Hayek's legacy

Mainstream economics pragmatically emphasizes debate about results, not about methodologies.

So, certainly, individual's names can be bolted onto specific curves, econometric estimators, statistical tests, probability inequalities, interest-rate rules, and mathematical equations and models — but not onto entire systems or ways of thinking.

The case of Friedrich Hayek, however, provides a rare example of a consistent body of work in the profession where such identification might be justified.

Living the frenetic cultured existence of the mid 1900s — as political events forever changed the global geography of intellectual endeavor — Hayek became one of the 20th century's most influential economists and political philosophers. In economics he made profound and enduring contributions in areas as diverse as monetary and business cycle theory, the social organization of dispersed knowledge, and the spontaneous emergence of order. But while seemingly varied, all these research questions were attacked by Hayek in a consistent, unified perspective. It is this single perspective then that potentially can be most identified with Hayek.

However, matters are complex from the opposite direction as well.

Hayek viewed business cycles as having their initiating impulse of central-bank credit overexpansion and their propagation mechanism as misallocation of capital across short- and long-term investments. This sees echo in many modern technical treatments — both empirical and theoretical — of economic fluctuations.

Hayek saw the price system to be the single leading mechanism by which limited local knowledge and actions can be efficiently aggregated into optimal social outcomes — through human action, not human design. This is, in one guise, simply the fundamental theorem of welfare economics. But combining these two Hayek propositions — that on business cycles and that on local knowledge — also recovers critical ingredients of Robert Lucas's rational expectations reconciliation of the short-run Phillips curve with monetary neutrality.

Being clear on the distinction between monetary and credit overexpansion brings to the fore modern econometric investigations of the different roles for money and credit over business cycles. Exploring the full implications of whether markets perfectly aggregate imperfect information is precisely the idea underlying a rich seam of technical research in microeconomics.

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