First published in Great Britain in 1983 by Maurice Temple Smith Ltd Jubilee House, Chapel Road Hounslow, Middlesex, TW3 ITX © 1983 Eamonn Butler This edition is copyright under the Berne Convention. All rights are reserved. Apart from any fair dealing for the purpose of private study, research, criticism or review, as permitted under the Copyright Act 1956, no part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means whatsoever, without the prior permission of the copyright owner. Butler, Eamonn Hayek. 1. Hayek, F.A. 2. Economics—History I. Title 330.1 HB103.H3 ISBN 0–85117–233–4 (hardback); 0–85117–234–2 (paperback) Printed in Great Britain by Billing and Sons Ltd, Worcester Contents Preface 3 3 Introduction: Hayek's life and work 4 Chapter 1: Understanding how society works 13 Chapter 2: The market process 31 Chapter 3: Hayek's critique of socialism 49 Chapter 4: The criticism of social justice 64 Chapter 5: The institutions of a liberal order 78 Chapter 6: The constitution of a liberal state 89 Epilogue: Sense and sorcery in the social sciences 97 Notes 111 Select bibliography 127 Index 129 2 Preface At a recent meeting of the Carl Menger Society (a group devoted to the understanding of the ‘Austrian School’ of economics), the words of F.A. Hayek were being discussed. As usual, the Alternative Bookshop had brought along a wide selection of the works of Hayek and other members of the school. But as the many people present who had no background in economics or political science looked over the books, some were intimidated by the technical content of several of them, and the remainder had to ask where the general reader should start. This incident made it clear to me that there was an urgent need for an introduction to Hayek’s thought which covered his main arguments but which could be understood by the general reader or the student who did not have a social sciences background. To summarise the often complex arguments of over 25 books in one volume must require some oversimplification, and no doubt my friends in the academic community will argue that I have distorted Hayek’s arguments in the process. But it is to me the discharge of an intellectual duty to present the essentials of Hayek’s thought without any resort to intimidating technical language, so enabling a much wider audience to understand his work instead of knowing only his name. I would like to thank my friends at the Adam Smith Institute for their help and advice on the manuscript: Dr Madsen Pirie and Mr Russell Walters. The Adam Smith Institute, London 3 INTRODUCTION Hayek's Life and Work . we must shed the illusion that we can deliberately 'create the future of mankind'... This is the final conclusion of the forty years which I have now devoted to the study of these problems . .1 FRIEDRICH HAYEK'S influence in helping a generation to understand the nature of a liberal2 society and the errors of collectivism goes far beyond that of any writer of his period. Before and after the Second World War, the intellectual tide swept unceasingly in the direction of socialism. The consensus of the age was for economic planning, the setting of targets for economic growth, full employment policy, comprehensive state welfare services, and the redistribution of incomes. It was a consensus which Hayek never joined.3 Indeed, it was he who showed in The Road to Serfdom that even the most modest dalliance with these ideas would lead to disaster if they were pursued consistently. His clear book, and the condensed version of it which reached millions,4 achieved a major and demonstrable change in the minds of many men of thought and of action. When the worst implications of the political consensus were becoming plain, Hayek gave powerful ammunition to the supporters of the free society in his statement of its principles, The Constitution of Liberty; and later in Law, Legislation and Liberty he set out the legal and constitutional framework needed to support the delicate structure of the liberal social order. His contribution, therefore, is in line with his belief that all of the great social movements have been led not by politicians but by men of ideas. And yet his practical influence is increased by the fact that many prominent people in the world of politics have not only read his works, but have been moved by them. Hayek's family had a strong tradition of scholarship in the natural sciences. One grandfather was a zoologist, the other (after a time as professor of constitutional law) was a statistician and president of the Statistical Commission of Austria. His father, a doctor of medicine, turned to research and teaching as professor of botany at the University of Vienna. One brother became professor of anatomy at Vienna, the other, professor of chemistry at Innsbruck. So although economic issues fascinated him, as a young man Hayek was uncertain whether to become an economist or a psychologist. But despite his eventual movement away from the sciences, the family tradition continued: his daughter became a biologist and his son a bacteriologist. 4 Born in Vienna on 8 May 1899, Hayek undoubtedly benefited from his intellectual environment. He knew the great economist, Eugen von Böhm–Bawerk, for example, as a friend of his grandfather even before he had learnt the meaning of the word 'economics'. It was scarcely surprising that he should enter the University of Vienna, and hardly less so that he should receive two doctorates, in law (1921) and in political science (1923). He was just old enough to glimpse the imperial civilisation of Austria which was extinguished by the first world war, and even to serve in the armed forces (although he later claimed that his only lasting memory of the conflict was that of trying to recapture a bucketful of eels which were meant for the breakfast of the troops, but which he had accidentally overturned in a dewy field). But the turmoil of the wartime period diverted him away from the natural sciences, and made him take up the economic and social issues on which his reputation would come to be based. As a research student he had visited the United States, although the free enterprise economy of that country does not seem to have made much of an impact on the moderate, Fabian socialist views he held at the time. He has speculated that this mild socialism proved of value to him in the long term, because he had to work out the principles of a free society for himself, deliberating over every point. In this, he was helped by the leading economist of the 'Austrian' school, Ludwig von Mises.5 As one of the directors of a temporary government office, Mises was looking for young lawyers and economists. At his interview, Mises remarked that he had never seen Hayek at his lectures on economics (almost true: Hayek had looked in once but found Mises's lecture conspicuously antipathetic to his mild socialist ideas) but hired him nonetheless. For the next five years, Mises was Hayek's chief in the office, and after that he became vice–president of the Austrian Institute for Economic Research, an institute to study business cycles and economic policy which they started together and of which Hayek became director. In addition to this work, Hayek spent the years between 1929 and 1931 lecturing in economics at the University of Vienna. This was undoubtedly a period of important intellectual development as Mises weaned Hayek off his Fabian views. In the Private seminar discussion group which met in Mises's office, he began to understand the problems of socialism, and was completely won over by Mises's stinging critique, Socialism, which appeared in German in 1922.6 It was also a time when Hayek was coming into contact with many of the great economists of the age. In London in 1928, for example, he first met John Maynard Keynes, with whom he conducted a public and private debate on the importance of money for the next twenty years. It was a subject which Hayek had definite views about: he had, after all, been in a job where his salary was increased 200 times in eight months to keep up with prices which doubled each day.7 And he became an acknowledged expert on the subject with the German publication of Monetary Theory and the Trade Cycle in 1929. 5 London: Lionel (later Lord) Robbins was also impressed with Hayek, and arranged for him to give a series of lectures at the London School of Economics in 1931, soon afterwards published as Prices and Production. Later that year, Hayek was appointed Tooke Professor of Economic Science and Statistics at the University of London, where he remained until 1950. The values which he found in Britain impressed him so much that he became a naturalised British subject in 1938, just a few weeks before German forces invaded his native Austria. In 1931 and 1932 he devoted much energy and time to a critical review of Keynes's Treatise on Money, only to be told by its author that he had changed his mind completely on the subject in the meantime. Largely because he suspected that Keynes would change his mind yet again, Hayek did not attempt a systematic refutation of Keynes's next and most influential work, the General Theory.8* It was a mistake for which Hayek much blamed himself in later years.