Hayek: A Collaborative Biography

Despite its status as the world’s leading school of economics during the second half of the nineteenth century, it is now generally accepted that within the contemporary mainstream, the GHSE has the ‘worst reputation’ of all the research programmes in the history of economic thought. This view has been largely shaped by Austrian School theorists. The Austrian School of Economics was originally founded on the basis of Carl Menger’s critiques of the supposed weaknesses and flaws of the German Historical School of Economics: this chapter examines how criticisms of the fundamental principles of the—as expressed by ASE theorists—influenced the formation and development of the ASE’s own fundamental principles. In addition to disputes over methodological collectivism or methodological individualism, the deductive versus the inductive method, ethical values and state intervention and the nature of ‘knowledge,’ there were emotional issues: Menger—who was truly upset by the severe criticisms directed against him and his book by GHSE theorists and their labelling of him as an ‘Austrian’ economist—went from having a high opinion of the GHSE to having a low opinion of its theorists.

In spring 1931, Friedrich Hayek sent an article to Wilhelm Röpke, who at that time was the most authoritative member of the ‘Brauns Kommission,’ a board of experts appointed by Heinrich Bruning’s government to put forward proposals that might reduce the dramatic rise in unemployment. The Commission had just published a Report containing guidelines for an expansionary policy based on public works. This chapter provides the stylized facts that characterize the business cycle in which the Great Depression is embedded; examines the expansionary programme put forward by the Brauns Commission; Hayek’s criticism and Röpke’s defence; and explains how Heinrich Brüning’s government (30 March 1930–30 May 1932), after considering the Brauns (and Lautenbach) Plans, decided to continue with their deflationary policy. Adolf Hitler became Chancellor in January 1933.

In his early writings on business cycle theory and the Great Depression Hayek argued that business cycle downturns including the steep downturn of 1929–1931 were caused by unsustainable elongations of capital structure of the economy resulting from bank-financed investment in excess of voluntary saving. Because monetary expansion was the cause of the crisis, Hayek argued that monetary expansion was an inappropriate remedy to cure the deflation and high unemployment caused by the crisis. He therefore recommended allowing the Depression to take its course until the distortions that led to the downturn could be corrected by market forces. However, this view of the Depression was at odds with Hayek’s own neutral money criterion which implied that prices should fall during expansions and rise during contractions so that nominal spending would remain more or less constant over the cycle. Although Hayek strongly favoured allowing prices to fall in the expansion, he did not follow the logic of his own theory in favouring generally increasing prices during the contraction. This chapter explores the reasons for Hayek’s reluctance to follow the logic of his own theory in his early policy recommendations. The key factors responsible for his early policy recommendations seem to be his attachment to the gold standard and the seeming necessity for countries to accept deflation to maintain convertibility and his hope or expectation that deflation would overwhelm the price rigidities that he believed were obstructing the price mechanism from speeding a recovery. By 1935, Hayek’s attachment to the gold standard was starting to weaken, and in later years he openly acknowledged that he had been mistaken not to favor policy measures, including monetary expansion, designed to stabilize total spending.

It was much more difficult to communicate ideas and establish networks before the Internet, www, e-mail, and PC. In orthodox academic circles, published journals and formal conferences played a major role in the communication and exchange of ideas—and were even more important for the development of ‘unorthodox’ schools of economics. In the 1970s, Austrian economics experienced a resurgence in the English-speaking world, especially in America—the Austrian Economics Newsletter played an important role of communicating, diffusing, and developing Austrian ideas. The first ten AEN issues reveal how the Austrian revival took place; and what its infrastructure and personalities were. They also illustrate the ideas and problems that came to characterize the resurgence in Austrian economics: dynamics, process, expectation, time, entrepreneurship, (Knightian) uncertainty, knowledge, discovery, learning, equilibration and disequilibration, spontaneous order, subjectivism, Austrian methodology and praxeology, criticism of general equilibrium, price system as a conveyor of information, monetary policy, etc. Without Hayek’s 1974 Nobel Prize combined with funding from the Institute for Humane Studies, Austrian Economics may never have been revived.

By the mid-1970s, the Cercle Pinay had succeeded in creating an international contact network of groups working on anti-communist and counter-subversion propaganda. But despite such wide-ranging contacts, the various components of the Cercle network, brought together to defend the conservative cause, felt their vision of the world to be threatened as never before. Between 1974 and 1976, a paranoid feeling of apocalypse, of imminent Armageddon spread through the private clubs, the lobby rooms and the secret services throughout Europe: the Left was on the rise! In Germany, despite a barrage of smears and attack ads, Willy Brandt had triumphed in the 1972 elections; after his resignation in 1974, the new Chancellor Helmut Schmidt led the SPD towards a strong showing in the 1976 elections. In Britain, humiliated by the unions, the Conservative government fell, and Labour’s Harold Wilson won the two 1974 elections. In France and in Belgium, the Left seemed well-placed to break the electoral monopoly of the conservatives. In the Iberian Peninsula, the longstanding geopolitical stability was soon overturned: in Portugal, Marcelo Caetano’s dictatorship crumbled before the left-wing soldiers of the Armed Forces Movement; in Spain, the Generalissimo died, and democratic elections were called. This chapter documents the efforts of the ‘International Right’ to defend apartheid and the Shah of Iran and to assist the election efforts of Franz Josef Strauss and Ronald Reagan.

Hayek is highly-regarded for his contributions to the development of liberal thought, particularly his work on individual freedom, economic freedom, ‘spontaneous’ order, and limited state action. He also defended dictatorial regimes, provided that they were committed to achieving the conditions of a ‘free’ market economy at the expense of unlimited democracy. This chapter examines Hayek’s rationale for supporting certain types of dictatorial regimes, based largely on the views expressed in an interview published in the Argentinean weekly magazine, SOMOS while on a one-week visit to Argentina in 1977. At that time, ‘Dirty War’ Argentina was ruled by the administration of army commander General Jorge Rafael Videla. Hayek defined ‘the condition of freedom’ as ‘a state in which each can use his knowledge for his purposes’ so as to achieve individual goals free from intervention or coercion on the part of an external authority: ‘Coercion is evil precisely because it thus eliminates an individual as a thinking and valuing person and makes him a bare tool in the achievement of the ends of another.’ By defending the practice of relying on dictatorial regimes to achieve the conditions of a ‘free’ market economy, Hayek contradicted his own concept of freedom, which he defined as ‘absence of coercion.