Originally published in Flourishing April/May 2012.
Friedrich August von Hayek was born in Vienna, Austria on May 8, 1899. A prolific author, he made fundamental contributions in political theory, psychology, and economics. In his book Commanding Heights (1998), Daniel Yergin called Friedrich Hayek the “preeminent” economist of the last half of the twentieth century.
The major problem for any economy, Hayek argued, is how people’s actions are coordinated. He noticed, as Adam Smith had, that in a free market, the spontaneous price system did a remarkable job of coordinating people’s actions, even though that coordination was not part of anyone’s intent.
By “spontaneous” Hayek did not mean that prices were unplanned; rather, he meant that they are planned by each independent economic actor, based on his own unique circumstances, rather than by a central planning authority. In other words, the current state of the market was not designed by anyone, but evolved slowly as the result of voluntary human interactions.
One cause of unemployment, he said, was increases in the money supply by the central bank. Such increases, he argued in Prices and Production (1931), would drive down interest rates, making credit artificially cheap. Businessmen and consumers would then make capital investments and long-range purchases that they would not have made if they had understood that they were getting a distorted price signal from a manipulated credit market.
Hayek died in 1992, but his theories, gleaned from events of the 1920s and 1930s, have proved prescient in the bursting of the Tech Bubble and the Housing Bubble. mh