Alex Tabarrok helps to set the record straight on Hayek and modern macro. Hayek's influence in modern economics is ubiquitous, even if sadly modern economics is not as Hayekian as I would like it to be. Information economics, theories of dynamic competition, equilibrium theory of the business cycle, and complexity theory all owe a debt to Hayek's economic contributions. The work on legal origins owes a debt to Hayek's work on law and political-social philosophy as well. Hayek impacts the DNA of economics and political economy to such an extent that many are unaware of the pervasive influence.
Then add to the mix confirmation bias among certain segments of the economics profession --- such as Krugman. This is no surprise, Krugman is a Keynesian economist. To him non-Keynesian economists are a caricature of some position he considers completely unreasonable to hold. So in his reading it makes no sense but to see Keynes's chief rival at the time as unreasonable (so unreasonable in fact to as not even have been a rival at all --- rivalry implies the competition was close). Hayek cannot possibly be useful today because he was so soundly defeated back then. But what if Hayek's defeat was an error of judgement by professional economists and policy makers?
And moreover, what if we separate Hayek's ideas in economics from Hayek's iconic position within our political culture. Can Krugman assess the ideas in The Road to Serfdom, rather than the bastardized presentation by those on the left and right of the political spectrum? I am talking about the subtle points about democracy and the limits of agreement; about interest groups and the political economy set in motion by the critique of laissez faire; about the selection process of leadership within a planned economy; and about the tension between socialist planning, democracy and the rule of law. In short, can Krugman deal with The Road to Serfdom the way Keynes himself did at the time it was written? I don't think so. Warsh refers to The Road to Serfdom as an embarrassment, really? Has he actually read what Hayek wrote and the subtle argument he presents in the book.
The final problem I have with both Krugman and Warsh is that they don't actually consult the historical record and the accounts of those who were there in the 1930s when the battle was engaged or the direct citation evidence from post-WWII thinkers such as Koopmans, Hurwicz, etc., all the way to Lucas, et. al. Instead they rely on impressionistic accounts from their education and discourse communities, and cherry pick from recent journalistic histories of economics. Why not listen to people like Shackle -- who studied with Hayek at the LSE but became persuaded by the Keynesian argument? Or, listen to individuals like Coase who were at the LSE in the 1930s. Or they could consult Sir John Hicks, who wrote in his essay "The Hayek Story" that:
When the definitive history of economic analysis during the nineteen thirties comes to be written, a leading character in the drama (it was quite a drama) will be Professor Hayek. . . . Hayek’s economic writings . . . are almost unknown to the modern student; it is hardly remembered that there was a time when the new theories of Hayek were the principal rival of the new theories of Keynes. Which was right, Keynes or Hayek?
Keep in mind that Hicks wrote that in 1967, a decade latter Bob Lucas would be using Hayek's work on the equilibrium foundations of the business cycle to explain his own work in "Understanding Business Cycles", a few years after that Vernon Smith would frame his market experiments as "testing the Hayek hypothesis", and a decade after that Joe Stiglitz would have a section of Whither Socialism? devoted to Hayek versus Stiglitz. A lot of attention by some very worthy Nobel Prize winners across the ideological spectrum for a guy who is only known for his political position and not his economics!
Do I wish the economics profession was more Hayekian in nature? Of course. Do I think Hayek gets abused by those on the right and on the left of our political culture? Of course. But was Hayek a major figure in 20th century scientific economics? OF COURSE.
Hayek is the leading representative of mainline economics in the second half of the 20th century (Mises and Buchanan being the others). These are the men who sit in the seat of Adam Smith and demand our attention, and they are to be juxtaposed to the mainstream of economics which is what is currently fashionable in science and politics. To miss that, is to misunderstand what is fleeting and what is enduring in the history of the disciplines of economics and political economy.