Thursday, 27 September 2012

Hayek's Austrian way

Last week, the BBC’s Masters of Money programme explored the life and works of Keynes. This week it crossed over an intellectual gulf to look at his great academic sparring partner: F. A. Hayek. Like Keynes, Hayek had significant influence on western economic affairs and political philosophy. His pamphlet The Road to Serfdom informed the thoughts of the young Nigel, now Lord, Lawson.  Margaret Thatcher’s famous handbag contained quotes, apparently. And when Hayek died, his daughter in law was asked if she had informed the President of the United States.  So what were all these people reading?    
They were, of course, reading the man’s ‘free market’ philosophising.  Hayek viewed markets as natural wonders, evolved, in the Darwinian sense, over the years to become the motor that drives civilisation’s progress, that delivers ever greater prosperity to ever more of its citizens. The world’s markets are a grand ‘telecommunications network’ that matches supply with demand and which, somewhat magically, communicates this information through price. It is magnificent work that these markets do, he argued, so let them move. And don’t get in their way, Government! Don’t fix prices and interest rates, and don’t try to bend markets to your will by manipulation of the money supply. 
This was Hayek’s most radical idea. When governments try to intervene in the economy they generally foul it up, he said. And there is certainly plenty of evidence.
The programme took us to the New York stock exchange of the 1920s, and described how the newly established Federal Reserve started buying government debt on the open market in order to get money into the economy. It also kept interest rates low. This encouraged everyone to borrow more. With high credit and cheap loans, explained the presenter Stephanie Flanders, a boom was created and people started investing heavily in property and shares.  And we all know how the 1920s in New York finished.  Fast-forward to 2001, and the Federal Reserve cut interest rates in order to encourage every one to borrow. With high ....  I won’t bother repeating myself.
Hayek’s lesson from the sorry tale was that government’s fixing of the interest rates had distorted the signals that the market was sending to its participants: the grand telecommunications system was broken. The artificially low interest rate told that there was much cash available, sitting in bank accounts, waiting to be invested. There wasn’t. And when investors realised this, there came a spectacular bust.
Therefore, said Hayek, states should lose their control of money, and private citizens should be free to trade in whichever currency they trust - there could be dozens in circulation in one economy. Governments would no longer be able to set interest rates, and currency competition would restrain it from such things as quantitative easing. This, thought Hayek, might avoid a lot of trouble. 
No Government is going to do this. Giving up power is not in their nature. To many the Hayekian vision looks, as Krugman put it on the show, like the Wild West, when “men were men and currency was free,” a time that was heavily prone to financial crises.  But as the Government’s fiscal and monetry tricks for economic revival fall foul of unintended consequences, will the vision of ‘government-free markets’, become more enticing, more doable?  Or will it remain a naive and fanciful utopia?