Archival Insights into the Evolution of Economics

Series Editor Robert Leeson Stanford University Stanford, CA, USA Tis series provides unique insights into economics by providing archival evidence into the evolution of the subject. Each volume provides biograph- ical information about key economists associated with the development of a key school, an overview of key controversies and gives unique insights provided by archival sources.

More information about this series at http://www.palgrave.com/gp/series/14777 Robert Leeson Editor Hayek: A Collaborative Biography Part XV: The School of Economics, Hayek’s ‘luck’ and the 1974 Nobel Prize for Economic Science Editor Robert Leeson Stanford University Stanford, CA, USA

Archival Insights into the Evolution of Economics ISBN 978-3-319-95218-5 ISBN 978-3-319-95219-2 (eBook) https://doi.org/10.1007/978-3-319-95219-2

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© Te Editor(s) (if applicable) and Te Author(s) 2018 Tis work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifcally the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microflms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Te use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specifc statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Te publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. Te publisher remains neutral with regard to jurisdictional claims in published maps and institutional afliations.

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Tis Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG Te registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Contents

Part I Hayek’s Luck

1 ‘I Have Been Lucky in Tis Game’ 3 Robert Leeson

2 Te Tobacco, Obesity and Fossil Fuel Lobby—‘As Happy as Hell’ 69 Robert Leeson

3 1–15: Residual Reverence Towards the Second Estate 91 Robert Leeson

4 16–20: Loyal ‘Intermediaries’ 127 Robert Leeson

5 21–24: ‘I Desire to Preserve Correct Relations in Public’ 161 Robert Leeson

v vi Contents

6 25: Suppression, the Dogs Tat Didn’t Bark and the Emerging Chicago School of Economics 193 Robert Leeson

7 31 Conclusions About Hayek’s Nineteen Tirty-One ‘Prediction’ 215 Robert Leeson

Part II Myrdal and Machlup

8 Te Saving/Investment Explanation of Business Cycles in Hayek and Myrdal: Similarities and Diferences 273 Adrián de León Arias

9 Machlup and Hayek: Filiation of Ideas and Ambition 289 Carol M. Connell

Part III Te Chicago School of Economics

10 Friedman and Hayek’s Converging Ideas on Freedom and the State 327 Birsen Filip

11 Chicago Economics in the Making, 1926–1940: A Further Look at United States Interwar Pluralism 373 Luca Fiorito and Sebastiano Nerozzi

Index 419 Chronology

1894/1895: Milton Friedman’s parents leave the Habsburg Empire for America. 1907/1908: relocates to Vienna and absorbs the prevailing anti-Semitic culture co-created by prominent proto-Nazi families like the von Hayeks. 1909–1938: Mises works as a lobbyist for the Lower Austrian Chamber of Commerce and Industry. 1912: Mises’ becomes the quasi-ofcial theorists of the Austro-German business sector with his Teorie des Geldes und der Umlaufsmittel (Teory of Money and Credit). Hitler embraces a popularized version of Austrian Business Cycle Teory as a tool with which to destroy democracy. 1914–1918: the ‘Great’ War between the dynasties. 1917–1918: the Romanovs, Hohenzollerns and Habsburgs are over- thrown. April 1919: the status of ‘German Austrian citizens’ ‘equal before the law in all respects’ is forcibly imposed on the Habsburg Second Estate by what ‘von’ Hayek denigrates as a ‘republic of peasants and ­workers’: coats of arms and titles (‘von,’ ‘Archduke,’ ‘Count’ etc) are abolished the Adelsaufhebungsgesetz (the Law on the Abolition of Nobility).

vii viii Chronology

Violators face fnes or six months jail—‘von Hayek and ‘von’ Mises become common criminals. 1926: Mises is impressed by the ‘commercial success’ of monthly reports of American business cycle Institutes: ‘Te price of an annual subscrip- tion was on the order of $100, a small fortune at the time.’ 1927: Mises establishes the Austrian Institut für Konjunkturforschung (Austrian Institute for Economic Research) ‘mainly to provide Hayek with a suitable position.’ 1927: Mises proposes to become the intellectual Führer of a Nazi- Classical Liberal Pact (‘Ludendorf and Hitler’ are among the ‘Fascists’ praised). : Hayek’s Institute predicts a cyclical recovery starting in Austria. : Hayek’s Institute assessed conditions in the USA: ‘Because of the comparatively strong position of the money market, it was believed that these adverse developments would probably not lead to a crisis followed by a depression but rather to a further sharp tightening of the money market.’ : Hayek’s Institute stated that ‘it can be emphatically emphasised that, given a smooth and undisturbed development of the fnancial and political situation, all the prerequisites seem to be given to make a new upswing possible within a few months.’ October 1929: the Wall Street Crash. 1930: the American banking system collapses. 1932: advised by his ‘Austrian’ Treasury Secretary (Andrew Mellon), becomes a one-term President. 1929–1934: the defation promoted by ‘von’ Hayek and ‘von’ Mises intensifes the Great Depression and undermines democracy in Germany (1933), Austria (1934) and elsewhere. 23 : Hayek writes to the Rockefeller Foundation requesting funds for a ‘Foundation Program in Economic Stabilization’—but makes no mention of his ‘spring of 1929’ or ‘’ prediction about the Great Depression. 27–30 : ‘von’ Hayek gives the University of London Advanced Lectures in Economics. Chronology ix

February 1931: the editors of the University of Chicago Journal of Political Economy, Frank Knight and Jacob Viner, publish Carl Teodore Schmidt’s analysis of ‘Te Austrian Institute for Business Cycle Research,’ which reports that Hayek’s Institute ‘makes no pretence of ofering a defnite basis for the prognosis of cyclical fuctuations.’ : the fnancial crisis spreads to Europe via Vienna’s Credit- Anstalt. : in his Foreword to the frst edition of Hayek’s Prices and Production, Lionel Robbins uses a serfdom analogy: ‘I am bound to say that [Austrian theory] seems to me to ft certain facts of the American slump better than any other explanation I know. And I can- not think that it is altogether an accident that the Austrian Institut für Konjunkturforschung, of which Dr. Hayek is director, was one of the very few bodies of its kind which, in the spring of 1929, predicted a set- back in America with injurious repercussions on European conditions.’ As a result, Hayek ‘expected nothing less’ than a job ofer from the LSE. 22 : ‘von’ Hayek arrives in London to begin a one year Visiting Professorship: ‘it was really from the frst moment arriving there that I found myself for the frst time in a moral atmosphere which was completely congenial to me and which I could absorb overnight.’ : Hayek explains that the ‘central theme’ of his Monetary Teory and Trade Cycle is a ‘critique of the programme of the “Stabilizers”.’ 1 : the Tooke Professorship of Economic Science and Statistics is revived for ‘von’ Hayek. : Robbins provides a glowing Introduction to Hayek’s Monetary Teory and the Trade Cycle about ‘Professor von Hayek, until recently Director of the Austrian Institut fur Konjunkturforschung, now Tooke Professor of Economic Science and Statistics in the University of London.’ 5 : After lunch with Hayek, John Maynard Keynes refects: ‘what rubbish his theory is—I felt today that even he was beginning to disbelieve it himself.’ 1933: in an essay on ‘Te Current Status of Business Cycle research and its Prospects for the Immediate Future,’ Mises fails to mention Hayek’s ‘prediction’ of the Great Depression. x Chronology

March 1934: Mises becomes a card-carrying Austro-Fascist and member of the ofcial Fascist social club. : Hayek begins a 16-year crusade to persuade his wife to give him a divorce. : Robbins publishes his Austrian-account of Te Great Depression. : In the Preface of the second edition of Prices and Production, ‘v Hayek’ thanks Robbins for his ‘help’—Robbins had ‘asked Hayek to remove his laudatory introduction in his frst edition.’ 1936: Hayek declines to respond to Keynes because ‘I rather expected that when he thought out Te General Teory, he would again change his mind in another year or two; so I thought it wasn’t worthwhile investing as much work.’ August 1936: Adolph O. Berger’s University of Chicago Department of Economics dissertation on ‘Te Forecasting Methods and Results of the Austrian Institute for Business Cycle Research’ provided evidence which contradicted the Hayek/Robbins (and later Machlup/Nobel) assertion: with qualifcations, the forecasting results of the Austrian Institute for Business Cycle Research ‘do not compare very favourably with those of the American services.’ Berger summarized Hayek’s June 1929 Institute assessment of conditions in the USA and the October 1929 assertion about ‘a new upswing possible within a few months’ (as cited above). 1936: between February and November, Hayek’s attitude towards Knight appeared to have been, at least in part, transformed from sar- casm to reverence. G.L.S. Shackle notes that Hayek’s ‘attitude had noticeably softened towards Frank Knight.’ 1945–1950: Hayek instructs his lawyers to go jurisdiction shopping to fnd a location to ‘enforce’ the divorce that his wife refuses to give him so that he can marry his cousin. To fnance his post-divorce life, Hayek seeks employment in the USA but the University of Chicago depart- ment of economics refuses to even consider him. Knight and Friedman are reportedly among the ‘blackballers.’ 1945–1946: Mises becomes ‘Visiting Professor’ at New York University and a full-time employee (‘spiritus rector’) of the Foundation for Economic Education (FEE). Friedman and George Stigler are disgusted by those with whom they are about to form a ‘free’ market ‘Pact’ (the Chronology xi

Mont Pelerin Society). Stigler refers to FEE’s Leonard Read and Orval Watts as ‘those bastards.’ 1947: Hayek establishes the fully funded Mont Pelerin Society and invites (along with Knight) a solitary female, Veronica Wedgewood who (according to a University of Chicago ‘oral tradition’) was Knight’s lover. Mises ‘hits the roof’ at the suggestion of a ‘Pact’ with the Chicago School of Economics—and stomps out saying ‘You’re all a bunch of socialists.’ 1950: when Hayek abandons his frst wife and children, Robbins leaves the Mont Pelerin Society, and severs all links with the amoral Hayek who has (for the second time?) ‘deceived’ him. Friedman is also repulsed. 1960: Hayek dedicated Te Constitution of Liberty to ‘the members of the Mont Pelerin Society and in particular to their two intellectual lead- ers, Ludwig von Mises and Frank H. Knight.’ 1960: the death of Hayek’s frst wife facilitates a reunion between Hayek and Robbins. Hayek falls into a year-long suicidal depression. 1961: Robbins praises Hayek’s ‘moral ardour.’ 1961: Hayek argues that ‘It is at least possible … that the use of so severe a form of coercion as conscription may be necessary to ward of the danger of worse coercion by an external enemy.’ 1962: at a banquet in honour of Hayek, Mises states that Hayek had published ‘several excellent essays’ during his time at the Austrian Institute for Economic Research—but Mises makes no mention of Hayek’s prediction of the Great Depression. 1963: in Human Action, Mises lobbies for the Warfare State: ‘He who in our age opposes armaments and conscription is, perhaps unbeknown to himself, an abettor of those aiming at the enslavement of all.’ 1963–1964: in A Monetary History of the United States, 1867–1960, Friedman and Anna Schwartz described the ‘Great Contraction.’ Friedman presumably began his frst ‘plucking model’ assault on Austrian business cycle theory about this time. 1966: As the Vietnam War intensifes, Mises again lobbies for conscrip- tion and the Warfare State. 1968: Te Chicago School’s W. Allen Wallis declares that ‘nothing is more opposed to our ethical, religious, and political principles than xii Chronology taking bodily control of a person and forcing him to submit totally to the will of others.’ 1968: Te Swedish Central Bank announces the inauguration of a Nobel Prize for Economic Sciences. 1969: Hayek sinks into his second prolonged suicidal depression (which lasts until 1974). August 1970: in Autobiography of an Economist, Robbins declines to mention the Mont Pelerin Society and his rift with Hayek; describes in detail his confict with Keynes; states that his friendship with Hayek ‘was an especially happy one’; and justifes his attachment to the Austrian School: ‘I was acting in good faith and with a strong sense of social obligation … I had become the slave of theoretical construc- tions which, if not intrinsically invalid as regards logical consistency were inappropriate to the total situation which had then developed and which therefore misled my judgement.’ Hayek refects that Robbins had ‘one extremely likeable habit. He’s the most loyal friend of anyone you could meet. But if he were asked his memories of Harold Laski or Beveridge, it would be honest but it would not be true. Much embel- lished. Because they were close friends of his.’ February 1971: Murray Rothbard states that it was ‘deplorable’ that Friedman and his followers ‘have never paid attention to the achieve- ment of Ludwig von Mises’ and his Austrian business cycle theory. Friedman’s ‘purely monetarist’ approach was ‘almost the exact reverse of the sound—as well as truly free-market—Austrian view.’ Friedman was the enemy—‘the Establishment’s Court Libertarian.’ September 1971: the Nobel Selection Committee receives the ‘appraisal’ of Hayek’s worthiness for a Nobel Prize that they had requested from Fritz Machlup—Hayek’s close friend, fellow Austrian School econo- mist and founding Mont Pelerin Society member: ‘In a comment which Hayek published in the Monthly Reports of the Austrian Institute for Economic Research (as its Director) in February 1929 he boldly pre- dicted that crisis and downturn in the United States might be immi- nent. With these warnings, which came true with a vengeance, Hayek had introduced one of the main themes of his monetary theory of the investment cycle.’ Chronology xiii

5–9 September 1971: Machlup, Hayek and other Board members met to plan the 25th Mont Pelerin Society anniversary meeting. 1972: at the 25th Mont Pelerin Society anniversary meeting, ‘President’ Friedman unsuccessfully attempts to sever the institutional link (a divorce?) between the Austrians and the Chicago School of Economics by proposing the winding-up of the Society. 27 January 1973: what Friedman calls a ‘major stain on our free soci- ety’—military conscription—ends: and the all-volunteer armed force is instituted. 1974: in ‘Homage to Hayek,’ Hayek’s LSE colleague, Arnold Plant, makes was no mention of Hayek’s ‘prediction’ of the Great Depression. June 1974: at the frst Koch-funded Austrian revivalist conference, dele- gates compete with each other over what Friedman described as ‘rotten bastard’ proposals: the speed with which non-Austrian (i.e., aristocratic, tax-exempt and academic) ‘entitlements’ could be eliminated—forcing wounded veterans, the famine-stricken, the old, the sick, the young and the poor to seek private charity. September 1974: the Nobel Prize Selection Committee reports that Hayek ‘tried to penetrate more deeply into the business cycle mecha- nism than was usual at that time. Perhaps, partly due to this more pro- found analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.’ December 1974: ‘Professor von Hayek’ is invited ‘to accept from the hand of His Majesty the King the 1974 Prize in Economic Science ded- icated to the memory of Alfred Nobel.’ 1975: after a gap of 44 years, Hayek asserts: ‘I was one of the only ones to predict what was going to happen. In early 1929, when I made this forecast, I was living in Europe which was then going through a period of depression. I said that there’s no hope of a recovery in Europe until interest rates fell, and interest rates would not fall until the American boom collapses, which I said was likely to happen within the next few months. What made me expect this, of course, was one of my main the- oretical beliefs, that you cannot indefnitely maintain an infationary boom.’ xiv Chronology

1977–2006: Friedman relocates to the Hoover Institution where disci- ples of ‘von Hayek and ‘von’ Mises are being recruited - one, ‘Dr’ Kurt Leube, has no post-secondary qualifcations. From 1987 to 1992, the ‘Mises University at Stanford University’ appeared to have a privileged existence. One of the ‘star’ speakers is Rothbard who delivers a menda- cious lecture on ‘Te Future of Austrian Economics.’ 1979: Hayek again asserts: ‘At the time I was so convinced that this was an overexpansion that, as you perhaps know, at the beginning of 1929 I predicted the American crash. One could foresee this very clearly.’ 1982: the Ludwig von Mises Institute is established. 1984–1988: Leube’s Hoover Institution publications (Te Essence of Hayek, Te Essence of Stigler and Te Essence of Friedman) are immedi- ately followed by Friedman’s ‘plucking model’ attack on the Austrian business cycle model (after a gap of 24 years). 1991: Friedman published ‘Say “No” to Intolerance’—which targets Mises. 1992: Hayek dies—but his for-posthumous-consumption oral history interviews continue to be suppressed. 1992: the Rothbardian defation-promoting Boettke arrives at the Hoover Institution as a National Fellow: Friedman lets him know he is ‘a pain in the ass.’ 1993: Friedman publishes his ‘plucking model’ attack (after a further gap of fve years). 1993: Rothbard, the Academic Vice President of the tax-exempt Ludwig von Mises Institute, celebrates the frst bombing of the World Trade Center and becomes, in efect, a spotter for Al-Qaeda by suggest- ing other New York buildings to bomb. 1994: in ‘A New Strategy for Liberty,’ Rothbard establishes an Austrian School ‘Outreach’ to ‘Redneck’ militia groups. Te ‘least’ Austrians could do ‘is accelerate the Climate of Hate in America, and hope for the best.’ 1994: the defamatory content of Hayek on Hayek challenges the rever- ential ‘knowledge’ of loyal Austrians. 1998: in the tax-exempt Human Action Te Scholars Edition, Mises’ lobbying for the Warfare State and conscription is silently corrected through deletion. Chronology xv

1998: Friedman informs the Mises Institute Senior Fellow, Walter Block, that ‘I believe Hayek has been a great force for good and has done a great deal to promote an appreciation of the role of markets in a free society. He deserves better than your self-satisfed diatribe.’ In response, Block complains about ‘economic fascism, the economic sys- tem employed by Nazi Germany, and Mussolini’s Italy. In these cases, there was a thin veneer of private property rights, but the underlying economic reality was one of government control.’ Friedman informs Block: ‘you are a fanatic who fnds it absolutely impossible to under- stand the thinking of anybody other than himself. It is time to close our discussion.’ 2000: Block describes the Austrian School ‘united front’ with Neo- Nazis. 2003: after seven decades (and almost half a century of intense aca- demic dispute), the 1932–1934 evidence about Friedman’s Chicago ‘oral tradition’ is—for the frst time—examined and reported (and largely absolves Friedman from the criticism levelled at him). 2007: Mises’ card-carrying Austro-Fascist status is reported (after being suppressed for almost three-quarters of a century). 2007: Te Road to Serfdom Texts and Documents Te Defnitive Edition may have earned Bruce Caldwell $1 million in a single month on the back of ‘pufng’ Fox News’ conspiracy theorist, Glenn Beck. 2010: in the Washington Post, Caldwell—a major ‘free’ market fund- raiser—illustrates their Use of Knowledge in Society: ‘Hayek himself disdained having his ideas attached to either party.’ 2010/2012: referring to the 1929 American crash, Hansjörg Klausinger confrmed: ‘there is no textual evidence for Hayek predicting it as a con- crete event in time and place’; we lack ‘convincing evidence of a predic- tion that conformed to what Robbins suggested in his foreword.’ 2011: in Te Constitution of Liberty Te Defnitive Edition, Hayek’s motive for writing the book—to market to ‘Fascist’ dictators such as António de Oliveira Salazar—is silently corrected through deletion.