Tuesday, December 18, 2012

Jeffrey Sachs Blasts Keynesianism in Favor of Hayek

This is an oddity. Jeffery Sachs, who is certainly not averse to government intervention in the economy to "solve" many perceived crises (3rd world poverty, the environment) has launched a neat attack on Keynesians and provides a shout out to Austrian economist Friedrich Hayek.

In FT, he writes:
For more than 30 years, from the mid-1970s to 2008, Keynesian demand management was in intellectual eclipse. Yet it returned with the financial crisis to dominate the thinking of the Obama administration and much of the UK Labour party. It is time to reconsider the revival.
The rebound of Keynesianism, led in the US by Lawrence Summers, the former Treasury secretary, Paul Krugman, the economist-columnist, and the US Federal Reserve chairman Ben Bernanke, came with the belief that short-term fiscal and monetary expansion was needed to offset the collapse of the housing market.[...]
We can’t know how successful (or otherwise) these policies have been because of the lack of convincing counterfactuals. But we should have serious doubts. The promised jobs recovery has not arrived. Growth has remained sluggish. The US debt-GDP ratio has almost doubled from about 36 per cent in 2007 to 72 per cent this year.[...]There are three more reasons to doubt the Keynesian view.
He then brings in Hayek as one of the tree reasons, as he blasts away at the Keynesians:
...the zero interest rate policy has a risk not acknowledged by the Fed: the creation of another bubble. The Fed has failed to appreciate that the 2008 bubble was partly caused by its own easy liquidity policies in the preceding six years. Friedrich Hayek was prescient: a surge of excessive liquidity can misdirect investments that lead to boom followed by bust.
Not surprising, Sachs concludes by twisting Hayek, for his own interventionist pet projects:

When the world is changing rapidly and consequentially, as it is today, it is misguided to expect a “general theory”. As Hayek once recommended to Keynes, we instead need a tract for our times; one that responds to the new challenges posed by globalisation, climate change and information technology.
Which means that Sachs has not absorbed much of Hayek. What Hayek actually said was that Keynes' so-called "general theory" was nothing of the sort and only applied to a specific case. Hayek never argued that Austrian business cycle theory was a tract for a specific time, but rather that it explained the business cycle as caused, in any time, by monetary expansion.

Further, Hayek would never have argued that "we need a tract for our times; one that responds to the new challenges posed by globalisation , climate change and information technology." He would have hailed the growth of of information technology as an example of how free markets develop in ways that central planners could never anticipate. He would have argued that globalisation, led by banksters and other elite, was a trend opposite of free markets, leading to central planning and thus contra to the lessons that have been put in front of us by our thinking about the reasons behind the growth in information technology. And, given his intense interest in scientific methodology, it is likely he would have been very skeptical about the scientific methodology used by those so confident about climate change developments.

It is also curious that Sachs mentions Hayek and not Ludwig von Mises. Hayek built upon Mises, but it was Mises who first recognized the structural distortions caused by monetary expansion.

Bottom line: It is good to see another hole developing in the big ship Keynesianism, but make no mistake, mainstream economists have a long way to go before they fully understand the many things that have been taught to us by Mises, Hayek and Murray Rothbard.


  1. Why does Sachs cite Hayek and not Mises? This is why.


  2. Hoppe recently destroyed Hayek as a liberal at PFS 2012.

    The idea that Hayek was a good Austrian is one of those quirks of the Austrian movement. When it is good and convenient, Austrians talk about how he won a Nobel, and when he was an interventionist and state apologist, Austrians pretend he doesn't exist.

  3. Anonymous: thanks for the very enlightening link! I never had the will to get myself through Hayek's works but this article by Hoppe summarizes everything I need to know about him. You just spared me a few weeks of reading - thanks!

    So does this mean that Hayek actually contributed greatly to the intellectual foundation of modern liberalism? Hoppe's analysis sounds to me that he's the founder of modern liberalism logically justifying the necessity of government "services" for the sake of "liberty".