The great boon of the internet

[Sanjeev Sabhlok <sabhlok@almaak.usc.edu>]

For some random reason I was searching the internet on Hayek. Found a
superlative piece on this gentleman. For those (such as me) who are not
quite aware of everything about Hayek, this is an excellent
introduction. Note that this guy was a full Prof. at the University of
London at the age of 32, and I can only envy his good fortune! {was it
fortune? No. It was his calibre}. He was also the 8th economist to
receive a Nobel prize. Lesson: Read him and be not distracted by my
rather aggressive argumentation. 

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Friedrich A. Hayek (1899-1992)

by Peter J. Boettke 

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 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 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 an 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 J. Boettke is a professor of economics at New York University and
the author of The Political Economy of Soviet Socialism and Why
Perestroika Failed.

This article is from The Freeman, August, 1992.


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