Saturday, November 10, 2012

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


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,” 10 November, 2012
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.


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


  1. They gave it to Myrdal and Hayek at the same time. The motivation was political. They wanted to indicate that Hayek's approach was valid -- which it wasn't -- while ensuring not to alienate the Swedes, for whom Myrdal the social democrat and de facto Post-Keynesian was a darling.

    Why else give the prize to two theories that were significantly at odds with one another? (Didn't Myrdal essentially repudiate the natural rate?)

    1. Yes, I usually stress (forgot to here) that it was a joint award.

      And I agree with your points above - they are all well made.

    2. Jan said:Philip,Gunnar Myrdal was an student of Gustav Cassel,Knut Wicksell´s rival in Sweden and started as very critical to Wicksell´s natural rate concept in general.It must also be said that Knut Wicksell used natural rate in total different way when those that interprented him slavishly,like Austrian schoolars.For Wicksell him self the natural rate,was more of thought model,a idealised picture to understand changes in the cumulative process of cycles,a tool you could say.Wicksell in late life even more or less rejected the Natural rate as maybee a useless fanatasy.But it could be of some interest to see how two schools like Stockholm school and the Austrian´s that both relied on Wicksellian ground could differ so much.When Stocholm school,Gunnar Myrdal,Bertil Ohlin,Erik Lindahl etc was mentored by Wicksell himself,they also rebelled against their elder teachers Cassel,Wicksell,Davidson and Hecksher in a rather fruithful way.They saw the Wicksellian framework as a starting point,but developed it in a way that became in most part indentical to what Keynes and his followers came up with at same time.The Austrian´s as Hayek read Wicksell in a very narrow way,and hold natural rate concept as a holy grail it seems.It was fare from Wicksell´s spirit as it could be.And when the General Theory came out the Stockholm school embraced the Keynsian thoughts very naturally,it was almost hard to see any differences at all,more than it was expressed in concentrated form by Keynes.And Gunnar Myrdal could easily be classified as a Post-Keynsian and was pointed out as such by among others Shackle,that showed the similarity in Myrdal´s Ex-ante Ex-post expections theories and Keynes work on uncerainty.The ideas about adjust budgets to speed an economy,boost aggeagate demand as well as use low interst rates was recommended in the Social democratic 1932 program in Sweden by Myrdal,and was also practiced by the winning Social democratic goverment.

  2. For those interested in the development of Neo-Liberalism and how Hayek and von Mises
    in a time almost forgotten was digged up and introduced again it could be useful to watch this documentary.And it also shows how Hayek´s Nobel award,was merely given for political reasons.
    Encirclement -- Neo-Liberalism Ensnares Democracy (Part 1 of 2)

  3. His acceptance speech wasn't even about the prize but about the conceit of engaging in central planning.
    Certainly such talk could be threatening to a profession whose highest positions consist mostly in advising central planners.

  4. Jan: Hayek´s speech was also an indirect attack on Gunnar Myrdal,that represented all that Hayek despised, he was a Keynsian,Institutionalist economist one of his generations most esteemed economists with a great influence on public policy,he had worked for Roosevelt,was the author of An American Dilemma that was a corner stone for later civil rights legislation in US.He was later Minister of Trade in Sweden, Executive Secretary of the United Nations Economic Commission for Europe the ,that distributed Marshall plan.Gunnar Myrdal was also professor at numerous prestigious Universities in Europe,America and Asia,and in work as Development economist advocated planning to deal with poverty in the undedevelopment regions.An antithesis to Hayek.Gunnar Myrdal did not pay von Hayek much attencion.Myrdal read him briefly when he worked on build econometric society and lived in London in the years round 1930 and wrote some pages that dealed with what Myrdal thought was very unvalid and rigid assumptions on equilibrium and imperfect information in price formation etc.All that was passé he tought.He had allready criticised and dealed in earlier work with as well Neo-classical equilibium theories and the Austrian school that he was very familiar with since his youth,and even in his later years Myrdal praised Carl Menger as one of the great economists.But Myrdal never wanted to return to things he allready had dealed with ,he was to impatience for such.But at the time of Hayek-Myrdal "Nobel-award",the Swedish commity was consistent of a new generation,Neo-liberal leaning economists,that sure had more in common with von Hayek then Myrdal.Gunnar Myrdal wanted to abolish the prize.

  5. I get that an economy metric can be boosted higher with stimulus. Do central planners ever consider the difficulty in choosing which projects will work best to stimulate (production/spending)? Or do they just spend however and wherever it is possible to do so? If it's just about spending then why not just hand out cash? Do government employees know where to put the "investment" or do they just guess or use some computer algorithm that figures out people's greatest wants? I find it a very dangerous mode to increase spending without a mechanism to also increase production in the very goods and services people value most. We can build roads and schools but how do we know these are the most valued items to produce? I'm not questioning the value of roads and schools, just the danger in possibly producing too much of anything without it being the most valued items by consumers!

  6. Thanks for the interesting post. Just to be clear, Hayek was an Austrian economist, and not a Neo-classical economist, even if he did spend some time at the University of Chicago. It was a short time, however, and I don't believe it was in the economics department, since Friedman did not want him there.

    And I think it is safe to say that most Austrian economists of the Mises brand would agree that the Neo-classical theory is fundamentally wrong at its core, for instance like the new winner, Fama, and his EMH, which is utter nonsense.