Frierdrich A. von Hayek (1899-1992)

08.05.2024

Nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger.

F.A. von Hayek

TAKE AWAY

Nobel Laureate Friedrich A. von Hayek was arguably the most seminal social philosopher of our time and together with Ludwig von Mises (1881-1973) the leading representative of the “Austrian School of Economics”. Hayek’s approach to economic and social phenomena is distinguished by his methodological individualism and subjectivism, and thus rests upon the insight that every individual chooses and acts in pursuit of his purposes and in accordance with the perception of his options for achieving them. His groundbreaking insights exposed the fatal flaws of Socialism and stripped it from its political and cultural fictions. Hayek’s theories on business cycles, the division of knowledge, on competition and spontaneous social orders explained the mechanics of a society of free people. His works became milestones in the literature of social philosophy. Hayek’s ideas on the Denationalization of Money or on the reform of democracy are considered revolutionary. The best collection of Hayek’s massive oeuvre, is The Essence of Hayek (1984/86/92, Stanford, Hoover Press) published at the occasion of his 85th birthday.

An artillery officer

It is an undeniable fact that economics and social philosophy, more than other academic fields, are subject to popular myths and recurrent fads. The almost cyclical misreading and ostracizing of Friedrich A. von Hayek’s work is a case in point. 125 years after Hayek’s birth on May 8, 1899 and in the midst of an oddly renewed interest in redundant doctrines, we should briefly recall his most important works. F.A.von Hayek was born in fin-de-siecle Vienna into a family that could lay claim to an academic tradition of well over 3 generations. To avoid the societal embarrassment of failing at several schools in Vienna, he dropped out and voluntarily joined the Austro-Hungarian Army at the age of 18. As an artillery officer he served at the northern Italian front and endured the terminal blow delivered by the Italians that ended the senseless carnage. When a truce was finally signed on Nov. 3, 1918, tens of thousands of demoralized troops left their trenches and set out for their hazardous retreat towards the grim reality of their respective homelands. Left without any binding military command or discipline, these unruly comrades in war, speaking some 11 languages often turned aggressive. And yet they spontaneously began to cluster into small bands to move on in their trying march through hostile territories. Severely weakened by malaria, Hayek was among them and experienced firsthand how unplanned human actions spontaneously matured into social orders that surpass any structures men could consciously contrive.

Hayek arrived in a starving and deeply divided Vienna on Nov. 12, the day when a self-styled parliament resolved that the German speaking portion of the defeated Austro-Hungarian Empire will be part of a German Republic. With the breakdown of the monarchy’s venerable institutions, Hayek’s own social class vanished before his very eyes and the once proud Empire was suddenly reduced to a small, land-locked country neither politically nor socially or economically suited to cope with the post-war problems. These episodes forever affected Hayek’s profoundly and posed the foundations of his thinking. Immediately after his return from the Italian front, Hayek enrolled in the University of Vienna and, only three years later obtained his law degree (Dr. jur.). While Hayek studied for his second doctoral degree in Political Science (Dr. rer. pol.) which he earned in 1923, he began to work under Ludwig von Mises’ directorship in the so-called “Abrechnungsamt”, a Vienna based office for the settlement of pre-war debts. As the most eminent scholar of the third generation of the Austrian School of Economics, Mises (1881-1973) became Hayek’s mentor and in 1927 they succeeded in founding the “Austrian Institute for Business Cycle Research” which soon gained high academic reputation under Hayek’s and later Oskar Morgenstern’s leadership.

Inflationary character

The culturally vibrating climate of interwar Vienna provided the stimulating background for many scholarly circles and schools, such as the “Vienna Circle of Philosophy”, the “Vienna School of Psychoanalysis”, or the “Mises Private Seminar”. This famous “Seminar” which Mises conducted between 1921-1934 off campus in his Chamber of Commerce office was the nucleus of the fourth generation of the Austrian School, the most important representative of which was Hayek. It is remarkable that far more than half of its participants later became world-famous in their respective academic fields. Yet, with the Nazi terror on the rise and almost no prospects of ever gaining access to an adequate academic position, all but a very few of these uniquely talented scholars left Austria for good. Schumpeter and Hayek were the first, many others were soon to follow. This “brain drain” lead to devastating consequences in the intellectual life in Austria and Germany which could be felt well into the 1970s. Hayek’s first book Monetary Theory and the Trade Cycle (1929) at once set a standard in modern business cycle theory, which is still valid. One of the most striking characteristics of the “Austrian” business cycle theory is Hayek’s insight that any shortage of capital immediately causes a crises.

While classical economic theory never elucidated what causes such a shortage, Hayek made it clear that any overinvestment leads to “scarcity of capital”, unavoidably compelling a decline in investment and hence leading to the loss of a part of the real capital, produced because of the excessive investment rate. Impressed by Hayek’s new business cycle theory, Lord Robbins invited him to lecture at the London School of Economics in the winter of 1931. The lectures where so successful that he was offered the position of “Tooke Professor of Economic Science” almost immediately thereafter and he accepted almost without hesitation. At this time, when J.M. Keynes’ new theories began to dominate academic and political life it was unavoidable for Hayek not to be immediately drawn into a fundamental debate with Keynes. Due to their inflationary character Hayek vigorously opposed Keynes’ theories and thus became the leading intellectual force against Keynes and his followers, mostly at Cambridge. However, in view of a recession with inacceptable unemployment it became politically obvious that Hayek’s approach of “waiting out the crisis“ was doomed to be overshadowed by the theoretically seriously flawed yet politically attractive “Keynesian Revolution” with easy “solutions” and massive government interventions. Due to the Zeitgeist Keynesian economics with its misleading market signals, whether intended or unintended, is fashionable again today. As a consequences we witness today large central governments with insupportably huge national debts and failing democratic institutions.

While being deeply involved in these heated debates, Hayek at the same time opened yet another intellectual front and published the three famous essays which forever shattered the foundations of socialism. These essays were later collected in his Individualism and Economic Order (1948). The painful collapse of socialism as a viable political system in 1989 is the belated empirical proof of Mises’ as well as Hayek’s insights. The LSE having closed due to the German bombardments of London, Hayek spent the summer months of 1942 in Cambridge and finished there The Pure Theory of Capital and his essays “The Counter-Revolution of Science” as well as “Scientism and the Study of Society”. The Pure Theory of Capital must be rated as one of the most penetrating books ever published in this complex field. And his two lengthy essays are probably the most effective refutation of the still popular superstition that the methodology of the natural sciences can be utilized to explain social phenomena and human
action. These works are collected in his The Counter-Revolution of Science (1952, 1989) and are key to the understanding of his work.

Pelerin Society

But his intensive work on the insoluble economic and moral problems of socialism, the terror of fascism, and the outbreak of WW II made him write The Road to Serfdom (1944). This courageous best-seller of the immediate post war years, in the meantime translated in some 20 languages, was a revelation for those who wanted freedom. Hayek clearly showed there the ideological links between socialism and fascism and demonstrated that no variety of socialism, no matter what its name or however modified by trendy adjectives, carries with it any adequate provisions for the preservation of economic and political freedom. Thus the popular view of the convergence of
economic systems is rooted in pure economic error and is a “pretense of knowledge”. This book made him world-famous. In 1946 an excellent condensation of it appeared “Reader’s Digest” and there was even a cartoon booklet with captions available. This book made him to an enemy of the left. His ground breaking article The Use of Knowledge in Society (1945) became a classic. In this essay on the division of knowledge, Hayek shows how the unorganized knowledge of the particular circumstances of time and place will spontaneously bring about a social order. The independent interaction of millions of individuals, each possessing only bits and pieces of information of which beneficial use might be made, creates circumstances that cannot be conveyed to any central authority. The price system is therefore a system of signals and the only mechanism that communicates information and enables us to adapt to circumstances of which we know nothing. Our whole modern social order and well-being thus rests on the possibility of adapting to processes that we do not know. The devastation, the hopelessness and the threat of an aggressive communist agenda following WWII forced Hayek to action. In 1947, with help in Switzerland he organized an international conference of economists, philosophers and historians to discuss and exchange ideas about the nature and the intellectual means to strengthen a free society. This important meeting in Switzerland turned out to be instrumental for the foundation of the exclusive “Pelerin Society”, an international association of classical liberal scholars.

Chicago years

By the end of 1949, Hayek left the London School of Economics, spent the spring term of 1950 in Fayetteville (AR) and in the fall of the same year he joined a congenial group of scholars with M. Friedman (Nobel Prize 1976), G. Stigler (1989), R. Coase (1991) or G. Becker (1992) at the University of Chicago. Among his many important works published during his 12 Chicago years only two books shall be singled out. Although The Sensory Order (1952) is probably Hayek’s most difficult and least known work it nevertheless contains some of his most original and important ideas, which are key for the understanding of his thinking. The preliminary thoughts for this discourse in theoretical psychology date back to the early 1920s, when Hayek took his chance and had the momentous opportunity to work in Constantin von Monakow’s “Brain Anatomy Institute” in Zurich (CH). These few months in Zurich proved to be decisive for his intellectual development. He became fascinated with the sensory coordination and functional relationships between the brain’s different zones and parts and drafted his “Beiträge zur Theorie der Entwicklung des Bewusstseins”. The extended version was published in book form some 30 years later as The Sensory Order. The structure of the book was inspired by the philosophical works of Moritz Schlick and of his distant cousin, Ludwig Wittgenstein.

The second book to be mentioned is Hayek’s famous classic The Constitution of Liberty (1960) – truly one of the great books of our time. Here Hayek further developed his idea of spontaneous order, and laid down the ethical, legal and economic principles of freedom and free markets. While for many social philosophers the chief aim of politics consists in setting up an ideal social order through utopian reforms, Hayek’s main task is the finding of rules that enable men with different values and convictions to live together. These social orders develop spontaneously through the interactions of individuals obeying these general rules. It is distinguished from the constructivist approach, which interprets all social orders as the product of a conscious design.

Intellectual isolation

In 1962 Hayek returned to Europe and joined the University ofvFreiburg/Breisgau. Among the many works, which he published there, again only two shall be mentioned. Hayek dedicated his Studies in Philosophy, Politics and Economics (1967) to his friend the influential Austrian born philosopher Sir Karl R. Popper (1902-1994). This book covers Hayek’s works dating from the early 1950s to the mid-1960s and contains classics such as “The Results of Human Action but not of Human Design” or “The Intellectuals
and Socialism”. His Freiburger Studien (1969) is a collection of important German essays, including his seminal “Competition as a Discovery Procedure” and “Kinds of Order in Society”.

After becoming professor emeritus at the University of Freiburg in 1969, he accepted a professorship at the University of Salzburg (Austria) which he kept until 1977. In spite of his poor health and relative intellectual isolation, Hayek nevertheless was able to produce a number of significant works. Among others, he published in 1973 the first volume of his trilogy Law, Legislation, and Liberty where he argues that a spontaneous social order and an organization are quite distinct and that their distinctiveness is closely related to the two different kinds of rules that prevail in them. These are the “end-state rules’ and the “process rules”. In the second volume, published in 1976, Hayek treated the misleading yet politically very popular terms “Social Justice”. This narcotic phrase can have meaning only in an organization where strict distributive rules apply, but cannot be used as a measure for income distribution in the spontaneous order of free societies. In 1974, very much to his own surprise he was awarded the Nobel Prize
in Economics. Probably for the political reasons he had to share the Prize with a complete adversary, Gunnar Myrdal, the intellectual force behind the socialistic Swedish welfare state, the model which was once highly praised and copied, however turned into a complete failure. At the peak of Neo-Keynesianism, Hayek in his Nobel lecture on “The Pretense of Knowledge” (1974) refuted once again the erroneous assumption of this politically popular superstition. This prestigious distinction clearly inspired the intellectual revival of the Austrian School of Economics and helped Hayek to finally step out of his isolation, if only temporarily. In typical opportunistic fashion suddenly, politicians, intellectuals, or Academies of Science and universities, which before shunned his work as ‘one of those long ago extinct dinosaurs that should be banned from libraries and classes’, began to shower him with prestigious titles or orders and multiple honorary degrees.

At the age of 78 he decided to leave Austria again and moved back to Freiburg where he completed the third volume of his trilogy Law, Legislation, and Liberty in which he refined his critique of democracy and developed the principles of a political order for free people. As a side product, he published his Denationalization of Money in 1977. In this revolutionary work he argues that inflation can be avoided only if the monopolistic power of issuing money is taken away from government and/or state authorities, and private industry be given the task be given of promoting competition in currencies. Hayek continued to lecture, write and travel extensively until the mid 1980s when he became ill and never fully recovered. Thus, he could not complete his last book The Fatal Conceit (1989) in which he hoped to develop further his theory of cultural evolution and expose once more the “errors of constructivism”. Regrettably and due to his inability to manage the huge manuscript, arguably this book has been heavily edited and not always in the most understanding and sensitive way. Hayek’s work arose and developed from a comprehensive approach to various disciplines that condition and influence one another. His publication list contains well over 40 books and some 300 scholarly essays and articles. As a scholar, a teacher and as caring fatherly friend, Friedrich August von Hayek came as close to the vanishing ideal of a gentleman as perhaps human frailty will ever permit. He died in Freiburg/Br, on March 23, 1992.