Messiah of the Market

The abysmal forecasting record of the dismal science comes as no surprise to one of its severest in-house critics:

Friedrich A. von Hayek, 85, the Austrian-born scholar who won the Nobel Prize for Economics in 1974 and is now en joying a revival of influence. In Hayek's opinion, economists can observe and describe general patterns that emerge in the marketplace, but cannot make precise predictions about the course of an economy. He told TIME Correspondent Lawrence Malkin, "Not even a computer can keep track of the daily information that is dispersed among hundreds and thousands of people about their real intentions to buy, sell and invest. They signal them through prices. They of ten won't say what they intend and don't even know them selves until the moment they find out the price is right."

Throughout a long career that has included professorships at the London School of Economics and the University of Chicago, Hayek has deplored colleagues who believe that they have enough information to forecast and manage economic growth. A truer disciple of Adam Smith than most modern economists, he has urged that governments leave the invisible hand of the market in charge, while having laws to protect against abuses by busi ness and the state. He first gained world wide attention in 1944 with his book The Road to Serfdom, an attack on economic planning and socialism.

In the 1960s, when economists thought they could fine-tune growth and employment, Hayek was dismissed as an eccentric crank. But when stagflation struck Western countries in the 1970s, he became a messiah for growing numbers of conservative economists. Now a professor emeritus at West Germany's University of Freiburg, Hayek receives numerous invitations to lecture in Europe and the U.S.

Hayek's free-market philosophy has influenced the current governments of the U.S., Britain and West Germany. British Prime Minister Margaret Thatcher, in particular, is a longtime admirer. Hayek has been invited to Buckingham Palace in October to be made, on Thatcher's recommendation, a Companion of Honor for "services to the study of economics." When Ronald Reagan visited London in 1982, Thatcher introduced him to Hayek. The President said he had come across one of the economist's books and "learned a good deal from it." Hayek, though, has become concerned about the results of Reaganomics. Says he: "The U.S. debt begins to alarm me a little."

Hayek has also been somewhat skeptical of Thatcher's strategy of gradually reducing inflation by curbing the British money supply and government borrowing.

After Thatcher was elected in 1979, Hayek surged that she give the economy a swift, sharp squeeze that might boost unemployment to 20% for six months, but would provide quick relief from inflation. Warning against Thatcher's more gradual approach, he said, "you cannot have 10% unemployment for three years. I don't think the government can hold out." But it did. Thatcher is still in power even though British unemployment has been higher than 10% since 1981. Of all people, Hayek should have known better than to forecast.