A metaphor and its consequences

Friedrich Hayek was among the first economists in the 20th century to clearly expose the impotency of static equilibrium analysis in explaining real market phenomena. Standing on the shoulders of the first professor of political economy in France and author of the fundamental principle of classical macroeconomics, Jean-Baptiste Say, Hayek tirelessly revealed the dangers of imposing a straightjacket of mathematical models on the studies of human action. Following in the steps of his mentor, Ludwig von Mises and earlier Austrian scholars, Hayek was a formidable critic of interventionism at a time when the ideas of John Maynard Keynes fully conquered academia and, starting in the 1960s, dominated policy making.

Portraying laissez-faire capitalism of the earlier epoch as ugly, stupid, unjust, and counterproductive, Keynes developed a new economic theory that was meant to help policy makers save the system from its animal spirits. Obsessed with finding a quick, painless, activist cure for the Great Depression, he went overboard with the use of simplistic assumptions. His disciples grasped on this new mechanistic representation of the market economy. They abandoned the messy literary methodology of teaching economics in favor of mathematics. Keynesians persuaded the governments of both developed and developing nations that the economy could be fine-tuned the same way a mechanic fine-tunes our car engine and gave politicians the perfect excuse to increase spending without having to raise taxes.

The illusion that the economy works as a machine and that economists posses the tools to steer it through fiscal policies was attacked within a few years by rising inflation and a series of recessions-the stagflationary 1970s. It took some time for the colleagues of Hayek to abandon the wrong metaphor-after decades of being ridiculed or ignored, he was awarded a Nobel Prize in Economics in 1974. Unfortunately, by that time, Hayek's predictions had come to pass-we had given our governments tremendous new responsibilities, as Hayek wrote in The Road to Serfdom, "to make and enforce decisions in circumstances which cannot be foreseen and on principles which cannot be stated in generic form." In effect, we have created an environment for the surrender of powers unbound by fixed rules to ignorant bureaucrats and corrupt politicians. And now we reap what we sowed.