Unorthodox thinker who defended free markets, minds

HAYEK’S CHALLENGE: AN INTELLECTUAL BIOGRAPHY OF F.A. HAYEK

By Bruce Caldwell

University of Chicago Press, $55, 489 pages

HAYEK’S JOURNEY: THE MIND OF FRIEDRICH HAYEK

By Alan Ebenstein

Palgrave, $27.95, 283 pages

REVIEWED BY GERALD J. RUSSELLO

In many ways, the 21st century belongs to Nobel Prize-winning economist Friedrich Hayek (1899-1992). His groundbreaking 1944 work “The Road to Serfdom,” published while Hayek was a moderately famous professor at the London School of Economics (LSE), changed the intellectual life of the West.

At the time, elite opinion uniformly held that socialism was the wave of the future, and confidence in state control of the economy and centralized planning was at its height. The Great Depression of the 1930s had caused many to distrust free enterprise, and World War II had given governments unprecedented power and opportunities to centralize their authority.

As Bruce Caldwell describes Hayek’s position in his new biography “Hayek’s Challenge,” “It is not enough to say that some of his views were unpopular. For most of his life his economic and political positions were completely out of sync with those of the rest of the intelligentsia.”

Hayek was one of the very few thinkers whoquestioned the prevailing orthodoxy. In the United States, “The Road to Serfdom” became one of the foundation texts of the nascent conservative movement, along with Russell Kirk’s “The Conservative Mind” and Robert Nisbet’s “The Quest for Community.”

And Hayek has been vindicated: The collapse of communism and the end of the Cold War have proven the vitality and prosperity of economic freedom. Markets are now the norm in most countries.

Nevertheless, Western elites still find the temptation to use government power to remake economic life almost irresistible, especially during campaign season. Even the State of the Union address by the current Republican president contains numerous proposals for government action.

Hayek condemned such political meddling not only as bad economics, but also as a fundamentally flawed understanding of human nature.

These two books try to assess Hayek’s contributions as a thinker in economics and also in political philosophy and psychology. Mr. Caldwell, a respected economic historian, presents a detailed account of the economic theories of Hayek and other members of the so-called Austrian School. While necessarily technical at times, the book repays careful effort.

Alan Ebenstein, author of a previous biography of Hayek, has in contrast pitched his book for a wider audience, and presents the economic issues in a simpler fashion while still discussing the major topics.

When he published “The Road to Serfdom,” Hayek was best known for his work in monetary theory and other areas of technical economics. But his impassioned polemic addressed nothing less than the future of freedom.

Hayek brought a disciplined mind that ranged across fields, from philosophy and economics to psychology, in the service of solving what he termed the “knowledge problem.” For him, it was central to understanding why a free society worked.

To understand what that problem was, and why it was important to a free society, one needs to start at the beginning: in this case the Vienna of the last days of the Austro-Hungarian Empire, where Hayek was born and where he studied under some of the leading economic thinkers of Europe.

Hayek had entered the University of Vienna after returning from Italy, where he served in an Austrian unit during World War I. A distinctive Austrian “school” of economics was already well established; its first exponent, Carl Menger, had published his influential “Principles of Economics” in 1871. His work was continued by major figures such as Friedrich von Wieser (who was Hayek’s most influential teacher) and Eugen von Bohm-Bawerk.

In the late 19th century, the Austrians had already engaged Marxist economics and its labor theory of value. Mr. Caldwell discusses the school and the debates that brought it through the 1920s in a long introductory section. He covers historicism, positivism and the Austrian methodological approaches, setting the stage for Hayek’s contributions.

The core of the Austrian approach was what Mr. Ebenstein calls “the theory of subjective value.” The Austrians argued that “[g]oods have no value apart from the value people place on them.” The value of commodities, in other words, was derived from their worth to actual individuals.

Economics, therefore, was an ethical discipline concerned with human prosperity, rather than an objective or “neutral” science that can be manipulated by experts or a centralized authority.

Hayek was graduated in 1921 with a degree in law, and later received a degree in economics. Upon his graduation, Wieser got Hayek a job with the great economist Ludwig von Mises, who had just written an influential article on the inability of socialism to provide accurate prices.

Mises’ theory contended that the price of something communicated to the market its relative scarcity; without that signal, socialist economics could not accurately determine the scarcity of the means of production, leading inevitably to shortages and wildly unreliable prices.

In a free-market system, in contrast, price conveys accurate information and allows consumers and others to make informed decisions. Centralized planning, therefore, even of the mild variety known as the welfare state, was ultimately inefficient and unjust.

Hayek took this Misesian insight one step further. He interpreted the problem as “how an overall order of economic activity was achieved which utilized a large amount of knowledge which was not concentrated in any one mind but existed only as the separate knowledge of thousands or millions of different individuals.”

Hayek was to call the coordination of this disparate knowledge the “spontaneous order,” and he believed it had as much application to politics as to economics. Because this order develops naturally in human society, Hayek thought it had been ignored by most economists, who preferred to believe that they could plan and direct economic life.

First articulated in an address entitled “Economics and Knowledge,” Hayek claimed that this approach to “the utilization of dispersed knowledge” was his most significant intellectual discovery.

Hayek spent the years 1931-1950 at the LSE, where he met the economist John Maynard Keynes and philosopher Karl Popper. He published in these years a withering review of Keynes’ “Treatise on Money” and his own “Pure Theory of Capital.”

Six years after the publication of “The Road to Serfdom” Hayek moved to the University of Chicago and its Committee on Social Thought, where he remained until 1962. His reputation continued to grow, and he moved beyond formal economics to discover how the complex organism of society functioned.

In 1952, for example, he published “The Sensory Order,” which was a work of physiological psychology and, like his economic work, provided a defense of individual freedom. As Mr. Caldwell explains, it was written in part as a critique of behaviorism, which treated individuals as passive receptors of stimuli.

To the contrary, Hayek argued, each individual nervous system reacts and interprets stimuli and experiences in a way that does not correspond exactly to the world of outside stimuli. Contemporary neuropsychologists are only just now confirming Hayek’s insights.

These two books confirm Hayek’s status as one of the great intellects of the last century. His defense of the “spontaneous order” has replaced the formerly dominant socialist model, and his wide-ranging work provides a rich background for understanding the centrality of freedom in human society.

Gerald J. Russello lives in Brooklyn.