Greetings,

We wrapped up our unit on economic theory over the past two weeks and began our economic activity game.  With the field trip last week, field day this week, and senior thesis preparations under way, we did not make much progress, but I wanted to let you know about our examination of theories of F.A. Hayek.  At various times throughout the 20th century, either Keynes or Hayek has been in fashion.  In the Great Depression it was Keynes, then in the mid-late 70’s Hayek began his run, and recently Keynes has made a comeback.

Keynes and Hayek differ philosophically in a few key ways.  Keynes sees economics working like Legos.  While certain laws govern economic activity, these laws depend more on human activity in particular contexts, especially spending.  We can manipulate economies, like legos, in ways to fit our particular needs at the time.  When Keynes said, “In the long run we’re all dead,” he did not mean to lay out a pessimistic philosophy of life.  Rather, he argued that economics does not exist in the realm of absolutes.  It is a human creation that exists for human needs.  We do what we can in the moment.  Bailouts are not wrong, anymore than having a cup of coffee in the afternoon to get you through the day is not wrong.  Ideally we do neither, but neither are either of them wrong in the strict moral sense.

Hayek did not disagree with everything Keynes taught, but he did part ways with him in at least two key areas.  First, he argued that economies function well when they reflect real value.  He did not think that if you gazed into the heavens long enough you would discover that a candy bar should cost $1.  Candy bars do not have an inherent value in themselves, but the market gives it a “real” value in its particular time and place.  If merchants can freely sell, and customers freely buy, then the price of the item will reflect its “real” value in that time and place.  The item’s price has been arrived at through a silent, though nonetheless democratic process.  If the price is too high, not enough will buy it.  Too low, and he won’t profit and stay in business.

We understand in general the concept that proper functionality depends on the extent to which you allow things to work as intended.  Market manipulation, by government, by collusion, or other such means will create an artificial barrier between merchants and customers.  An imposition has come between the people and the price.  What we pay no longer reflects its real market value, but an artificial one.

This process of messing with prices distances economies from reality, and hurting the economy will hurt other areas of society.  When we no longer deal in reality, we deal in fantasy, and every fantasy must end sooner or later.  What will reality be like after our flight from it?

Hayek would not panic with society using a cup of coffee every so often to get through the day, but he would worry about where that cup of coffee might lead.  Soon would we need it?  Would we then need more than one cup?  What other stimulants might we try?  Would we then need depressants to sleep?  In time we might be living only through constant manipulation of our moods and energy, but this would not truly be living at all.  Likewise, a manipulated economy is not a real economy, and cannot reflect real value.

In his famous The Road to Serfdom Hayek felt that a process of manipulating the economy would lead to dependance on someone to deliver us from reality, a process by which we abandon our freedom and liberty.  That is of course the worst-case scenario.  But Hayek would add that every market manipulation messes with the people’s ability to freely negotiate prices with producers.  It sets up a collusive, oligarchical barrier to democracy.  And how will this price be set?  Will bureaucrats know more than the aggregate wisdom of the people?  Likely not, and so again, the market, and the people, will suffer.

I really enjoyed our discussions in class on these issues, and gladly saw students take both sides.  Some pointed out that Hayek’s “dependance” analogy can go too far.  When we are sick, we take medicine to restore normalcy, not flee from it.  Of course, we could get addicted to medicines, but that doesn’t stop us from using them when we need it.

Below I include two You Tubes, both of which are admittedly a bit cheesy.   All cards on the table — they are also pro-Hayek in their interpretation.  But agree or not, this was a creative way to communicate the ideas!