Seminar Paper, 2005, 34 Pages
Hayek as a Liberal. His Contribution to Politics and Economic
von: Roman Hinka
CHAPTER I. HAYEK�S CONTRIBUTION TO ECONOMICS 7
1.1. MACROECONOMIC INTRODUCTION 7
1.2. HAYEK�S INTERPRETATION OF BUSINESS CYCLE 10
1.3. MONETARY POLICY 15
1.4. THE PRICE SYSTEM 17
CHAPTER II. HAYEKS CONTRIBUTION TO POLITIC AND LIBERALISM 20
2.1. THE IDEA OF A UNITY OF LIBERAL TRADITION. 20
2.2. PLANNING AS AN ECONOMY COORDINATION MECHANISM 21
2.3. THE THREAT OF MONOPOLIES 23
2.4. THE FATE OF DEMOCRACY IN A SOCIALIST STATE 25
2.5. FUNDAMENTALS OF TOTALITARIANISM 27
2.6. INTERNATIONAL ASPECT 28
LIST OF LITERATURE 34
The present paper deals with Friedrich August von Hayek, one of the prominent liberal thinkers of the twentieth century. He engaged himself actively in economy, political philosophy, psychology, and epistemology. The Royal Swedish Academy of Sciences awarded Professor Hayek the Prize in Economic Science in Memory of Alfred Nobel for 1974 together with Professor Gunnar Myrdal �for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena�1. But his contribution does not limit only to economic.
Hayek developed his seminal explanation of business cycle based on classical macroeconomic theories of Knuth Wicksell and Ludwig von Mises. Theirs ideas are briefly presented in the first part of Chapter I. Further it will be discussed the essence of the theory of business cycle in terms of production structure and capital employment. In particular, the model demonstrates that boom-bust cycles are caused not by mysterious defects inherent in industrial capitalism, but by the unfortunate inflationary bank credit expansion propelled by central banks. Next section presents Hayek�s ideas about the role of money in economy and intelligent monetary policy. The problem of price system in market economy, linking Hayeks economic and political articles and books is elaborated in section four of Chapter I. Critical remarks to his statements voiced by his adversaries and fellows are discussed directly in the main text. The rationale for such structure is to alleviate understanding of the subject.
In the next chapter one gets on overview of The Road to Serfdom, the book by which Professor Hayek deserved popularity from both sides of Atlantic. It linked the statism of communism, social democracy, and fascism, and demonstrated that, just as people who are best suited for any given occupations will rise to the top in those pursuits, so under statism, "the worst" would inevitably rise to the top. The attention is paid to the critical issues like alleged advantages of central planning and market economy, the idea of a unity of liberal tradition, and Hayek�s view of post-war international order. The chapter includes statements from his debates with socialists. The paper refers heavily to Hayek�s works like Monetary Theory and Trade Cycle (1929), Prices and Production (1931), The Use of Knowledge in Society (1945), The Road to Serfdom (1944).
Friedrich von Hayek was born in Vienna on May 2, 1899 in family of Viennese intellectuals. His father, August was a medicine doctor teaching biology in the University of Vienna. His mother, Felicitas von Juraschek was from wealthy, conservative, land-owing family. Hayek was the oldest of three boys. Heinrich and Erich came one-and-a-half and five years after him. In March 1917 Hayek entered the army. He was sent as an officer to the Italian front after seven months of training. He served for over a year in Italy until the war�s end in November 1918.
Hayek came to the University when he was 19, just after the World War I. He was enrolled as a law student, but he attended with great interest lectures in economics and psychology. In the post-was time poverty was wide spread in Austria. Like his fellows in economic faculty Hayek wanted to get knowledge how to improve social conditions. The book Die Gemeinwirtschaft, published in 1922 by Mises, impressed him. Its key idea of necessity of market for means of production shook popular at that time believes about socialism as appropriate way out for the crisis. Mises�s sharp critics of central planning induced Hayek to accept a liberal concept of economics and politic. While being a student, Hayek attended the Privatseminar conducted by Mises. Mises developed earlier concepts of banking and monetary theory applying marginal utility principle to the value of money and drafted a theory of industrial fluctuations. He based his considerations on ideas of Swedish economist Knut Wicksell. Hayek also used Wicksells ideas for his research on fluctuations, explaining the origin of the business cycle in terms of bank credit expansion and its transmission in terms of capital investments. Lectures to this topic helped him to get an invitation to the London School of Economics and took there a Chair in Economics and Statistics. In London Hayek popularised Austrian business cycle theory, which was accepted as preferred explanation for the Depression until Keynesian General Theory was published. In early 1930�s Hayek disputed with Keynes over his Treatise on Money. Despite Hayek was able to refute completely ideas of the Treatise, he never did this. One can attribute his reluctance partly to the personal charm of Keynes and partly to the role of ally against inflation, which Hayek ascribed to him. Furthermore, Hayek later explained that Keynes often changed his theoretical framework, so there was no point to belabour a deliberate critique, if Keynes might change his mind again. With growing popularity Keynesian General Theory Austrian school underwent a decadence. The Austrian approach to capital theory, which was the pivot point in the business cycle theory, was heavily attacked by American scientists. The business cycle theory itself was regarded as obsolete in the light of enthusiasm of the General Theory. As well as this, prominent economists left Vienna, for personal and political reasons, so the Austrian school as such stopped to exist. Hayek remained at the L.S.E. until 1950, when he joined the Committee on Social Thought at the University of Chicago. There he ceased to work on economic theory, concentrating instead on psychology, philosophy, and politics, and Austrian economics entered a prolonged eclipse.
When the 1974 Nobel Prize in economics went to Hayek, interest in the Austrian school was suddenly and unexpectedly revived. The rediscovery of Hayek by the economics profession was nonetheless a decisive event in the renaissance of Austrian economics. Hayek′s writings were taught to new generations, and Hayek himself appeared at the early Institute for Humane Studies conferences in the mid-1970s. He continued to write, producing The Fatal Conceit in 1988, at the age of 89. Hayek died in 1992 in Freiburg, Germany, where he had lived since leaving Chicago in 1961.
1.1. Macroeconomic Introduction
It seems to be convenient to make a brief introduction in classic theory of fluctuation and explain crucial relationships and terms. The key issue is the assumption that prices, expressed as an exchange rate of one good to others, are flexible in the long run, i.e. they adjust to changes of supply and demand over time. In the short run, to the contrary, they are rigid. Note, one considers here prices not only for consumer goods, but also for commodities, labour, and capital as well. Next, macroeconomics deals with the aggregated supply and aggregated demand. The latter labels demand of economic agents (e.g. households, firms, and government) on all available assets in the entire economy. In other words, demand of households on food and comfort, and firms� demand on labour, half-finished products, electricity, additional credits and so on. By the same token, aggregated supply implies the gross domestic product that is produced materialized value in the economy. Further, consider the nature of the above-mentioned terms. The both lines depicted in price level - income output space react differently, i.e. move either upwards, or downwards, on changes of the same factors. Generally, is accepted the equilibrium equation: MV=PY, where M stands for money supply, V presents the speed of income turnover, and P, and Y label price level and production volumes respectively.
1 http://nobelprize.org/economics/laureates/1974/presentation-speech.html on March 11, 2005
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