The Economics of Friedrich Hayek
by G. R. Steele 
New York: St. Martin's Press, 1993, pp. xiii, 262 

In a review of Robert Skidelsky's John Maynard Keynes: Economist as Savior, John Gray [2] asserted that Keynes was "the greatest economic thinker of our age." Don Boudreaux [1] called this common assertion into question, claiming that several others, including F. A. Hayek, are in contention for that honor. Gray's untitled reply hinted that Hayek and the others had too narrow a focus. The "increased specialization in economics since Keynes's day" precluded would-be contenders from having a comparable "transforming effect on economics as a discipline." It was Keynes, Gray reminds us, who "set the intellectual agenda for economics in our time." 
        Pinning the superlative on Keynes seems to require that we interpret "greatest" to mean "most influential�for good or for bad." G. R. Steele would not dispute that Keynes�or Marx�was "great" in the sense of "influential." But "great" in the sense of "markedly superior in character or quality" does not describe Keynes's ideas or their implied policies for managing the macroeconomy. In his preface, Steele understates the judgment that those ideas and policies are markedly inferior: "Keynes," he writes, "has much to answer for." 
        Steele is a latecomer to Hayekian scholarship and is apparently unaware of G. P. O'Driscoll's book [3], which has a similar theme. But his writing style is even, scholarly and readable, and his positive restatement of Hayekian thought gives us a well balanced survey of this alternative intellectual agenda. Citing John Hicks, Steele recognizes that economics was at a crossroads in the 1930s and that the road signs bore the names of Keynes and Hayek. He endorses Hayek's judgment that "the economist who is only an economist is likely to become a nuisance if not a positive danger" (p. xiii) and then goes on to show that the breadth and depth of Hayek's thinking are second to none. If Keynes was our savior, it was Hayek from whom he saved us. Steele gives us a refreshing glimpse of the economic understanding that might have developed had Hayek saved us from Keynes. 
        The first half of the book draws heavily from Hayek's Constitution of Liberty. In chapters on "Liberty and Law" and "Liberty and the Market," Steele provides a contrast between the elitist's conception of constructivist rationalism and the classical liberal's understanding of a spontaneous order. Chapters on "Economic and Social Science" and "The Socialist Calculation Debate" deal with contrasting methodologies and their significance for understanding the case for decentralized decisionmaking. Steele's chapter on "Neutral Money and Monetary Policy" builds a bridge between the broad issues of the early chapters and the more narrow issues of "Capital" and "Business Cycles." It is in these more technical chapters on Hayekian macroeconomics that the reader may have some difficulty in sorting out Hayek's ideas from the author's own. 
        Resurrecting a long-forgotten argument from Hayek's Pure Theory of Capital, Steele discusses the nature of the "yield from the use of capital" (pp. 146-47). He might have noted that Hayek parts company here with several other prominent Austrian writers, whose yield theories put heavy emphasis on time preferences as opposed to capital productivity. Some, including Ludwig von Mises, Israel Kirzner and Murray Rothbard, have argued that interest payments are to be wholly attributed to time preferences; Hayek adopted a more eclectic view. According to the obscure argument that Steele resurrects, it is the "latent," or "non-economic" factors of production complementary to market-valued factors that account for an investment's net yield. Land adjacent to a yet-to-be-built waterwheel and millhouse is offered as an example. The reader is entitled to wonder why the latent factors are undervalued. If the argument is that speculative demand somehow systematically underestimates the true value of their contribution to future production, then specifying just how and just why would be the key part of a theory of profit and entrepreneurship rather than a theory of net yield in the sense of interest. If, even in the circumstances of fully enlightened entrepreneurship, there remains a value differential between current factor inputs and the corresponding (future) output, then the implied rate of interest or apparent capital productivity is to be accounted for in terms of the systematic discounting, which is taken by most Austrian writers to reflect the time preferences of market participants. Finally, if these latent factors have no market value either because of the lack of well defined property rights (or because they are truly non-scarce), then we must ask why the prices of the market-valued resources are not bid up to reflect the full value of the output. Again, time discount rather than capital productivity of latent (or actuated) resources seems to be the answer. Fortunately, a full appreciation of Hayek's treatment of the economy's capital structure and of industrial fluctuations does not require the acceptance of his latent-resource theory of capital's yield. 
        Steele attempts to draw insight from complexity by constructing mathematical expressions for input-output relationships pertaining to time-consuming production processes. A critical section entitled "The Dimensions of Capital" (pp. 149-54) deals with the intertemporal input-output relationships that underlie Hayekian capital theory. A definite integral whose limits are the beginning and end of the production period relate the value of labor inputs and time to the value of output. The value of continuous labor input, a, over the production period, n', is treated as parametric. It is not clear whether Steele believes that treating a factor value as a multiplicative constant adequately captures Hayek's formulation or that such treatment is the unavoidable cost of mathematical tractability. There is no objection here to the mathematization per se or even to the use of "a" but rather to the lack of adequate discussion of the merits and limitations of this formulation. Steele cites Joan Robinson to the effect that "a value for capital can be obtained only as the discounted sum of future earnings, which means that the aggregate amount of capital is dependent upon those earnings" [p. 155; see also Hayek as quoted on p. 154]. The reader may wonder if a similar statement does not apply to the value of dated labor, which Steele has taken as parametric. And if it does, then are we to jettison this mathematical formulation as a misrepresentation of Hayek's ideas? 
        Still, Steele's definite integrals have some merit as tools for expositing Hayek's pure theory of capital: they recognize and give play to the notion that capital must be measured in two dimensions (value and time) and that changes in market conditions may have different effects on different components of the capital structure. Further, the definite integrals and corresponding patterns of output over time provide the basis for illustrating the dynamics of Hayek's business cycle theory. 
        The book ends with chapters on national and international monetary institutions and alternative monetary standards and a final chapter on Hayek's legacy, in which Steele (p. 228) draws from Norman Barry to explain why Hayek's ideas lost out to Keynes's: "A doctrine that tells us more of the limitations on our ability to manage social affairs than of the possibilities of controlling the course of social and economic development is not likely to be popular in an age of scientism." 
 

1. Donald J. Boudreaux, "The Graying of J. M. Keynes," National Review, May 16, 1994, p. 2.

2. John Gray, "Are You Saved," National Review, March 21, 1994, pp. 61-4.

3. Gerald P. O'Driscoll, Jr., Economics as a Coordination Problem: The Contributions of Friedrich A. Hayek. Kansas City: Sheed Andrews and McMeel, Inc., 1977.