Last Thursday must have been Hayek Day. In the morning was the release of the rap video, "Fight of the Century: Keynes vs. Hayek Round Two." And then in the afternoon a distinguished panel convened in the Cato Institute's F. A. Hayek Auditorium to discuss Hayek's great work The Constitution of Liberty, just released in a new definitive edition by the University of Chicago Press. The forum was moderated by Cato fellow in social thought Ronald Hamowy, who edited the new edition. Panelists were Hayek's intellectual biographer and editor of The Collected Works of F. A. Hayek, Bruce Caldwell; the brilliant legal scholar Richard Epstein; and the hedge-fund billionaire and Open Society Foundations founder George Soros. (Find video and transcript here; easier-to-search video here.)
Hayek is generally regarded as the apostle of a brand of economics which holds that the market will assure the optimal allocation of resources as long as the government doesn’t interfere. It’s a highly formalized and mathematical theory whose two main pillars are the efficient market hypothesis and the theory of rational expectations. It’s usually called the Chicago School and it has come to dominate the teaching of economics in the United States. I refer to it as market fundamentalism.
He went on to criticize that theory and to offer his own alternative theory of "reflexivity," while praising Hayek's warning "against the slavish imitation of natural science" in the social sciences. Richard Epstein countered that Hayek wasn't systematic enough:
In some sense, I'm taking exactly the opposite side of George Soros; saying that in effect, if he had been a little bit more systematic, had tried to been a little bit more Newtonian in the way in which he had worked things, he might have been able to come up with a more persuasive presentation of a series of ideas in The Constitution of Liberty which I think are really, enormously instructive on one hand, but in certain kinds of ways are in fact incomplete.
Epstein argued that Hayek's work points not to unfettered markets but to a "presumption against regulation." Bruce Caldwell, giving voice to some of the whispers in the audience, responded to Soros:
I think that George has a handle on some parts of Hayek but misunderstands other parts of Hayek. And that if he understood those other parts of Hayek he would identify himself, I’ll say it provocatively, as a Hayekian. I don’t think that that’s necessarily true, but I spent the morning rereading The Soros Lectures by George Soros and there were just lots and lots of areas where things that he wrote in here I think are certainly consistent with many of Hayek’s insights.
I’m just going to mention a couple of things in your talk that I would disagree with and I think that [with] further study of Hayek you might see my point. First of all, Hayek and the Austrians in my estimation reject the usefulness of an efficient market hypothesis and a theory of rational expectations for capturing the workings of a market process. So if the acceptance of those two theories is the defining characteristic of being a market fundamentalist, then he’s not the sort of market fundamentalist that you’re describing. I think a pithy way of putting this is that there’s definitely a difference methodologically and in other realms between Chicago and Vienna.
I think he has allowed himself to be, let's say expropriated by the Chicago School and the extremist view of markets which claims that markets are perfect, and that of course he also denied in his Nobel Prize lecture which I thought was a reminder to the Chicago School that they’ve gone too far.
Continuing his earlier call for all sides to acknowledge that they may have half the truth and should engage in more dialogue, Soros continued:
Soros: Maybe we can find common ground. I think that we would all agree that government regulation is a necessary evil. I don’t know if we could agree with that --
Epstein: Well, but the necessary evil means you set the presumption against it....
Soros: Look, I happen to agree with you, because while I argue that markets are unstable and this instability has been artificially expurgated from current economic dogma, I also agree that regulations are inherently imperfect. In fact, in my writings I have said that they are more imperfect than markets. Why? Because they are bureaucratic, they are subject to financial interests and very much influenced by political -- So if you can avoid regulations you should. So we have actually found common ground.
Some observers picked up on Soros's criticisms of the less-than-savory political and legislative processes that produced the recent health care and financial-reform bills. I'm just glad to have arranged a lively and civil discussion on the most important social thinker of the 20th century.
We are honored that in the last years of his life F. A. Hayek was a Distinguished Senior Fellow of the Cato Institute. A few months ago, when Kate Zernike wrote in the New York Times that Tea Party activists were resurrecting "long-dormant ideas [found in] once-obscure texts by dead writers," I noted that she meant
those of F. A. Hayek, the winner of the Nobel Prize in Economics, who met with President Reagan at the White House, whose book The Constitution of Liberty was declared by Margaret Thatcher “This is what we believe,” who was described by Milton Friedman as “the most important social thinker of the 20th century” and by White House economic adviser Lawrence H. Summers as the author of “the single most important thing to learn from an economics course today,” who is the hero of The Commanding Heights, the book and PBS series by Daniel Yergin and Joseph Stanislaw, and whose book The Road to Serfdom has never gone out of print and has sold 100,000 copies this year.
I should have added that John Cassidy wrote in the New Yorker that "on the biggest issue of all, the vitality of capitalism, he was vindicated to such an extent that it is hardly an exaggeration to refer to the twentieth century as the Hayek century." Hayek was not just an economist. He also published impressive works on political theory and psychology.
He's like Marx, only right.