Does Hayek Still Matter?

25 April 2007 at 3:17 am 7 comments

| Nicolai Foss |

I may be wrong, but I have the feeling that the thought of Friedrich von Hayek is receiving less and less attention. This worries me for personal reasons — I wrote my Master’s Thesis in economics in 1989 on Hayek’s business cycle theory, and his work has continuously served as an important source of inspiration to me (e.g., this paper) as well as to countless others — and for the reason that Hayek’s thought is too important to vanish in influence.

To be sure, Hayek’s 1945 paper “The Use of Knowledge in Society” has for a long time been a rather standard reference in works on efficient markets, asymmetric information, and the like (it receives a whopping 2,023 citations on Google Scholar). However, it is usually cited when the aim is to discuss the evolution of the relevant field or engage in political discussion (rather, polemics; think Joseph Stiglitz). The paper has also received much attention in management (in fact, in terms of (unweighted) citation counts, much more attention than in economics; see here). All in all, Hayek’s present Google Scholar performance isn’t really bad (although perhaps not that impressive for an econ Nobel Laureate) with 1,029 for the Constitution of Liberty, 841 for The Road to Serfdom, or 256 for “Competition as a Discovery Procedure.” There are also some pretty solid fellows among those who have more recently (i.e., within the last decade) cited Hayek (e.g., here, here and here).

But, still, it seems that among economists and other social scientists Hayek is increasingly attaining the status of a classical writer in the sense of Schumpeter — namely somebody who is cited and invoked, but mainly for ceremonial/ritualistic reasons and more often in footnotes than in the main text. In contrast, little use is made of his work for purposes of actual theory development. So, if I am right, what is happening to Hayek’s is similar to what Ronald Coase once said of his own 1937 paper on the nature of firm: “[Relatively] Much cited, but little used.” In fact, if somebody bothers to do the citation analysis, they may even find that Hayek is actually becoming less cited (I suspect it), at least in economics and political science (if perhaps not in management).

Supposing that I am right, what may have caused this? The optimistic interpretation is that his work has been assimilated by economics to the degree where giving Hayek distinct recognition for a specific point is superfluous (you don’t see many references to Pigou, Viner and Robinson for the construction of neoclassical cost curves, right?). In a more pessimistic interpretation large parts of Hayek’s thought is in a sense passè. For example, while Hayek developed a convincing critique of Soviet-style socialism, critiquing that kind of social organization nowadays is flogging a dead horse (except in Havana and Pyongyang), and the interesting issue is the welfare state to the critique of which it is unclear whether Hayekian arguments apply that well.

Entry filed under: - Foss -, Austrian Economics, Classical Liberalism. Tags: .

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7 Comments Add your own

  • 1. Sinclair Davidson  |  25 April 2007 at 5:08 am

    You’ll be pleased to know that a debate over Hayek broke out in the Australian popular press in late 2006. Some of that debate is precis’d here.

  • 2. chris  |  25 April 2007 at 10:11 am

    There’s a nice irony in you quoting Coase, as the two men’s big insights were exactly opposed. Hayek said the price mechanism was sufficient to coordinate economic activity without the need for planning. Coase, in The Nature of the Firm, said it wasn’t – hence the need for firms.
    Couls it be that one way to reinvigorate Hayekian thinking would be to ask whether the Coasean case for the existence of firms – to save transactions costs – is as robust as thought?

  • 3. Nicolai Foss  |  25 April 2007 at 10:15 am

    Chris, Interesting observation. Some (e.g.,Jensen and Meckling) have argued that taking Hayek to the extreme negates the need for firms. This seems to also be your interpretation. However, other scholars (e.g., Brian Loasby) argue that Hayek and Coase are complementary, because the costs of using the price system that Coase talks about (but does little to characterise) are partly caused by the kind of knowledge problems that Hayek talked about.

  • 4. John Mathews  |  24 May 2007 at 6:56 pm

    Interesting question you raise Nicolai about the relevance of Hayek. Apart from the question of firms vs. markets, which is a perennial topic and which will always involve non-trivial references to Coase and Hayek, there is the (to my mind) much more interesting question of just what is meant by disequilibrium and the real state of the economy at any point in time. Hayek captured what is surely the best interpretation of this in his Pure Theory of Capital (1941) where the conflicting investment strategies of firms are held to be the principal source of the disequilibrium within which the economy functions. At equilibrium all such conflicts have been ironed out, and there are no further discrepancies—and hence no further interest for a strategic perspective (or as Hayek and the Austrians would say, for a subjectivist perspective).

    If we take this feature of Hayek’s work as central, then we have a clear line of descent from Austrian emphases on ‘market process’ and ‘subjectivism’ to today’s strategic calculations. Strategy will always be distinct from economics. Strategy if it is about anything at all would have to be about one firm’s subjective calculations and its resulting investment choices, as opposed to the conflicting subjective calculations of another firm with its different investment choices. If we go back to Hayek, then we understand that the free enterprise economy must live with these conflicts and uncertainties as the price of choice. The conflicts between subjective views of the world are only reconciled at equilibrium when the ‘capital structure’ of the economy is settled, and can be subject to ‘objective’ calculation or evaluation. This is where Lachmann makes his entrance, as heir apparent to Hayek in the theory of capital.

    My point is that strategy is missing something fundamental when it takes over the objectivist discourse of neoclassical economics, which can only make sense at the very particular point in the economy termed equilibrium. At equilibrium the subjective has been brought into alignment with the objective. But everywhere else the entrepreneur is free to formulate investment strategies according to his or her subjective evaluations of the state of things – technologies, markets, demand, competitive forces etc etc. This is where disequilibrium has to be viewed as the normal state of affairs. The key intellectual forces behind this perspective are surely Hayek and Lachmann – as recognized recently by Chiles et al in their Organization Studies article.

    So does Hayek still matter? You bet he does, but in the unlikely guise of the founding figure of strategy.

  • 5. Nicolai Foss  |  26 May 2007 at 9:23 am

    John,

    A very valuable observation! It has been many years since I read The Pure Theory of Capital, and the association that I have made between firm strategy and Austrian capital theory has been in terms of Lachmann’s work, particularly his 1956 book (I have a paper soon forthcoming in Org Studies that develops this). But the clear precursor of Lachmann (1956) is Hayek (1941), as you points out.

    In some sense, however, the “case for disequilibrium” on the part of Hayek is too facile. Hayek’s equilibrium notion is that of full intertemporal equilibrium (Hayek’s 1928 paper is the first paper in the econ literature that sketches such a construction). If “equilibrium” is such an equilibrium, then of course equilibrium never obtains, and it is also highly questionable as an analytical concept. Hayek apparently never realized (in contrast to economists so different as Hicks, Keynes, Mises, and Lachmann) than one can have equilibrium with conflicting expectations (and conflicting investment plans), for example, simple demand/supply equality at a point of time.

  • 6. Hayek Fan  |  28 May 2007 at 9:42 pm

    I agree with Nicholai: It is easy to go astray by applying Hayek’s conclusions directly to the welfare state, which has proved far more robust than Hayek predicted. Largely, this is because Hayek never really understood democratic politics.

    (Robert Higgs has a clear discussion of this in his essay, “Who’ll be Persuaded?” in a symposium on The Fatal Conceit in the Humane Studies Review, Winter, 1988. Sadly, it seems that this issue is no longer on line. It is worth tracking down.)

    I think the really important question is somewhat different than the one Nicolai asked: Where is the new Hayek? Why are the canonical writings of classical liberalism all from the mid to late 20th century, and thus increasingly out of date?

    Jim Buchanan has an interesting take on these questions, in his writings on “The Soul of Classical Liberalism,” a version fo which is here:

    http://www.independent.org/pdf/tir/tir_05_1_buchanan.pdf

    For bibliographic completeness, you might be interested to know that Hayek is alive and well among leftish political philosophers. One of them, Elizabeth Anderson, of the University of Michigan, blogged for several months trying to convince progressives to come to grips with Hayek, since, as she said over and over, “Hayek was right.”

    These blogs are collected here:

    http://www-personal.umich.edu/%7Eeandersn/blogpoliticaleconomy.html

  • 7. Hayek Fan  |  29 May 2007 at 2:07 am

    Here are some quotations from the Higgs piece. I see that parts of it raise the Hayek/Coase question referred to earlier.

    Hayek simply ignores the most significant debates now occurring in political economy. From reading Hayek, one would never know that public choice had been invented. Neither Buchanan nor Tullock nor any of their followers gets a single mention. Nor does Hayek show any awareness of public choice problems. He proceeds as if socialist intellectuals, by faulty arguments and inexcusable obstinacy, have led the world astray. Presumably, by exploding these arguments Hayek expects to keep us away from the precipice. In Hayek’s world, political actors seem always to be at odds over how to operate the whole system. There are no special-interest groups, no vote-maximizing congressmen, no public-good problems, no free riders, no prisoner’s dilemmas, no issues of constitutional revision or meta-constitutional ideology….

    Not only does Hayek ignore the structural and political issues studied by public choice scholars; he also ignores the issues emphasized by the intellectuals who have most successfully challenged the claims of pro-market scholars during the twentieth century. I refer, of course, not to socialists but to the mainstream economists and others who have embraced the concept of “market failure” in its many guises. According to this school, actual markets are beset by deviations from the ideal of Pareto optimality because of externalities, increasing returns to scale, monopoly power, public goods, and insufficiencies of information. Except for presenting his familiar ideas about the nature of the information problem as it is solved by the market process, Hayek makes no explicit attempt to refute the errors of this influential school of blackboard economists. He might easily have done so, for recent decades have witnessed fundamentally important efforts in theory and empirical research having to do with transaction costs and property rights, and these efforts have gone far to discredit the market-failure interpretation. Hayek makes passing mention of Coase, citing the classic papers on the nature of the firm and on social cost, but confines his remarks about recent studies in property right economics to little more than a page, much of which is taken up by an attack on copyrights and patents.

    In sum, despite the many insights it offers-most of which appeared in Hayek’s earlier works-Hayek’s The Fatal Conceit fails because of its rhetoric. It does not face up to the nature of the world we live in, a world of more or less mixed economies with not a single case even approximating the ideal market system of private property rights and very few cases approaching the ideal socialist system of central planning. I do not expect Hayek’s argument to win over anyone not already in great sympathy with it: the argument simply does not meet the opponents’ claims on their own grounds. Nor does it exploit the fundamental developments of analysis by friends of the market during the past few decades. Instead, Hayek has chosen to take still another whack at the intellectually dead horse of central planning and to rail against all those impudent enough to think that reason should be brought to bear to understand and, in some cases, to challenge certain received traditions and morality.

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