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Saturday, August 1, 1992

Friedrich A. Hayek (1899-1992)

Friedrich A. Hayek, who died on March 23, 1992, at the age of 92, was probably the most prodigious classical liberal scholar of the 20th century. Though his 1974 Nobel Prize was in Economic Science, his scholarly endeavors extended well beyond economics. He published 130 articles and 25 books on topics ranging from technical economics to theoretical psychology, from political philosophy to legal anthropology, and from the philosophy of science to the history of ideas. Hayek was no mere dabbler; he was an accomplished scholar in each of these fields of inquiry. He made major contributions to our understanding in at least three different areas—government intervention, economic calculation under socialism, and development of the social structure. It is unlikely that we will see the likes of such a wide-ranging scholar of the human sciences again.

Hayek was born into a family of intellectuals in Vienna on May 8, 1899. He earned doctorates from the University of Vienna (1921 and 1923). During the early years of the 20th century the theories of the Austrian School of Economics, sparked by Menger’s Principles of Economics (1871), were gradually being formulated and refined by Eugen von Boehm-Bawerk, his brother-in-law, Friedrich Wieser, and Ludwig von Mises. When Hayek attended the University of Vienna, he sat in on one of Mises’ classes, but found Mises’ anti-socialist position too strong for his liking. Wieser was a Fabian socialist whose approach was more attractive to Hayek at the time, and Hayek became his pupil. Yet, ironically it was Mises, through his devastating critique of socialism published in 1922, who turned Hayek away from Fabian socialism.

The best way to understand Hayek’s vast contributions to economics and classical liberalism is to view them in light of the program for the study of social cooperation laid out by Mises. Mises, the great system builder, provided Hayek with the research program. Hayek became the great dissecter and analyzer. His life’s work can best be appreciated as an attempt to make explicit what Mises had left implicit, to refine what Mises had outlined, and to answer questions Mises had left unanswered. Of Mises, Hayek stated: “There is no single man to whom I owe more intellectually.” The Misesian connection is most evident in Hayek’s work on the problems with socialism. But the insights derived from the analysis of socialism permeate the entire corpus of his work, from business cycles to the origin of social cooperation.

Hayek did not meet Mises when he was attending the University of Vienna. He was introduced to Mises after he graduated through a letter from his teacher, Wieser. The Hayek-Mises collaboration then began. For five years, Hayek worked under Mises in a government office. In 1927, he became the director of the Institute for Business Cycle Research which he and Mises had set up together. The institute was devoted to theoretical and empirical examinations of business cycles.

Building on Mises’ The Theory of Money and Credit (1912), Hayek refined both the technical understanding of capital coordination and the institutional details of credit policy. Seminal studies in monetary theory and the trade cycle followed. Hayek’s first book, Monetary Theory and the Trade Cycle (1929), analyzed the effects of credit expansion on the capital structure of an economy.

Publication of that book prompted an invitation from Lionel Robbins for Hayek to lecture at the London School of Economics. His lectures there were published in a second book on the “Austrian Theory of the Trade Cycle,” Prices and Production (1931), which was cited by the Nobel Prize Committee in 1974.

Hayek’s 1930-1931 lectures at the London School were received with such great acclaim that he was called back to the prestigious University of London and appointed Tooke Professor of Economic Science and Statistics. At age 32, Hayek had reached the pinnacle of the economics profession.

The Mises-Hayek theory of the trade cycle explained the “cluster of errors” that characterizes the cycle. Credit expansion, made possible by the artificial lowering of interest rates, misleads businessmen; they are led to engage in ventures that would not otherwise have appeared profitable. The false signal generated by credit expansion leads to malcoordination of the production and consumption plans of economic actors. This malcoordination first manifests itself in a “boom,” and then, later, in the “bust” as the time pattern of production adjusts to the real pattern of savings and consumption in the economy.


Hayek versus Keynes

Soon after Hayek’s arrival in London he crossed swords with John Maynard Keynes. Keynes, a prominent member of the British civil service then serving on the governmental Committee on Finance and Industry, was credited by the academic community as the author of serious books on economics. The Hayek-Keynes debate was perhaps the most fundamental debate in monetary economics in the 20th century. Beginning with his essay, “The End of Laissez Faire” (1926), Keynes presented his interventionist pleas in the language of pragmatic classical liberalism. As a result, Keynes was heralded as the “savior of capitalism,” rather than being recognized as the advocate of inflation and government intervention that he was.

Hayek pinpointed the fundamental problem with Keynes’s economics—his failure to understand the role that interest rates and capital structure play in a market economy. Because of Keynes’s unfortunate habit of using aggregate (collective) concepts, he failed to address these issues adequately in A Treatise on Money (1930). Hayek pointed out that Keynes’s aggregation tended to redirect the analytical focus of the economist away from examining how the industrial structure of the economy emerged from the economic choices of individuals.

Keynes did not take kindly to Hayek’s criticism. He responded at first by attacking Hayek’s Prices and Production. Then Keynes claimed that he no longer believed what he had written in A Treatise on Money, and turned his attention to writing another book, The General Theory of Employment, Interest, and Money (1936), which in time became the most influential book on economic policy in the 20th century.

Rather than attempting to criticize directly what Keynes presented in his General Theory, Hayek turned his considerable talents to refining capital theory. Hayek was convinced that the essential point to convey to Keynes and the rest of the economics profession concerning monetary policy lay in capital theory. Thus Hayek proceeded to set forth his thesis in The Pure Theory of Capital (1941). However correct his assessment may have been, this book, Hayek’s most technical, was his least influential. By the end of the 1930s, Keynes’s brand of economics was on the rise. In the eyes of the public Keynes had defeated Hayek. Hayek lost standing in the profession and with students.

During this time, Hayek was also involved in another grand debate in economic policy—the socialist calculation debate, triggered by a 1920 article by Mises which stated that socialism was technically impossible because it would lack market prices. Mises had refined this argument in 1922 in Socialism: An Economic and Sociological Analysis, the book which had profoundly impressed the young Hayek when it appeared. Hayek developed Mises’ argument further in several articles during the 1930s. In 1935, he collected and edited a series of essays on the problems of socialist economic organization: Collectivist Economic Planning. Additional Hayek essays on the problems of socialism, and specifically the model of “market socialism” developed by Oskar Lange and Abba Lerner in their attempt to answer Mises and Hayek, were later collected in Individualism and Economic Order (1948).

Again, the economics profession and the intellectual community in general did not appreciate Hayek’s criticism. Had not modern science given man the ability to control and design society according to moral rules of his own choosing? The planned society envisioned under socialism was supposed to be not only as efficient as capitalism (especially in view of the chaos capitalism was said to generate with its business cycles and monopoly power), but socialism, with its promise of social justice, was expected to be fairer. Moreover, it was considered the wave of the future. Only a reactionary, it was argued, could resist the inevitable tide of history. Not only had Hayek appeared to lose the technical economic debate with Keynes and the Keynesians concerning the causes of business cycles but, in view of the rising tide of socialism throughout the world, his general philosophical perspective was increasingly labeled as a primitive version of liberalism.


The Road to Serfdom

Hayek, however, kept on refining the argument for the liberal society. The problems of socialism that he had observed in Nazi Germany and that he saw beginning in Britain led him to write The Road to Serfdom (1944). This book forced advocates of socialism to confront an additional problem, over and beyond the technical economic one. If socialism required the replacement of the market with a central plan, then, Hayek pointed out, an institution must be established that would be responsible for formulating this plan. Hayek called this institution the Central Planning Bureau. To implement the plan and to control the flow of resources, the bureau would have to exercise broad discretionary power in economic affairs. Yet the Central Planning Bureau in a socialist society would have no market prices to serve as guides. It would have no means of knowing which production possibilities were economically feasible. The absence of a pricing system, Hayek said, would prove to be socialism’s fatal flaw.

In The Road to Serfdom Hayek also argued that there was good reason to suspect that those who would rise to the top in a socialistic regime would be those who had a comparative advantage in exercising discretionary power and were willing to make unpleasant decisions. And it was inevitable that these powerful men would run the system to their own personal advantage.

Hayek was right on both counts, of course—on the economic as well as the political problem of socialism. The 20th century is replete with the blood of the innocent victims of socialist experiments. Stalin, Hitler, Mao, Pol Pot, and a host of lesser tyrants have committed heinous crimes against humanity in the name of one or another variant of socialism. Totalitarianism is not a historical accident that emerges solely because of a poor choice of leaders under a socialist regime. Totalitarianism, Hayek shows, is the logical outcome of the institutional order of socialist planning.

After the defeat in the public forum of his critique of Keynes and the controversy that arose over the debate on economic calculation under socialism, Hayek turned his attention away from technical economics and concentrated on restating the principles of classical liberalism. Hayek had pointed out the need for market prices as conveyors of dispersed economic information. He showed that attempts to replace or control the market lead to a knowledge problem. Hayek also described the totalitarian problem associated with placing discretionary power in the hands of a few. This led him to examine the intellectual prejudices which blind men from seeing the problems of government economic planning.

During the 1940s, Hayek published a series of essays in professional journals examining the dominant philosophical trends that prejudiced intellectuals in a way that did not allow them to recognize the systemic problems that economic planners would confront. These essays were later collected and published as The Counter-Revolution of Science (1952). The Counter-Revolution, perhaps Hayek’s best book, provides a detailed intellectual history of “rational constructivism” and the problems of “scientism” in the social sciences. It is in this work that Hayek articulates his version of the Scottish Enlightenment project of David Hume and Adam Smith of using reason to whittle down the claims of reason. Modern civilization was not threatened by irrational zealots hell-bent on destroying the world, but rather it was the abuse of reason by rational constructivists trying to consciously design the modern world that had placed mankind in chains of his own making.

In 1950, Hayek moved to the University of Chicago, where he taught until 1962 in the Committee on Social Thought. While there, he wrote The Constitution of Liberty (1960). This work represented Hayek’s first systemic treatise on classical liberal political economy.

In 1962, Hayek moved to Germany, where he had obtained a position at the University of Freiburg. He then increasingly centered his efforts on examining and elaborating the “spontaneous” ordering of economic and social activity. Hayek set about to reconstruct liberal social theory and to provide a vision of social cooperation among free individuals.

With his three-volume study, Law, Legislation and Liberty (1973-1979) and The Fatal Conceit (1988), Hayek extended his analysis of society to an examination of the “spontaneous” emergence of legal and moral rules. His political and legal theory emphasized that the rule of law was the necessary foundation for peaceful co-existence. He contrasted the tradition of the common law with that of statute law, i.e., legislative decrees. He showed how the common law emerges, case by case, as judges apply to particular cases general rules which are themselves products of cultural evolution. Thus, he explained that embedded within the common law is knowledge gained through a long history of trial and error. This insight led Hayek to the conclusion that law, like the market, is a “spontaneous” order—the result of human action, but not of human design.

Hayek’s work in technical economics, political and legal philosophy, and methodology of the social sciences has attracted great interest among scholars of at least two generations, and interest in his work is growing. His contributions to economic and classical liberalism are vast and will live on in the progressive research program he has bequeathed to future generations of scholars.

Friedrich Hayek lived a long and fruitful life. He had to endure the curse of achieving fame at a young age and then having that fame turn to ridicule as the Keynesians and socialists gained popularity and the intellectual and political world moved away from his ideas. Fortunately he lived long enough to see his towering intellect recognized again. Both Keynesians and socialists were eventually defeated soundly by the tide of events and the truth of his teachings. Classical liberalism is once again a vibrant body of thought. Austrian economics has re-emerged as a major school of economic thought, and younger scholars in law, history, economics, politics, and philosophy are pursuing Hayekian themes. We may mourn the loss of this great champion of liberalism, but at the same time we can rejoice that F. A. Hayek left us such a brilliant gift

A great scholar is defined not so much by the answers he provides as by the questions he asks. Successive generations of scholars, intellectuals, and political activists throughout the world will long be pursuing questions that Hayek has posed.

  • Peter Boettke is a Professor of Economics and Philosophy at George Mason University and director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center. He is a member of the FEE Faculty Network.