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Friedrich Hayek

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Friedrich August von Hayek
Era20th-century philosophy File:Nobel medal dsc06171.jpg
RegionWestern Philosophy
SchoolOld Whig, Classical liberalism and Austrian economics
Main interests
Economics, social philosophy, political philosophy, philosophy of mind
Notable ideas
Economic calculation problem, Catallaxy, Extended order, Dispersed knowledge, Spontaneous order

Friedrich August von Hayek, CH (May 8, 1899 in Vienna – March 23, 1992 in Freiburg) was an Austrian-British economist and political philosopher known for his defence of classical liberalism and free-market capitalism against socialist and collectivist thought in the mid-20th century. He is considered to be one of the most important economists and political philosophers of the twentieth century.[1] 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 Prize in Economics with ideological rival Gunnar Myrdal "for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena."[2] He also received the U.S. Presidential Medal of Freedom in 1991.[3] He is considered to be one of the major forces of change from the dominant interventionist and Keynesian policies of the first part of the 20th century to the more market friendly, less state controlled and neoliberal policies after the 1980s.

Early Life

Hayek was born in Vienna, Austro-Hungarian Empire, as part of an aristocratic family of prominent intellectuals working in the fields of statistics and biology. His father published a major botanical treatise while working as a doctor in the government's social welfare system. On his mother's side, he was second cousin to the philosopher Ludwig Wittgenstein. When World War I began in 1914, Hayek lied about his age and joined the Austro-Hungarian Army. He survived the war without serious injury and was decorated for bravery. After being discharged he decided to pursue an academic career.

Economist

At the University of Vienna, he earned doctorates in law and political science in 1921 and 1923 respectively, and he also studied psychology and economics with a 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. He was a student of Friedrich von Wieser.

Hayek worked as a research assistant to Prof. Jeremiah Jenks of New York University from 1923 to 1924. He then worked for the Austrian government helping to work out the legal and economic details of the international treaty ending World War I. Hayek then set up and became director of the Austrian Institute for Business Cycle Research before joining the faculty of the London School of Economics at the behest of Lionel Robbins in 1931. In the 1930s Hayek enjoyed a considerable reputation as a leading economic theorist, but his models were not received well by the followers of John Maynard Keynes and debate between the two schools of thought continues to this day.

Refugee

Unwilling to return to Austria after the Anschluss to Nazi Germany, Hayek became a British citizen in 1938, a status he held for the remainder of his life.

The Road to Serfdom

It was during this time that The Road to Serfdom was written. Hayek was concerned about the general view in Britain that Fascism was a capitalist reaction against socialism, and the book was to be the popular edition of the second volume of a treatise entitled "The Abuse and Decline of Reason".[4] It was written between 1940-1943 and the title came from the French liberal thinker Alexis de Tocqueville's writings on the "road to servitude".[5] It was first published in Britain by Routledge in March 1944 and was quite popular, leading Hayek to call it "that unobtainable book," also due in part to wartime paper rationing.[6] The book was favorably reviewed by George Orwell among others. When it was published in the United States by the University of Chicago in September of that year, it was far more popular than it had been in Britain, though it was not better received by critics. The American magazine Reader's Digest also published an abridged version in April 1945, enabling The Road to Serfdom to reach a far wider audience than academics.

In 1950, Hayek left the London School of Economics for the University of Chicago, becoming a professor in the Committee on Social Thought. (Hayek's position was unpaid and he was barred from entering the Economics department because of his Austrian economic views by one member whom he would not name and many speculate was Frank Knight. For his livelihood he depended on donations from private philanthropists.) At Chicago, he found himself among other prominent economists, such as Milton Friedman, but, by this time, Hayek had turned his interests towards political philosophy and psychology — although he continued to work on economic issues, and most of his economic notes from this period have yet to be published.

Other Writings

In the aftermath of editing a book on John Stuart Mill's letters and a series of lectures he gave in Cairo in 1955, he intended to write two books on the liberal order, the first volume of this was to be The Constitution of Liberty.[7] He worked on The Constitution of Liberty for the next four years, completing it in May 1959. It was published in February 1960. Among others, Hayek sent copies of this work to former U.S. President Herbert Hoover and the then Vice President, Richard Nixon, who sympathized with the book's basic arguments.[8] However Hayek was disappointed by the book's general reception, since it was not as popular as The Road to Serfdom had been fifteen years before.

From 1962, until his retirement in 1968, he was a professor at the University of Freiburg. It was here that most of Law, Legislation and Liberty was written. This was not intended for a general audience, and it was published in three volumes in 1973, 1976 and 1979.

Later Life

In 1974, he shared the Nobel Memorial Prize in Economics, causing a revival of interest in the Austrian school of economics. In 1984, he was appointed as a member of the Order of the Companions of Honour by Queen Elizabeth II of the United Kingdom on the advice of British Prime Minister Margaret Thatcher for his "services to the study of economics." Later, he was a visiting professor at the University of Salzburg. In 1991 George H. W. Bush awarded Hayek with the Presidential Medal of Freedom, one of the two highest civilian awards in the United States, for a "lifetime of looking beyond the horizon". 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 risk of leading towards totalitarianism, because the central authority would have to be endowed with powers that would have an impact on social life as well, and because the scope of knowledge required for central planning is inherently decentralized.

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 used 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.

Spontaneous order

Hayek viewed the free price system, 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 neurophysiology¹.

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

Capital, money, and the business cycle are prominent topics in Hayek's early 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 became known as the "Austrian Theory of the Business Cycle". 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.

This business cycle theory was criticised when published by Keynes, Sraffa and then Kaldor[9]. Since then, 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 a position held by other theorists of the Austrian School, such as Mises and later Rothbard, in beginning to shun the wholly monetary theory of the business cycle in favor of an 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 model of the business cycle cannot be wholly reconciled with any specific "Austrian" theory.

Social and political philosophy

In the latter half of his career Hayek made a number of contributions to social and political philosophy, which he based on his views on the limits of human knowledge[10], and the idea of spontaneous order in social institutions. He argues in favor of a society organized around a market order, in which the apparatus of state is employed almost, though not entirely, exclusively to enforce the legal order (comprised of abstract rules, and not particular commands) necessary for a market of free individuals to function. These ideas were informed by a moral philosophy derived from epistemological concerns regarding the inherent limits of human knowledge.

In his philosophy of science, which has much in common with that of his good friend Karl Popper, Hayek was highly critical of what he termed scientism: a false understanding of the methods of science that has been mistakenly forced upon the social sciences, but that is contrary to the practices of genuine science. Usually scientism involves combining the philosophers' ancient demand for demonstrative justification with the associationists' false view that all scientific explanations are simple two-variable linear relationships. Hayek points out that much of science involves the explanation of complex multi-variable and non-linear phenomena, and that the social science of economics and undesigned order compares favorably with such complex sciences as Darwinian biology. These ideas were developed in The Counter-Revolution of Science: Studies in the Abuse of Reason, 1952 and in some of Hayek's later essays in the philosophy of science such as "Degrees of Explanation" and "The Theory of Complex Phenomena".

In The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology (1952), Hayek independently developed a "Hebbian learning" model of learning and memory — an idea which he first conceived in 1920, prior to his study of economics. Hayek's expansion of the "Hebbian synapse" construction into a global brain theory has received continued attention in neuroscience, cognitive science, computer science, behavioral science, and evolutionary psychology.

Hayek and conservatism

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 dévote of Hayek's writings. Shortly after Thatcher became Leader of the 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.”[11] After winning the 1979 election, Thatcher appointed Keith Joseph, the director of the Hayekian Centre for Policy Studies, as her secretary of state for industry in an effort to redirect parliament’s economic strategies. Likewise, some of Ronald Reagan’s economic advisers were friends of Hayek.[12]

Hayek wrote an essay titled Why I Am Not a Conservative[13] (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 European-style conservatism [citation needed], 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 its original definition, and the term "libertarian" has been used instead. However, for his part Hayek found this term "singularly unattractive" and offered the term “Old Whig” (a phrase borrowed from Edmund Burke) instead. In his later life he said: "I am becoming a Burkean Whig".[14]

Influence and recognition

By 1947, Hayek was an organizer of the Mont Pelerin Society, a group of classical liberals who sought to oppose what they saw as socialism in various areas. He was also instrumental in the founding of the Institute of Economic Affairs, the free-market think tank that inspired Thatcherism. 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. 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 also participated in the inaugural meeting of the Mont Pelerin Society. Their friendship and mutual admiration, however, do not change the fact that there are important differences between their ideas (See Birner, 2001).

Having heavily influenced Margaret Thatcher's economic approach, and some of Ronald Reagan's economic advisors, in the 1990s Hayek became one of the most-respected economists in Eastern Europe.

Hayek's greatest intellectual debt was to Carl Menger, who pioneered an approach to social explanation similar to that developed in Britain by Bernard Mandeville and the Scottish moral philosophers. He had a wide-reaching influence on contemporary economics, politics, philosophy, sociology, psychology and anthropology. For example, Hayek's discussion in The Road to Serfdom (1944) about truth, falsehood and the use of language influenced some later opponents of postmodernism (e.g., Wolin 2004).

Even after his death, Hayek's intellectual presence was noticeable, especially in the universities where he had taught: the London School of Economics, the University of Chicago, and the University of Freiburg. A number of tributes resulted, many posthumous. A student-run group at the LSE Hayek Society, was established in his honor. At Oxford University, there is also a Hayek Society. The Cato Institute named its lower level auditorium after Hayek, who had been a Distinguished Senior Fellow at Cato during his later years. Also, the auditorium of the school of economics in Universidad Francisco Marroquín in Guatemala is named after him.

Hayek was cited many times in the recent BBC TV series The Trap.

Criticism of Hayek

Richard Posner has criticized Hayek's legal theory. Posner defended cost-benefit judicial decision-making that has no place in Hayek's theory.

In his 1944 book review, George Orwell called The Road to Serfdom "an eloquent defence of laissez-faire capitalism" and praised Hayek's criticism of contemporary left-wing and conservative thought.[15]

He then expressed the following opinion of Hayek's solutions: "But he does not see, or will not admit, that a return to 'free' competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State. The trouble with competitions is that somebody wins them. Professor Hayek denies that free capitalism necessarily leads to monopoly."

The problem in summary was: "Capitalism leads to dole queues, the scramble for markets, and war."

Selected bibliography

See also: List of books by Friedrich Hayek

1) Rules and Order, 1973
2) The Mirage of Social Justice, 1976
3) The Political Order of a Free People, 1979

Notes

  1. ^ Edward Feser (edt), The Cambridge Companion to Hayek, Cambridge University Press (2007), ISBN 0521849772, p.13
  2. ^ Bank of Sweden (1974). "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1974".
  3. ^ George H. W. Bush (1991-11-18). "Remarks on Presenting the Presidential Medal of Freedom Awards". {{cite web}}: Check date values in: |date= (help)
  4. ^ Alan Ebenstein, Friedrich Hayek. A Biography (New York: Palgrave, 2001), p. 107.
  5. ^ Ibid., p. 116.
  6. ^ Ibid., p. 128.
  7. ^ Ibid., p. 195.
  8. ^ Ibid., p. 203.
  9. ^ http://www.economyprofessor.com/theorists/friedrichhayek.php
  10. ^ The Use of Knowledge in Society
  11. ^ John Ranelagh, Thatcher's People: An Insider's Account of the Politics, the Power, and the Personalities (HarperCollins, 1991), p. ix.
  12. ^ Muller, Jerry Z. The Mind and the Market. Anchor Books, New York. 2003.
  13. ^ Why I Am Not a Conservative
  14. ^ E. H. H. Green, Ideologies of Conservatism. Conservative Political Ideas in the Twentieth Century (Oxford: Oxford University Press, 2004), p. 259.
  15. ^ Orwell, George "The Road to Serfdom by F. A. Hayek, The Mirror of the Past by K. Zilliacus", London, 1944
  16. ^ Liberty - The Fatal Deceit

Bibliography

  • Birner, Jack, 2001, "The mind-body problem and social evolution," CEEL Working Paper 1-02.
  • Birner, Hack, and Rudy van Zijp, eds., Hayek: Co-ordination and Evolution: His legacy in philosophy, politics, economics and the history of ideas (1994)
  • Caldwell, Bruce, 2005. Hayek's Challenge: An Intellectual Biography of F.A. Hayek.
  • Cohen, Avi J. "The Hayek/Knight Capital Controversy: the Irrelevance of Roundaboutness, or Purging Processes in Time?" History of Political Economy 2003 35(3): 469-490. Issn: 0018-2702 Fulltext: online in Project Muse, Swetswise and Ebsco
  • Brian Doherty. 2007. Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement
  • Ebenstein, Alan O., 2001. Friedrich Hayek: A Biography.
  • Gray, John, 1998. Hayek on Liberty.
  • Hacohen, Malachi, 2000. Karl Popper: The Formative Years, 1902 – 1945.
  • Horwitz, Steven. "Friedrich Hayek, Austrian Economist." Journal of the History of Economic Thought 2005 27(1): 71-85. Issn: 1042-7716 Fulltext: in Swetswise, Ingenta and Ebsco
  • Kasper, Sherryl, 2002, The Revival of Laissez-Faire in American Macroeconomic Theory: A Case Study of Its Pioneers. Chpt. 4.
  • Kley, Roland, 1994. Hayek's Social and Political Thought. Oxford Univ. Press.
  • Muller, Jerry Z., 2002. The Mind and the Market: Capitalism in Western Thought. Anchor Books.
  • Rosenof, Theodore, 1974, "Freedom, Planning, and Totalitarianism: The Reception of F. A. Hayek's Road to Serfdom," Canadian Review of American Studies.
  • Samuelson, Richard A. "Reaction to the Road to Serfdom." Modern Age 1999 41(4): 309-317. Issn: 0026-7457 Fulltext: in Ebsco
  • Shearmur; Jeremy, 1996. Hayek and after: Hayekian Liberalism as a Research Programme. Routledge.
  • Touchie, John, 2005. Hayek and Human Rights: Foundations for a Minimalist Approach to Law. Edward Elgar.
  • Vanberg, V. (2001). "Hayek, Friedrich A von (1899–1992)," International Encyclopedia of the Social & Behavioral Sciences, pp. 6482-6486. Abstract.
  • Vernon, Richard. "The 'Great Society' and the 'Open Society': Liberalism in Hayek and Popper." Canadian Journal of Political Science 1976 9(2): 261-276. Issn: 0008-4239 Fulltext: in Jstor
  • Weimer, W., and Palermo, D., eds., 1982. Cognition and the Symbolic Processes. Lawrence Erlbaum Associates. Contains Hayek's essay, "The Sensory Order after 25 Years" with "Discussion."
  • Wolin, R. 2004. The Seduction of Unreason: The Intellectual Romance with Fascism from Nietzsche to Postmodernism. Princeton University Press, Princeton.

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