government.

In his 2010 book, Wilhelm Röpke’s Political Economy (described by one reviewer in Economic Affairs as “the most comprehensive in its analysis of this important thinker’s political economy” and another reviewer in The American Spectator as “mandatory reading for every student of political economy”) Acton’s Research Director Samuel Gregg included an analysis of Röpke’s thinking about business cycles and recessions as the world remained stuck in an economic quagmire throughout the 1930s. Gregg compares Röpke’s position to that of Hayek and Keynes, illustrating how Röpke moved ever closer to Hayek’s analysis and prescriptions and ever more skeptical (and outspokenly so) of Keynes’s views.

Those interested in this subject, but who also wonder what Röpke might have thought of our current economic predicaments might be interested in an address delivered by Dr. Gregg in Buenos Aires, Argentina, in March 2010. The English-language lecture—“Wilhelm Röpke, The Depression and the 2008 Crisis: Reflections from the Past, Lessons for Today”—has just been published in the May 2010 edition of the Argentine journal Revista de Instituciones, Ideas y Mercados, the flagship journal of ESEADE, one of Argentina’s leading market-oriented universities.

It’s especially interesting to observe that while Röpke was initially willing to contemplate some mild interventions (mainly of the type that removed obstacles to a market-driven recovery), Gregg shows that Röpke soon concluded that most interventionist programs were counterproductive and/or ineffectual. Here Röpke was especially influenced by what he regarded as the failure of the New Deal (a failure beautifully documented by the economic historian Amity Shlaes in her 2008 book, The Forgotten Man) to reignite the American economy. As Röpke wrote in 1942:

It turned out that the original calculation that the Government’s boost of purchasing power would set off the private investment drive that was due, was wrong. Every time the Government’s injections were withheld, it was as if there was no private initiative which could take the place of public initiative.

Sound familiar? In his lecture, Gregg notes:

Most interwar active business-cycle policies aimed at combating the Depression, Röpke argued, had failed . . . . Instead [citing Röpke] ‘only an artificially continued prosperity developed which was bound to come to an end the moment the state injections of purchasing power upon which it depended, ceased.’ Bad investments had driven out good investments, meaning that governments were not only bound to keep injecting purchasing power, but to increase them. Such, Röpke wrote, was ‘the slippery slope of collectivism.’

How little we have learned from the past.

Via the Volokh Conspiracy:

Mario Rizzo and Gerald O’Driscoll point to dueling letters to the editor from 1932 in The London Times by John Maynard Keynes and F. A. Hayek on whether government spending can help cure contemporary economic woes. The letters, unearthed by Richard Ebeling, show that today’s debates over economic policy are, in many respects, a rerun of the debates of the 1930s.

Everything old is new again! Related: Fear the Boom and Bust

“Intellectuals and Society,” by Thomas Sowell, (2009) Basic Books, New York, 398 pp.

Arguments about ideas are the bread and butter of the academic, journalism and think tank worlds. That is as it should be. Honest intellectual debate benefits any society where its practice is allowed. The key element is honesty.

Today, someone is always looking to take out the fastest gun, and in the battles over the hearts and minds of the public many weapons are brought to bear. Unfortunately, and too often, among the artillery deployed by both sides in an argument are rhetorical deception, misleading statistics and an air of authority, which can immediately bury facts in the Boot Hill of honest debate.

Seldom held accountable for the violence brought to bear on the verifiable when their ideas lead to long-lasting negative effects, many of these intellectual gunslingers head into battle confident that their wits will save the world from another perceived plight.

Fortunately, Thomas Sowell is one of the fastest intellectual guns in the proverbial corral. His latest, Intellectuals and Society, finds the erudite economist turning his guns on the so-called intellectuals who attempt and too often succeed in swaying public opinion and political policy where the arrogance of intellect too often is the smart bomb dropped squarely on empirical evidence.

Indeed, intellectual folly knows no ideological parameters. However, Sowell divides intellectuals into two classes, where ideological divides are readily identifiable. The first is comprised of those with a constrained, or tragic, view of the world. To a conservative sympathetic to writers such as Russell Kirk and T.S. Eliot, there is an understanding that humankind is fallen and that there can be no heaven on Earth. Eliot and Kirk held that a worldview is only viable inasmuch as it reflects what Edmund Burke called the moral imagination, which he defined as, “the power of ethical perception which strides beyond the barriers of private experience and events of the moment …” (more…)

From Econstories.tv: In Fear the Boom and Bust, John Maynard Keynes and F. A. Hayek, two of the great economists of the 20th century, come back to life to attend an economics conference on the economic crisis. Before the conference begins, and at the insistence of Lord Keynes, they go out for a night on the town and sing about why there’s a “boom and bust” cycle in modern economies and good reason to fear it.

Lyrics sample (written by John Papola and Russ Roberts):

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

[Keynes Sings:]

John Maynard Keynes, wrote the book on modern macro
The man you need when the economy’s off track, [whoa]
Depression, recession now your question’s in session
Have a seat and I’ll school you in one simple lesson

BOOM, 1929 the big crash
We didn’t bounce back—economy’s in the trash
Persistent unemployment, the result of sticky wages
Waiting for recovery? Seriously? That’s outrageous!

more here.

Blog author: jwitt
Monday, December 7, 2009
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My essay in today’s American Spectator Online looks at why Ben Bernanke should not be confirmed to a second term as Chairman of the Federal Reserve:

Two planks in Bernanke’s recovery strategy: Expand the money supply like a banana republic dictator and throw sackfuls of cash at failed companies with a proven track record of mismanaging their assets. The justification? According to the late John Maynard Keynes, this is supposed to restore the “animal spirits” of the cowed consumer, the benighted creature who foolishly imagines that after a period of prodigality and mismanagement, maybe a country should rediscover its inner Dave Ramsey.

The full essay is here.

In his new encyclical, Caritas in Veritate, Pope Benedict XVI calls for an international political authority, “so that the concept of the family of nations can acquire real teeth.” He tasks it with issues like human rights, ensuring access to necessities including food and water, and managing the global economy. What might an effective international governing body look like?

The Nobel laureate economist Friedrich Hayek asked the same question in 1944 in his book, The Road to Serfdom. Seeing his beloved Europe torn apart by war and gross economic inequalities, Hayek wrote, “we cannot hope for order or lasting peace after this war if states, large or small, regain unfettered sovereignty in the economic sphere.” He was referencing World War II, but it sounds like the Pope feels the same way about hoping for order and prosperity after this recession.

Neither Hayek nor the Pope have utopian visions of the world. The Pope reaffirmed the value of subsidiarity many times in Caritas in Veritate. Subsidiarity is the principle that decisions should be left to the smallest competent authority. In questions of politics and economics, this is often a local authority; it is rarely an international organization. Hayek said the same thing when he noted that “the problems raised by a conscious direction of economic affairs on a national scale inevitably assume even greater dimensions when the same is attempted internationally.”

These constraints make international governance difficult, and they all but rule out any effort by a world body to coordinate economic activity. Real problems still remain with a nationally-divided world, though. Hayek said that “it is neither necessary nor desirable that national boundaries sharp differences in standards of living,” and the Pope refers to the “scandal of glaring inequalities” in Caritas in Veritate. What, then, is to be done?

First, it is necessary to ask what stands in the way of people having their rights respected and their needs met. All too often, it is the state. The Pope criticizes much government-to-government foreign aid on the grounds that corruption and bad economic policy need to be fixed before money will do any lasting good. He also calls for Western countries to end the subsidies to agriculture that block farmers in poor countries from having fair access to global markets. When it comes to accessing investment, food, and water, poor governance has done much to hold back the world’s most impoverished people.

As an Austrian who witnessed the rise of Nazism, fascism, and communism in Europe, Hayek shared a similar critique of the unwillingness of many governments to give their people the freedom they need to flourish. His experiences impacted his vision of the international order, and Hayek ultimately proposed that “there must be a power which can restrain the different nations from action harmful to their neighbors, a set of rules which defines what a state may do, and an authority capable of enforcing these rules… it must, above all, be able to say ‘No’ to all sorts of restrictive measures.”

Perhaps Pope Benedict XVI could draw inspiration from this perspective. In order to promote general equity and a search for the common human good among nations, an international authority with the ability to check irrational and cruel decisions made by governments may be the best way to proceed. An international body with the ability to veto rights abuses, tariffs, excessive inflation, corporate welfare policies, agricultural subsidies, and other harmful laws might be the best way to encourage the solidarity of the “family of nations.” It would let markets tap into the ability of every person to create wealth and meet their own needs through the dignity of their own work. By promoting openness and checking destructive policies without trying to take on the job of managing everything in the world, such an authority could also meet the Pope’s requirement that global political authority be organized in “a subsidiary and stratified way.”

The United Nations may or may not be the best organization to carry forward this vision, and it is possible that some other body might be the future of internal governance “with teeth.” Between Hayek, the Pope, and everyone looking for the best way to heed the challenges of Caritas in Veritate, hopefully a productive framework for governing globalization so that it works for the benefit of everyone can emerge.