Economics, Political Economy and Social Philosophy

By Grudev, Lachezar | Erasmus Journal for Philosophy and Economics, Spring 2019 | Go to article overview

Economics, Political Economy and Social Philosophy


Grudev, Lachezar, Erasmus Journal for Philosophy and Economics


Review of Peter J. Boettke's F. A. Hayek: Economics, Political Economy and Social Philosophy. London: Palgrave Macmillan, 2018, 323 pp.

Friedrich A. Hayek is often considered to have been an economist and a social philosopher who was a strong free-market proponent and who argued that markets are perfectly efficient in generating an optimal allocation of resources. In his recently published book, F. A. Hayek: Economics, Political Economy and Social Philosophy, Professor Peter J. Boettke argues that such claims represent a common misconception about Hayek's central ideas. Boettke's book aims to clarify these misconceptions because, he argues, they prevent us from understanding Hayek's arguments. For Boettke, these arguments are still relevant to contemporary discussions and can contribute a lot to our debates, particularly in the methodology of the social sciences and in technical economics.

This review will discuss those points in Boettke's book that we as economists lack in our model-based thinking, but that are, nevertheless, highly relevant to our efforts to grasp reality. The book is highly recommended for academics concerned with technical economics as it is an invitation to talk about thinkers, whose theories have either been misinterpreted or unjustly remained forgotten in the old books.

Boettke's book conveys the simple message that the history of economics matters since it provides valuable answers to highly topical questions, such as the role of the institutional framework on the economic process. Boettke argues that Hayek was involved in many debates during the 1930-1960 in economics and political economy which gave rise to a renewed focus on the institutional framework within which economic activity takes place. After this period Hayek explored the discovery and learning aspects of alternative institutional arrangements, which Boettke defines as epistemic institutionalism. Here, the fundamental question concerns the institutional prerequisites for learning and error correction among individuals in a society. By focusing on this, the book derives important implications for the methodology of the social sciences, for analytical economics, and for practical public policy.

Hayek as a Technical Economist: The Coordination Problem

Fundamental to understanding Hayek's epistemic institutionalism are the chapters "Hayek: An Overview of His Life and Work" and "The Anatomy of an Economic Crisis: Money, Prices, and Economic Order". Here, Boettke points out that Hayek was influenced by the earlier generations of the Austrian School, particularly Friedrich von Wieser and Ludwig von Mises. In his early period, Hayek incorporated Austrian concepts into his explanation of the exchange process and the structure of production. At the same time, Boettke delineates the main difference between Keynes and Hayek. For Hayek, macroeconomics obscures the economic problem which should be viewed as a coordination process of economic activity through time. Relative prices guide future exchange and production decisions, and thus agents' economic plans, because producers utilize the price system with the intention to "make rational economic calculation about alternative courses of action in commercial activity" (p. 42).

In his technical books on cyclical fluctuations, Hayek showed the fatal consequences that might result when relative prices fail to fulfill this information function. Based on Böhm-Bawerk's concept of a production period and on Mises's monetary theory, Hayek pointed out that if the money interest rate is manipulated and artificially lowered below the natural interest rate, then producers would concentrate their resources on ventures that had not been profitable before the change in the interest rate. This affects relative prices which, in turn, influences the decision-making of the producers and alters the production structure of the economy. The new production structure is not sustainable because commercial banks would at some point be compelled, first, to raise the interest rate due to liquidity reasons and, second, to curtail the credit provision for new ventures to the producers. …

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