At Marginal Revolution, Alex Tabarrok notes David Warsh’s claim, seconded by Paul Krugman, that “Friedrich Hayek is not an important figure in the history of macroeconomics.” Apparently Warsh and Krugman have no memory of the 20th century. The big issue of the century in economic theory and economic policy, spanning macroeconomics and microeconomics, was the contest between central planning and markets. Hayek and Ludwig von Mises were by far the most prominent economists who argued long and loud that central planning was disastrous, not just because of the viciousness of communist dictatorships, but because even under ideal conditions it could not generate and use effectively the knowledge necessary to maintain modern standards of living. For a long time they were considered to be naive. As late as 1989, Paul Samuelson was still writing in his best-selling economics textbook, “The Soviet economy is proof that … a socialist command economy can function and even thrive.” About a hundred million people died proving that Karl Marx, his followers, and credulous souls inclined to give central planning the benefit of the doubt, such as Samuelson, were wrong, and that Mises and Hayek were right.
In comparison to the gigantic contest between central planning and markets, all the other economic issues of the century look insignificant. (Yes, even the Great Depression. How many Americans starved to death at the depth of the Depression in 1933? Not many. How many Ukrainians starved to death in the same year as a result of Joseph Stalin’s drive to collectivize agriculture? Millions.) Even so, on a lower plane of significance, I think that Hayek’s revival of the idea of free banking will eventually be recognized as an important event in the history of macroeconomics. It took more than half a century for economists to acknowledge the importance of Hayek’s insights on central planning. It may take just as long with free banking.