Hayek: An Overview
September 1945 contained multiple defining events around the world. In Germany, the Allies solidified control over their occupation zones. In Asia, the Allies rounded up Japanese forces. In the United States, factory workers began striking due to the postwar economic downturn. Lost in the shuffle is the publication of a 12-page journal article in The American Economic Review by an Austrian immigrant to the United Kingdom. The article’s author would change the economies and politics of the UK and the U.S.
Friedrich August von Hayek was born in Vienna, Austria—then part of the Austro-Hungarian empire—on May 8th, 1899. Hayek’s academic interest came from his father—a doctor and part-time botany professor. Hayek entered the Austrian army in March 1917 to fight on the Italian Front; the prolonged inactivity gave him time to study economics. Hayek pursued economics at Vienna University after the war, specifically, Austrian economics. Austrian economics believes individuals are responsible for the economy; this goes against the belief in Keynesian economics—named for British economist John Maynard Keynes—that government is responsible for the economy. Hayek’s interests expanded while he worked for prominent Austrian economist Ludvig von Mises in the Austrian government. Mises introduced Hayek to other economists practicing Austrian economics in Europe and North America. Hayek later said, “For the following eight years Mises was the personal contact from who I profited most, not only by way of mental stimulation but also for the direct assistance in my career” (Caldwell, 2003, p 144). Hayek spent his free time on his personal life; he married his first wife—a fellow civil servant—in August 1926. Hayek also wrote articles in economic journals; one of them caught the eye of Lionel Robbins, the head of the London School of Economics (LSE). Robbins contacted Hayek at the perfect time; he couldn’t find any good work in the Austrian economy. Hayek moved to the UK in early 1931 to assume his new post.
Hayek was an outlier at LSE; the nonsocialist was considered the brightest mind among the school’s socialist economists. Hayek, the school, and economists all over the world debated how to escape the Great Depression. Some economists thought the solution was embracing a centrally planned economy like Fascist Italy or the Soviet Union. Hayek disagreed because eroding economic liberty leads to the end of all liberties. Economic liberty, therefore, must be defended as rigorously as other liberties like free expression. As Hayek defended his ideas, Germany and Austria went fascist and embraced central planning. In 1938 Hayek’s family fled to the UK after Germany annexed Austria; in 1939 Germany invaded Poland, kicking off World War II.
Hayek asked the British government when the war began if they needed his services; the government said no. As the Battle of Britain began in the summer of 1940, the LSE moved to Cambridge and stayed there during the war. In late 1942 economist William Beveridge released the Beveridge Report outlining the UK’s post-war social welfare policies. Hayek felt the report would make Britain implement the same policies that hobbled the interwar Austrian economy. In March 1944 Hayek released The Road To Serfdom which critiqued central planning. The book made Hayek a celebrity as it received rave reviews in popular magazines. The end of the war in Europe in May 1945 wasn’t a joyful time for Hayek; he wasn’t happy with his marriage. He soon reconnected with a cousin from Austria in secret. In July UK voters threw out Winston Churchill and the Tories for a Labour government under Clement Atlee; the party ran on implementing the Beveridge Report’s recommendations. Hayek felt he needed to respond to the supporters of central planning; they needed to understand why their system would fail. In September 1945 he published a 12-page article making his case.
Hayek opens “The Use of Knowledge in Society” with a question every person asks about economics: “What is the problem we wish to solve when we try to construct a rational economic order?” (Hayek, 1945, p519) Most of us assume it’s getting enough information to make the best decision. Hayek claims knowledge is so spread out no one entity can know everything; this is why central planning fails. The best solution is a decentralized system where everyone can gain and exchange information in the form of prices. Prices allow better coordination of resources; any economic system without decentralization and prices will fail because it won’t transmit the right information. Hayek’s essay left a huge mark on economics; any student studying mainstream economics will read his essay. The essay also influenced early computing, especially artificial intelligence. Hayek’s greatest impact would be on both sides of the Atlantic.
Hayek stayed at the LSE until he couldn’t keep his affair a secret anymore. In 1948 he told his wife he wanted a divorce, but she refused. That same year, the University of Chicago offered Hayek a teaching position. Hayek accepted but he needed to put his personal life in order first: Hayek moved to the U.S. in 1949, divorced his first wife a year later, and returned to Austria to marry his real love. Hayek spent 12 years at the university teaching future economists like Milton Friedman while writing and editing his masterpiece. In 1960 Hayek published The Constitution of Liberty; his treatise on politics and economics. The book received mixed reviews; some intellectuals loved it while others were lukewarm on the dense book. Two people who embraced Hayek’s ideas were a former movie star in California and an austere female chemist turned politician in Britain. Hayek felt disappointed with his book—future celebrity fans aside; it didn’t help that the economist struggled with financial issues. Hayek took long international vacations and spent his summers back in his native Austria. In 1962 Hayek left America and lived the rest of his life in West Germany. In 1974 Hayek won the Nobel Prize in Economics. The prize brought him and his ideas back into the spotlight. Meanwhile, Hayek’s two celebrity fans rose through the political ranks. The chemist-turned-politician, Margaret Thatcher, became prime minister in late 1979; the movie star, Ronald Reagan, became president a year later. Hayek supported each leader’s policies, and they gave him awards for his work. Hayek died on March 23rd, 1992. “The stone for his headstone came from the area of the Tyrolean Alps in which he vacationed every summer. Engraved on the rough-hewn stone, beneath the cross, reads: F.A. Hayek 1899-1992.” (Ebenstein, 2003, 318)
What is written here is just a tiny distillation of Hayek’s life. One could spend hours examining his work and not even see just how influential he was. Then again time proves which ideas are the strongest and Hayek certainly touched many of them.
Works Cited
Caldwell, B. (2003). Hayek's Challenge: An Intellectual Biography of F. A. Hayek. University of Chicago Press.
Ebenstein, A. O. (2003). Friedrich Hayek: A Biography. University Of Chicago Press.
Hayek, F. A. (1945). “The Use of Knowledge in Society.” The American Economic Review, 35(4), 519–530. http://www.jstor.org/stable/1809376
