(Via O&M)  It’s like somebody put FA Hayek in a time machine and deposited him right into mid-2008…  The Mises Institute has an interview up that Hayek did on Meet the Press in 1975.  The line of questioning is, as Jeff Tucker points out, rather ridiculous, but that was the orthodoxy of the day.  Hayek’s major points are as follows:

  • Government, through inflation, created the boom which has turned into a bust.
  • There is no meaningful trade-off between unemployment and inflation.  In other words, the Phillips curve does not hold.  [Fortunately, one of the positive aspects of Rational Expectations theory is the destruction of that idea.]
  • The process of stopping inflation must be undertaken by the government—the ultimate cause of the action—and will be a somewhat painful but necessary process.  The longer the government abstains from undergoing this process, the longer it will take to eliminate the problem.
  • Booms occur when, due to inflation (or, as Roger Garrison pointed out in 1994, changes in risk), individuals at firms believe that they can produce more than is actually sustainable.  They will hire new people, create new products, and we will have a happy little boom.  Unfortunately, that party will eventually end because the government gets scared at the high rate of inflation (or risk, like we had in the 1980s and just now) and turns down the spigots.  At this point, people realize that their calculations were based on incorrect data and we go into a bust period.
  • Not all of the problems in the world are solvable, especially in the short run.  One of the questioners brought up the problem of unemployment among inner-city black youth and all Hayek could do was shrug his shoulders and say that he doesn’t have an answer for that, especially over the year or so that there would be recessionary adjustments.
  • The dangerous situation would be for a government or a set of individuals to decide that “the market has failed” and that the only “rational” choice would be for the government or that set of individuals to take over, via central planning.  This idea is inevitably a poor one.

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