Hayek’s central belief is that the prosperity of society was driven by creativity, entrepreneurship and innovation, which were possible only in a community with free markets. His view was that inevitably socialism would always lead to central planning. Therefore, the price market mechanism should be allowed to work without government Intervention to create market signals and incentives for consumers and producers in a market. This would help to achieve more economic growth for the economy. Hayek also views that there is societal progress was driven by the ideas of a few rather than the whole society. Hence, he wasn’t strongly opposed to societal inequality, unlike the Occupy protestors.
In terms of financial markets, Hayek believed that markets were over-regulated rather than not being regulated enough. This further strengthens his ideology of having as less government intervention as possible in the economy.
One contemporary issue would be the financial crisis of 2008. During 2008 the government used various expansionary monetary and fiscal policies to help stimulate economic growth. Such as through Quantitative Easing which increases the money supply in the economy as the Bank Of England injects this electronically created money in hopes to boost consumption and Investment. However, this economic method strongly disagrees with Hayek’s. As in his work on the articulate business cycle theory, Hayek disapproves of the Bank’s role in economic upturns and downturns.
The Bank rate was also reduced to 0% during the crisis but this still didn’t stimulate economic growth, as both consumers and investors had low business confidence. Hayek is strongly against the government lowering the interest rate because low-interest rates can lead to uncontrolled expenditure by consumers which would cause an increase in capital spending by firms. However, as the sudden increase in demand was only temporary, due to the change in interest rates, the newly bought capital by firms would now be under-utilised and hence there would be allocative inefficiency of capital in the economy by the firms.
As the firm’s savings have been wasted and thus carry a huge opportunity cost, where that expenditure power could have been used more efficiently, all due to the lowering of interest rates. Therefore, Hayek would believe that this ‘malinvestment’ of capital would arise from the expansionary monetary policy. Thus, proving Hayek’s view that the natural interest rate is an intertemporal price, reflecting the decisions made by the savers and investors as time increased.
Therefore, Hayek believes that even in times of a recession the government should resist the urge of intervening as they can provide short-term gain, but at a huge opportunity cost in the long run. As, Hayek saw busts such as the Great Depression as a healthy and necessary readjustment in the economy, the way to avoid these busts, he argued, is to avoid the booms that cause them.
By Anshjeet Singh