Posted by: burusi | 03/06/2013

The life and times of F.A. Hayek

Friedrich Hayek

Friedrich Hayek

The life and times of F.A. Hayek

The life and times of F.A. Hayek, who explained why political liberty is impossible without economic liberty

Socialism appealed to the idealism of intellectuals, yet it brought the most hideous tyrannies. Just from the standpoint of human liberty, socialism was a catastrophe everywhere.

More than anyone else, Friedrich Hayek explained why central planning undermines human liberty and, if pursued far enough, will lead to tyranny. He told why thugs end up dominating socialist regimes. He told how the essential institutions of a free society develop without central planning.

He became more radical as he grew older. For instance, this passage from The Political Order of a Free People (1979), about abolishing government monopolies: “any governmental agency allowed to use its taxing power to finance such services ought to be required to refund any taxes raised for these purposes to all those who prefer to get the services in some other way. This applies without exception to all those services of which today government possesses or aspires to a legal monopoly, with the only exception of maintaining and enforcing the law and maintaining for this purpose (including defense against external enemies) an armed force, i.e. all those from education to transport and communications, including post, telegraph, telephone and broadcasting services, all the so-called ‘public’ utilities’, the various ‘social’ insurances and, above all, the issue of money.”

Hayek was an extraordinarily learned man. His knowledge and insights spanned not only economics, for which he was awarded the Nobel Prize in 1974, but also philosophy, history and even psychology. Nobel Laureate Ronald H. Coase hailed Hayek’s “high standards of scholarship” and “the power of his ideas.”

Hayek transcended nationality like few others in the 20th century. Stephen Kresge, Editor of The Collected Works of F.A. Hayek, which the University of Chicago Press is publishing in 22 volumes, likens Hayek’s global reputation to that of the physicists Niels Bohr and Albert Einstein. Today Hayek is revered by intellectuals throughout Europe, Asia and the Americas.

“Over the years,” Nobel Laureate Milton Friedman remarked, “I have again and again asked fellow believers in a free society how they managed to escape the contagion of their collectivist intellectual environment. No name has been mentioned more often as the source of enlightenment and understanding than Friedrich Hayek’s…I, like the others, owe him a great debt…his powerful mind…his lucid and always principled exposition have helped to broaden and deepen my understanding of the meaning and the requisites of a free society.”

Former British Prime Minister Margaret Thatcher wrote that “the most powerful critique of socialist planning and the socialist state which I read at this time [the late 1940s], and to which I have returned so often since [is] F.A. Hayek’s The Road to Serfdom.” Harvard University philosopher Robert Nozick remembered, “While in graduate school I encountered the writings of Friedrich Hayek and Ludwig von Mises, which shook me out of my then socialist beliefs.” Hoover Institution scholar, prolific author and popular columnist Thomas Sowell acknowledged that Hayek influenced his book Knowledge and Decisions (1980), citing Hayek’s “deeply penetrating insight into the way societies function and malfunction, and clues as to why they are so often and so profoundly misunderstood.” Internationally-acclaimed philosopher Karl R. Popper confided to Hayek, “I think that I have learned more from you than from any other living thinker, except perhaps Alfred Tarski…but not even excepting [Bertrand] Russell.” University of Chicago Law School distinguished professor Richard Epstein: “I have been heavily influenced by the work of Friedrich Hayek.” Nobel Laureate John Hicks saluted Hayek who “left a deep mark on my thinking.” Respected business thinker Peter F. Drucker called him “our time’s preeminent social philosopher.”

Pulitzer Prize winning journalist Daniel Yergin reported in The Commanding Heights (1998), written with Joseph Stanislaw: “Concepts and notions that were decidedly outside the mainstream have now moved, with some rapidity, to center stage and are reshaping economies in every corner of the world…Hayek, the fierce advocate of free markets…is preeminent.” Nobel Laureate Herbert Simon: “No one has characterized market mechanisms better than Friedrich von Hayek.”

He was a thin, distinguished-looking man who stood an inch or two over six feet. He had a small gray moustache and, in his later years, neatly-combed white hair. He spoke in a slow, thoughtful manner with a thick Austrian accent. He was an ardent hiker, spending as many summers as he could in the Alps. “I was a guideless mountaineer,” he recalled, “finding my way on difficult, but not exceedingly difficult, terrain — combinations of ice and rock.” He loved to collect rare books on economics, philosophy and history, and he assembled three formidable libraries during his life.

While some students found his lectures hard to follow, others were enthralled. Majorie Grice-Hutchinson, for instance, who saw him at the London School of Economics during the 1940s: “He generally strolled up and down while lecturing, and he talked in a conversational tone, without emphasis or pedantry. His excellent memory and wide humanistic background allowed him to present attractively the ideas of philosophers, jurists, politicians and businessmen of many countries and every period, and he had no difficulty in holding the attention of the large numbers of students who always filled his classroom.”

Eamonn Butler, Director of the Adam Smith Institute, London, observed that Hayek “takes an obvious delight in hearing a new point of view, and of quickly and delightedly exploring its implications along many lines of thought with an agility and economy which is the envy of many younger men.”

“His sense of humour was delightfully impish,” recalled David O’Mahony, a friend, “as, for example, when he used to turn off his hearing aid with obvious relish rather than endure a pompous speaker. He was always courteous and polite.” A 1983 International Herald Tribune profile reported, “He is everything you want an 83-year-old Viennese conservative economist to be. Tall and rumpled. A pearl stickpin in his tie. A watch chain across his vest, even though he wears a digital wristwatch.”

Although Hayek defended controversial views for decades, he usually managed to maintain the goodwill of his adversaries. He developed a warm relationship with the English economist John Maynard Keynes whose advocacy of government intervention in the economy he emphatically disagreed with. As a gesture of good will, Hayek dedicated his best-known work, The Road to Serfdom (1944), to “socialists of all parties.” Nobel Laureate George J. Stigler observed that “Hayek has always been both a gentleman and a scholar.”

Friedrich August von Hayek was born on May 8, 1899 in Vienna which was the political and intellectual capital of Austria-Hungary, the multi-national Habsburg empire which controlled much of Central Europe. Stephen Kresge and Leif Wenar, editors of Hayek on Hayek, noted that “He was born into the class which was largely responsible for the maintenance of the Austro-Hungarian empire and which did not survive its collapse.” His father, Dr. August von Hayek, was a botany professor at the University of Vienna. His mother, Felicitas Juraschek, called him Fritz. He had two younger brothers, Erich and Heinz.

As a child, he collected specimens of minerals, insects and flowers. Then he became fascinated with fossils and evolution. Gradually, as a teenager, he focused on human psychology and society. According to biographer Alan Ebenstein, he also enjoyed photography, bicycling, skiing, mountaineering and the theatre — early on, he had wide-ranging interests.

Hayek was drafted into the Austrian army in March 1917 and spent about a year on the Italian front. He contracted malaria but passed time reading about the Austrian School of economics which maintained that market prices are driven by the subjective valuations of customers. “I really got hooked,” he recalled, “when I found [Carl] Menger’s Grundsatze [Principles of Economics] such a fascinating book, so satisfying.” Hayek was especially interested in Menger’s “conception of the spontaneous generation of institutions.”

After his return in 1918, he enrolled at the University of Vienna. Things were so bad that in 1919 the university closed because it didn’t have enough fuel to heat the rooms. In an effort to shake the malaria, he went to Switzerland, then Norway.

At the university, Hayek recalled, “you were not expected to confine yourself to your own subject. I must have spent as much time in lectures on other fields, with other people, as I did in economics. Nominally I was studying law, but still it left me time, or I took time. I spent my day at the university from morning till evening, but shifting from subject to subject, readily hearing lectures about art history or ancient Greek plays or something else.” Hayek earned degrees in law (1921) and political science (1923).

In October 1921, with a letter of introduction from his economics professor Friedrich von Wieser, Hayek met Ludwig von Mises who was a financial advisor at the Chamber of Commerce. Mises’ 1912 book The Theory of Money and Credit had made him a respected economist, and in 1920 he wrote a controversial article which declared that government control of the means of production — socialism — guarantees inefficiency and waste. Mises found Hayek a job at the Abrechnungsamt [Office of Accounts] which helped clear up debts suspended during the war. This was amidst Austria’s postwar inflation; Hayek’s initial salary was 5,000 old kronen per month; in an effort to maintain purchasing power, the salary was tripled within 30 days, and nine months later the salary was about a million old kronen per month.

Mises’ 1922 book Die Gemeinwirtschaft [Socialism] had a major impact on Hayek’s thinking. “It gradually but fundamentally altered the outlook of many of the young idealists returning to their university studies after World War I,” Hayek recalled. “I know, for I was one of them.

“We felt that the civilization in which we had grown up had collapsed. We were determined to build a better world, and it was this desire to reconstruct society that led many of us to the study of economics. Socialism promised to fulfill our hopes for a more rational, more just world. And then came this book. Our hopes were dashed. Socialism told us that we had been looking for improvement in the wrong direction.”

Mises helped Hayek’s career many ways. “When, after only a year and a half,” Hayek remembered, “it was he [Mises] who smoothed my way not only by getting for me the necessary leave of absence but on financial conditions so favorable as to make my plan practicable.” Hayek was awarded a Rockefeller Foundation grant, offered to help European intellectuals broaden their horizons by visiting the United States. From March 1923 to June 1924, based at New York University, he attended classes at Columbia University and the New School. He broke into print in English, a letter published in the August 19, 1923 New York Times, about the German financial situation. He also spent some time at New York Public Library, reading news accounts of World War I, and he was astonished that they differed so dramatically from what he had read back in Austria. This led to his profound skepticism about government.

Upon his return, Hayek began attending Mises’ twice-monthly private seminar on free market economics. It met in Mises’ office at the Chamber of Commerce. “During the middle twenties,” Hayek noted, “this was much the most important center of economic discussion at Vienna…” In January 1927, Hayek, with Mises’ help, established Osterreichische Konjunkturforschunginstitut [Austrian Institute for Business Cycle Research], perhaps inspired by Columbia University professor Wesley Mitchell whose lectures Hayek had attended while visiting the United States. Mitchell gathered statistics on business cycles. In 1929, Hayek became a Privatdozent at the University of Vienna, which meant he could teach students there — without being paid.

Hayek had fallen in love with his cousin Helene Bitterlich, but he never got around to asking her to marry him before he left for America, and when he came back 14 months later, she was with another man whom she subsequently married. At the Abrechnungsamt, Hayek met Berta Maria von Fritsch, known as Hella. They got married in the summer of 1926. They had two children, Christina Maria Felicitas (1929) and Lorenz (Laurence) Josef Heinrich (1934).

Hayek wrote an essay, “The Paradox of Saving,” which critiqued the prevalent view that depressions occurred because people saved too much, and this essay impressed Lionel Robbins who was head of the economics department at the London School of Economics. He read German and knew the Austrian economics literature, although he embraced the approach of Cambridge University’s Alfred Marshall. Robbins’ book The Nature and Significance of Economic Science, as Hayek put it, was “a brilliant exposition of ideas which were largely familiar to the Austrian tradition.” Robbins arranged to reprint the work of a number of economists in the classical tradition. He assigned Risk, Uncertainty and Profit, by the University of Chicago’s Frank H. Knight. He encouraged the translation of Ludwig von Mises’ Socialism (London, 1934).

Robbins invited Hayek to deliver four lectures there in February 1931. He surveyed the history of monetary theory and introduced English-speaking economists to the Austrian view that economic fluctuations were substantially driven by monetary fluctuations, and that depression was the inevitable consequence of prior inflation. The lectures caused quite a stir, and they were published as the book Prices and Production (September 1931). Robbins wanted to appoint a professor who was competent in economic theory and familiar with thinking outside England, and Hayek satisfied those qualifications. He was offered the post of visiting professor for 1931-1932. Then he was appointed Tooke Professor of Economic Science and Statistics. Hayek became a naturalized British citizen and remained at the London School of Economics until 1949.

Why was Hayek, rather than Mises, invited to London? According to Hayek, because he had become reasonably fluent in English during his 14-month visit to America and because he had written a critique of the emerging view — soon to be promoted by the English economist John Maynard Keynes — that in a market economy people sometimes save too much and spend too little, bringing on a depression. In addition, he had started a book on the history of monetary theory, and so he was knowledgeable about the history of English monetary theory, which impressed the professors in London.

Hayek’s seminars drew friends and foes alike. Harvard University socialist economics professor John Kenneth Galbraith remarked that “The urge to participate (and correct Hayek) was ruthlessly competitive.” Ronald H. Coase remembered, “At LSE in the 1930s, economists were very receptive to new ideas. For this, a good deal of credit must go to Hayek…encouraging rigour in our thinking and in enlarging our vision.” Hayek had Austrian-born philosopher Karl R. Popper speak at a seminar, and Popper expanded it into his most controversial book, The Open Society and Its Enemies (1945), a passionate attack on Plato and Karl Marx; Hayek helped find a publisher and persuaded colleagues at the London School of Economics to give Popper a teaching position — rescuing him from a hostile academic environment in New Zealand. Through the ups and downs of Hayek’s life, Popper remained his closest friend.

Soon Hayek found himself a rival of Cambridge-based John Maynard Keynes whom he had met on a previous visit to London, perhaps in 1929. Three years earlier, in an Oxford lecture, “The End of Laissez Faire,” Keynes had used some reassuring language (“the important thing for Government is not to do things which individuals are doing already”), but he embraced potentially far-reaching government intervention. For instance, he asserted that government should determine “the scale on which it is desirable that the community as a whole should save, the scale on which these savings should go abroad in the form of foreign investments, and whether the present organization of the investment market distributes savings along the most nationally productive channels.”

Keynes, as editor of the Economic Journal, authorized his colleague Piero Sraffa to launch an attack on Hayek’s book Prices and Production. Hayek wrote an extended attack on Keynes’ Treatise on Money in the journal Economica (August 1931, February 1932) which was edited by Robbins. Keynes shrugged off the criticism, saying he had abandoned the views expressed in the book. This made Hayek wonder why he bothered to refute the book. Keynes counter-attacked Hayek’s Prices and Production: “The book, as it stands, seems to be to be one of the most frightful muddles I have ever read…an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlam.” Hayek and Keynes exchanged at least 11 letters debating monetary issues, and Hayek continued the debate in 10 articles.

Throughout the 1930s, Hayek devoted most of his energies to exploring the theories of money and capital, and initially his reputation was high. His 1929 book Geldtheorie und Konjunkturtheorie (1929) appeared in English as Monetary Theory and the Trade Cycle (1933). He delivered five lectures at the Institut Universitaire de Hautes Etudes Internationales, Geneva, where his former professor Ludwig von Mises had gone after Hitler came to power, and these lectures were published as Monetary Nationalism and International Stability (1937). Hayek’s Profits, Interest and Investment came out in 1939. The Pure Theory of Capital, in 1940. But soon all this work, noted Lancaster University (U.K.) scholar G.R. Steele, “was misunderstood, attacked, misrepresented and finally neglected.” Partially because he needed money and partially because he was moving on, Hayek sold his library on the history of money to a Swiss bank.

Hayek’s theory, the Austrian theory of the great depression, struck people as bad news – politically unacceptable. It maintained that once government began inflating the money supply, a depression became unavoidable. A depression just had to work itself out. When wages and prices found their new lower level, and unsound businesses were liquidated, then the recovery process could begin. Government could do nothing but stay out of the way. Then came Keynes’ The General Theory of Employment, Interest and Money (1936) which promised good news. He claimed that a free market economy sometimes failed to generate high enough levels of consumption, but this could be remedied by increasing government expenditures — “pump priming,” the policy was called.

According to Hayek, he never mounted a major attack on the General Theory because he was so turned off by Keynes macro-economic approach which aimed to manipulate an economy through aggregates like investment and consumption. This was utterly alien to Hayek’s micro‑economic view that an economy could be understood only through the action of individual people. More likely, Hayek didn’t expect Keynesian doctrines would be as seductive as they were, and he didn’t see how to deliver a decisive blow against them. Keynes swept the economics profession. Evan Durbin, John Hicks, Nicholas Kaldor, Abba Lerner and others at the London School of Economics — eventually Robbins himself — succumbed to Keynesian doctrines. Government officials loved Keynes since he told them to do what they wanted to do anyway, which was spend money.

As Keynes gained influence, in 1936, Hayek delivered a talk before the London Economic Club, and Economica reprinted it the following year. Called “Economics and Knowledge,” it was a sophisticated critique of schemes for a government-run economy. “How,” Hayek asked, “can the combination of fragments of knowledge existing in different minds bring about results which, if they were to be brought about deliberately, would require a knowledge on the part of the directing mind which no single person can possess?” This essay didn’t have any apparent effect on the Keynesian Revolution, but Hayek subsequently developed it into a powerful attack against central planning, and he viewed it as his most original insight.

Keynes’ stunning success banished Hayek to the minor leagues as far as the economics profession was concerned, but the two men became good friends. “Even to those who knew Keynes but could never bring themselves to accept his monetary theories, and at times thought his pronouncements somewhat irresponsible,” Hayek wrote, “the personal impression of the man remains unforgettable. And especially to my generation (he was my senior by 16 years) he was a hero long before he achieved real fame as an economic theorist. Was he not the man who had had the courage to protest against the economic clauses of the peace treaties of 1919? We admired the brilliantly written books for their outspokenness and independence of thought, even though some older and more acute thinkers at once pointed out certain theoretical flaws in his argument. And those of us who had the good fortune to meet him personally soon experienced the magnetism of the brilliant conversationalist with his wide range of interests and bewitching voice.”

Hayek did know how to answer the case for central economic planning which had become fashionable around the world, a consequence of the apparent success of Soviet central planning. He proceeded with vigor. “For more than a half century,” he wrote, “the belief that deliberate regulation of all social affairs must necessarily be more successful than the apparent haphazard interplay of independent individuals has continuously gained ground until to-day there is hardly a political group anywhere in the world which does not want central direction of most human activities in the service of one aim or another.” Hayek realized that decisive critiques of central planning, which had been published in German, were virtually unknown among English-speaking readers. Accordingly, he gathered English translations of essays by Ludwig von Mises, N. G. Pierson and Georg Halm into a book, Collectivist Economic Planning (1935).

The essays emphasized that without the signals provided by free market prices, it’s impossible to determine what consumers want and how to organize production most effectively — chronic inefficiency means chronic poverty. The most important essay was the one by Mises, written in 1920 while Lenin was still struggling for mastery of Russia.

This launched the “economic calculation” debate about whether a socialist economy could be made to deliver decent living standards. Mises was ridiculed because he had somewhat overstated his case (“in a socialist state wherein the pursuit of economic calculation is impossible, there can be — in our sense of the term — no economy whatsoever”). Socialist economists dismissed him, claiming central planning could mimic market prices without actually being tainted by a market. None of these pipedreams were ever tried out, but it didn’t seem to matter, because wasn’t the Soviet Union a wondrous showcase for socialism? George Bernard Shaw, H.G. Wells, Harold Laski and other intellectuals visited Moscow and testified to the blessings of life under Joseph Stalin.

Meanwhile, Hayek found himself “differing very strongly in the interpretation of the political events in Germany from the view then generally current in England and particularly held by the majority of my socialistically inclined colleagues in the other departments of the London School of Economics. They all tended to interpret the National Socialist regime of Hitler as a sort of capitalist reaction to the socialist tendencies of the immediate postwar period, while I saw it rather as the victory of a sort of lower-middle-class socialism, certainly thoroughly anti-capitalistic and anti-liberal but taking over all the methods of socialism.”

The May 1940 issue of Economica published Hayek’s article “Socialist Calculation: The Competitive ‘Solution,'” in which he addressed the political consequences of government control over the economy. He wrote, “This is of course precisely the authoritarian doctrine preached by Nazis and Fascists…in a planned system all economic questions become political questions, because it is no longer a question of reconciling as far as possible individual views and desires, but one of imposing a single scale of values, the ‘social goal’ of which socialists ever since the time of Saint-Simon have been dreaming.” He added: “an examination in greater detail would clearly exceed the scope of an article…an adequate treatment would require another book…”

Hayek began his most famous attack on central planning in September 1940. It was a book that took almost four years to write. After the Germans started bombing London, the London School of Economics moved from their quarters on Houghton Street to Peterhouse College, Cambridge, and Keynes found rooms for Hayek at King’s College, Cambridge. He lived there about a year. “Hayek’s son,” reported biographer Ebenstein, “remembers that the rooms…were very comfortable but cold…Ultimately, he succeeded in finding a semi-converted barn in Cambridge, in which he and his family lived until 1945. This former barn where Hayek did his work was approximately two stories high and was subsequently used as an auditorium for amateur dramatics.” Hayek remarked that he worked midst “the continuous disruptions of falling bombs.”

English intellectuals — promoters of central planning — claimed socialism was the opposite of Nazism, but Hayek insisted that socialism, communism and Nazism were part of the same collectivist trend which had gathered momentum during the 20th century. Hayek predicted that if the trend went far enough in England, the breeding ground of liberty in the modern world, it would bring totalitarianism.

He noted there is general agreement about a few functions of government — such as punishing violent criminals. But as government takes on more functions, it necessarily goes beyond the realm of general agreement and infringes ever more on personal liberty. Central economic planning, Hayek explained, inevitably means massive assaults on liberty by giving bureaucrats the power to decide which kinds of cars, pens, apples and everything else should be produced — and who should get them. He observed that power tends to be corrupted because it naturally attracts people who enjoy taxing, imprisoning and even executing others. Hence, “the worst get on top.” Hayek warned that central planning is on a collision course with liberty and democracy.

Called The Road to Serfdom — after Alexis de Tocqueville’s phrase “the road to servitude” — the book was published in England on March 10, 1944. Only about 2,000 copies were printed initially, but the book provoked controversy, and the press run sold out. Newspaper commentators and Members of Parliament began talking about the book.

To secure an American publisher, Hayek sought help from fellow Austrian economist Fritz Machlup, then working in Washington, D.C. at the federal government’s Office of Alien Property Custodian. Machlup submitted English page proofs to three American publishers, and none were interested. One publisher rated the book “unfit for publication.” Then Machlup showed the page proofs to Aaron Director, Milton Friedman’s brother-in-law. Presumably it was Director who sent the page proofs to Frank Knight, the most influential thinker in the University of Chicago’s economics department. Knight, in turn, seems to have urged the book on William Couch, editor of the University of Chicago Press, and the decision was made to publish it. There would be an introduction by John Chamberlain, a respected book reviewer.

But University of Chicago Press editors didn’t expect much. They had only 2,000 copies printed. Then came libertarian journalist Henry Hazlitt’s 1,500-word review on the front page of the Sunday New York Times Book Review, September 24, 1944. He declared that “Friedrich Hayek has written one of the most important books of our generation…It is a strange stroke of irony that the great British liberal tradition, the tradition of Locke and Milton, of Adam Smith and Hume, of Macaulay and Mill and Morley, of Acton and Dicey, should find in England its ablest contemporary defender — not in a native Englishman but in an Austrian exile.” This dwarfed the impact of Orville Prescott’s dour review in the daily New York Times, September 30th — Prescott belittled “this sad and angry little book.” The University of Chicago Press ordered another 10,000 copies, and there were requests for rights to translate the book into German, Spanish and Dutch.

Reader’s Digest editor-in-chief Dewitt Wallace bought serial rights, and he devoted the first 20 pages of the April 1945 issue to a condensation of The Road to Serfdom. At the time, Reader’s Digest had a ciculation around 8,000,000, so the condensation was what made Hayek a name to reckon with in America. Moreover, Book-of-the-Month Club, the largest book marketer, distributed some 600,000 copies of the condensation. All this stimulated interest in the book, but paper shortages induced by price controls forced the University of Chicago Press to issue the book in a smaller format. In the more than a half-century since the book appeared, it has sold over 80,000 hardcover copies and 175,000 paperback copies in the United States, plus authorized editions in almost 20 languages and unauthorized editions in Eastern European languages.

Keynes, of all people, wrote Hayek this enthusiastic letter: “In my opinion it is a grand book. We all have the greatest reason to be grateful to you for saying so well what needs so much to be said. You will not expect me to accept quite all the economic dicta in it. But morally and philosophically, I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement.”

Socialist author George Orwell: “In the negative part of Professor Hayek’s thesis there is a great deal of truth. It cannot be said too often — at any rate it is not being said nearly often enough — that collectivism is not inherently democratic, but, on the contrary, gives to a tyrannical minority such powers as the Spanish Inquisitor never dreamed of.”

The University of Chicago Press had contemplated a lecture schedule at five American universities, but the Reader’s Digest splash led to a five week schedule for popular audiences. “At first it didn’t make any impression on me,” Hayek told an interviewer. “Only on the next morning, when I was picked up at my hotel [in New York]…I asked, ‘What sort of audience do you expect?’ They said, ‘The hall holds 3,000 but there’s an overflow meeting.’ Dear God, I hadn’t an idea what I was going to say. ‘How have you announced it?’ ‘Oh, we have called it ‘The Rule of Law in International Affairs.’ My God, I had never thought about that problem in my life. So I knew as I sat down on that platform, with all the unfamiliar paraphrenalia — at that time it was still dictating machines — if I didn’t get tremendously excited I would break down. So the last thing that I remember is that I asked the chairman if three-quarters of an hour would be enough. ‘Oh, no, it must be exactly an hour…you are on the radio.” Hayek was a hit.

During the 1945 parliamentary elections, Winston Churchill took a campaign theme from Hayek’s book. On June 4th, he broadcast a speech which warned that a Labour Government wouldn’t “allow free, sharp or violently worded expressions of public discontent.” He warned: “They would have to fall back on some form of Gestapo, no doubt very humanely directed inthe first instance. And this would nip opinion in the bud; it would stop criticism as it reared its head, and it would gather all the power to the supreme Party and the Party leaders, rising like stately pinnacles above their vast bureaucracies of Civil Servants, no longer servants and no longer civil. And where would the ordinary simple folk — the common people as they like to call them in America — where would they be once this mighty organism had got them in its grip?” Churchill added that socialism was “inseparably interwoven with Totalitarianism and the abject worship of the State.” Laborite Clement Atlee hooted at Churchill’s “Gestapo speech,” saying it was a “second-hand version of the academic views of an Austrian professor, Friedrich August von Hayek.”

Hayek remembered meeting Churchill at a dinner: “I could see him swilling brandy in great quantities; and by the time I was introduced to him, he could hardly speak but at once identified me as the author of The Road to Serfdom. He was stock drunk. He just said one sentence: ” ‘You are completely right; but it will never happen in Britain.’ Half an hour later he made one of the most brilliant speeches I ever heard.”

The Labour Party won the election, Atlee became the next Prime Minister, and he attacked the right of individuals to choose their work. “Ask yourself,” Atlee declared in a March 1947 radio broadcast, “whether you are doing the kind of work which the nation needs in view of the shortage of labor. Your job may bring you in more money but be quite useless to the community. You may complain of the shortage of coal or houses…towels and underclothing…but have you any right to complain if you are content to do some better-paid but quite useless work?” By the fall of 1947, the Labor-dominated Parliament enacted peacetime forced labor. As economist John Jewkes explained, “no man between the ages of 18 and 50 years and no woman between the ages of 18 and 40 years could change his or her occupation at will. Every such change had to be registered at the Employment Exchange, and the Minister of Labour had the power to direct workers changing their jobs to the employment he considered best in the national interest.

“It is extremely significant, and indeed sinister,” Jewkes continued, “to watch how, by the logic of events, the ardent planner, still retaining his respect for individual freedom acquired from his upbringing in another type of society, was driven to hedge, to temporize, to qualify and finally to capitulate before the inexorable demands of the Plan.” This was exactly what Hayek warned about. Fortunately, there was a public outcry against forced labor, and this contributed to the Labor Party’s defeat in the 1950 elections.

Hayek further developed the case against socialism by gathering a dozen of his essays into Individualism and Economic Order (1948). “The peculiar character of the problem of a rational economic order,” he wrote, “is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate ‘given’ resources — if ‘given’ is taken to mean given to a single mind which deliberately solves the problem set by these ‘data.’ It is rather a problem of how to secure the best use of resources, known to any of the members of society, on ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilitization of knowledge which is not given to anyone in its totality.” A market, he went on to show, is a discovery process which continuously gathers knowledge, updates it and relays it to participants.

Meanwhile, in 1947 Hayek called a meeting of scholars concerned about liberty. “After the publication of The Road to Serfdom,” Hayek recalled, “I was invited to give many lectures. During my travels in Europe as well as in the United States, nearly everywhere I went I met someone who told me that he fully agreed with me, but that at the same time he felt totally isolated in his views and had nobody with whom he could even talk about them. This gave me the idea of bringing these people, each of whom was living in great solitude, together in one place. And by a stroke of luck I was able to raise the money to accomplish this.”

Thirty-six participants from 10 countries gathered at the Hotel du Parc, Mont Pelerin, near Vevey, Switzerland, April 1st to April 10th, 1947. Among the 17 from the United States were University of Chicago economist Milton Friedman, Newsweek columnist Henry Hazlitt, University of Chicago economist Frank H. Knight, New York University economist Ludwig von Mises, Foundation for Economic Education President Leonard E. Read and Brown University economist George J. Stigler. There was considerable debate about how much government intervention in the economy would be compatible with a free society — the Americans being more radical than the Europeans. The participants couldn’t agree on specific economic policies, but they did agree to form an ongoing group whose name, in a compromise, would be the Mont Pelerin Society. Four of the original members later won Nobel Prizes, and over the years Mont Pelerin Society members did much to lead the revival of liberty throughout the world.

The University of Chicago Law Review (Spring 1949) published Hayek’s essay “The Intellectuals and Socialism” which explored prospects for the future of liberty. “The main lesson which the true liberal must learn from the success of the socialists,” he wrote, “is that it was their courage to be Utopian which gained them the support of the intellectuals and therefore an influence on public opinion which is daily making possible what only recently seemed utterly remote.” This view became a battle cry, and the essay was reprinted by the thousands.

Hayek’s personal situation made things more difficult in England. While visiting Austria to see family members who had survived the war, he learned that his first love Helene Bitterlich had become a widow and was therefore free to marry him. He and his wife Hella separated in December 1949. Friends were upset because they loved Hella. Lionel Robbins, for one, reportedly broke with Hayek over the separation and subsequent divorce in July 1950. Soon afterward, Hayek married Helene Bitterlich, and they remained together.

Biographer Alan Ebenstein remarked that “Publication of The Road to Serfdom was the great event in Hayek’s professional and personal lives. It brought him general reknown and established him as the most prominent exponent of classical liberalism. If he had not written the book, he might never have left England or been able to seek his divorce. His entire subsequent life was different because of the work. It may, indeed, be well argued that — had he never written The Road to Serfdom — he would have ended his days as merely an academic footnote: a respected, if old-fashioned, economics professor at LSE who had some battles with Keynes at the beginning of the ’30s and wrote a book on capital that no one understood. This would slight his contribution in the field of the division of knowledge, but even here his work has become much more known than it would have been otherwise, as a result of The Road to Serfdom and later work based on it.”

Hayek had to get away from London, and the most obvious destination was the United States. But most members of the University of Chicago economics department didn’t seem to want him. Herman Finer, in the political science department, wrote a bitter attack on Hayek called The Road to Reaction. Hayek spent a year teaching at the University of Arkansas, hardly a happy place for a cosmopolitan scholar.

For several years, Harold W. Luhnow, President of the William Volker Charities Fund, Kansas City, had urged Hayek to write an American version of The Road to Serfdom, and he replied that he might do it if he were at an American university. Hayek’s first choice reportedly was Princeton where Jacob Viner had gone after being a mainstay in the University of Chicago’s economics department. Viner, who specialized in international trade and the history of economic thought, would have been a stimulating companion. But others at Princeton wanted nothing to do with Hayek, so there wasn’t any offer. Hayek spent a couple months at Stanford University, but no offer was forthcoming from there, either. John U. Nef, Chairman of the University of Chicago’s Committee on Social Thought, invited him to be Professor of Social and Moral Science. Although the University of Chicago wouldn’t pay him a salary, Luhnow agreed to cover that. Accordingly, he settled into his new office, Room 506 of the Social Sciences building on 59th Street. “I was allowed there to devote myself to almost any subject I cared and to do as much or as little teaching as I wanted,” Hayek reflected.

One of his students, Shirley Robin Letwin, remembered that “Every week he conducted a seminar of staggering catholicity. On Wednesdays, after dinner, a large assortment of the wise and callow, coming from all disciplines and all nations, assembled around a massive oval oak table in a mock Gothic chamber to talk about topics proposed by Hayek….philosophy, history, social science, and knowledge generally…Hayek presided over this remarkable company with a gentle rectitude that made his seminar an exercise in the liberal virtues…The general subject was liberalism and no one was in any doubt about Hayek’s convictions..The seminar was a conversation with the living and the dead, ancient and modern; the only obligation was to enter into the thoughts of others with fidelity and to accept questions and dissent gracefully.”

Hayek recognized that views about history were a major factor shaping views about current policies. In particular, escalating regulatory burdens on free markets were due, in part, to the view that untrammelled capitalism generated tremendous wealth while it impoverishing millions. In 1954, Hayek gathered work of economic historians T.S. Ashton and Louis Hacker, economists W.H. Hutt and Bertrand de Jouvenal into a book, Capitalism and the Historians. Far from grinding down the poor, Hayek explained, the 19th century Industrial Revolution enabled millions to survive.

He wrote, “for the greater part of history, for most men the possession of the tools for their work was an essential condition for survival or at least for being able to rear a family. The number of those who could maintain themselves by working for others, although they did not themselves possess the necessary equipment, was limited to a small proportion of the population. The amount of arable land and of tools handed down from one generation to the next limited the total number of whom could survive. To be left without them meant in most instances death by starvation or at least the impossibility of procreation. There was little incentive and little possibility for one generation to accumulate the additional tools which would have made possible the survival of a larger number of the next, so long as the advantage of employing additional hands was limited mainly to the instances where the division of the tasks increased the efficiency of the work of the owner of the tools.”

“Economic suffering both became more conspicuous and seemed less justified, because general wealth was increasing faster than ever before,” Hayek continued. “But this, of course, does not prove that the people whose fate was beginning to cause indignation and alarm were worse off than their parents or grandparents had been. While there is every evidence that great misery existed, there is none that it was greater than or even as great as it had been before.”

Hayek concluded that “The freedom of economic activity which in England had proved so favorable to the rapid growth of wealth was probably in the first instance an almost accidental byproduct of the limitations which the revolution of the seventeenth century had placed on the powers of government; and only after its beneficial effects had come to be widely noticed did the economists later undertake to explain the connection and to argue for the removal of the remaining barriers to commercial freedom.”

Hayek received a Guggenheim Foundation grant in 1954, enabling him to pursue research on the English economist John Stuart Mill — specifically, Mill’s travels through Italy and Greece. Hayek stopped in Cairo where he delivered a series of lectures for the National Bank of Egypt. He chose as his subject “The Political Ideal of the Rule of Law.” He surveyed the history of efforts to limit government power by achieving a rule of law, meaning laws that apply to everybody, apply equally and are predictable so that people know what they must avoid doing to stay out of trouble. Hayek discussed the difficulties of applying rule of law principles to administrative law which has interfered so much with everyday life.

Hayek developed these ideas more fully in The Constitution of Liberty. His aim was “that condition of men in which coercion of some by others is reduced as much as is possible in society.” Like John Milton, John Locke, John Stuart Mill and others, Hayek began by making a practical case for liberty. Because there are so many things human beings don’t know, he maintained it’s essential that we be free to pursue the truth. He affirmed that “the chief reason why we should be held wholly responsible for our decisions is that this will direct our attention to those causes of events that depend on our actions.” He stressed that the most important benefits come from the unforeseen ways people use their liberty. He explained that civilization depends on progress, and progress requires inequality: somebody — in a free society, rich people — must try out and finance the development of new things before they can become available for ordinary people.

How to protect liberty? Each individual must have a sphere where he or she can be free without interference from others, including government — as long, of course, as they don’t interfere with anybody else. This means secure private property. “The recognition of property is clearly the first step in the delimitation of the private sphere which protects us against coercion,” Hayek wrote. “We are rarely in a position to carry out a coherent plan of action unless we are certain of our exclusive control of some material objects…” Hayek embraced democracy as a mechanism for peaceful political change, but he cautioned: “The conception that government should be guided by majority opinion makes sense only if that opinion is independent of government. The ideal of democracy rests on the belief that the view which will direct government emerges from an independent and spontaneous process. It requires, therefore, the existence of a large sphere independent of majority control in which the opinions of the individuals are formed.”

Hayek went on to summarize a legal framework for liberty. First, laws should be rules rather than commands dictating specifically what people must do. A related principle: an individual shouldn’t be charged with a crime unless there was already a law on the books saying that the individual’s action was illegal. “The rationale for securing to each individual a known range within which he can decide on his actions is to enable him to make the fullest use of his knowledge,” Hayek noted. Moreover, laws should be general, applying to government as well as the people. This won’t prevent all bad laws from being passed, but if lawmakers know that laws apply with full force to them, they’ll be less prone to mischief. Hayek discussed the separation of powers principle articulated by Montesquieu, that the branch of government making laws should be different from the branch of government enforcing laws. Hayek recognized American contributions to liberty: a written constitution delegating limited powers from the people to government and a bill of rights to further limit government power. Ironically, Hayek explained, during the late 18th century in Prussia, which later got a reputation as a police state, liberals advanced the principle that independent courts should have the power to strike down practices by government bureaucrats. While he didn’t discuss procedural safeguards such as trial by jury, he emphasized that “they presuppose for their effectiveness the acceptance of the rule of law as here defined and that, without it, all procedural safeguards would be valueless.”

Hayek noted that “today the conception of the rule of law is sometimes confused with the requirement of mere legality in all government action. The rule of law, of course, presupposes complete legality, but this is not enough: if a law gave the government unlimited power to act as it pleased, all its actions would be legal, but it would certainly not be under the rule of law. The rule of law, therefore, is also more than constitutionalism: it requires that all laws conform to certain principles…The rule of law is therefore not a rule of the law, but a rule concerning what the law ought to be…”

Despite the importance of these ideas, Hayek accepted surprisingly conventional views toward government schooling, subsidized housing, land use zoning and other forms of government intervention. The Constitution of Liberty has proven to be valuable because of its legal principles rather than its discussion about public policy.

Author William F. Buckley. Jr. observed that “Hayek has always taken scrupulous care to give credit, if it is faintly plausible to do so, to others who articulated ideas before he did, and indeed sometimes, on reading the footnotes to The Constitution of Liberty, one almost has the feeling that the book is a collection of after-dinner toasts by Hayek to great philosophers, political thinkers, and economists, from Thales to Ludwig von Mises. But he cannot shrug off the credit for having brought much if it all together: the integrated perception of the relation between law, and justice, and liberty.”

Hayek had high hopes for The Constitution of Liberty, published on February 9, 1960, which he seems to have considered his best work. Promotion didn’t come naturally for him, but he helped finance mailings to editors, academics, business leaders and government officials. He solicited plugs. He encouraged reviews. “Hayek’s attempts to promote The Constitution of Liberty were without parallel elsewhere in his career up to that time,” noted biographer Ebenstein. Ludwig von Mises expressed his disagreement with Hayek’s commentary on public policies but nonetheless hailed the book as “a brilliant exposition of the meaning of liberty and the creative powers of a free civilization.” While Hayek did get reviewed in friendly publications, like the Wall Street Journal, Chicago Tribune, Fortune and Henry Hazlitt’s Newsweek column, the book was generally ignored — as was Milton Friedman’s Capitalism and Freedom which came out a couple years later. Reader’s Digest declined to condense it. Hayek became depressed.

In April 1962, the William Volker Charities Fund was dissolved, and Hayek feared that his salary would be cut off. Apparently, the University of Chicago didn’t offer to pick it up. In any case, Hayek was mindful that at the University of Chicago he would get a single lump sum payment upon retiring at the age of 65, which he considered early. Consequently, when he received an offer to teach at the University of Freiburg, southwestern Germany, he took it. Retirement there would bring a pension.

There was a farewell dinner at the University of Chicago’s Quadrangle Club, put on by the Intercollegiate Society of Individualists and New Individualist Review, a magazine which several of his graduate students published. Milton Friedman, George J. Stigler and Fritz Machlup were among those attending. Ludwig von Mises, teaching at New York University, sent this message which reportedly was read: “We are not losing Hayek entirely…we are certain that from time to time he will come back for lectures and conferences to this country. And we are certain that, on these visits, he will have much more to say…In this expectation, we may take it as a good omen that the name of the city of his future sphere of activity is Freiburg. ‘Frei’– that means free.”

Hayek developed his thinking beyond The Constitution of Liberty, but he suffered ill health and for several years was unable to finish his next major work. In 1969, he became a visiting professor at the University of Salzburg, Austria. “I am increasingly inclined to believe that my miserable state in the early 1970s,” he told an interviewer, “was chiefly due — after some initial heart disturbance in 1969 — to my personally very nice and well-regarded Salzburg doctor treating me erroneously for diabetes and giving me a medicine that produced too low a sugar content of my blood, that was the main cause of that ‘inner trembling,’ as I called the state, which intellectually disabled me.” He did recover and then, in 1974, was energized by international acclaim that followed his winning the Nobel Prize.

“In retrospect,” wrote Daniel Yergin and Joseph Stanislaw in The Commanding Heights (1998), “it was the awarding of the 1974 Nobel Prize in economics that first captured, almost by chance, the great intellectual change. The Swedish academy wanted to honor Gunnar Myrdal, distinguished Keynesian…and a great figure of Swedish socialism. But the grantors, worried about the appearance of choosing so local a favorite, decided that they ought to balance the ticket with a more conservative figure, and they awarded the prize to Myrdal jointly with Friedrich von Hayek. A good part of the economics profession was scandalized by the choice of Hayek; many economists in the United States, if polled, would have hardly even considered him an economist. He was regarded as right-wing, certainly not mainstream, even something of a crank as well as a fossil from an archaic era. As for Gunnar Myrdal, the lore among other Nobelwinners is that he was so irritated that he hardly even spoke to Hayek during the ceremonies.

“Yet the award documented the beginning of a great shift in the intellectual center of gravity of the economics profession toward a restoration of confidence in markets, indeed a renewed belief in the superiority of markets over other ways of organizing economic activity.”

He completed his long-dormant trilogy Law, Legislation and Liberty, consisting of Rules and Order (1973), The Mirage of Social Justice (1976) and The Political Order of a Free People (1979). He attributed much of the decline of liberty to the mistaken belief “that democratic control of government made unnecessary any other safeguards against the arbitrary use of power.” He attacked “social justice” as a wholly arbitrary, meaningless idea aimed to justify the endless expansion of government power during the 20th century. The most disastrous consequences occurred in countries which adopted parliamentary government — but lacked a constitutional tradition limiting, at least to some degree, what legislators might do. “It turned out,” Hayek wrote, “that the Americans two hundred years ago were right, and an almighty Parliament means the death of the freedom of the individual…Personal freedom requires that all authority is restrained by long-run principles which the opinion of the people approves.”

He observed that the U.S. Constitution didn’t prevent a highly centralized government from developing. He thought this was because Congress had the power both enact what he called “rules of just conduct” and to direct the federal government. He recommended that these functions be separated: a “Legislative Assembly” to enact “rules of just conduct” and a “Government Assembly” to direct the federal government. He thought the Legislative Assembly should be incapable of giving out favors; candidates should be between 45 and 60, and they should be elected to 15 year terms, giving them something like the independence of judges. The Government Assembly should deal with topical issues subject to interest group lobbying; the whole body should be elected periodically, like the U.S. House of Representatives, and membership in the Government Assembly should render a person ineligible for the Legislative Assembly. Hayek hoped that assigning separate functions to two assemblies would reduce the overall level of coercion and in particular reduce the amount of discriminatory legislation. For example, budgets which authorize spending to benefit some interest groups, financed by taxes on other interest groups.

Hayek added that “I certainly do not wish to suggest that any country with a firmly established constitutional tradition should replace its constitution by a new one drawn up on the lines suggested…[but] very few countries in the world are in the fortunate position of possessing a strong constitutional tradition.”

In 1976, Hayek produced The Denationalization of Money, a report for the Institute of Economic Affairs (London), which challenged what he called “the source and root of all monetary evil, the government monopoly of the issue and control of money.” He referred to the scourge of inflation and deflation, the consequence of volatile central bank policies. He made a case that private institutions would do a better job than government at maintaining stable money. He cited historic precedents and explained why competition, the scrutiny of currency exchanges and the financial press would provide more discipline than there is in central banks subject to political pressures.

Meanwhile, Hayek had moved to picturesque Salzburg because it was closer to his wife’s family in Vienna, and the university there agreed to buy his library and let him continue using it. But Salzburg became frustrating. As he reported in a letter to the newspaper Die Presse, “The [Austrian] Federal Ministry of Education [must] be notified of foreign travel by university professors even when it occurs during lecture breaks, as well as when it lasts more than eight days…I then discovered that Salzburg University was not empowered to grant the [appropriate academic degree] and therefore there were not serious students of political economy here, and since according to existing laws my teaching career would be terminated at age 75, while at Freiburg University I would be able to teach as a professor emeritus for the rest of my life, it became obvious to me that I had made a mistake in moving to Salzburg. What held me here for a while was that the law faculty had acquired my library…But after standing by for seven years and seeing the library practically unused because the Ministry could not bring itself to take on the cost of setting up a subject catalog…I lost all joy in it.” With some of his Nobel money, Hayek offered to buy back his library, but the university refused. He returned to Freiburg in 1977.

When ideological winds began shifting in the late 1970s and 1980s, Hayek emerged as a thinker people around the world could relate to. His writings inspired Ronald Reagan in the United States and Margaret Thatcher in Great Britain. Hayek was especially revered among dissident intellectuals in Easterm Europe, the Soviet Union and China where first-hand experience confirmed Hayek’s insights about the shoddy tyranny of socialism. Hayek’s last work was The Fatal Conceit, the Errors of Socialism (1988), substantially edited by William Bartley III whom he had picked to put together his collected works and write a biography. Bartley died in 1990, the biography unwritten.

Although Hayek was lucid almost to the end, he was physically unable to do any writing after about 1985. Besides the infirmities of old age, he suffered a bout with pneumonia. Hayek seldom ventured out of the third floor apartment in a big stucco house on Urachstrasse 27, Freiburg, West Germany, next to the Black Forest. It was the same apartment he and his wife had lived in when they first moved there. Biographer Ebenstein described it as “not a particularly posh apartment by American upper income standards. His library contained perhaps 4,000 volumes across a number of disciplines, including economics, psychology, anthropology, and political philosophy. The furniture was not new, nor the interior recently painted. The ceilings were high and the kitchen — of which, according to his daughter (who helped care for him during his last years), he was proud to boast he ‘never stepped foot’ — slightly run down…He had on his desk a picture of his second wife as a beautiful young woman in Vienna many years before.”

He died on Monday, March 23, 1992 in the apartment. He was 92. About a hundred family members and invited guests attended a funeral service April 4th, conducted by Father Johannes Schasching. Hayek was buried in the hilly Neustift am Wald cemetery, overlooking the Vienna woods.

Hayek had lived just long enough to see the Union of Soviet Socialist Republics disappear from the map. He had insisted, as Mises did before him, that socialism would never deliver decent living standards — and he was vindicated. He warned that socialism means tyranny, and after World War II dozens of countries embraced socialism and suffered through savage tyranny. He did perhaps more than anyone else to show that free people, not government planners, are the key to a flourishing civilization.

As John Cassidy wrote in the February 7, 2000 New Yorker: “If there are two things most people can agree on these days, they are that free-market capitalism is the only practical way to organize a modern society and that the key to economic growth is knowledge. So prevalent are these beliefs that their origins are rarely examined, which is somewhat surprising, since both statements can be traced back, in large part, to one man, Friedrich August von Hayek.” His moral courage and dazzling insights made clear that ideas shape our destiny.


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