Friedrich Hayek

• 1. Introduction

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  Friedrich Hayek wrote on the 26th of October 1929, three days before the Wall Street crash, that there was no reason to expect a sudden collapse of the New York stock exchange. Decades later, the Nobel committee would praise him as one of the few economists who warned that a major crisis was coming. Both things are part of his record. He never produced textual evidence of the prediction the world later credited to him, yet he answered yes when an interviewer asked if he had forecast the depression. This is the puzzle of the man who shared the 1974 Nobel Memorial Prize in Economic Sciences with Gunnar Myrdal. He was an Austrian economist and philosopher, born in Vienna and dying in Freiburg, Germany. He fought as a teenager in World War I and lost hearing in his left ear. He held doctorates in law and political science. How does a student who once failed Latin, Greek and mathematics become a thinker that Ronald Reagan, Margaret Thatcher and a pope would all seek out? Why did he resist being called a conservative? And what did he mean when he argued that prices, like language, are something humans make but never design? The answers run through Vienna, London, Chicago and a Tyrolean mountain village.

• 2. A Viennese Inheritance

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  August von Hayek, born in 1871, was a medical doctor for Vienna's municipal health ministry and a part-time botany lecturer at the University of Vienna. His son Friedrich helped him with botanical work and read the evolutionary writings of Hugo de Vries and August Weismann at his father's suggestion. Goethe, the boy decided, was his greatest early intellectual influence. Both of Hayek's grandfathers were scholars he knew personally. His maternal grandfather, Franz von Juraschek, was an economist in Austria-Hungary and a close friend of Eugen von Bohm-Bawerk, one of the founders of the Austrian School. His paternal grandfather, Gustav Edler von Hayek, taught natural sciences and wrote on biological systematics. On his mother's side Hayek was a second cousin of Ludwig Wittgenstein, related on the non-Jewish side of that family. His mother often played with Wittgenstein's sisters. Through that connection Hayek was among the first to read the Tractatus Logico-Philosophicus when it appeared in German in 1921. He recalled discussing philosophy with Wittgenstein when both were officers in World War I, and after the philosopher's death he gathered family materials and helped later biographers. Curious about why people assumed he was Jewish, Hayek researched his ancestors and found none within five generations. The surname itself came from the Czech Hajek, traced to an ancestor who left Prague in the 1500s. That ancestor's migration sits at the root of a family that would produce a microbiologist son and an entomologist daughter.

• 3. Drawn To Economics

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  In 1917, Hayek joined an artillery regiment in the Austro-Hungarian Army and fought on the Italian front, where he was decorated for bravery. He later put it plainly: the decisive influence was really World War I, because it forces your attention onto the problems of political organization. The wish to help avoid the mistakes that led to that war pulled him toward an academic life. At the University of Vienna he first studied philosophy, psychology and economics, in a system that let students choose freely with few tests before the final exams. He earned a doctorate in law in 1921 and in political science in 1923, planning to combine the two for a diplomatic career. When the university briefly closed, Hayek worked in Constantin von Monakow's Institute of Brain Anatomy, spending his hours staining brain cells. Carl Menger's account of social science and Friedrich von Wieser's classroom presence marked him most among his teachers. On Wieser's recommendation, Ludwig von Mises hired him to work on the legal and economic details of the Treaty of Saint-Germain-en-Laye. Between 1923 and 1924, Hayek crossed the Atlantic as a research assistant to Professor Jeremiah Jenks of New York University, compiling data on the American economy and the Federal Reserve. America did not make him happy. He had few social contacts, missed Vienna's cultural life and was troubled by poverty as his family's finances collapsed after the war. Initially sympathetic to Wieser's democratic socialism, Hayek found Marxism rigid; his mild socialist phase lasted until he was about 23. Reading von Mises's book Socialism turned him toward the classical liberalism of Menger, and soon he was attending Mises's private seminars alongside Fritz Machlup, Alfred Schutz, Felix Kaufmann and Gottfried Haberler.

• 4. The Quarrel With Keynes

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  Lionel Robbins took the helm of the London School of Economics in 1929 and wanted alternatives to the Cambridge approach descended from Alfred Marshall. He invited Hayek, who joined the LSE faculty in 1931 and was quickly recognised as one of the leading economic theorists in the world. His work on processes in time and the coordinating function of prices fed the later microeconomics of John Hicks, Abba Lerner and others. In Prices and Production, published in 1931, Hayek argued that the business cycle came from a central bank's inflationary credit expansion and the capital misallocation caused by artificially low interest rates. John Maynard Keynes called the book one of the most frightful muddles he had ever read, adding that it showed how a remorseless logician, starting with a mistake, can end in Bedlam. The two clashed in print over British monetary and fiscal policy, with the deflationary depression that followed Winston Churchill's 1925 return to the gold standard as the backdrop. In 1932, Hayek co-signed a letter in The Times with Robbins arguing that private investment beat government spending as a road to British recovery. Keynes asked his friend Piero Sraffa to answer Hayek, producing the Sraffa-Hayek debate over forced savings and the natural rate of interest. Nicholas Kaldor wrote that Prices and Production produced a remarkable crop of critics, with a volume of journal pages rarely equalled in past economic controversies. By the 1940s, much of Hayek's business-cycle work was largely ignored. The economists who learned at the LSE under him in those years included Arthur Lewis, Ronald Coase, Nicholas Kaldor and a young David Rockefeller.

• 5. That Unobtainable Book

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  The Road to Serfdom grew from Hayek's worry that British academia saw fascism as a capitalist reaction to socialism. He argued the opposite: that fascism, Nazism and state socialism shared roots in central planning and the empowering of the state over the individual. The title drew on Alexis de Tocqueville's phrase about the road to servitude. Routledge published it in Britain in March 1944, where wartime paper rationing made copies so scarce that Hayek called it that unobtainable book. When the University of Chicago issued it in September, it found greater popularity than in Britain. At the instigation of editor Max Eastman, an American magazine published an abridged version in April 1945, carrying the argument far beyond academics. Unwilling to return to Austria after the Anschluss of 1938 brought it under Nazi Germany, Hayek had already remained in Britain. He and his children became British subjects in 1938, a status he kept for life though he did not live in Britain after 1950. The book later played a part in transforming how Milton Friedman understood society. Friedman, no admirer of Hayek's technical economics, called The Road to Serfdom one of the great books of our time.

• 6. Prices As Knowledge

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  In The Use of Knowledge in Society, published in 1945, Hayek argued that the price mechanism shares and synchronises the local, personal knowledge scattered across a society. No central planner, he held, could ever gather the dispersed information that prices coordinate automatically. He had set this up in 1937 in Economics and Knowledge, noting that equilibrium theory wrongly assumed all agents possess full and correct information. The roots reached back to a debate Mises had begun. In 1935, Hayek edited Collectivist Economic Planning, which included Mises's claim that rational planning was impossible under socialism. The socialist Oskar Lange answered with general equilibrium theory, arguing that planners could mimic a market by adjusting prices up or down when gluts or shortages appeared. Hayek replied that real individuals hold different bits of knowledge and that some of what they believe is simply wrong. He used the term catallaxy for a self-organizing system of voluntary cooperation, and he put the price system on the same level as language. The Nobel Committee cited this research directly in its press release. In 2011, The Use of Knowledge in Society was chosen as one of the top 20 articles published in the American Economic Review during its first 100 years.

• 7. Mountains And Money

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  Hayek left the London School of Economics in 1950, after the scandal of his divorce led some colleagues to refuse all contact with him. He married Helen Berta Maria von Fritsch in August 1926, and they had two children, but he had restarted a relationship with an old girlfriend after the war. He divorced in July 1950 and married his third cousin Helene Bitterlich weeks later, having moved to Arkansas to use its permissive divorce laws. He then joined the University of Chicago's Committee on Social Thought, his salary funded not by the university but by the outside William Volker Fund. There he helped form the Mont Pelerin Society with Frank Knight, Friedman and George Stigler. He completed The Constitution of Liberty in May 1959 and was disappointed by its poor reception. Money worried him constantly. He avoided lucrative work like writing textbooks, complained about his pension, and left Chicago mostly for financial reasons. Much of his income went to travel: summers in the Tyrolean village of Obergurgl, where he climbed mountains, plus four trips to Japan and journeys to Tahiti, Fiji, Australia and Ceylon. From 1962 until 1968 he was a professor at Freiburg, which he called very fruitful, beginning Law, Legislation and Liberty there. He held a chair at Salzburg from 1969 to 1977, then wrote that moving there had been a mistake, citing the small department and inadequate library. He brought Law, Legislation and Liberty to publication in three volumes, in 1973-1976 and 1979.

• 8. Power And Its Admirers

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  On the 9th of October 1974, the announcement came that Hayek would share the Nobel Memorial Prize with Gunnar Myrdal. He was surprised, and suspected he had been paired with Myrdal to balance the politics. His biographer called the prize the great rejuvenating event in his life. At the December ceremony he met the Russian dissident Aleksandr Solzhenitsyn and later sent him a Russian translation of The Road to Serfdom. In February 1975, Margaret Thatcher became leader of the Conservative Party. At a Conservative Research Department meeting that summer, as a speaker defended the pragmatic middle way, Thatcher reached into her briefcase, held up The Constitution of Liberty and said, this is what we believe, before banging the book on the table. Yet she and Hayek were in contact only once or twice a year. Reagan listed Hayek among the two or three people who most influenced his philosophy and welcomed him to the White House. The reach extended to figures most thinkers would never embrace. Hayek sent Antonio de Oliveira Salazar a copy of The Constitution of Liberty in 1962, hoping it might help design a constitution proof against the abuses of democracy. He visited Chile under Augusto Pinochet, became honorary chairman of a free-market think tank there, and said he preferred a liberal dictatorship to a democracy devoid of liberalism. He drew a sharp line between authoritarianism, which he could accept as a transition, and totalitarianism, which he opposed. In 1984 he was appointed a Member of the Order of the Companions of Honour on Thatcher's advice, and after a twenty-minute audience with the Queen he called it the happiest day of his life. In 1991, President George H. W. Bush awarded him the Presidential Medal of Freedom for a lifetime of looking beyond the horizon. He died on the 23rd of March 1992, aged 92, in Freiburg, and was buried on the 4th of April in the Neustift am Walde cemetery on the northern edge of Vienna, according to the Catholic rite.