Friedrich August von Hayek

Friedrich August von Hayek 1899-1992
“A society that does not recognize that each individual has values of his own which he is entitled to follow can have no respect for the dignity of the individual and cannot really know freedom.” F. A. von Hayek.

Friedrich August von Hayek was an eminent Austrian born economist who won the 1974 Noble Memorial Prize in Economic Science. He was a prolific writer and his Collected Works are currently being published by the University of Chicago Press and Routledge, which take up nineteen volumes. He is regarded as a one of the leading economists of the twentieth century and his works continue to be influential in business-cycle theory, political and social philosophy, legal theory and comparative economic systems. He spent over seventy years promoting the superiority of capitalism over socialism and challenged the prevailing opinions of many other social scientists and intellectuals during his life. In retrospect, many refer to the twentieth century with its battle between classic socialism and democratic capitalism as the “Hayek Century”.

In this paper I will discuss Friedrich Hayek’s life, important contributions. and major published works in economics and history during the twentieth century. His works always portrayed his unwavering belief that capitalism is a more efficient and just form of economic production than socialism. Within the academic and intellectual circles he was often derided for his belief that a competitive market is more conducive to freedom, knowledge, and economic production. But Hayek crafted increasingly powerful critiques that a socialist run state could not advance or engineer economic prosperity. Hayek was the great anti-socialist.

Born in the cosmopolitan capital of Vienna on May 8, 1899 to an upper class Austrian family, Hayek was surrounded with culture and great intellectuals. Vienna, the largest city in the world, was the capital and cultural center of the great Austro-Hungarian Empire.

In 1914 the First World War raged over Europe and Vienna collapsed along with the Austro-Hungarian Empire. Hayek entered the army in 1917 and at the early age of 17 and served as an artillery officer in Italy until the war ended in November 1918. He returned home to a changed Vienna as the multiethnic Austro- Hungarian Empire had dissolved. Borders were redefined all over Europe, eight new states were formed and the Soviet Union came into existence. Austria was now only one seventh of the population it had been. The economy disintegrated and post war Vienna with all its culture and economic prosperity was replaced with famine, lack of fuel, inflation and an epidemic of influenza. These social conditions that Hayek saw first hand lead him to enroll in the University of Vienna with an idealism that sought to improve economic conditions in post war Vienna and put an end to poverty, suffering, and misery of mankind.

At university Hayek entered as a law student but was quickly drawn to the field of economics as he wanted to know if the Marxist socialism that many others found attractive was feasible as he wanted to build a more just world. He earned a doctorate degree in law (1921) and then one in political science (1923) and emerged as a changed man. He now totally believed in the liberal/free market of economics and that functioning socialism based on central planning was impossible. At university Hayek was greatly influenced by reading Carl Menger’s publication entitled Principals of Economics and Investigations.

After finishing his degrees in 1923, Hayek went to New York University where he began a doctoral program on the problems of money stabilization. Unable to finish his research thesis due to a lack of funds, he returned to Vienna in 1925 having learned English and published many articles on the American Banking System. Back in Vienna, Hayek became an avid follower of Ludwig von Mises, who was a great proponent of capitalism and liberalism. He regularly attended Mises’ seminars along with other intellectuals on advanced economics and societal theory until 1931.

In 1927, Mises formed the Austrian Institute for Business Cycle Research and appointed Hayek as its first director. Mises was impressed with the knowledge and understanding of economics Hayek had acquired at university and in America. The two great issues of the day were inflation and what drives business cycles (the tendency for economies to oscillate between booms and busts). Hayek’s theory of a business cycle was that when central banks artificially lower interest rates economic activity through purchases of capital goods would increase. Over time however, this increased consumption cannot last because real savings in the economy do not exist to maintain it. The central bank then would be forced to allow market equalization through increased interest rates causing an economic slowdown or continue economic expansion through lowering interest rates further by injecting more money into the economy. The later would result in inflation and inflation destroys an economy because of the lack of a stable base for economic transactions.

This research earned him the position of professor of economics and statistics at the University of London in 1931 and he published a book on business cycles entitled Prices and Productions that year. Gradually Hayek’s Austrian theory of the business cycle became accepted in England and he became the most influential young economist of his generation.

Socialism on a national scale was untried in this period of history and many countries were trying to rebuild themselves after the war along socialist lines. Hayek contended that socialists could not calculate in advance the manpower, natural resources, capital, and products needed to satisfy human needs. In absence of markets and market prices which reflect the true state of supply and demand the central planners would have no way of knowing who would get what, when and why. His published writings entitled Economics and Knowledge (1937) explained why central planning could not work. He wrote that free markets and free prices are the only means to convey and utilize information. Central planners would have a ‘division of knowledge’ problem and it would be impossible for them to know how to secure the best use of resources known only to individuals in a society.

Hayek also stated that “we must look at the price system as such a mechanism for commuting information if we want to understand its real function” in his 1945 paper The Use of Knowledge in Society. He believed that in the market system the free choice of individuals guides the running of the economic system. Competition through innovation, communication, and natural actions of individuals would direct and redirect resources to satisfy consumers in the most efficient way. Therefore capitalism would be a spontaneous knowledge-gathering mechanism.

During World War 11 people willingly gave up their personal freedom and liberty to fulfill the common purpose of defeating the Axis powers. Powerful totalitarian societies had engaged every citizen’s energy in the struggle. Britain, Canada, and the United States needed to do the same. They enlisted soldiers, labour, and determined what was to be produced for the war effort. Wages, profits, and prices were controlled. Strikes were not allowed, all were employed, and food was rationed. The general population marveled at the effectiveness of the war effort. Prewar scourges of poverty, hunger, and unemployment had vanished. After the war, government planners in England (Labour Party) and the United States (New Dealers) set about to continue these policies to reshape societies. Hayek, contrary to the central government planners and public opinion, knew that the loss of individual freedom would ultimately lead to economic devastation. Hayek wrote and published The Road to Serfdom in 1944, which caused a sensation throughout the educated world and subsequently through the public in England and America. He became an instant celebrity and over 600,000 copies of his book were sold. pg. 7 of the Hayek Century Hayek had seen the negative results of national acts following World War 1 and feared that England would embrace nationalization of the means of production. His book was dedicated “to the Socialists of All Parties” and it was against classical socialism in which he spoke strongly against the totalitarianism practices of Stalin and Hitler. He said that central planning ultimately leads to dictatorship because dictatorship is the most efficient and effective way to a planned economy. The movement towards a centrally planned economy would be taking a road down to serfdom for individuals in a society. The state would then control people’s incomes and distribute goods. He was a believer of human freedom and happiness and that people should have the highest material standard of living. A classical liberal order that he believed in is a maximized competition where prices, profits, private property, a competitive market, and a rule of law is prominent. He strongly purported in the power of individuals to build a life fit for themselves and others to live.

In 1950, Hayek left England to join the Committee on Social Thought at the University of Chicago where he was professor of Social and Moral Science, from 1950-1962. By 1953, Hayek had ceased to work on economic theory as he became interested in psychology, philosophy, and politics. The Austrian view of economics entered a mostly dormant stage. Hayek retired in 1962, left the University of Chicago, and went back Europe to live in Frieburg, Germany. He was soon after appointed professor of economics at the University of Frieberg in West Germany. In 1969, he returned to Austria and became a visiting professor at the University of Salzburg. Hayek received the Nobel Prize in 1974 in economics along with Gunnar Myrdal for their “pioneering work in the theory of money and economic fluctuations and for their pioneering analysis of the interdependence of economic, social, and institutional phenomena.” (Microsoft Encarta 2000). Hayek was the first free market economist to win this prize. Interest in his Austrian theory of economics was revived and his writings were taught to a whole new generation.

Another significant postwar event was when Prime Minister Margaret Thatcher and her Conservative government used the ideas from Hayek’s book The Constitution of Liberty to understand and reverse the decades of increased state control of society and the economy. Thatcher rendered the oppositional Labour Party ineffective for many years and Thatcherism was embraced.

Hayek lived to see the collapse of Communism, the fall of the Berlin Wall, and the crumbling of the Soviet Union in Eastern Europe. Eastern Europeans now looked to his work for direction on how to foster the institutions of liberal freedom. At the age of 89, Friedrich von Hayek died in Frieberg, Germany. At his graveside Father Johannes Schasching officiated and stated:
“It is impressive how in the time of economic and political crisis of Austria, great men left the country and contributed outside, especially in the United States, in an important way to the solution of political, economic, and social problems. Among them was Friedrich von Hayek.”

Hayek’s legacy has spread throughout the whole world. Privatization is now a worldwide phenomenon, including here in Canada where companies such as CN and Air Canada have been privatized. The growing push for free trade, flat taxes, sale of utilities, competition in telecommunication services, and the idea of tradable pollution credits under the Kyoto Accord on greenhouse gases all stem from Hayek’s economic theories and insights.

Hayek’s insights and economic breakthroughs were a result of his way of thinking. He described himself as a “muddler” or “puzzler” never availing or accepting the current verbal arguments or conclusions of others. Instead, he would intuitively gain new knowledge through his individual thinking. His thinking or philosophy has guided us through the twentieth century. Today scholars in law, political science, philosophy, and other fields are turning with fresh interest to Hayek’s ideas. His great message was “we ought to have learnt enough to avoid destroying our civilization by smothering the spontaneous process of the interactions of the individuals by placing its direction in the hands of any authority.”

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