Friedrich Hayek

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Friedrich Hayek

Friedrich August von Hayek (May 8, 1899 in Vienna – March 23, 1992 in Freiburg) was an Austrian economist and political philosopher, noted for his defense of liberal democracy and free-market capitalism against socialist and collectivist thought in the mid-20th century. Widely regarded as one of the most influential members of the Austrian School of economics, he also made significant contributions in the fields of jurisprudence and cognitive science. He shared the 1974 Nobel Memorial Prize in Economics with ideological rival Gunnar Myrdal.

Life

Hayek was born in Vienna to a Catholic family of prominent intellectuals. At the University of Vienna he received doctorates in law and political science in 1921 and 1923 respectively, and he also studied psychology and economics with keen interest. Initially sympathetic to socialism, Hayek's economic thinking was transformed during his student years in Vienna through attending Ludwig von Mises' private seminars along with Fritz Machlup and other young students.

Hayek worked as a research assistant to Prof. Jeremiah Jenks of New York University from 1923 to 1924. He then served as director of the newly formed Austrian Institute for Business Cycle Research before joining the faculty of the London School of Economics at the behest of Lionel Robbins in 1931. Unwilling to return to Austria after its annexation to Nazi Germany, Hayek became a British citizen in 1938.

In the early 1940s, Hayek enjoyed a considerable reputation as a leading economic theorist. But after the end of World War II, Hayek's laissez-faire doctrines were challenged by John Maynard Keynes and others who argued for active government intervention in economic affairs. The debate between the two schools of thought remains unresolved today, with Hayek's position gaining currency since the late 1970s. Unable to find employment in any of the major university departments of economics, Hayek became a professor in the Committee on Social Thought at the University of Chicago. He remained there from 1950 to 1962. From 1962 until his retirement in 1968, he was a professor at the University of Freiburg. Later he was a visiting professor at the University of Salzburg. Hayek died in 1992 in Freiburg, Germany.

Work

The economic calculation problem

Hayek was one of the leading academic critics of collectivism in the 20th century. Hayek believed that all forms of collectivism (even those theoretically based on voluntary cooperation) could only be maintained by a central authority of some kind. In his popular book, The Road to Serfdom (1944) and in subsequent works, Hayek claimed that socialism required central economic planning and that such planning in turn had a strong probability of leading towards totalitarianism, because the central authority would have to be endowed with powers that would impact social life as well.

Building on the earlier work of Mises and others, Hayek also argued that in centrally-planned economies an individual or a select group of individuals must determine the distribution of resources, but that these planners will never have enough information to carry out this allocation reliably. The efficient exchange and use of resources, Hayek claimed, can be maintained only through the price mechanism in free markets (see economic calculation problem). In The Use of Knowledge in Society (1945), Hayek argued that the price mechanism serves to share and synchronize local and personal knowledge, allowing society's members to achieve diverse, complicated ends through a principle of spontaneous self-organization. He coined the term catallaxy to describe a "self-organizing system of voluntary co-operation."

In Hayek's view, the central role of the state should be to maintain the rule of law, with as little arbitrary intervention as possible. Hayek conceded that when competition is not possible (or, more rarely, when competition does not provide efficient outcomes) some degree of direct government control becomes necessary. He also argued that social services are a paramount duty of the state but they should not interfere with the principle of economic competition.

Spontaneous order

Hayek viewed the price mechanism, not as a conscious invention (that which is intentionally designed by man), but as spontaneous order, or what is referred to as "that which is the result of human action but not of human design". Thus, Hayek put the price mechanism on the same level as, for example, language. Such thinking led him to speculate on how the human brain could accommodate this evolved behavior. In The Sensory Order (1952), he proposed, independently of Donald Hebb, the connectionist hypothesis that forms the basis of the technology of neural networks and of much of modern neurophysiology.

Hayek attributed the birth of civilization to private property in his book The Fatal Conceit (1988). According to him, price signals are the only possible way to let each economic decision maker communicate tacit knowledge or dispersed knowledge to each other, in order to solve the economic calculation problem.

The business cycle

Hayek's writings on capital, money, and the business cycle are widely regarded as his most important contributions to economics. Mises had earlier explained monetary and banking theory in his Theory of Money and Credit (1912), applying the marginal utility principle to the value of money and then proposing a new theory of industrial fluctuations based on the concepts of the British Currency School and the ideas of the Swedish economist Knut Wicksell. Hayek used this body of work as a starting point for his own interpretation of the business cycle, which defended what later become known as the "Austrian business cycle theory". In his Prices and Production (1931) and The Pure Theory of Capital (1941) he explained the origin of the business cycle in terms of central bank credit expansion and its transmission over time in terms of capital misallocation caused by artificially low interest rates.

The "Austrian business cycle theory" has been criticized by advocates of rational expectations and other components of neoclassical economics, who point to the neutrality of money and to the real business cycle theory as providing a sounder understanding of the phenomenon. Hayek, in his 1939 book Profits, Interest and Investment, distanced himself from other theorists of the Austrian School, such as Mises and Rothbard, in beginning to shun the wholly monetary theory of the business cycle in favor of a more eccentric understanding based more on profits than on interest rates. Hayek explicitly notes that most of the more accurate explanations of the business cycle place more emphasis on real instead of nominal variables. He also notes that this more eccentric explanation model of the business cycle which he proposes cannot be wholly reconciled with any specific Austrian theory.

Social and political philosophy

While known more as an economist than a philosopher, in the latter half of his career Hayek made a number of contributions to social and political philosophy, derived largely from his views on the limits of human knowledge[1], and the role played by his spontaneous order in social institutions. His arguments in favor of a society organized around a market order (in which the apparatus of state is employed solely to secure the peace necessary for a market of free individuals to function) were informed by a moral philosophy derived from epistemological concerns regarding the inherent limits of human knowledge. In his philosophy of science, Hayek was highly critical of what he termed scientism—abuses of the methods of science in the attempt to justify inherently unknowable propositions, particularly in the fields of social science, economics and economic history (see The Counter-Revolution of Science: Studies in the Abuse of Reason, 1952). In The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology (1952), he develops his social theory of spontaneous order into a bold philosophy of mind which has recently become the focus of a renewed level of interest within the fields of cognitive science and evolutionary psychology.

Hayek and conservatism

An academic outcast for much of his career, Hayek attracted new attention in the 1980s and 1990s with the rise of conservative governments in the United States and the United Kingdom. Margaret Thatcher, the Conservative British prime minister from 1979 to 1990, was an outspoken devotée of Hayek's writings. Shortly after Thatcher became Leader of the Conservative Party, she "reached into her briefcase and took out a book. It was Friedrich von Hayek's The Constitution of Liberty. Interrupting [the speaker], she held the book up for all of us to see. 'This', she said sternly, 'is what we believe', and banged Hayek down on the table." (John Ranelagh, Thatcher's People: An Insider's Account of the Politics, the Power, and the Personalities. London: HarperCollins, 1991.)

Hayek wrote an essay entitled Why I Am Not a Conservative [2], (included as an appendix to The Constitution of Liberty) in which he disparaged conservatism for its inability to adapt to changing human realities or to offer a positive political program. His criticism was aimed primarily at the European-style conservatism, which has often opposed capitalism as a threat to social stability and traditional values. Hayek identified himself as a classical liberal, but noted that in the United States it had become almost impossible to use "liberal" in the older sense that he gave to the term. In the U.S., Hayek is usually described as a "libertarian", but the denomination that he preferred was "Old Whig" (a phrase borrowed from Edmund Burke).

Influence and recognition

By 1947, Hayek was the chief organizer of the Mont Pelerin Society, a group of classical liberals who sought to oppose what they saw as "socialism" in various areas. For many years their efforts remained on the intellectual fringes, but they have received increasing attention over the past 30 years.

In his speech at the 1974 Nobel Prize banquet, Hayek, whose work emphasized the fallibility of individual knowledge about economic and social arrangements, expressed his misgivings about promoting the perception of economics as a strict science on par with physics, chemistry, or medicine (the academic disciplines recognized by the original Nobel Prizes).

While there is some dispute as to the matter of influence, Hayek had a long standing and close friendship with philosopher of science Karl Popper, also from Vienna. Each found support and similarities in each other's work and cited each other often, though not without qualification. In a letter to Hayek in 1944, Popper stated, "I think I have learnt more from you than from any other living thinker, except perhaps Alfred Tarski." (See Hacohen, 2000). Popper dedicated his Conjectures and Refutations to Hayek. For his part, Hayek dedicated a collection of papers, Studies in Philosophy, Politics, and Economics, to Popper, and in 1982 said, "...ever since his Logik der Forschung first came out in 1934, I have been a complete adherent to his general theory of methodology." (See Weimer and Palermo, 1982). Popper was also a participant at the 1947 inaugural meeting of the Mont Pelerin Society, organized by Hayek.

Even after his death, Hayek maintained a significant intellectual presence in the universities where he had taught: the London School of Economics, the University of Chicago, and the University of Freiburg. A student-run group, the LSE Hayek Society, was established in his honor. At Oxford University, there was also a Hayek Society. The Cato Institute, one of Washington, D.C.'s leading think tanks, named its lower level auditorium after Hayek, who had been a Distinguished Senior Fellow at Cato during his later years.

Quotations

From The Political Order of a Free People: Limited and Unlimited Power :

Nobody with open eyes can any longer doubt that the danger to personal freedom comes chiefly from the left.

From A Conversation with Friedrich A. von Hayek, AEI, Washington D.C., 1979:

I have arrived at the conviction that the neglect by economists to discuss seriously what is really the crucial problem of our time is due to a certain timidity about soiling their hands by going from purely scientific questions into value questions. This is a belief deliberately maintained by the other side because if they admitted that the issue is not a scientific question, they would have to admit that their science is antiquated and that, in academic circles, it occupies the position of astrology and not one that has any justification for serious consideration in scientific discussion. It seems to me that socialists today can preserve their position in academic economics merely by the pretense that the differences are entirely moral questions about which science cannot decide.

From an interview with Friedrich Hayek in El Mercurio, 1981:

Personally I prefer a liberal dictator to democratic government lacking liberalism.

From a dinner attended by both Friedrich Hayek and Walter E. Williams near the end of Hayek's life:

Professor Williams asked him if he had the power to write one law that would get government out of our lives, what would that law be? Professor Hayek replied he'd write a law that read: Whatever Congress does for one American it must do for all Americans. He elaborated: If Congress makes payments to one American for not raising pigs, every American not raising pigs should also receive payments.

References

• Hacohen, M. Karl Popper: The Formative Years, 1902 – 1945. Cambridge: Cambridge University Press, 2000.
• Weimer, W., Palermo, D., eds. Cognition and the Symbolic Processes. Hillsdale, NJ: Lawrence Erlbaum Associates. 1982. See Hayek's essay, "The Sensory Order after 25 Years", and "Discussion".

See also

• List of Austrian Scientists
• List of Austrians
• Austrian School of economics
• Liberalism in Austria

External links

• Bio from the Ludwig von Mises Institute
• The Hayek Scholar's Page
• Hayek's influence on Friesian philosophy
• Friedrich Hayek
• Bio and online works on Econlib
• The Road to Serfdom in Five Minutes Hayek's book, as illustrated by Look Magazine, condensed into a 5-minute movie
• Hayek, F. A Directory of links on Hayek from the Open Source Directory
• F A Hayek on the Adam Smith Institute website
• Hayek Bio at hayek.de
• Reason magazine's article on what Hayek might think of gay marriage (describes the conservatism vs. liberalism dispute)
• Information and Economics: A critique of Hayek essay included in the book Towards a New Socialism reviewed by the hayekian Len Brewster
• The economics of information, market socialism and Hayek's legacy
• Hayek and Socialism
• The Market Dynamics of Speculation: Hayekian Market Signals and the Rise of the Culture Industries
• Text of 1974 Nobel Prize lecture
• Hayek Links The most extensive list of links on Hayek