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An ethno-linguistic map of Austria–Hungary, 1910
Friedrich August von Hayek was born in
Vienna to
August von Hayek and Felicitas Hayek (
née
von Juraschek). His father, from whom he received his middle name, was
born in 1871 also in Vienna. He was a medical doctor employed by the
municipal ministry of health with a passion for
botany, about which he wrote a number of monographs. August von Hayek was also a part-time botany lecturer at the
University of Vienna.
His mother was born in 1875 to a wealthy conservative and land-owning
family. As her mother died several years prior to Hayek's birth,
Felicitas received a significant inheritance, which provided as much as
half of her and her husband's income during the early years of their
marriage. Hayek was the oldest of three brothers, Heinrich (1900–1969)
and Erich (1904–1986), who were one-and-a-half and five years younger
than him.
His father's career as a university professor influenced Hayek's goals later in life. Both of his grandfathers, who lived long enough for Hayek to know them, were scholars.
Franz von Juraschek was a leading economist in
Austria-Hungary and a close friend of
Eugen Böhm von Bawerk, one of the founders of the
Austrian School of Economics. Hayek's paternal grandfather,
Gustav Edler von Hayek, taught natural sciences at the Imperial
Realobergymnasium (secondary school) in Vienna. He wrote works in the field of biological systematics, some of which are relatively well known.
On his mother's side, Hayek was second cousin to the philosopher
Ludwig Wittgenstein.
His mother often played with Wittgenstein's sisters and had known him
well. As a result of their family relationship, Hayek became one of the
first to read Wittgenstein's
Tractatus Logico-Philosophicus
when the book was published in its original German edition in 1921.
Although he met Wittgenstein on only a few occasions, Hayek said that
Wittgenstein's philosophy and methods of analysis had a profound
influence on his own life and thought. In his later years, Hayek recalled a discussion of philosophy with Wittgenstein when both were officers during World War I.
After Wittgenstein's death, Hayek had intended to write a biography of
Wittgenstein and worked on collecting family materials and later
assisted biographers of Wittgenstein. He was related to Wittgenstein on the non-Jewish side of the
Wittgenstein family.
Since his youth, Hayek frequently socialized with Jewish intellectuals
and he mentions that people often speculated whether he was also of
Jewish ancestry. That made him curious, so he spent some time
researching his ancestors and found out that he has Jewish ancestors
which date back five generations. Surname
Hayek is German spelling of Czech surname
Hájek.
Hayek displayed an intellectual and academic bent from a very young age. He read fluently and frequently before going to school. At his father's suggestion, as a teenager he read the genetic and evolutionary works of
Hugo de Vries and
August Weismann and the philosophical works of
Ludwig Feuerbach. In school, Hayek was much taken by one instructor's lectures on
Aristotle's ethics.
In his unpublished autobiographical notes, Hayek recalled a division
between him and his younger brothers who were only a few years younger
than him, but he believed that they were somehow of a different
generation. He preferred to associate with adults.
In 1917, Hayek joined an artillery regiment in the
Austro-Hungarian Army and fought on the
Italian front.
Much of Hayek's combat experience was spent as a spotter in an
aeroplane. Hayek suffered damage to his hearing in his left ear during
the war and was decorated for bravery. During this time, Hayek also survived the
1918 flu pandemic.
Hayek then decided to pursue an academic career, determined to
help avoid the mistakes that had led to the war. Hayek said of his
experience: "The decisive influence was really
World War I. It's bound to draw your attention to the problems of political organization". He vowed to work for a better world.
Education and career
University of Vienna's main building seen from across the Ringstraße
At the
University of Vienna,
Hayek earned doctorates in law and political science in 1921 and 1923
respectively and also studied philosophy, psychology and economics. For a
short time, when the University of Vienna closed he studied in
Constantin von Monakow's Institute of Brain Anatomy, where Hayek spent much of his time
staining brain cells. Hayek's time in Monakow's lab and his deep interest in the work of
Ernst Mach inspired his first intellectual project, eventually published as
The Sensory Order
(1952). It located connective learning at the physical and neurological
levels, rejecting the "sense data" associationism of the
empiricists and
logical positivists. Hayek presented his work to the private seminar he had created with
Herbert Furth called
the Geistkreis.
During Hayek's years at the University of Vienna,
Carl Menger's work on the explanatory strategy of social science and
Friedrich von Wieser's commanding presence in the classroom left a lasting influence on him. Upon the completion of his examinations, Hayek was hired by
Ludwig von Mises on the recommendation of Wieser as a specialist for the Austrian government working on the legal and economic details of the
Treaty of Saint Germain. Between 1923 and 1924, Hayek worked as a research assistant to Professor
Jeremiah Jenks of
New York University, compiling macroeconomic data on the American economy and the operations of the Federal Reserve.
Initially sympathetic to Wieser's
democratic socialism, Hayek's economic thinking shifted away from socialism and toward the
classical liberalism of Carl Menger after reading von Mises' book
Socialism. It was sometime after reading
Socialism that Hayek began attending von Mises' private seminars, joining several of his university friends, including
Fritz Machlup,
Alfred Schutz,
Felix Kaufmann and
Gottfried Haberler,
who were also participating in Hayek's own more general and private
seminar. It was during this time that he also encountered and befriended
noted political philosopher
Eric Voegelin, with whom he retained a long-standing relationship.
With the help of Mises, in the late 1920s he founded and served as director of the
Austrian Institute for Business Cycle Research before joining the faculty of the
London School of Economics (LSE) in 1931 at the behest of
Lionel Robbins.
Upon his arrival in London, Hayek was quickly recognised as one of the
leading economic theorists in the world and his development of the
economics of processes in time and the co-ordination function of prices
inspired the ground-breaking work of
John Hicks,
Abba P. Lerner and many others in the development of modern microeconomics.
In 1932, Hayek suggested that private investment in the public
markets was a better road to wealth and economic co-ordination in
Britain than government spending programs as argued in an exchange of
letters with
John Maynard Keynes, co-signed with Lionel Robbins and others in
The Times. The nearly decade long
deflationary depression in Britain dating from
Winston Churchill's decision in 1925 to return Britain to the
gold standard
at the old pre-war and pre-inflationary par was the public policy
backdrop for Hayek's dissenting engagement with Keynes over British
monetary and fiscal policy. Well beyond that single public conflict,
regarding the economics of extending the length of production to the
economics of labour inputs, Hayek and Keynes disagreed on many essential
economics matters. Their economic disagreements were both practical and
fundamental in nature. Keynes called Hayek's book
Prices and Production
"one of the most frightful muddles I have ever read", famously adding:
"It is an extraordinary example of how, starting with a mistake, a
remorseless logician can end in Bedlam". Many other notable economists have also been staunch critics of Hayek, including
John Kenneth Galbraith and later
Paul Krugman, who wrote that "the Hayek thing is almost entirely about politics rather than economics".
Notable economists who studied with Hayek at the LSE in the 1930s and 1940s include
Arthur Lewis,
Ronald Coase,
William Baumol, the aforementioned John Kenneth Galbraith,
Leonid Hurwicz,
Abba Lerner,
Nicholas Kaldor,
George Shackle,
Thomas Balogh,
L. K. Jha,
Arthur Seldon,
Paul Rosenstein-Rodan and
Oskar Lange. Some were supportive and some were critical of his ideas. Hayek also taught or tutored many other LSE students, including
David Rockefeller.
Unwilling to return to Austria after the
Anschluss brought it under the control of
Nazi Germany in 1938, Hayek remained in Britain. Hayek and his children became
British subjects in 1938.
He held this status for the remainder of his life, but he did not live
in Great Britain after 1950. He lived in the United States from 1950 to
1962 and then mostly in Germany, but also briefly in Austria.
The Road to Serfdom
Hayek was concerned about the general view in Britain's academia that fascism was a capitalist reaction to socialism and
The Road to Serfdom
arose from those concerns. It was written between 1940 and 1943. The
title was inspired by the French classical liberal thinker
Alexis de Tocqueville's writings on the "road to servitude". It was first published in Britain by
Routledge
in March 1944 and was quite popular, leading Hayek to call it "that
unobtainable book" also due in part to wartime paper rationing.
When it was published in the United States by the University of Chicago
in September of that year, it achieved greater popularity than in
Britain. At the instigation of editor
Max Eastman, the American magazine
Reader's Digest also published an abridged version in April 1945, enabling
The Road to Serfdom to reach a far wider audience than academics. The book is widely popular among those advocating
individualism and
classical liberalism.
Chicago
In 1950, Hayek left the London School of Economics. After spending the 1949–1950 academic year as a visiting professor at the
University of Arkansas, Hayek was brought on by the University of Chicago, where he became a professor in the
Committee on Social Thought. Hayek's salary was funded not by the university, but by an outside foundation, the
William Volker Fund.
Hayek had made contact with many at the University of Chicago in the 1940s, with Hayek's
The Road to Serfdom playing a seminal role in transforming how
Milton Friedman and others understood how society works.
Hayek conducted a number of influential faculty seminars while at the
University of Chicago and a number of academics worked on research
projects sympathetic to some of Hayek's own, such as
Aaron Director, who was active in the
Chicago School in helping to fund and establish what became the "Law and Society" program in the University of Chicago Law School. Hayek,
Frank Knight, Friedman and
George Stigler worked together in forming the
Mont Pèlerin Society, an international forum for neoliberals. Hayek and Friedman cooperated in support of the Intercollegiate Society of Individualists, later renamed the
Intercollegiate Studies Institute, an American student organisation devoted to libertarian ideas.
Hayek's first class at Chicago was a faculty seminar on the
philosophy of science attended by many of the University of Chicago's
most notable scientists of the time, including
Enrico Fermi,
Sewall Wright and
Leó Szilárd. During his time at Chicago, Hayek worked on the philosophy of science, economics, political philosophy and the
history of ideas. Hayek's economics notes from this period have yet to be published. Hayek received a
Guggenheim Fellowship in 1954.
After editing a book on
John Stuart Mill's letters he planned to publish two books on the liberal order,
The Constitution of Liberty and "The Creative Powers of a Free Civilization" (eventually the title for the second chapter of
The Constitution of Liberty). He completed
The Constitution of Liberty
in May 1959, with publication in February 1960. Hayek was concerned
that "with that condition of men in which coercion of some by others is
reduced as much as is possible in society". Hayek was disappointed that the book did not receive the same enthusiastic general reception as
The Road to Serfdom had sixteen years before.
Freiburg, Los Angeles and Salzburg
From 1962 until his retirement in 1968, he was a professor at the
University of Freiburg, West Germany, where he began work on his next book,
Law, Legislation and Liberty. Hayek regarded his years at Freiburg as "very fruitful". Following his retirement, Hayek spent a year as a visiting professor of philosophy at the
University of California, Los Angeles, where he continued work on
Law, Legislation and Liberty,
teaching a graduate seminar by the same name and another on the
philosophy of social science. Preliminary drafts of the book were
completed by 1970, but Hayek chose to rework his drafts and finally
brought the book to publication in three volumes in 1973, 1976 and 1979.
University of Salzburg (below, foreground) since the mid 1980s as seen from city center
Hayek became a professor at the
University of Salzburg
from 1969 to 1977 and then returned to Freiburg, where he spent the
rest of his days. When Hayek left Salzburg in 1977, he wrote: "I made a
mistake in moving to Salzburg". The economics department was small and
the library facilities were inadequate.
Nobel Memorial Prize Winner
On 9 October 1974, it was announced that Hayek would be awarded the
Nobel Memorial Prize in Economics along with Swedish economist
Gunnar Myrdal. The reasons for the two of them winning the prize are described in the Nobel committee's press release.
He was surprised at being given the award and believed that he was
given it with Myrdal to balance the award with someone from the opposite
side of the political spectrum.
During the Nobel ceremony in December 1974, Hayek met the Russian dissident
Aleksandr Solzhenitsyn. Hayek later sent him a Russian translation of
The Road to Serfdom. He spoke with apprehension at his award speech about the danger the authority of the prize would lend to an economist,
but the prize brought much greater public awareness to the then
controversial ideas of Hayek and has been described by his biographer as
"the great rejuvenating event in his life".
British politics
In February 1975,
Margaret Thatcher was elected leader of the
British Conservative Party. The Institute of Economic Affairs arranged a meeting between Hayek and Thatcher in London soon after. During Thatcher's only visit to the
Conservative Research Department
in the summer of 1975, a speaker had prepared a paper on why the
"middle way" was the pragmatic path the Conservative Party should take,
avoiding the extremes of left and right. Before he had finished,
Thatcher "reached into her briefcase and took out a book. It was Hayek's
The Constitution of Liberty. Interrupting our pragmatist, she
held the book up for all of us to see. 'This', she said sternly, 'is
what we believe', and banged Hayek down on the table".
In 1977, Hayek was critical of the
Lib–Lab pact in which the
British Liberal Party agreed to keep the
British Labour government in office. Writing to
The Times,
Hayek said: "May one who has devoted a large part of his life to the
study of the history and the principles of liberalism point out that a
party that keeps a socialist government in power has lost all title to
the name 'Liberal'. Certainly no liberal can in future vote 'Liberal'". Hayek was criticised by Liberal politicians
Gladwyn Jebb and
Andrew Phillips, who both claimed that the purpose of the pact was to discourage socialist legislation.
Lord Gladwyn pointed out that the
German Free Democrats were in coalition with the
German Social Democrats. However, Hayek was defended by Professor
Antony Flew,
who stated that—unlike the British Labour Party—the German Social
Democrats had since the late 1950s abandoned public ownership of the
means of production, distribution and exchange and had instead embraced
the
social market economy.
In 1978, Hayek came into conflict with Liberal Party leader
David Steel,
who claimed that liberty was possible only with "social justice and an
equitable distribution of wealth and power, which in turn require a
degree of active government intervention" and that the Conservative
Party were more concerned with the connection between liberty and
private enterprise than between liberty and democracy. Hayek claimed
that a limited democracy might be better than other forms of limited
government at protecting liberty, but that an unlimited democracy was
worse than other forms of unlimited government because "its government
loses the power even to do what it thinks right if any group on which
its majority depends thinks otherwise".
Hayek stated that if the Conservative leader had said "that free
choice is to be exercised more in the market place than in the ballot
box, she has merely uttered the truism that the first is indispensable
for individual freedom while the second is not: free choice can at least
exist under a dictatorship that can limit itself but not under the
government of an unlimited democracy which cannot".
Influence on central European politics
President
Ronald Reagan
listed Hayek as among the two or three people who most influenced his
philosophy and welcomed Hayek to the White House as a special guest.
In the 1970s and 1980s, the writings of Hayek were also a major
influence on many of the leaders of the "velvet" revolution in Central
Europe during the collapse of the old
Soviet Empire. Some supporting examples include the following:
-
- There is no figure who had more of an influence, no
person had more of an influence on the intellectuals behind the Iron
Curtain than Friedrich Hayek. His books were translated and published by
the underground and black market editions, read widely, and undoubtedly
influenced the climate of opinion that ultimately brought about the
collapse of the Soviet Union.
- —Milton Friedman (Hoover Institution)
- The most interesting among the courageous dissenters of the 1980s
were the classical liberals, disciples of F.A. Hayek, from whom they had
learned about the crucial importance of economic freedom and about the
often-ignored conceptual difference between liberalism and democracy.
- —Andrzej Walicki (History, Notre Dame)
- Estonian Prime Minister Mart Laar
came to my office the other day to recount his country's remarkable
transformation. He described a nation of people who are harder-working,
more virtuous – yes, more virtuous, because the market punishes
immorality – and more hopeful about the future than they've ever been in
their history. I asked Mr. Laar where his government got the idea for
these reforms. Do you know what he replied? He said, "We read Milton
Friedman and F.A. Hayek."
- —United States Representative Dick Armey
- I was 25 years old and pursuing my doctorate in economics when I was
allowed to spend six months of post-graduate studies in Naples, Italy. I
read the Western economic textbooks and also the more general work of
people like Hayek. By the time I returned to Czechoslovakia, I had an
understanding of the principles of the market. In 1968, I was glad at
the political liberalism of the Dubcek Prague Spring, but was very
critical of the Third Way they pursued in economics.
- —Václav Klaus (former President of the Czech Republic)
Recognition
In 1980, Hayek, a non-practising
Roman Catholic, was one of twelve Nobel laureates to meet with
Pope John Paul II "to dialogue, discuss views in their fields, communicate regarding the relationship between
Catholicism
and science, and 'bring to the Pontiff's attention the problems which
the Nobel Prize Winners, in their respective fields of study, consider
to be the most urgent for contemporary man'".
Hayek was appointed a
Companion of Honour (CH) in the
1984 Birthday Honours by
Elizabeth II on the advice of British Prime Minister
Margaret Thatcher for his "services to the study of economics". Hayek had hoped to receive a
baronetcy
and after being awarded the CH sent a letter to his friends requesting
that he be called the English version of Friedrich (i.e. Frederick) from
now on. After his twenty-minute audience with the Queen, he was
"absolutely besotted" with her according to his daughter-in-law Esca
Hayek. Hayek said a year later that he was "amazed by her. That ease and
skill, as if she'd known me all my life". The audience with the Queen
was followed by a dinner with family and friends at the
Institute of Economic Affairs. When later that evening Hayek was dropped off at the
Reform Club, he commented: "I've just had the happiest day of my life".
Work
The business cycle
Parts of a business cycle
Hayek's principal investigations in economics concerned
capital, money and the business cycle.
Ludwig von Mises had earlier applied the concept of
marginal utility to the value of money in his
Theory of Money and Credit (1912) in which he also proposed an explanation for "industrial fluctuations" based on the ideas of the old
British Currency School and of Swedish economist
Knut Wicksell.
Hayek used this body of work as a starting point for his own
interpretation of the business cycle, elaborating what later became
known as the
Austrian theory of the business cycle.
Hayek spelled out the Austrian approach in more detail in his book,
published in 1929, an English translation of which appeared in 1933 as
Monetary Theory and the Trade Cycle. There, Hayek argued for a monetary approach to the origins of the cycle. In his
Prices and Production (1931), Hayek argued that the business cycle resulted from the
central bank's inflationary
credit expansion and its transmission over time, leading to a capital misallocation caused by the artificially low
interest rates.
Hayek claimed that "the past instability of the market economy is the
consequence of the exclusion of the most important regulator of the
market mechanism, money, from itself being regulated by the market
process".
Hayek's analysis was based on
Eugen Böhm von Bawerk's concept of the "average period of production"
and on the effects that monetary policy could have upon it. In
accordance with the reasoning later outlined in his essay "The Use of
Knowledge in Society" (1945), Hayek argued that a monopolistic
governmental agency like a central bank can neither possess the relevant
information which should govern supply of money, nor have the ability
to use it correctly.
In 1929, Lionel Robbins assumed the helm of the
London School of Economics
(LSE). Eager to promote alternatives to what he regarded as the narrow
approach of the school of economic thought that then dominated the
English-speaking academic world (centred at the
University of Cambridge and deriving largely from the work of
Alfred Marshall),
Robbins invited Hayek to join the faculty at LSE, which he did in 1931.
According to Nicholas Kaldor, Hayek's theory of the time-structure of
capital and of the business cycle initially "fascinated the academic
world" and appeared to offer a less "facile and superficial"
understanding of
macroeconomics than the Cambridge school's.
Also in 1931, Hayek critiqued
John Maynard Keynes's
Treatise on Money (1930) in his "Reflections on the pure theory of Mr. J.M. Keynes" and published his lectures at the LSE in book form as
Prices and Production.
For Keynes, unemployment and idle resources are caused by a lack of
effective demand, but for Hayek they stem from a previous unsustainable
episode of easy money and artificially low interest rates. Keynes asked
his friend
Piero Sraffa
to respond. Sraffa elaborated on the effect of inflation-induced
"forced savings" on the capital sector and about the definition of a
"natural" interest rate in a growing economy (see
Sraffa–Hayek debate). Others who responded negatively to Hayek's work on the business cycle included
John Hicks,
Frank Knight and
Gunnar Myrdal. Kaldor later wrote that Hayek's
Prices and Production
had produced "a remarkable crop of critics" and that the total number
of pages in British and American journals dedicated to the resulting
debate "could rarely have been equalled in the economic controversies of
the past".
Hayek continued his research on monetary and capital theory,
revising his theories of the relations between credit cycles and capital
structure in Profits, Interest and Investment (1939) and The Pure Theory of Capital
(1941), but his reputation as an economic theorist had by then fallen
so much that those works were largely ignored, except for scathing
critiques by Nicholas Kaldor. Lionel Robbins himself, who had embraced the Austrian theory of the business cycle in The Great Depression (1934), later regretted having written the book and accepted many of the Keynesian counter-arguments.
Hayek never produced the book-length treatment of "the dynamics of capital" that he had promised in the
Pure Theory of Capital.
After 1941, he continued to publish works on the economics of
information, political philosophy, the theory of law and psychology, but
seldom on macroeconomics. At the
University of Chicago,
Hayek was not part of the economics department and did not influence
the rebirth of neoclassical theory that took place there (see
Chicago school of economics).
When in 1974 he shared the Nobel Memorial Prize in Economics with
Myrdal, the latter complained about being paired with an "ideologue".
Milton Friedman declared himself "an enormous admirer of Hayek, but not for his economics. I think
Prices and Production is a very flawed book. I think his [
Pure Theory of Capital] is unreadable. On the other hand,
The Road to Serfdom is one of the great books of our time".
The economic calculation problem
Building on the earlier work of Mises and others, Hayek also argued
that while in centrally planned economies an individual or a select
group of individuals must determine the distribution of resources, these
planners will never have enough information to carry out this
allocation reliably. This argument, first proposed by
Max Weber, says that the efficient exchange and use of resources can be maintained only through the
price mechanism in free markets (see
economic calculation problem).
In 1935, Hayek published Collectivist Economic Planning, a
collection of essays from an earlier debate that had been initiated by
Mises. Hayek included Mises's essay in which Mises argued that rational
planning was impossible under socialism.
Some socialists such as
H. D. Dickinson and
Oskar Lange responded by invoking
general equilibrium theory,
which they argued disproved Mises's thesis. They noted that the
difference between a planned and a free market system lay in who was
responsible for solving the equations. They argued that if some of the
prices chosen by socialist managers were wrong, gluts or shortages would
appear, signalling them to adjust the prices up or down, just as in a
free market. Through such a trial and error, a socialist economy could
mimic the efficiency of a free market system while avoiding its many
problems.
Hayek challenged this vision in a series of contributions. In
"Economics and Knowledge" (1937), he pointed out that the standard
equilibrium theory assumed that all agents have full and correct
information. However, in the real world different individuals have
different bits of knowledge and furthermore some of what they believe is
wrong.
In "
The Use of Knowledge in Society"
(1945), Hayek argued that the price mechanism serves to share and
synchronise local and personal knowledge, allowing society's members to
achieve diverse and complicated ends through a principle of spontaneous
self-organization.
He contrasted the use of the price mechanism with central planning,
arguing that the former allows for more rapid adaptation to changes in
particular circumstances of time and place. Thus, Hayek set the stage for
Oliver Williamson's later contrast between markets and hierarchies as alternative co-ordination mechanisms for economic transactions. He used the term
catallaxy
to describe a "self-organizing system of voluntary co-operation".
Hayek's research into this argument was specifically cited by the Nobel
Committee in its press release awarding Hayek the Nobel prize.
Criticism of collectivism
Front cover art for Hayek's book Individualism and Economic Order, 1948
Hayek was one of the leading academic critics of collectivism in the
20th century. Hayek argued that all forms of collectivism (even those
theoretically based on voluntary co-operation) could only be maintained
by a central authority of some kind. In Hayek's view, the central role
of the state should be to maintain the
rule of law, with as little arbitrary intervention as possible. In his popular book
The Road to Serfdom
(1944) and in subsequent academic works, Hayek argued that socialism
required central economic planning and that such planning in turn leads
towards
totalitarianism.
In The Road to Serfdom, Hayek wrote:
Although
our modern socialists' promise of greater freedom is genuine and
sincere, in recent years observer after observer has been impressed by
the unforeseen consequences of socialism, the extraordinary similarity
in many respects of the conditions under "communism" and "fascism".
Hayek posited that a central planning authority would have to be
endowed with powers that would impact and ultimately control social life
because the knowledge required for centrally planning an economy is
inherently decentralised, and would need to be brought under control.
Though Hayek did argue that the state should provide law
centrally, others have pointed out that this contradicts his arguments
about the role of judges in "discovering" the law, suggesting that Hayek
would have supported decentralized provision of legal services.
Hayek also wrote that the state can play a role in the economy, specifically in creating a safety net, saying:
There
is no reason why, in a society which has reached the general level of
wealth ours has, the first kind of security should not be guaranteed to
all without endangering general freedom; that is: some minimum of food,
shelter and clothing, sufficient to preserve health. Nor is there any
reason why the state should not help to organize a comprehensive system
of social insurance in providing for those common hazards of life
against which few can make adequate provision.
Investment and choice
Perhaps more fully than any other economist, Hayek investigated the
choice theory
of investment. He examined the inter-relations between non-permanent
production goods and "latent" or potentially economic permanent
resources, building on the choice theoretical insight that "processes
that take more time will evidently not be adopted unless they yield a
greater return than those that take less time".
Hayek's work on the
microeconomics
of the choice theoretics of investment, non-permanent goods, potential
permanent resources and economically-adapted permanent resources mark a
central dividing point between his work in areas of
macroeconomics and that of almost all other economists. Hayek's work on the macroeconomic subjects of
central planning,
trade cycle theory, the division of knowledge and entrepreneurial
adaptation especially, differ greatly from the opinions of macroeconomic
"
Marshallian" economists who follow the tradition of
John Maynard Keynes and the microeconomic "
Walrasian" economists who follow the tradition of
Abba Lerner.
Philosophy of science
During World War II, Hayek began the Abuse of Reason project. His
goal was to show how a number of then-popular doctrines and beliefs had a
common origin in some fundamental misconceptions about the social
science. In his
philosophy of science, which has much in common with that of his good friend
Karl Popper, Hayek was highly critical of what he termed "
scientism",
a false understanding of the methods of science that has been
mistakenly forced upon the social sciences, but that is contrary to the
practices of genuine science. Usually, scientism involves combining the
philosophers' ancient demand for demonstrative justification with the
associationists' false view that all scientific explanations are simple
two-variable linear relationships.
Hayek points out that much of science involves the explanation of complex multivariable and nonlinear phenomena
and the social science of economics and undesigned order compares
favourably with such complex sciences as Darwinian biology. These ideas
were developed in
The Counter-Revolution of Science
in 1952 and in some of Hayek's later essays in the philosophy of
science such as "Degrees of Explanation" (1955) and "The Theory of
Complex Phenomena" (1964).
In Counter-Revolution, for example, Hayek observed that the hard
sciences attempt to remove the "human factor" to obtain objective and
strictly controlled results:
[T]he
persistent effort of modern Science has been to get down to "objective
facts," to cease studying what men thought about nature or regarding the
given concepts as true images of the real world, and, above all, to
discard all theories which pretended to explain phenomena by imputing to
them a directing mind like our own. Instead, its main task became to
revise and reconstruct the concepts formed from ordinary experience on
the basis of a systematic testing of the phenomena, so as to be better
able to recognize the particular as an instance of a general rule.
— Friedrich Hayek, The Counter-Revolution of Science (Chapter II, "The Problem and the Method of the Natural Sciences")
Meanwhile, the soft sciences are attempting to measure
human action itself:
The
social sciences in the narrower sense, i.e., those which used to be
described as the moral sciences, are concerned with man's conscious or
reflected action, actions where a person can be said to choose between
various courses open to him, and here the situation is essentially
different. The external stimulus which may be said to cause or occasion
such actions can of course also be defined in purely physical terms. But
if we tried to do so for the purposes of explaining human action, we
would confine ourselves to less than we know about the situation.
— Friedrich Hayek, The Counter-Revolution of Science (Chapter III, "The Subjective Character of the Data of the Social Sciences")
He notes that these are mutually exclusive and that
social sciences should not attempt to impose
positivist methodology, nor to claim objective or definite results:
Psychology
In
The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology (1952), Hayek independently developed a "
Hebbian learning"
model of learning and memory—an idea he first conceived in 1920 prior
to his study of economics. Hayek's expansion of the "Hebbian synapse"
construction into a global brain theory has received attention in
neuroscience,
cognitive science, computer science, behavioural science and
evolutionary psychology by scientists such as
Gerald Edelman and
Joaquin Fuster.
The Sensory Order can be viewed as a development of his
attack on scientism. Hayek posited two orders, namely the sensory order
that we experience and the natural order that natural science has
revealed. Hayek thought that the sensory order actually is a product of
the brain. He described the brain as a very complex yet self-ordering
hierarchical classification system, a huge network of connections.
Because of these nature of the classifier system, richness of our
sensory experience can exist. Hayek's description posed problems to
behaviorism, whose proponents took the sensory order as fundamental.
Social and political philosophy
In the latter half of his career, Hayek made a number of contributions to
social and
political philosophy which he based on his views on the limits of human knowledge
and the idea of spontaneous order in social institutions. He argues in
favour of a society organised around a market order in which the
apparatus of state is employed almost (though not entirely) exclusively
to enforce the legal order (consisting of abstract rules and not
particular commands) necessary for a market of free individuals to
function. These ideas were informed by a moral philosophy derived from
epistemological
concerns regarding the inherent limits of human knowledge. Hayek argued
that his ideal individualistic and free-market polity would be
self-regulating to such a degree that it would be "a society which does
not depend for its functioning on our finding good men for running it".
Although Hayek believed in a society governed by laws, he disapproved of the notion of "
social justice". He compared the market to a game in which "there is no point in calling the outcome just or unjust" and argued that "social justice is an empty phrase with no determinable content".
Likewise, "the results of the individual's efforts are necessarily
unpredictable, and the question as to whether the resulting distribution
of incomes is just has no meaning".
He generally regarded government redistribution of income or capital as
an unacceptable intrusion upon individual freedom, saying that "the
principle of distributive justice, once introduced, would not be
fulfilled until the whole of society was organized in accordance with
it. This would produce a kind of society which in all essential respects
would be the opposite of a free society".
Spontaneous order
Hayek viewed the
free price system
not as a conscious invention (that which is intentionally designed by
man), but as spontaneous order or what Scottish philosopher
Adam Ferguson referred to as "the result of human action but not of human design". For instance, Hayek put the price mechanism on the same level as language.
Hayek's concept of the market as a spontaneous order has been
recently applied to ecosystems to defend a broadly non-interventionist
policy.
Like the market, ecosystems contain complex networks of information,
involve an ongoing dynamic process, contain orders within orders and the
entire system operates without being directed by a conscious mind.
On this analysis, species takes the place of price as a visible element
of the system formed by a complex set of largely unknowable elements.
Human ignorance about the countless interactions between the organisms
of an ecosystem limits our ability to manipulate nature. Since humans rely on the ecosystem to sustain themselves, we have a prima facie
obligation to not disrupt such systems. This analysis of ecosystems as
spontaneous orders does not rely on markets qualifying as spontaneous
orders. As such, one need not endorse Hayek's analysis of markets to
endorse ecosystems as spontaneous orders.
Hayek's views on social safety nets
With regard to a
social safety net,
Hayek advocated "some provision for those threatened by the extremes of
indigence or starvation due to circumstances beyond their control" and
argued that the "necessity of some such arrangement in an industrial
society is unquestioned—be it only in the interest of those who require
protection against acts of desperation on the part of the needy". Summarizing Hayek's views on the topic, journalist
Nicholas Wapshott
has argued that "[Hayek] advocated mandatory universal health care and
unemployment insurance, enforced, if not directly provided, by the
state".
Critical theorist Bernard Harcourt has argued further that "Hayek was adamant about this". In 1944, Hayek wrote in
The Road to Serfdom:
There
is no reason why in a society which has reached the general level of
wealth which ours has attained [that security against severe physical
privation, the certainty of a given minimum of sustenance for all; or
more briefly, the security of a minimum income]
should not be guaranteed to all without endangering general freedom.
There are difficult questions about the precise standard which should
thus be assured... but there can be no doubt that some minimum of food,
shelter, and clothing, sufficient to preserve health and the capacity to
work, can be assured to everybody. Indeed, for a considerable part of
the population of England this sort of security has long been achieved.
Nor is there any reason why the state should not assist...
individuals in providing for those common hazards of life against which,
because of their uncertainty, few individuals can make adequate
provision. Where, as in the case of sickness and accident, neither the
desire to avoid such calamities nor the efforts to overcome their
consequences are as a rule weakened by the provision of assistance –
where, in short, we deal with genuinely insurable risks – the case for
the state's helping to organize a comprehensive system of social
insurance is very strong.... [And] there is no incompatibility in
principle between the state's providing greater security in this way and
the preservation of individual freedom.
Wherever communal action can mitigate disasters against which the
individual can neither attempt to guard himself nor make the provision
for the consequences, such communal action should undoubtedly be taken.
There
is no reason why in a free society government should not assure to all,
protection against severe deprivation in the form of an assured minimum income, or a floor below which nobody need to descend.
To enter into such an insurance against extreme misfortune may well be
in the interest of all; or it may be felt to be a clear moral duty of
all to assist, within the organised community, those who cannot help
themselves. So long as such a uniform minimum income is provided
outside the market to all those who, for any reason, are unable to earn
in the market an adequate maintenance, this need not lead to a
restriction of freedom, or conflict with the Rule of Law.
Hayek's liberalism and skepticism
Arthur M. Diamond argues Hayek's problems arise when he goes beyond
claims that can be evaluated within economic science. Diamond argued:
The
human mind, Hayek says, is not just limited in its ability to
synthesize a vast array of concrete facts, it is also limited in its
ability to give a deductively sound ground to ethics. Here is where the
tension develops, for he also wants to give a reasoned moral defense of
the free market. He is an intellectual skeptic who wants to give
political philosophy a secure intellectual foundation. It is thus not
too surprising that what results is confused and contradictory.
Chandran Kukathas
argues that Hayek's defence of liberalism is unsuccessful because it
rests on presuppositions that are incompatible. The unresolved dilemma
of his political philosophy is how to mount a systematic defence of
liberalism if one emphasizes the limited capacity of reason.
Norman P. Barry
similarly notes that the "critical rationalism" in Hayek's writings
appears incompatible with "a certain kind of fatalism, that we must wait
for evolution to pronounce its verdict".
Milton Friedman and
Anna Schwartz
argue that the element of paradox exists in the views of Hayek. Noting
Hayek's vigorous defense of "invisible hand" evolution that Hayek
claimed has created better economic institutions than could be created
by rational design, Friedman pointed out the irony that Hayek was then
proposing to replace the monetary system thus created with a deliberate
construct of his own design.
John N. Gray
summarized this view as "his scheme for an ultra-liberal constitution
was a prototypical version of the philosophy he had attacked".
Bruce Caldwell
wrote that "[i]f one is judging his work against the standard of
whether he provided a finished political philosophy, Hayek clearly did
not succeed", although he thinks that "economists may find Hayek's
political writings useful".
Hayek's views on dictatorship
Hayek sent
António de Oliveira Salazar a copy of
The Constitution of Liberty
(1960) in 1962. Hayek hoped that his book—this "preliminary sketch of
new constitutional principles"—"may assist" Salazar "in his endeavour to
design a constitution which is proof against the abuses of democracy".
Asked about the
liberal non-democratic rule by a Chilean interviewer, Hayek is translated from German to Spanish to English as having said the following:
As
long term institutions, I am totally against dictatorships. But a
dictatorship may be a necessary system for a transitional period. [...]
Personally I prefer a liberal dictatorship to democratic government
devoid of liberalism. My personal impression – and this is valid for
South America – is that in Chile, for example, we will witness a
transition from a dictatorial government to a liberal government.
In a letter to the
London Times,
he defended the Pinochet regime and said that he had "not been able to
find a single person even in much maligned Chile who did not agree that
personal freedom was much greater under Pinochet than it had been under
Allende".
Hayek admitted that "it is not very likely that this will succeed, even
if, at a particular point in time, it may be the only hope there is",
but he explained that "[i]t is not certain hope, because it will always
depend on the goodwill of an individual, and there are very few
individuals one can trust. But if it is the sole opportunity which
exists at a particular moment it may be the best solution despite this.
And only if and when the dictatorial government is visibly directing its
steps towards limited democracy".
For Hayek, the distinction between authoritarianism and
totalitarianism has much importance and he was at pains to emphasise his
opposition to totalitarianism, noting that the concept of transitional
dictatorship which he defended was characterised by authoritarianism,
not totalitarianism. For example, when Hayek visited Venezuela in May
1981, he was asked to comment on the prevalence of totalitarian regimes
in Latin America. In reply, Hayek warned against confusing
"totalitarianism with authoritarianism" and said that he was unaware of
"any totalitarian governments in Latin America. The only one was Chile
under Allende". For Hayek, the word "totalitarian" signifies something
very specific, namely the intention to "organize the whole of society"
to attain a "definite social goal" which is stark in contrast to
"liberalism and individualism".
Influence and recognition
Hayek's
influence on the development of economics is widely acknowledged. With
regard to the popularity of his Nobel acceptance lecture, Hayek is the
second-most frequently cited economist (after
Kenneth Arrow)
in the Nobel lectures of the prize winners in economics. Hayek wrote
critically there of the field of orthodox economics and neo-classical
modelisation. A number of
Nobel Laureates in economics, such as
Vernon Smith and
Herbert A. Simon, recognise Hayek as the greatest modern economist. Another Nobel winner,
Paul Samuelson,
believed that Hayek was worthy of his award, but nevertheless claimed
that "there were good historical reasons for fading memories of Hayek
within the mainstream last half of the twentieth century economist
fraternity. In 1931, Hayek's
Prices and Production had enjoyed an
ultra-short Byronic success. In retrospect hindsight tells us that its
mumbo-jumbo about the period of production grossly misdiagnosed the
macroeconomics of the 1927–1931 (and the 1931–2007) historical scene".
Despite this comment, Samuelson spent the last 50 years of his life
obsessed with the problems of capital theory identified by Hayek and
Böhm-Bawerk and Samuelson flatly judged Hayek to have been right and his
own teacher
Joseph Schumpeter
to have been wrong on the central economic question of the 20th
century, the feasibility of socialist economic planning in a production
goods dominated economy.
Hayek is widely recognised for having introduced the time
dimension to the equilibrium construction and for his key role in
helping inspire the fields of
growth theory,
information economics and the theory of spontaneous order. The "informal" economics presented in
Milton Friedman's massively influential popular work
Free to Choose
(1980) is explicitly Hayekian in its account of the price system as a
system for transmitting and co-ordinating knowledge. This can be
explained by the fact that Friedman taught Hayek's famous paper "The Use
of Knowledge in Society" (1945) in his graduate seminars.
In 1944, he was elected as a Fellow of the
British Academy after he was nominated for membership by Keynes.
Harvard economist and former Harvard University President
Lawrence Summers
explains Hayek's place in modern economics: "What's the single most
important thing to learn from an economics course today? What I tried to
leave my students with is the view that the invisible hand is more
powerful than the [un]hidden hand. Things will happen in well-organized
efforts without direction, controls, plans. That's the consensus among
economists. That's the Hayek legacy".
Hayek had a long-standing and close friendship with philosopher of science
Karl Popper,
who was also from Vienna. In a letter to Hayek in 1944, Popper stated:
"I think I have learnt more from you than from any other living thinker,
except perhaps
Alfred Tarski". Popper dedicated his
Conjectures and Refutations to Hayek. For his part, Hayek dedicated a collection of papers,
Studies in Philosophy, Politics, and Economics, to Popper and in 1982 said that "ever since his
Logik der Forschung first came out in 1934, I have been a complete adherent to his general theory of methodology".
Popper also participated in the inaugural meeting of the Mont Pelerin
Society. Their friendship and mutual admiration do not change the fact
that there are important differences between their ideas.
Hayek also played a central role in Milton Friedman's intellectual development. Friedman wrote:
My
interest in public policy and political philosophy was rather casual
before I joined the faculty of the University of Chicago. Informal
discussions with colleagues and friends stimulated a greater interest,
which was reinforced by Friedrich Hayek's powerful book The Road to
Serfdom, by my attendance at the first meeting of the Mont Pelerin
Society in 1947, and by discussions with Hayek after he joined the
university faculty in 1950. In addition, Hayek attracted an
exceptionally able group of students who were dedicated to a libertarian
ideology. They started a student publication, The New Individualist
Review, which was the outstanding libertarian journal of opinion for
some years. I served as an adviser to the journal and published a number
of articles in it....
Hayek's greatest intellectual debt was to
Carl Menger, who pioneered an approach to social explanation similar to that developed in Britain by
Bernard Mandeville and the Scottish moral philosophers in the
Scottish Enlightenment.
He had a wide-reaching influence on contemporary economics, politics,
philosophy, sociology, psychology and anthropology. For example, Hayek's
discussion in
The Road to Serfdom (1944) about truth, falsehood and the use of language influenced some later opponents of
postmodernism.
Hayek and conservatism
Hayek wrote an essay, "Why I Am Not a Conservative" (included as an appendix to
The Constitution of Liberty)
In it he disparaged conservatism for its inability to adapt to changing
human realities or to offer a positive political program, remarking:
"Conservatism is only as good as what it conserves". Although he noted
that modern day
conservatism shares many opinions on economics with classical liberals, particularly a belief in the
free market, he believed it is because conservatism wants to "stand still" whereas
liberalism
embraces the free market because it "wants to go somewhere". Hayek
identified himself as a classical liberal, but noted that in the United
States it had become almost impossible to use "liberal" in its original
definition and the term "
libertarian" has been used instead. In this text, Hayek also opposed conservatism for "its hostility to
internationalism and its proneness to a strident
nationalism", with its frequent association with
imperialism.
Hayek also found libertarianism a term "singularly unattractive" and offered the term "Old
Whig" (a phrase borrowed from
Edmund Burke)
instead. In his later life, he said: "I am becoming a Burkean Whig".
However, Whiggery as a political doctrine had little affinity for
classical political economy, the tabernacle of the Manchester School and
William Gladstone.
His essay has served as an inspiration to other liberal-minded
economists wishing to distinguish themselves from conservative thinkers,
for example
James M. Buchanan's essay "Why I, Too, Am Not a Conservative: The Normative Vision of Classical Liberalism".
His opponents have attacked Hayek as a leading promoter of
neoliberalism. A British journalist,
Samuel Brittan, concluded in 2010 that "Hayek's book [
The Constitution of Liberty]
is still probably the most comprehensive statement of the underlying
ideas of the moderate free market philosophy espoused by neoliberals". Brittan adds that although
Raymond Plant (2009) comes out in the end against Hayek's doctrines, Plant gives
The Constitution of Liberty a "more thorough and fair-minded analysis than it has received even from its professed adherents".
In
Why F A Hayek is a Conservative, British policy analyst
Madsen Pirie
claims Hayek mistakes the nature of the conservative outlook.
Conservatives, he says, are not averse to change, but like Hayek they
are highly averse to change being imposed on the social order by people
in authority who think they know how to run things better. They wish to
allow the market to function smoothly and give it the freedom to change
and develop. It is an outlook, says Pirie, that Hayek and conservatives
both share.
Hayek and policy discussions
Hayek's
ideas on spontaneous order and the importance of prices in dealing with
the knowledge problem has inspired a debate on economic development and
transition economies after the fall of the Berlin wall. For instance,
Peter Boettke elaborated in detail on why reforming socialism failed and the Soviet Union broke down. Ronald McKinnon
uses Hayekian ideas to describe the challenges of transition from a
centralized state and planned economy to a market economy. Former World
Bank Chief Economist
William Easterly emphasizes why foreign aid tends to have no effect at best in books such as
The White Man's Burden.
Since the
2007–2008 financial crisis,
there is a renewed interest in Hayek's core explanation of
boom-and-bust cycles, which serves as an alternative explanation to that
of the savings glut as launched by Bernanke. Economists at the Bank of
International Settlements, e.g. William White, emphasize the importance
of Hayekian insights and the impact of monetary policies and credit
growth as root causes of financial cycles.
A. Hoffmann and G. Schnabl provide an international perspective and
explain recurring financial cycles in the world economy as consequence
of gradual interest rate cuts led by the central banks in the large
advanced economies since the 1980s. N. Cachanosky outlines the impact of American monetary policy on the production structure in Latin America.
In line with Hayek, an increasing number of contemporary
researchers sees expansionary monetary policies and too low interest
rates as mal-incentives and main drivers of financial crises in general
and the
subprime market crisis in particular.
To prevent problems caused by monetary policy, Hayekian and Austrian
economists discuss alternatives to current policies and organizations.
For instance, L. White favors free banking in the spirit of Hayek's
"Denationalization of Money".
Hayek's ideas find their way into the discussion of the post-
Great Recession issues of
secular stagnation.
Monetary policy and mounting regulation are argued to have undermined
the innovative forces of the market economies. Quantitative easing
following the financial crises is argued to have not only conserved
structural distortions in the economy, leading to a fall in
trend-growth. It also created new distortions and contributes to
distributional conflicts.
Personal life
In
August 1926, Hayek married Helen Berta Maria von Fritsch (1901–1960), a
secretary at the civil service office where Hayek worked, on the
rebound upon hearing of his cousin's marriage. They had two children
together.
Upon the close of World War II, Hayek restarted a relationship with
his cousin, who had married since they first met, but kept it secret
until 1948. Hayek and Fritsch divorced in July 1950 and he married his
cousin Helene Bitterlich (1900–1996) just a few weeks later after moving to Arkansas to take advantage of permissive divorce laws.
His wife and children were offered settlement and compensation for
accepting a divorce. The divorce caused some scandal at LSE where
certain academics refused to have anything to do with Hayek.
In a 1978 interview to explain his actions, Hayek stated that he was
unhappy in his first marriage and as his wife would not grant him a
divorce he had to enforce it. He rarely visited his children after the divorce.
Hayek was brought up in non-religious setting and decided that he was an
agnostic from age 15. He died in 1992 in
Freiburg, Germany, where he had lived since leaving Chicago in 1961.
Legacy and honours
Hayek's grave in Neustifter Friedhof, Vienna
Even after his death, Hayek's intellectual presence is noticeable,
especially in the universities where he had taught, namely the London
School of Economics, the University of Chicago and the University of
Freiburg. A number of tributes have resulted, many established
posthumously:
- The Hayek Society, a student-run group at the London School of Economics, was established in his honour.
- The Oxford Hayek Society, founded in 1983, is named after Hayek.
- The Cato Institute named its lower level auditorium after Hayek, who had been a Distinguished Senior Fellow at Cato during his later years.
- The auditorium of the school of economics in Universidad Francisco Marroquín in Guatemala is named after him.
- The Hayek Fund for Scholars of the Institute for Humane Studies provides financial awards for academic career activities of graduate students and untenured faculty members.
- The Ludwig von Mises Institute
holds a lecture named after Hayek every year at its Austrian Scholars
Conference and invites notable academics to speak about subjects
relating to Hayek's contributions to the Austrian School.
- George Mason University has an economics essay award named in honour of Hayek.
- The Mercatus Center, a free-market think tank also at George Mason University, who has a philosophy, politics and economics program of study named for Hayek.
- The Mont Pelerin Society has a quadrennial economics essay contest named in his honour.
- Hayek was awarded honorary degrees from Rikkyo University, University of Vienna and University of Salzburg.
- Hayek has an investment portfolio named after him. The Hayek Fund invests in corporations who financially support free market public policy organisations
- 1974: Austrian Decoration for Science and Art
- 1974: Nobel Memorial Prize in Economic Sciences (Sweden)
- 1977: Pour le Mérite for Science and Art (Germany)
- 1983: Honorary Ring of Vienna
- 1984: Honorary Dean of WHU-Otto Beisheim School of Management
- 1984: Companion of Honour (United Kingdom)
- 1990: Grand Gold Medal with Star for Services to the Republic of Austria
- 1991: Presidential Medal of Freedom (United States)
- 1994: The FA Hayek Scholarship in Economics or Political Science, University of Canterbury.
The scholarship supports students toward study for an honours or
master's degree in the Economics or Political Science at the University.
It was established in 1994 by a gift from entrepreneur Alan Gibbs.
Notable works
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