Friedrich von Hayek Economic theory

February 12, 2017
Keynes v Hayek: Two economic

Peter J. BoettkeFriedrich A. Hayek, who died on March 23, 1992, at the age of 92, was probably the most prodigious classical liberal scholar of the 20th century. Though his 1974 Nobel Prize was in Economic Science, his scholarly endeavors extended well beyond economics. He published 130 articles and 25 books on topics ranging from technical economics to theoretical psychology, from political philosophy to legal anthropology, and from the philosophy of science to the history of ideas. Hayek was no mere dabbler; he was an accomplished scholar in each of these fields of inquiry. He made major contributions to our understanding in at least three different areas—government intervention, economic calculation under socialism, and development of the social structure. It is unlikely that we will see the likes of such a wide-ranging scholar of the human sciences again.

Hayek was born into a family of intellectuals in Vienna on May 8, 1899. He earned doctorates from the University of Vienna (1921 and 1923). During the early years of the 20th century the theories of the Austrian School of Economics, sparked by Menger’s Principles of Economics (1871), were gradually being formulated and refined by Eugen von Boehm-Bawerk, his brother-in-law, Friedrich Wieser, and Ludwig von Mises. When Hayek attended the University of Vienna, he sat in on one of Mises’ classes, but found Mises’ anti-socialist position too strong for his liking. Wieser was a Fabian socialist whose approach was more attractive to Hayek at the time, and Hayek became his pupil. Yet, ironically it was Mises, through his devastating critique of socialism published in 1922, who turned Hayek away from Fabian socialism.

The best way to understand Hayek’s vast contributions to economics and classical liberalism is to view them in light of the program for the study of social cooperation laid out by Mises. Mises, the great system builder, provided Hayek with the research program. Hayek became the great dissecter and analyzer. His life’s work can best be appreciated as an attempt to make explicit what Mises had left implicit, to refine what Mises had outlined, and to answer questions Mises had left unanswered. Of Mises, Hayek stated: “There is no single man to whom I owe more intellectually.” The Misesian connection is most evident in Hayek’s work on the problems with socialism. But the insights derived from the analysis of socialism permeate the entire corpus of his work, from business cycles to the origin of social cooperation.

Hayek did not meet Mises when he was attending the University of Vienna. He was introduced to Mises after he graduated through a letter from his teacher, Wieser. The Hayek-Mises collaboration then began. For five years, Hayek worked under Mises in a government office. In 1927, he became the director of the Institute for Business Cycle Research which he and Mises had set up together. The institute was devoted to theoretical and empirical examinations of business cycles.

Building on Mises’ The Theory of Money and Credit (1912), Hayek refined both the technical understanding of capital coordination and the institutional details of credit policy. Seminal studies in monetary theory and the trade cycle followed. Hayek’s first book, Monetary Theory and the Trade Cycle (1929), analyzed the effects of credit expansion on the capital structure of an economy.

Publication of that book prompted an invitation from Lionel Robbins for Hayek to lecture at the London School of Economics. His lectures there were published in a second book on the “Austrian Theory of the Trade Cycle, ” Prices and Production (1931), which was cited by the Nobel Prize Committee in 1974.

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