Hayek talks to Reason contributing editor Thomas Hazlett in 1977.
The most disturbing thing is Hayek's initial dissing of Keynes--Hayek's claim that Keynes did not really think that The Road to Serfdom was "a grand book... morally and philosophically I find myself... in deeply moved agreement," but that Keynes only thought that he thought Road to Serfdom was a grand book, because Keynes falsely "believed he was fundamentally still a classical English liberal" and did not understand "how far he had moved away" from true liberalism.
The second most disturbing thing is Hayek's claim that there is "more social discontent in Sweden than in almost any other country I have been. The standard feeling that life is really not worth living is very strong in Sweden..."
And the third most disturbing thing--but true--is Hayek's claim that "Milton [Friedman's] monetarism and Keynesianism have more in common with each other than I have with either..."
The Road from Serfdom - Reason Magazine: [Contributing Editor Thomas W. Hazlett interviewed Hayek in 1977, shortly before starting graduate school in economics at the University of California, Los Angeles.]
Reason: Of your bestselling The Road to Serfdom, John Maynard Keynes wrote: "In my opinion it is a grand book.... Morally and philosophically I find myself in agree- ment with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement." Why would Keynes say this about a volume that was deeply critical of the Keynesian viewpoint?
Hayek: Because he believed that he was fundamentally still a classical English liberal and wasn't quite aware of how far he had moved away from it. His basic ideas were still those of individual freedom. He did not think systematically enough to see the conflicts. He was, in a sense, corrupted by political necessity. His famous phrase about, "in the long run we're all dead," is a verv good illustration of being constrained by what is now politicallv possible. He stopped thinking about what, in the long run, is desirable. For that reason, I think it will turn out that he will not be a maker of long-run opinion, and his ideas were of a fashion which, fortunately, is now passing away.
Reason: Did Keynes turn around in his later years, as has frequently been rumored?
Hayek: Nothing as drastic as that. He was fluctuating all the time. He was in a sort of middle line and he was always concerned with expediency for the moment. In the last conver- sation I had with him (about three weeks before his death in 1945). I asked him if he wasn't getting alarmed about what some of his pupils were doing with his ideas. And he said," Oh, they're just fools. These ideas were frightfully important in the 1930s, but if these ideas ever become dangerous. you can trust me--I'm going to turn public opinion around like this." And he would have done it. I'm sure that in the post-war period Keynes would have become one of the great fighters against inflation.
Reason: Was the Keynes thesis that govemment spending is needed to bolster aggregate demand in times of unemployment correct at one time?
Hayek: No. Certainly not. But, of course. I go much further than this. I believe that if it were not for govemment interference with the monetary system, we would have no industrial fluctuations and no periods of depression.
Reason: So trade cycles are caused solely by government monetary authorities?
Hayek: Not that directly. As you put it, it would seem that it results from deliberate mistakes made by government policies. The mistake is the creation of a semi-monopoly where the basic money is controlled by government. Since all the banks issue secondarv money, which is redeemable in the basic money, you have a system which nobody can really control. So it's really the monopoly of government over the issue of money which is ultimately responsible. Nobody in charge of such a monopoly could act reasonably.
Reason: You have written that the period from about 1950 to 1975 will go down in history as the Great Prosperity. If the Keynes thesis is incorrect, why the tremendous economic success? Why, for instance,haven't we experienced a hyperinflation on the order of Germany in 1922?
Hayek: Because the inflation in Germany was not for the purpose of maintaining prosperity but was forced upon them due to financial difficulties. If you inflate for the purpose of maintaining prosperity you can do so at a much more moderate rate. The prosperity did last longer than I anticipated. I always expected its breakdown, but I thought it would come much sooner. I was thinking in terms of the collapse of the inflationary booms during past trade cycles. But those collapses were due to the gold standard, which put a brake on those expansions after a few years. We never had a time where a policy of deliberate expansion was unlimited by any framework of monetary order. We've come to an end only when has been seen we cannot accelerate inflation so fast that we can still maintain prosperity....
Reason: How does inflation cause unemployment?
Hayek: By drawing people into jobs which exist only because the relative demand for the particular things is temporarily increased, and these employments must disappear as soon as the increase in the quantity of money ceases....
Reason: The Keynesian economic formula seeks out a nearly perfect symbiotic relationship with the political forces of the modem welfare state. At what point can this marriage be broken? How can the Keynesians be politically defeated?
Hayek: I really should begin with Keynes himself. Keynes despaired in the 1920s of the possibility of again making wages flexible. He came to the conclusion that we must accept wages as they are and adjust monetary policy to the existing wage structure. That, of course, forced him to say "I don't want any restriction on monetary policy because I have to adjust monetary policy to a given situation." But he overlooked that, at that very moment, the trade unions knew that the government was under an obligation to correct the effect of the trade-union policy, and so we get a hopeless spiral. The unions push up wages, and government has to provide enough money to keep employment at these wages, and this leads into the inflationary spiral. This came out of the practical considerations of Keynes in the short run--that we can't do anything about the rigidity of wages. In fact, the British in the 1920s were very near success. The very painful, and silly, process of deflation was very nearly successful at the end of the 2Os. Then they got frightened by the long period of unemployment. I think if they had lasted a year or two longer they probably would have succeeded....
Reason: In 1947 you founded the Mont Pelerin Society, an international group of free-market scholars. Has its progress pleased you?
Hayek: Oh yes. I mean its main purpose has been wholly achieved. I became very much aware that each of us was discovering the functioning of real freedom only in a very small field and accepting the conventional doctrines almost everywhere else. So I brought people together from different interests. Any time one of us said, "Oh yes--but in the field of cartels you need government regulation," someone else would say, "Oh no, I've studied that." That was how we developed a consistent doctrine and some international circles of communication....
Reason: You currently carry the torch for the Austrian school of economics, representing a great tradition from Carl Menger to Bohm-Bawerk to Ludwig von Mises to yourself. What is the most important way in which the Austrians differ with Milton Friedman and the Chicago School?
Hayek: The Chicago School thinks essentially in "macroeconomic" terms. They try to analyze in terms of aggregates and averages, total quantity of money, total price level, total employment--all these statistical magnitudes which, I think, is a very useful approach and even quite impressive. Take Friedman's "quantity theory." I wrote 40 years ago that I have strong objections against the quantity theory because it is a very crude approach that leaves out a great many things, but I pray to God that the general public will never cease to believe in it. Because it is a simple formula which it understands. I regret that a man of the sophistication of Milton Friedman does not use it as a first approach but believes it is the whole thing. So it is really on methodological issues, ultimately, that we differ. Friedman is an arch-positivist who believes nothing must enter scientific argument except what is empirically proven. My argument is that we know so much detail about economics, our task is to put our knowledge in order. We hardly need any new information. Our great difficulty is digesting what we already know. We don 't get much wiser by statistic information except in gaining information about the specific situation at the moment. But theoretically I don't think statistical studies get us anywhere.
Reason: You have written that the main reason that the Keynesian explanation of unemployment was accepted over the classical explanation was that the former could be statistically tested while the latter could not.
Hayek: From that point of view, Milton's monetarism and Keynesianism have more in common with each other than I have with either....
Reason: Well, then, why isn't there any such thing as social justice?
Hayek: Because justice refers to rules of individual conduct. And no rules of the conduct of individuals can have the effect that the good things of life are distributed in a particular manner. No state of affairs as such is just or unjust: it is only when we assume that somebody is responsible for having brought it about. Now, we do complain that God has been unjust when one family has suffered many deaths and another family has all of its children grow up safely. But we know we can't take that seriously. We don't mean that anybody has been unjust. In the same sense, a spontaneously working market, where prices act as guides to action, cannot take account of what people in any sense need or deserve, because it creates a distribution which nobody has designed, and something which has not been designed, a mere state of affairs as such, cannot be just or unjust. And the idea that things ought to be designed in a 'just' manner means, in effect, that we must abandon the market and turn to a planned economy in which somebody decides how much each ought to have, and that means, of course, that we can only have it at the price of the complete abolition of personal liberty....
Reason: If big government is really the culprit, why do Sweden and many Scandinavian welfare states seem to be prospering?
Hayek: Well, we mustn't generalize. Sweden and Switzerland are the two countries which have escaped the damages of two wars and have become repositories of a large part of the capital of Europe. In Switzerland, there is still some traditional instinct against government interference. Switzerland is a marvelous example where, when the politicians become too progressive, the people hold a referendum and promptly say, "No!"
Reason: Yet Sweden is reasonably successful...
Hayek: Yes. But there is perhaps more social discontent in Sweden than in almost any other country I have been. The standard feeling that life is really not worth living is very strong in Sweden. Although they can hardly conceive of things being different than what they're used to, I think the doubt about their past doctrines is quite strong...