Friedrich A. Hayek

Friedrich A. Hayek

Born: 1889. Died: 1992.


Among the most masterful and insightful of 20th Century economists, Friedrich Hayek alone could have stood shoulder-to-shoulder with his great rival, John Maynard Keynes. Trained by Wieser and Böhm-Bawerk in the Austrian tradition at Vienna, Friedrich A. Hayek nonetheless carved a distinct spot in the economic pantheon - in some ways more different from the Austrian School than that of his friend and intellectual companion, Ludwig von Mises.

After some fundamental early contributions (e.g. his 1928 article is often credited with having introduced the concept of a fully intertemporal equilibrium), Hayek's early work was primarily in monetary cycle theory (1929, 1931, 1939). Drawing upon the "cumulative process" of Knut Wicksell and a Continental tradition of multi-sectoral overinvestment models, Hayek argued that when finance permitted investment to be greater than savings, then both desired investment and consumption demand cannot be met by actual output - thus there will be forced saving and changing degrees of 'capital intensity' (with capital conceived in a very Austrian sense) changing output and employment. However, forced savings are not sustainable as capital goods demand will not be maintained if consumer goods producers are being dried of consumption demand. Thus, there is a contraction in output and a subsequent fall in capital intensity. Hayek argued that this "concertina" process was the main motor behind business cycles.

Friedrich Hayek presented his main treatise on monetary cycle theory in a slim book, Prices and Production (1931), in England and was immediately drafted by Lord Robbins to join the London School of Economics - where he would serve as that institution's answer to Cambridge's John Maynard Keynes who was then working on similar issues. Keynes did not take lightly the criticisms Hayek made of his Treatise on Money (1930), and thus Keynes and Piero Sraffa joined forces to bury Hayek and his cycle theory in the Economic Journal in 1932.

At the London School of Economics, Hayek was instrumental in furthering its then-novel "continental" bent and he was highly influential on his junior colleagues (such as John Hicks) and students (which included Abba Lerner and Nicholas Kaldor). However, following the appearance of the General Theory by John Maynard Keynes in 1936, Abba Lerner and Nicholas Kaldor, like the rest of the economics profession, were drawn away from Hayek's orbit. Nicholas Kaldor's departure was particularly stinging - since his subsequent criticisms of the 'Ricardo Effect' upon which Hayek was hanging the remnants of a shredded cycle theory, led Hayek to abandon his cycle theory entirely.

Hayek's attempted to work a new system in his Pure Theory of Capital (1941), which he originally envisioned as a part of a larger work. In it, he attempted to develop a joint theory of investment and capital. Inexplicably, his 1941 book fell dead-born from the press and proved to be his last substantial effort in the area of theoretical neo-classical economics. Nonetheless, many of the Hayekian capital themes would emerge later in the theory of investment by his students, notably Friedrich and Vera Lutz and Abba Lerner and, more distantly, Trygve Haavelmo.

Hayek turned in 1944 to the political arena with his Road to Serfdom, a polemical defense of laissez-faire - the work for which he is best known outside academia. His subsequent political activities include the foundation of the libertarian 'Mont Pelerin Society' in the 1940s.

In 1935, Friedrich Hayek had edited a book on the Socialist Calculation debate in which Mises had been engaged. In resurrecting Barone's 1908 article, Friedrich Hayek realized that the Mises attack on the socialist position was untenable. As a result, in several famous articles - notably, 'Economics and Knowledge' (1937) and 'On the Use of Knowledge in Society' (1945) - Hayek composed a response which advanced the 'Socialist Calculation' debate to a new level. Succinctly, he claimed, countering Lange and the Paretians, that prices are not merely 'rates of exchange between goods', but rather 'a mechanism for communicating information' (Hayek, 1945). Friedrich Hayek argued that people have little knowledge of the world beyond their immediate surroundings and this is what forces them to be price-takers - the crucial ingredient that makes the price system work. If, on the other hand, a particular agent's knowledge were greater, agents would then refuse to act as price-takers but rather make decisions in a way which would manipulate their environment to their advantage thereby destroying the price system. In a complex, uncertain environment, Hayek argument, agents are not able to predict the consequences of their actions, and only this way could the price system work. In Hayek's words, the "fatal conceit" of the Oskar Lange and other 'Socialists' in the calculation debate was that they believed this order could be 'designed' by a planner who just gets the prices right, without realising that a price system evolved spontaneously as a result of lack of knowledge. The same limited knowledge which afflicts the agent's predictive power must necessarily constrain the planner's as well.

Hayek enhanced this argument with considerations of 'spontaneous order' - the idea that a harmonious, evolving order arises from the interaction of a decentralized, heterogeneous group of self-seeking agents with limited knowledge. This order, he claimed, was not "designed" nor could be "designed" by a social planner, even a very wise one, but merely "emerged" or evolved spontaneously from a seemingly complex network of interaction among agents with limited knowledge. Hayek's elaborations on this complex, evolving spontaneous order are found in various places (e.g. 1952, 1964). Hayek continued with his work on 'evolving order', linking it with his work on political and legal theory (e.g. 1960, 1973). In tackling the evolution of political, social, legal and economic institutions, Hayek is rightly conceived as one of the founding fathers of "evolutionary economics".

In many ways, one can see how the work of the social "evolutionist" and skeptic philosopher, David Hume was particularly influential on Hayek. Indeed, Hayek's scholarly work on the history of economic thought - e.g. on John Stuart Mill, Richard Cantillon and the Bullionist Debates - often echoed his search for bedfellows in the past, those who had resisted the "rational", calculable worldviews and simplistic solutions ever-so-present within intellectual circles. In his work on the philosophy of science (1952), Hayek traces the intellectual roots of the rational-socialist tendencies of economics to the theories of Auguste Comte and Saint-Simon in the 19th Century.

Hayek's efforts were nonetheless ignored in the Keynesian mainstream which then dominated economics. Finding a deaf ear in economics, he looked elsewhere. In an apparently bizarre interlude, Hayek turned his attention to psychology - turning out an anti-behaviorist (and Hume-drenched) tract, The Sensory Order (1952), which fit into his "group selection" type of evolution he had applied to his "spontaneous order" in economics.

All this led to one of his most famous works, the Constitution of Liberty (1960) bringing all his previous work on political theory together into one magnificent defense of "Old Whig" political doctrine and a return attack on the Saint-Simon-Comte collectivism.

Having seen his old idea of a "commodity reserve currency" (1943) fail to generate much interest, Hayek turned in the 1970s to champion the cause of a "free banking system" originally proposed by Vera Smith Lutz and the devolution of monetary control away from the central banks and into the hands of private banks (1978). This drew upon him the opposition of Milton Friedman and the Chicago Monetarists.

After spending many fruitful years at the London School of Economics, Hayek joined the Committee on Social Thought (not the economics department) of the University of Chicago in 1950. In 1962, Hayek left for the University of Freiburg in Germany and subsequently Salzburg, where he spent his remaining years. Friedrich Hayek shared the Nobel Prize with Gunnar Myrdal in 1974 in one of the more controversial and surprising awards ever made (controversial because Myrdal had called for the abolition of the Nobel prize as a result of it having been awarded to Hayek and Milton Friedman, and surprising for, at that time, Hayek was virtually forgotten in the economics profession).

Interest in Friedrich Hayek and his work increased after the 1974 award (his Nobel speech being a reiteration of his Counterrevolution thesis) and has kept on that track until today - his stock being enormously boosted by the collapse of communism in Eastern Europe.

Major Books of Friedrich A. Hayek

- A Tiger by the Tail, with Sudha R. Shenoy, 1972
- Can We Still Avoid Inflation? (orig. 1970), in Austrian Theory of the Trade Cycle and Other Essays, Richard M. Ebeling, editor
- The Constitution of Liberty, 1960
- The Counter-Revolution of Science: Studies on the abuse of reason, 1952
- Denationalisation of Money: The argument refined, 1978
- The Dilemma of Specialization, 1956, in White, editor, State of Social Sciences
- The Fatal Conceit: Or the errors of socialism, 1988
- Individualism and Economic Order, 1948
- John Stuart Mill and Harriet Taylor, 1951
- Law, Legislation and Liberty, 3 volumes, 1973-1979
- Ludwig von Mises, 1977
- Monetary Theory and the Trade Cycle , 1929
- Money, Capital and Fluctuations: Early essays, 1984
- On Neutral Money, 1933
- New Studies in Philosophy, Politics, Economics and the History of Ideas, 1978
- Prices and Production, 1931
- The Primacy of the Abstract, 1968, in Beyond Reductionism New Perspectives In The Life Sciences by Arthur Koestler and J.R. Smythies
- Profits, Interest and Investment: and Other Essays on the Theory of Industrial Fluctuations , 1939
- The Pure Theory of Capital, 1941
- The Road to Serfdom, 1944
- Rules, Perception and Intelligibility, 1962, Proceedings of British Academy
- The Sensory Order: an Inquiry Into the Foundations of Theoretical Psychology, 1952
- Socialist Calculation, two articles in Hayek, 1935, editor, Collectivist Economic Planning
- Studies in Philosophy, Politics and Sociology, 1967
- The Theory of Complex Phenomena, 1964, in Bunge, editor, The Critical Approach to Science and Philosophy

Major Articles of Friedrich A. Hayek

- 1925, The Monetary Policy of the United States After the Recovery from the 1920 Crisis, ZfVS
- 1926, Friedrich von Wieser, JfNS
- 1928, Intertemporal Price Equilibrium and Movements in the Value of Money, WWA
- 1931, The Paradox of Saving, Economica (Original in ZfN, 1929)
- 1931-1932, Reflections on the Pure Theory of Money of Mr. John Maynard Keynes, Parts 1, 2, Economica
- 1932, A Note on the Development of the Doctrine of Forced Saving, QJE
- 1933, The Trend of Economic Thinking, Economica
- 1934, Capital and Industrial Fluctuations, Econometrica
- 1934, Carl Menger, 1840-1921, Economica
- 1935, The Maintenance of Capital, Economica
- 1935, Price Expectations, Monetary Disturbances and Malinvestments, Nationalok Tidsk
- 1936, The Mythology of Capital, QJE
- 1936, Richard Cantillon: His life and work, Revue des Sciences Economiques
- 1936, Utility Analysis and Interest, EJ
- 1937, Economics and Knowledge, Economica
- 1937, Investment that Raises the Demand for Capital, REStat
- 1940, The Socialist Calculation: the Competitive Solution, Econometrica
- 1942, The Ricardo Effect, Economica
- 1943, A Commodity Reserve Currency, EJ
- 1943, The Facts of the Social Sciences, Ethics
- 1945, The Use of Knowledge in Society, AER
- 1949, The Intellectuals and Socialism, U of Chicago Law Review
- 1955, Degrees of Explanation, BJPS
- 1958, Freedom, Reason, and Tradition, Ethics
- 1961, The Non Sequitur of the Dependence Effect, SEJ
- 1962, Rules, Perception and Intelligibility, Proceedings of British Academy
- 1965, Kinds of Rationalism, ESQ
- 1966, Principles of a Liberal Social Order, Il Politico
- 1967, The Legal and Political Philosophy of David Hume, Il Politico
- 1969, Three Elucidations of the Ricardo Effect, JPE
- 1975, The Pretence of Knowledge, The Swedish JE
- 1979, Toward a Free-Market Monetary System, J of Libertarian Studies

Quotes from Friedrich A. Hayek

- "From the saintly and single minded idealist to the fanatic is often but a step." (from "The Road to Serfdom", 1944)

- "Independence of mind or strength of character is rarely found among those who cannot be confident that they will make their way by their own effort." (from "The Road to Serfdom", 1944)

- "Responsibility, not to a superior, but to one's conscience, the awareness of a duty not exacted by compulsion, the necessity to decide which of the things one values are to be sacrificed to others, and to bear the consequenses of one's own decision, are the very essence of any morals which deserve the name." (from "The Road to Serfdom", 1944)

- "It is ... the essence of the demand for equility before the law that people should be treated alike in spite of the fact that they are different." (from "The Constitution of Liberty", 1960)

- "Liberty not only means that the individuals has both the opportunity and the burden of choice; it also means that he must bear the cinsequences if his actions. ... Liberty and responsibility are inseparable." (from "The Constitution of Liberty", 1960)


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