F. A. Hayek

Austrian-born British economist

• Born: May 8, 1899
• Birthplace: Vienna, Austria
• Died: March 23, 1992
• Place of death: Freiburg, Germany

Hayek developed a persuasive demonstration of how free markets mobilize information to achieve a productive and progressive economic system. His best-known work, The Road to Serfdom, argued that government economic interventions were likely to fail in their direct goals for economic improvement, and that these interventions also would be likely to undermine personal liberty and democracy. Government economic management would necessarily rely on coercion in such forms as taxation, prohibitions, and requirements.

Early Life

F. A. Hayek (HI-ehk) was the son of a medical doctor employed by the government whose real love was botany, a field in which he actively pursued research and published extensively. Young Hayek, too, was interested in botany. His family was prosperous (aided by inherited wealth) and liberal, so Hayek and his two brothers were given a large degree of personal freedom and intellectual stimulation, free from religious and other prejudices. He enjoyed many forms of vigorous outdoor activity, including mountain climbing.

World War I broke out in August, 1914, and Hayek entered military service in March, 1917, as a combat officer; he sustained a minor shrapnel wound. In addition to ground combat, he worked with observation balloons and airplanes. The war destroyed the Habsburg Empire and unleashed severe social upheaval and inflation in Austria conditions that figured prominently in Hayek’s intellectual development.

After the war’s end in 1918, Hayek began his studies at the University of Vienna, concentrating on economics and psychology. At the time, his own ideas in economics favored mild forms of social reform, but he also developed a negative view of Marxian socialism and communism, topics he studied intensively. He was greatly impressed with the ideas of Karl Menger, an Austrian pioneer in the development of marginal-utility economics, whose chief work had appeared in the 1870’s. Hayek studied with Friedrich von Wieser, who helped develop many of Menger’s ideas.

Hayek completed his law degree in 1921 and a second degree, in political science, in 1923. In 1921, he became associated with Ludwig von Mises of the Austrian chamber of industry, working on financial settlements associated with the peace treaties. Mises was another powerful free market devotee, whose anti-inflation and antisocialist convictions strongly influenced Hayek. In 1923, Hayek entered a doctoral program at New York University but returned to Vienna in May, 1924, and accepted a government position. In 1926 he married a fellow worker, Helen Berta Maria von Fritsch. With the aid of von Mises, Hayek became head of the newly created Austrian Institute for Business Cycle Research in 1927.

Life’s Work

From the mid-1920’s Hayek published prolifically. Most of his early writings related to money and business cycles. Following Swedish economist Knut Wicksell, Hayek believed there was a “natural” rate of interest that would bring equality between saving and investment in physical capital goods. However, political pressures would lead governments and central banks to set interest rates below the natural rate, supported by money creation by the banking system. This would generate investment spending in excess of current saving, causing a cyclical boom. At the artificially low interest rate, though, firms would undertake investment projects that could not be sustained by the flow of current saving. A slowing of monetary expansion would cause interest rates to rise, choking off the boom and sending the economy into recession.

Hayek’s theory had strong policy implications. He felt that it was improper for government to intervene in business recessions, which were a necessary corrective to purge the economy of unsuitable projects. Policy makers should concentrate on keeping the interest rate close to the natural rate (assuming they could guess what the natural rate might be).

Despite Hayek’s experience with the business-cycle institute, his exposition was purely abstract and theoretical, without a foundation in data on actual business conditions. His hands-off attitude toward depressions was very unpopular during the Great Depression following 1929, when the only real question was how to intervene, not whether to do so. After the publication of John Maynard Keynes’s General Theory of Employment, Interest, and Money in 1936, and the ensuing enthusiasm for econometric studies based on statistical data, Hayek’s theory lost support.

An increasing share of Hayek’s attention, however, came to focus on issues relating to socialism, economic freedom, and the appropriate economic role of government. He found a congenial environment to develop such thinking at the London School of Economics (LSE) in 1931. He became a British citizen in 1938 and taught at the LSE until 1950. The Great Depression unleashed a torrent of denunciations of market economy and proposals for outright socialism (government ownership and management of production) or less extreme programs of economic planning and government control.

Hayek’s insights, the main basis for his 1974 Nobel Prize, concerned the nature of information. All the proposals for socialism and government planning presupposed that officials could access sufficient information to direct production and distribution in patterns superior to those of market economy. To Hayek, this was impossible. The relevant information was dispersed among all the millions of participants in the economy and much of it was intuitive and implicit, rather than available in direct verbal expression. Consumers know what they like and dislike but they cannot always accurately fill out a lengthy questionnaire documenting their precise preferences. Businesspersons have intuitions and opinions about all aspects of their work, particularly about the people they deal with. Often these opinions are only revealed in actions.

The miracle of market economy, as Hayek recognized, is that it is not necessary for all this information to be assembled in one place, or for it to be verbally explicit. Competitive market prices provide an organizing link, transmitting to each participant information about the relative scarcity or abundance of inputs and outputs, and behind those, the relative supplies of and demands for all sorts of goods, services, and assets. The price of a consumer product transmits to producers the strength of demand for that product. Wage rates send signals about the priority attached by employers to different work specialties.

Some economists urged that a socialist economy could imitate the price structure of a competitive system. Hayek dismissed this suggestion, noting that market economy relies on the motivation associated with the quest for profit under a system in which businesses are privately owned. Only under such private enterprise do entrepreneurs develop and act out appropriate intuitions about projects and people.

Hayek’s insights on these matters formed the basis for numerous articles in professional journals, many of which were assembled in his Individualism and Economic Order (1948). His greatest impact on public awareness, however, came with his book The Road to Serfdom (1944), published during the last stages of World War II. The book emphasized that ambitious government economic interventions were likely to fail in their direct goals for economic improvement, and that these interventions also would be likely to undermine personal liberty and democracy. Government economic management would necessarily rely on coercion in such forms as taxation, prohibitions, and requirements. Comprehensive government economic management would strongly influence incomes and wealth, placing a huge premium on gaining political power. Hayek had been traumatized by the triumph of fascism in Germany and Austria, and feared a similar pattern in other areas. The Road to Serfdom reached a wide audience and stirred vigorous debate and controversy.

Hayek continued to publish until his death in 1992, and his intellectual horizons continued to widen. He had become fascinated by the image of spontaneous order represented by market economy, and extended the concept into such areas as the development of language. He also tried to propose designs for political systems that would help them maintain good social and economic achievements, but these ideas took him steadily further from mainstream economics.

Significance

Hayek’s analysis of information played a major role in weakening the enthusiasm of professional economists for collectivist government interventions. The Road to Serfdom played a similar role in public discussions. The book was not immediately persuasive. Liberal interventionists such as Herman Finer (The Road to Reaction, 1946) greeted Hayek’s book with howls of outrage. Finer pointed out that freedom and democracy in the Anglo-Saxon world had deep roots, and that interventions that threatened them would likely be reversed.

Hayek’s work helped to encourage people to look critically at experiments in economic policy. For example, John Jewkes (Ordeal by Planning, 1948) showed that many of Hayek’s feared tendencies were showing up in the policies of the British Labour government. However, the problematical policies were in fact reversed, in large degree under Prime Minister Margaret Thatcher, an avowed fan of Hayek’s work.

Hayek was the principal founder of the Mont Pelerin Society, established in 1947 and devoted to the support and promotion of personal liberty and free market economic arrangements. Hayek’s ideas helped generate U.S.-based enthusiasm for Austrian economics, but an enthusiasm more for the work of Mises than of Hayek.

Bibliography

Boettke, Peter J. “Hayek’s The Road to Serfdom Revisited: Government Failure in the Argument Against Socialism.” Eastern Economic Journal 21, no. 1 (Winter, 1995): 7-26. Describes the reception of Hayek’s book and relates its themes to subsequent developments in public choice.

Ebenstein, Alan. Friedrich Hayek: A Biography. New York: Palgrave, 2001.

‗‗‗‗‗‗‗. Hayek’s Journey. New York: Palgrave, 2003. In combination, these two volumes give a comprehensive overview of Hayek’s life and work. Each volume has an essay identifying works about Hayek.

Hayek, Friedrich. The Constitution of Liberty. Chicago: University of Chicago Press, 1960.

‗‗‗‗‗‗‗. Law, Legislation, and Liberty. Chicago: University of Chicago Press, 1973-1979. Biographer Ebenstein regards these two works by Hayek as the outstanding examples of Hayek’s social-philosophical ideas. The Constitution of Liberty includes the striking section Freedom in the Welfare State.

Hoover, Kenneth R. Economics as Ideology: Keynes, Laski, Hayek, and the Creation of Contemporary Politics. Lanham, Md.: Rowman and Littlefield, 2003. Examines the lives and thoughts of economists Hayek, Keynes, and Laski, who espoused different political views, to determine how they developed their ideas and how those ideas influenced contemporary politics.

Vane, Howard R., and Chris Mulhearn, eds. The Nobel Memorial Laureates in Economics. Northampton, Mass.: Edward Elgar, 2005. A concise and readable chapter that stresses Hayek’s explicitly economic works.