Socialism appealed to the idealism of intellectuals, yet it brought the most hideous tyrannies. Just from the standpoint of human liberty, socialism was a catastrophe everywhere.
More than anyone else, Nobel Laureate Friedrich Hayek showed why socialism undermines human liberty and, if pursued far enough, must result in tyranny. He told why thugs dominate so many socialist regimes. He explained how institutions of a free society develop without central planning.
“Over the years,” Nobel Laureate Milton Friedman remarked, “I have again and again asked fellow believers in a free society how they managed to escape the contagion of their collectivist intellectual environment. No name has been mentioned more often as the source of enlightenment and understanding than Friedrich Hayek’s…I, like the others, owe him a great debt…his powerful mind…his lucid and always principled expositions have helped to broaden and deepen my understanding of the meaning and the requisites of a free society.”
Former British Prime Minister Margaret Thatcher wrote that “the most powerful critique of socialist planning and the socialist state which I read at this time [the late 1940s], and to which I have returned so often since [is] F.A. Hayek’s The Road to Serfdom.” Futurist Peter F. Drucker called him “our time’s preeminent social philosopher.”
Pulitzer Prize winning journalist Daniel Yergin reported in The Commanding Heights (1998), written with Joseph Stanislaw: “Concepts and notions that were decidedly outside the mainstream have now moved, with some rapidity, to center stage and are reshaping economies in every corner of the world…Hayek, the fierce advocate of free markets…is preeminent.”
He was a thin, distinguished-looking man who stood an inch or two over six feet. He had a small gray mustache and, in his later years, neatly-combed white hair. He spoke in a slow, thoughtful manner with a thick Austrian accent. He was an ardent hiker, spending as many summers as he could in the Alps. He loved to collect rare books on economics, philosophy and history, and he assembled three formidable libraries during his life.
While some students found his lectures hard to follow, others were enthralled. Majorie Grice-Hutchinson, for instance, who saw him at the London School of Economics during the 1940s: “He generally strolled up and down while lecturing, and he talked in a conversational tone, without emphasis or pedantry. His excellent memory and wide humanistic background allowed him to present attractively the ideas of philosophers, jurists, politicians and businessmen of many countries and every period, and he had no difficulty in holding the attention of the large numbers of students who always filled his classroom.”
Although Hayek defended controversial views for decades, he usually managed to maintain the goodwill of his adversaries. He developed a warm relationship with the English economist John Maynard Keynes whose advocacy of government intervention in the economy he emphatically disagreed with. As a gesture of good will, Hayek dedicated his best-known work, The Road to Serfdom (1944), to “socialists of all parties.” Nobel Laureate George J. Stigler observed that “Hayek has always been both a gentleman and a scholar.”
Friedrich August von Hayek was born on May 8, 1899 in Vienna which was one of Europe’s great intellectual capitals. He was the oldest of three boys born to Felicitas Juraschek and Dr. August von Hayek, a botany professor at the University of Vienna.
Early on, he enjoyed reading about all kinds of things, and it was during World War I, when he was in the Austrian army, that he read Carl Menger’s Grundsatze der Volkswirtschaftslehre [Principles of Economics]. Menger explained how markets work, and Hayek was fascinated. After the war, in 1918, he enrolled at the University of Vienna where he earned degrees in law (1921) and political science (1923).
In October 1921, Hayek met Ludwig von Mises who was a financial adviser at the Chamber of Commerce. Mises’ 1912 book The Theory of Money and Credit had made him a respected economist, and he explained how government expansion of money and credit caused the runaway inflation which was front page news. Mises found Hayek a job with an initial salary of 5,000 old kronen per month. In an effort to maintain purchasing power, amidst Austria’s postwar inflation, the salary was tripled within 30 days, and nine months later the salary was about a million old kronen per month.
Mises had an enormous impact on Hayek’s career. Mises’ 1922 book Die Gemeinwirtschaft [Socialism] convinced Hayek that a government-run economy would be a mess. Thanks to Mises’ efforts, Hayek was awarded a Rockefeller Foundation grant which enabled European intellectuals to visit the United States. From March 1923 to June 1924, he attended classes at New York University, Columbia University and the New School, which helped him learn English. He broke into print in English, a letter about runaway inflation, published in the August 19, 1923 New York Times. At New York Public Library, he read news accounts of World War I, and he was astonished that they differed so dramatically from the Austrian government’s war reports. This made him profoundly skeptical about government.
Back in Vienna, Hayek began attending Mises’ twice-monthly private seminar on free market economics, meeting in Mises’ office at the Chamber of Commerce. In January 1927, Hayek, with Mises’ help, established Osterreichische Konjunkturforschunginstitut [Austrian Institute for Business Cycle Research]. Two years later, Hayek became a Privatdozent at the University of Vienna, which meant he could teach students there—without pay.
Hayek had fallen in love with his cousin Helene Bitterlich, but he never got around to asking her to marry him before he left for America, and when he came back 14 months later, she was with another man whom she subsequently married. At the Abrechnungsamt, Hayek met Berta Maria von Fritsch, known as Hella. They got married in the summer of 1926. They had two children, Christina Maria Felicitas (1929) and Lorenz (Laurence) Josef Heinrich (1934).
Impressed by his work on the causes of economic depressions, economics professor Lionel Robbins invited him to deliver guest lectures at the London School of Economics and later to become a full professor there. Hayek introduced English-speaking economists to the Austrian view that a depression was the consequence of a prior inflation of money and credit. When ruinous inflation is stopped, many businesses collapse because they had become dependent on ever-rising prices. He became a British citizen and taught at the London School until 1949.
Hayek’s seminars influenced many people. Future Nobel Laureate Ronald H. Coase remembered Hayek for “encouraging rigor in our thinking and in enlarging our vision.” Hayek had Austrian-born philosopher Karl R. Popper speak at a seminar, and Popper expanded his talk into his most controversial book, The Open Society and Its Enemies (1945), a passionate attack on collectivists Plato and Karl Marx. Hayek helped find a publisher and persuaded colleagues at the London School of Economics to give Popper a teaching position.
During the 1930s, Hayek’s influence was dwarfed by Cambridge-based John Maynard Keynes whose book The General Theory of Employment, Interest and Money (1936) told politicians to try curing depression with inflation. It didn’t work, but the politicians wanted to spend money, so that’s what they did, and Keynes was hailed as a genius. Despite their disagreements, Hayek and Keynes became good friends.
Hayek focused on central planning which captured the imagination of intellectuals and politicians almost everywhere. He realized that decisive critiques of central planning, published in German, were virtually unknown among English-speaking readers. Accordingly, he gathered English translations of essays by Ludwig von Mises, N. G. Pierson and Georg Halm into a book, Collectivist Economic Planning (1935). Without free market prices, they showed, an economy won’t work efficiently.
In 1936, Hayek gave a talk, “Economics and Knowledge,” at the London Economic Club, and Economica reprinted it. He explained that prosperity depends on tapping vast amounts of information about what people want and how best to supply it. The information is dispersed among millions of people and constantly changing, which dooms central planning to failure.
Meanwhile, Hayek emphatically disagreed with intellectuals who claimed the Nazis were “a sort of capitalist reaction to the socialist tendencies of the immediate postwar period,” as he put it. He believed socialism leads to tyranny and that the Nazis—National Socialists—were just a variety of socialist tyranny. The May 1940 issue of Economica published Hayek’s article “Socialist Calculation: The Competitive ‘Solution,’” where he wrote that in a government-controlled economy, “all economic questions become political questions, because it is no longer a question of reconciling as far as possible individual views and desires, but one of imposing a single scale of values.”
In September 1940, Hayek began turning this idea into a book. It took almost four years. After the Germans started bombing London, the London School of Economics moved from their quarters on Houghton Street to Peterhouse College, Cambridge, and Keynes found rooms for Hayek’s family at King’s College, Cambridge. The rooms were cold, so they moved to a semi-converted barn nearby, and that’s where he finished his book.
He noted there is general agreement about a few functions of government such as providing national defense and punishing violent criminals, but as government expands beyond the realm of general agreement, it must enforce conformity. Central economic planning, Hayek explained, means more and more coercion as officials gain power to decide what work people must do, which kinds of cars, pens, apples and everything else must be produced—and who should get them. He observed that power attracts those who don’t have scruples about imprisoning or even executing people. That’s why “the worst get on top.”
Called The Road to Serfdom—after Alexis de Tocqueville’s phrase “the road to servitude”—Hayek’s book was published in England on March 10, 1944. It provoked controversy, and the 2,000-copy press run sold out. To secure an American publisher, Hayek sought help from Fritz Machlup, an economist who had attended Mises’ Vienna seminar, emigrated to the United States and got a job in Washington, D.C. Machlup couldn’t interest any publisher in the book, but he showed English page proofs to Aaron Director, Milton Friedman’s brother-in-law. Apparently he sent them to professor Frank Knight in the University of Chicago’s economics department. Knight recommended the book to William Couch, editor of the University of Chicago Press, and it was accepted. They had 2,000 copies printed.
Then came libertarian journalist Henry Hazlitt’s 1,500-word review on the front page of the Sunday New York Times Book Review, September 24, 1944. He declared that “Friedrich Hayek has written one of the most important books of our generation.” The University of Chicago Press ordered another 10,000 copies, and there were requests for rights to translate the book into German, Spanish and Dutch. Reader’s Digest editor-in-chief Dewitt Wallace devoted the first 20 pages of the April 1945 issue to a condensation of The Road to Serfdom. At the time, Reader’s Digest had a circulation around 8,000,000. Moreover, Harry Scherman’s Book-of-the-Month Club, America’s biggest bookseller, distributed some 600,000 copies of the condensation. Since the book appeared, it has sold over 80,000 hardcover copies and 175,000 paperback copies in the United States, plus authorized editions in almost 20 languages and unauthorized editions in Eastern European languages.
The book struck a responsive chord with at least some of Hayek’s intellectual adversaries. Keynes wrote Hayek: “In my opinion it is a grand book—morally and philosophically, I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement.” George Orwell, the socialist who attacked totalitarianism in his novels Animal Farm and 1984, acknowledged that Hayek’s thesis contains “a great deal of truth—collectivism is not inherently democratic, but, on the contrary, gives to a tyrannical minority such powers as the Spanish Inquisitor never dreamed of.”
The University of Chicago Press rushed Hayek into the lecture circuit, a new experience for him. He told an interviewer, “when I was picked up at my hotel [in New York]…I asked, ‘What sort of audience do you expect?’ They said, ‘The hall holds 3,000 but there’s an overflow meeting.’ Dear God, I hadn’t an idea what I was going to say. ‘How have you announced it?’ ‘Oh, we have called it ‘The Rule of Law in International Affairs.’ My God, I had never thought about that problem in my life—I asked the chairman if three-quarters of an hour would be enough. ‘Oh, no, it must be exactly an hour…you are on the radio.” Hayek was a hit.
During the 1945 parliamentary elections, Winston Churchill drew a campaign theme from Hayek’s book. On June 4th, he warned that a Labour Government wouldn’t “allow free, sharp or violently worded expressions of public discontent…they would have to fall back on some form of Gestapo…” Laborite Clement Atlee derided this speech as a “second-hand version of the academic views of an Austrian professor, Friedrich August von Hayek.” The Labour Party won the election, Atlee became the next Prime Minister, and by the fall of 1947, they enacted peacetime forced labor. As economist John Jewkes explained, “the Minister of Labour had the power to direct workers changing their jobs to the employment he considered best in the national interest.” Fortunately, the Labour Party was defeated in the 1950 elections.
Meanwhile, in 1947 Hayek called a meeting of scholars, journalists and others who were concerned about liberty. “After the publication of The Road to Serfdom,” Hayek recalled, “I was invited to give many lectures. During my travels in Europe as well as in the United States, nearly everywhere I went I met someone who told me that he fully agreed with me, but that at the same time he felt totally isolated in his views and had nobody with whom he could even talk about them. This gave me the idea of bringing these people, each of whom was living in great solitude, together in one place. And by a stroke of luck I was able to raise the money to accomplish this.” Thirty-six participants from 10 countries gathered at the Hotel du Parc, Mont Pelerin, near Vevey, Switzerland, April 1st to April 10th, 1947. They exchanged views and formed the Mont Pelerin Society. Four of the original members won Nobel Prizes.
The University of Chicago Law Review (Spring 1949) published Hayek’s essay “The Intellectuals and Socialism.” He wrote, “The main lesson which the true liberal must learn from the success of the socialists,” he wrote, “is that it was their courage to be Utopian which gained them the support of the intellectuals and therefore an influence on public opinion which is daily making possible what only recently seemed utterly remote.” Thousands of copies of this essay were distributed over the years, and Hayek’s view inspired efforts in many countries to influence intellectuals and ultimately public policy for liberty.
While visiting Austria to see family members who had survived the war, Hayek learned that his first love Helene Bitterlich had become a widow and was therefore free to marry him. He and his wife Hella separated in December 1949. Friends were upset. Soon after the divorce in July 1950, Hayek married Bitterlich, and they were together for the rest of his life.
Hayek had to get away from England, and the best bet was the United States. The University of Chicago was a possibility because of The Road to Serfdom, but the economics department didn’t want him. Princeton and Stanford turned him down. After teaching for a year at the University of Arkansas, John U. Nef, Chairman of the University of Chicago’s Committee on Social Thought, invited him to be Professor of Social and Moral Science. The University of Chicago wouldn’t pay him a salary, but the William Volker Fund’s Harold W. Luhnow agreed to cover it. Hayek office was Room 506 of the Social Sciences building on 59th Street.
One of his students, Shirley Robin Letwin, remembered that “On Wednesdays, after dinner, a large assortment of the wise and callow, coming from all disciplines and all nations, assembled around a massive oval oak table in a mock Gothic chamber to talk about topics proposed by Hayek…philosophy, history, social science, and knowledge generally…Hayek presided over this remarkable company with a gentle rectitude that made his seminar an exercise in the liberal virtues…The general subject was [market] liberalism…the only obligation was to enter into the thoughts of others with fidelity and to accept questions and dissent gracefully.”
Since views about history influence about current policies, Hayek gathered contributions by economic historians T.S. Ashton and Louis Hacker, economists W.H. Hutt and Bertrand de Jouvenal into a book, Capitalism and the Historians (1954). They rejected the widely held view that free markets made people worse off and that government regulation was needed. The book told how people voluntarily migrated from poor rural areas to factories because tough as factory work might have been, it made possible a better and longer life.
In 1956, Hayek was invited to deliver some lectures for the National Bank of Egypt. He chose as his subject “The Political Ideal of the Rule of Law.” He surveyed the history of efforts to limit government power by achieving a rule of law, meaning laws that apply equally to everybody and are predictable so that people can plan their lives accordingly. Hayek developed these ideas more fully in The Constitution of Liberty. Like John Milton and John Stuart Mill, Hayek went on to say that because one never knows where discoveries might come from, it’s essential that people be free to pursue the truth. He wrote, “the chief reason why we should be held wholly responsible for our decisions is that this will direct our attention to those causes of events that depend on our actions. The recognition of property is clearly the first step in the delimitation of the private sphere which protects us against coercion. We are rarely in a position to carry out a coherent plan of action unless we are certain of our exclusive control of some material objects…”
Hayek summarized a legal framework for liberty. First, laws should be rules rather than commands dictating specifically what people must do. “The rationale for securing to each individual a known range within which he can decide on his actions is to enable him to make the fullest use of his knowledge,” Hayek noted. Moreover, laws should be general, applying to government as well as the people. This won’t prevent all bad laws from being passed, but if lawmakers know that laws apply with full force to them, they’ll be less prone to mischief.
Hayek pointed out that “today the conception of the rule of law is sometimes confused with the requirement of mere legality in all government action. The rule of law, of course, presupposes complete legality, but this is not enough: if a law gave the government unlimited power to act as it pleased, all its actions would be legal, but it would certainly not be under the rule of law. The rule of law, therefore, is also more than constitutionalism: it requires that all laws conform to certain principles…The rule of law is therefore not a rule of the law, but a rule concerning what the law ought to be…”
Hayek had high hopes for The Constitution of Liberty, published on February 9, 1960, which he seems to have considered his best work. While he did get reviewed in friendly publications, like the Wall Street Journal, Chicago Tribune, Fortune and Henry Hazlitt’s Newsweek column, the book was generally ignored. Hayek became depressed.
In April 1962, the Volker Fund was dissolved, and Hayek feared that meant no more income at the University of Chicago. Consequently, when he received an offer to teach at the University of Freiburg, southwestern Germany, he took it. Hayek pushed his thinking beyond The Constitution of Liberty, but he suffered ill health and didn’t write much. In 1969, he became a visiting professor at the University of Salzburg, Austria because it was closer to his wife’s family in Vienna, and the law faculty bought his library while letting him continue to use it.
Five years later, those on the Nobel Prize nominating committee wanted to honor Swedish socialist Gunnar Myrdal, but they decided they better be more balanced and share the award with somebody holding contrary views. They settled on Hayek. The Nobel Prize lifted his spirits, and as Daniel Yergin and Joseph Stanislaw observed in The Commanding Heights (1998), “documented the beginning of a great shift in the intellectual center of gravity of the economics profession toward a restoration of confidence in markets, indeed a renewed belief in the superiority of markets over other ways of organizing economic activity.”
Hayek completed his long-dormant trilogy Law, Legislation and Liberty, consisting of Rules and Order (1973), The Mirage of Social Justice (1976) and The Political Order of a Free People (1979). He attributed much of the decline of liberty to the mistaken belief “that democratic control of government made unnecessary any other safeguards against the arbitrary use of power.” He attacked “social justice” as a vague idea aimed to justify the endless expansion of government power during the 20th century. The most disastrous consequences occurred in countries which adopted parliamentary government and lacked a constitutional tradition limiting, at least to some degree, what government could inflict on people.
In 1976, Hayek produced The Denationalization of Money, a report for the Institute of Economic Affairs (London), which challenged what he called “the source and root of all monetary evil, the government monopoly of the issue and control of money.” He made a case that private institutions would do a better job avoiding inflation or depression because they’d be watched by competitors, currency exchanges and the financial press.
Hayek’s writings inspired Ronald Reagan in the United States and Margaret Thatcher in Great Britain. Hayek was revered by people who suffered from socialist tyranny in Eastern Europe, the Soviet Union and China. Hayek’s last work was The Fatal Conceit, the Errors of Socialism (1988), substantially edited by William Bartley III whom he had picked to write a biography and assemble his collected works. Bartley died in 1990, the biography unwritten, but Bartley’s associate Stephen Kresge has ably directed the publication of Hayek’s collected works.
Although Hayek was lucid almost to the end, he couldn’t do any writing after about 1985. Besides the infirmities of old age, he suffered a bout with pneumonia. He seldom ventured out of the third floor apartment in a big stucco house on Urachstrasse 27, Freiburg, West Germany, next to the Black Forest. He had moved back to Freiberg in 1977. Biographer Ebenstein reported, “His library contained perhaps 4,000 volumes across a number of disciplines, including economics, psychology, anthropology, and political philosophy. The furniture was not new, nor the interior recently painted…He had on his desk a picture of his second wife as a beautiful young woman in Vienna many years before.”
He died Monday, March 23, 1992 in the apartment. He was 92. About a hundred people attended a funeral service April 4th, conducted by Father Johannes Schasching. Hayek was buried in the hilly Neustift am Wald cemetery, overlooking the Vienna Woods.
Hayek had lived just long enough to see the Union of Soviet Socialist Republics disappear from the map. He had insisted, as Mises did before him, that socialism would impoverish multitudes—and he was vindicated. He correctly warned that socialism ultimately means oppression, slavery and mass murder. He did perhaps more than anyone else to show that free people, not government planners, are the key to a flourishing civilization.
As John Cassidy wrote in the February 7, 2000 New Yorker, “If there are two things most people can agree on these days, they are that free-market capitalism is the only practical way to organize a modern society and that the key to economic growth is ‘knowledge.’ So prevalent are these beliefs that their origins are rarely examined, which is somewhat surprising, since both statements can be traced back, in large part, to one man, Friedrich August von Hayek.” His moral courage and dazzling insights made clear that ideas shape our destiny.
Essay from 1982
An Interview With F.A. Hayek
In December the Cato Institute launched its Distinguished Lecturer Series with an address by F.A. Hayek, 1974 Nobel laureate in economics and author of numerous books, including The Road to Serfdom; The Constitution of Liberty; Prices and Production; Monetary Theory and the Trade Cycle; and Law, Legislation, and Liberty. Professor Hayek is now working on a book entitled The Fatal Conceit, which will deal with socialism and central planning in all its forms. Before his lecture, Professor Hayek granted the following exclusive interview to Policy Report.
Policy Report: What role can a public policy institute, like the Cato Institute, play to limit the size of government and increase individual freedom?
Hayek: Well, I can’t speak about particular institutes, but the one institution of that sort which I have watched from the beginning and for the existence of which I am in some sense responsible, is the Institute of Economic Affairs of London, which was created by Antony Fisher. He thought you could sway mass opinion. What I insisted and what was strictly followed by the Institute was not to appeal to the large numbers, but to the intellectuals. My conviction is that, in the long run, political opinion is determined by the intellectuals, by which I mean, as I once defined it, the secondhand dealers in ideas—the journalists, schoolmasters, and so on. In fact, socialism is very largely an affair of the intellectuals and not the working class.
So the Institute began publishing little brochures or pamphlets dealing with a few political issues on a level intelligible to the intelligent, but not technically educated, person. They are not writing for the economist, nor for the general public, but for the educated man, represented by schoolmasters and journalists and so on.
It has taken a long time to prove its success. And for a time I did wonder whether or not I was thinking correctly. I now think it has become the most powerful maker of opinion in England. By now, book shops usually have a special rack of Institute of Economic Affairs pamphlets. Even people on the left feel compelled to keep informed of the Institute’s publications. And I think that if you are looking for a program here in the United States, you can do no better than to study the Institute’s publications catalogue.
PR: Do you think monetarism has failed? And what would be wrong with enforcing a monetary rule that limited the growth of high-powered money?
Hayek: I don’t know what monetarism is. If monetarism just means a good old-fashioned quantity theory, of course it has not failed. If it means the particular version of Milton Friedman, I think it has because he imagines that he can achieve—ascertain—a clear quantity relationship between a measurable quantity of money and the price level. I don’t think that is possible. In fact, just about 40 years ago in the opening sentences of my book, Prices and Production, I wrote that it would be a great misfortune if people ever cease to believe in the quantity theory of money. It would be even worse ever to believe it literally. And that’s exactly what Milton Friedman does. He imagines that it is possible to prescribe to the monetary authorities a definite rate at which “the ” quantity of money must be allowed to increase. I must say that I don’t know what “the” quantity of money in a measurable sense is. It has become so complex. There is a distinction between Ml, M2, and so on. I don’t think there is such a simple relationship.
When you mean by monetarism that you can instruct the monetary authorities—the Federal Reserve System—to adjust the quantity of money to keep the price level stable, I believe that is correct. But they have to find out by experimentation what they have to do to keep the price level stable. If you understand correctly what Milton Friedman believes, that you can tell them to increase some particular observable quantity by 3% a year, I think it is nonsense. I say this although Friedman is a great friend of mine, and I admire most of his views, but his quantitative approach to economics seems to me to involve a gross oversimplification of what things really are like.
PR: What steps would you recommend to return the United States to stable economic growth and prosperity?
Hayek: What I can say about the United States is exactly the same that I’ve been preaching in England since Mrs. Thatcher has been in power. It is politically possible to cause, by braking inflation, 20% unemployment for six months. It is not politically possible to create 10% unemployment for three years. If you do it quickly even a very high rate of unemployment can be tolerated. If you try to do it slowly and gently, you are bound to fail, because people in the long run will not put up with it. But they will accept it if it comes quickly.
I think every termination of inflation, which is without doubt the most important thing to do, has to be done much more quickly than it has been done in England. It wasn’t Mrs. Thatcher’s fault; she knew she couldn’t get her cabinet to follow her view. She admits as much. In fact, I heard her say, “My one mistake was to go on much too slowly. I ought to have done it much more quickly.” I think the same thing is in a measure true of the United States. You have done much better. You have, since Reagan came into power, reduced inflation very considerably. But one thing I might add is that reducing inflation is of little use unless you bring it down to zero inflation. Anybody who argues that a little inflation is all right, is completely wrong because inflation stimulates things only as it accelerates. If you rely on a little inflation, you are bound to increase it. You are driven into increasing inflation. So the aim must be not to reduce inflation, but as rapidly as possible to get back to a stable price level.
PR: One thing that some of the Reagan advisors have talked about is applying a cost/benefit test to regulations. Is it possible to measure costs and benefits and is cost/benefit analysis a sufficient program for deregulation?
Hayek: If you take “measure” literally, certainly not. But so far as you can estimate them roughly, they must be your guide. I think what you soon arrive at is that for practically all regulations the costs are greater than the benefits. It is simpler to argue against regulations as such than to pretend that you can single out those where clearly the costs are greater than the benefits. There is good sense behind the cost/benefit argument, but I don’t think it’s of great practical value.
PR: What reforms would you propose in our monetary system?
Hayek: Well, I have despaired of ever again finding a way of restraining government abuse of any money which it issues. My proposal to denationalize money was always in a sense Utopian because governments will never freely allow competition in this business. I believe there are ways around this, and my present view—which I hope before long to state in detail—is that there is probably a possibility of not issuing currency but starting with credit accounts under some other name—say, call the unit a “stable” and promise to redeem it with enough of whatever current monies are required to buy a certain list of raw materials. So it doesn’t involve issuing any circulating money, but it enables the holder to keep a stable unit in the form of a credit. Once you’ve succeeded in this, the next step would be issuing credit cards on these accounts. And then you have circumvented the whole monopoly of government.
Since it is politically impractical to deprive the government of its monopoly, you have to circumvent it.
PR: Other than monetary reform, what sort of limits or constraints do you think it is feasible to put on government in a Western democratic society?
Hayek: I think it requires a change in the constitutional arrangement. We have really to redo in a different manner what the world tried to do in the 18th century when they hoped that the principle of the separation of pwers was intended as a restriction on democracy. It hasn’t done so. I think we have to invent a new way.
PR: Professor Hayek, when did you realize the important incentive and information functions played by market prices?
Hayek: Well, it’s a very curious story, in a way, that I was led to put the emphasis on prices as a signal of what to do. It was an essay I wrote in 1936 called “Economics and Knowledge.” That was originally written to persuade my great friend and master, Ludwig von Mises, why I couldn’t accept all of his teaching. The main topic of the essay was to show that while it was perfectly true that what I called the logic of choice—analysis of individual action—was, like all logic, an a priori subject, Mises’ contention that all the analysis of the market was an a priori thing was wrong, because it de-pended on empirical knowledge. It depends on the problem of knowledge being conveyed from one person to another.
Now, curiously, Mises, who was so very resentful generally of critiques by his pupils, even praised my article, but he never seemed to recognize to what extent it meant a diversion from his own fundamental conception. And I never got him to admit what I really imagined to be the case, that I refuted his contention that the analysis of the market economy was an a priori function, that it was a fully empirical matter. What was a priori was a logic behind it—a logic of individual action—that when you pass from the action of one individual, there occurs a causal process of one person acting upon another and learning. And this could never be a priori. This must be empirical. And pursuing this thought is how it started. This led me to investigate how important the prices forming on the market were as guides to individual action. And it is since that date, since what originally was a criticism of my master, Mises, that I have developed this idea of the guide function of prices which 1 regard as more and more important, which I have applied in its effect on price fixing, on rent restriction, on capital investment.
All through, what it comes to is that we can achieve a condition of correspondence of separate effort only if we rely on prices as guides which tell people what to do.
I am personally convinced that the reason which led the intellectuals, particularly of the English-speaking world, to socialism was a man who is regarded as a great hero of classical liberalism, John Stuart Mill. In his famous textbook, Principles of Political Economy, which came out in 1848 and for some decades was a widely read text on the subject, he makes the following statement as he passes from the theory of production to the theory of distribution: “Once the product is there, mankind—socially or individually—can do with it whatever it pleases.” Now, if that were true I would admit that it is a clear moral obligation to see that it is justly distributed. But it isn’t true, because if we did do with that product whatever we pleased, it would never be there again. Because if you ever did it once, people would never produce those things again.
PR: Professor Hayek, we’re hearing much today about the threat to world trade through new rounds of protectionism. What advice would you have to political leaders and also to the people of Western countries who might be concerned about new protectionist measures?
Hayek: Perhaps I am over-optimistic—but one thing has been understood, at least by the more responsible people, that nothing did more to intensify the depression of the 1930s than the return to protectionism. I have not yet found anybody who, once he was reminded of this fact, would still continue to believe that it might be necessary to reintroduce protection.
PR: In your recent interview with the New York Times you said, “Keynes was one of the most intelligent people I knew, but he understood very little economics.” How do you account for his great influence in policy-making circles as well as in the academic community?
Hayek: Well, that is a very profound problem. He was in complete agreement with the philosophical movement which had invaded that generation, what I’d call intellectualist or constructivist ideas derived from many decades of French philosophers. These ideas taught: Don’t believe anything which you cannot rationally justify. This was at first applied to science, but then was equally applied to morals. “Do not regard as binding upon you any morals which you cannot intellectually justify.” Now that meant in the person of Keynes two things which he himself stated. He admitted publicly that he had always been an amoralist. And that involved the famous statement—in the long run we are all dead. Now the great merit of traditional morals is that they have evolved and developed by long-run effects which people never foresaw and understood. And the merits of the institution of private property and of saving are that in the long run those groups that adhered to them prospered.
Similarly, the function of the market system, the benefits of it, are effects beyond our vision—beyond our comprehension. Now, any philosopher who says, “I should admit only what I can rationally justify,” must exclude effects which are not foreseeable, must refuse to acknowledge a moral code which has been evolved because of its de facto effect. The utilitarian theorists believed, and Mises strongly believed, that man had chosen his morals with an intelligent understanding of the good effects. But that is wrong. Most of the effects of the moral we can’t foresee. They are beyond our vision.
The effect is that on the market especially we can serve people whom we do not know. We can profit from the services of people we do not know. In short, we can form an order of activities far exceeding our comprehension. The same is true in our action for the future. Our morals teach that saving is a good thing, because it will help future generations, but that is not a thing we know from experience. All we do know is that those social groups in which saving was a virtue have prospered, and they gradually displaced the others. We simply must realize that our traditional morals are not to be approved because we can show how they are beneficial to us, but only because they have been proved in a process of selection.
By selection I sometimes speak of the natural selection of religions: those religions which preached the right morals survived and enabled the group to multiply. It is not the intelligence of our ancestors that has left us with more efficient morals, but—as I like to express it to shock people—our ancestors were really the guinea pigs who experimented and chose the right ways which have been transmitted to us. It was not necessarily their superior intelligence. Rather, they happened to be right, so their successes multiplied, and they displaced the others who believed in the different morals.
So the difference between Keynes and me is really based on different beliefs about the foundation of ethics. Keynes believed—asserted—”I am only prepared to believed in such rules the effects of which I can see.” But, in fact, civilization has formed by man learning to conform to rules of action, the effects of which were far beyond his vision. I’ve just come up with a new formulation which I rather like, that the invention or the development of the market amounts to the invention of a new sense organ in effect, similar to the evolution of sight in addition to the sense of touch. The sense of touch gives information only about the immediate environment as far as we can feel. The formation of the sense of sight in the evolution of animals enables us to take account of a much wider environment, but one still visible to our senses. Now, the market has become a sort of, as the biologists call it, extra-somatic or external sense organ, which informs us of things of which we are not aware physically. We cannot see the benefits of our action. We cannot see where our benefit come from, but we have developed a mechanism that serves as an organ of information operating very similarly to the sense organs, but enabling us to adjust our action to events which are beyond our sensory perception.
PR: What flaws do you see in current free-market economic thinking?
Hayek: I have two defaults in my activities which I frequently regret. The one is that when Keynes, after I had devoted so much time to criticism of his Treatise on Money, thought out his general theory and told me no one believed in what I spent so much time to criticize, I did not return to the charge and never systematically attacked the General Theory.
And the second thing which I regret is that when Milton Friedman, who was a close colleague and friend, preached positivist economics, I did not attack his positivist economics. Positivist economics is really based on the same idea that we can form appropriate policy on the assumption of complete knowledge of all the relevant facts. In fact, the achievement of the market system is that we can do much better than we would do if we relied only on what we positively know. We can make use of this signaling system, as I call the market, which informs us of things which we cannot directly perceive or which are only transmitted to us—and that applies both spatially and temporally. We learn to adjust ourselves to the events which are beyond our vision spatially, which happen on other continents, and we learn to adjust ourselves to things which will happen in the distant future which we cannot see. The mathematical economists in particular talk of the “given” knowledge, the “given” data. Note how the use is placed to cause reduplication: “Given data” means “given” “givens.” If they suspect that things are not really given to them, they reassure themselves by calling them “given data”; in fact the data are hypothetical assumptions. Nobody knows all of the data. They only become operative and enable us to form an appropriate order by this transmission system of the market, where through many relays and changes what happened somewhere in New Zealand still affects my action by affecting wool prices or land prices and guiding me in what to do.
So it’s all a guide, as I put it before, an information system, something, which, incidentally, Adam Smith said over 200 years. In many respects I find more wisdom in Adam Smith than in most of the later classical economics (not to speak of the famous mathematical economics) which is very beautiful and very true if you assume all of the data are known, but becomes nonsense when you remember that these data are not known to anybody.
PR: Do you think that positivism as a methodology, as a way of thinking, tends to incline economists toward believing that they can fine-tune and intervene in the economy to achieve predictable results?
In England I took a little longer. At the age of 19 years I had been for the first time used on a mission of the colonial office and six months later had left the country. In the United States, where I was for 12 years in Chicago, it never got quite as far because by the time I was asked to sit on a government committee I had already committed myself to leave the country. By moving around the world I have avoided that corruption which government service regularly involves.
And more sadly, I have seen in some of my closest friends and sympathizers—I won’t mention any names—who completely agreed with me, how a few years in government corrupted them intellectually and made them unable to think straight.
I suppose you all know the famous story of the one-handed economist. An American chief of one of the big corporations advertised for a one-handed economist. His associates were very puzzled as to what he meant. He replied, “Oh, I want a person who doesn’t say, ‘on the one hand and on the other.’” And I’m afraid that all the people who have been in government service have become two-handed economists who think in terms of one hand and the other. If one has kept out of government service, one remains a one-handed economist who believes there is a clear way in which we ought to proceed, but one maintains this conviction only so long as one stays out of government. All my friends who have gone into it and stayed for any length of time have, in my sense, been corrupted.
This interview originally appeared in the February 1983 issue of Cato Policy Report.
Source: www.libertarianism.org
