Pause for a moment from the parade of nonsense that is American public life, and consider the source of great ideas that would dramatically improve our world. The life and work of economist Friedrich August von Hayek (1899-1992), born 100 years ago, is cause for celebration because they have helped lead the revival of the idea of liberty in a century of socialism.
He was educated in Austria in the early part of this century, but it was Ludwig von Mises’s 1922 book Socialism that first jarred Hayek away from the fashionable collectivism of his Vienna contemporaries. He went on to become a close colleague and collaborator of Mises, first in shaping the business cycle theory that would later win him the Nobel Prize in economics, and later in battling the rise of Keynesianism.
In the 1930s, Hayek was one of the few economists to decry the monetary debasement taking place all over the world. Far from digging the world out of depression, he warned, inflating the money can only disrupt international trade and generate further declines in the standard of living.
Instead, he urged the restoration of an authentic gold standard, whereby paper money was fully convertible into gold at a fixed rate. This system would not only prevent inflation, said Hayek; it would facilitate international trade and rein in government power.
The Misesian theory of the business cycle was also essential to his critique of paper money. When the central bank distorts interest rates downward, it subsidizes capital investment out of proportion to savings, leading to an artificial economic boom. The bust follows when the central bank curbs credit expansion to prevent higher prices, or when the exaggerated optimism of investors gives way to the realities of the underlying economic structure.
For this reason, Hayek was a severe critic of lender-of-last-resort banking policies. Instead, he thought banks should function like any other market institution, being neither hobbled by regulations nor subsidized through a central bank like the Fed. If his view had prevailed, the dollar would still be as good as gold, the Asian bust and the bailout mania of the last ten years would not have occurred, and the world economy would be in much better shape.
Note too that money expansion rates have sometimes run into double digits this year, and with Greenspan keeping the lid on the interest rates he controls, one wonders if the present stock market boom is entirely justified. As Hayek explained, credit expansion doesn’t have to show up in prices to cause underlying damage that isn’t revealed until it is too late.
Hayek also collaborated with Mises in debunking the fallacies of socialism. It was not an economic system, he said, so much as a system of control that empowered the total state. Hayek further argued that central planners could not have access to all the information necessary to coordinate production and exchange for an entire economy.
Like Mises himself, Hayek broadened his interests beyond economic studies during and after the Second World War. His The Road to Serfdom spelled out the institutional links between socialism and tyrannical political controls, and said that no society could be free in the absence of a capitalist system of economics.
The book shocked the intelligensia in Britain and the US because he saw no strict line demarcating Italy’s fascism and Germany’s national socialism from Soviet socialism, which at the time were seen as polar opposites of right and left. Moreover, he saw no strict line demarcating these systems from America’s New Deal and Britain’s Fabian planning. They all exalted the state above the individual and stood in opposition to the classical idea of liberty.
His studies of law and society, gathered in his three-volume Law, Legislation and Liberty, decried the rise of egalitarianism and “distributive justice” implied in the welfare state. As opposed to the legal uncertainties of special-interest legislation, he favored the classical rule of law, which held that established general rules applied to the whole population.
Also in these years, Hayek began to develop a systematic critique of the rise of “scientism” in the study and management of society. Society cannot be designed and redesigned by intellectuals; it must evolve according to the interests and voluntary behavior of people with localized knowledge. It’s a message that needs to be heard and understood by every school of social science in the West.
Mises was critical of Hayek’s later work in several respects. In books such as The Constitution of Liberty, Hayek had conceded too much to the social democrats, permitting a range of government interventions that were neither necessary nor genuinely compatible with a free society. Further, Murray Rothbard has argued that Mises provided a more fundamental and devastating critique of socialism.
Nonetheless, Hayek was an enthusiastic backer of the Mises Institute at its founding and served on the board of advisers in the years before his death. And the Nobel Prize he won in 1974 served to introduce a new generation of students into the Austrian tradition and the classically liberal ideal. F. A. Hayek was a champion of freedom and good scholarship in a century when these virtues were extremely scarce.
