Friedrich Hayek is considered one of the economic brains of all time due to his contribution to the field of Economics. Through different publications that include books, introduced or edited books, pamphlets and essays, Hayek clearly articulated some of the economic principles that are in use today. Moreover, he built on the works of various economic theorists, tuning them to attain greater accuracy, and exploring the concepts behind the theories. Most of the works done by Hayek are summarized in the form of theories that find application in Economics in a variety of contexts. Hayek’s contributions to Economics can, therefore, be described based on his contributions to economic theory and practice through writings on psychology, intellectual history, political and legal philosophy, and to pure and directly on monetary economic theory.
Hayek’s Contributions to Economics
Hayek’s contribution to Economics is most effectively explained from his background’s dependence on the studies conducted by Mises on social cooperation. The theories developed by Mises formed the foundation upon which Hayek built his early theories, which formed the basis of his intellect in economic science. Particularly, the role of Hayek in Economics has been extensively explained based on his argument that he owed a lot of his economic science intellect to Mises; while Mises was a systems builder, Hayek became the dissector and analyser of systems (Boettke par. 2-3). This role led to his criticism of the works of various great economists such as Keynes, and the eventual establishment of individual works and founding of independent economic theories that have found use to-date. Understanding Hayek’s contributions to Economics, therefore, begins by an exploration of his contributions towards making Mises’ implicit theories more explicit, particularly through the theory of money and credit developed in 1912.
The Theory of Money and Credit is one of Hayek’s earliest contributions to economic theory and policy. The theory was founded on the premise of social cooperation advanced by Mises, and was aimed at refining the technical understanding of capital coordination and also expounding on the institutional details associated with credit policy. Hayek’s first book on economic theory, titled ‘Monetary Theory and Trade Cycle (1929),’ is considered as one of his important contributions pertaining to the theory of money and credit (Boettke par. 3). The arguments and assertions made in the book contributed extensively to economics as the basis upon which several studies on monetary theory have been established to-date. It can thus be deduced that through the theory of money and credit, Hayek created an impetus for further research, thus facilitating the thirst for greater knowledge among existing economists. Seminal studies on the subjects of the trade cycle and monetary policy have extensively analysed the economic effects of the capital structure and credit expansion (Machlup 498). Without Hayek’s work on monetary theory and the trade cycle, such a background would have been unavailable for seminal research to base their arguments or rationales on.
Another significant contribution by Hayek was through the theory of the trade cycle, developed collaboratively with Mises. According to O’Driscoll, the theory of the trade cycle helped to explain a “cluster of errors” that is a characteristic of the trade cycle (11). A feature such as credit expansion, which is facilitated by a decline in interest rates, misleads business people (Caldwell par. 12). Because of such misleading outcomes, businessmen are led to engage in various ventures that are ultimately detrimental to their businesses. Additionally, credit expansion results in a false signal that facilitates the mal-coordination between production and consumption plans among economic stakeholders. The theory further explains the adjustment of production to the existing savings and consumption patterns in the economy.
The Mises-Hayek theory of the trade cycle is an important contribution to economic theory and practice since the trade cycle is the primary foundation of economic flows in any country. Caldwell suggests that the trade cycle is mostly used in different economies to describe international trade (par. 10). In the contemporary environment where international trade has gradually become a significant backbone of economic growth in many countries, understanding the trade cycle is an important aspect in the development of economic policy. Prasad further suggests that understanding the factors that drive fluctuations in international trade is not only important for macroeconomic forecasting, but also for the development of short-term domestic policy considerations and for coordination in international trade policies (588). Through the Mises-Hayek theory of trade cycle, the relationship between production and the savings and consumption patterns can be drawn, hence influencing economic decision-making in relation to production systems and policies (Boettke par. 8). The theory thus contributes to the understanding of the factors influencing international trade, which is relevant to macroeconomic and domestic economic policy formulations.
Keynes’s economics are considered some of the leading contributions to contemporary economic policy, and Hayek played a similarly significant role in motivating their refinement. As a dissector and analyser, Hayek developed a critic of the works of Keynes, with a focus on imploring deeper understanding of the concepts shared by Keynes (Boettke par. 3). One such area was on the subjects of capital structure and interest rates. Particularly, Hayek raised attention to Keynes’s failure to understand the contribution of capital structure and interest rates to the market economy which was attributed to Keynes’s tendency to focus on aggregate concepts, which led to his failure to address the mentioned issues (Caldwell par. 9). Hayek’s contribution argued that Keynes tended to redirect the economist’s analytical focus away from the examination of the emergence of the industrial structure in an economy. As such, Hayek’s contribution was to raise concern about the gaps in Keynes’s theories, an action that led to Keynes’s decision to extend his works even further through the development of the neoclassical economic perspective that was later polished to the classical economic theory for which Keynes is known (O’Driscoll xxii). The criticism by Hayek, therefore, contributed significantly to the Economic theory not only by raising concern about the visible gaps, but also by initiating further works on capital structures and interest rates by both Keynes and Hayek himself. The outcomes of such works have found wide application in modern-day economic analyses on the same subjects.
Further contribution by Hayek was through his participation in socialist calculation debates. Through the socialist calculation debates, Hayek argued that prices exist to provide guidelines on decision-making for the future and are not determined by the past happenings (Ebenstein 146). The arguments in this aspect were founded through Hayek’s deviation from the conventional Social theorist perspective towards a different perspective of the political-economic problem, which viewed the society as an order and not an organization (Ebenstein 147). The new perspective to the political-economic problem focused on defining the society based on its functionality, which was described mainly as fulfilling the wills of the individual members. From this perspective, Hayek defined the society as an enabling institution, and argued that the best society is that which gives the individual members an opportunity to have their wills fulfilled through various ways. This particular perspective not only explains the role of the political system towards attaining economic stability, but also shows that an effective political system would be that which takes care of its people (Ebenstein 149-150). Therefore, Hayek’s deviation from the conventional social theorist perspective can be considered a starting point for explaining the role of the national economy to the people.
Efforts by governments, both in the past and in the contemporary society, have been aimed towards economic stability through the implementation of economic policies that are aimed at improving prices, interest rates, and managing inflation rates, outcomes that are characteristic of the deliberate efforts to improve the quality of life of citizens. Furthermore, economic indicators such as productivity, employment rates, healthcare expenditure, and education can all be considered to be tied to the quality of life of citizens in any country, pointing towards the role of the society in fulfilling the will of the members. It is, thus, deductible that through his participation in the socialist debates, Hayek contributed significantly to practice economics for the past and future generations.
To explain the concept of price changes and its impacts on the people even better, Hayek proposed a knowledge model for the world. In the address delivered to the London Economic Club in 1936 on Economics and Knowledge, Hayek proposed a world in which the information possessed by one agent is not necessarily correct, as knowledge is dispersed among several agents (O’Driscoll 10-11). In such an environment, Hayek proposed that social coordination could only be realized where the market prices are freely formed and freely adjusting (Caldwell par. 12). For this to occur intentionally, the adjusting market prices had to reflect the plans of several millions of market participants due to the impressions given by the change in price. Information on the relative scarcity of goods can be obtained through observations of market price fluctuations, enabling market agents to engage in effective planning, and to align their subjective thinking about market conditions with the actual conditions on the ground (Ebenstein 149). With the constant changes in the world, as well as the consistency in errors, the only way to sustain entrepreneurship is through the consideration of those errors as opportunities for profits to entrepreneurs. In his report, Ebenstein argues that from Hayek’s perspective, the market prices allow agents operating under conditions of limited information to attain coordination in their activities. Contrastingly, information equilibrium models that were previously developed obscure the strategy through which real markets address the problem of dispersed information because of the assumption that coordination already exists (151-152). The utilization of Hayek’s representation of the real world as a space in which information is already dispersed can help in identifying the opportunities for change and refining the thoughts about price fluctuations in the market, thereby enhancing economic outcomes to businesses and to the country as a whole.
The concept of social liberty, which is used in explaining the impacts of price fluctuations on market structures, also helps to explain the political system from a property perspective. Hayek argues that the concept of social liberty is intricately tied to the free markets system, which is a characteristic of a democratic polity in which a strong constitution protects the sphere of individual activity (Caldwell par. 13). The characteristics of a strong constitution as envisioned by Hayek included enforceable property rights, governance by the rule of law, whereby the laws are enforced equitably, are prospective, are stated abstractly, and are stable (Ebenstein 151). Under such a constitution, individuals are permitted to pursue own interests and values and also have the capacity to leverage their localized knowledge for individual benefits. Accordingly, these arguments still enforce the dependence of the economy on the political system. The contributions generated by the concept of social liberty to economics, therefore, are such that individual economic growth is dependent on the effectiveness, autonomy, and stability of the political environment (Ebenstein 151-152). With a focus on these areas, therefore, it becomes inevitable for socio-political and economic success to be realized. The interconnection between the social environment, the political environment, and the economic environment implies that contribution to one discipline inadvertently affects progress in the other two.
Hayek’s final contribution to the counter-socialism discourse confirms the interconnection between the social and political environments, and the economic environment. In the final argument, Hayek proposed a distinction between ‘constructed order’ and ‘spontaneous order,’ describing many social institutions as spontaneous orders that arise following human action and are the outcomes of humans pursuing their goals (Lee 22). Such systems are flexible and can adapt to change. On the other hand, constructed systems made by human design are often flawed and are difficult to adapt to the changing political and economic environments (Lee 23). The constructed systems are outcomes of central planning and have been implemented over the years with limited positive outcomes in the improvement of flexibility (Lee 23). Through such arguments, Hayek confirmed the viability of socialism, and through the years, advocacy of social planning reduced significantly, with economics and market socialists leading the shift. Hayek’s contribution is best observed through the incorporation of considerations of information and knowledge into the Economic theory and decision-making, as well as their applicability in the social environment.
The works by Hayek exhibit methodological ideas that find application beyond the scope of the economic theory. Particularly, Hayek has contributed to extensive debates on the feasibility and appropriateness of new economic and political systems (Caldwell par. 16). The ideas around Hayek’s activity in the economic environment transcend the circumstances that inspired their development and have the capacity for application in a wide range of concepts (Caldwell par. 16). Through collaboration with others, borrowing from the works of others, and citing the errors in other works, Hayek showed that no one has the monopoly over knowledge. Hayek, therefore, has made significant impacts in institutions and economic systems through the confirmation that understanding the limitation of individual knowledge is an essential step towards gaining wisdom, which can be instrumental in economic, social, and political decision-making processes.
The field of economics has benefitted expansively from Hayek’s contributions. The contributions span different disciplines including politics, social constructionism, and economics, which are all tied together for the purpose of exemplifying decision-making in an information-limited environment. Contributions to the Economic theory, expansion of concepts presented in other economists’ theories, and criticism of other concepts have had significant impacts not only on the economic environment, but also in the political system. Furthermore, the contributions are reported to transcend the contexts within which they were made, hence making their application relevant to contemporary economics.
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Ebenstein, Lanny. Chicagonomics: The evolution of Chicago free market economics. Saint Martin’s Press, 2015.
Lee, Orlan. “The Law of a Free Society Emerges like the Laws of Economics: F.A. Hayek from The Road to Serfdom to Law, Legislation and Liberty.” NYU Journal of Law & Liberty, vol. 1, no. 0, no date, pp. 17-34. www.law.nyu.edu/sites/default/files/ECM_PRO_060883.pdf. Accessed 14 May 2020.
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O’Driscoll, Gerald P. Economics as a Coordination Problem: The Contributions of Friedrich A. Hayek . Kansas City: Sheen Andrews and McMeel, 1977. oll.libertyfund.org/titles/driscoll-economics-as-a-coordination-problem-the-contributions-of-friedrich-a-hayek. Accessed 14 May, 2020.
Prasad, Eswar S. “International trade and the business cycle.” The Economic Journal, vol. 109; 1999, pp. 588-606. www.jstor.org/stable/2565636?seq=1. Accessed 14 May, 2020.