Posted by: aboutalbion | September 26, 2012

Hayek documentary

A couple of nights ago, I enjoyed the next episode of the three-part BBC series on three influential economists.   The second programme featured Friedrich Hayek (1899-1992).

The programme suggested that Hayek was sensitized to economic analysis by living through a period of hyperinflation in his native Austria during 1922.  Apparently, He concluded that a government’s control over money supply was the key issue, and that the time of hyperinflation in Austria was caused by the government’s ignorance of this.

More generally, he held the view that all actions to ‘control’ the economy by government were likely to have adverse consequences.  For Hayek, the reason for holding this view was that he could see a no essential difference between communist governments who controlled ‘the means of production’ and capitalist governments who controlled ‘the money supply’ and set interest rates.  Both were expressions of totalitarian central control.  I would draw a possible further conclusion.  If communist systems can collapse, then so can capitalist systems.

Hayek took his line of thinking to its logical conclusion.  The proper role of government is the security of its borders and managing the rule of law within its borders.  In his view, governments have no reason to intervene in the economy because a modern economy is so complex that governments can never know enough about its (real-time) working so as to form policy responses.  Rather, for Hayek, the price mechanism is the mechanism of choice to rapidly broadcast the essential market information that everyone needs to make economic decisions.

What this would mean in practice is that each government would abolish its own central bank, and hand the supply of money itself over to private providers in the market.  That is, there would be competing currency providers within each nation state.  The programme spent some time featuring the American who had recently been promoting the private currency called the Liberty Dollar (until he was prosecuted and convicted of counterfeiting offences in 2011).

I’m not an economist, but my instincts are that competing multiple currencies within a nation state would subvert the unity of that nation state.

Although Hayek was a joint Nobel Prize winner, I think I can begin to see why no one is prepared to put Hayek’s idea of abolishing central banks into practice.

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