World-famous economist, scholar and writer, Dr. Richard M. Ebeling, spoke at the Hayek Institut this past March about the different economic policy challenges facing Europe. Reflecting his expertise in history, politics, and economics, his lecture focused on the benefits of a gold standard for sound monetary policy, and the advantages of a free banking system. He recently spoke to the Hayek Institut’s Secretary General about monetary policy, his life-long interest in the Austrian School of Economics and the important legacy of Friedrich A. von Hayek.
Part I of that conversation.
How did you discover the Austrian School of Economics? Who most influenced your academic career and intellectual development?
I was a teenager when I “discovered” the Austrian School—when I was about 15 or 16 years old. I was interested in public policy issues, but found it difficult to sort out how to understand and analyze the cases “for” or “against” various forms of government regulation or intervention. It was also a time when many still believed that the Soviet Union and Mao’s China were positive “models” of central planning for third world countries to emulate to achieve economic development. This was in the second half of the 1960s, when, in the United States, the Lyndon B. Johnson Administration was implementing its “Great Society” programs of expanded redistribution of wealth, greater government intervention in market activities, and the fighting of an enlarged war in Vietnam.
I met two people who introduced me to the writings of philosopher and novelist, Ayn Rand. It was through the references and footnotes in her non-fiction writings—especially her collection of essays, Capitalism: the Unknown Ideal—that I found out about the writings of Carl Menger, Eugen von Böhm-Bawerk, and Ludwig von Mises, as well as “popularizers” of “Austrian”-oriented ideas such as the free market journalist, Henry Hazlitt. This led me to the writings of Friedrich A. Hayek.
And how did you proceed?
I began with his The Road to Serfdom and The Constitution of Liberty; but soon I was reading all of Hayek’s early works from the 1920s and 1930s on monetary theory and the business cycle. I also went through his writings of the 1930s and 1940s on the nature of the market competitive process and the division of knowledge in society, which, as Hayek explained, only the price system could successfully integrate and coordinate.
In terms of my views on the nature and workings of the market order, and its alternatives, the two most influential thinkers have been Ludwig von Mises and Friedrich Hayek. Their influence can be seen in my two books, Austrian Economics and the Political Economy of Freedom (2003) and Political Economy, Public Policy and Monetary Economics: Ludwig von Mises and the Austrian Tradition (2010).
Did you ever meet Hayek?
One of the intellectual highlights of my life was the opportunity to spend a good part of two summers in almost daily contact with Friedrich von Hayek. In 1975 and 1977, I had the good fortune to have summer research fellowships at the Institute for Humane Studies, when it was still headquartered in Menlo Park, California, near Stanford University. Both of those summers Hayek also was there as a senior fellow. My office was a door or two down from his, and almost everyday I would go in and talk with him for about an hour or so. I asked him about the history and ideas of the Austrian School; the “old Vienna days,” when he participated in Ludwig von Mises’ “private seminar”, and when he was the first director of the Austrian Institution for Business Cycle Research; his battles with Keynes and the advocates of central planning in the interwar period when he was at the London School of Economics; and his philosophy of freedom and classical liberalism.
But I should mention that for a period of time I also had the additional good fortune to know and study under Israel Kirzner, Ludwig Lachmann, Fritz Machlup, and Oskar Morgenstern at New York University. I also knew Murray Rothbard fairly well in the years I lived in New York in the late 1970s and early 1980s. And I had the chance to meet and interview Gottfried Haberler. Each has had a significant impact on my thinking about economics in general, and especially my understanding of Austrian Economics.
Why do you think Hayek is so important? What would you say is Hayek’s principal contribution to the world?
In my opinion, Hayek’s explanation and defense of the competitive market economy and the free society in general is, possibly, the most insightful and profound argument for liberty penned in the 20th century. His analysis of man’s inescapable ignorance of much of the knowledge that others possess—but upon which use we are all dependent in the extended system of division of labor—represents one of the subtlest understandings of why government central planning and heavy-handed intervention and regulation are inherently inferior to a functioning competitive market order.
The “moral” lesson, of course, is that each of us, in accepting our own limited and imperfect knowledge, should practice a high degree of humility in what we can claim to know and do in terms of trying to direct or command the otherwise “spontaneous” evolution and development of society and its institutions. This is the overarching message that runs through Hayek’s writings over the decades. As he often put it, we need to use our reason to appreciate the limits of what our reason can realistically do in attempting to “plan” the social order and its daily operation. It is the reason why he, truly, was one of the most worthy to be awarded a Nobel Prize in economics, in terms of a lasting contribution to human knowledge about man and society.
In the context of the West’s current economic and financial difficulties, is Hayek still relevant?
It is now nearly 40 years since Hayek was awarded that Nobel Prize in 1974. Yet, in my view, his writings are as important as when he wrote them. Back in 1942, the American economist, Kenneth Boulding reviewed Hayek’s The Pure Theory of Capital, shortly after it was published. Boulding at one point says: “Mr. Keynes’s economics of surprise, like Hitler’s, may be admirable in producing spectacular immediate successes. But we need Puritan economists like Dr. Hayek to point out the future penalties of spendthrift measures and to dangle us over the hell-fire of the long run.”
Hayek often said that society was approaching the long-run consequences of Keynesian-style short run policies. Well, we are most definitely now in that long-run. Throughout much of Europe the interventionist welfare state seems to be reaching its limit. The economies of many of these countries are not productive enough to generate the output and wealth to pay for all that politicians have offered and special interest groups have demanded, one election cycle after another.
What do you think are the root causes of the current crisis?
This “crisis” of government paternalism was accelerated by monetary and related interventionist policies in the United States and Europe that produced another “boom-bust” cycle in the first decade of the 21st century. It has had all of the hallmarks of the type of business cycle that the Austrians—and especially, Hayek—had explained decades earlier. Financial markets were awash with loanable funds made possible due to aggressive monetary expansion by central banks; interest rates were artificially pushed far below any market-based level; business investment borrowing, home borrowing, and consumer credit borrowing were far in excess of actual savings rates able to sustain them.
The capital, resources, and labor of society were misallocated and misdirected into various directions throughout these economies, all of which was going to necessitate a significant “adjustment” period when the “bubbles” of the boom finally burst. But rather than allowing the required adjustments and reallocations of capital and labor, and accepting that government welfare and related spending had to be permanently reduced or eliminated, governments have resisted these needed changes.
In many countries, the presumed “austerity” policies have really involved little or no reduction in the levels of government spending and redistribution, but noticeable increases in taxes. “Austerity” means squeezing the private sector to maintain a blotted government sector. The implicit psychology of many in Europe and the United States is that if the current crisis can “somehow” be gotten over, then the trend line of intrusive and growing government spending of past decades can be returned to in the future.
Is this a crisis of the capitalist system, as some have tried to argue?
Similar to what both Mises and Hayek pointed out over-and-over again during their own times, the present “crisis” through which we are living is not a crisis of “capitalism” or “free markets.” It is a dramatic and possibly fatal crisis of the interventionist welfare state.
As Hayek patiently explained many times, any understanding of the business cycle must look beneath the surface of the “macro” aggregates of total employment, total output and the overall level of prices. It is necessary to appreciate that the really harmful and destabilizing aspects of monetary-induced booms and busts is the “microeconomic” sequential process through which injections of money and credit into the banking system systemically distort the structure of relative prices, the profitability of different types of investment and production, with a consequent misallocation of labor and capital that will have to be “corrected” for at some point.
Any additional expansions of money and credit, or other interventions, to delay or prevent the required changes in relative prices and wages, and reallocations of labor and capital among sectors of the economy, only makes the adjustment period worse and more prolonged. If you overlay on all of this the bloated welfare states of modern Europe, with governments unwilling or unable to introduce cuts in spending and taxing, then you have the situation that we see today, with continuing high levels of unemployment and sluggish, or zero, or even negative growth.
At the end of the day, the choice is free markets (with limited government and low taxes) or the regulated and redistributive state (with intrusive government and high taxes and unsustainable borrowing).
What policy suggestions—in monetary and/or fiscal matters—do you have for today’s leaders and politicians?
On monetary policy matters, the central banks of Europe and the United States need to give up their attempts to manipulate interest rates in the name of economic “stimulus.” Interest rates are prices that are meant to interconnect and coordinate the decisions of savers with those of investors. They are the prices at which savings and investment are brought together and into balance. Interest rates are also a “capitalization factor.”
That is, interest rates enable a determination of the present value of possible investment projects of varying time-durations. By manipulating interest rates and preventing them from telling the “truth” about the available real savings to fund investments that might be undertaken, and from limiting investments to time horizons sustainable within the constraints of that real savings in the economy, central banks invariably induce types and amounts of investments that will be found to be inconsistent with consumption/savings decisions of income earners in society. Thus, central bank monetary and interest rate policies that are meant to maintain economic stability in fact generate imbalances between savings and investment, and misdirected resource uses that lead to the economic downturns those central banks claim to be trying to prevent.
On the fiscal side, governments must accept the politically difficult fact that their redistributive promises to voting constituencies are unsustainable, given the productive potentials of their societies. The welfare state must be dramatically cut back, if not repealed. Obviously, this goes against the political and ideological currents of our time.
What lies behind the dominant ideology of today?
The fact is there is a “specter” that continues to haunt Europe; it is the “specter of communism”—not communism in the sense that many people want a return to the totalitarian state and Soviet-style central planning. No, I mean in the sense that Europe—and America to a slightly different extent—are still haunted by Marx’s critique of capitalism and the market order. The presumption among policy-makers and many others in European society is implicitly that Marx was right in his criticisms of capitalism.
Left to its own device