What Would Hayek Do?

Last Monday T and I took a trip up to Holborn to see Dr Eamon Butler at London School of Economics. He was giving a public speech named ‘What Would Hayek do to Sort out this mess?’.

For those of you who aren’t as clued up on historical economists, Friedrich Hayek was Austrian born economist born in 1899. F.A. Hayek, as he is frequently known, was in fact a British economist and philosopher. He is perhaps best known for his defending of classical liberalism, and in 1974 he shared the Nobel Memorial Prize in Economic Sciences. He is also known for being the arch rival of fellow economist J.M. Keynes, due to their conflicting objectives, however they are known to have been great friends outside of work.

Now, onto the lecture itself, Dr Butler opened by showing this clip, which amused us all greatly and from then on had us hooked on his every word. After a brief introduction on F.A. Hayek he began to explain exactly what Hayek would do. According to Dr Butler, Hayek would say that you cannot cure a recession by trying to recreate a boom, and that in actual fact it is the boom that is more problematic than the bust. The longer the boom is, the longer the recession is. In order to prevent the bust from occurring, it is austerity during the boom that is needed, not during the recession. Price signals should be taken into greater account, and government prices should be removed, as it is the bad policy that leads to a recession. Hence 'free' markets are important. Hayek believed that growth comes from saving, and investment and postponing consumption. Therefore interest rates should be a true reflection, not fixed to try to encourage spending.

So what would Hayek do to sort out this mess?

•  Savings are a key element that is needed. 
• A reduction of marginal tax rates to provide better incentives, for example; cutting tax on a capital and inheritance.
• Some methods of deregulation are needed, with the view to cutting the cost of new ventures, making starting new businesses cheap and easy.
•  A slightly more controversial policy, removing price laws, therefore no minimum wage.
•  An altering of the banks’ policies, to prevent them earning so much, a mechanism to curb the central bankers. 

Some form of reserve banking is proposed, as forcing banks to keep capital prevents the money multiplier effect, which as a result, encourages entrepreneurs to build up capital.

Although Keynes’ plans to invest in infrastructure may be good in the short term due to the direct creation of jobs etc., in the long term, the money borrowed must be paid back, meaning raising taxes, de-stabilizing the currency, more borrowing, all of which destroy jobs in the long term.

Another point which Dr Butler raised was the fact that the current situation we are in is causing people not spend, as people are afraid of spending. This is mainly due to the fact that people face such uncertainty about what the future might bring, and are uneasy about even spending the money they have. The fact is that the only people who are spending right now is the government, and not enough on the part of everyone else.

Finally, it was mentioned that government shouldn't be taking business, and put taxes on capital gain. This gives people a disincentive to start up their own business, fearing that the tax which would be imposed on them would not make it worth their while in the long run. Dr Butler mentioned that we need concentrations of wealth to build up capital, and in fact taxing the wealthy is not the greatest idea. Things like cooperation tax also produce the same out come as it is 'damaging' to the economy and people incentives, and that the government shouldn't be taxing company's, but instead tax people. 

We both really enjoyed the talk, and it helped broaden our views on the current economic crisis, and the factors which could maybe help curb us from entering what is said to be a 'triple dip recession'. The views of Hayek and Dr Eamon Butler were clearly addressed in order to give us insight into what Hayek would do..

 F A Hayek: google images

Thanks for reading!

K

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