About F A Hayek
Friedrich August von Hayek (1899-1992) was an Austrian-British economist who won the 1974 Nobel Memorial Prize in Economic Sciences for his groundbreaking work in understanding the coordination function of prices in economy, formulating new business cycle theory with links to monetary expansion, and investigating how a decentralised free-market economic system is feasible and advantageous over a centralised socialist planning.
F A Hayek served in a field artillery battery on the Italian front during the World War I. After the war, he enrolled at the University of Vienna where he got his first doctorate in law in 1921. His classmates included some future prominent economists, including Fritz Machlup, Gottfried von Haberler, and Oskar Morgenstern. Later, in 1923, Hayek was awarded a second doctorate in political economy. During his years at the University of Vienna, Hayek was influenced by Carl Menger's work on explanatory social science research and Friedrich von Wieser's commanding classroom teaching. He also began working at a temporary government office, where he met Ludwig von Mises, a monetary theorist and a critic of socialism.
In 1931, Hayek was invited by Lionel Robbins to deliver lectures on monetary economics at the London School of Economics and Political Science (LSE). These lectures ultimately led to his appointment the following year as the Tooke Professor of Economic Science and Statistics at LSE, where Hayek remained until 1950. This period also witnessed "Hayek vs Keynes", the historical debate between F A Hayek and the University of Cambridge economist John Maynard Keynes over their respective monetary economics theories. To stimulate aggregate demand, Keynes suggested demand-side interventions, such as low rate loans, low taxes, and excess borrowing, funded by the government. Hayek, whose saw his homeland of Austria ravaged due to inflation after the World War I, cautioned against such a Keynesian stimulus, which may reduce unemployment in the short term but would completely distort markets in the medium to long term. Following up on his ideas of deregulation, Hayek also engaged in debates with economists on the merits of socialism in the mid 1930s. When LSE was evacuated to Cambridge during the World War II, Hayek started working on his Abuse of Reason project in which he emphasised scientism - the misguided and prejudiced application of the methods of natural science to the problems of social science. Though this project never got completed, it became the basis for Hayek's most famous book, The Road to Serfdom. In 1940s, Hayek was instrumental in the creation of the Mont Pèlerin Society - an organisation dedicated to the establishment and preservation of free societies. The founding meeting of the society in 1947 was attended by 39 prominent scholars, including Ludwig Von Mises, Lionel Robbins, Milton Friedman, Frank Knight, George Stigler, Aaron Director, and Karl Popper.
In 1950, Hayek left LSE for the University of Chicago, where he spent the next 12 years of his life. In Chicago, he wrote a number of articles on political philosophy, history of ideas, and social science methodology that weaved into his 1960 book, The Constitution of Liberty. In 1962, Hayek returned to Europe and joined the University of Freiburg in Germany. He remained there until his retirement in 1968, when he accepted an honorary professorship at the University of Salzburg in Austria. During this period, he started working on his book, Law, Legislation and Liberty, which got published in three separate volumes in 1973, 1976 and 1979, which is two years after he permanently moved to Freiburg. In 1976, the Institute of Economic Affairs in London published The Denationalization of Money in which Hayek advocated for the establishment of competitively issued private currency. His final book, The Fatal Conceit, presents forceful critique against socialism and got published four years before his death.
1920-40 - Economics as a Coordination Problem: Role of Relative Prices and Monetary Disturbances
Hayek's first major work, Monetary Theory and the Trade Cycle, described his monetary theory of the trade cycle. In this work, he dismembered opposing monetary theories of the trade cycle by discarding faulty analysis and maintaining sound foundations. Since, this book could not get published in England until 1933, his second major book, Prices and Production, which was published in 1931 brought him widespread recognition. Hayek argued that a successful analysis of economic disequilibrium required a reformulation of the concept of equilibrium, positing the social function of prices in transmitting individual knowledge in society. His work on price theory in late 1930s and 1940s can be interpreted as an extension of his business cycle theory. That is, in response to criticisms towards his monetary theory, he tried to systematically work out the basic assumptions using firmer foundations of price theory. Hayek was also a major participant in the Socialist calculation debate and edited a volume on the subject titled Collectivist Economic Planning in 1935. The connection between Hayek's work on the price system and on resource allocation in a centrally planned economy is readily apparent-prices mechanism allocates resources more efficiently than a 'command economy'. Nevertheless, the join between the work on monetary theory and on the theory of economic fluctuations is less clear. In Hayek's view, business cycles are result of non-correspondence between savers and investors plans when important market signals-relative prices-are falsified by previous monetary disturbances. Hayek restated his business cycle theory in his 1939 book, Profits, Interest and Investment. However, his magnum opus on capital theory, The Pure Theory of Capital, was not published until 1941. Again, this book builds on the work that had been published earlier. In the 1940s, Hayek turned his attention to other matters. He began working in the philosophy of science and the social sciences in general, on political philosophy, and on the theory of perception.
1930-60 - Abuse of Reason Project: Engagement with Market Socialists
Hayek spent two-thirds of this period working as a professor at LSE. This period can qualify to be the most significant era in Hayek's life as a scholar. It witnessed his meteoric rise in academic circles with his free market and deregulation ideas getting recognition from all over the world. Many notable scholars, including Lionel Robbins at LSE and Milton Friedman, George Stigler, and Frank Knight at the University of Chicago got influenced with his understanding of the society, and later also became members of the Mont Pèlerin Society, an international forum for libertarian economists. Hayek was an ardent life-long opponent of socialism. In the 1930s Hayek attacked the economic feasibility of socialism drawing on an earlier German language debate that involved one of his influencers, Ludwig von Mises. This drew a response from Oskar Lange, who advocated 'market socialism'. The ensuing battle with Lange and others led Hayek to develop a distinctive 'knowledge-based' critique of socialism. During the war period, Hayek started his Abuse of Reason project, which never got completed. Nevertheless, he published a series of articles in the book, The Road to Serfdom, which is considered as his chef-d'oeuvre. It contains Hayek's political critique of socialism, and also seeds of his later more positive work on alternative liberal utopia. During the war period, Hayek also became fascinated with questions of methodology. In his book, The Counter-Revolution of Science: Studies on the Abuse of Reason, he critiques the idea of ignorantly applying successful methods from natural sciences into social sciences and calls it 'slavish imitation'. In the same year, his least appreciated work among economists, The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology got published. This book provides a theoretical basis for the 'lack of knowledge' theme that has been recurrent in Hayek's work. This claim in turn implies limits on the ambitions of socialist planners and economists and constitutes another set of arguments against socialism. Hayek was a proponent of theory, but he also understood its limitations very well. The world cannot accept market socialism, just because simplistic mathematical models can duplicate the working of a competitive market system. To practically run such a model, we would need a staggering amount of 'tacit' and 'dispersed' information that can be plausibly aggregated, formulating the correct system of thousands of equations and solving them repeatedly, and the ability of such a system to adapt to changes.
1950-80 - Liberal Principles of Justice
Hayek defended the principles of a free society, casting a skeptical eye on the growth of the welfare state and examining the challenges to freedom posed by an ever-expanding government–as well as its corrosive effect on the creation, preservation, and utilisation of knowledge. Guided by this quality, he elegantly demonstrated that a free market system in a democratic polity-under the rule of law and with strong constitutional protections of individual rights-represents the best chance for the continuing existence of liberty. Hayek's interest in the ideal of rule of law as the centerpiece of a free society grew out of his analysis of the nature of centralised economic planning. In his book, The Political Ideal of the Rule of Law, Hayek insists that there be a system of judicial review available in countries that aim to establish 'rule of law'. The Road to Serfdom has one of the clearest and most powerful formulations of the ideal of the rule of law: 'stripped of all technicalities this means that government in all its actions is bound by rules fixed and announced beforehand–rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances, and to plan one's individual affairs on the basis of this knowledge'. Since the rule of law is just one of the virtues that law should possess, it has to be balanced against competing claims of other values. Hence, Hayek's arguments in this domain also suffer from varied interpretations when viewed across different 'frames of liberty'. Conformity to the rule of law is a matter of degree, and though, other things being equal, the greater the conformity the better-other things are rarely equal. A lesser degree of conformity is often to be preferred precisely because it helps realisation of other goals.
1980-92 - Cultural Evolution
Though the period in consideration here appears shorter than others, but the emergence of Hayekian ideas on cultural evolution dates back to 1948, when Hayek included his Finlay Lecture "Individualism: True and False" as the lead essay in his book Individualism and Economic Order. He also introduced evolutionary themes in his 1960 work titled The Constitution of Liberty, where he relates the growth of civilisation to the growth of knowledge, and emphasises that 'social evolution' is not an evolution towards any goal. In his book, The Sensory Order, Hayek links together the notions of evolution, spontaneous orders, and the limits to explanation when dealing with complex phenomena. At the Committee on Social Thought in the University of Chicago, Hayek organised a seminar titled "Scientific Method and the Study of Society", which brought diverse fields such as genetics, physiology, and paleontology into discussion. By the mid-1950s, his methodological writings began to show the influence of biologists, systems theorists, and cyberneticists. And their influence ultimately spilled over into his writings on political and social theory. In the late 1960s, Hayek explicitly added the mechanism of group selection to his description of cultural evolution. Even the three volumes of Law Legislation and Liberty and his final work, The Fatal Conceit did not fall short of building arguments on the spontaneous orders-self-forming, complex orders that come about through rule-following behaviour. These documentary evidences suggest that Hayek was aware of the importance of interaction between social and economic processes and dynamics of cultural evolution, and he carefully embraced this 'warp' in his own work as he went forward.