Austrian professor Friedrich von HayekHL
He's the man the economics profession left behind.
Friedrich August von Hayek, born in Vienna in 1899, was an emerging star in the early 1930s. He was lured to the London School of Economics at that time to counter the growing influence of Cambridge University's John Maynard Keynes, who was developing his ideas on how governments could counter recessions by replacing lost private demand.
Hayek saw the business cycle differently: Booms and busts were unavoidable because business investment always gets ahead of consumer demand. Tampering by politicians and central bankers will only make things worse by encouraging "malinvestment," which only prolongs the downturn.
Many economists said Hayek's theory was sounder than Keynes's early work. But the Austrian couldn't hold his supporters. Keynes's gifts as a "persuader" were supreme, according to Robert Skidelsky, the author of a three-volume biography of Keynes, and the economic recovery that followed the heavy public spending during the Second World War appeared to reinforce his views.
Keynes, who died in 1946, inspired a legion of disciples and economics textbook writers who took over the field. When the Chicago School of economists pushed back against government intervention in the 1960s and 1970s, it was Milton Friedman who came to dominate the resistance, despite Hayek being awarded a Nobel Prize in economics in 1974. By the time of his death in 1992, Hayek had been mostly forgotten or dismissed.
"When I began studying economics at Oxford in the early eighties, Hayek was widely seen as a right-wing nut," writes journalist John Cassidy in his 2009 book How Markets Fail: The Logic of Economic Calamities.
But in 2011, Hayek is poised to exact a measure of revenge. The stage for his comeback is already set: Capitol Hill.
The ideas of Hayek, his mentor Ludwig von Mises, and others from the so-called Austrian School of economics figure prominently in the intellectual underpinning of the Tea Party movement that stormed the American political establishment's barricades at November's mid-term elections.
Tea Partiers' influence in Congress will douse talk of further fiscal stimulus to spur the economy. There will be considerable pressure to reduce government spending and reduce the deficit - without raising taxes. House Republicans already have promised to try to repeal Mr. Obama's health care legislation. The Federal Reserve will face unprecedented political scrutiny from lawmakers who will openly question whether the central bank should even exist.
Much of this will be done in the name of F.A. Hayek, who is enjoying something of a popular rebirth.
Glenn Beck, the Fox News and radio personality who attracted tens of thousands of Tea Party supporters to a rally in Washington in August, turned Hayek into a surprise No. 1 bestseller on Amazon.com last year after raving about the Austrian's 1944 book, The Road to Serfdom.
Russell Roberts, an economics professor at George Mason University in Fairfax, Va., and filmmaker John Papola made an eight-minute mock rap video with actors posing as a duelling Hayek and Keynes. (Joint refrain: We've been going back and forth for a century/ Keynes: I want to steer markets / Hayek: I want them set free.) The video has drawn more than 1.7 million hits since it was posted on YouTube last January.
Prof. Roberts called the success of his video startling. He said the interest seems to be driven by a new-found interest in Hayek, not his skill at crafting rap lyrics. "There are 9,000 or 10,000 comments," Prof. Roberts said in an interview. "People are asking `Who is this Hayek guy? Why didn't I learn about him in school?' "
Amity Shlaes, the senior fellow for economic history at the Council on Foreign Relations in New York, said in an interview that "people who know their Hayek made money in the downturn."
For those of the Austrian School, overindulgence is a given, an assumption that allowed too few investors to see that the surge in the U.S. housing market wasn't the boon it appeared to be. According to Hayek, interest rates are inevitably left too low for too long, creating a credit boom that creates the conditions for a bust. Cheap money induces companies to over-invest. When the fall comes, companies are left with excess capacity, which takes years to clear up.
That's a persuasive explanation for the financial crisis, especially with the apparent failure of the Keynesian-inspired bank bailouts and stimulus programs to generate fast enough economic growth to make a serious dent in the U.S. unemployment rate.
The weakness of Austrian economics is that it fails to explain why markets fail to deliver things such as affordable health care and pensions to poorer people. Hayek also has been characterized as "gloomy," especially compared with Keynesian thought, which plays to the human tendency to want to do something in response to crisis.
But gloomy isn't the first word you would use to describe the most prominent living disciple of the Austrian School. Texas congressman Ron Paul was in medical school in the 1960s when he happened to pick up a copy of The Road to Serfdom. The book, which argues that state control of the economy leads to tyranny, reportedly inspired a lifelong interest in economics.
If you don't know Mr. Paul's name, you soon will.
A public figure since the mid-1970s, Mr. Paul was routinely ignored, even by fellow Republicans. Legislative efforts to bring back the gold standard and do away with the Federal Reserve resigned him to the fringe. But the financial crisis, and more specifically, the popular backlash against the Wall Street rescue and deep skepticism over the Fed's creation of hundreds of billions of dollars to buy bonds and other financial assets, has moved mainstream thought in the United States considerably closer to libertarian fringe. As a result, the American intelligentsia has suddenly decided that Ron Paul is cool.
The Atlantic magazine included the 75-year-old Texas congressman in its annual list of "Brave Thinkers" in November, calling Mr. Paul "the Tea Party's brain." Mr. Paul, a committed libertarian who ran an insurgent campaign for president in 2008, also made Foreign Policy magazine's list of Top 100 thinkers of 2010, coming in at No. 19, one spot ahead of Mohamed ElBaradei, former head of the International Atomic Energy Agency and Nobel Peace Prize laureate. After being denied the post in the past, Mr. Paul, whose books include End the Fed and Liberty Defined, is set to take over as chairman of the House of Representatives subcommittee that oversees the central bank.
"The size of the fringe is much bigger than it was a few years ago," Prof. Roberts said in an interview. "A lot of people are now seriously considering radical change at the Fed. That was unimaginable a few years ago."