Friedrich A. Hayek 1899-1992 (1)

Hayek By David R. Henderson
Cited from Econlib.org

If there is a Renaissance man among 20th-century economists—someone who innovated across a wide range of fields—it is Friedrich Hayek. He made fundamental contributions to political theory, psychology, and economics. His contributions are so remarkable that in areas where initial thoughts often lose their relevance as they are expanded upon, people are still reading his work more than 50 years after it was written. For example, today, many graduate students in economics draw insights from Hayek's papers from the 1930s and 1940s on economics and the study of knowledge, which some of their predecessors in specialized fields of economics have not yet fully grasped. It would not be surprising if, even in 2050, a significant minority of economists were still reading and learning from them.
Daniel Yergin, in his book "Commanding Heights," calls Hayek the "preeminent" economist of the latter half of the 20th century.
Hayek is the best-known proponent of what is today called Austrian economics. He was, in fact, born and raised in Austria. He is also the only major recent member of the Austrian School. After World War I, Hayek earned doctorates in law and political science at the University of Vienna. Later, Hayek joined the informal seminar of Ludwig von Mises—the Austrian equivalent of John Maynard Keynes's "Cambridge Circus"—along with other young economists such as Gottfried Haberler, Fritz Machlup, and Oskar Morgenstern. In 1927, Hayek became the director of the newly established Austrian Institute for Business Cycle Research. In the early 1930s, at the invitation of Lionel Robbins, Hayek moved to the London School of Economics, where he spent 18 years. He became a British citizen in 1938.
Hayek's work from the 1920s through the 1930s was in the Austrian School's business cycle theory, capital theory, and monetary theory. Hayek saw a connection among all three. The main problem in any economy, he argued, is how people's activities are coordinated. He realized, as Adam Smith had, that the free-market price system does an amazing job of coordinating people's activities—and that this coordination is not intended by anyone. The market, Hayek said, is a spontaneous order. By spontaneous, Hayek meant unplanned—the market is not designed by anyone, but evolves slowly as a result of human activity. However, the market does not work perfectly. Hayek asked: what causes it to leave large numbers of people unemployed at times?
He said that one reason was an increase in the money supply by central banks. In "Prices and Production," he argued that such an increase would lower interest rates and make credit artificially cheap. Businessmen would make capital investments they would not have made had they understood that they were getting distorted price signals from the credit market. But capital investment is not uniform. Long-term investments are more sensitive to interest rates than short-term investments. This is similar to how long-term bonds are more interest-sensitive than short-term Treasury bills. Therefore, he concluded that artificially low interest rates not only cause investment to be artificially high, but also cause "malinvestment"—too much investment goes into long-term projects rather than short-term ones, and the boom bursts. Hayek described the burst as a healthy and necessary correction. He argued that the way to avoid the burst is to avoid the boom that caused it.
Hayek and Keynes modeled the world at the same time. They were well aware of each other's views and argued about their differences. Many economists believe that Keynes's "The General Theory of Employment, Interest and Money" won that debate. However, Hayek never believed that until the day he died, and neither did others in the Austrian School. Hayek believed that Keynes's policies to fight unemployment would inevitably cause inflation, and that to keep unemployment low, central banks would increasingly accelerate the money supply, further fueling inflation. Hayek's idea, expressed as early as 1939, is now accepted by mainstream economists (see the Phillips curve).
In the 1930s and early 1940s, Hayek returned to the debate over whether socialist planning could work. He argued that it could not. Socialist economists think central planning can work, Hayek argued, because they think planners can receive given economic data and allocate resources accordingly. But Hayek pointed out that the data was not given. The data did not exist, and could not exist, in any one mind or even a few minds. Each individual possesses knowledge about the potential opportunities for using these resources that a central planner cannot have. The virtue of the free market, Hayek argued, is that it gives the information that only they possess to the people who use it. In short,the market process generates the data, and without the market, the data would not exist in the first place.
Mainstream economists and even many socialist economists now accept Hayek's argument. Columbia University economist Jeffrey Sachs notes: "If you ask an economist where is a good place to invest, which industry will grow in the future, or where specialization will occur, the results are quite dismal. Economists do not gather on-the-ground information the way entrepreneurs do. Poland always asks, 'Well, what can we produce?' I answer, 'I don't know.'"
In 1944, Hayek also attacked socialism from a very different angle. From his vantage point in Austria, he had observed Germany very closely in the 1920s and early 1930s. After moving to England, he noticed that many British socialists were advocating for government control policies over people's lives similar to those he had seen promoted in Germany in the 1920s. He also saw that the Nazis were actually National Socialists—that is, they were nationalists and socialists. So, inThe Road to Serfdom (The Road to Serfdom), he warned his fellow British citizens of the dangers of socialism. His basic argument was that control over our economic life leads to totalitarianism. It is not the case that "economic control only controls a part of human life, and the rest can be separated," he wrote; "it is the control of all means for our final ends."
Surprisingly to some, John Maynard Keynes highly praised the book. Keynes's words are quoted on the cover of the book: "In my opinion, it is a grand book. Morally and philosophically, I find myself in agreement with virtually the whole of it. And not only in agreement, but in deeply moved agreement."
Hayek only intended "The Road to Serfdom" for a British audience, but it was also sold in the United States. In fact, Reader's Digest produced a condensed version. The book established him as the world's leading classical liberal. Today he would be called a libertarian or a market liberal. A few years later, along with Milton Friedman, George Stigler, and others, he founded the Mont Pelerin Society. As a result, classical liberals were able to meet every two years and support each other when something important was being lost.
In 1950, Hayek became a professor of social and moral sciences at the University of Chicago, where he remained until 1962. During that time, he worked on methodology, psychology, and political theory. In methodology, Hayek attacked scientism—the imitation of the methods of the physical sciences in the social sciences. His argument was that the social sciences, including economics, study humans, not objects, and can only do so by paying attention to human purpose. The Austrian School of the 1870s had suggested that the value of an item comes from its ability to satisfy human purposes. Hayek argued that the social sciences should more generally take human purposes into account. His thoughts on this point are in "The Counter-Revolution of Science: Studies in the Abuse of Reason." In psychology, he wrote "The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology."
In political theory, Hayek wrote his views on the proper role of government in "The Constitution of Liberty." It was, in fact, a more expansive theory of the proper role of government than that of his fellow classical liberals. He discussed the principles of liberty and based his policy proposals on these principles. For example, his main objection to progressive taxation was not that it creates inefficiency, but that it violates equality before the law. In the book's postscript, "Why I Am Not a Conservative," he distinguished his classical liberalism from conservatism. As reasoning for rejecting conservatism, he cited that moral and religious ideals are not "proper objects of coercion," and that conservatism is hostile to internationalism and loyal to noisy nationalism.
In 1962, Hayek returned to Europe as a professor of economic policy at the University of Freiburg in Breisgau, West Germany, where he remained until 1968. He then taught at the University of Salzburg in Austria until his retirement nine years later. His publishing activity slowed down considerably in the early 1970s. In 1974, he was jointly awarded the Nobel Prize with Gunnar Myrdal for his "pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena." This award seemed to breathe new life into him. He began publishing in economics and politics again.
Many people become more conservative with age. However, Hayek became more radical. He had been in favor of central banking for most of his life, but in the 1970s, he began recommending the denationalization of money. Private currencies issued by companies, he argued, would have an incentive to maintain the purchasing power of their currency. Customers could choose from competing currencies. Whether that would lead back to the gold standard was questionable, given that Hayek was a believer in spontaneous order. With the collapse of communism in Eastern Europe, some economic consultants considered Hayek's monetary system as an alternative to fixed-exchange-rate currencies.
Hayek was still publishing at the age of 89. In his book "The Fatal Conceit," he explains why intellectuals are attracted to socialism and shows that their beliefs are incorrect.