The following is an interview with the Austrian Economics Center (AEC), affiliated with the Friedrich A. Hayek Institute in Vienna, Austria, and which was originally published in two parts on the AEC’s website, “Free Markets, Free People” (August 8 & 13, 2013). The interviewer for AEC was Alvino-Mario Fantini.
AEC: How did you discover the Austrian School of Economics? Who most influenced your academic career and intellectual development?
Ebeling: I was a teenager when I “discovered” the Austrian School—when I was about 15 or 16 years old. I was interested in public policy issues, but found it difficult to sort out how to understand and analyze the cases “for” or “against” various forms of government regulation or intervention. It was also a time when many still believed that the Soviet Union and Mao’s China were positive “models” of central planning for third world countries to emulate to achieve economic development. This was in the second half of the 1960s, when, in the United States, the Lyndon B. Johnson Administration was implementing its “Great Society” programs of expanded redistribution of wealth, greater government intervention in market activities, and the fighting of an enlarged war in Vietnam.
I met two people who introduced me to the writings of philosopher and novelist, Ayn Rand. It was through the references and footnotes in her non-fiction writings—especially her collection of essays, Capitalism: the Unknown Ideal—that I found out about the writings of Carl Menger, Eugen von Böhm-Bawerk, and Ludwig von Mises, as well as “popularizers” of “Austrian”-oriented ideas such as the free market journalist, Henry Hazlitt. This led me to the writings of Friedrich A. Hayek.
AEC: And how did you proceed?
Ebeling: I began with his The Road to Serfdom and The Constitution of Liberty; but soon I was reading all of Hayek’s early works from the 1920s and 1930s on monetary theory and the business cycle. I also went through his writings of the 1930s and 1940s on the nature of the market competitive process and the division of knowledge in society, which, as Hayek explained, only the price system could successfully integrate and coordinate.
In terms of my views on the nature and workings of the market order, and its alternatives, the two most influential thinkers have been Ludwig von Mises and Friedrich Hayek. Their influence can be seen in my two books, Austrian Economics and the Political Economy of Freedom (2003) and Political Economy, Public Policy and Monetary Economics: Ludwig von Mises and the Austrian Tradition (2010).
AEC: Did you ever meet Hayek?
Ebeling: One of the intellectual highlights of my life was the opportunity to spend a good part of two summers in almost daily contact with Friedrich von Hayek. In 1975 and 1977, I had the good fortune to have summer research fellowships at the Institute for Humane Studies, when it was still headquartered in Menlo Park, California, near Stanford University. Both of those summers Hayek also was there as a senior fellow. My office was a door or two down from his, and almost everyday I would go in and talk with him for about an hour or so. I asked him about the history and ideas of the Austrian School; the “old Vienna days,” when he participated in Ludwig von Mises’ “private seminar”, and when he was the first director of the Austrian Institution for Business Cycle Research; his battles with Keynes and the advocates of central planning in the interwar period when he was at the London School of Economics; and his philosophy of freedom and classical liberalism.
But I should mention that for a period of time I also had the additional good fortune to know and study under Israel Kirzner, Ludwig Lachmann, Fritz Machlup, and Oskar Morgenstern at New York University. I also knew Murray Rothbard fairly well in the years I lived in New York in the late 1970s and early 1980s. And I had the chance to meet and interview Gottfried Haberler. Each has had a significant impact on my thinking about economics in general, and especially my understanding of Austrian Economics.
AEC: Why do you think Hayek is so important? What would you say is Hayek’s principal contribution to the world?
Ebeling: In my opinion, Hayek’s explanation and defense of the competitive market economy and the free society in general is, possibly, the most insightful and profound argument for liberty penned in the 20th century. His analysis of man’s inescapable ignorance of much of the knowledge that others possess—but upon which use we are all dependent in the extended system of division of labor—represents one of the subtlest understandings of why government central planning and heavy-handed intervention and regulation are inherently inferior to a functioning competitive market order.
The “moral” lesson, of course, is that each of us, in accepting our own limited and imperfect knowledge, should practice a high degree of humility in what we can claim to know and do in terms of trying to direct or command the otherwise “spontaneous” evolution and development of society and its institutions. This is the overarching message that runs through Hayek’s writings over the decades. As he often put it, we need to use our reason to appreciate the limits of what our reason can realistically do in attempting to “plan” the social order and its daily operation. It is the reason why he, truly, was one of the most worthy to be awarded a Nobel Prize in economics, in terms of a lasting contribution to human knowledge about man and society.
AEC: In the context of the West’s current economic and financial difficulties, is Hayek still relevant?
Ebeling: It is now nearly 40 years since Hayek was awarded that Nobel Prize in 1974. Yet, in my view, his writings are as important as when he wrote them. Back in 1942, the American economist, Kenneth Boulding reviewed Hayek’s The Pure Theory of Capital, shortly after it was published. Boulding at one point says: “Mr. Keynes’s economics of surprise, like Hitler’s, may be admirable in producing spectacular immediate successes. But we need Puritan economists like Dr. Hayek to point out the future penalties of spendthrift measures and to dangle us over the hell-fire of the long run.”
Hayek often said that society was approaching the long-run consequences of Keynesian-style short run policies. Well, we are most definitely now in that long-run. Throughout much of Europe the interventionist welfare state seems to be reaching its limit. The economies of many of these countries are not productive enough to generate the output and wealth to pay for all that politicians have offered and special interest groups have demanded, one election cycle after another.
AEC: What do you think are the root causes of the current crisis?
Ebeling; This “crisis” of government paternalism was accelerated by monetary and related interventionist policies in the United States and Europe that produced another “boom-bust” cycle in the first decade of the 21st century. It has had all of the hallmarks of the type of business cycle that the Austrians—and especially, Hayek—had explained decades earlier. Financial markets were awash with loanable funds made possible due to aggressive monetary expansion by central banks; interest rates were artificially pushed far below any market-based level; business investment borrowing, home borrowing, and consumer credit borrowing were far in excess of actual savings rates able to sustain them.
The capital, resources, and labor of society were misallocated and misdirected into various directions throughout these economies, all of which was going to necessitate a significant “adjustment” period when the “bubbles” of the boom finally burst. But rather than allowing the required adjustments and reallocations of capital and labor, and accepting that government welfare and related spending had to be permanently reduced or eliminated, governments have resisted these needed changes.
In many countries, the presumed “austerity” policies have really involved little or no reduction in the levels of government spending and redistribution, but noticeable increases in taxes. “Austerity” means squeezing the private sector to maintain a blotted government sector. The implicit psychology of many in Europe and the United States is that if the current crisis can “somehow” be gotten over, then the trend line of intrusive and growing government spending of past decades can be returned to in the future.
AEC: Is this a crisis of the capitalist system, as some have tried to argue?
Ebeling: Similar to what both Mises and Hayek pointed out over-and-over again during their own times, the present “crisis” through which we are living is not a crisis of “capitalism” or “free markets.” It is a dramatic and possibly fatal crisis of the interventionist welfare state.
As Hayek patiently explained many times, any understanding of the business cycle must look beneath the surface of the “macro” aggregates of total employment, total output and the overall level of prices. It is necessary to appreciate that the really harmful and destabilizing aspects of monetary-induced booms and busts is the “microeconomic” sequential process through which injections of money and credit into the banking system systemically distort the structure of relative prices, the profitability of different types of investment and production, with a consequent misallocation of labor and capital that will have to be “corrected” for at some point.
Any additional expansions of money and credit, or other interventions, to delay or prevent the required changes in relative prices and wages, and reallocations of labor and capital among sectors of the economy, only makes the adjustment period worse and more prolonged. If you overlay on all of this the bloated welfare states of modern Europe, with governments unwilling or unable to introduce cuts in spending and taxing, then you have the situation that we see today, with continuing high levels of unemployment and sluggish, or zero, or even negative growth.
At the end of the day, the choice is free markets (with limited government and low taxes) or the regulated and redistributive state (with intrusive government and high taxes and unsustainable borrowing).
AEC: What policy suggestions—in monetary and/or fiscal matters—do you have for today’s leaders and politicians?
Ebeling: On monetary policy matters, the central banks of Europe and the United States need to give up their attempts to manipulate interest rates in the name of economic “stimulus.” Interest rates are prices that are meant to interconnect and coordinate the decisions of savers with those of investors. They are the prices at which savings and investment are brought together and into balance. Interest rates are also a “capitalization factor.”
That is, interest rates enable a determination of the present value of possible investment projects of varying time-durations. By manipulating interest rates and preventing them from telling the “truth” about the available real savings to fund investments that might be undertaken, and from limiting investments to time horizons sustainable within the constraints of that real savings in the economy, central banks invariably induce types and amounts of investments that will be found to be inconsistent with consumption/savings decisions of income earners in society. Thus, central bank monetary and interest rate policies that are meant to maintain economic stability in fact generate imbalances between savings and investment, and misdirected resource uses that lead to the economic downturns those central banks claim to be trying to prevent.
On the fiscal side, governments must accept the politically difficult fact that their redistributive promises to voting constituencies are unsustainable, given the productive potentials of their societies. The welfare state must be dramatically cut back, if not repealed. Obviously, this goes against the political and ideological currents of our time.
AEC: What lies behind the dominant ideology of today?
Ebeling: The fact is there is a “specter” that continues to haunt Europe; it is the “specter of communism”—not communism in the sense that many people want a return to the totalitarian state and Soviet-style central planning. No, I mean in the sense that Europe—and America to a slightly different extent—are still haunted by Marx’s critique of capitalism and the market order. The presumption among policy-makers and many others in European society is implicitly that Marx was right in his criticisms of capitalism.
Left to its own devices, capitalism exploits workers and leads to harmful monopoly. Unregulated by the state, private capitalism is guided by the profit motive, and pursuit of profit is considered to be almost always in opposition to the “common good” or the “general welfare.” Dictated by market forces, competition always results in an “unjust” distribution of wealth.
Of course, liberal, free market capitalism produces just the opposite of these “accusations.” Competitive capitalism creates employment opportunities and rising wages for the vast majority of workers over time. Open competition is the great enemy of monopoly, since the only sustainable monopolies are those that receive support and protection from the government.
AEC: And the only way forward is to try to move towards greater freedom, exchange, and competition?
Ebeling: As Adam Smith explained more than 235 years ago, in The Wealth of Nations, in a system of division of labor with voluntary exchange, the only way in which an individual can earn a profit that provides him with the financial wherewithal to buy those things he desires is to devote his skills, resources, and energies to producing what others will willingly take in trade. Thus, in his own self-interest each in the market system must focus his productive activities to serving the market demands of others. Thus, though it may be no part of his conscious intention, each individual ends up serving the “common good,” through actions that tend to improve the conditions of others as well as his own well being.
In an open, competitive market, as Hayek explained, individuals are not “rewarded” on the basis of “merit”—that is, by some ethical standard on the basis of which each receives what they “deserve”—but on the basis of “service.” That is, how successfully they have supplied others with the goods and services they want, and at better terms and with better qualities than others also competing for the same consumer business.
For the government to redistribute wealth on the basis of “merit” or “deservedness” would require the political authorities to claim knowledge and wisdom to know what each person “really” deserves. This is a knowledge and wisdom that no man, or group of men can claim to possess—which is why Hayek said redistributive or “social justice” is a “mirage.” It also gives to government a power over the distribution of wealth in society that is easily abused by those in political authority to serve their own narrow purposes.
AEC: Just as we have seen happen over and over again around the world. What do you think about the viability and long-term sustainability of the Euro? Do you foresee a collapse?
Ebeling: I have often found that one of the most difficult things to predict is the unpredictable! We must remember that the Euro did not develop as a market-selected medium of exchange. The European Union political elite, who wished to reinforce the integration of the EU institutional order, politically imposed it on the member nations. If the citizens of the member states had had an open and free chance to decide through referenda or plebiscites it is highly unlikely whether the national currencies would have been abandoned.
The stability and viability of a common currency requires that the regions within the currency area allow their relative price and wage structures to adapt to and reflect changes in the demands for goods and money over the common currency zone. This is a theme in Hayek’s highly insightful but neglected 1937 lectures on Monetary Nationalism and International Stability.
The member states of the EU are not willing to do this; or I should say that interest groups within these countries, including the government bureaucracies, are unwilling to fully and consistently adjust to the reality of the supply and demand for goods and money across Europe, as well as with the world economy with which the European Union inescapably interacts.
This is the reason why some groups in the countries hardest hit in the current economic crisis are calling for a return to their national currencies. Their panacea is currency devaluation and domestic price inflation through money creation to fund government spending to resist relative price and income adjustments in their economies. Inflation, however, is only an illusionary solution that soon brings about its own distortions, imbalances, and injustices.
The Eurocrats in Brussels are frightened by the fact that their dream of a United States of Europe—which they would command and control through the EU regulatory and legislative mechanisms—might implode with a successful currency “secessionist” movement. Thus, the survival of the Euro is partly dependent upon the willingness of those at the helm of the EU and the European Central Bank to provide the loanable funds and central bank-created money to put off the necessary national internal adjustments.
AEC: Why do people find it so hard to allow the market to function without calling for government solutions? Is it simply a fear of risk? Or is there something in our psychological make-up that makes us look to the state for help?
Ebeling:This is one of the most difficult but important questions that friends of freedom can ask, and try to answer. Adam Smith was highly pessimistic about the chances for winning the war of ideas and establishing a regime of free trade. In The Wealth of Nations he despaired of the “prejudices of the public” and the “power of the interests.” By the prejudices of the public, he meant the difficulty of getting people to understand the seemingly counter-intuitive argument that when men pursue their own self-interest in a competitive economy the outcome in terms of both freedom and prosperity is far greater than when governments attempt to guide and command the productions of society. By the power of the interests, Smith meant the influence of special interest groups to gain monopolies, trade protections, subsidies and other benefits from the government at the expense of the general consuming public, and their determination to fight “tooth-and-claw” to prevent losing these political privileges.
Others, such as the Italian economist, Vilfredo Pareto, British economist, Philip Wicksteed, and German, free market economist, Wilhelm Röpke, pointed out that there is an inherent “bias” in society toward “producer” interests over the interests of the general consuming public. The reason being is that while each of us is the consumer of many goods, in the division of labor we are the producer of one or a small handful of goods. And unless we have been successful in earning income in our producer role in society, we do not have the financial means to purchase whatever other goods we desire to buy as a consumer. Thus, people tend to place greater priority on limiting competition in their own line of production, than fighting for competition for all the separate goods they purchase as consumers.
Still others, such as Joseph A. Schumpeter, or the French social critic, Bertrand de Jouvenel, or Mises and Hayek, emphasized the role of the intellectuals in society in influencing and shaping public opinion and attitudes about the social order and the economic system. The fact is that since the times of the ancient Greeks philosopher-intellectuals have expressed a deep disrespect and contempt for the arena of work, industry and commerce. For the ancients, with their slave societies, work and trade were reserved for the “underclass,” while the “free citizen” devoted himself to the “higher” callings of life—the pursuit of “beauty,” the “good” and the “virtuous.” The modern intellectual grew up with the development of industrial capitalism. Indeed he could never have devoted his near full-time efforts to “ideas” if not for the productivity of capitalism to support his “life of the mind,” which freed him from the “sordid” affairs of having to earn a living from market-based production of goods and services.
The modern intellectual’s disapproval of free market capitalism often comes from two frustrations: First, the market frequently fails to appreciate the intellectual’s work to the same degree he values his own worth. That is, the intellectual sees the university dropout make millions from inventing a new sink faucet, while he must get by on a university professor’s salary or a research grant with little or no recognition of his “big ideas” in the society as a whole. Second, the intellectual is confident that he knows how to correct all the “ills of society” through regulation, control, and redistribution. Yet, his Olympian perspective on how to make the world a better, a more “just” and “fairer” place remains stillborn because self-interested and narrow-minded people do not appreciate his grand vision for creating a “good society.”
Finally, freedom, as has often been pointed out, has an accompanying requirement: self-responsibility for one’s actions—both when they succeed or fail. Hence, freedom can be a scary thing. This has made the appeal of the modern welfare, “entitlement” state, well, so appealing to many. Worse, still, once a large number of the members of a democratic society become dependent for either all or a large portion of their income from state spending or redistribution, removing such financial support involves a “shock” to the social system. It is also a shock to the psychology of many people who can no longer imagine a world in which the state does not take care of them.
AEC: What are the consequences of this attitude or mentality?
Ebeling: We see the consequences of this psychological dependency in places like Greece and, now, Portugal. Thousands of people demonstrate on the streets of Athens or Lisbon insisting—demanding—that their governments maintain or restore welfare spending and government jobs. From whom the tax money will be provided, from where the resources will come to maintain the unsustainable, seemingly none of these people care to ask. They just want their government jobs and social “safety nets” to be once more guaranteed “for life.”
Much of this mentality has been fostered by the illusion of “something for nothing,” seemingly made possible by decades of government deficit spending. For every Euro of government spending, the citizens of these countries have only been taxed a fraction of the true cost, with the difference made up with borrowed money. But, now, no one wants to lend to these countries, or at least not without an interest rate containing a high default-risk premium. And the reality of this is more than some can accept.
AEC: Are we witnessing a renaissance of free market thinking?
Ebeling: When I first became interested in free market and “Austrian” ideas as a teenager in the second half of the 1960s, I could take pride in the fact that I was able to read everything that was published by conservative, classical liberal and libertarian thinkers. The reason for this was due to the fact that in the United States there were only three “right-of-center” publications—National Review, The Freeman, and Human Events—and only a small handful of books that appeared each year, usually published by “fringe” publishing houses such as Arlington House, Henry Regnery, and Devin-Adair. (It seemed as if only Hayek and Milton Friedman could be published by reputable publishers like the University of Chicago Press.)
Today the intellectual environment is totally different. If a person devoted all of their waking hours to doing nothing but reading, they could never keep up with all the literature appearing from “the right.” The market has exploded with books by conservative, classical liberal, and libertarian authors from some of the most mainstream publishing houses. There are, now, dozens of free market-oriented think tanks throughout the United States producing an immense amount of policy-based monographs and position papers. And such organizations have blossomed around the world, as well, including in Europe. And, of course, the Internet has offered a vast arena for the spreading of free market ideas.
Indeed, the poorest person anywhere in the world, with some access to the Internet, can now read for free thousands of books and articles by all the great writers on liberty and economic freedom. This, too, in a very dramatic way has helped advance an awareness of free market ideas. In the United States there is also a vast “underground” of advocates and writers on Austrian Economics at dozens of Internet websites, far beyond anything that appears in the traditional media.
There is also the fact that collectivist ideas of all types are intellectually bankrupt. Other than in North Korea, Cuba, and a handful of “leftist” South American countries, who defends anymore communism and socialist central planning? In the West the interventionist welfare state persists as a political engine for anti-competitive privilege and protection, and plundering redistributions of wealth based on pressure group influence and power. Does anyone, anymore, say with a straight face that the welfare state will really bring about the “fairer” and socially more “just” society that was promised in the decades immediately after the Second World War?
The interventionist welfare state survives because ideologically, as I said, many people in Western society have been persuaded that free market capitalism is unjust and unfair, in spite of it “delivering the goods.” And it persists because so many in these societies have been enveloped within the web of “entitlement” dependency to such an extent that they cannot imagine a way they could get by without it.
But we should not be despondent. It is useful to recall Hayek’s argument in his 1949 essay, “The Intellectuals and Socialism.” Hayek explained that trends in opinion do not change over night. The ideas and policies current today are the product of intellectual fads and fashions that emerged more than a half a century ago. Current policies are a “lagging indicator” of intellectual trends in the past. The ideas of liberty have been slowly—and sometimes beneath the surface—experiencing a revival among people, and often among the young, who reject social paternalism and who frequently can be persuaded about the benefits and ethics of market liberalism, as well.
AEC: How receptive are students today to the message of the Austrian School? And how can spread this message around the world?
Ebeling: I would argue that Austrian Economics is especially that school of economics that is most easy to explain to students. This is not because it is simple or “simplistic.” But because of its common-sense realism of analyzing human beings as they really are with imperfect and decentralized knowledge, whose interactions can achieve a relatively high level of mutual coordination through the competitive market price system, through which information is disseminated and integrated to an extent far beyond the capacity of any central planner or government regulator.
The spreading of these ideas can bring about the change in trends that may show its full intellectual and political power only ten or twenty or even thirty years from now. Hayek ended his 1949 essay with a call for all those who value liberty to realize that the great challenge is to articulate the case for free market liberalism as a moral and principled ideal that can truly liberate mankind from wasteful plunder, political privilege, and corrupt policies that leave people less free and far poorer than they have to be.
Nothing is more “revolutionary” or “progressive” than the classical liberal ideal of individual liberty, under which every human being is viewed and treated as an end in himself—who “owns” himself, to shape his own life according to his own values and meaning for living. Nothing is more moral than a social ideal of voluntary association and freedom of exchange, under which violence and coercion are removed from all human relationships to the greatest extent possible. Nothing is more “visionary” than a conception of a world in which free men may use their creative potentials in any way they desire, and which creates a world of wide opportunities and improvements in the human condition that elements poverty and generates rising prosperity for all.
That is the future that freedom can give us all. What greater ideal is worth fighting for and achieving? If, that is, we are willing to try and not waver from focusing our vision on that point on the horizon that represents the free society of the future that can be ours.
AEC: Thank you so very much for your time.