Newsweek by Ruchir SharmaNovember 28, 2010 http://www.newsweek.com/2010/11/28/a-return-to-economist-friedrich-hayek-s-ideas.html Last year the consensus opinion was that we are all Keynesians now. Virtually everyone in the commentariat believed that John Maynard Keynes’s solution for the Great Depression—heavy government spending to resuscitate the economy—was also the answer to today’s global downturn. The first cracks in the consensus appeared with the outbreak of the fiscal crisis in Greece earlier this year. Across the developed world, critics began to argue that government spending had reached the point of diminishing returns, and was producing an anemic recovery that mainly benefited special-interest groups. And the electorate listened. From Europe to the United States, as voters started to reward candidates focused on fiscal discipline and less government intervention, Keynesianism quickly fell out of favor. One key exception was U.S. Federal Reserve chairman Ben Bernanke. Dissatisfied with the gradual recovery and a high unemployment rate, he let it be known that he thought more stimulus was in order, and realizing that was not in the congressional cards, he decided to take monetary activism to a new level by offering an open-ended commitment to pump as much money into the system as required to meet the Fed’s dual mandate of maximum employment and price stability. This is the first time a Fed chairman has explicitly stated that monetary policy can turbocharge an economic recovery. Bernanke says he is doing everything Milton Friedman would have had the Fed do. Friedman, the father of monetarism, argued that the Great Depression was largely the result of a major contraction in money supply, and that such a severe economic outcome could have been avoided had the Fed held the money supply stable. The public doesn’t buy it. There’s a growing backlash against the Fed’s monetary activism, for two reasons. It is increasingly clear that the Fed can print all the money it wants to but has no control over where it ends up. Ever since the Fed stepped up talk of quantitative easing this summer, the prospect of easy money has driven up prices of commodities and emerging-market stocks, and Wall Street is abuzz with talk of the “next bubble.” Second, monetary activism suffers from the same fundamental flaw as Keynesianism, in that it protects inefficient players instead of injecting renewed vigor into the economy. In a telling statement of the Fed’s thinking, New York Fed member Brian Slack recently said that, with luck, quantitative easing will work by keeping “asset prices higher than they should be,” as that adds to household wealth. This is why stimulus can be so unpopular: it often benefits the rich (who own a disproportionate share of inflating assets such as stocks) at the cost of the poor (who are hurt most by the related rise in food and energy prices). In a sign of the times, some of the most popular videos on YouTube this year are satires on economic policy; the latest lampoons the Fed amid a growing feeling that policymakers are committing what economist Friedrich Hayek called the “fatal conceit” in micromanaging the economic cycle. Hayek hated policy intervention of any kind. Keynes, Friedman, and Hayek were leading lights of the three most influential schools of economic thought of the last century. Hayek was associated with the Austrian school, ascendant in the 19th and early 20th centuries, which argued that the private sector should be left free to carry out the task of any readjustment in a downturn. Faith in the market’s purging power served the U.S. well in the 19th century, when the economy emerged stronger after each recession, but was taken too far in the policy mix of tight money and high taxes that led to the Great Depression and the rise of the Keynesians. Keynesianism and monetarism are now suffering a similar distortion. Keynes would probably never have supported big government deficits during boom times, such as those that led to our current debt crisis. Likewise, Friedman would probably not have backed the new Fed use of monetary policy as a tool to engineer expansion rather than merely cushion the pain in a downturn. The systematic perversion of Keynes’s and Friedman’s thought is now resulting in a fall in their fortunes, leaving Hayek triumphant, once again. Sharma is head of Emerging Markets at Morgan Stanley Investment Management. <object width="640" height="505"><param name="movie" value="http://www.youtube.com/v/7ESHjYat9rk?fs=1&hl=en_US"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/7ESHjYat9rk?fs=1&hl=en_US" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="640" height="505"></embed></object>
The ideas of Keynes, Friedman, and Hayek are all woefully out of date because they're still based on capitalist assumptions. Capitalism is dead.
Surprise. Surprise a stock broke/ financial guy is a fan of Hayek or libertariansm. They tend to like naked "free" marketism as it sort of justifies their tremendous earnings that far excede their use to society. Also as usual they pine for the 1800's when the poor literally starved during a depression. Libertarians can seem so heartless to normal people who have not drunk the kool-aid. In their **** sureness that great suffering is worth it if necessary to achieve their "scientific" abstraction they so remind me of Marxist Leninists or "scientific" socialists who were always willing to crack a few eggs or if necessary a million skulls to issue in their utopia. From the original article
No one realizes that these schools of thought are broken in the sense of dealing with real world problems of increasing scale and complexity. Which school predicted the crisis and gave a roadmap to rise out of it?
The funny thing is that emerging from a recession with a stronger economy also happened every time in the 20th century as well. If the 1800's is the kind of evidence they rely on to make the case, then they really don't have a case to begin with.
This is false. Friedman advised Japan to use monetary policy to get out of their deflationary depression. I think all 3 have useful ideas, and all 3 at one point or another during this crisis have been to declared to be "back in vogue."
The triumphant return of Hayek, which I guess is what this dude is interpreting the results of the last election, had a rallying cry of "get your government hands off my Medicare". I think maybe somebody should re-read his Hayek.
I'm sure there's someone from each group who claims to have predicted it. Of course, they ALL have a roadmap that allegedly gets us out of this mess.
Nope, it's an animated corpse being powered by the income of people not yet old enough to vote. I call it the CapitaLich.
The Operative: I believe in something greater than myself. A better world. A world without sin. Mal: So me and mine gotta lay down and die... so you can live in your better world? The Operative: I'm not going to live there. There's no place for me there... any more than there is for you. Malcolm... I'm a monster.What I do is evil. I have no illusions about it, but it must be done.
So did I! I was thinking it was going to be about her breast feeding some more babies. Major disappointment.
you need to reread your great depression history. Hoover was just as much of a interventionist as Roosevelt. Roosevelt was just a much better politician. http://seekingalpha.com/instablog/2...bert-hoover-put-the-great-in-great-depression
This is not even remotely true, the fantasy of deluded libertarians. Brad DeLong FTW over winguts from seeking alpha: http://delong.typepad.com/sdj/2009/08/herbert-hoover-a-working-class-hero-is-something-to-be.html That's the magic of libertarians and the teabaggers of today, the moment their policies don't work, which is like always, because they are stupid, they claim that they aren't REAL libertarian policies. If President Rand Paul introduced a gold standard, and we all ended up eating Dinty Moore in an alleyway for the next 100 years, the "TRUE" libertartians would no doubt claim that gold standard was in fact....FOOL'S GOLD. What we need is something firm and strong, like an IRON standard.
