The gold standard was based on what was essentially an irrational superstition. As long as people believed there was no salvation but the gold standard, the thing could work. That illusion or superstition has been lost. We now can never successfully run a gold standard. I wish we could. It's largely as a result of this that I have been thinking of alternatives.
Reason: You have, at various times, championed a commodity-reserve monetary system and competition in the money supply. Are these practical alternatives to a govemment controlled central banking system?
Hayek: Yes. I have been convinced that while the idea of the commodity-reserve system is a good one, practically it is unmanageable. The idea of accumulating actual stocks of commodities as reserves is so complex and impractical that it just cannot be done.
Then I came to the conclusion that the necessity of actual redemption of the real commodities is only necessary if you have to place a discipline on an authority which otherwise has no interest in keeping its currency stable. If you place the issue of money in the hands of firms whose business depends upon their success in keeping the money they issue stable, the situation changes completely. In that case, there is no necessity of depending upon their obligation to redeem in commodities; it depends on the fact that they must so regulate the supply of their money that the public will accept the money for its stability. This is better than anything else.
Reason: The Keynesian economic formula seeks out a nearly perfect symbiotic relationship with the political forces of the modem welfare state. At what point can this marriage be broken? How can the Keynesians be politically defeated?
Hayek: I really should begin with Keynes himself. Keynes despaired in the 1920s of the possibility of again making wages flexible. He came to the conclusion that we must accept wages as they are and adjust monetary policy to the existing wage structure. That, of course, forced him to say "I don't want any restriction on monetary policy because I have to adjust monetary policy to a given situation."
But he overlooked that, at that very moment, the trade unions knew that the government was under an obligation to correct the effect of the trade-union policy, and so we get a hopeless spiral. The unions push up wages, and government has to provide enough money to keep employment at these wages, and this leads into the inflationary spiral. This came out of the practical considerations of Keynes in the short run--that we can't do anything about the rigidity of wages.
In fact, the British in the 1920s were very near success. The very painful, and silly, process of deflation was very nearly successful at the end of the '20s. Then they got frightened by the long period of unemployment. I think if they had lasted a year or two longer they probably would have succeeded.
Reason: Gunnar Myrdal, your co-winner for the Nobel Prize in 1974, recently published an article advocating the abolition of the Nobel Prize for economics, apparently as a reaction to the awarding of the prize to Milton Friedman and yourself. His most remarkable statement is his reference to you regarding your "lack of concern." Specifically, that you have "certainly never been much troubled by epistemological worries."
Not only does the statement summon shock on the basis of your numerous writings on the very question of epistemology (in economics as well as in other fields), but your Nobel speech, delivered into Myrdal's own ears, centered on the subject of the methodology of economics. Is Myrdal's misstatement prompted by ignorance or malice? And is this a fair sampling of the general academic environment throughout Europe?
Hayek: No, it is certainly a rather extreme case combined with an intellectual arrogance that, even among economists, is rare. Myrdal has been in opposition on these issues even before Keynes came out. His book on monetary doctrines and values and so on dates from the late 1920s. He has his own peculiar view on this subject which I think is wrong. His book couldn't even be reproduced now. I don't think he has ever been a good economist.
Reason: So Myrdal is not typical? The intellectual and academic environment is, on the whole, much more hospitable to your ideas?
Hayek: Oh, much more than Myrdal, yes. And, of course, the younger generation is coming around to my sort of view. In a sense, I would say that the great problem is still a methodological one but not the one Myrdal has in mind. I believe that economics and the sciences of complex phenomena in general, which include biology, psychology, and so on, cannot be modeled after the sciences that deal with essentially simple phenomena like physics.
Don't be shocked when I call physics essentially simple phenomena. What I mean is that the theories which you need to explain physics need to contain very few variables. You can easily verify this if you look into the formula appendix to any textbook on physics, where you will find that none of the formulas which state the general laws of physics contain more than two or three variables.
You can't explain anything of social life with a theory which refers to only two or three variables. The result is that we can never achieve theories which we can use for effective prediction of particular phenomena, because you would have to insert into the blanks of the formula so many particular data that you never know them all. In that sense, our possibility both of explaining and predicting social phenomena is very much more limited than it is in physics.
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