Friedrich A. Hayek - Expensivity

by Fred Bech

Hayek’s Early Life

Friedrich August von Hayek (1899⁠–⁠1992) was one of the twentieth century’s most influential opponents of socialism and defenders of free markets. In 1974, he shared the Nobel Memorial Prize in Economic Sciences with Gunnar Myrdal.

Hayek was born in Vienna into an upper-middle-class professional family. His father was a physician and a part-time lecturer in botany, while his paternal and maternal grandfathers were a biologist and a well-known economist, respectively. On his mother’s side, Hayek was also a second cousin of the philosopher Ludwig Wittgenstein.

During World War I, Hayek fought with an Austrian artillery regiment on the Italian front. During the fighting he sustained damage to his hearing and was later decorated for bravery.

Hayek’s Education

After the war, Hayek entered the University of Vienna where he studied philosophy, psychology, and economics. For a time, he also worked with the neurologist Constantin von Murakow at the latter’s Institute of Brain Anatomy in Zurich. While there, Hayek participated in research on sensory and motor neural pathways—work which blossomed decades later into his one book on psychology, The Sensory Order (1952).

However, Hayek soon decided he was more interested in pursuing a career in diplomacy, to which end he shifted the focus of his studies from philosophy and psychology to political science and the law, while continuing to study economics. He received his law degree in 1921 and a second doctorate (in political science) in 1923.

Hayek is usually considered a member of the “second generation” of the Austrian School of Economics, though he stood at a bit of a remove from the mainstream of that movement. Nevertheless, he rubbed shoulders with bona fide Austrian economists throughout his early life. One of the Austrian School’s co-founders, Eugen von Böhm-Bawerk, was a close friend of Hayek’s maternal grandfather, and while an undergraduate at the University of Vienna Hayek read Carl Menger closely in a class taught by Friedrich von Wieser.

Around this same time, Hayek began attending the private seminars being offered by Ludwig von Mises. The circle of close friends he formed there and elsewhere in Vienna included several individuals who would go on to have distinguished careers of their own, including the economist Fritz Machlup, the social phenomenologist Alfred Schütz, and the philosopher/historian Eric Voegelin.

Hayek’s Career

During the late 1920s, with the help of Mises, Hayek founded a private think tank known as the Austrian Institute for Business Cycle Research. In 1931, however, Lionel Robbins, Director of the London School of Economics (LSE), invited Hayek to take up a position there. The latter did research and taught at the LSE for nearly two decades, until leaving for the U.S. in 1950. After the Anschluss in 1938, Hayek was granted British citizenship, which he retained until the end of his life.

In 1947, Hayek was centrally involved in the founding of the Mt. Pèlerin Society (MPS), an international organization composed of philosophers, historians, economists, and businessmen united by the aim of wishing to advance free market ideas. The group was named after a mountain on Lake Geneva where their initial meeting was held. The MPS is still active today under the auspices of the Universidad Francisco Marroquín in Guatemala City.

In 1950, largely as a result of the publishing success of his book The Road to Serfdom, which had come out in 1944, Hayek was invited to join the prestigious Committee on Social Thought at the University of Chicago.

In 1962, Hayek left Chicago for the University of Freiburg. In 1969, he moved to the University of Salzburg, and then in 1977 he returned to Freiburg, where he remained for the rest of his life. He also had a relationship with UCLA, where he taught several times as a Visiting Professor.

Hayek was married twice and had two children by his first wife, a son, Laurence, who became a distinguished microbiologist and a daughter, Christine, who was an entomologist employed by the British Museum of Natural History.

Christine cared for her father during his last years, which were beset by illness. Hayek died in Freiburg and was buried in his native Vienna.

Hayek’s Ideas

During his early years at the LSE, Hayek got involved (along with Mises) in an ongoing public controversy with several well-known socialist economists of the day, which came to be known as the Socialist Calculation Debate.

In these debates, Hayek first articulated the thesis for which he later became best known: namely, that centralized planning of a large-scale economy inevitably leads to local gluts and shortages due to the impossibility of the planners’ acquiring the information they would need to allocate resources efficiently.

Hayek argued that in a free-market system, such information is generated spontaneously through the price mechanism. That is why economic planners in the USSR used to use Sears catalogs to set their own prices, which shows that such minimal efficiency as socialist economies may achieve is parasitical upon the existence of free markets elsewhere.

In 1932, in the aftermath of the Stock Market Crash and the onset of the Great Depression, Hayek became embroiled in an even more famous public debate with the English economist John Maynard Keynes in a series of signed letters by both parties (as well as Lionel Robbins and others) addressed to The Times of London.

In this debate, Keynes argued that the British government should use deficit spending as a means of helping to augment consumer demand and thus to stimulate overall economic activity. The debate grew quite acrimonious, with Keynes making ad hominem attacks against Hayek, including insulting remarks about the latter’s recently published book, Prices and Production.

In a nutshell, Hayek believed that the fundamental underlying cause of economic crashes was the misallocation of resources towards unprofitable forms production. If this was so, then the solution was not to put more money into consumers’ hands, but rather to liquidate unproductive capital investments to make way for more productive ones.

Hayek also argued that government intervention, whether fiscal (deficit spending) or monetary (artificially low interest rates), tended to exacerbate the underlying cause of the crisis (the misallocation of resources) and thus to worsen the economic situation, not improve it.

As previously mentioned, in 1944 Hayek published The Road to Serfdom, which was destined to be his most famous book and to make him an international academic star the following year when it was serialized in the hugely popular American magazine, Reader’s Digest.

In a nutshell, the book argued that socialism in all its forms leads inevitably to repression and dictatorship for the simple reason that radical egalitarianism violates essential features of human nature and so can be implemented only by means of violence, i.e., a police state.

In 1960, during his Chicago years, Hayek published what is surely his masterpiece, The Constitution of Liberty. This weighty tome is a widely ranging and deeply probing philosophical analysis of the liberal-democratic political order, along its social, economic, legal, and political dimensions.

Hayek’s influence, not just on economists, but also on politicians and statesmen, continued to grow throughout the 1960s and ’70s, especially after he won the Nobel Prize. The truth of this statement may be illustrated by a famous anecdote about The Constitution of Liberty.

According to this story, when the newly elected British Prime Minister, Margaret Thatcher, came to power in 1980, someone at an early cabinet meeting asked about her government’s reigning philosophy. In reply, she reportedly banged a copy of The Constitution of Liberty on the table, saying, “This is what we believe!”

Hayek’s last substantial work was the highly ambitious treatise, Law, Legislation, and Liberty, a three-volume study in which he sought to achieve a final, grand, unified system that would synthesize his earlier views on political economy with his own idiosyncratic take on philosophical anthropology in the context of evolutionary biology (with the latter based upon the concept of self-organization rather than Darwinian natural selection).

While Law, Legislation, and Liberty is breathtaking in its conceptual sweep, compared to The Constitution of Liberty it is not as powerfully argued nor as meticulously detailed a work of scholarship. On the other hand, as testimony to Hayek’s undiminished ambition during his later years—when he might easily have chosen to bask in the glory of his Nobel Prize and a lifetime of impressive intellectual achievement—the work is indeed admirable.

In fact, in most of his principal works, Hayek succeeds in communicating to the reader an urgent sense that the ideas he is discussing are vitally important, not just for their own sake, but for the sake of defending human freedom and improving the human condition generally.