by – Yash Dubey
F.A Hayek was an economist and Nobel Laureate. He was one of the most prominent thinkers of 20th century. At the time of Keynes’s rising influence and socialist dominance, it was Hayek who was adamant in favor of people’s liberty and the importance of the Market. Amongst his major works, the Dispersed Knowledge, Price Signals, and Austrian Business Cycle theory were his notable contributions. Moreover, Hayek was strictly against any authority to alter the price system and this led to his concern on Monetary theory as he was well aware that Money in control of the government would give them coercive power to control the economy. According to him, the price signals could work best when prices were flexible and inflation or any other wrong monetary policies would give wrong signals to people that would let them take wrong decisions which is also called ‘monetary’ overinvestment theory but the right word for it is Mal-Investment. This theory gives the explanation behind the Boom and Bust cycle that happens in the economy. Furthermore, it states that the problem is in the boom whereas the bust is market adjustments that cover up the wastages and dislocation in the market.
To put further emphasis, Hayek’s major works in economics had many relations with Monetary Economics which he thought needed a revisit. After Great Depression in the early 1930s, the Austrian economist still supported the Gold Standard but later agreed with the work “A Monetary History of the United States, 1867–1960” by Nobel Laureate Milton Friedman and Schwartz which, being a groundbreaking work, explained that the Depression occurred because of the restricted money supply. Though Hayek agreed with the work of Milton Friedman, he still wasn’t satisfied and his concern became bigger when Central Bank was given complete power of Money.
Finally, in the late 70s, Hayek proposed a new monetary system where he said that the money would be fiat but it would be issued privately which was a revolutionary concept that challenged all kinds of monetary theories. Put differently, Hayek liberalized currencies where private players will print their currencies and it would leave to people what money they want as a medium of exchange. Supporter of individual Liberty, he brought a system that would give liberty to people to even choose currencies. Hayek wanted to take away monetary power from Government but not with force. He said that people will prefer private currencies over the government which will eventually eradicate state control. In his book “The Denationalisation of Money”, the author said to let private businesses issue their own currency and not impose a specific currency on every member of the economy in form of Legal tender laws.
Criticism
Hayek’s book wasn’t received well in economics and later became an ignored work of renowned economist. Monetarist Milton Friedman was critical of this work of Hayek and argued that Issuers who fail to stabilize the value of their notes are expected to lose market share, the private issuer will have to regulate the value of their money from spontaneous switching in its value which will be a difficult task. Apart from network effects and switching costs being large, there was another problem the people will get used to a particular currency ceasing them to make changes or they might get influenced by others’ choices. Hayek’s work wasn’t received very well in the Austrian School of thought too, Murray Rothbard argued that Hayek’s work is Utopian in the worst sense and it doesn’t follow the Regression Theorem of Mises, also people wouldn’t accept any other currency over the one issued by the central bank. Keynesians as usual weren’t welcoming to the theory of the biggest rival of Keynes.
Cryptocurrency
According to the European Central Bank, the Economic Foundation of Bitcoin and its theoretical roots are found in Hayek’s work.[1] The book’s first edition was published in 1976 and Bitcoin began in 2009 which is very similar to Hayek’s Idea. Bitcoin is simply a decentralized currency issued by a private body but in digital form. Economist Robert P. Murphy was in favor of Hayek’s work but also found it quite fanciful as money would just become a number on the computer screen and there won’t be limits.[2] After the emergence of Cryptocurrency, he said that this new invention has changed his perspective towards currencies.[3] Therefore the concept of cryptocurrency is economically feasible and sustainable.
In an interview with Cato Institute, Hayek mentioned that his theory is Utopia.[4] But, unlike critiques, he wasn’t doubting the technicality of his work rather his concern was that the Government won’t let this system work. In 2022, it can be very well seen how the success of Cryptocurrency has proven the Austrian economist right but seeing how governments of different countries are highly taxing and banning it shows how visionary was Professor Hayek.
F.A. Hayek won Nobel Prize in Economic Sciences in the year 1974. He is still on the featured list of Nobel Laureates.[5] No matter the era we live in, Friedrich August von Hayek will remain a relevant name who escalated the value, importance, and true meaning of Individual Liberty.
[1] https://www.ecb.europa.eu/press/key/date/1999/html/sp990527.en.html
[2] Hayek’s Plan for Private Money | Mises Institute
[3] What Bitcoin Taught the Public and Economists | Robert P. Murphy (independent.org)
[4] https://www.cato.org/policy-report/february-1983/interview-fa-hayek
