Friedrich A. Hayek, 1899-1992

Hayek was born into a family of intellectuals in Vienna on May 8, 1899. He earned doctorates from the University of Vienna (1921 and 1923). During the early years of the 20th century the the ories of the Austrian School of Economics, sparked by Menger's Principles of Economics (1871), were gradually being formulated and refined by Eugen Boehm-Bawerk, his brother-in law, Friedrich Wieser, and Ludwig von Mises. When Hayek attended the University of Vienna, PeterJ. Boettke is a professorofeconomicsat New York Universityand the author of The Political Economy of Soviet Socialism and Why Perestroika Failed. he sat in on one of Mises' classes,but found Mises' anti-socialist position too strong for his liking. Wieser was a Fabian socialist whose approach was more attractive to Hayek at the time, and Hayek became his pupil. Yet, ironically it was Mises, through his devastating critique of socialism published in 1922, who turned Hayek away from Fabian socialism.

The best way to understand Hayek's vast contri butions to economics and classical liberalism is to view them in light of the program for the study of social cooperation laid out by Mises. Mises, the great system builder, provided Hayek with the research program. Hayek became the great dis secter and analyzer. His life's work can best be appreciated as an attempt to make explicit what Mises had left implicit, to refine what Mises had outlined, and to answer questions Mises had left unanswered. Of Mises,Hayek stated: "There is no single man to whom lowe more intellectually." The Misesian connection is most evident in Hayek's work on the problems with socialism.But the insights derived from the analysis of socialism permeate the entire corpus of his work, from busi ness cycles to the origin of social cooperation. Hayek did not meet Mises when he was attend ing the University of Vienna. He wasintroduced to Mises after he graduated through a letter from his teacher, Wieser. The Hayek-Mises collaboration then began. For five years, Hayek worked under Mises in a government office. In 1927,he became the Director of the Institute for Business Cycle 300 Research which he and Mises had set up together.

The Institute was devoted to theoretical and empirical examinations of business cycles. Building on Mises' The Theory of Money and Credit (1912), Hayek refined both the technical understanding of capital coordination and the institutional details of credit policy.Seminal stud ies in monetary theory and the trade cycle fol lowed. Hayek's first book, Monetary Theory and the Trade Cycle (1929), analyzed the effects of credit expansion on the capital structure of an economy. Publication of that book prompted an invitation from Lionel Robbins for Hayek to lecture at the London School of Economics. His lectures there were published in a second book on the" Austrian Theory of the Trade Cycle," Prices and Produc tion (1931), which was cited by the Nobel Prize Committee in 1974. Hayek's 1930-1931 lectures at the London School were received with such great acclaim that he was called back to the prestigious University of London and appointed Tooke Professor of Eco nomic Science and Statistics.At age 32,Hayek had reached the pinnacle of the economics profession.

The Mises-Hayek theory of the trade cycle explained the "cluster of errors" that characterizes the cycle. Credit expansion, made possible by the artificial lowering of interest rates, misleads busi nessmen; they are led to engage in ventures that would not otherwise have appeared profitable. The false signal generated by credit expansion leads to malcoordination of the production and consumption plans of economic actors. This mal coordination first manifests itself in a "boom," and then, later, in the "bust" as the time pattern of pro duction adjusts to the real pattern of savings and consumption in the economy. HayekversusKeynes Soon after Hayek's arrival in London he crossed swords with John Maynard Keynes. Keynes, a prominent member of the British civilservice then serving on the governmental Committee on Finance and Industry, was credited by the academ ic community as the author of serious books on economics. The Hayek-Keynes debate was per haps the most fundamental debate in monetary economics in the 20th century. Beginning with his essay,"The End of Laissez Faire" (1926), Keynes 301 presented his interventionist pleas in the language of pragmatic classical liberalism. As a result, Keynes was heralded as the "savior of capitalism,"

rather than being recognized as the advocate of inflation and government intervention that he was. Hayek pinpointed the fundamental problem with Keynes's economics-his failure to under stand the role that interest rates and capital struc ture play in a market economy. Because of Keynes's unfortunate habit of using aggregate (collective) concepts, he failed to address these issues adequately in A Treatiseon Money (1930). Hayek pointed out that Keynes's aggregation tended to redirect the analytical focus of the economist away from examining how the industri al structure of the economy emerged from the eco nomic choices of individuals. Keynes did not take kindly to Hayek's criticism. He responded at first by attacking Hayek's Prices and Production. Then Keynes claimed that he no longer believed what he had written in A Treatise on Money, and turned his attention to writing another book, The General Theory of Employ ment, Interest, and Money (1936), which in time became the most influential book on economic policy in the 20th century.

Rather than attempting to criticizedirectly what Keynes presented in his General Theory, Hayek turned his considerable talents to refining capital theory. Hayek was convinced that the essential point to convey to Keynes and the rest of the eco nomics profession concerning monetary policy lay in capital theory. Thus Hayek proceeded to set forth his thesis in The Pure Theory of Capital (1941).However correct his assessment may have been, this book, Hayek's most technical, was his least influential. By the end of the 1930s,Keynes's brand of economics was on the rise. In the eyes of the public Keynes had defeated Hayek. Hayek lost standing in the profession and with students. During this time, Hayek was also involved in another grand debate in economic policy-the socialist calculation debate, triggered by a 1920 article by Mises which stated that socialism was technically impossible because it would lack mar ket prices. Mises had refined this argument in 1922 in Socialism: An Economic and Sociological Analysis, the book which had profoundly im pressed the young Hayek when it appeared.

Hayek developed Mises' argument further in several articles during the 1930s. In 1935, he col302 THE FREEMAN • AUGUST 1992 lected and edited a series of essayson the problems of socialist economic organization: Collectivist Economic Planning. Additional Hayek essays on the problems of socialism, and specifically the model of "market socialism" developed by Oskar Lange and Abba Lerner in their attempt to answer Mises and Hayek, were later collected in Individ ualism and Economic Order (1948). Again, the economics profession and the intel lectual community in general did not appreciate Hayek's criticism. Had not modern science given man the ability to control and design society according to moral rules of his own choosing? The planned society envisioned under socialism was supposed to be not only as efficient as capitalism (especiallyin view of the chaos capitalism was said to generate with its business cycles and monopoly power), but socialism, with its promise of social justice, was expected to be fairer. Moreover, it was considered the wave of the future. Only a reac tionary, it was argued, could resist the inevitable tide of history. Not only had Hayek appeared to lose the technical economic debate with Keynes and the Keynesians concerning the causes of busi ness cycles but, in view of the rising tide of social ism throughout the world, his general philosoph ical perspective was increasingly labeled as a primitive version of liberalism.

The Road to Selfdom Hayek, however, kept on refining the argu ment for the liberal society. The problems of socialism that he had observed in Nazi Germany and that he saw beginning in Britain led him to write The Road to Serfdom (1944). This book forced advocates of socialism to confront an addi tional problem, over and beyond the technical economic one. If socialism required the replace ment of the market with a central plan, then, Hayek pointed out, an institution must be estab lished that would be responsible for formulating this plan. Hayek called this institution the Central Planning Bureau. To implement the plan and to control the flow of resources, the Bureau would have to exercise broad discretionary power in economic affairs. Yet the Central Planning Bureau in a socialist society would have no mar ket prices to serve as guides. It would have no means of knowing which production possibilities were economically feasible. The absence of a pricing system, Hayek said, would prove to be socialism's fatal flaw.

In The Road to Serfdom Hayek also argued that there was good reason to suspect that those who would rise to the top in a socialistic regime would be those who had a comparative advantage in exercising discretionary power and were willingto make unpleasant decisions. And it was inevitable that these powerful men would run the system to their own personal advantage. Hayek was right on both counts, of course-on the economic as well as the political problem of socialism. The 20th century is replete with the blood of the innocent victims of socialist experi ments. Stalin, Hitler, Mao, Pol Pot, and a host of lesser tyrants have committed heinous crimes against humanity in the name of one or another variant of socialism. Totalitarianism is not an his torical accident that emerges solely because of a poor choice of leaders under a socialist regime. Totalitarianism, Hayek shows, is the logical out come of the institutional order of socialistplanning.

After the defeat in the public forum of his cri tique of Keynes and the controversy that arose over the debate on economic calculation under socialism, Hayek turned his attention away from technical economics and concentrated on restating the principles of classical liberalism. Hayek had pointed out the need for market prices as convey ors of dispersed economic information. He showed that attempts to replace or control the market lead to a knowledge problem. Hayek also described the totalitarian problem associated with placing discretionary power in the hands of a few. This led him to examine the intellectual prejudices which blind men from seeing the problems of government economic planning. During the 1940s, Hayek published a series of essaysin professional journals examining the dom inant philosophical trends that prejudiced intellec tuals in a way that did not allow them to recognize the systemic problems that economic planners would confront. These essays were later collected and published as The Counter-Revolution of Science (1952). The Counter-Revolution, perhaps Hayek's best book, provides a detailed intellectual history of "rational constructivism" and the prob lems of "scientism" in the social sciences. It is in this work that Hayek articulates his version of the Scottish Enlightenment project of David Hume and Adam Smith of using reason to whittle down the claims of reason. Modern civilization was not threatened by irrational zealots hell-bent on destroying the world, but rather it was the abuse of reason by rational constructivists trying to con sciously design the modern world that had placed mankind in chains of his own making.

In 1950, Hayek moved to the University of Chicago, where he taught until 1962in the Com mittee on Social Thought. While there, he wrote The Constitution of Liberty (1960). This work represented Hayek's first systemic treatise on classical liberal political economy. In 1962, Hayek moved to Germany, where he had obtained a position at the University of Freiburg. He then increasingly centered his efforts on examining and elaborating the "spontaneous" ordering of economic and social activity.Hayek set about to reconstruct liberal social theory and to provide a vision of social cooperation among free individuals. With his three-volume study, Law, Legislation and Liberty (1973-1979) and The Fatal Conceit (1988),Hayek extended his analysis of society to an examination of the "spontaneous" emergence of legal and moral rules. His political and legal the ory emphasized that the rule of law was the neces sary foundation for peaceful coexistence. He con trasted the tradition of the common law with that of statute law, i.e., legislative decrees. He showed how the common law emerges, case by case, as judges apply to particular cases general rules which are themselves products of cultural evolu tion. Thus, he explained that embedded within the common law is knowledge gained through a long history of trial and error. This insight led Hayek to F.A. Hayek FRIEDRICH A. HAYEK (1899-1992) 303 the conclusion that law,like the market, is a "spon taneous" order-the result of human action, but not of human design.

Hayek's work in technical economics, political and legal philosophy, and methodology of the social sciences has attracted great interest among scholars of at least two generations, and interest in his work is growing. His contributions to economic and classical liberalism are vast and will live on in the progressive research program he has be queathed to future generations of scholars. Friedrich Hayek lived a long and fruitful life. He had to endure the curse of achieving fame at a young age and then having that fame turn to ridicule as the Keynesians and socialists gained popularity and the intellectual and political world moved away from his ideas. Fortunately he lived long enough to see his towering intellect recog nized again. Both Keynesians and socialists were eventually defeated soundly by the tide of events and the truth of his teachings. Classical liberalism is once again a vibrant body of thought. Austrian economics has re-emerged as a major school of economic thought, and younger scholars in law, history, economics, politics, and philosophy are pursuing Hayekian themes. We may mourn the loss of this great champion of liberalism, but at the same time we can rejoice that F. A. Hayek left us such a brilliant gift.

A great scholar is defined not so much by the answers he provides as by the questions he asks. Successive generations of scholars, intellectuals, and political activists throughout the world will long be pursuing questions that Hayek has posed. [] IDEAS ON LIBERTY T he principle that the end justifies the means is in individualist ethics regarded as the denial of all morals. In collectivist ethics it becomes necessarily the rule; there is literally nothing which the consistent collectivist must not be prepared to do if it serves "the good of the whole," because the "good of the whole" is to him the only criterion of what ought to be done .... Once you admit that the individual is merely a means to serve the ends of the higher entity called society or the nation, most of those features of totalitarian regimes which horrify us follow of necessity. From the collectivist standpoint intolerance and brutal suppression of dissent, the complete disregard of the life and happiness of the individual, are essential and unavoidable consequences of this basic premise ....

- The Road to Serfdom Tough Love for the Needy by James L. Payne W hy do government welfare programs keep failing? Much of the problem can be summed up in one word: dependency. Government programs reinforce social pathologies they are trying to cure: they pay people for being out of work-and encourage unemployment; they pay people to have children they can't support-and encourage larger welfare families. Even politicians agree that this one-sided giv ing is unhealthy. In their rhetoric, they condemn policies of "handout," and extol the virtues of the "helping hand." Yet in practice, program after program turns into another dependency-causing subsidy. Nowhere is this pattern more dramatically illus trated than in programs to provide shelter for the unhoused. Governments keep increasing their efforts, only to reap ever-growing numbers of homeless. In New York,for example, to help street people the city has built 26,700units of permanent housing, and has provided 23,000temporary beds.