Boettke on Hayek and Market Socialism

Recapitulating the story of Boettke on Hayek so far. The purpose of the book is to show how Hayek rose to some of the great challenges to good economics and classical liberalism. The main theme of the story is the turn to the explore the social and cultural institutions that became invisible to economists in the 20th century. This aspect of Hayek’s work emerged out of his long debate with socialism that was one of the lifelong threads in the Hayekian “tapestry”.

Boettke sketched four stages in Hayek’s progress over seventy years of active work. The first from 1920 to 1945 was primarily dedicated to economics and the problem of coordinating plans in the marketplace. Chapter 3 is “The Anatomy of an Economic Crisis: Money, Prices and Economic Order” and Chapter 4 is “Hayek on Market Theory and the Price System”. These chapters provide a difficult but accessible access to Austrian capital theory and the theory of the business cycle. The latter was Hayek’s first major topic during the 1920s, first in government service with Mises and later when he managed an institute set up to study business cycles.

In 1931 Hayek moved to the London School of Economics and enjoyed something of a triumph in occupying a prestigious chair in his early 30s. However the 1930s became decade of Triumph and Disaster, “these two imposters” as Kipling famously called them.

The most obvious disaster was the Keynesian revolution and parallel with it the rising popularity of socialist central planning among economists. For Hayek the deeper level of the disaster was the way the revolutionaries such as Lange were able to use the tools of advanced economic theory for their own purpose. Boettke noted that “Lange’s argument presented a formidable challenge for believers in the productive superiority of capitalism, a challenge that Hayek would devote the better part of the 1940s to attempting to meet.” [128] During the 1940s he also phased into his Abuse of Reason project and published The Road to Serfdom that foreshadowed his later work to restate liberal principles.

Hayek realised that deeper currents were driving Keynesianism than the political convenience of telling politicians what they wanted to hear about the way to handle the Great Depression. The same currents were driving mathematical formalism in microeconomics and the newly emerging general equilibrium theory. These currents included the new positivism in the philosophy of science courtesy of the Vienna Circle; the development of multivariate techniques and their application in econometrics to support Keynesian macro (techniques that Keynes himself deplored); and the growing body of national statistics that provided the raw material for econometrics. Boettke noted two defective aspects of methodology at that time – the absence of institutions and also incentives [127].

These were defects that Hayek set about to correct. At the same time he found fault with the new approach to equilibrium that was treated as a genuine end point rather than an analytical device like the “evenly rotating economy” used by Mises. The latter part of the chapter dealing with these matters will be engrossing for people with an interest in methodology but do not lend themselves to paraphrase.

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