Today I reread F. A. Hayek’s Nobel Lecture, “The Pretence of Knowledge.” Hayek was awarded the Nobel Memorial Prize in 1974 and delivered his lecture on December 11, 1974. I was amazed at how modern it was, and appropriate once again for the times.

The 1970s were terrible times: stop-go demand management policies had produced stagflation that would continue for the rest of the decade.  Hayek said that “we have indeed at the moment little cause for pride: as a profession we have made a mess of things.” He charged that the mess had been produced by policies the majority of economists “recommended and even urged governments to pursue.”

The focus of his lecture was on scientism and how its errors had led economists and the Western economies to where they found themselves at that moment.  What was the chief theoretical error? It was “the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level.” The “Pretence of Knowledge” was that economists had or could ever have the knowledge required to do that.

What was the correct theory of the cause of widespread unemployment? It is “the existence of discrepancies between the distribution of demand among the different goods and services and the allocation of labour and other resources among the production of those outputs.” We call such discrepancies a coordination failure.

The coordination failure cannot be resolved by stimulating demand because spending is always on particular goods and services.  There is no aggregate out put on which to spend money. Aggregate demand and supply are categories of a model with no empirical counterparts.

Unless economists can solve the knowledge problem, they have no way of aligning spending with actual preferences.  Stimulus policies are more likely to aggravate as alleviate the problem.

Indeed, it was stimulus that caused the coordination failure.  Hayek outlined his theory succinctly in one paragraph.

• Monetary injections into particular markets stimulate demand only temporarily.
• Labor and other resources are drawn into the stimulated activities [think housing, 2002-07].
• Once the monetary stimulus ceases or merely slows, the production and employment cannot be maintained.
• Only if monetary stimulus or accelerated (once expectations come into play) can the new pattern of production and employment be maintained.

The consequence of monetary stimulus is “a distribution of employment which can be maintained only by a rate of inflation which would rapidly lead to a disorganization of all economic activity.”

The lecture is worth reading by those who have not done so, and rereading by those who have.

[Cross-posted at Thinkmarkets.]

Tony Blankley, former press secretary to Speaker of the House Newt Gingrich, exults in the Washington Times that Americans are waking up “to our heritage of freedom” and to the abuse of the Constitution:

All the following acts have suddenly awakened Americans to their Constitution: (1) The nationalization of car companies and banks; (2) the subordination of the car companies’ legal bondholders to union bosses; (3) the creation of trillion-dollar slush funds (the stimulus package) used for, among other purposes, the corrupt purchase of congressional votes; (4) the mandating of individual health insurance purchase against the will of Americans; (5) the attempt to have Obamacare “deemed” to have been enacted, rather than actually publicly voted on by Congress.

Amazingly, spontaneously, Americans are educating themselves about the details of our Constitution.

He’s absolutely right. All those actions do raise serious questions about whether there are still any constitutional limitations on government, which is to say, whether the Constitution is still in effect, questions that Roger Pilon also raised this week in the Christian Science Monitor. But it would be even better if Americans had noticed the threats to constitutional government a bit earlier, if not during the New Deal or the Great Society, then perhaps during the past decade when, as Gene Healy and Tim Lynch wrote in 2006:

Unfortunately, far from defending the Constitution, President Bush has repeatedly sought to strip out the limits the document places on federal power. In its official legal briefs and public actions, the Bush administration has advanced a view of federal power that is astonishingly broad, a view that includes

• a federal government empowered to regulate core political speech—and restrict it greatly when it counts the most: in the days before a federal election;
• a president who cannot be restrained, through validly enacted statutes, from pursuing any tactic he believes to be effective in the war on terror;
• a president who has the inherent constitutional authority to designate American citizens suspected of terrorist activity as “enemy combatants,” strip them of any constitutional protection, and lock them up without charges for the duration of the war on terror— in other words, perhaps forever; and
• a federal government with the power to supervise virtually every aspect of American life, from kindergarten, to marriage, to the grave.

President Bush’s constitutional vision is, in short, sharply at odds with the text, history, and structure of our Constitution, which authorizes a government of limited powers.

But better late than never, and we join Tony Blankley in hoping that the Constitution’s limits on the powers of the federal government will once again be an issue in American politics and governance.