Hayek’s Ten Rules for a Recession

by Kirk Kinder on February 21, 2011

If you have read my blog for any length of time, you have probably read the words “Austrian Economics” at some point. I certainly believe our nation would be better served following those principles than the current Keynesian theory. I doubt it will ever happen as the Austrian theory lets markets operate naturally so it diminishes the role of our DC overlords. Essentially, there is no free lunch, and that is not a popular idea in DC. Here is an article listing the top ten ideas from F.A. Hayek, a famed Austrian economist. From the article (with notes from me):

1. Recessions are bound to happen: Shifts between periods of economic growth and periods of stagnation or decline are a necessary and unavoidable part of a free-market monetary economy. Downturns are not aberrations but rather painful and necessary medicine for restoring equilibrium to the economy. (Think of brush fires…they actually clear away dead plants and brush to prevent an out of control forest fire. When we stop all brush fires, we set up a bigger blaze down the road)

2. A stimulus will only stimulate the deficit: Past experience with trying to fine-tune the economy shows that counter-cyclical fiscal and monetary policy can sometimes make matters much worse (as in the 1970s). Wise politicians would therefore be advised not to meddle, however much their instincts tell them to show voters they’re doing something.

3. Pure laissez-faire doesn’t work either: Some regulation is necessary for individuals to carry out their plans and for the market to function. Hayek therefore endorsed “general rules, equally applicable to all people and intended to be permanent (even if subject to revision with the growth of knowledge), which provides an institutional framework within which the decisions as to what to do and how to earn a living are left up to the individuals.” (Massive government agencies are not needed to regulate, nor do they work that well. However, I believe laws that strongly punish fraud should be in place. Also, parties should be held responsible when advice given for a commission blows up on the buyer. In other words, hit Wall Street with jail or fines if they push junk on buyers with the sole intent to earn a commission knowing full well the buyer just got screwed)

4. Central planning and excessive regulation sure as hell don’t work: The desire to plan and to subject the economy to the rule of experts endangers liberty. As Hayek succinctly noted: “the more the ‘state’ plans, the more difficult planning becomes for the individual.”

5. The economy is too complex for precise forecasting: As Yogi Berra could have said: “I hate making economic predictions. Especially about the future.” It’s not that we don’t know anything, but rather that what we do know reveals the limits of our knowledge, and consequently, of our ability to plan and forecast. (The best person to make a decision for you is you. No one can determine what is best for all the individuals in society…can’t be done)

6. Remember the rule of unintended consequences: History shows that when trying to realize certain ends—particularly when their achievement involves interfering with the workings of the price mechanism—all sorts of pernicious effects will occur that were not part of the original plan.

7. You won’t believe how much you’ll learn in Econ 101: While Hayek repeatedly pointed to the limitations inherent in a discipline that deals with a complex system like the economy, the basic principles of economics—scarcity, supply and demand, division of labor, etc.—can explain a lot about the world and, more importantly, help rule out certain inappropriate policy responses (e.g. price ceilings).

8. Leave social justice out of it: Free markets necessarily lead to an unequal distribution of wealth and, just as inevitably, fuel calls for egalitarian social justice. Hayek viewed such cries as misguided—justice has nothing to do with an impersonal market process—and dangerous—redistributive schemes presume that we possess knowledge that we in fact can never possess (see #5).

9. Nothing beats the free market: Hayek admitted that if we had more knowledge we could do a lot more to improve the world through planning and regulation. But we don’t, and in the world of dispersed knowledge we live in, much of the knowledge we actually do possess is due to the workings of the market mechanism. (In every country with growing economic standards, free market principles were present. Just look at how China, India and other emerging countries are doing as more free market principles are introduces. Look at how we are fading as more government intervention happens).

10. As a rule of thumb, government cures are not only worse than the disease, but lead to further disease: When you consider that bureaucrats have an incentive to maximize bureaucracy, that politicians who seek reelection—and which ones don’t?—have an incentive to increase spending and decrease taxes, and that corporations have an incentive to squeeze out the competition through government conferred advantages, you’ll conclude that the free market remains our best option (see #9).

Great economic principles to live by.

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