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4 April 2023


How Friedrich Hayek became the godfather of neoliberalism.

By Jan-Werner Müller

The spectacular implosion of Liz Truss’s zombie Thatcherism last autumn gives every reason to reconsider its intellectual sources. The Iron Lady once confronted wet Tory grandees who were pontificating on economics by opening her handbag and pulling out Friedrich Hayek’s chef-d’oeuvre, Constitution of Liberty (1960), thundering “This is what we believe!” Hayek was no unknown quantity: he had attained fame in the mid-1940s with The Road to Serfdom (1944), a polemic predicting that economic planning would lead to totalitarianism. His arguments had played a role in the 1945 UK general election, with Labour politicians accusing Conservatives of recycling dubious claims from a “German professor”.

Hayek was Austrian. Anybody curious about his background is well served by the exhaustive account written by two historians of economic thought, the American Bruce Caldwell and Hansjörg Klausinger, who teaches in Vienna. The book, published in November, aims to be “the definitive full biography” and not only recounts the major debates on economics in which Hayek participated; it is also aimed at those who would like “to learn more about Hayek’s personal life”. One learns a lot, more than anyone could ever have wanted to know. Much of it is not pretty. By contrast, we don’t learn much that’s new when it comes to Hayek’s thinking, but quite a bit about how this master institution-builder spread his thinking to political elites.

As the authors confess, they don’t exactly keep a critical distance from the subject they affectionately call “Fritz”. They reconstruct the complicated history of his family, part of Austria’s lowest rank of the lower nobility. Hayek’s parents exhibited plenty of anti-Semitism, but the man himself, Caldwell and Klausinger are at pains to show, did not – a plausible claim not least because Hayek disliked nationalism, which, he held, made it more probable that people would accept the creation of a welfare state based on national fellow feeling.  

[See also: John Gray: The Friedrich Hayek I knew, and what he got right – and wrong]

Born in Vienna in 1899, Hayek was a distinctly political economist. He had little interest in mathematics (which the Austrian school he attended had sidelined in favor of Latin and Greek), and plenty of academic colleagues, especially in the US, subsequently looked down on him as a result. Hayek certainly had the ambition to propound general theories, both in economics and social philosophy, but, as this biography makes clear, he regularly abandoned grand projects like a “big book on money” or an extended intellectual history explaining the supposed rise of a dangerous social engineering mentality since the 19th century. Using Hayek’s own distinction between “masters” and “puzzlers”, Caldwell and Klausinger demonstrate that Hayek was nothing if not a puzzler, someone who kept going back to problems as opposed to offering a definitive synthesis.

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“Fritz” (a name Hayek apparently disliked because it reminded him of Frederick the Great of Prussia) was born into the Vienna we now remember as the intellectual crucible from which emerged psychoanalysis, positivism, atonal music – and fascism (in fact, Wittgenstein was one of his distant cousins). Hayek had started his intellectual trajectory sympathetic to economic planning and what he called in retrospect “a sort of Fabian socialism” (he never took much interest in Marx himself, considering the German theorist merely one in a long line of thinkers who overestimated the power of science to predict and control society). Soon enough, though, Hayek came under the spell of Ludwig von Mises, a libertarian much more than a typical 19th-century continental liberal. Between 1924 and 1931, he attended Mises’s private seminar, which was held in Mises’s large office in the Austrian Chamber of Commerce (followed by dinner and then night caps in Café Künstler); it left him convinced that planners would be lost without prices signalling relative scarcities and that socialism was bound to fail. 

Mises was also instrumental in getting Hayek a job in Vienna and then, as a research assistant, in New York City, from March 1923 to May 1924. Hayek’s impressions of the US make one read his dedication of Constitution of Liberty to the “unknown civilisation that is growing in America” in a new light. The Viennese visitor felt that his belief in “the vast intellectual superiority of the Europeans” had been confirmed; he complained to Mises about the “tastelessness and banality” of American life and, in a heroic act of old-world resistance, grew a moustache to “protest against American civilisation” (or lack thereof, considering the real meaning of the dedication). Hayek concluded that “America is a country to earn one’s money but not to live” (a comment that proved oddly prescient about Hayek’s later decision to maximise his salary at the University of Chicago to financially support the family he had abandoned in Europe).

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Probably to the annoyance of aficionados of notions like the “Anglosphere”, Hayek also contrasted the cultural wasteland of the US with an England which he had come to idealise even before he visited (for the Austrian, Britain was always only England; he had little attention when writing about Adam Smith, for instance, to anything particularly Scottish in the Scottish enlightenment). His dream of English life came true with an appointment at the London School of Economics in 1931; ever after, he would insist that he had remained “much more English than the English”, the last defender of what he considered “Gladstonian liberalism”.

[See also: How Friedrich Hayek became fascinated with the romance of Harriet Taylor and J S Mill]

LSE in the Thirties was a place of extraordinary intellectual ferment and clashing political perspectives: from six in the evening, one could hear Hayek lecture on why a collectivist economy would not work, and at the same time one might listen to the distinguished economist (and Labour politician) Evan Durbin explain how to run a collectivist economy. One of Hayek’s prominent arguments at the time was that increasing public or private spending constituted the wrong response to the economic downturn; instead, what mattered was restoring “the right structure of production” and ending the “consumption of capital” (due, it seemed, to excessive demands by a newly enfranchised working class). This position – articulated such that people couldn’t decide whether it was English with a strong German accent or German with a strong English accent – made him what his colleague and friend Lionel Robbins called a “sadistic deflationist”. It also made him less popular among students. As one of them put it, in the early Thirties everyone had been a Hayekian; by the end of the decade the only Hayekians left were Hayek himself and the student lamenting that fact.

Of course, the biggest theoretical battle was with Keynes, who felt that Hayek had some mysterious taste for picking on him, but who, during the war years, graciously invited Hayek to take up rooms in Cambridge (which Hayek considered the most English part of England). Keynes, in Hayek’s view, was more an artist than a social scientist, and, in economics, a fellow puzzler, even though Keynes’s most famous contribution was branded a “general theory”. Both men, though, understood that theory really mattered, in contrast with empiricists such as the Webbs and Beveridge, who were unable to think beyond immediate policy questions.

Hayek – in contrast to so many economists today – thought that theory and history were not opposed to each other; economic history mattered, even if it could not by itself yield economic theories, but the history of economics – especially of how economic thought had gone wrong – also remained crucial. Hayek was deeply interested in the past of his own discipline; in particular, he sought to understand just how the social engineering mindset had come to dominate the 20th century. He was aghast at those scientists who proclaimed that capitalism’s primary fault was not even inequality, but “irrationality” on account of its sheer wastefulness, as well as its supposed tendency to “frustrate science”. Hayek charged that the “men of science” misunderstood the scientific method; they failed to see that reason was not a thing, but an ongoing process which could not yield failsafe prescriptions for society-wide planning.

Hayek’s own academic plans often failed to materialise; he set aside his history of the rise of “scientism” in favor of a short, polemical volume, The Road to Serfdom. There he argued that planning must lead to totalitarianism; central planners would have to impose their own values, instead of allowing people to develop and act on their own preferences (which were never just material but bound up with values). He also deployed what would become the most influential argument still associated with his name: knowledge – including tacit knowledge – is distributed throughout society; central planners could never gain access to that knowledge, but it could be expressed in individual market transactions and hence in prices (he did not anticipate that, already in the early 1970s, cybernetics experts had created a computer network that was supposed to generate instant feedback to planners under Salvador Allende’s ill-fated socialist experiment in Chile). To be fair, the issue was not just information, but the feature of markets as allowing for co-ordination without agreement – never mind that market power can also mean that people are forced to agree; there’s hardly much anyone can do if they happen to disagree with their mobile phone company’s terms and conditions.

[See also: John Gray: The Friedrich Hayek I knew, and what he got right – and wrong]

Hayek’s critics – including Keynes, who in general registered “deeply moved agreement” with The Road to Serfdom – claimed that one could stop on what Hayek had presented as a slippery slope to totalitarianism; meanwhile his libertarian readers would never quite forgive that Hayek had cautiously endorsed an “extensive system of social services”. His most enthusiastic followers probably never read the finer points; especially American businessmen delighted in the short Reader’s Digest version that brought Hayek fame and fortune in the US, as he was sent on lecture tours and was offered a privately financed position at the University of Chicago.

Hayek’s professorship was not in economics, but in the Committee on Social Thought, a much more philosophical, humanistic, and, broadly speaking, conservative unit within an uncompromisingly intellectual university, whose president had famously abolished the football team. Hayek’s placement made sense: from around the mid-1940s he had effectively abandoned economics for social philosophy. At the same time, closer in spirit to what would later come to be known as the “Chicago Boys”, he was determined to influence policy. To do so, he concluded, it was crucial to change the climate of ideas.

Hayek’s instrument to bring about intellectual climate change was the Mont Pèlerin Society, named after the Swiss mountain village where it was founded in 1947. More interesting designations had been mooted, but contenders like the Tocqueville Society or Acton Society proved vulnerable to the charge that mid-20th century crusaders for freedom should not invoke Catholic aristocrats. Hayek worked assiduously to make the society a success. He had already proven his talents for academic politics during his university years in Vienna; now he embarked on decades of a kind of intellectual diplomacy: he brought together ideologically diverse figures in the initial meetings, to the dismay of his conservative US donors who dispatched delegates to find out whether some of the attendees were really “sound”. Hayek proved able to get along with famously difficult characters like Mises and Karl Popper; and, like many a successful leader, he kept people on board by keeping them guessing about what he himself really thought about some of the heated society debates (Mises, always pushing free market orthodoxy pur et dur left no one guessing and stormed out of one MPS meeting shouting “you are all a bunch of Communists!”).

[See also: Why inflation and the cost-of-living crisis won’t take us back to the 1970s]

Caldwell and Klausinger’s first volume stops in 1950, so how exactly the society gained influence – especially on what Hayek called “second-hand dealers in ideas”, ranging from journalists to cartoonists and doctors – is not told here. What comes through clearly enough, though, is the talent and energy Hayek had for building institutions and for what can only be called propaganda. He once offered his services to the British Ministry of Information as an “ex-Austrian” who could formulate propaganda aimed at Germany to set the facts of German history straight. He worked out extensive plans for a Central European College, aimed at creating a distinctly liberal intelligentsia, as well as a post-war “Danube federation”. 

The one plan – or, one is tempted to say, the one instance of personal engineering – that came to pass perfectly was Hayek’s transition to a new wife, a new job, and the New World. Caldwell and Klausinger, drawing on interviews and archival material apparently never used before, recount in excruciating detail how Hayek traded his first wife, Hella, for his first love (and cousin) Helene. Hella had done everything the traditional role of wife of a very important professor demanded; Hayek himself joked that he had never seen the inside of his own kitchen. Hella, left with two children, did not want the marriage to end, so Hayek devised a devious scheme to move to Arkansas (also deceiving his future employers at Chicago about his real intentions), residing there just long enough to be granted a “bootleg divorce”. His cruelty cost him the friendship with Lionel Robbins, with the latter declaring that “the man I knew is dead and I should find it almost unbearably painful to meet his successor”.    

Caldwell and Klausinger spend many, many of their roughly 800 pages on what they call Hayek’s “ambivalent love life”. Was it necessary for the rest of us to know all the details? Maybe it’s because these historians believe in detail tout court; nothing is too minute (was there hot and cold toast or only cold toast on the boat to New York? Was a bag Hayek forgot at a train station – which had no connection to anything else in Hayek’s life story – recovered or not? Curious minds will find out). But perhaps, in their own way, they wanted to convey a side of their “Fritz” not unconnected to policies for which his name was to be invoked ever since the 1970s: something cold, cruel and inhumanly consistent in the name of “freedom”, no matter the costs. 

[See also: Ha-Joon Chang interview: “Talk of a ‘fiscal black hole’ is an insult to the concept”]