For almost three quarters of a century, the Nobel Prize has been awarded to the greatest minds in literature, the natural sciences and in the pursuit of peace.
In 1968, Riksbank, a Swedish bank celebrating its 300th anniversary, established a Nobel Prize for economic science. And beginning in 1969, the recipients have included Paul Samuelson, Simon Kuznets, Kenneth Arrow, John R. Hicks and Wassily Leontief.
The common denominator among the award holders is their general acceptance of the Keynesian framework, a belief in the validity of State intervention in economic affairs and the use of mathematical, static models that almost always have little relevance for understanding complex economic phenomena.
Thus, it came as no surprise when it was announced in October that the 1974 award had been given to the Swedish economist Gunnar Myrdal. For half a century, Professor Myrdal has been one of the most vocal and prominent advocates of socialism and welfare statism. Serving in the Swedish Parliament in the 1930's, he helped design that nation's welfare system. He acted as Commerce Minister from 1945 to 1947 and headed the U.N. Economic Commission for 10 years. His prominence in the public eye is due to his 1944 study of American racial problems, An American Dilemma, and Asian Drama: An Inquiry Into the Poverty of Nations in 1968. (Less well known is the fact that Myrdal was a Nazi sympathizer in the 1930's, publicly describing Nazism as the movement of youth and the movement of the future).
But what came as a surprise was the economist chosen to share this year's award with Myrdal. For his "pioneering work in the theory of money and economic fluctuations" and for his "penetrating analysis of the interdependence of economic, social and institutional phenomena," Sweden's Royal Academy of Science awarded half of the $124,000 prize money to Friedrich von Hayek!
Professor Hayek thus became the first thorough-going free-market economist to receive the Prize. Born in Austria in 1899, he studied at the University of Vienna under the great Austrian School economist Ludwig von Mises and participated in the famous "Mises-Kreis" seminars of the 1920's and early 1930's. In 1927, at the age of 28, Hayek became the first Director of the Austrian Institute for Economic Research. Following a series of lectures on the Austrian Theory of the Trade Cycle in England, he was appointed to a position at the London School of Economics in 1931. In 1950, he moved to the University of Chicago where he stayed until 1962, when he took a position at the University of Frieburg, Germany. Since 1968, he has been Visiting Professor at the University of Salzburg, Austria.
In his first writings, Hayek was involved in a study of narrow, technical economics. Building upon the monetary and cyclical theories developed by Ludwig von Mises, he worked out a detailed and rigorous explanation of the business cycle and inflation. His investigations are presented in his works Monetary Theory and the Trade Cycle, Prices and Production and Profits, Interest and Investment.
In an attempt to stimulate economic activity, Hayek pointed out, the banking system—with government support—expands the quantity of money and credit and pushes down the interest rate. This increases investment in capital goods on the part of businesspeople. The price of labor and raw materials is bid up in these sectors of the economy. But as the money is received as wages and payment for resources, the recipients spend the newly created money on desired consumer goods, thus pushing up these prices as well. A contest then begins between those businessmen who are trying to obtain labor and resources for the production of capital goods and those entrepreneurs producing consumer goods. As long as the banking system continues to make new money available to the investment sector of the economy, it can keep in the race of rising prices for scarce resources. But when the fear of inflation finally results in the banks cutting back on increases of the money supply, many businesses find themselves to be unprofitable and misdirected. Thus, the source of inflation and severe economic fluctuations is government-supported increases in money and credit.
But as the ideal of Social Planning and Total Collectivist War became the dominating forces in the 1930's and 1940's, Hayek came to realize that a sound economic system could only be possible when balanced by equally correct social and political theories. The result of this insight has been a series of books including The Road to Serfdom, The Constitution of Liberty, Studies in Philosophy, Politics and Economics and Law, Legislation and Liberty (the first of three planned volumes).
In a world of imperfect knowledge, emphasized Hayek, with information vital to the economic and social progress of a community decentralized among millions of individuals, the idea of a central body planning and controlling social activity was preposterous. Only in a social framework in which every individual had the opportunity to offer that knowledge to others could all of society gain from his material and intellectual resources. And, in fact, it is through the market process that spontaneous order in which individuals attempt to cooperate and harmonize their interests, that cultural progress is brought about. For this reason Hayek defined competition as a discovery procedure.
The economics profession has been dominated by feelings of uneasiness for a long time. Its models of comparative statics and perfect competition that overlook the dynamic, purposeful nature of human action, in which individuals try to gain the knowledge they need for their ends; the Keynesian framework of economic aggregates that ignore the individual actors who are the underpinnings of economic activity; the Establishment assumption that inflation is excessive demand, rather than seeing that it is monetary expansion that creates a general rising of prices—all these problems, and more, have their solutions in the works of Friedrich von Hayek and the other members of the Austrian School. Perhaps the light of attention will now be shown on their theories with the awarding of this Nobel Prize.
Guest Editorialist Richard Ebeling is a senior in Economics at Sacramento State University and an avid student of Austrian economics.
This article originally appeared in print under the headline "Friedrick von Hayek and the Nobel Prize in Economics".