• The Heritage Network
    • Resize:
    • A
    • A
    • A
  • Donate
  • Hayek’s Top 10 Do’s and Don’ts in a Recession

    With the country in the midst of the worst recession since the Great Depression, it’s no surprise that the economy is on everyone’s mind. According to the latest Gallup poll, 7 in 10 Americans point to economic issues as the most important problems facing the country.

    Such are the problems—now what do we do about them? Well, it depends on who you ask.

    According to Paul Krugman of The New York Times, we need another $800 billion stimulus. The first one, you see, wasn’t big enough. “The stimulus right now makes almost no difference,” Krugman recently said at the World Knowledge Forum in Seoul. And for those who worry about the deficit, he had these soothing words: “What does a trillion dollars of borrowing do to the U.S. long-run fiscal position?”

    For those of us who find little comfort in Krugman’s prescriptions, we turn to the ideas of Friedrich Hayek, the author of the classic Road to Serfdom and one of the most important economists of the 20th century. In a new essay, Bruce Caldwell, the editor of The Collected Works of F.A. Hayek (19 volumes), distills the key Hayekian insights on what to do—and not do—during a recession. The short of it: “We usually don’t have the necessary knowledge to intervene effectively in the economy, and the political process is such that, even if we did, we still likely would get bad policy, coupled with an ever-growing government sector.” With a little help from public choice theorists, here are the 10 Hayekian insights for trying economic times:

    1. Recessions are bound to happen: Shifts between periods of economic growth and periods of stagnation or decline are a necessary and unavoidable part of a free-market monetary economy. Downturns are not aberrations but rather painful and necessary medicine for restoring equilibrium to the economy.

    2. A stimulus will only stimulate the deficit: Past experience with trying to fine-tune the economy shows that counter-cyclical fiscal and monetary policy can sometimes make matters much worse (as in the 1970s). Wise politicians would therefore be advised not to meddle, however much their instincts tell them to show voters they’re doing something.

    3. Pure laissez-faire doesn’t work either: Some regulation is necessary for individuals to carry out their plans and for the market to function. Hayek therefore endorsed “general rules, equally applicable to all people and intended to be permanent (even if subject to revision with the growth of knowledge), which provides an institutional framework within which the decisions as to what to do and how to earn a living are left up to the individuals.”

    4. Central planning and excessive regulation sure as hell don’t work: The desire to plan and to subject the economy to the rule of experts endangers liberty. As Hayek succinctly noted: “the more the ‘state’ plans, the more difficult planning becomes for the individual.”

    5. The economy is too complex for precise forecasting: As Yogi Berra could have said: “I hate making economic predictions. Especially about the future.” It’s not that we don’t know anything, but rather that what we do know reveals the limits of our knowledge, and consequently, of our ability to plan and forecast.

    6. Remember the rule of unintended consequences: History shows that when trying to realize certain ends—particularly when their achievement involves interfering with the workings of the price mechanism—all sorts of pernicious effects will occur that were not part of the original plan.

    7. You won’t believe how much you’ll learn in Econ 101: While Hayek repeatedly pointed to the limitations inherent in a discipline that deals with a complex system like the economy, the basic principles of economics—scarcity, supply and demand, division of labor, etc.—can explain a lot about the world and, more importantly, help rule out certain inappropriate policy responses (e.g. price ceilings).

    8. Leave social justice out of it: Free markets necessarily lead to an unequal distribution of wealth and, just as inevitably, fuel calls for egalitarian social justice. Hayek viewed such cries as misguided—justice has nothing to do with an impersonal market process—and dangerous—redistributive schemes presume that we possess knowledge that we in fact can never possess (see #5).

    9. Nothing beats the free market: Hayek admitted that if we had more knowledge we could do a lot more to improve the world through planning and regulation. But we don’t, and in the world of dispersed knowledge we live in, much of the knowledge we actually do possess is due to the workings of the market mechanism.

    10. As a rule of thumb, government cures are not only worse than the disease, but lead to further disease: When you consider that bureaucrats have an incentive to maximize bureaucracy, that politicians who seek reelection—and which ones don’t?—have an incentive to increase spending and decrease taxes, and that corporations have an incentive to squeeze out the competition through government conferred advantages, you’ll conclude that the free market remains our best option (see #9).

    Posted in First Principles [slideshow_deploy]

    31 Responses to Hayek’s Top 10 Do’s and Don’ts in a Recession

    1. George Colgrove, VA says:

      If I can pick out two of the basic principles that we need to adhere to more than the others for fixing this mess, they would be:

      1 – Nothing beats the free market

      2 – As a rule of thumb, government cures are not only worse than the disease, but lead to further disease:

    2. Wildcat from Dallast says:

      It seems too much like the consistent application of common sense if the government would only follow those ten rules.

      A note about which leaders or the political parties they attach to their name concerning the mistakes made relative to economic policy would most likely reveal that both Republicans and Democrats have made mistakes. While in my assessment the Republican leaders deem to violate the rule about trying to do something so the people think they are doing something about the economy whereas the Democrats seem to forget rule number six (the rule of unintended consequences) and rule number eight (leave social justice out of it).

      The current administration, more than any previous one fails to recognize that stimulus packages only stimulate the debt and that nothing beats the free market. We have suffered from so-called stimulus packages in the past but not to this magnitude. When you couple that with the errant concept of social justice, excessive regulation, the law of unintended consequences and that government programs are not only usually worse than the disease but further complicate the economy later on down the road.

      If I didn’t know any better I would quickly come to the conclusion the Obama administration is overtly following the Cloward & Piven’s Plan while intentionally misleading the people by saying otherwise.

      I wonder if following such a plan as an elected official (Executive and/or Legislative branch) would fall under the clause of, “High Crimes and Misdemeanors”.

    3. Bobbie says:

      On many occasions Mr. Obama stresses "we need this for our future." His actions are directed towards a future, but not a future of America's founding principles of freedom. Not a future of accountability or correcting what is out of our control. I believe he is working for a future but it isn't in the best interest of America or even ALL mankind.

      Do's and don'ts? From observing Obama, the do's are his don'ts and the don'ts are his do's.

    4. Pingback: » Financial News Update – 02/15/11 NoisyRoom.net: The Progressive Hunter

    5. Pingback: Tweets that mention Hayek’s Top 10 Do’s and Don’ts in a Recession | The Foundry: Conservative Policy News. -- Topsy.com

    6. Pingback: » Hayek’s Top 10 Do’s and Don’ts in a Recession | The Foundry: Conservative Policy News. MySquawk

    7. Dave, North Carolina says:

      Interesting rhetoric, but where are the backing citations? This is almost entirely an opinion piece. Several of these are demonstrably not true, especially in the context of the most recent Great Recession. #1 is certainly not, as the recent debacle was not a natural cyclic dip, it was manufactured out of risk shifting and unprecedented lobbying by Wall Street and the banking industry to remove regulation and oversight.#2 is easily shown to be wrong in the most recent context, as most economists publicly agree that the stimulus prevented a global catastrophe – even though it perpetuated some corporations that should fail. And so on. #8 sounds interesting and libertarian, but the facts are that without a robust middle class the rest of the country falls apart. Without some balance between regulation and free market, the middle class dissolves. In fact, the vaunted Econ101 class (well, perhaps 201) even instructs that a Free Market cannot be sustained WITHOUT reasonable regulation.

    8. Hiscross, Virginia says:

      The government can't leave things alone, because if they did, citizens would know they have no value. Government tries to create value by creating programs. Those programs have never worked or if they did, only for a short time (like infrastructure projects). On the other hand, the open market can only do so much with the resources it has to work with. In the end, it is an individual responsibility to take care of our self.

    9. Forrest says:

      They should have read this on the floor of the house when they finished reading the Constitution. Also, if we pay for our politicians to travel to exotic places for marginally important meetings (pleasure) then why can't we have them do something much more important that would actually be of service to their constituents, like actually take an Econ 101 class. Actually Econ 101 should be a requirement for office, now that'd be some useful regulation. Government, regulate thyself not the economy.

    10. Mister Snitch, Hobok says:

      "For those of us who find little comfort in Krugman’s prescriptions"

      You mean, anyone not hopelessly married to a leftist ideology. He's only a pretend economist, really Krugman is merely a leftist ideologue. That's his bread and butter, he just dresses up as an economist because it sounds (to some) as if his weightless opinions should have more weight.

    11. subrot0, king of pru says:

      Where did Hayek fall on taxation? A flat tax would make governing easier.

      Telling a politician that is government exacerbates the problem is not helpful. What then is a politician to do? They got elected to solve the problem. The only thing that might help is term limits?

    12. Don M, Maywood, CA says:

      "Government is not the solution. Government is the problem. " Where have I heard that before?

      Of course if only the SCOTUS would rule that "insurance" is not an enumerated power, and is not necessary or proper…

    13. Frank, TX says:

      to subrot0,

      You asked where Hayek stood on taxation. He was most definitely opposed to the progressive income tax system we currently have as it is socialist/marxist in nature, and he was not keen on taxing income at all as income taxation of any sort is a punishment for being successful. A good read in which he addresses this is his work, The Constitution of Liberty; but be warned, its a hefty read, but well worth the effort.

    14. Cover Me, Porkins says:

      Echoing the comments on Hayek, the layman's usage of "laissez-faire" differs from the economist's or historian's. Typically, the former refers to contemporary disincentives to risk, growth and even domestic operation that appear in the form of taxes and regulatory obstacles.

    15. megapotamus Atlanta, says:

      It is amusing in the extreme to find someone who still claims that the stimuli in all their forms averted a depression as Team O and the Bushies continue to say. Oh, "economists" say it is so, do they? Here are some questions for these fine ladies and gentlemen whether economists or other players propounding on economics: What is a depression? Now, we do have a statistically rigid definition for recession, that is a continuous shrinkage of economic activity for six consecutive months. But a depression is no more than a particularly severe recession. Is this recession particularly severe? Nearly every metric is the worst and for the longest time of any recession in economic history. Now, this does NOT include the Great Depression as economic history was nearly invented for the New Dealers but even many approximations taken from available data show that yes, we are as bad as even that. So who sez when there is a depression? I seem to recall elected Democrats declaring forcefully that Bush was presiding over depression with the levels of unemployment and growth we remember so well. Depression averted? How absurd.

    16. Demosthenes, TX says:

      I wonder if Dave from NC actually READ the piece in question:

      "Several of these are demonstrably not true, especially in the context of the most recent Great Recession. #1 is certainly not, as the recent debacle was not a natural cyclic dip, it was manufactured out of risk shifting and unprecedented lobbying by Wall Street and the banking industry to remove regulation and oversight."

      #1, of course, says that recessions are bound to happen in a free market economy. This is a truism. It does NOT say that ALL downturns are natural events, which would be as obviously false. So Dave begins by fashioning and responding to a straw man. His misguided "counterexample," meanwhile, can be quite easily explained by #5 and #6.

      "#2 is easily shown to be wrong in the most recent context, as most economists publicly agree that the stimulus prevented a global catastrophe – even though it perpetuated some corporations that should fail."

      Methinks Dave is confusing the ARR Act of 2009 (Pres. Obama's stimulus) with TARP (Pres. Bush's bailouts). I have heard plenty of economists and political leaders say that the bailouts "prevented a global catastrophe," including the noted budget hawk Rep. Paul Ryan (R-WI). I'm not sure I've heard anyone say that about the stimulus. Its purpose, as sold to the American public, was to give a shot of adrenalin to the economy, not to prevent a global economic meltdown.

      "#8 sounds interesting and libertarian, but the facts are that without a robust middle class the rest of the country falls apart."

      This makes no sense. Cries for social justice are generally issued on behalf of the people who exist on the bottom of the social ladder, not for the ones on the middle rungs. Further, you can't "regulate" the existence of a middle class…there simply isn't enough money to redistribute in order to ensure the existence of the "robust middle class" that Dave has in mind. In any case, #9 sounds like the perfect response to Dave's misguided concerns about #8. The free market not only creates wealth, it creates opportunities for people to move into the middle class.

      "Without some balance between regulation and free market, the middle class dissolves. In fact, the vaunted Econ101 class (well, perhaps 201) even instructs that a Free Market cannot be sustained WITHOUT reasonable regulation."

      Congratulations to Dave on discovering the principle behind point #3 above. Although I think I may have to rescind those congratulations, seeing as how Dave apparently believes he is somehow partially refuting the points in this list, even while he is restating one of them.

    17. Jared, MA says:

      Numbers six and ten are inextricably linked. Unintended consequences are the excuses used to justify further intervention.

      On a separate note, here is "The Road to Serfdom" in a five-minute cartoon. (Scroll to the bottom of the page):

      http://lucidicus.org/videos.php

    18. Glenmore, New Orlean says:

      Dave,

      Your statement "Great Recession is certainly not a natural cyclic dip, it was manufactured out of risk shifting and unprecedented lobbying by Wall Street and the banking industry to remove regulation and oversight" strikes me as true – and also the result of violation of Hayek's tenet #3 – make rules that apply to ALL and ENFORCE them.

    19. Vader says:

      Dave,

      "Several of these are demonstrably not true, especially in the context of the most recent Great Recession. #1 is certainly not, as the recent debacle was not a natural cyclic dip, it was manufactured out of risk shifting and unprecedented lobbying by Wall Street and the banking industry to remove regulation and oversight."

      This does not mean #1 is wrong. That recessions are inevitable does not mean that all recessions are inevitable or that they cannot be made worse. The author of this post can tell us if he agrees, but I think Hayek certainly would have. Yours is a great example of the hazards of rent seeking when the government has sweeping economic powers.

      "#2 is easily shown to be wrong in the most recent context, as most economists publicly agree that the stimulus prevented a global catastrophe – even though it perpetuated some corporations that should fail."

      Perhaps most of todays economists would agree, though your assertion is no more cited than the column author's. But I doubt Hayek would have agreed.

      "And so on. #8 sounds interesting and libertarian, but the facts are that without a robust middle class the rest of the country falls apart. "

      The middle class has never been the beneficiary of the redistribution Hayek cautioned against. They have, in fact, historically tended to carry much of its burden.

      "Without some balance between regulation and free market, the middle class dissolves. In fact, the vaunted Econ101 class (well, perhaps 201) even instructs that a Free Market cannot be sustained WITHOUT reasonable regulation."

      Absolutely agree. And it was Point #3, if you missed that.

      It is the limited nature of the regulation, not its absence, that distinguishes the free market. And by "limited" I do not mean lacking in teeth. It is regulation aimed at maintaining a fair and orderly market, not regulation aimed at achieving whatever politicians decide are socially desirable outcomes, that are needed.

    20. GeekWithA.45, USA says:

      #3 really needs some elaboration and constraints put on it, or it (not might, not can) will degenerate into #8 under some pretext or another.

      A simple statement that the goals of the regulation are for creating an open, fair marketplace of enforceable, voluntary contracts and restraining the abuses of fraud, monopoly and market manipulation will go a lot, but not all, of the way.

      Ultimately, I think that unless and until we muzzle government social and economic meddling with some additional, basic constraints in the form of Constitutional amendments, we're just going to muddle along in some hell-light purgatory with a sickly substitute for liberty.

    21. Pingback: Instapundit » Blog Archive » F.A. HAYEK’S Top 10 Dos And Don’ts In A Recession….

    22. BLBeamer says:

      Re: Dave, North Carolina on February 15th, 2011 at 7:26am said:

      Where are the backing citations for your assertions regarding #1, #2 and #8?

      You were on the right track, with #1 but you became derailed when you implied no active governmental role (Fannie, Freddie, etc.).

      On #8, you unwittingly demonstrated why Hayek was right: the article did not mention the middle class. You saw the words "social justice" and "middle class" is what came to your mind. Others read it and think "the poor" or "immigrants" or "slavery reparations", etc. There's no end to aggrieved parties whose needs for "justice" must be addressed.

      Your note is a vivid reminder of the truth of Hayek's insights.

    23. Pingback: Daily Pundit » This Guy Winning an Econ Nobel Is of Equal Moment to Arafat Winning the Peace Prize

    24. Pingback: Recession “Do’s and Don’ts” « Mangy Redbone Hound

    25. Pingback: Daily Dive-15 Feb 11 | adeliemanchot

    26. Jim Howard Austin, T says:

      Having spent thirty-five years in the investment world this is simply basic operating practices for anyone attempting to manage an ice cream store. The problem is that the people in charge of operating our government and our economy don't have this knowledge. And or they think they are the smartest people in the room and know better! I think the results speak for themselves!

      Question is how can we get the fools that are steering the ship away from the wheel, before we end up on the rocks! Yes…… Barack Hussen Obama there are rocks, the cost of hitting them may well be greater than any of us want to pay!

    27. Pingback: What to do — and not do — in a recession « Capitol Report | New Mexico

    28. Rusty, Chicago says:

      Whether Dave is right or wrong isn't as important as the fact that Krugman and Roubini have been right to-date. They predicted the crisis and predicted the stimulus would not move the numbers significantly. It's not like Krugman is making this up as he goes along — he complained about the size of the stimulus originally. And his predictions about a world food price crisis look prescient as well. And, to-date, he's won the argument about hyperinflation (though he's agreed the budget needs to address entitlements in a serious way). I guess for Heritage the meritocracy only applies outside of cyberspace.

    29. Drew says:

      Rusty, where to begin. Not only did Krugman not predict the crisis (the man he tore up in his blog the other day, Thomas Dilorenzo predicted it in 1999 btw, an austrain/hayekian) but Krugman advocated for the rediculusly low standards of lending that LED to the crisis. So how exactly did he predict it? So he advocated for what caused the crisis, and then predicted it is that what your saying? So he is evil basically because he advocated a policy he knew would blow up the U.S. economy? Thats pretty darn doubtful sir, and he admits himself he did not see it coming, and said so many times when he cliams no real economist could have predicted it, even though almost every austrian did (hell even Bush did, see WSJ in 2003, i hate Bush more than Obama but that article is on my wall to refute people like you).

      Your right however that he did complain about the Stimulus, because the man does not understand simple monetary policy. It's not exactly rocket science to understand that the Fed Reserve has to print tons and tons of Fiat when the gov't spends 800 billion on one bill. Not to mention the 4 trillion the Fed used to bail out foreign banks. Do you understand that the only reason the dollar buys anything at all is because people have faith in the full credit of the U.S. Faith that is rapidly detiorating (just ask Tim Giethner, when he claimed to a Chinese audience the dollar was strong they laughed him off the stage, not that they Yuen is strong but thats another topic) Even U.S. citizens are losing complete faith in the dollar, see all the Cash for Gold stores, the gold commercials etc. So how in the hell has he won the hyperinflation debate? It is coming Rusty whether you believe it or not, the only reason it hasnt come to the U.S. yet is because Big Banks have so many Excess reserves, as soon as they start lending again those reserves will enter the money supply and double the money supply thereby creating hyperinflation. From 1783 to 1913 (the yr the Fed was created) the value of the U.S. dollar rose 8%. From 1913 to 2010 the value of the dollar has dropped 98%, thats not extreme inflation to you? And they have doubled the money supply since when it lost 98% of its value. Imagine how much richer as a nation we would be if we hadnt created the Fed and kept the gold standard. When we became the Worlds Reserve Currency in 1976 the dollar would have gained like 50% value, a dollar would have bought two or three weeks worth of groceries. Krugman has completely lost the hyperinflation arguement, look at the Middle East right now. Food prices are at the highest price they have ever been, hmm wonder why??? Maybe QE1 and QE2. I mean corn is up to 7 bucks, but that is somewhat due to ethanol subsidies. Everything is rising in price, everything.

      If Krugman is such a great man, such a great economist then why wont he debate the austrian school economist Robert Murphy. Murphy has raised 100,000K that will be donated to food banks if Krugman simply shows up, and he wont do it. I wonder why? Could it be he is petrified of getting booted off the Federal Reserve Payroll (which he is absolutley on, just look it up) and the world will see the true extent of his falacies.

    30. Pingback: Random Nuclear Strikes » This week’s Top Ten list

    31. Pingback: Hayek’s Ten Rules for a Recession

    Comments are subject to approval and moderation. We remind everyone that The Heritage Foundation promotes a civil society where ideas and debate flourish. Please be respectful of each other and the subjects of any criticism. While we may not always agree on policy, we should all agree that being appropriately informed is everyone's intention visiting this site. Profanity, lewdness, personal attacks, and other forms of incivility will not be tolerated. Please keep your thoughts brief and avoid ALL CAPS. While we respect your first amendment rights, we are obligated to our readers to maintain these standards. Thanks for joining the conversation.

    Big Government Is NOT the Answer

    Your tax dollars are being spent on programs that we really don't need.

    I Agree I Disagree ×

    Get Heritage In Your Inbox — FREE!

    Heritage Foundation e-mails keep you updated on the ongoing policy battles in Washington and around the country.

    ×