Hayek, Friedrich August
(18991992), economist and political philosopher
, was born in Vienna on 8 May 1899, the eldest of three sons of August Josef Gustav von Hayek (18711928), physician and botanist, and his wife, Felicitas Johanna Valerie, née
von Juraschek (18751967), daughter of Franz von Juraschek, statistician, professor, and senior civil servant. His great-great-grandfather, Josef von Hayek (17501830), gained a minor title of nobility as an enterprising steward for an aristocratic landowner in Moravia. Hayek's English-language opponents insisted on calling him in later life von Hayek. In fact such titles were abolished in the inter-war Austrian republic. The von got back into his name only by an accident, when he submitted his birth certificate for his British naturalization in 1938, and was in too much of a hurry for a passport to correct it. Hayek's mother called him Fritz, an appellation also used by friends and contemporaries, but which he never liked. He was educated at two different Volkschüler
and two different Gymnasia
; he later explained his frequent changes of school by saying that he ran into difficulties with my teachers, who were irritated by the combination of obvious ability and laziness and lack of interest I showed (Hayek on Hayek
, 42). In March 1917 he joined a field artillery regiment in Vienna, and at the end of 1917 he was sent to the Italian front. There he contracted malaria and encountered his cousin Ludwig Wittgenstein. Returning to Vienna, he enrolled at the university in November 1918.
Hayek's father never achieved his ambition to hold a university chair, which helps to explain his son's belief that that was the most desirable of all positions. He afterwards remarked that the decisive aspect of his own student years was that you were not expected to confine yourself to your own subject (Hayek on Hayek
, 51); and indeed he wavered between psychology and economics, which at the time had to be combined with law. During winter 191920 (when the University of Vienna was closed for lack of fuel for heating) he went to Zürich, where he worked briefly in the laboratory of the brain anatomist von Monakow. He once said that he might well have become a biologist had not his father given him two heavy volumes by August Weismann (the biologist who rediscovered Mendel's genetics) at a time when he was too immature to appreciate them. He also remarked that the qualities he had admired in the University of Vienna had disappeared by the Second World War, and he avoided returning to the city.
Hayek graduated with a Dr Jur in 1921, completing his degree in three years rather than the usual four. In October that year a letter of recommendation from his university teacher Friedrich von Wieser to Ludwig von Mises led to a post with the Abrechnungsamt
, an agency concerned with clearing debts arising from the First World War. While working there he also studied at the University of Vienna for the DScPol., completing his second degree in 1923. His real opportunity came when he gained a research assistantship in New York in 19234. While there he investigated statistical time series and, more characteristically, wrote a critique of proto-Keynesian under-consumption theories. He also unearthed from American accounts facts about the First World War which had largely been kept from the Austrian population. This may well have been one of the origins of his scepticism about government and all its works.
Back in Austria Hayek became a participant in the economics seminar organized by von Mises, who in 1927 secured for him the post of director of the Austrian Institute for Economic Research, a newly established institute for business cycle research. He also held a lectureship in economics at the University of Vienna, from 1929. Some of his papers caught the attention of Lionel Robbins, professor of economics at the London School of Economics (LSE), and one of the very few British economists who could read German. In 1931 Robbins invited him to give a series of lectures in London, published later that year as Prices and Production
. Recalling his arrival, Robbins wrote: I can still see the door of my room opening to admit the tall, powerful, reserved figure which announced itself quietly and firmly as Hayek (Robbins, 127). In the same year Hayek was appointed visiting professor at the LSE, and in 1932 he was appointed Tooke professor of economic science and statistics, a post he held until 1950. As he subsequently remarked: If you are offered a chair in the University of London at the age of 32 you take it. He was naturalized in 1938.
The London School of Economics
Robbins himself had been appointed in 1929, at thirty, the youngest economics professor in the UK. He wanted to establish the LSE as a centre for economic theory; to counteract the insular emphasis of Cambridge; and to combat the influence of John Maynard Keynes, with whom he had already clashed on an official committee in 1930. He believed Hayek could help on all three fronts. Hayek did indeed bring many cosmopolitan contacts to the LSE. He was, for instance, instrumental in the appointment of Karl Popper, the philosopher and author of The Open Society
(1945). He subsequently looked back on his own work at the LSE in the 1930s as intellectually [the] most active and satisfying of my life (Hayek on Hayek
Hayek's technical work at the LSE had three main but related aspects: capital, monetary, and business cycle theory. He promoted the Austrian capital theory, which emphasized that lower interest rates promoted a more roundabout structure of productionwhat later would be described as a capital-deepening one. But he eventually abandoned the earlier Austrian concept of an average period of production in favour of the more complex idea of the structure of production. He was himself dissatisfied with his final effort in this direction, The Pure Theory of Capital
, which appeared in 1941 and which he subsequently said he had rushed out too quickly under the erroneous belief that the war would soon make such publications impossible. An intended sequel covering money and business cycles was never written.
American writers who attempted to relaunch Austrian economics towards the end of the twentieth century tended to treat The Pure Theory of Capital
as an unfortunate divergence and preferred to base themselves on Prices and Production
and related works. The issue of Austrian economics did not loom large in the 1930s because during that time the differences between the Austrian and other branches of neo-classical economics were less than at any time before or since. The main intellectual battle line was between neo-classical economics of all kinds and the increasingly heretical work of Keynes at Cambridge which culminated in the latter's General Theory
(1936). By the time that the large divergencies between post-war mainstream economics and the Austrian tradition had emerged into daylight Hayek had largely switched his interest to political philosophy and broad questions of economic policy. Nevertheless his policy recommendations still had their roots in his earlier work on capital and monetary theory; and he did write the occasional short clarificatory paper well into the 1960s, sometimes in response to queries from John Hicks.
It was ironical that media critics later described Hayek as the father of monetarism. From his early studies of business cycles onwards, he emphasized how difficult it was to define the money supply and that, in any case, variations in velocity were at least as important as changes in quantity. But the special characteristic of his cycle theory was his stress on the divergent movement of different prices during the business cycle, so that general price indices could not convey useful information for policy. In view of his insistence on the importance of changing relative prices in so many contexts, and throughout his career, it is surprising that he never sought to measure or estimate such relative price changes. This cannot be completely explained away by his distrust of index numbers.
Hayek's insistence that, while inflation is a monetary phenomenon, there is no such thing as the quantity of money, and no sharp boundary between money and other financial assets, has stood the test of time. The experience of the British governments in the 1980s, which changed their monetary targets so much and to so little avail, was much less puzzling to a Hayekian than to a true monetarist believer. So, too, was the high unemployment cost of reducing inflation, which Hayek insisted was inevitable while labour markets were dominated by the collective bargaining mentality.
Hayek's own business cycle theory started out from the natural rate of interest, a concept invented by the Swedish economist Knut Wicksell. This was the rate at which savings and investment were equal and the economy was in equilibrium. In an upturn or downturn the market rate of interest diverges from the natural one and the economy becomes unco-ordinated. In the boom phase banks expand credit, and consumption goods are pushed up in price; thus forced savings are extracted from consumers. A neutral monetary policy would attempt to smooth out the cycle by keeping the market rates equal to the natural rate. But as the latter was unknowable this would, in Hayek's view, be an impossible undertaking. Any attempt to use monetary policy to keep the general price level stable would make matters worsefor instance, central banks would raise interest rates near the top of a boom, thus aggravating the ensuing recession. During the 1970s, when the main questions were no longer those of smoothing the business cycle, but double-digit inflation that threatened world prosperity, Hayek changed his views, at least by implication. He then roundly castigated governments, central banks, and, above all, economists for having allowed inflation to soar out of control, from a misguided Keynesian desire to give priority to output and employment.
Hayek and Keynes
During his visit in 1931, Hayek was invited to Cambridge. Richard Kahn, Keynes's closest collaborator, asked why if in the middle of a slump he went out and bought an overcoat he would not help to increase output and employment. Hayek replied that it would take a long mathematical demonstration to explain why not; and according to local reports this incident destroyed Hayek's chances of a Cambridge chair.
Looking back seventy years later, the analyst is struck by the similarity rather than the differences of the business cycle theories of Hayek and Keynes at the time of the latter's Treatise on Money
of 1931. The controversy between the two is admirably set out in volume 9 of the Routledge edition of the collected works of Hayek. This contains papers by Keynes and others as well as Hayek; and the editor, Bruce Caldwell, contributes a lucid and non-partisan introduction concluding that both men promoted theories with specific application to particular times and place, but that neither produced a general
theory of the trade cycle. (The Cambridge economist Dennis Robertson quipped that what Hayek called a boom Keynes called a slump.) Ironically, Hayek's over-investment theory of the cycle was least applicable to the depressed 1930s when it was launched, but could have found its application in Japan in the 1980s and 1990s, when excessive investment helped trigger a long-lasting recession. Any attempt, however, to revive the theory in a globalized economy would require an analysis of the effects of supporting investment by overseas capital inflows, as well as by forced domestic savings.
The underlying divergence between Hayek and Keynes was rooted in the latter's growing conviction that a frequent and perhaps normal condition of capitalism was one of unused resources, a doctrine which was not fully set out until the General Theory
, published in 1936. Hayek on the other hand tended to assume as a first approximation full employment of resources. Keynes's rapid victory was above all due to the fact that his theory was primarily directed to explain severe and persistent unemployment during one of the worst depressions of all time. In addition Keynes's theory was more easily translated into mathematical models which bore the hallmark of what was regarded as serious economics. Last but by no means least, Keynes was able to promote the General Theory
by various means (including offering the book at an especially low price). By the end of the 1930s even the LSE was largely Keynesian.
Hayek wrote a long review for Economica
of Keynes's earlier 1931 Treatise on Money
, only to be told by the author (who was by then working on the General Theory
), Oh, never mind; I no longer believe all that (Hayek on Hayek
, 90). Hayek often declared that his greatest regret was his failure to write a critique of the General Theory
, which after his earlier experience he was initially inclined to dismiss as a mere tract for the times. Nevertheless in the last few pages of The Pure Theory of Capital
there is in fact a sketch of Hayek's unwritten critique. In a section entitled Mr Keynes's economics of abundance, Hayek insisted that abundant reserves of all resources are unlikely except in the depths of a severe depression. This still left open the question of where between the two extremes an economy would tend to be. The answer did not appear until Milton Friedman launched the concept of the natural rate of unemployment (later rechristened the non-accelerating inflation rate of unemployment, or NAIRU) in 1967. The implicit answer was that the sustainable limit to economic activity was the point at which inflation began to accelerate.
Prices as signalling devices
Hayek himself came to regard a different and less technical essay, Economics and knowledge, first published in Economica
in 1937 and later, with related papers, in Individualism and the Economic Order
(1948), as the most original contribution I have made to the theory of economics (Hayek on Hayek
, 79); and it does indeed form the link between his economic ideas and his wider social philosophy. It set itself to answer the question: How can a combination of fragments of knowledge existing in different minds bring about results, which if they were to be brought about deliberately would require a knowledge on the part of the directing mind which no single person can possess? According to Hayek, a market system is a discovery technique. No computer can predict the emergence of new knowledge, original ideas, or innovationsand people's reactions to them. His scepticism about the use of econometric relationships was based on a wider epistemological view. For he insisted that the most important kind of knowledge was not of propositions or theories, but of practical skills and dispositions governed by rules which we may imperfectly discover afterwards, but not formulate in advance.
Contrary to popular repute, Hayek always believed that mathematics had an important role to play in economic theory as a beautiful way of describing certain patterns (Hayek on Hayek
, 148). But he remarked that mathematical economists usually understood so little real mathematics that they believed their subject had to be quantitative and numerical. Unlike many mainstream neo-classical economists Hayek saw the market as an example of human institutions, like language or law, which have evolved without any conscious plan on anyone's part. Whereas mainstream economists were preoccupied with the optimal allocation of resources in given conditions, Hayek was concerned with the effect of the market system on the evolution and stability of society. He insisted that wants, techniques, and resources are not given, but are constantly changingin part because of the activities of entrepreneurs who open up possibilities which people did not know existed before. (The dynamic and entrepreneurial aspect was also emphasized by another economist of Austrian origin, Joseph Schumpeter, thus providing a so-called Austrian critique of mainstream neo-classical economics, which overlaps with the objections of radical political economists.)
It was this turn in his economic thinking, quite as much as any political differences, which was responsible for Hayek's growing estrangement from the mainstream economics profession. It was not that they disagreed with his depiction of the market as a signalling and incentive device. It was much more that it was difficult to formulate it in terms of the models fashionable among the new generation of economists. A more legitimate criticism was that just as there could be market failures in traditional economics, due to the divergence of private from social costs, so could there be failures in signalling systems, which policy might try to improve. But Hayek had little to say on these, apart from his specialized work on business cycles which he did not revisit. Another problem was that his depiction of markets did not seem to lead to a research programme for further work. (A reasonably sympathetic critic described it as poetry.) This deficiency was beginning to be remedied at the end of the twentieth century by researchers developing the mathematical theory of complexity, originally derived from physics and applied to phenomena such as earthquakes or biological cataclysms, but which they felt could be developed for the study of social events.
During the war years the LSE was evacuated to Cambridge; and Keynes took care that Hayek had comfortable rooms in King's College. Keynes himself spent weekends in Cambridge and the two became friends, despite differences of outlook. Unlike Keynes, Hayek was in no sense a charismatic personality. But they had many shared interests, for instance in antiquarian books and biography. It was then that Hayek came across the correspondence between John Stuart Mill and his future wife Harriet Taylor, which he subsequently published in 1951.
The Road to Serfdom
Contrary to widespread belief, Hayek did not suddenly leave economics to write a political polemic. His inaugural lecture at the London School of Economics in 1933 was partly devoted to what he saw as the error of socialists who, from the best of motives, were liable to bring about results the very opposite of what they intended. But he was no more happy with conservatives who never felt the urge to reconstruct the world and who frequently supported the forces of stability only for reasons of selfishness (F. A. Hayek, The trend of economic thinking, Collected Works
The basic idea that a planned economy could not work because it would provide no basis for deciding what to produce and by what methods (the so-called calculation problem) was due not to Hayek but to his mentor von Mises. Hayek became involved through his role as an editor of a book on this debate, Collectivist Economic Planning
(1935), which also contained essays by socialists who wanted to use the market mechanism. Hayek's main contribution was to explain why it would not be possible for socialist enterprises simply to copy private enterprise principles, while remitting their profits to the state. The unexpected collapse of the Soviet Union and its satellites in 198991 supplied a belated vindication of his thesis.
The genesis of The Road to Serfdom
was a memorandum Hayek wrote in the late 1930s for William Beveridge, then director of the London School of Economics, protesting against the frequent depiction of Nazism and fascism as forms of capitalism. He viewed them as collectivist systems, much closer to Soviet communism than to anything in the USA or Britain. This memorandum was enlarged in 1939 for the Public Policy Pamphlets
series of the University of Chicago Press. Hayek was induced to expand it further as a tract for a wider market by his alarm at the number of well-intentioned English writers who naïvely wished to continue wartime planning systems to direct the economy for conscious purposes in times of peace. He saw such centralized control as a threat not only to prosperity but to freedom. He did not pretend that most people enjoyed choice. The question was rather whether people should be left themselves to make inescapable choices or whether the decisions should be made for them by someone else.
A reader several decades later would have had to make some allowance for the historical circumstances. But that would have been all to the good. For Hayek had indeed seen all the supposedly progressive ideas he castigated advanced a generation earlier among German militaristic as well as socialist circles. Although central planning fell into disrepute among political élites in the last twenty or thirty years of the twentieth century, there is always a danger that, faced with seemingly intractable problems, there will be a cry for a strong government to take a lead. Hayek afterwards regretted that, because of the wartime alliance with the Soviet Union, he had to choose all his examples from German thinking and policy. But it was fortunate that he did so. He thereby removed the work from cold-war polemics and also provided a perennially needed reminder of the roots of collectivism in German metaphysics, which exalted society over the individual and poured scorn on the selfish and commercial motivation of the Anglo-Saxons.
The Road to Serfdom
was far and away the most eloquent and straightforward statement of his political and economic outlook that Hayek ever achieved. It also seemed something of a miracle, given the sometimes tortuous nature of his other writing. Perhaps the greatest miracle was his choice of title, which is so important to the success of any popular work of political economy. The Road to Serfdom
was a very clear statement of certain economic verities, which mainstream economists would find it difficult to deny, but which rarely come out in their work. For instance, it analysed what would happen if a planning authority tried to regulate the numbers in different employments by adjusting pay and other terms of work. Is not this an enlightened application of market principles? No, it is not. When a government authority fixes remuneration for a category of worker and supposedly selects them by merit,
the strength of their desire for the job will count for very little. The person whose qualifications are not of the standard type, or whose temperament is not of the ordinary kind, will no longer be able to come to special arrangements with an employer.
Someone who prefers irregular hours or even a happy-go-lucky existence with a small and perhaps uncertain income to a regular routine will no longer have the choice. People will no longer be free to be rational or efficient only when and where we think it worthwhile (Road to Serfdom
, 1976 edn, 712). The individual would be used by authority to service such abstractions as the social welfare or the good of the community. These few sentences are worth more than all the research-based studies of minimum-wage laws of later decades.
In his preface to the edition of 1976 Hayek explained that he subsequently tried hard to get back to economics proper but he could not free himself of the feeling that the problems on which I had so undesignedly embarked were more challenging and important than those of economic theory; and that much that I had said in my first sketch needed clarification and elaboration (Road to Serfdom
, 1976 edn, vii). Not all who criticized Hayek for leaving economics proper were political opponents. Some just did not believe that such questions on the borders of politics, philosophy, and economics lent themselves to academic study, and that they were best discussed over coffee when economists were challenged by sociologists, politicians, or journalists.
With The Road to Serfdom
, Hayek achieved what the editor of his collected works subsequently called his fifteen minutes of fame, and he was invited in 1946 to give a lecture tour of the United States, where he was not always received as politely as in Britain. Although the book became an international best-seller, Hayek dated his ostracism by many fellow economists to that work, which they shunned as a popular polemic. Nevertheless his critique of planning was more sympathetically received in Britain than it was in America. For instance, one leading British Fabian, Barbara Wootton, took pains to try to show that democratic planning need not be a threat to freedom. Some of Hayek's disciples have, however, made too much of Keynes's letter in which he said that morally and philosophically he was in deeply moved agreement with The Road to Serfdom
. More indicative of their underlying differences was Keynes's remark: Dangerous acts can be done safely in a community which thinks and feels rightly, which would be the way to hell if they were executed by those who think wrongly (Keynes, The Collected Writings
, 27, 1980, 3858).
Although no politician, Hayek did indeed try to rally intellectual support. With aid from Swiss and American sympathizers he founded in 1947 the Mont Pélerin group of scholars dedicated to the revival of classical liberalism, of which he was president for the next thirteen years and which continued to meet for the rest of the century and beyond. His most lasting practical legacy was probably the network of free-market think-tanks he helped to inspire all over the world. He later remarked that if he had followed his natural inclination he would eventually have become active in public life; but his migration from one country to another made that impossible.
Chicago and after
To add to his problems, Hayek remarried in controversial circumstances. Owing to some misunderstanding, his youthful first love, Hélène Bitterlich, had married someone else, and Hayek himself went on to marry, in 1926, Hélène Berta Marie (Hella) von Fritsch (d
. 1960), with whom he had a daughter, Christina Maria Felicitas (b
. 1929), and a son, Lorenz Josef Heinrich Erich (b
. 1934). But when he returned on a private visit to Vienna after the Second World War he found that he was then free to marry Hélène Bitterlich, which he did, in 1950, after divorcing his first wife. This led to estrangement from many of his closest associates in London, and especially from Lionel Robbins, whose actions have been condemned by some as an example of illiberal liberalism and explained by others as sympathy for Hayek's first wife. It was this combined personal and professional distancing which helped to explain his move to Chicago, where he went in 1950 to take up a chair of social and moral science established by the interdisciplinary committee on social thought, a post he held until 1962. (He had earlier been turned down by the economics faculty.)
Hayek's initial years in Chicago saw the publication in book form of two earlier works. The Sensory Order
(1952) was the final form of a thesis he had developed in Vienna in the 1920s on philosophical psychology. In oversimplified form, the thesis was that there are inherent limits to the human mind's capacity to understand itself, and that human beings know much more than they can ever explicitly explain. The second book, The Counter-Revolution of Science
(1952), was based on wartime papers attacking scientism, by which he meant the pitfalls which arise when the social sciences believe they can ape too closely the methods of the natural ones. His scepticism was initially based on the Austrian belief that the data of the social sciences were inherently subjective. In later papers, reproduced in Studies in Philosophy, Politics and Economics
(1967), he shifted his groundpartly under the influence of Poppersomewhat away from subjectivity towards the more persuasive one of the complexity
of social phenomena. He maintained that the social sciencesin common with biologydealt with complex phenomena which are susceptible only to predictions of pattern and not to specific forecasts.
For Hayek the cardinal sin of his time was something known under the ungainly label of constructivism. This was akin to what Michael Oakeshott called rationalism, and is the error of believing that any order we find in society has been put there by a designing mindand can be, accordingly, redesigned from scratch. His continuing concern was with the results of human action but not of human intention, a phrase which he took from the Scottish philosopher Adam Ferguson (17231816). This led him away from the Benthamite utilitarianism which he had originally imbibed from von Mises, towards a version of rule utilitarianism.
The main achievement of Hayek's Chicago years was The Constitution of Liberty
, published in 1960. His concern in that book was for that condition of men in which coercion of some by others is reduced as much as is possible (p. 11). However, he did not in fact provide any easily recognizable criteria for identifying state interventions of the harmful type. The free-market arguments in The Road to Serfdom
were based on the incompatibility of central planning with personal liberty. But Hayek now approached the issue indirectly. He argued that the main condition for a free society is what he called the rule of law. By that he meant a presumption in favour of general rules and against discretionary power. He attempted to derive from this conception not only the fundamental political and legal basis, but also the economic policies, of a free society. Many writers of the most diverse political persuasions accepted that general rules were an important protectionperhaps the most important single protectionfor freedom. But Hayek was criticized for suggesting that general laws were a sufficient
condition for a free society. Many policies involving a high degree of coercion can be imposed by general rulesfor example, a ban on the teaching of evolution, or on any literature or music which flouts the principles of MarxismLeninism.
There is no one philosopher's stone for minimizing coercion in society. Hayek's concern to restore a government of laws rather than of men can be seen from his later writings, which warned of the degeneration of democracy into a struggle for spoils among competing groups. He saw the source of interest-group domination in what he called majoritarian or unlimited democracy. This is the belief that a government elected by a majority of voters (usually a plurality) should be able to enact what it likes without any checka system which Lord Hailsham was to call an elective dictatorship. Some of Hayek's own later constitutional proposals struck even his admirers as far-fetched. But their underlying aim was important. It was to recover an older idea of a state, which has no purposes of its own, but provides a framework of rules and arrangements under which people can pursue their own individual aims without getting in each other's way. This idealwhich is a long way removed from the practice of any modern government, even of the radical righthas been labelled by Oakeshott as a civil association, as opposed to the more usual idea of the state as an enterprise association, with its own aims and purposes. The close similarity of the later work of Hayek and Oakeshott, pursued in relative isolation, is a theme which deserves a study of its own.
Politics apart, Hayek ascribed his isolation from post-war economics partly to the fact that he never sympathized with either macroeconomics or econometrics. At a time when most go-ahead economists were raring to equip themselves with forecasting models and computer printouts, Hayek, in contrast to Milton Friedman, seemed an armchair thinker, preoccupied with problems such as the limitations of human knowledge. But in the longer haul the contrast did not necessarily tell against Hayek. A disadvantage of late twentieth-century methodological orthodoxy, carefully explained in Studies in Philosophy, Politics and Economics
, is that many economists acquired a vested interest in the existence of stable, discoverable, numerical relationships between phenomena such as income and consumption, or short-run changes in the money supply and the price level. Hayek warned that one could not guarantee the successful discovery of such relationships, but that scientific method could still be applied to predict certain general features of interacting systemsas it is, for instance, in biology and linguistics. Despite his friendship and ideological sympathy with Milton Friedman, he regarded the stress on prediction in Friedman's Essays in Positive Economics
as quite as dangerous as anything that Keynes had written (Hayek on Hayek
Although Hayek spent over a decade in Chicago, he never really felt at home in the United States. He was also growing increasingly deaf and had ceased to go to the theatrethus leaving mountaineering as his main extra-curricular interest. In 1962 he accepted a professorship of economic policy at the University of Freiburg im Breisgau in Germany, where he enjoyed a pretty free rein. This was followed by a less happy period as a professor at the University of Salzburg from 1969 to 1977; he then returned to Freiburg, where he spent the rest of his days.
The Nobel prize
Hayek suffered more than one fit of depression in later life. The first was in 1960, which he ascribed to his cessation of smoking because of a medical false alarm. A subsequent depression occurred in the early 1970s, which he attributed to a doctor erroneously treating him for diabetes. But his disappointment with the initial reception of The Constitution of Liberty
and his own recognition that after his seventieth birthday in 1969 his mental powers began noticeably to decline (Hayek on Hayek
, 131) could also have been relevant.
The award of a Nobel prize for economics in 1974, jointly with the left-inclined Swedish economist Gunnar Myrdal, was followed by a rejuvenation. Even that award had its bitter-sweet side. His Nobel address, The pretence of knowledge, was rejected by Economica
, the journal of the LSE of which he had previously been editor; and it was eventually published by the free-market Institute of Economic Affairs. But among political theorists and sociologists, even those critical of the new right, he was studied more seriously than the more fashionable economic technicians. (A good example of such studies is Andrew Gamble, The Iron Cage of Liberty
Hayek's last major work of social philosophy was entitled Law, Legislation and Liberty
(3 vols., 19739). He originally described it as a tailpiece to The Constitution of Liberty
. But what attracted most attention was a postscript in which he ascribed the success of human institutions to their evolutionary success in the struggle for survival. This came dangerously near to justifying whatever system happened to existincluding by inference the communist order which still prevailed in Russia. Some of his strongest earlier supporters, such as Norman Barry, complained that his previous critical rationalism had been almost completely jettisoned in favour of a curious, neo-Darwinistic form of social evolutionism (Barry, Classical Liberalism
There were thus great ultimate differences between Hayek and some others who shared a similar outlook. Unlike most classical liberals, Hayek's espousal of liberty turned out to be based neither on ultimate judgements, nor on considerations of welfare, utility, or happiness. He did not even accept the methodological individualism of most mainstream economists. For him, the key to institutions was natural selection among competing traditions. This evolutionary approach remained in the background in the classic politico-economic works of his middle period. But its roots went back to his student reflections on biology.
Meanwhile, in the world of public affairs, Hayek's return to public attention also owed something to the proclaimed adherence of Margaret Thatcher, Britain's radical right prime minister from 1979 to 1990. It was sometimes said that if she was, as she proclaimed, a conviction politician, the convictions were those of Hayek. Yet the conclusion was not quite fair to either. Although the former UK Conservative leader was an admirer, Hayek mainly provided articulation and confirmation of convictions she had already reached. The admiration was reciprocated, yet some saw much in his writings that was at variance with Thatcherite practice.
Hayek never ceased commenting on topical economic issues. He had always distrusted the idea of purely national currencies floating against each other. In a pre-war work, Monetary Nationalism and International Stability
(1937), he came out in favour of a fixed international standard. This would probably be gold, but he had no particular preference for that over any other reference point. During the Second World War he published, in the Economic Journal
for 1943, a proposal for an international currency which would be convertible into a basket of commodities on a pre-determined basis. He was here supporting and amplifying similar proposals put forward earlier by Benjamin Graham and Frank D. Graham. Such ideas faded from public view, as the Bretton Woods system developed at the end of the war came to be based on national currencies linked by fixed but adjustable exchange rates. It may or may not be a coincidence (most likely it was common causality) that the breakdown of Bretton Woods coincided with the great inflation of the 1970s, probably the largest peacetime inflation of the twentieth century, apart from the hyperinflations following the two world wars.
In the 1970s Hayek went on to propose free competition, not only between national currencies, but between privately issued ones as well. This started as a bitter joke directed against what he regarded as the chronic inability of governments to provide sound money. But it led him into the fascinating problem of what would happen if money were provided competitively (Hayek on Hayek
, 150). His analysis of this topic, in The Denationalisation of Money
(1978), proved to be his most detailed pronouncement on monetary matters for several decades. A number of economists devoted serious attention to these proposals. Indeed, competition between different official (but not private) currencies was the main alternative put forward by the British government, in various guises, to the plan for a European currencythe eurowhich was finally launched in 1999. Notions of competitive currencies enjoyed a certain vogue, especially but not only among opponents of European monetary union. But what their exponents could never explain was what prevented this competition from developing in countries such as the UK, where legal tender laws were not restrictive, and people could contract in whatever currencies they chose.
Much more was likely to be heard of competitive private enterprise currencies during the twenty-first century. The progress of electronic money and instant communication via the internet was a long-term threat to the central bank monopoly of base moneycash and bank reserves. Electronic transactions could reach a point where the private sector might make settlements without the need for clearing through the central bank. This threatened the whole concept of an official national money, a possibility outlined by the deputy governor of the Bank of England, Mervyn King, writing in the Bank of England Bulletin
An iconoclast to the end
In 1988 Hayek produced a final book, The Fatal Conceit
, which some readers found a refreshingly straightforward guide to his teachings. It needs, however, to be stressed that this book emerged near the end of his life, after an illness, and that it was heavily edited by W. Bartley with the aid of a host of scholars apart from Hayek himself.
Whatever the status of this last volume, Hayek remained to the end much more iconoclastic than his more conventional supporters would have liked. He never subscribed, for instance, to any religious belief; and late in life he reiterated in an interview that he found monotheistic religions more objectionable than some others because they tended to be more intolerant of competition and dissent. As far as the economy was concerned, he never imagined that there was anything just in market rewards. These depended on an unpredictable mixture of effort, ability, and luck. Quite apart from the adverse economic consequences, it was not desirable even to try to reward merit through public policy, which would involve some authority deciding how much pain and effort a task had cost, and how much of a person's achievement was due to outside circumstances.
Hayek was mainly known in the 1930s for technical studies of monetary, business cycle, and capital theory. These were subsequently overshadowed by the Keynesian Revolution, but were being re-examined towards the end of the twentieth century. He had a brief period of fame in some circles and notoriety in others for The Road to Serfdom
, his tract of 1944 against centralized economic planning in time of peace. He was held to have inspired a controversial election broadcast by Winston Churchill a year later, in which the latter warned of a socialist gestapo. He re-emerged in the public eye in the 1970s and 1980s at a time of widespread disillusion both with Keynesian methods for securing full employment and with the apparently relentless expansion in the role of government. The breakdown of the post-war boom, triggered by the oil price explosion of 1973, was no surprise to Hayekexcept that he had never expected it to last nearly as long as it did. In the last twenty years of the twentieth century many dozens of books and articles on Hayek appeared, although mostly by political theorists and historians of ideas rather than economists. His most important contribution to political and economic philosophy was almost certainly The Constitution of Liberty
Hayek's own inability to resolve the ultimate conundrums of human conduct should not obscure the range of his achievements. His writings asserted the case for general rules over discretionary authority. They exposed the misleading identification of liberal democracy with the divine right of temporary majorities. They demonstrated the connection between economic and personal freedoms. They showed that the domination of both the political and economic market place by interest group struggles is a source of evil; and they explained why pecuniary rewards neither can nor should reflect merit. In presenting him as a revered thinker with a complete system, his followers may have made his work neater, simpler, and less interesting than it really was. In all these matters Hayek, like Keynes or Friedman or the American philosopher John Rawls, or other such seminal figures, is best treated as an intellectual iconoclast rather than a pundit with all the answers.
Hayek died in Freiburg im Breisgau, Germany, on 23 March 1992. He was survived by his second wife, and the two children of his first marriage. A memorial meeting was held at the London School of Economics on 23 September 1992.