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Friedrich Hayek

Hayek's life

• Friedrich August von Hayek was born in 1899 in Vienna, then the capital of the Austro-Hungarian Empire. His was a diversely academic family: his father was a doctor; one grandfather was a leading zoologist, the other a professor of constitutional law and president of Austria’s Statistical Commission; the philosopher Ludwig Wittgenstein was a cousin; his brothers would become science professors.
  Hayek initially showed an interest in science, too, but events would shift his interest elsewhere. With the first world war raging, he joined the Austro-Hungarian artillery on the Italian front, and served as a spotter in the ramshackle aircraft of the time, an experience he was lucky to survive. Human history was changing before his eyes: Russia was seized by communism, the Habsburg Empire collapsed. And in 1919, postwar Austria abolished the minor aristocratic ‘von’ titles, from which time he became just plain F. A. Hayek.
  As the war ended, Hayek decided he must study economic and social issues rather than the natural sciences. He entered the University of Vienna, where philosophy and law featured in his studies. He earned a doctorate in law while still only 20, and two years later earned another, in political economy.
  But Hayek did not give up his keen interest in science. In 1920, he worked briefly at the laboratory of brain anatomist Constantin Monakow, an experience that stimulated his insights on perception and the workings of the human mind – insights that would be crucial to his later thinking on economics.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

Hayek on economics

Hayek and market

• He argued that socialism, even democratic socialism and moderate state intervention, was founded on a mistake; and he dedicated much of his later life to explaining what this mistake was. On the basis of his deep knowledge of economics, politics, philosophy, psychology and information science, Hayek concluded that socialist planners could never in fact assemble the vast amount of information they would need to run an economic system, because that knowledge – which market systems process easily and routinely every day – is dispersed, diffuse, incomplete and essentially personal, existing only in the minds and experience of millions of different people.
  The socialist dream, therefore, would always be frustrated by reality; and as the socialists tried to impose more and more control on that reality, ordinary people would increasingly find their freedoms being stripped away.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

Hayek and Mises

• At Vienna, Hayek – a voracious reader – came across the work of the ‘Austrian School’ economists, who emphasised the importance of individuals’ values – and their freedom to act on them – for economic progress. One such was Ludwig von Mises. As well as being a private tutor at the university, Mises was running an office set up to resolve debt issues stemming from the Austro-Hungarian break-up, and was seeking young economists to help. Hayek had looked in on one of Mises’s lectures, but had found it far too hostile to his own mildly Fabian socialist views: Mises had already published a paper arguing that socialism could not possibly work. But Hayek took the job, joined in Mises’s seminars, and gradually found his own views changing – though not completely – as their collaboration deepened.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

Hayek and inflation

• Inflation too was a powerful educator. Prices in Austria escalated wildly in the 1920s. In the space of just eight months, Hayek’s salary was raised 200-fold, just to keep pace with prices that doubled each day; and the disruption that this hyperinflation wrought on society was clear to him. For the whole of his life, Hayek would regard inflation as a major, and avoidable, evil.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

Hayek and business cycles

• When the authorities made credit cheap by keeping interest rates low, or printed more money to finance their expenditures, it created a frenzy of borrowing and spending, a boom that must inevitably end in a bust. The analysis was powerful: Hayek predicted just such a bust for the United States, shortly before the 1929 Wall Street Crash and the Great Depression that followed.
  This research, encapsulated in Hayek’s books Monetary Theory and the Trade Cycle (1929), Prices and Production (1931) and later The Pure Theory of Capital (1941), brought Hayek fame as a macroeconomist. And he had a flair for promoting his ideas more widely: his letter to the New York Times on Germany’s finances in the 1920s was only the first of his large output of ‘letters to the editor’ in the newspapers of many countries.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

Hayek and Keynes

• Though Hayek and Keynes went on to become personal friends, they disagreed fundamentally on economics. After a spell as a tutor at Vienna, Hayek moved to the London School of Economics in 1931 to teach economics and statistics – and perhaps to balance the School’s famously Fabian outlook – at the invitation of its head of economics Lionel (later Lord) Robbins. Within a year, Hayek and Keynes were exchanging pointed letters in The Times: Keynes advocated government spending to kick-start the failing economies of the time; Hayek believed that this policy would produce only indebtedness, inflation and disruption.
  Yet in terms of their impact on policy debate, the methodical Hayek, an outsider with a broad Austrian accent that he never lost, was no match for the well-connected, urbane and intellectually agile Keynes. For example, Hayek spent a great deal of time writing a critical review of Keynes’s Treatise on Money, fearing its inflationary consequences – only for Keynes to tell him that in the meantime, he had changed his mind on the issue completely. When, in 1936, Keynes published his General Theory of Employment, Interest and Money, Hayek did not bother to review it, believing that Keynes would probably change his mind yet again. But the book, which Hayek thought a mere “tract for the times” – the depression era – became a runaway success and set the tone for decades of postwar government intervention, expansion, borrowing and inflation.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

Collectivist Economic Planning

• Hayek had also been deepening his understanding of the limits to social and economic planning. With Collectivist Economic Planning, in 1935, he brought the continental debate over socialist calculation – in which Mises was a principal contender – to the English-speaking world.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

Hayek and Keynesian economics

• By then, what Hayek saw as the dire consequences of the Keynesian Orthodoxy were all around him. Inflation was reaching alarming levels, particularly in Britain. So Hayek returned briefly to pure economics, and to the boom and bust analysis where he had started with Mises. In A Tiger by the Tail (1972), he explained how inflation sabotaged the delicate workings of an economy and led to enormous waste. Inflation, he explained, stemmed from too much spending and borrowing by governments. Like a drug, only greater and greater doses of inflation could keep the Keynesian boom fantasy alive; but that must inevitably end in even greater disaster.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

Hayek on politics

Hayek and politics

• Spread widely in this way, Hayek’s ideas came to have a practical political effect too – something unimaginable for much of the half-century following the second world war. Politicians such as Margaret Thatcher and Ronald Reagan owed much to his thinking. So did the revolutionaries who became the political leaders of Eastern Europe following the collapse of Soviet communism: they read and translated his books in underground editions that would help change the climate of opinion. “No person,” concluded Milton Friedman, “had more of an influence on the intellectuals behind the Iron Curtain than Friedrich Hayek.” The fall of that Iron Curtain was indeed due in large part to him.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

The Road to Serfdom

• The second world war changed Hayek’s life as much as the first. He sold many of his books on monetary policy and turned to political science instead. With the London School of Economics evacuated because of the blitz, Keynes found Hayek rooms adjoining his own Cambridge college, King’s, where Hayek, frustrated at the hostilities, began a short book, The Road to Serfdom. He aimed to show how the moderate state planning that so attracted British intellectuals had morphed, in Germany, into totalitarianism – as it would elsewhere.
  The book came out in 1944 and, hugely controversial, quickly sold out its initial print run. It impressed Britain’s wartime leader Winston Churchill, and became an issue in the 1945 general election. It was also read by the young Margaret Thatcher, who later said she found it “the most powerful critique of socialist planning and the socialist state”. It made Hayek’s name in America, too, where tens of thousands of copies were sold, and Reader’s Digest distributed another 600,000 copies of its own condensed version. On the back of this fame, Hayek lectured across the United States and became a visiting professor at Stanford University.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

Mont Pelerin Society

• The Mont Pelerin Society, as it became known, remained small for many years. This was, after all, a time when liberals like Hayek were very much in the minority. Communism had now gripped the whole of Eastern Europe; even in the West, the talk was of ‘winning the peace’ through the same sort of central controls that had been used to fight the war. State planning was seen as more rational, modern and efficient than a ‘chaotic’ market economy.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

Institute of Economic Affairs (IEA)

• But thanks to Hayek, other seeds of liberty were being planted too. In 1946 a former RAF fighter pilot, Antony (later Sir Antony) Fisher, who had read The Road to Serfdom, sought out Hayek at the London School of Economics to ask how he could help promote its liberal principles. Hayek warned him off entering politics, arguing that ideas have a far more profound importance on events than any politician. Fisher took the advice, and ten years later set up the Institute of Economic Affairs (IEA), appointing Ralph (later Lord) Harris and Arthur Seldon to run it. Through the following decades, the IEA would challenge the intellectual assumptions of the day, issuing a barrage of reports and papers that showed the merits of free markets over state intervention in many different areas of public policy.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

The Constitution of Liberty

• He began working on the letters of the nineteenth-century libertarian philosopher (and author of Utilitarianism) John Stuart Mill, and started thinking about the history of liberal ideas and tracing their roots in authors such as John Locke, David Hume, Adam Smith, Alexis de Tocqueville and Mill. This would form the foundation for his next great book, The Constitution of Liberty (1960), a positive alternative to the dire warnings of The Road to Serfdom, finished in the Alpine tranquility of his native Austria. But the book was out of tune with its times, even in America. The postwar economic boom now persuaded not just intellectuals, but politicians and the public too, of the merits of Keynesian-style government intervention and spending. Through the two decades from the mid-1950s to the mid-1970s, as what became known as the ‘Keynesian Orthodoxy’ picked up momentum, Hayek found himself scorned and isolated. These were his wilderness years.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

Law, Legislation, and Liberty

• In poor health and nearing retirement, he returned home to German-speaking Europe, taking up a post at the University of Freiburg in West Germany. There, he worked on his trilogy Law, Legislation and Liberty, in which he would explain the difference between the ‘laws’ and institutions that had grown up naturally through history and experience, and the ‘legislation’ laid down by politicians who mistakenly thought they could do a better job.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence

Hayek and socialism

• The final volume of Law, Legislation and Liberty was published in 1979. This time, Hayek’s work was embraced with enthusiasm – and not just in the West. His ideas were seeping through the chinks in the Iron Curtain, and bootleg translations of his books were starting to excite the intellectuals of Eastern Europe. Then in 1989, the Iron Curtain at last fell, exposing the grim reality of what Hayek had predicted of state socialism. New, younger, liberal revolutionaries replaced the Soviet old guard – personalities such as Mart Laar, the first post-Soviet prime minister of Estonia, and Vaclav Klaus, the prime minister and later president of the Czech Republic. Each discovered Hayek’s ideas and went on to become prominent members of the Mont Pelerin Society. Most Western intellectuals believed that what problems there might be with Soviet communism could be put down to individual personalities and cultures, rather than any fundamental fault in the idea. Only Hayek and his liberal colleagues had maintained that the whole edifice was built on a mistake and that it would largely extinguish human freedom, before inevitably collapsing. He lived just long enough to see his predictions borne out by events, and the intellectual tide turn at last in his favour. He died in 1992 in Freiburg – by then in a reunified Germany – and was buried on the outskirts of his native Vienna.
  • Eamonn Butler, Friedrich Hayek: The Ideas and Influence of the Libertrian Economist (2012), Hayek and His Influence