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 Chicago 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 Library of Congress Control Number: 2018946165 © 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. Printed on acid-free paper 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: Adolf Hitler 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). March 1928: Hayek’s Institute predicts a cyclical recovery starting in Austria. June 1929: 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.’ October 1929: 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), Herbert Hoover 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 September 1930: 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 ‘February 1929’ prediction about the Great Depression. 27–30 January 1931: ‘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.’ May 1931: the fnancial crisis spreads to Europe via Vienna’s Credit- Anstalt. June 1931: 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 September 1931: ‘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.’ June 1932: Hayek explains that the ‘central theme’ of his Monetary Teory and Trade Cycle is a ‘critique of the programme of the “Stabilizers”.’ 1 August 1932: the Tooke Professorship of Economic Science and Statistics is revived for ‘von’ Hayek. September 1932: 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 March 1933: 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. March 1934: Hayek begins a 16-year crusade to persuade his wife to give him a divorce. June 1934: Robbins publishes his Austrian-account of Te Great Depression. August 1934: 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).