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Economics
on Trial -- THE FREEMAN May 1998
Today's
Most Influential Economist?
by Mark Skousen
"But
half a century later, it is Keynes who has been toppled and
[______________], the fierce advocate of free markets, who
is preeminent."
--DANIEL YERGIN and JOSEPH STANISLAW, The
Commanding Heights 1
Fill
in the blank. Who is the mysterious economist named
above? Most of my colleagues named Milton Friedman,
but in Daniel Yergin and Joseph Stanislaw's bestseller, the
Chicago economist runs a close second to....
F.A.
Hayek, the Austrian economist!
Why
Hayek? Because, according to Yergin and Stanislaw, Hayek
has done more than any other economist to debunk socialism
in its many forms--Marxism, communism, and industrial planning--and
to promote free markets as an alternative system. Hayek's
influence perfectly illustrates John Maynard Keynes's remark
that politicians, "madmen in authority," are the
"slaves of some defunct economist."2
Indeed,
Hayek's influence has been ubiquitous. As Yergin and
Stanislaw point out, The Road to
Serfdom greatly affected Margaret Thatcher in reforming
Great Britain and raised doubts about industrial planning.
Hayek's criticisms of Keynesianism (A
Tiger by the Tail) called into question deficit
spending and the ability of the state to fine-tune the economy.
His theory of decentralized knowledge and competition as a
discovery process has had an impact on microeconomic theory
and experimental economics. His work on the trade cycle
and the denationalization of currencies has influenced monetary
policy. His co-founding of the Mont Pelerin Society
spread the gospel of free markets, property rights, and libertarian
thought throughout the globe.3
A
Surprising Victory
Yergin
and Stanislaw's revelation in The
Commanding Heights: The Battle Between Government and the
Marketplace That Is Remaking the World is a monumental
victory for Austrian economics. It is all the more remarkable
given Yergin's background as an establishment journalist and
author of The Prize, a
Pulitzer Prize-winning book about big oil.
At
the beginning of this decade, I argued in Economics
on Trial that the "next economics" would
be the Austrian model, with its focus on entrepreneurship,
microeconomics, deregulation, savings, free enterprise, and
sound money.4 But even I am
surprised how rapidly Hayek and the Austrian school have achieved
recognition.
The
next step is to see how quickly the economics profession absorbs
Austrian economics in its theories and textbooks. A
quick review of the current top-ten textbooks reveals only
two with significant entries on Hayek and the Austrians: Roy
Ruffin and Paul Gregory's sixth edition of Principles
of Economics, and James Gwartney and Richard Stroup's
eighth edition of Economics: Private
and Public Choice. Ruffin and Gregory give
credit to Hayek (and Mises) for the fall of socialism, one
of Ruffin and Gregory's "defining moments in economics."
Curious note: Ruffin and Gregory's fifth edition had no references
to Hayek or Mises; clearly Ruffin and Gregory are quick to
recognize a paradigm shift.
Other
textbook writers are not so prescient. Samuelson's 16th (50th
anniversary) edition highlights only Joseph A. Schumpeter.
Textbooks by David Collander, John Taylor, and Joseph Stiglitz
cite Hayek only once, while top sellers by Roger LeRoy Miller;
Michael Parkin; William Baumol and Alan Blinder; Campbell
McConnell and Stanley Brue; and Paul Heyne make no references
to Hayek and the Austrians.
A
Tale of Two Cities
Yergin
and Stanislaw rightly point to two schools of free-market
economics responsible for the shift from government to private
enterprise as the solution to world economic problems.
"And the eventual victory of this viewpoint was really
a tale of two cities--Vienna and Chicago," declare the
authors.5
In
the judgment of many economists, Milton Friedman and the Chicago
school have had even a greater influence than Hayek and the
Austrians. Yergin acknowledges Friedman as "the
world's best-known economist," noting that "the
Chicago School loomed very large" in its sway on monetarism
at the Federal Reserve and economic policy (under Ronald Reagan).
And, of course, all top-ten textbooks in economics have significant
sections on Friedman and his theories (monetarism, natural
rate of unemployment, welfare reform, privatization).
Friedman and the Chicago school have mounted an effective
counter-revolution to Keynesianism.
The
Great U-Turn
But
Keynes's principal rival in the 1930s was Hayek. Teaching
at the London School of Economics, Hayek defended the classical
model of thrift, balanced budgets, the gold standard, and
free markets, while Keynes (Cambridge University) promoted
the "new economics" of consumption, deficit spending,
easy money, and big government. Keynes won the first battle
for the hearts of economists, and his brand of "mixed
economy" swept the profession. Hayek fell out of
favor and went on to write about law and political science.
The task of dethroning Keynes fell to Friedman; he has accomplished
it masterfully.
Since
winning the Nobel Prize in economics in 1974, Hayek and the
Austrians have had a rebirth. Equally, Friedman and
the Chicago school have come out of obscurity into prominence.
Fifty years ago the Keynesian-collectivist consensus expressed
the sentiment, "The state is wise and the market is stupid."
Today, the growing consensus is just the opposite: "The
market is wise and the state is stupid."
Break
out the champagne. It's time to celebrate.
1.
Daniel Yergin and Joseph Stanislaw, The
Commanding Heights: The Battle Between Government and the
Marketplace That Is Remaking the Modern World (Simon
& Schuster, 1998), p. 15.
2.
John Maynard Keynes, The General
Theory of Employment, Interest and Money (London:
Macmillan, 1936), p. 383.
3.
For a good overview of Hayek's works, see The
Essence of Hayek, ed. Chiaka Nishiyama and Kurt
R. Leube (Stanford, Calif.: Hoover Institution, 1984).
For a partial autobiography, see Hayek
on Hayek (Chicago: University of Chicago Press,
1994). A full-scale intellectual biography of Hayek
has been completed by Alan Ebenstein, Hayek:
Philosopher of Libertarianism (forthcoming).
4.
Mark Skousen, "The Next Economics," Economics
on Trial (Baldwinsville, N.Y.: Irwin, 1991), pp.
274-90.
5.
Yergin and Stanislaw, p. 141. See my Freeman
column, "Vienna and Chicago: A Tale of Two Schools,"
February 1998.
Reprinted
with permission
Economics
on Trial
The Freeman
Foundation for Economic Education
30 South Broadway
Irving-on-Hudson, NY 10533
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