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 law and the second in politi- ate lists of important people, anniversary of the birth of Austrian economist Friedrich von cal economy. While at the events and things. As the title university, he had many bril- of this article suggests, F. A. Hayek. He and American Milton Friedman stand as perhaps liant teachers of political Hayek not only belongs on the most influential free market economists 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 household The Federal Reserve 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 economics, sociology 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 Adam Smith 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, intellectual 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 governments that operate He considered his an idyllic school of economics.2 Within impact during this century, under the rule of law. 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 Ludwig Wittgenstein, became cal liberal tradition. across its decades, affecting the political opposition. Even a world-famous philosopher. 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 state 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 Austria), order on society 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 business 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 individual free- The Early Years and war’s end there would be a turtheorie (later published in dom—is a spontaneous one the Great Depression societal reorganization and English as Monetary Theory that does not need imposi- The Austro-Hungarian world peace. In 1918 Hayek and the Trade 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 Vienna, where he earned two in other nations, and in 1930 or constitutionally, restrained in pre–World War I Vienna. doctorates, 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 extended order of human cooperation, an order more commonly, if cago Press had to reprint it Order, a book of essays that somewhat misleadingly, known as capitalism. 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- government 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 wealth—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 evolution. …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, advocates 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 demand 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 Geneva, 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 socialism, the general ing of the Mont Pelerin not satisfy the canons or norms of rationality 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 intellectuals 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 “reason.” 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 Fatal Conceit: The Errors of Socialism, 6–7. 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 economic system 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 Prices and Production.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 price 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 Capital and the book that a thorough refutation of this belief.