My take is that there are two parts to Hayek’s career as a macroeconomist. In the first part, which runs till roughly 1941, Hayek is a business cycle theorist who was on to something–the role of the manipulation and volatility of interest rates in disrupting production and employment. It is this Hayek that John Papola and I try to capture in Fear the Boom and Bust. Hayek’s (and other Austrians’) ideas about interest rates have garnered renewed interest because the Fed’s low interest rate policy followed by rapid increases at the start of this century had something (and maybe a lot) to do with housing boom and bust.
But Hayek’s response to the Keynes was first silence and then The Pure Theory of Capital (in 1941) which Hayek himself didn’t seem particularly excited about it. Keynes took the profession by storm. My mental image of this period of Hayek’s life is that of a crowd of thousands surging out of an arena after a rally about the importance of government saving the economy and Hayek trying to make his way toward the arena saying, “Wait a minute! You’ve forgotten old truths!” No one listened to him.
The Pure Theory of Capital was Hayek’s attempt at his own grand theory and even he found it deeply dissatisfying. Then came the second phase of Hayek’s macro. He wrote The Road to Serfdom, a warning about the dangers of central planning and top-down solutions to economic problem. He wrote his most important article, The Use of Knowledge in Society where he argues that prices and economic decisions driven by those prices emerge, wondrously, without anyone controlling them. Economic problems can get solved without centralized direction. Hayek’s writing on bottom-up emergent processes contain Hayek’s deepest insights. They are microeconomic in general but they have macroeconomic implications. I tried to capture some of that depth in my novel, The Price of Everything.
Astoundingly, Hayek wins the Nobel Prize in 1974. His Nobel Prize lecture for me represents the second phase of Hayek as macroeconomist. Rather than arguing that he has a better model of the economy or the business cycle, he argues that the economy is too complex to model. As John Papola and I put it in The Fight of the Century:
The economy’s not a class you can master in college
To think otherwise is the pretense of knowledge
In his Nobel Prize lecture, Hayek uses his microeconomic insights about complexity and emergence to argue that macroeconomic precision is beyond our abilities. Macroeconomics is not like physics. The lecture is a plea for humility, a plea for skepticism about what we can know and cannot know. It is an argument for embracing the limitations of reason and especially the limitations of experts in steering the economy:
Often all that we shall be able to predict will be some abstract characteristic of the pattern that will appear – relations between kinds of elements about which individually we know very little. Yet, as I am anxious to repeat, we will still achieve predictions which can be falsified and which therefore are of empirical significance.
Of course, compared with the precise predictions we have learnt to expect in the physical sciences, this sort of mere pattern predictions is a second best with which one does not like to have to be content. Yet the danger of which I want to warn is precisely the belief that in order to have a claim to be accepted as scientific it is necessary to achieve more. This way lies charlatanism and worse. To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the over-confident because their experiments may after all produce some new insights. But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based – a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed.
This is “The Use of Knowledge in Society” meets “The Road to Serfdom.” John Papola and I tried to capture some of these ideas in The Fight of the Century. Is it macroeconomics? A contribution to macroeconomics? All I know is that it helps me think about political economy–the interface between politics, policy, and economic outcomes. I also know that it is profoundly discomfiting to mainstream macroeconomists to suggest that if not totally naked, their clothing is not the ermine of a true emperor.
Was Hayek an important macroeconomist? I would argue that the macroeconomic skepticism of the later Hayek is more valuable than the macroeconomic theorizing of the early Hayek. But he wasn’t an important macroeconomist in the mainstream sense of the title. So what? That’s a badge of honor. He was merely a great economist, without any prefix. He helps me see things I wouldn’t otherwise see. That’s all that really counts.