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Friedrich Hayek

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I very well remember Hayek's visit to Cambridge on his way to the London School. He expounded his theory and covered a black-board with his triangles. The whole argument, as we could see later, consisted in confusing the current rate of investment with the total stock of capital goods, but we could not make it out at the time.
--
Joan Robinson, Contributions to Modern Economics, Chapter 1, p. 2

 
Friedrich Hayek

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I will be discussing what happened in economics in England, but these were times when, to a very considerable extent, this was what happened in economics. The first episode I will discuss is local, but the economists involved were among the best in the world. In February 1931, Friedrich Hayek gave a series of public lectures entitled 'Prices and Production' at the London School of Economics … They were undoubtably the most successful set of public lectures given at LSE during my time there, even surpassing the brilliant lectures Jacob Viner gave on international trade theory. The audience, notwithstanding the difficulties of understanding Hayek, was enthralled. What was said seemed to us of great importance and made us see things of which we had previously been unaware. After hearing these lectures, we knew why there was a depression. Most students of economics at LSE and many members of the staff became Hayekians or, at any rate, incorporated elements of Hayek's approach in their own thinking. With the arrogance of youth, I myself expounded the Hayekian analysis to the faculty and students at Columbia University in the fall of 1931.

 
Friedrich Hayek
 

I remember Robbins asking me if I could turn the Hayek model into mathematics … it began to dawn on me that … the model must be better specified. It was claimed that, if there were no monetary disturbance, the system would remain in 'equilibrium'. What could such an equilibrium mean? This, as it turned out, was a very deep question; I could do no more, in 1932, than make a start at answering it. I began by looking at what had been said by … Pareto and Wicksell. Their equilibrium was a static equilibrium, in which neither prices nor outputs were changing … That, clearly, would not do for Hayek. His 'equilibrium' must be progressive equilibrium, in which real wages, in particular, would be rising, so relative prices could not remain unchange … The next step in my thinking, was … equilibrium with perfect foresight. Investment of capital, to yield its fruit in the future, must be based on expectations, of opportunities in the future. When I put this to Hayek, he told me that this was indeed the direction in which he had been thinking. Hayek gave me a copy of a paper on 'intertemporal equilibrium', which he had written some years before his arrival in London; the conditions for a perfect foresight equilibrium were there set out in a very sophisticated manner.

 
Friedrich Hayek
 

Hayek made a suggestion that was to be of great importance in the theory's [i.e. General Equilibrium Theory or 'GET'] subsequent history, that the same goods available at two different moments of time should be treated as distinct goods whose relations of exchange were to be examined, although they might, 'technically speaking,' be one and the same product.

 
Friedrich Hayek
 

One of the most original and most important ideas advanced by Hayek is the role of the "division of knowledge" in economic society … [But if] I had to single out the area in which Hayek's contributions were the most fundamental and pathbreaking, I would cast my vote for the theory of capital. As I said before, when I reviewed Hayek's book on The Pure Theory of Capital, it is "my sincere conviction that this work contains some of the most penetrating thoughts on the subject that have ever been published." If two achievements may be named, I would add Hayek's contributions to the the theory of economic planning. Most of what has been written on systems analysis, computerized data processing, simulation of market processes, and other techniques of decision-making without the aid of competitive markets, appears shallow and superficial in the light of Hayek's analysis of the 'division of knowledge', its dispersion among masses of people. Information in the minds of millions of people is not available to any central body or any group of decision-makers who have to determine prices, employment, production, and investment but do not have the signals provided by a competitive market mechanism. Most plans for economic reform in the socialist countries seem to be coming closer to the realization that increasing decentralization of decision-making is needed to solve the problems of rational economic planning.

 
Friedrich Hayek
 

The essential measure of the success of the economy is not production and consumption at all, but the nature, extent, quality, and complexity of the total capital stock, including in this the state of the human bodies and minds included in the system. In the spaceman economy, what we are primarily concerned with is stock maintenance, and any technological change which results in the maintenance of a given total stock with a lessened throughput (that is, less production and consumption) is clearly a gain. This idea that both production and consumption are bad things rather than good things is very strange to economists, who have been obsessed with tile income-flow concepts to the exclusion, almost, of capital-stock concepts.

 
Kenneth Boulding
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