The Great Economists Friedrich Hayek1

We are 99%

A slogan, which is referred to the high proportion of global wealth accounted for by the top 1% of the distribution. Protests outside the London Stock Exchange in 2011. A month earlier - in New York’s Wall Street. The protestors called for financial reform and fairer wealth distribution

The prosperity of society was driven by … .

Creativity, entrepreneurship, and innovation, which were possible in a society with free markets

In Hayek’s view, socialism would invariably lead up to … .

Centra planning

Keynes believed, that recessions were …. The economy was subject to …. However, government policy could do much to offset the impact of these national output and employment. Hayek’s model of the business cycle is far more nuanced and harder to understand.

The consequences of weak aggregate demand … bouts of optimism and pessimism known as “animal spirits“

Animal spirits represents the …. If spirits are low, then the confidence is low too, which will drive down a promising market - even if the market or economy fundamentals are strong.

Emotions of confidence, hope, fear, and pessimism that can affect financial decision-making, which in turn can fuel or hamper economic growth

Hayek’s model is as follows. First, there are many different stages of production in creating goods. Each final good reflects the processing of primary and intermediate goods. At each stage of production, ….Therefore, once installed, the stock of capital can only be used to produce certain goods.

There is a requirement for businesses to install capital goods. Such as machines. These are not the same for different factories and cannot be easily transferred across sectors or stages of production.

So, it is possible for capital to …. As capital is not reversible or transferable, capital is essentially stuck and abandoned if under-utilized. The savings that funded the investment …. Hayek believed this misallocation …. This, according to Hayek, accounted for the Great Depression.

Be allocated inefficiently in the economy if it is directed to areas where demand has been temporarily boosted and cannot be sustained … Have been wasted and could have been more efficiently used elsewhere in the economy … could arise from monetary policy, specifically if interest rates had been held too low, as that leads to bad investments

Hayek viewed recessions as a necessary evil, ….

Simply periods of liquidation resulting from the past over-accumulation of capital

Hangover Theory

The term to describe the view that economic recessions are necessary consequence of preceding periods of economic excess or boom

Main characteristics of Hangover Theory

Recession as a correction … Critique of intervention

The main drawback of Hangover Theory

The theory focuses too much on supply-side issues e.g: misallocation of resources, and often overlooks demand-side factors, that can lead to recessions

Keynes thought the government should provide the conditions under which ….

Such activities take place

Without prices, …

There would be no way for the baker to know how much to sell his bread for

The market is an … talented prosper.

Evolutionary mechanism where the economically

QE has been described by John Taylor as….

“Mondustrial policy“ (monetary-industrial policy) since it represents discretionary government involvement in the economy to support certain industries

Mondustrial policy refers to …. Key aspects: Ensuring low-interest loans for industrial expansion; …; ….

Liquidity support programmes through which authorities shape the location and continuation of financial activity on their soil … Using targeted credit policies to support strategic sectors … Coordinating exchange rate policies to enhance exports and industrial competitiveness

The 1960-1970 financial crisis reflects the latest abandonment of Hayek’s principles. …. Once the foundations of a market economy were properly set, including appropriate regulation of the financial system, then economic prosperity would return. And that would mean that was a chance of restoring faith in the capitalist system. Hayek would probably have agreed with a paraphrased version that substituted capitalism for democracy.

Governments bailed out financial institutions and responded to the crisis with aggressive monetary policies. Avoiding these interventions would allow economic growth, in Hayek’s view, driven by the market and not by the government policies, to resume

Substituted Capitalism

Reflects an economic system where government takes on the role of private entrepreneurs in driving economic development. Limited Private sector. Protectionism. Common in developing nations. Eg: China’s State-Owned Enterprises

None other than former British prime minister Margaret Thatcher, whose ethos is based on free-market principles, was an admirer: “Adam Smith“, the greatest exponent of free enterprise economics till Hayek and Friedman… Thatcher also remarked:“….

All the general propositions favoring I had either imbibed at my father’s knee or acquired by the candle-end reading of Burke and Hayek“

Hayek thought that it is more important to touch all social topics, be ….

Heard and admired by the people, rather than influencing the laymen

The invisible hand is more powerful than the [un]hidden hand. Things will happen in …. That’s the consensus among economists. That’s the Hayek legacy.

Well-organized efforts without direction, controls, plans.