Von Hayek Revisited – Warts and All

by DAVID WARSH

Everyone in Boston of a certain age knows the story of Rosie Ruiz, the marathoner who crossed the Boston finish line in 1980 at 2:31.56, flabby thighs and all, having barely broken a sweat.  Despite mounting skepticism, she basked in the glory of having run the third-fastest female marathon in history – for a few days, that is, until a couple of students remembered seeing her jump out of the crowd half a mile from the finish.

Something of the sort has been going on recently with the shade of Friedrich von Hayek.  The Austrian economist, who died in 1992 just short of what would have been his ninety-third birthday, never made false claims for himself – far from it: he knew all too well the loneliness of the long distance runner. And scrupulous work by editor W.W. Bartley, interpreter Bruce Caldwell, and biographer Alan Ebenstein, have made it possible to see the man clear.

But the claims conservatives are making about the role he played as an economist are beginning to smack of Ruizismus.  That is, they have jumped a caricature out of the bushes late in the day and claim that their guy ran a great race.

By now the story of the short-lived contest between Hayek and John Maynard Keynes in the early 1930s is fairly well known, thanks to highly readable books like Grand Pursuit: The Story of Economic Genius, by Sylvia Nasar, and Keynes Hayek: The Clash that Defined Modern Economics, by Nicholas Wapshott. There is always that very funny rap video, too, if you prefer to watch.

It is certainly true that Lionel Robbins had invited Hayek to London in 1930, specifically to battle Keynes. As Nasar writes, British economics at the beginning of the ’30s was in the process of dividing into two broad camps.  There was Cambridge University, the seat of high theory since Newton, home to Malthus and Darwin,  citadel of English economics since Alfred Marshall arrived in 1885, and, withal, of decidedly interventionist temperament.  The Cambridge camp was led by “the Prof” (there could be only one), Cecil Arthur Pigou, though he was about to be upstaged in unexpected ways by Keynes.

And there was the London School of Economics, where the 30-year-old Robbins had set out to assemble a cosmopolitan group of market-oriented liberals, which included John Hicks, from South Africa; Abba Lerner, from Bessarabia; and Hayek, from Austria. “Robbins’ ambition was to turn the LSE, founded and patronized by Fabian [socialists], into the liberal counterweight to Cambridge collectivism,” writes Nasar.

Hayek arrived in London in January 1931, just as the world slump was deepening. He gave four lectures, arguing, as he had before, that an increase in the money supply would further distort the structure of production and prolong the slump. He was hired by the LSE and got into a fierce exchange with Keynes.

Keynes’ Treatise on Money had just appeared – an attempt to get back to academic economics after a decade of speculation and influential journalism. Hayek panned the book for the “almost unbelievable” degree of obscurity of its equations.  Keynes replied by calling Hayek’s 1927 tome, Prices and Production, “One of the most frightful muddles I have ever read.”  Pigou attempted to referee:  “Body-line bowling [cricket’s equivalent of baseball’s beanball]! The method of the duello! That kind of thing was surely a mistake.”

It turned out that Treatise on Money wasn’t a very important book after all. Keynes hurried on to his General Theory of Employment, Interest, and Money, with its bold claims that a collapse of effective demand had caused the Depression, that a program of government stimulus could end it. And when The General Theory appeared in 1936, Hayek didn’t review it. He may not have been asked.

Keynes’ book was anything but “collectivist” in, say, the manner of Pigou, who in The Economics of Welfare, had argued for extensive government planning. Instead, the new book argued only for governmental management of the business cycle, through the use of monetary and fiscal policy (macroeconomics, as it quickly became known); the conduct of microeconomics was left to the capitalists.

Thus, in the autumn of 1936, Hayek slowly began to switch to a new and much more philosophical project: an investigation of various spontaneous orders that arise without central direction, and the significance of knowledge in economics.

Thereafter he labored under five distinct handicaps.

The Pure Theory of Capital, his response to Keynes’ success, turned out to be an abject failure.  Hayek had begun the book in 1934, hoping to expand decisively on the earlier arguments of Prices and Production.  He didn’t finish it until 1940; and when it appeared, in 1941, it seemed completely beside the point – “a pebble thrown in the pool of economic science that  seemingly left nary a ripple” was the way Paul Samuelson later described it.

The Road to Serfdom, which appeared in 1944, was an embarrassment. Instead of adopting anti-utopian fiction, as George Orwell did four years later, in Nineteen Eight-Four, Hayek actually argued in the middle of World War II that “it is Germany whose fate we are in some danger of repeating.”  Lumping together the more ambitious vision of post-war Labor governments with altogether more modest efforts at reform that soon would be dubbed “the mixed economy,” Hayek wrote, “[D]emocratic socialism, the great utopia of the last few generations, is not only unachievable but to strive for it produces something so utterly different that few of those who now wish it would be prepared to accept the consequences.” Reader’s Digest excerpted it in the United States, and many of those who voted for Thomas Dewey in 1948 may have read it there.  But it did Hayek’s reputation as a scholar a great deal of harm.

His divorce in 1950 from his wife of twenty years was a scandal; Robbins, godfather to his son, didn’t speak to Hayek for fifteen years. An early courtship had been jinxed by a year that Hayek spent in 1923-24 studying in New York. Through “some misunderstanding of intentions,” the object of his affections married someone else. He then he married, as he put it, “on the rebound.” Returning to Vienna in 1946, he discovered his earlier sweetheart was now free to marry, whereupon he left his wife (who, under English law, wouldn’t grant him a divorce), their seventeen-year-old daughter and twelve-year-old son, in especially churlish fashion. Wapshott tells the story:

Hayek celebrated Christmas Day with Hella and the children in their snug family home in Hampstead.  Two days later he left them for good, travelling to New York to attend the American Economic Association convention.  Hayek’s finances were more on his mind than economics. To avoid the expense of a contested divorce, he slipped a note under the hotel room door of Harold Dulan, chairman of the economics and business department of the University of Arkansas, Fayetteville, asking for a teaching post.  Hayek’s plan was to establish residency in Arkansas, a state whose permissive marriage laws would allow him to wrest a cheap divorce from Hella. Dulan duly obliged, as did the chancery division of the Arkansas high court.  Hayek’s divorce became absolute in July 1950. “Finally I enforced it,” Hayek recalled. “I’m sure that was wrong and yet I have done it,” he said.  “It was just an inner need to do it.”

Hayek needed a way out of England, too. He had acquired an American backer, the libertarian Volcker Fund, of Kansas City, Mo., a foundation willing to pay him $10,000 a year, two or three times an ordinary academic salary. The Institute for Advanced Study wouldn’t hire him, but the University of Chicago, under president Robert Hutchins, would – just not in the economics department, where young professor Milton Friedman objected to Hayek’s economics. So Hutchins persuaded the university’s Committee on Social Thought to appoint him, a second-rate appointment, professionally speaking. Starting in 1950, this permitted Hayek mostly to write and travel; he didn’t participate in the workshop that was remaking monetary economics. These were “wilderness years,” as Wapshott describes them.  In 1969 Hayek moved back to Austria for financial reasons, and began suffering from acute depression, probably arising from the first of two heart attacks whose scars were not detected until much later.

Even when he was awarded the Nobel Prize, in 1974, the occasion was bittersweet. He shared the award with another old rival, Swedish economist Gunnar Myrdal.  Both men had been highly influential in the economics of the early ’30s (Myrdal, writing in Swedish and German, had pretty thoroughly anticipated Keynes); both had stopped working in the field after Keynes’ triumph in 1936.  Myrdal had become a planner, writing two influential books:  An American Dilemma: The Negro Problem and American Democracy and Asian Drama: The Pursuits of Modernization in India and Indonesia.  Hayek had written The Sensory Order, The Constitution of Liberty, and  Law, Legislation, and Liberty. The two thoroughly disliked each other. And both were overshadowed by the presence at the ceremonies that year of Alexander Solzhenitsyn.  The novelist, who had been awarded the prize for literature in 1970, had finally been expelled from the Soviet Union.

The great irony is that it was Milton Friedman, honored with a Nobel two years later, who had demonstrated the series of mistakes in monetary policy, tightening when they should have eased, by which the US Federal Reserve Board turned what likely would have been an ordinary recession into the Great Depression.  Hayek had been clearly wrong, at least about the monetary policy that was appropriate at the time.  (It was the policy that had been advocated by Friedman – supplying liquidity in a financial crisis –that in 2008 enabled the Fed to carry the day.) And as for the period-of-production arguments of Austrian capital theory, they remain unsupported by later empirical work.

The recognition of the Nobel added years to Hayek’s life, at least in the view of those who knew him. (He adamantly denied that the award had anything to do with his longevity.) But it was Margaret Thatcher who plucked him from scientific obscurity and put him at the head of her parade. She had read Road to SerfdomITAL while studying chemistry at Oxford, Wapshott says.  He describes the scene when, soon after assuming leadership of the Conservative Party, in 1974, “meeting with the party’s left-leaning research department, she reached into her bag and slammed a copy of Hayek’s Constitution of Liberty on the table. ‘This is what we believe!’” Photo ops with with Ronald Reagan, and Presidential Medal of Freedom in 1991.

Since then, there has been a modest flowering of academic interest in his work, particularly at George Mason University – and an explosion of political interest.  “The core Hayekian belief that the size of government should be kept to a minimum manifested itself in the early ’90s in the ambitions of Newt Gingrich, a university professor turned Congressman from Georgia,” writes Wapshott. Flat income taxes, as opposed to progressive rates, a long-time Hayek favorite, have begun to appear on some political agendas. And The Road to Serfdom once again topped the best-seller lists for a time last year, when Glenn Beck touted it on his Fox news show.

But the fact remains that Hayek just didn’t contribute very much to the development of technical economics. With the publication of “The Use of Knowledge in Society” in the American Economic Review in 1945, he essentially won on the “calculation debate,” conducted with Ludwig von Mises and Oscar Lange, concerning the possibility of central planning. But it was Leo Hurwicz who carried the lessons to the next stage, where they began to have practical effect.

Paul Samuelson later said, “I can bear witness that, for twentieth century professional economists, Milton Friedman was infinitely more important for turning economists toward conservatism than was Hayek.” His implication was that the Swedes had made the right choices in the mid-1970s. On another occasion he slyly suggested that the award might have been better still if the prize-givers had cited Cambridge economist Joan Robinson, a partisan of Chinese and North Korean communism, as well.

That combination, Hayek, Myrdal and Robinson, might have cast the contributions of each into sharper relief:  three pioneers who, after important early contributions, gave up economics for political activism.

Was Hayek more important for the lay public?  Perhaps, in the few years after Thatcher rehabilitated him.  Whether his thinking played much of a role in “the German miracle,”  the restoration of Germany’s devastated economy after World War II, as Nasar implies in her chapter “The Road from Serfdom: Hayek and the German Miracle,” I have my doubts.  Certainly the thinking that underlay the Marshall Plan had more to do with The Economic Consequences of the Peace, Keynes’ 1919 polemic against the reparations imposed on Germany after World War I, than with Hayek’s  jeremiad of 1944. Both as a contributor to economic theory, and a designer of economic policy, Hayek seems to have more in common with Rosie Ruiz than with the vigorous figure depicted in George Mason economics professor George Mason Economics professor Russ Roberts and filmmaker John Papola’s  two widely-viewed videos, “Fear the Boom and Bust”  and “The Fight of the Century” – or at least so it seems to me.

That said, Hayek himself may yet turn out to have been a great economist after all, far more significant than Myrdal or Robinson, when seen against the background of a broader canvas.  The proposition that markets are fundamentally evolutionary mechanisms runs through Hayek’s work. Caldwell, of Duke University, notes that, starting with the Constitution of Liberty, “the twin ideas of evolution and spontaneous order” become prominent, especially the idea of cultural evolution, with its emphasis on rules, norms, and decentralization. These are today lively concepts in laboratories and universities around the world. Hayek may yet enter history as a prophet of evolutionary economics, a discipline dreamt of since the days of Thorstein Veblen and Alfred Marshall in the late nineteenth century but not yet forged, whose great days lie ahead.

DAVID WARSH covered economics for The Boston Globe for  22 years and, earlier, reported on business for The Wall Street Journal and Forbes. He publishes Economic Principals.com, an  independent weekly commentary on the production and distribution of economic ideas, where this article first appeared. He can be reached at warsh@economicprincipals.com

Will Falk moved to the West Coast from Milwaukee, WI where he was a public defender.

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