Why Did Hayek get a Nobel Memorial Prize in Economic Sciences?

And, more importantly, did he really deserve it?

Let us look at the original press release:

Press Release

9 October 1974

ECONOMICS PRIZE FOR WORKS IN ECONOMIC THEORY AND INTER-DISCIPLINARY RESEARCH

The Royal Swedish Academy of Sciences has awarded the 1974 Prize for Economic Science in Memory of Alfred Nobel to

Professor Gunnar Myrdal and Professor Friedrich von Hayek

for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena.

The Academy of Sciences consider that Myrdal and von Hayek have, in addition to their contributions to central economic theory, carried out important interdisciplinary research so successfully that their combined contributions should be awarded the Prize for Economic Science.

Since the Economics Prize was inaugurated, the names of two economists, whose research has reached beyond pure economic science, have always been on the list of proposed prizewinners: Gunnar Myrdal and Friedrich von Hayek. They both started their research careers with significant works in the field of pure economic theory. In the main, their early work - in the twenties and thirties - was in the same fields: theory of economic fluctuation and monetary theory. Since then both economists have widened their horizons to include broad aspects on social and institutional phenomena.

....

The Functional Efficiency of Economic Systems
von Hayek’s contributions in the field of economic theory are both profound and original. His scientific books and articles in the twenties and thirties aroused widespread and lively debate. Particularly, his theory of business cycles and his conception of the effects of monetary and credit policies attracted attention and evoked animated discussion. He tried to penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.

von Hayek showed how monetary expansion, accompanied by lending which exceeded the rate of voluntary saving, could lead to a misallocation of resources, particularly affecting the structure of capital. This type of business cycle theory with links to monetary expansion has fundamental features in common with the postwar monetary discussion.

The Academy is of the opinion that von Hayek’s analysis of the functional efficiency of different economic systems is one of his most significant contributions to economic research in the broader sense. From the mid-thirties he embarked on penetrating studies of the problems of centralized planning. As in all areas where von Hayek has carried out research, he gave a profound historical exposé of the history of doctrines and opinions in this field. He presented new ideas with regard to basic difficulties in “socialistic calculating,” and investigated the possibilities of achieving effective results by decentralized “market socialism” in various forms. His guiding principle when comparing various systems is to study how efficiently all the knowledge and all the information dispersed among individuals and enterprises is utilized. His conclusion is that only by far-reaching decentralization in a market system with competition and free price-fixing is it possible to make full use of knowledge and information.

von Hayek’s ideas and his analysis of the competence of economic systems were published in a number of works during the forties and fifties and have, without doubt, provided significant impulses to this extensive and growing field of research in “comparative economic systems.” For him it is not a matter of a simple defence of a liberal system of society as may sometimes appear from the popularized versions of his thinking.

“The Prize in Economics 1974 - Press Release,” Nobelprize.org. 10 November, 2012
http://www.nobelprize.org/nobel_prizes/economics/laureates/1974/press.html

There are two reasons given:

(1) Hayek’s business cycle theory research, and

(2) his contribution to the socialist calculation debate, and work on knowledge, prices, and market systems.

It is astonishing that one of the two main reasons given for Hayek’s Nobel Memorial Prize was his business cycle theory: for this was precisely that part of his research program that was a clear failure. Hayek never succeeded in creating a monetary theory of the trade cycle that evaded the serious criticisms his opponents levelled against it, which included the non-existence of the Wicksellian natural rate of interest, the role of subjective expectations, and the questionable role of general equilibrium theory in his theory. Because of the serious problems with his theory, Hayek eventually abandoned his trade cycle theory work and never returned to it. Above all, the promised second volume of the Pure Theory of Capital (1941) where Hayek was supposed to deal with capital and money was never written.

The committee that awarded the prize was also fooled by the myth that Hayek predicted the Great Depression. In my view, that myth was largely created by Lionel Robbins, as I have argued in these posts:

“Lionel Robbins and the Myth of Hayek’s Prediction of the Great Depression,” February 5, 2012.

“Hayek and the Stock Market Crash of 1929: So Much for His Predictive Powers,” December 28, 2011.

In the introduction to the original edition of Prices and Production (London, 1931), Lionel Robbins made a bold claim for Hayek’s predictive power:

“... I cannot think that it is altogether an accident that the Austrian Institut für Konjunkturforschung, of which Dr. Hayek is director, was one of the very few bodies of its kind which, in the spring of 1929, predicted a setback in America with injurious repercussions on European conditions” (Hayek 1931: xi-xii).

But, if one searches the monthly reports (“Monatsberichte” in German) of the institute, one finds little evidence of this prediction.

The most relevant passage in an issue of the Monatsberichte for 26 October 1929 made predictions that were utterly wrong:

“Jedoch besteht derzeit kein Grund, einen plötzlichen Zusammenbruch der New Yorker Börse zu erwarten. Allerdings ist es nicht ausgeschlossen, daß nunmehr das Ende der geradezu phantastischen Kurssteigerungen gekommen ist und das Niveau langsam abbröckeln dürfte.

Die Kredit Möglichkeiten sind jedenfalls augenblicklich noch sehr große und es erscheint daher die Gewähr gegeben, daß eine ausgesprochen krisenhafte Zerstörung des jetzigen hohen Niveaus nicht befürchtet werden müßte. Zur Zeit werden europäische Gelder bereits in großen Beträgen abgezogen, so daß der Dollarkurs gedrückt ist.”

“However, at present there is no reason to expect a sudden crash of the New York stock exchange. However, it is not impossible that the end of the absolutely amazing price increases has arrived, and [that] the [price] level should slowly crumble. The credit possibilities/conditions are, at any rate, currently very great, and therefore it appears assured that an outright, crisis-like destruction of the present high [sc. price] level should not be feared. At the moment, European funds are already being withdrawn in large amounts, so that the value of the [US] dollar is down.”

Monatsberichte des österreichischen Institutes für Konjunkturforschung, 3. Jahrgang, Nr. 10 (26 October, 1929), p. 182.

Matters are somewhat better if we turn to Hayek’s contribution to the socialist calculation debate, but even here, in my view, his major contribution was showing the inadequacy of Walrasian general equilibrium theory, when that neoclassical theory was used by Hayek’s socialist opponents in their arguments in favour of rational economic planning in a command economy.

But demonstrating the flaws of Walrasian general equilibrium is not what Hayek is really remembered for by his modern apologists.

In the end, it is quite questionable whether Hayek really deserved any Nobel Memorial Prize in economics. But not that this is any great surprise: for Nobel Memorial Prizes generally go to neoclassical economists anyway, whose theory is, at heart, fundamentally wrong.


BIBLIOGRAPHY

Hayek, F. A. von, 1931. Prices and Production. G. Routledge & Sons, Ltd, London.