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The Road to Serfdom at 75: When central bankers reflect on lessons from Hayek

Summary:
Yale Univ recently organised a conference on the 75 years of Hayek’s book : Road to serfdom. I had pointed to a fascinating paper on the Book’s 75 years earlier. One of the speakers in the Yale event was Randall Quarles, Vice chair of Federal Reserve. In his speech he reflects on lessons from Hayek: The financial crisis, and the deep recession that followed it, prompted changes in the United States’ regulatory framework. These changes have been designed to make the financial system more resilient than it was before the crisis. By creating appropriate incentives and rules, they should also encourage financial markets to price risk more appropriately than they did in the years leading up to the crisis—for example, by reducing the danger of investor complacency regarding the riskiness of

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Yale Univ recently organised a conference on the 75 years of Hayek’s book : Road to serfdom. I had pointed to a fascinating paper on the Book’s 75 years earlier.

One of the speakers in the Yale event was Randall Quarles, Vice chair of Federal Reserve.

In his speech he reflects on lessons from Hayek:

The financial crisis, and the deep recession that followed it, prompted changes in the United States’ regulatory framework. These changes have been designed to make the financial system more resilient than it was before the crisis. By creating appropriate incentives and rules, they should also encourage financial markets to price risk more appropriately than they did in the years leading up to the crisis—for example, by reducing the danger of investor complacency regarding the riskiness of their investments and the possibility of adverse scenarios. If we follow Hayek and regard the price system as like a telecommunications network, and then apply that metaphor to the financial sector, we can think of the institutional and regulatory changes to the financial system over the past decade as designed to improve the reliability and signal quality of the transmissions.25

How does all of this relate to the larger questions of philosophy and social order to which Hayek devoted much of his thought? Hayek’s insights about the price system depend importantly on his theory of knowledge: The information that is available to us as a society is the aggregate of the highly dispersed and sometimes inarticulate knowledge possessed by each of us individually. It is not only hard to convey that information to a central authority for processing into a rational decision—it is also conceptually impossible given the nature of that knowledge. And, indeed, important parts of that knowledge will not even be generated except through our interaction with each other through the mechanism of the market. Trying to centralize economic decisionmaking, then, is not just too hard to do as a practical matter. It would actually reduce the amount of knowledge available to us as a society, by replacing those myriad individual interactions in a free marketplace. Thus, even if some technological way to aggregate information other than through prices could be invented, it would lead to less efficient, less humane outcomes because it would be based on less total human information.

The price mechanism, then, is not just a matter of economics—it is a matter of social and, indeed, civilizational progress. As Hayek says in The Constitution of Liberty, “[C]ivilization begins when the individual in pursuit of his ends can make use of more knowledge than he himself acquired and when he can transcend the boundaries of his ignorance by profiting from knowledge that he himself does not possess.”26

I think this ties together the various threads of Hayek’s thought throughout a long life: his early work on psychology (“How do we know?”), his later epistemology (“What do we know, and what does it mean to know it?”), his economics (“How do we make knowledge usable?”), and his social and political theory (“What institutions will ensure that the greatest amount of human knowledge will be usable in the pursuit of their human fulfillment?”). Contrary to those polemicists across the ideological spectrum whose tendentious simplifications of Hayek’s thought would turn him into a crude icon rather than a complex thinker, this is a deeply human, and a deeply humane, project. I will look forward to the contributions of the others you will hear from today in how Hayek elaborated it and how we can further these principles today.

Hmm…

Hayek would be amused to see central bankers reflecting on his central lesson on the need to “decentralise economic activity”. Infact, Hayek would point that the crisis was due to central banks designed incentives in such a way that people took higher risks. He would say post-crisis regulation will lead to similar problems as again regulation etc is all coming from centralised agencies..

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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