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HAYEK Social Theorist of the Century

HAYEK Social Theorist of the Century

Economic Insights

FEDERAL RESERVE BANK OF DALLAS VOLUME 4, NUMBER 1 HAYEK Social Theorist of the Century

Americans love to cre- This last year of the 20th century is also the 100th and the second in politi- ate lists of important people, anniversary of the birth of Austrian Friedrich von cal . While at the events and things. As the university, he had many bril- of this article suggests, F. A. Hayek. He and American stand as perhaps liant teachers of political Hayek not only belongs on the most influential free of the century. economy, most notably Lud- a list of the century’s great Hayek’s The Road to Serfdom and other works helped turn the vig von Mises. Mises held an social theorists but deserves honorary professorial post world away from socialist and communist ideology. to be at its apex. Although but, more important, hosted Hayek is not a The Bank of Dallas is proud to make the fortnightly Privatseminar, name, no other 20th century available this essay about Hayek and his legacy. An excellent, where gifted, rising students social thinker has better in , and understood how free soci- fuller treatment can be found in a commemorative album philosophy presented their eties work, and none has compiled by John Raybould and published by the papers and where new ideas been so vindicated by un- Institute in London. and theories were enthusias- folding events in so many tically discussed. For Hayek, areas. As 1999 is — Bob McTeer it was the beginning of a life- the centenary of Hayek’s President long friendship with Mises, Federal Reserve Bank of Dallas birth, it’s an especially oppor- the most prominent living tune time to examine his member of the Austrian ideas and their real-world that operate He considered his an idyllic school of economics.2 Within impact during this century, under the . Tens childhood.1 The Hayek men three years, Hayek’s socialis- much of which Hayek—who of millions of people have had typically been civil ser- tic leanings had been redi- died in 1992—lived to see. died in this century’s wars, vants, but Hayek and his two rected by Mises’ persuasive The 20th century has perished under oppressive brothers became university arguments, which were con- seen a single, unifying intel- regimes or were put to death professors, and his cousin, sistently rooted in the classi- lectual struggle play out simply because they were in , became cal liberal tradition. across its decades, affecting the political opposition. Even a world-famous . Because the war’s after- all the earth’s peoples. That those who survived have During the Great War math brought depression to struggle has been between often suffered harsh eco- that transformed Europe many countries and hyperin- those who wished the nomic and political depriva- both geographically and ide- flation to Germany (which to impose a centrally planned tion. This is the most visible ologically, Hayek served as dramatically affected ), order on and those manifestation of the ideolog- an artillery officer in the Hayek and Mises cofounded who understood that the ical struggle in which Hayek Austrian army. He became, an institute to study best order—and the only was a central participant. in his own words, a “mild cycles. Hayek’s 1929 work one consistent with democ- socialist,” who hoped that at Geldtheorie und Konjunk- racy and free- The Early Years and war’s end there would be a turtheorie (later published in dom—is a spontaneous one the societal reorganization and English as Monetary Theory that does not need imposi- The Austro-Hungarian world . In 1918 Hayek and the Cycle) drew tion. Such an order flourishes empire was at its zenith entered the University of the attention of economists only under democratically, when Hayek was growing up , where he earned two in other nations, and in 1930 or constitutionally, restrained in pre– Vienna. , one at age 21 in he was invited to London to of the Atlantic, The Road to ist, antiplanning arguments. The Foundation of Our Civilization Serfdom. This book, com- He retreated to academia pleted in 1944, sold so well and in 1948 published Indi- Our civilization depends, not only for its origin but also for its preservation, on what can be precisely described only as the that the University of Chi- vidualism and Economic of human cooperation, an order more commonly, if cago Press had to reprint it Order, a book of essays that somewhat misleadingly, known as . To understand our civ- three times in the first three dissented from the postwar ilization, one must appreciate that the extended order resulted not from human design or intention but spontaneously: it arose from weeks after its release. The embrace of ever-widening unintentionally conforming to certain traditional and largely moral Book-of-the-Month Club dis- intervention. practices, many of which men tend to dislike, whose significance tributed 600,000 copies of Believing the classical they usually fail to understand, whose validity they cannot prove, and which have nonetheless fairly rapidly spread by means of an evolu- the condensed version, which liberal order was under theo- tionary selection—the comparative increase in population and had been serialized in Read- retical and political assault in —of those groups that happened to follow them. The unwit- er’s Digest.5 Ultimately, this 1947, Hayek founded an ting, reluctant, even painful adoption of these practices kept these groups together, increased their access to valuable information of all work would become a multi- organization whose purpose sorts, and enabled them to be “fruitful, and multiply, and replenish million worldwide best-seller. was “to work out the princi- the earth, and subdue it” (Genesis 1:28).This process is perhaps the Hayek was better known ples which would secure the least appreciated facet of human . …The main point of my argument is, then, that the conflict to the general public than preservation of a free soci- between, on one hand, of the spontaneous extended even Keynes, whose policy ety” and to promote such a human order created by a competitive market, and on the other ideas and macroeconomic society internationally. The hand by those who a deliberate arrangement of human interaction by central authority based on central command over theories dominated the post- new group was named after available resources is due to a factual error by the latter about how war world. But Hayek’s the site of its initial meeting, knowledge is and can be generated and utilised. As a question of career seemed at its peak, for Mont Pelerin on Lake , fact, this conflict must be settled by scientific study. Such study after his penetrating dissec- Switzerland. The first meet- shows that, by following the spontaneously generated moral tradi- tions underlying the competitive market order (traditions which do tion of , the general ing of the Mont Pelerin not satisfy the canons or norms of embraced by most academic community slowly Society drew a glittering col- socialists), we generate and garner greater knowledge and wealth turned chilly toward him. lection of from than could ever be obtained or utilised in a centrally-directed econ- omy whose adherents claim to process strictly in accordance with The Labour Party, full of around the world, many of “.” Thus socialist aims and programmes are factually impossi- avowed socialists who want- whom had never met be- ble to achieve or execute; they also happen, into the bargain as it ed to implement many of cause of wartime travel were, to be logically impossible. ■ the policies Hayek’s book restrictions. The society would —From : The Errors of Socialism, 6Ð7. had condemned, took power ultimately succeed in making in 1945. The political and a reality of Hayek’s vision of intellectual climate in Hayek’s retaking the future from the adopted country was decid- then-dominant statist move- lecture on the Austrian tistics the following year. edly hostile to his antisocial- ments.6 theory of business cycles.3 Hayek promptly accepted, which led to his permanent The London Years residence, and citizenship, in Hayek was invited to Britain. Except for a brief The Condition of the Working Class lecture at the London stint at Cambridge during Under Capitalism School of Economics (LSE) World War II, he remained at by Lionel Robbins, and the LSE until 1950. There is, however, one supreme myth which more than any other has served to discredit the to which we owe in 1931 he gave the series It was during Hayek’s our present-day civilization...[I]t is the legend of the deterioration of of lectures that became London days that he be- the position of the working classes in consequence of the rise of and .4 Al- came internationally recog- “capitalism” (or of the “manufacturing” or the “industrial system”). though Hayek was coolly Who has not heard of the “horrors of early capitalism” and gained the nized as one of the world’s impression that the advent of this system brought untold new suffer- received at Cambridge, leading classical liberal schol- ing to large classes who before were tolerably content and comfort- home of John Maynard ars and thinkers. Prices and able? The widespread emotional aversion to “capitalism” is closely Keynes’ “Cambridge Cir- Production was followed by connected with this belief that the undeniable growth of wealth which the competitive order has produced was purchased at the of cus,” his lectures were Collectivist Economic Plan- depressing the standard of life of the weakest elements of soci- enthusiastically applauded ning, The Pure Theory of ety;…[A] more careful examination of the facts has, however, led to ■ at the LSE, which offered and the book that a thorough refutation of this belief. him the Tooke Chair in would introduce him to the —From Capitalism and the Historians, 9Ð10. Economic and Sta- general public on both sides the Nobel Memorial Prize came one of many macro- Decentralized Knowledge and in Economic . paradigm approaches that the Problem His retirement finan- developed between 1950 cially secured by the prize and 1980, including mone- The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the , Hayek returned to tarism, supply side econom- circumstances of which we must make use never exists in concen- his unfinished work and ics, trated or integrated form but solely as the dispersed bits of incom- completed the second and and, of course, variations on plete and frequently contradictory knowledge which all the separate 8 possess. The economic problem of society is thus not third volumes of Law, Leg- Keynes’ original ideas. merely a problem of how to allocate “given” resources—if “given” is islation and , in As we move into a new taken to mean given to a single mind which deliberately solves the which he elaborated on century, Hayek’s vision of a problem set by those “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, themes explored in The world of more open for ends whose relative importance only these individuals know. Or, Constitution of Liberty. In is arriving, albeit slowly in to put it briefly, it is a problem of the utilization of knowledge which is his final book, The Fatal places. His was a remarkable not given to anyone in its totality…[I] should briefly mention the fact that the sort of knowledge with which I have been concerned is Conceit: The Errors of So- life, and though he doubtless- knowledge of the kind which by its nature cannot be conveyed to any cialism, published in 1988, ly sometimes believed the central authority in statistical form. The statistics which such a cen- Hayek took a powerful and flow of ran against tral authority would have to use would have to be arrived at precise- logical look at why social- him, he always seemed opti- ly by abstracting from minor differences between the things, by lump- ing together, as resources of one kind, items which differ as regards ism had to fail. And then, mally positioned to research location, quality, and other particulars, in a way which may be very empirically, all over the and write on precisely the ■ significant for the specific decision. world that failure began to topics that would shape —From and Economic Order, 77Ð79. happen in ways so dramat- world events. He was a mod- ic as to have been unimag- el scholar, always except- inable just a few years ionally polite to his intellec- earlier. The tual adversaries, a prolific yet Chicago and also edited and wrote an collapsed, the Berlin Wall trenchant writer and an the Later Years introductory essay for Capi- fell and Germany was re- example of the type of per- In 1950, Hayek accepted talism and the Historians. united. Even self-described son who lives by his pro- a professorship in social and In 1962, Hayek returned socialist nations began to fessed ideals. And while in moral science at the Univer- to Germany as a professor follow America’s lead, cut- terms of policy his own cen- sity of Chicago and joined of at Albert ting their rates and tury favored others—notably the school’s Committee on Ludwigs Universität at Frei- sometimes selling off their Marx, Pigou, Fischer, Keynes, Social Thought. Through burg, West Germany. But public business monopo- Friedman and Mundell— the with writing economic theo- ironically, even as he lived lies. Historical develop- 21st may see an international ry at this point, Hayek amid the German “economic ments everywhere seemed blooming of societies based widened the scope of his miracle,” which his teaching to confirm Hayek’s theo- on his vision of a free—and writing and scholarship. He had so influenced,7 Hayek’s ries, and even his old a good—society. ■ published works in political political positions seemed nemesis—Keynesian science, law, sociology, his- less fashionable than ever economic theory—no long- tory of science, biography, to many, and in 1968 he er dominated macroecono- —Robert L. Formaini history and even . retired from the university mic policy. Instead, it be- Senior Economist Hayek was rare in that he and from active academic integrated his knowledge of life. He became isolated economic theory with a and depressed and was rou- On theory about the generation, tinely ignored or forgotten There were of course extraordinary gaps in his knowledge. His perception and evolution by those who disagreed with knowledge was aesthetically guided, with the result that he was of knowledge generally and him. Despite this, Hayek completely ignorant of nineteenth-century . Totally of all human evolution. It was far from through with ignorant. He just disliked it. I had to tell him every day, not so much about economic history, but even about the earlier English econo- was during this period that thinking and writing. The mists. He knew his Marshall, but very little else…[H]e had hardly he wrote The Sensory Order, catalyst that regenerated anything about theory…[I] like to say, I liked and Harriet the old fires came, surpris- Keynes and in many ways admired him, but do not think he was a good economist. ■ Taylor, The Constitution of ingly, in 1974 from socialist Liberty and The Counter- Sweden, when he and Gun- —From Hayek on Hayek, 92Ð93. of Science. He nar Myrdal were awarded References The Tempting Road to Serfdom Hayek, F. A. (1972), Individualism To learn more about and Economic Order (Chicago: the Raybould book, It is a revealing fact that few planners are content to say that Regnery Gateway Editions), orig. see the Adam Smith central planning is desirable. Most of them affirm that we can no pub. 1948. Institute’s web site, longer choose but are compelled by circumstances beyond our con- www.adamsmith.org.uk. trol to substitute planning for . The myth is deliberately ——— (editor) (1967a), Capitalism cultivated that we are embarking on the new course not out of free and the Historians, 8th ed. but because competition is spontaneously eliminated by techno- (Chicago: logical changes which we neither can reverse nor should wish to pre- Press), orig. pub. 1954. vent.This argument is rarely developed at any length—it is one of the assertions taken over by one writer from another until, by mere iter- ———(1967b),Prices and ation, it has come to be accepted as an established fact. It is, never- theless, devoid of foundation. The tendency toward and Production, 2nd ed. (New York: planning is not the result of any “objective facts” beyond our control Augustus Kelley Reprints but the product of opinions fostered and propagated for half a centu- of Economic Classics), orig. ry until they have come to dominate our policy. pub. 1931. …[O]nce government has embarked upon planning for the sake of , it cannot refuse responsibility for anybody’s fate or position. ——— (1967c), The Road to In a planned society we shall all know that we are better or worse off Serfdom (Chicago: University of than others, not because of circumstances which nobody controls, Chicago Press), orig. pub. 1944. and which it is impossible to foresee with certainty, but because some authority wills it. And all our efforts directed toward improving our ——— (1988), The Fatal Conceit: position will have to aim...[a]t influencing in our favor the authority The Errors of Socialism (Chicago: which has all the power. The nightmare of English nineteenth-centu- University of Chicago Press). ry political thinkers, the state in which “no avenue to wealth and honor would exist save through the government,” would be realized in a ——— (1994), Hayek on Hayek: completeness which they never imagined—though familiar enough in An Autobiographical Dialogue ■ some countries which have passed to . (Chicago: University of Chicago Press). —From The Road to Serfdom, 43 and 107. Raybould, John (1998), Hayek: A Commemorative Album (London: ). Notes 1 Raybould (1998). the late 1940s, attended the Further Reading on 2 Also known as the Viennese second meeting of the Mont Friedrich von Hayek school, the Pelerin Society. His chief eco- began with and nomic advisor, , Hayek, Friedrich von (1944), has included or influenced, to was also a society member The Road to Serfdom (Chicago: a greater or lesser degree at and later helped Hayek secure University of Chicago Press). various times, such notables as his position at Freiburg. Röpke, Eugen von Böhm-Bawerk, another Mont Pelerin member, ——— (1960), The Constitution , Gottfried had advised Earhard to abolish of Liberty (Chicago: University of Haberler, , the Allied-imposed controls in Chicago Press). , Fritz 1948. After the controls were Machlup, Lionel Robbins, Israel lifted, a long-running experi- ——— (1976), Law, Legislation Kirzner, Wilhelm Röpke, G. L. S. ment unfolded that showed and Liberty, Volume 2 (Chicago: Shackle, West Germany’s freer economy University of Chicago Press). and . was clearly superior to East 3 Hayek visited London a year Germany’s communist one. The Raybould, John (1998), Hayek: A Commemorative Album (London: earlier for a monetary confer- result was, of course, the erec- Economic Insights Adam Smith Institute). ence, where he first met his tion of the Berlin Wall to pre- is a publication of the Federal Reserve Bank of future lifelong intellectual oppo- vent flight from communist East Dallas. The views expressed are those of the Steele, G. R. (1996), The nent, John Maynard Keynes. to capitalist West. authors and should not be attributed 8 Economics of Though friends, Hayek and Keynesians now are in three to the Federal Reserve System. Keynes agreed infrequently on subgroups: Neo-Keynesian, (New York: St. Martin’s Press). economic theory and public post-Keynesian and Post Please address The University of Chicago policy issues. Keynesian. Each group is all correspondence to 4 Press is in the process of Hayek (1967b). attempting to come to terms Economic Insights 5 publishing Hayek’s collected Raybould (1998), 47. with the deficiencies of Keynes’ Public Affairs Department 6 writings in 20 volumes. Seven Raybould (1998), 55–59. The General Theory of Federal Reserve Bank of Dallas 7 of these are now available: Ludwig Earhard, whose “bon- , and P.O. Box 655906 1, 3, 4, 5, 6, 9 and 10. fire of controls” ignited the Money in light of economic Dallas, TX 75265-5906 German economic reconstruc- performance and policy prob- Visit our web site at tion one Sunday afternoon in lems since 1950. www.dallasfed.org.

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