“Hayek underestimated the risk that social transfers might expand almost without limit”

Today I’m publishing the second (and last) installment of my interview with Prof. Dr. Erich Weede. In this part we discussed great liberal thinkers such as Friedrich von Hayek and Karl R. Popper, methodology, and peace.

By the way, you can find the first part -which is mostly on Europe- here.

Dr. Weede during the event organized by the Austrian Economics Center to celebrate Hayek’s Nobel Prize 40th Anniversary. Photo by Christopher Ohmeyer.

Federico N. Fernández: Popper, Hayek, and virtually all of the contemporary Classical Liberal theorists advocate for Methodological Individualism. Why is it such a relevant principle?

Erich Weede: The principle of methodological individualism forces us to remember that individuals act, that they should be free to choose, that they should benefit from their actions or suffer the consequences of their errors. A normative corollary to methodological individualism is self-ownership. If one belongs to oneself, it is obvious that the first claim to the fruits of one’s labor belongs to the individual, not to the government.

Karl R. Popper. Photo Credit: The Economist

FF: Is Popper’s methodology still relevant for science today?

EW: Yes, this is because humans are fallible. Theories proposed by humans might be false. We should try to find out and to improve our theories. That is the basic message.

FF: Can Popper teach us anything in these times of absolute Relativism?

EW: Like liberty, truth is an absolute value. Unfortunately, certainty about possession of the truth is impossible. Nevertheless, it remains sensible to prefer theories which better fit observable facts, rather than those whose fit is worse.

FF: Friedrich von Hayek’s work has gained new interest after the international financial crises. Could you summarize his ideas on the business cycle?

EW: The basic idea is that too low interest rates promote a misallocation of credit and resources, for example too much investment in American or Spanish housing. Such a misallocation leads to a crisis, i.e., less growth and more unemployment. The crisis enforces a correction of preceding misallocations.

Friedrich von Hayek and Ludwig von Mises. Photo Credit: Tebjudningen

FF: Speaking of Hayek, he has been criticized both from the left and from the right. Even some Libertarians think of him as a “Socialist”? What is your general opinion about Hayek?

EW: It is an exaggeration to regard Hayek as a Socialist. But he endorsed some government assistance for the poor. He underestimated the risk that social transfers might expand almost without limit. Mises was more realistic in this respect. But Hayek was more realistic than Mises in seeing the consequences of human fallibility, i.e., the need for empirical testing of economic theories.

FF: You’ve written extensively on the relationship between capitalism and peace. How does economic freedom promote peace?

EW: International trade and other forms of economic interdependence raise the cost of war which interferes with mutually beneficial trade. As trade and economic interdependence are mutually rewarding, they promote friendly sentiments. Although trade and interdependence reduce the risk of war between nations, they do not succeed to bring it down to zero.