“Before the end of the war”, Miliband recounted, “she bought a copy of Friedrich Hayek’s [a Nobel prize winning economist instrumental in the rebirth of free-market ideas] Road to Serfdom. There is even a story that she suggested that Conservative Central Office distribute it in the 1945 campaign. She said: ‘It left a permanent mark on my political character.’ And nobody can grasp Margaret Thatcher’s achievements, and Thatcherism, without also appreciating the ideas that were its foundation. And the way in which they departed from the prevailing consensus.”
Hayek was a key twentieth century thinker. He argued that capitalism, low taxes, a small state, individual responsibility, free trade, the rule of law and sound money were the prerequisites of prosperity. He understood the inherent limitations of centralised action and of government intervention. He was a staunch opponent of communism, of the failed social-democratic consensus which brought the UK to its knees, and of central banks that distort the money supply and the financial system in a bid to boost short-term growth. His enemy in the 1970s and 1980s were the Keynesians who manipulated aggregate demand and led to double-digit consumer price inflation; his enemy, had he lived, in the 1990s and 2000s would have been central banks allowing excessive money and credit to build up, creating housing and asset price bubbles.
It is truly astonishing that so many commentators on the centre-left of politics can assert, seemingly without any knowledge of what Hayek and his disciples – members of the Austrian school of economics, and fellow travellers – thought or wrote, that the free-market reforms he inspired created the financial crisis. The problem is that the financial system that emerged in the late 1990s became increasingly “free” in the wrong way: it was freed from the constraints of the discipline of profit and loss, not free in the sense understood by Thatcher and Hayek. In a true free market, governments don’t protect firms, don’t stand behind them with guarantees, and don’t inject money into the economy whenever the stock market starts to fall. This silliness had nothing to do with the reforms of the 1980s or with Big Bang, but was a later phenomenon started in the US.
Austrian economists were among the main critics of the pre-2007 economy and financial system – there, were, of course, critics from other backgrounds too – warning of the absurd monetary policies being pursued by central banks, of the moral hazard from the authorities’ interventions, and of the hubris inherent in many mathematical financial models. Neo-Hayekians criticised Alan Greenspan and Ben Bernanke long before it became fashionable to do so, blaming them for the dot.com and housing bubbles. Austrians were aghast at the bailouts.
Hayekian ideas form the basis for an alternative intellectual framework being developed by a record number of scholars, especially in eastern Europe, the US, Latin America and even China. They are looking at ways in which market institutions can be harnessed to prevent another crisis, tackle the environment and find better ways of providing welfare, education and health. Politics is in a deeply statist phase. Eventually, however, the tide will turn, and Thatcher’s guru will be celebrated once again.
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