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This book explores the life and work of Austrian-British economist, political economist, and social philosopher, Friedrich Hayek. Set within a context of the recent financial crisis, alongside the renewed interest in Hayek and the Hayek-Keynes debate, the book introduces the main themes of Hayek’s thought. These include the division of knowledge, the importance of rules, the problems with planning and economic management, and the role of constitutional constraints in enabling the emergence of unplanned order in the market by limiting the perverse incentives and distortions in information often associated with political discretion. Key to understanding Hayek's development as a thinker is his emphasis on the knowledge problem that economic decision makers face and how alternative institutional arrangements either hinder or assist them in overcoming that epistemic dilemma. Hayek saw order emerging from individual action and responsibility under the appropriate institutional order that itself emerges from actors discovering new and better ways to coordinate their behavior. This book will be of interest to all those keen to gain a deeper understanding of this great 20th century thinker in economics.

Année:
2018
Edition:
1st ed.
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Palgrave Macmillan UK
Langue:
english
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342
ISBN:
978-1-137-41159-4;978-1-137-41160-0
Collection:
Great Thinkers in Economics
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PDF, 3,24 MB
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GREAT THINKERS IN ECONOMICS
Series Editor: A.P.Thirlwall

F. A. HAYEK
Economics, Political Economy
and Social Philosophy
Peter J. Boettke

Great Thinkers in Economics

Series Editor
A.P. Thirlwall
School of Economics
University of Kent
Canterbury, UK
“An intellectual historian discussing an eminent figure in social theory must not
only be sensitive to the subtle nuances of that theorist’s own contributions, he
must be able to relate those nuances to the complex, shifting intellectual fashions against which that theorist was rebelling. Peter Boettke’s skillful treatment
of Hayek’s intellectual journey brilliantly and provocatively succeeds in achieving this standard of excellence. This is a book that will be recognized as pathbreakingly important for many decades to come.”
—Israel M. Kirzner, New York University, USA
“Among mid-twentieth century economists, only Hayek’s work enabled us to
understand what I found truly astonishing. People in my market experiments
quickly discovered the efficient equilibrium outcomes hidden in their dispersed
knowledge of individual item values that I had assigned them privately. For
Hayek, prices convey the coordinating information that incentivizes performance by harnessing dispersed knowledge like no other known system. Boettke
brings this towering intellect into your own thinking. Hayek’s deep insights
extend far beyond economics and into jurisprudence, social and political philosophy. Read Boettke’s Hayek and soar.”
—Vernon L. Smith, Nobel Laureate Chapman University, USA
“Boettke advocates a humane and cosmopolitan liberalism as an antidote to the
nationalist and populist enthusiasms so evident today on the left and the right.
Hayek fought the same battles, of course, against similar foes. Boettke deftly
brings Hayek’s main contributions in the areas of economics, political economy,
and social philosophy into conversation with current concerns and recent writers.
On the way he corrects some egregious misreadings. It is a fine achievement.”
—Bruce Caldwell, Duke Universi; ty, USA

The famous historian, E.H. Carr once said that in order to understand
history it is necessary to understand the historian writing it. The same
could be said of economics. Famous economists often remark that specific episodes in their lives, or particular events that took place in their
formative years attracted them to economics. Great Thinkers in Economics
is designed to illuminate the economics of some of the great historical
and contemporary economists by exploring the interaction between their
lives and work, and the events surrounding them.
More information about this series at
http://www.palgrave.com/gp/series/15026

Peter J. Boettke

F. A. Hayek
Economics, Political Economy and
Social Philosophy

Peter J. Boettke
Department of Economics
George Mason University
Fairfax, VA, USA
F. A. Hayek Program for Advanced Study
in Philosophy, Politics and Economics
Mercatus Center, George Mason University
Fairfax, VA, USA

Great Thinkers in Economics
ISBN 978-1-137-41159-4    ISBN 978-1-137-41160-0 (eBook)
https://doi.org/10.1057/978-1-137-41160-0
Library of Congress Control Number: 2018946249
© The Editor(s) (if applicable) and The Author(s) 2018
The author(s) has/have asserted their right(s) to be identified as the author(s) of this work in accordance
with the Copyright, Designs and Patents Act 1988.
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether
the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of
illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or
dissimilar methodology now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication
does not imply, even in the absence of a specific statement, that such names are exempt from the relevant
protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information in this book
are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or
the editors give a warranty, express or implied, with respect to the material contained herein or for any
errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional
claims in published maps and institutional affiliations.
Cover illustration: Granger Historical Picture Archive / Alamy Stock Photo
This Palgrave Macmillan imprint is published by the registered company Springer Nature Limited
The registered company address is: The Campus, 4 Crinan Street, London, N1 9XW, United Kingdom

Pictured left to right: Jack High, Don Lavoie, F. A. Hayek, John Egger, Karen
Vaughn, Thomas DiLorenzo, and Richard Fink. At George Mason University in
1983

To Richard Fink, Karen Vaughn, and in memory of Donald Lavoie

Acknowledge Permission to Utilize
Content From

Boettke, Peter. 1990. The Theory of Spontaneous Order and Cultural
Evolution in the Social Theory of F. A. Hayek. Cultural Dynamics 3
(1): 1–11.
———. 2007. Hayek and Market Socialism. In Cambridge Companion
to Hayek, 51–66. Cambridge: Cambridge University Press.
———. 2016. Friedrich August von Hayek (1899–1992). In Handbook
on the History of Economic Analysis Volume I: Great Economists Since
Petty and Boisguilbert, ed. Gilbert Faccarello and Heinz D. Kurz,
557–567. Cheltenham: Edward Elgar Publishing.
———. 2018. Economic Policy of a Free Society. The Review of Austrian
Economics, forthcoming.
Boettke, Peter, and Liya Palagashvili. 2016. The Comparative Political
Economy of a Crisis. In Studies in Austrian Macroeconomics, Advances
in Austrian Economics, ed. Steven Horwitz, vol. 20, 235–263. Bingley:
Emerald Group Publishing Limited.
Boettke, Peter, and Rosolino Candela. 2017. The Intellectual Context of
F. A. Hayek’s The Road to Serfdom. The Journal of Private Enterprise 32
(1): 29–44.

ix

x

Acknowledge Permission to Utilize Content From

Boettke, Peter, Vlad Tarko, and Paul Aligica. 2016. Why Hayek Matters:
The Epistemic Dimension of Comparative Institutional Analysis. In
Revisiting Hayek’s Political Economy, Advances in Austrian Economics,
ed. Peter Boettke and Virgil Henry Storr, vol. 21, 163–185. Bingley:
Emerald Group Publishing.

Preface

It is a great honor to be asked to write a book on F. A. Hayek for the Great
Thinkers in Economics series. For this opportunity, I owe my thanks to
series editor Tony Thirlwall of the University of Kent. In his introduction
to the general series, he writes: “The famous historian, E.H. Carr, once
said that in order to understand history it is necessary to understand the
historian writing it. The same could be said of economics. Famous economists often remark that specific episodes in their lives, or particular events
that took place in their formative years, attracted them to economics.
This new series, Great Thinkers in Economics, is designed to illuminate
the economics of some of the great historical and contemporary economists by exploring the interaction between their lives and work, and the
events surrounding them.” Hayek certainly lived an eventful life—one
filled with up close witnessing of man’s inhumanity in World War I, the
economic ruin of the Great Depression, and a dangerous game of brinkmanship with respect to Western civilization itself, with the rise of fascism and communism in the 1930s and 1940s; of meteoric professional
success and crushing defeats that he often seemed to barely acknowledge
as he continued on with the honing of his craft as an economist, political
economist, and social philosopher; of personal relations torn asunder, as
well as lasting and loyal intellectual and personal friendships. How all this
impacts a thinker is for a historian to glean through devotion to archival
work and placing thinkers and their ideas in proper context.
xi

xii

Preface

This book, however, is not a proper intellectual history. Part of this relates
to the fact that as I embarked on this project, I did a survey of the intellectual
landscape in what could be termed “Hayek studies.” A literal explosion in
this field has taken place since 1975 and I document this in material in the
appendices and in the “Living Bibliography of Works on Hayek” (https://
ppe.mercatus.org/essays/living-bibliography-works-hayek) that provides
bibliographic details on books, articles, dissertations, and citations. It is also
the case that I have been working with, and writing on, Hayek’s ideas since
the mid-1980s and have carved out a certain interpretative niche myself in
this literature. So, the principle of comparative advantage kicked in as this
project took shape the same way that it kicks in all our endeavors. As the
epigraph to Philip Wicksteed’s brilliant The Common-Sense of Political
Economy (1910) states, “we are all doing it, though none of us knows we are
doing it.” Well, sometimes we economists are more conscious of when our
behavior conforms to our theories than the average person. Still, it might
make sense to first explain what not to expect from this book.
As already stated, it is not a proper intellectual history of Hayek—for
that I recommend the works of Bruce Caldwell and in particular, not
only his excellent Hayek’s Challenge (2004), but the various editorial
introductions that Caldwell has written for the The Collected Works of
F. A. Hayek, as well as his own ongoing research in a historical biography
forthcoming on Hayek. Nor have I written a popular introduction to the
essential ideas of Hayek for economic and social understanding, the best
book for that in my judgment being my colleague and good friend Don
Boudreaux’s The Essential Hayek (2015)—and the multimedia educational tools that go with it. Don is a master communicator of the basic
principles of economics and he captures Hayek’s work on the price system and the political, legal, and social order in as readable and as concise
a treatment as is humanly possible. My book is not an effort at attention
grabbing among lay readers either—for that, we have Alan Ebenstein’s
two works Friedrich Hayek (2001) and Hayek’s Journey (2003). I do not
have the singularity of praise for Ebenstein’s work as I do for Caldwell
and Boudreaux’s books, but I do recognize that there is much value to be
found in his books; I just think there are some subtle issues in philosophy
and technical economics that are ill-treated in such an effort at popularization. Writing to a general audience always has this risk associated with
it, but those gaps in Ebenstein’s work have marred, for me, what I

Preface
  

xiii

o­ therwise would deem a valiant effort to communicate Hayek’s ideas to a
new audience and his relevance to a new time. Finally, my book, while
dealing with the critical debates that Hayek engaged in throughout his
long career of a methodological, analytical, and practical political economy nature, is not a proper history of economic controversy—for that, I
simply point the reader to my colleague Lawrence H. White’s The Clash
of Economic Ideas (2012).
So, enough telling you what my book is not; let me tell you what it
actually is, and how it fits into The Great Thinkers in Economics series. The
book seeks to clarify refinements in economics, political economy, and social
philosophy that Hayek was led to make during his career because of the context of times and context of the argument. In the process, it is my hope to
clear up some general misconceptions about Hayek’s ideas that have, in
my humble opinion, served to block understanding the full implications
of his arguments. While stressing the context—both historical and intellectual—the story I am weaving together will be one-sided and not one
seeking balance between the contending perspectives. This is a story of
the evolution of a perspective of economic, political economic, and social
philosophic thought about how the world works. Hayek, in short, is
given several bites of the apple in developing his argument in relationship
to the central issues in economic theory, political economy, and social
philosophy. The book that my book resembles the most would be Gerald
O’Driscoll’s Economics as a Coordination Problem (1977), but obviously,
I have my own twist. That twist turns on what I term in this book epistemic institutionalism.1 The various debates in which Hayek was embroiled
during the 1930–1960 period led in economics and political economy to
a renewed focus on the institutional framework, but primarily to the role
that framework played in structuring the incentives that economic actors
faced. While this incentive institutionalism, in the hands of Armen
Alchian, James Buchanan, Ronald Coase, Harold Demsetz, Milton
Friedman, Leonid Hurwicz, Douglass North, Mancur Olson, Vincent
and Elinor Ostrom, Gordon Tullock, Oliver Williamson, and others
played a significant role in forcing a major rethinking in economic s­ cience
See this discussion at Liberty Matters initiated by my lead essay, “Hayek’s Epistemic Liberalism”
(September 2017) http://oll.libertyfund.org/pages/lm-hayek.

1

xiv

Preface

and political economy post-1950, and even though many of these thinkers stressed information and even some used the word “knowledge,” they
do not fully address themselves to Hayek’s argument about the contextual
nature of knowledge; the knowledge of time and place; the tacit domain
of our knowledge, and therefore they do not (with the notable exception
of the Ostroms) address the discovery and learning aspect of alternative
institutional arrangements as was the emphasis in Hayek.
If indeed the “curious task of economics is to demonstrate to men how
little they really know about what they imagine they can design,” then the
central question of economics becomes one about the institutional prerequisites required for learning and error correction among individuals in
society (Hayek 1988, 76). It is Hayek’s deepening exploration of the epistemic properties of alternative institutional arrangements that is the primary
focus of this book, and then, the drawing out of the implications of that
focus for methodology of the social sciences, analytical economics, and
practical public policy that I hope readers will see. I believe Hayek is of
continuing relevance not because of the man Hayek, and not because of
the critical role he played in intellectual debates during his career, but
because of what his ideas still have to say to us in our context and in our
debates to this day and where they may be going.
I think of Hayek’s intellectual journey as consisting of four phases,
none of which are actually clearly distinct from one another. He begins
his journey pursuing questions of a theoretical nature dealing with intertemporal coordination, and in particular, monetary and capital theory.
Hog farmers, for example, are currently making investments in the maintenance of livestock that will only yield returns in the future. How is it
possible that these farmers make this investment decision rationally?
Understanding how the assessment of the future demand for bacon
guides the investment decisions in hog farming today is critical to answering the question of the coordination of economic activity through time.
In developing his understanding of the “imputation problem,” Hayek
emphasized the role that interest rates play in investment decisions, and
the role that prices play in production decisions. He was working in the
grand tradition of the first and second generation of Austrian School
economists.

Preface
  

xv

Hayek and his fellow Austrian economists were consciously articulating a particular branch of early neoclassical economics grounded in both
subjective utility theory and the economic calculus of individual decision-­
making on the margin. But several things separated the Austrians from
Carl Menger to Hayek from others in the neoclassical approach that
would only become increasingly evident in the coming years: namely, a
thoroughgoing subjectivism that would encompass not just value, but
costs and expectations; incorporating the passage of real time in the analysis of exchange and production; the uncertainty of the economic environment and ignorance of the decision-maker must be acknowledged in
the analysis of the choice calculus; the non-neutral nature of money so
that distortions of the monetary unit can result in distortions in the patterns of exchange, production, and distribution; and the heterogeneous
nature of capital goods that possess multiple specific uses. Steel, for example, can be used to build not only bridges and buildings, but steel is not
all that critical in the production of ham sandwiches. Again, how do
economic actors figure out the best way to extract iron ore, the best
method to produce steel, the most valued use of that steel by others in the
market, and in what amount and at what quality would best satisfy the
uncertain and future demand for steel? The perennial economic questions of how, what, and for whom have to be answered and answered
anew everyday by critical decision-makers scattered throughout the
economy.
The economic answer provided by the Austrian School of economics
placed prices at the center of the analysis of the economic system. Or, as
we will see, they actually placed property, prices, and profit-and-loss in a
position of prominence in their theoretical explanation of the coordination of economics activities. The production plans of some, to put this
simply, must mesh with the consumption demands of others. Otherwise,
scarce resources will be wastefully utilized and economic frustration
among suppliers and demanders will result, and wealth-creating opportunities will be passed over. It is the function of property, prices, and profit-­
and-­
loss to structure incentives, mobilize information, discover and
utilize the knowledge that is dispersed throughout the economy, and provide the spur for innovation and the feedback on bad decision-making
that is necessary for economic actors to coordinate their plans, and in so

xvi

Preface

doing realize the mutual benefits of productive specialization and peaceful social cooperation.
This theoretical articulation of the continual process of the coordination of economic activity through time, and the adjustments and adaptations to changing circumstances guided by property, prices, and
profit-and-loss can be found in the writings of Carl Menger, Eugen
Bohm-Bawerk, Friedrich Wieser, Joseph Schumpeter, and Ludwig Mises,
and we must always remember that this formed the common bases for
the continued theoretical refinement of this analytical approach by Hayek
and his generation of theoretical economists in Vienna: Fritz Machlup,
Oskar Morgenstern, and Gottfried Haberler. This market process theory
and theory of the institutional framework is the common core of the
Austrian School of economics from its founding to today. And in my
reading, Mises and Hayek were responsible for the greatest refinements of
this contribution to scientific economics and the art of political
economy.
I have belabored this first phase of Hayek’s career because it is from this
common core that all the other phases of his career emerge. This first
phase can be termed, for our purposes, Economics as a Coordination
Problem and can be roughly dated 1920–1945. It is in this phase that
Hayek makes many, if not all, of his most original contributions to economic science. As Hayek developed these various contributions, he first
encountered acceptance by other leading economists, for example, his
appointment at the London School of Economics in the early 1930s.
However, as the decade of the 1930s progressed, his ideas met with greater
resistance. This resistance came in the form of both a philosophical rejection of his approach and an analytical rejection of his theory of the market process and the theory of the institutional framework.
Hayek’s brilliance, I contend, was to see the philosophical and analytical rejection as interrelated. This led naturally to the second phase of his
career, which was labeled by him as The Abuse of Reason Project, which
I date as running between 1940 and 1960. In my reading, the culmination of this project was not only Hayek’s The Counter-Revolution of Science
(1952), but The Constitution of Liberty (1960) and his critique of the
rational constructivism of the administrative state. Viewed in this way,

Preface
  

xvii

Hayek’s third phase of his career also seems to follow naturally from the
previous two.
In the period between 1960 and 1980, Hayek transitioned to a third
phase of intellectual inquiry, The Restatement of the Liberal Principles
of Justice. Here, Hayek articulates the importance of general rules—a
theme of course that a careful reading of The Road to Serfdom (1944)
would also reveal as key to his analysis of the institutional framework. As
Hayek developed these ideas in more depth, he sharpened his critique of
the modern theory and practice of democratic society. Crucial to Hayek’s
work during this period is the contrast between the liberal principles of
justice and the demands of social justice.
The interconnection between Hayek’s first three phases of his career is
reflected throughout his work, and as I said, as a matter of historical
record, it is near impossible to draw distinct boundaries around the different phases. He was always working as a technical economist concerned
with the problem of economic coordination through time, and he was
always a political economist who cared about the institutional infrastructure within which economic activity took place. And he was always a
social philosopher who thought seriously about the liberal order. As
Erwin Dekker (2014) has recently argued, we must understand the contributions of Hayek, and his fellow Austrian School economists, as the
product of “students of civilization.” This was always the subtext even in
the most technical of discussions about money, capital, interest, and the
price system. And this discussion animated the seminars and discussion
groups that made up the various intellectual circles in interwar Vienna.
And it was this discussion that animated Hayek’s later efforts with the
Mont Pelerin Society. As Hayek (1967, 123) argued in his essay “The
Dilemma of Specialization,” the social sciences are in a different position
than the natural sciences. “The physicist who is only a physicist can still
be a first-class physicist and a most valuable member of society. But
nobody can be a great economist who is only an economist—and I am
even tempted to add that the economist who is only an economist is
likely to become a nuisance if not a positive danger.”
Post-1980, Hayek’s work turned to what I would term Philosophical
Anthropology and the Study of Man, the last phase of his intellectual
journey, ending with his death in 1992. The culmination of this phase in

xviii

Preface

his career was The Fatal Conceit (1988). His work during this time is a
challenge not only to the development in economic thinking by John
Maynard Keynes and Oskar Lange, but broad social theorists such as Karl
Marx, Sigmund Freud, and Karl Polanyi. The arguments that Hayek
develops in this phase of his career will not be treated with the depth they
deserve in this book. It is my hope that future scholars will find the ideas
I discuss in these pages to be intellectually enticing and promising so they
will want to apply them to the contemporary intellectual debate in moral
economy and social economy.
In what follows, we will mainly focus on the intellectual evolution of
the first three phases in Hayek’s career, and try to highlight as I have said
is my purpose—the refinement and articulation of Hayek’s epistemic
institutionalism. It is important for my narrative to understand that
Hayek never abandoned the first phase of his journey. From 1920 to
1980, his work consistently and persistently is grounded in his “Austrian”
understanding of the coordination of economic activity through time.
But he was compelled to explore the underlying philosophical reasons
why his fellow economists were resistant to his analysis of the coordination problem. As he said on various occasions, figuring out why others
did not find conclusions he thought logically followed from the economic
calculus and market theory was of utmost importance to him, and a great
stimulus for his work. Why did economists in the 1930s–1960s seem to
overlook not only the insights of the Austrian economists from Menger
to Mises, but the teachings of the classical political economists such as
David Hume and Adam Smith? Why did they overlook the institutional
framework that the classical and early neoclassical theorists had taken as
given? What happened to the basic understanding that economists and
political economists shared concerning property, prices, and profit-and-­
loss? And since he believed he put his finger on the philosophical culprit,
how can we restate the foundations of our scientific discipline and discuss
the political economy of a free people once we overcome this intellectual
detour?
The structure of the book will follow this chronological and intellectual order I have just presented. After a chapter identifying what I think
are the greatest misconceptions about Hayek in the secondary literature,
and a brief biographical chapter, I proceed with a chapter addressing

Preface
  

xix

money, capital, and business cycles, followed by a chapter on market theory and the price system. I then turn to Hayek’s battle with socialism in
two chapters, and then turn to his development of a genuine institutional
economics. The ideas Hayek developed through his first two phases of his
career—1920–1960—culminate in his version of institutional economics, but I would argue that his institutional economics must be read back
in an explicit way into his earlier writings to truly understand Hayek’s
scientific contributions and the revolutionary implications for the practice of the science of economics and the art of political economy.
Just as Hayek, after his battle with Keynes and macroeconomics, and
his battle with market socialists and The Road to Serfdom, turned his
attention (at least in part) to the rejuvenation of the liberal project, so do
I turn to this project. I do not provide a full history of the Mont Pelerin
Society (MPS), but it is obvious that MPS played a major role in Hayek’s
career and life. But MPS, to Hayek, I would argue, was understood as a
scholarly project and not an ideological or public policy project as it is
often portrayed by skeptics of MPS and the liberal project. I would contend that MPS is a debate and discussion society headlined by Hayek,
Milton Friedman, and James Buchanan. Of course, the society can also
boast as members several other Nobel Prize economists, such as George
Stigler, Gary Becker, and Vernon Smith, but I think in painting with a
broad brush describing the society’s intellectual culture with reference to
Hayek, Friedman, and Buchanan is quite accurate. MPS was never a
Davos for neoliberal economists as critics have continually sought to
depict it as, but has always been a debate and discussion society concerned with foundational issues facing the liberal society. And this was
actually the purpose starting actually with the Walter Lippmann
Colloquium in 1938, which would inspire Hayek to found MPS in 1947.
The rejuvenation of liberalism in Hayek’s time and in our time is the
subject of Chaps. 8, 9, and 10.
The book concludes with a discussion of what I view as the progressive
research program in the social sciences and humanities of Hayek’s legacy.
Here again, I hope the reader will find insight and inspiration on how to
think seriously about fundamental issues in economic science, political
economy, and social philosophy.

xx

Preface

In working on this book, I benefited greatly from the financial support
from the Earhart Foundation and the John Templeton Foundation, as
well as the general academic support from the Mercatus Center and the
Department of Economics at George Mason University. Through this
support, I was able to make research trips to the archives at the Hoover
Institution on War, Revolution and Peace, where Hayek’s papers are
located; the London School of Economics, where Lionel Robbins’s papers
are located; Grove City College, where Mises’s papers are located; the
Library of Congress and Abba Lerner’s papers; the University of Vienna,
and the ongoing work in establishing the collection of papers of James
M. Buchanan at George Mason University. Numerous people helped me
with this background research and I want to especially thank Rosemary
Boettke, Emily Skarbek, and Roland Fritz. I have relied on several research
collaborators throughout my years of writing on Hayek; these include:
Paul Aligica, William Butos, Rosolino Candela, Christopher Coyne,
Daniel D’Amico, Steve Horwitz, Roger Koppl, Peter Leeson, Jayme
Lemke, Adam Martin, Kyle O’Donnell, Liya Palagashvili, Ennio Piano,
David Prychitko, Emily Skarbek, Dan Smith, Nicholas Snow, Virgil
Storr, Vlad Tarko, and Karen Vaughn. Thank you to all of them for how
much I have learned in the process of working with them to try to make
sense of Hayek’s ideas and their evolutionary potential. As this project
took shape, I also benefited from the critical feedback and suggestions
from Solomon Stein—a talented intellectual historian of economic ideas,
who happens to love archival research and the contextualization of ideas,
so he was a great sounding board as this project was working through the
various steps along the way. I also need to express a great intellectual debt
to Rosolino Candela—a very talented economist who cares passionately
about ideas and has been a constant source of inspiration and assistance
throughout. I also benefited greatly from a faculty lunch organized by my
colleague Jayme Lemke where I got critical feedback on the project from
my colleagues at the F. A. Hayek Program for Advanced Study in
Philosophy, Politics and Economics: Paul Aligica, Don Boudreaux, Tyler
Cowen, Chris Coyne, Stefanie Haeffele, Roberta Hertzberg, Peter Leeson,
Virgil Storr, Richard Wagner, and Lawrence White. Throughout the project, I was helped in a variety of ways by a team of graduate students:
Caleb Fuller, Aidan Harkin, Ennio Piano, Scott King, Andrew
Humphries, Kaitlyn Woltz, Bryan Cutsinger, Nathan Goodman, John

Preface
  

xxi

Kroencke, and Jordan Lofthouse. And none of this would be possible
without the constant intellectual and administrative support I received
from Eric Celler and Stephen Zimmer. I also would be very remiss if I did
not acknowledge the great assistance I have received through the years in
building our research and educational program here at GMU and
Mercatus from Peter Lipsey. To say his contributions have been indispensable would be an understatement for they have been the very meaning of the term “mission critical”. I cannot thank him enough for what he
has helped me do here at GMU/Mercatus. I must also thank Tyler Cowen,
Brian Hooks, and Dan Rothschild for their leadership at the Mercatus
Center and for their general support of our research and graduate educational programs at GMU. Finally, as this manuscript was going through
the final edits, I benefited greatly from comments from Tony Thirlwall,
Chris Coyne, Rosolino Candela, and the excellent editorial suggestions
of my colleagues at Mercatus McKenzie Robey and Erica T Celler, as well
as both Clara Heathcock and Laura Pacey at Palgrave Macmillan. I would
also like to thank Production Project Manager Dhanalakshmi Jayavel for
her attention to detail in guiding this project through its final stages. Of
course, the usual caveat holds.
Much of the story that you will encounter here has appeared in one
form or another through the years, starting with my first published papers
in the 1980s. During that course of time, of course I have accumulated a
great debt to such scholarly mentors as James Buchanan, Warren Samuels,
Israel Kirzner, and Mario Rizzo, and a list of fantastic PhD students
whom I have had the privilege to work with so closely in developing my
ideas at both NYU and GMU. Chris Coyne, Peter Leeson, and Virgil
Storr were once students of mine in name, but in reality, they have always
been my closest collaborators, cherished friends, and professional colleagues, who I am lucky enough to work with at GMU to build our
research and educational programs. But my biggest debt actually goes to
the individuals directly responsible for my professional career in economics and how they shaped that—Richard Fink, Don Lavoie, and Karen
Vaughn. In the 1980s, they established the Center for the Study of
Market Processes at George Mason University, and along with the Center
for Study of Public Choice formed the core of a new PhD program in
economics. I was in one of the first classes of PhD students in that program beginning in 1984 and finishing in 1988. They created the

xxii

Preface

i­ntellectual space in academia where the ideas of Hayek were treated neither as sacred texts to be memorized with great care and uncritical acceptance, nor as a closed chapter in the history of economic thought. Instead,
they insisted that we treat Hayek’s texts as an invitation to inquiry into
the yet unwritten chapters of a progressive research program in the social
sciences and humanities. That vision still inspires me today, and the institutional infrastructure that Rich, Don, and Karen created at George
Mason University has made possible our efforts to translate that earlier
inspiration to an aspiration to ultimately a realization in our research and
graduate education initiatives at the F. A. Hayek Program for Advanced
Study in Philosophy, Politics and Economics at the Mercatus Center at
George Mason University. It is with that acknowledgment in mind that I
dedicate this book to Richard Fink and Karen Vaughn, and in the memory of Don Lavoie.
Department of Economics
George Mason University
Fairfax, VA, USA
F. A. Hayek Program for Advanced Study
in Philosophy, Politics and Economics
Mercatus Center, George Mason University
Fairfax, VA, USA

Peter J. Boettke

Bibliography
Boettke, Peter J. 2017. Hayek’s Epistemic Liberalism. Liberty Matters: An Online
Discussion Forum.
Boudreaux, Donald. 2014. The Essential Hayek. Vancouver: Fraser Institute.
Caldwell, Bruce J. 2004. Hayek’s Challenge: An Intellectual Biography of F. A.
Hayek. Chicago: University of Chicago Press.
Ebenstein, Alan. 2001. Friedrich Hayek: A Biography. Chicago: University of
Chicago Press.
———. 2003. Hayek’s Journey: The Mind of Friedrich Hayek. London: Palgrave
Macmillan.
Hayek, F.A. 1944. The Road to Serfdom. Chicago: University of Chicago Press.

Preface
  

xxiii

———. 1967. The Dilemma of Specialization. Studies in Philosophy, Politics,
and Economics.
———. 1988. The Fatal Conceit: The Errors of Socialism, the Collected Works of
F. A. Hayek, W. W. Bartley, III. Chicago: University of Chicago Press.
O’Driscoll, Gerald P. 1977. Economics as a Coordination Problem: The
Contributions of Friedrich A. Hayek. Kansas: Sheed Andrews and McMeel
Retrieved Liberty Fund’s Online Library of Liberty.
Wicksteed, Philip. 1910. The Common Sense of Political Economy. London:
Routledge & Kegan Paul Limited.
White, Lawrence H. 2012. Clash of Economic Ideas: The Great Policy Debates and
Experiments of the Last Hundred Years. Cambridge, MA: Cambridge University
Press.

Contents

1	Clarifying Some Misconceptions About Hayek   1
2	Hayek: An Overview of His Life and Work  15
3	The Anatomy of an Economic Crisis: Money, Prices,
and Economic Order  37
4	Hayek on Market Theory and the Price System  77
5	Hayek and Market Socialism 119
6	The False Promise of Socialism and The Road to Serfdom 141
7	A Genuine Institutional Economics 159
8	The Political Economy of a Free People 197
9	Hayek, Epistemics, Institutions, and Change 227
xxv

xxvi

Contents

10	The Reconstruction of the Liberal Project 257
11	The Hayekian Legacy 283

Appendix
A: Scholarly Impact of Hayek’s Work as Measured
by Citations 297

Appendix
B: Top 20 Articles of the First 100 Years of the
American Economic Review 301
Appendix C: Hayek’s Intellectual Family Tree 303
Appendix D: Timeline of Hayek’s Professional Life 305
Author Index 309
Subject Index 315

List of Figures

Fig. 1.1
Fig. 1.2
Fig. 1.3
Fig. 1.4

Fig. 3.1

Unemployment rate in Germany, UK, and USA, 1920–1940.
Source for UK and Germany: Mitchell (1998a). Source for
USA: Mitchell (1998b)
Real GDP per capita. (Source: Bolt et al. (2018))
Government expenditure as a % of GDP. (Source: IMF (2016))
Number of deaths. Sources: WWI lower estimate (Source:
Haythornthwaite (1992)). WWI higher estimate (Source:
White (2011)). WWII lower estimate (Combat deaths) (Source:
Rummel (1994a)). WWII Higher estimate (Combat deaths)
(Source: White (2011)). Communist Russia lower estimate
(Source: White (2011)). Communist Russia higher estimate
(Source: Rummel (1994b)). Nazi Germany lower estimate
(Source: White (2011)). Nazi Germany higher estimate
(Source: Rummel (1994c))
The game of political economy

7
7
8

8
54

xxvii

1
Clarifying Some Misconceptions About
Hayek

F. A. Hayek is a lightning-rod figure in the social and policy sciences. He
is often criticized, along with Milton Friedman, as the architect of a neoliberal conspiracy that somehow hijacked the twentieth century and created tensions and conflicts that plague the twenty-first century. I will not
be able to fix those interpretative issues in this book. If you are expecting
an effort to counter Naomi Klein or Corey Robin and their attempt to
scandalize Hayek and his project, this book is not where to look. There
are two reasons for this. First, I believe the writings of Naomi Klein and
Corey Robin are actually not that challenging to a serious student of
Hayek’s work; they are, instead, musings of ideological ax-grinders who
appeal to those who already believe as they do. I would like to avoid that
entire “intellectual” enterprise.1 If you want to read legitimate scholarship
that finds serious flaws in Hayek’s writings and actions in this area of the
scandalous, I recommend, instead, the works of Andrew Farrant and
Edward McPhail (2014). For a more empathetic discussion of Hayek, I
See my 2017 Liggio Lecture “Context, Continuity and Truth,” https://www.atlasnetwork.org/
news/article/context-continuity-and-truth-theory-history-and-political-economy for a discussion
of what I believe to be the intellectual bankruptcy of the “hermeneutics of suspicion” in the history
of ideas, and how this is a problem for both the left and the right. Science and scholarship, I would
contend, advance in a culture of criticism, not as often portrayed in a culture of skepticism for this
very reason.
1

© The Author(s) 2018
Peter J. Boettke, F. A. Hayek, Great Thinkers in Economics,
https://doi.org/10.1057/978-1-137-41160-0_1

1

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P. J. Boettke

would recommend Bruce Caldwell and Leonidas Montes (2015). Second,
my purpose throughout this book is not to defend Hayek the man, but
to discuss the evolution of Hayekian ideas. In this regard, I believe an
extended discussion about Hayek, his efforts with the Mont Pelerin
Society, and his purported relationship with political figures such as
Pinochet, Reagan, or Thatcher is simply tangential to my purposes except
as it relates to the focus on the evolution of Hayekian ideas.
F. A. Hayek, like all of us, was a flawed man. He was, in a strange way,
thrust into public view early in his career, then again in the middle of the
career, and finally, at the end of his career—with long lapses of general
disinterest in what he had to say by the intellectual elite and general public. He fought with John Maynard Keynes, he fought with a variety of
socialists such as Oskar Lange, and he fought in general with an intellectual zeitgeist that he struggled to fully grasp. Hayek, the man, demonstrated the same confusions and frustrations in trying to make sense of it
all that all flesh-and-blood human beings do, and in the process, said and
did things, I am sure, in hindsight he would regret.
No doubt some of the remarks he said about the situation in Thatcher’s
England or Pinochet’s Chile would qualify as such remarks. But his relationships with those in political power was remote at best as Hayek was
never a political consultant to any leader in power; he was always a critical
scholar who tried to speak truth to power from the outside. While I have
no desire to defend Hayek, the man, I still have to ask—as Michel
Foucault in Power/Knowledge (1980, 135) taught—what in those texts of
Hayek that supposedly were developing an argument for true liberalism
might make possible authoritarian regimes?2 Hopefully, the reader will
find my exposition of Hayekian liberalism in the later parts of this book
See along these lines not only Farrant and McPhail’s (2014) discussion of “transitional dictatorship,” but Meadowcroft and Ruger (2014) and the discussion of the relationship between liberty
and democracy in the works of Friedman, Hayek, and Buchanan. In these discussions, however, we
must always keep in mind that there exists an “institutional possibility frontier” that any historically situated society also must take as a given constraint in time that consists of the existing stock
of human capital and technology. There are, in essence, constraints on the constraints of our choosing. This makes for some very complicated issues in the historical examination of pathways to
political and economic development. See Boettke et al. (2005) and the references therein, but also
the work by North et al. (2009) and Acemoglu and Robinson (2004). As my colleague Pete Leeson
likes to say, the rules in any given society might tell us what is permissible, but the constraints tell
us what is possible.
2

Clarifying Some Misconceptions About Hayek

3

as a sufficient beginning to this necessary conversation on the nature and
significance of the liberal project for our times.
Hayek, the man, witnessed first-hand the inhumanity of World War I
(WWI) and was dismayed by the lack of understanding among his
London School of Economics (LSE) colleagues of the developments in
Germany during the 1930s (see Hayek [1963] 1995, 62). Thus, his overarching concerns were the institutional setting of economic life and how
that institutional setting could be destroyed by unrestrained government
(whether democratic or not). Hayek’s articulation of Hayekian liberalism
was incomplete, and thus, the Hayekian argument needs to be continually worked on so as to realize a better understanding of the institutional
infrastructure of a political order of a free people: a political order that
exhibits neither discrimination nor dominion. Hayek was in many ways
a revolutionary, but strictly in the intellectual sense and not in the political sense.
Unfortunately, Hayek suffered the fate of an intellectual revolutionary
in two ways. He was misunderstood by foes and falsely appropriated by
friends as a result of the intellectual prejudices of the times. In the practical policy realm, this meant that his books such as The Road to Serfdom
([1944] 2007)3 and The Constitution of Liberty (1960) were not read, but
displayed. His arguments were not wrestled with, but reduced to slogans.
In the realms of methodology and analytics, Hayek’s bold ideas were
either incorrectly translated into the preferred language of the day—the
very language he was trying to get folks to break out of—or they were
outright dismissed as either incomprehensible or relics of an earlier age
that science had progressed beyond. I recently wrote in an article for the
Journal of the History of Economic Thought that: “Mises was a sophisticated
nineteenth-century thinker and Hayek was a sophisticated twenty-first-­
century thinker, but in both instances the twentieth century didn’t know
how to deal with their arguments about methodology, analytic methods,
and the political economy import of their analysis of socialism, interventionism, and radical liberalism” (2015, 84). This thesis will be repeatedly
Keynes famously commented on Hayek’s The Road to Serfdom in a letter dated June 28, 1944,
reprinted in John Maynard Keynes, Activities 1940–1946: Shaping the Post-War World: Employment
and Commodities, The Collected Writings of John Maynard Keynes Vol. 27 (1980, 385).
3

4

P. J. Boettke

stressed as we study the evolution of Hayekian ideas concerning epistemic
institutionalism and attempt to clarify a variety of misconceptions about
Hayek’s argument along the way.
So, putting aside the ideological misconceptions that are embedded in
the critique of neoliberalism, the main scientific misconceptions are:
1. Hayek’s methodological individualism was based upon atomistic
actors who were perfectly rational.
2. Hayek saw the price system as perfectly efficient.
3. Hayek was categorically opposed to government action.
4. Hayek presented a slippery slope argument toward totalitarianism in
The Road to Serfdom.
5. Hayek saw something being the product of spontaneous order as a
normative approval of that order.
6. Hayek’s resistance to formal modeling and statistical testing was
based on old-fashioned methodological ideas that led to dogmatic
stances rather than scientific progress.
7. Hayek’s evolutionary arguments developed late in his career about
group selection constituted an abandonment of his earlier methodological individualism.
8. Hayek’s ideas on monetary theory and the price system never evolved
throughout his career.
9. Hayek’s ideas were roundly defeated by Keynes with respect to macroeconomics, and by Lange-Lerner with respect to the market
socialism.
10. Hayek effectively abandoned economics after the publication of The
Pure Theory of Capital ([1941] 2007) and retreated to political theory, legal theory, and public intellectual work.
It is my hope to counter each of these ten claims throughout this book.
I will make judicious use of quotes from Hayek’s body of work, which
challenge each of these claims so the reader can see that these misconceptions are a product of efforts to pigeonhole a thinker who defies easy
characterization. They are not, however, the topic of focus in the chapters
to come, but they will all be challenged in the material I present. It is my
sincere intent to demonstrate that Hayek’s ideas went through critical

Clarifying Some Misconceptions About Hayek

5

refinement throughout his long career, and that there is a fundamental
coherence in those refinements in his capacity as an economic theorist, a
practitioner of political economy, and as a social philosopher.
Hayek did not shift topics and fields to run away from perceived intellectual defeats. Rather, he sought to deepen our understanding of the
nature of the economic problem that modern societies must confront
and the demands of a truly liberal order. He became an economist in his
late teens and early 20s and he remained an economist into his 90s, but
in order to appropriately place his intellectual innovations in economics,
he had to situate those ideas in various intellectual and institutional contexts—not unlike the Scottish Enlightenment Philosophers who he took
so much inspiration from: David Hume and Adam Smith. His technical
economics bumped into his political economy, and his political economy
bumped into his yet broader social philosophy, but that social philosophy
also feeds back into a deeper understanding of his technical economics.
As Hayek himself has put it, “the task of economic theory was to explain
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,” but “only through a re-examination of the age-old
concept of freedom under the law, the basic conception of traditional
liberalism, and of the problems of the philosophy of the law which this
raises, that I have reached what now seems to be a tolerably clear picture
of the nature of the spontaneous order of which liberal economists have
so long been talking” (1967: 91–92).
Karen Vaughn (1999) once published a paper on “Hayek’s Implicit
Economics,” where she tries to articulate the underlying economics that
can be found in his later writings. This book is completely consistent with
that spirit. Moreover, it also asks the reader to think seriously about
“Hayek’s Implicit Political Economy and Social Philosophy” that provided the institutional background even as he developed his most technical economics in the 1920s and 1930s. By weaving back and forth
between the implicit background and the explicit foreground of analysis
in Hayek’s career as divided from the 1920s to the 1940s, and then from
the 1950s to 1980s, what is implicit in both will become explicit and
thus capable of serving as building blocks for something altogether new

6

P. J. Boettke

in the twenty-first-century practice of economics, political economy, and
social philosophy.4
As a matter of historical fact, the critical period for the development of
Hayekian ideas is from 1930 to 1950, though there was continuous
development after 1950, and foundational developments in the 1920s.5
But for the period I see as critical, one must always remember Lionel
Robbins’s (1971, 129) warning that “the historian of the future, if he
wishes to treat of the relations between London and Cambridge during
this period … that any generalizations that he may wish to make must fit
facts of considerable complexity if they are not seriously to misrepresent
the situation.” Indeed, the disputes of these times that sharpened Hayek’s
thinking were complex. They took place during economic crisis in the
UK and the USA, and political crisis in Germany and elsewhere in
Continental Europe, and would eventually result in World War II
(WWII). These disputes, in other words, were more than just purely academic exercises.
To put things in historical context, it is useful to look at a few charts
and figures that might give us a window into the everyday world that an
economic and social thinker confronted during Hayek’s formative years
as a researcher of consequence. The changes during Hayek’s life are nothing short of monumental. Figure 1.1 illustrates the 20-year period of
unemployment rates in Germany, the UK, and the USA, each of which
was unable to escape the macroeconomic consequences of the Great
Depression, and address the economic situation that was the historical
background against which Hayek developed his economic ideas.
Figure 1.2 is meant to illustrate roughly the standard of living in the
countries where Hayek was working throughout his career—Austria
On the analytical importance of thinking about background and foreground and how shifting
those results in radical shifts in perspective, see Richard Wagner’s brilliant Mind, Society and Human
Action (2010, 1–26) and his idea of bivalent logic for economic inquiry.
5
“When I look back to the early 1930s, they appear to me much the most exciting period in the
development of economic theory during this century.” It was, Hayek continues, “a high point and
the end of one period in the history of economic theory and the beginning of a new very different
one.” He is referring there to ascendancy of Keynesian macroeconomics that treated “the economic
process in terms of aggregates” rather than focus on the “structure of relative prices,” and thus was
unable to provide an explanation of “changes in relative prices or their effects.” This would require,
Hayek suggests, economists to someday go back to the 1930s and “take up where we left off then”
to make progress in economic theory once again ([1963] 1995, 49; 60; 49).
4

Percentage Unemployed

Clarifying Some Misconceptions About Hayek

7

35
30
25
20
15
10
5
0

Year
GERMANY

UK

USA

Fig. 1.1 Unemployment rate in Germany, UK, and USA, 1920–1940. Source for
UK and Germany: Mitchell (1998a). Source for USA: Mitchell (1998b)
40000
35000
30000
25000

Germany

20000

US

15000
UK

10000
5000
0
1899

Austria
1909

1919

1929

1939

1949

1959

1969

1979

1989

Fig. 1.2 Real GDP per capita. (Source: Bolt et al. (2018))

(1920), the UK (1930s–1940s), the USA (1950s), and Germany
(1960s–1980s). In the same countries and during the same period
Fig. 1.3 illustrates the growth of government as a percentage of Gross
Domestic Product (GDP) due to the rise of the welfare state, particularly
after WWII. And, it is critical to always keep in mind, as illustrated in
Fig. 1.4, the experienced inhumanity that thinkers of this time were
forced to process during the first half of the twentieth century. To capture
this, look at the death toll from WWI, Soviet Communism, Nazi
Germany, and WWII.

39
19
49
19
59
19
69
19
79
19
89

19

29

19

19

18

99
18

89

79

19

19

69

19

59

19

19

19

19

19

18

49

0%

39

20%

0%

29

40%

20%

19

60%

40%

09

80%

60%

99

80%

19

Germany
100%

09

United States
100%

18

39
19
49
19
59
19
69
19
79
19
89

19

29

19

19

99

18

18

79

89

19

19

59

19

19

19

19

19

19

18

18

69

0%

39

20%

0%

49

40%

20%

19

60%

40%

29

80%

60%

99

100%

80%

09

100%

19

United Kingdom

09

Austria

Fig. 1.3 Government expenditure as a % of GDP. (Source: IMF (2016))

90000000
80000000
70000000
60000000
50000000
40000000
30000000
20000000
10000000
0

WORLD WAR I WORLD WAR II
SOVIET
(1914-1918)
(1939-1945)
COMMUNISM
(1917-1953)

LOWER ESTIMATE

NAZI
GERMANY
(1933-1945)

HIGHER ESTIMATE

Fig. 1.4 Number of deaths. Sources: WWI lower estimate (Source: Haythornthwaite
(1992)). WWI higher estimate (Source: White (2011)). WWII lower estimate
(Combat deaths) (Source: Rummel (1994a)). WWII Higher estimate (Combat
deaths) (Source: White (2011)). Communist Russia lower estimate (Source: White
(2011)). Communist Russia higher estimate (Source: Rummel (1994b)). Nazi
Germany lower estimate (Source: White (2011)). Nazi Germany higher estimate
(Source: Rummel (1994c))

Clarifying Some Misconceptions About Hayek

9

It is against this historical backdrop of economic and political turmoil
that social science was being developed in the 1930s and 1940s. These
grand debates in economics and political economy were taking place to
understand the prior causes that resulted in the macroeconomic instability of the Great Depression, the problems and difficulties of socialist
planning, and the future of a humane and civil social order. As Hayek
wrote to his good friend Fritz Machlup in June 21, 1940, the work he was
doing on The Abuse and Decline of Reason constituted a very important
challenge to the prevailing wisdom of the day and was, in his judgment
“the best I can do for the future of mankind.”6 The disputes were not
merely abstract academic discussions, but addressed the bridging of the
gap between high theory and practical policy in a very fundamental sense.
The cutting edge of academic research was meant to address the pressing
needs of public policy, since the stakes were to be found in Western civilization itself. The disputes were fundamental, but they were also personal and cut very close to the bone.
To give an example of the sort of impression one gets from commentators even as skilled as Robert Skidelsky, consider this summary judgment
that Hayek did not engage Keynes after The General Theory (1936) was
published because “Hayek did not want to expose himself to another
mauling from the Keynesians,” and that as a result, he became by the late
1930s a “bystander as the Keynesian Revolution unfolded” (1992,
456–459). Even Hayek’s closest associate at the LSE, Lionel Robbins,
recanted his intellectual affinity to the Austrian school and argued that his
trouble was purely intellectual. He “had become the slave of theoretical
constructions which, if not intrinsically invalid as regards logical consistency, were inappropriate to the total situation which had then developed
and which therefore misled my judgment” (1971, 153). Robbins would
put his change of mind in a very dramatic form, arguing that:
Now I still think that there is much in this theory as an explanation of a
possible generation of boom and crisis. But, as an explanation of what was
going on in the early ’30s, I now think it was misleading. Whatever the
This letter can be found in the Fritz Machlup papers at the Hoover Institution Box 43, Folder 15
and is reprinted in Volume 13 of Hayek’s Collected Works (2010, 312–313).
6

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P. J. Boettke

genetic factors of the pre-1929 boom, their sequelae, in the sense of inappropriate investments fostered by wrong expectations, were completely
swamped by vast deflationary forces sweeping away all those elements of
constancy in the situation which otherwise might have provided a framework for an explanation in my terms. The theory was inadequate to the
facts. Nor was this approach any more adequate as a guide to policy.
Confronted with the freezing deflation of those days, the idea that the
prime essential was the writing down of mistaken investments and the easing of capital markets by fostering the disposition to save and reducing the
pressure on consumption was completely inappropriate.
To treat what developed subsequently in the way which I then thought
valid was as unsuitable as denying blankets and stimulants to a drunk who
has fallen into an icy pond, on the ground that his original trouble was
overheating. (Robbins 1971, 154)

This led Robbins to conclude that: “I shall always regard this aspect of my
dispute with Keynes as the greatest mistake of my professional career, and
the book, The Great Depression, which I subsequently wrote, partly in
justification of this attitude, as something which I would willingly see be
forgotten” (Robbins 1971, 154).
Interestingly enough, we do not see a similar recanting of Robbins’s
Economic Planning and the International Order (1937). But more importantly, his recanting of the monetary theory of the trade cycle was not a
logical refutation in the same way that Keynes claimed that Hayek’s Prices
and Production was “muddled.” As Robbins himself stated, he never
refuted Hayek’s theory itself, only its applicability to the particular time
and place—namely, the Great Depression of the 1930s. Therefore, our
understanding of Robbins’s position would be better appreciated as a
question of application and policy pragmatics.
Robbins and Hayek represented a formidable research and educational
team in the 1930s. Both had been deeply influenced by Ludwig von
Mises in the 1920s, and in particular, Mises’s Socialism ([1922] 1981).
They sought, as described in Dahrendorf ’s LSE: A History of the London
School of Economics and Political Science, 1895–1995, to develop an international flavor to teaching and scholarship at the LSE that featured the
work of the Austrian school economists (1995, 222). Syllabi and seminars reflected this, as well as the constant stream of visitors. In most histories, folks date this to after Hayek’s arrival, but the facts are that Robbins

Clarifying Some Misconceptions About Hayek

11

was an Edwin Cannan student, and was influenced by Mises and knew
him personally from the mid-1920s and had developed a warm personal
relationship with Mises. Mises had, in fact, visited the LSE on numerous
occasions as well as interacted with Robbins at European conferences of
economists. The influence of these ideas were not limited to Robbins and
Hayek, but permeated the intellectual climate of the department in the
1920s and 1930s. Arnold Plant, W. H. Hutt, Ronald Coase, Nicholas
Kaldor,7 Ludwig Lachmann, and G. L. S. Shackle would all, in one way
or another, pick up various bits and pieces of these ideas and develop
them throughout their careers as teachers and scholars.
The misconceptions of Hayek’s ideas lead to an inability to see the
varied streams of thought that developed in the 1930s, and which had
their base within the blended traditions of the Austrian school and its
British counterparts, such as Wicksteed, or its US counterparts, such as
Knight. In Dahrendorf ’s history of the LSE, for example, he actually
describes Hayek as a “classical ‘a-social’ individualist” (1995, 515), a position that could really only be held if one never reads Hayek in any depth,
but only reads the slogans associated with Hayek, such as Thatcher’s
“There is no such thing as society.” A closer reading of Hayek (and
Thatcher, for that matter) will reveal that he was far from being an atomistic thinker. His theory of social cooperation under the division of labor
was not only critical to his economics, his political economy, and his
social philosophy, but also inconsistent with methodological atomism.
Hopefully, this gives the reader a clear picture of how I will proceed
and what purpose I have in mind. Once we see the Hayekian emphasis
on epistemic institutionalism as the critical development in response to the
disputes of the 1930s against Keynes, against market socialists, and
against philosophical movements in the philosophy of science, then the
unfolding of Hayek’s career will come into sharp relief. The questions he
asked, the answers he offered, and most importantly, the continuing
promise and relevance of the Hayekian research program will be better
Well known as a Keynesian, Nicholas Kaldor had begun his career working within the Austrian
tradition. His first published paper in 1932 was an “Austrian” interpretation of the trade cycle in
“The Economic Situation of Austria,” Harvard Business Review 11(10): 23–34. He later translated,
with Honor Croome, Hayek’s Monetary Theory and the Trade Cycle in 1933. See also Klausinger,
Hansjörg. 2011. “Hayek and Kaldor: Close Encounter at LSE.” History of Economic Ideas 19 (3):
135–163.
7

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P. J. Boettke

understood. Economics is about the coordination problem that society
must confront. The solution to that coordination problem is found in the
competitive entrepreneurial market process of discovery and learning
through time. But the effectiveness of that process of discovery and learning is a function of the institutional framework within which economic
activity is played out. The knowledge that is necessary to guide and discipline decisions is institutionally contingent—it literally does not exist
unless within a certain institutional environment.
What this ultimately means for economics, political economy, and
social philosophy will hopefully be what will unfold in the following
chapters as we talk about the following: the nature of a capital-using
economy; the role of money in such an economy; what function interest
rates serve in intertemporal coordination; how prices guide production;
what function property rights serve; why socialist planning faces an insurmountable knowledge problem; the political consequences of pursuing
socialist economic planning; why the rule of law and the generality norm
in politics provide the background for a discussion of the appropriate
institutional infrastructure for a vibrant and creative economy and society; and what a political order that exhibits neither discrimination nor
dominion would look like and whether it holds promise for us today in
our world. It is my belief that this approach is the best way to communicate to a new generation what Hayek’s ideas have to offer. We must first
clarify these ideas and then eliminate some of its most egregious
­misconceptions so that we can judge the evolutionary potential of these
ideas for social science and the humanities.
Let’s begin.

Bibliography
Acemoglu, Daron, Simon Johnson, and James Robinson. 2004. Institutions as
the Fundamental Cause of Long-Run Growth. The National Bureau of
Economic Research, NBER Working Paper No. 10481.
Alves, André Azevedo, and John Meadowcroft. 2014. Hayek’s Slippery Slope,
the Stability of the Mixed Economy and the Dynamics of Rent Seeking.
Political Studies 62 (4): 843–861.

Clarifying Some Misconceptions About Hayek

13

Boettke, Peter J. 2015. The Methodology of Austrian Economics as a
Sophisticated, Rather than Naïve, Philosophy of Economics. Journal of the
History of Economic Thought 37 (1): 79–85.
———. 2017. Context, Continuity and Truth. Atlas Network, November 9.
Boettke, Peter J., Christopher Coyne, Peter Leeson, and Frederic Sautet. 2005.
The New Comparative Political Economy. Review of Austrian Economics 18
(3–4): 281–304.
Bolt, Jutta, Robert Inklaar, Herman de Jong, and Jan Luiten van Zanden. 2018.
Rebasing ‘Maddison’: New Income Comparisons and the Shape of Long-run
Economic Development. GGDC Research Memorandum 174.
Caldwell, Bruce J., and Leonidas Montes. 2015. Friedrich Hayek and His Visits
to Chile. The Review of Austrian Economics 28 (3): 261–309.
Dahrendorf, Ralf. 1995. LSE: A History of the London School of Economics and
Political Science, 1895–1995. Oxford: Oxford University Press.
Farrant, Andrew, and Edward McPhail. 2014. Can a Dictator Turn a Constitution
into a Can-Opener? F.A. Hayek and the Alchemy of Transitional Dictatorship
in Chile. Review of Political Economy 26 (3): 331–348.
Foucault, Michel. 1980. Power/Knowledge: Selected Interviews and Other Writings
1972–1977. Ed. Colin Gordon. New York: Pantheon Books.
Hayek, F.A. 1933. Monetary Theory and the Trade Cycle. Trans. Nicholas Kaldor
and Honor Croome. London: Jonathan Cape.
———. [1941] 2007. The Pure Theory of Capital. In The Collected Works of
F.A. Hayek Vol. 12, ed. Lawrence H White. Chicago: University of Chicago Press.
———. [1944] 2007. The Road to Serfdom. Chicago: University of Chicago Press.
———. 1960. The Constitution of Liberty. Chicago: University of Chicago Press.
———. [1963] 1995. The Economics of the 1930s as Seen from London. In
The Collected Works of F. A. Hayek: Contra Keynes and Cambridge: Essays,
Correspondence Vol. 9, ed. Bruce Caldwell. Chicago: University of Chicago
Press.
———. 1967. Kinds of Rationalism. In Studies in Philosophy, Politics, and
Economics, ed. F.A. Hayek. Chicago: University of Chicago Press.
———. 2010. The Collected Works of F. A. Hayek: Studies on the Abuse and
Decline of Reason Vol. 13. Ed. Bruce Caldwell. Chicago: University of Chicago
Press.
Haythornthwaite, Philip J. 1992. The World War One Source Book, 382–383.
London: Arms and Armour.
International Monetary Fund. 2016. Government Expenditure, Percent of
GDP % of GDP. Fiscal Affairs Departmental Data. http://www.imf.org/external/datamapper/exp@FPP/USA/FRA/JPN/GBR/SWE/ESP/ITA/ZAF/
IND?year=2011. Data Accessed 5 July 2018.

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Kaldor, Nicholas. 1932. The Economic Situation of Austria. Harvard Business
Review 11 (10): 23–34.
Kalusinger, Hansjörg. 2011. Hayek and Kaldor: Close Encounter at LSE.
History of Economic Ideas 19 (3): 135–163.
Keynes, John Maynard. 1936. The General Theory of Employment, Interest and
Money. London: Palgrave Macmillan.
———. 1980. Activities 1940–1946: Shaping the Post-War World: Employment
and Commodities. The Collected Writings of John Maynard Keynes Vol. 27,
ed. Elizabeth Johnson and Donald Moggridge. Cambridge: Cambridge
University Press.
Meadowcroft, John, and William Ruger. 2014. Hayek, Friedman, and Buchanan:
On Public Life, Chile, and the Relationship Between Liberty and Democracy.
Review of Political Economy 26 (3): 358–367.
Mises, Ludwig. von. ([1922] 1981). Socialism: An Economic and Sociological
Analysis. Indianapolis: Liberty Fund.
Mitchell, B.R. 1998a. International Historical Statistics: Europe, 1750–1993.
London: Macmillan.
———. 1998b. International Historical Statistics: The Americas, 1750–1993.
London: Macmillan.
North, Douglas, John J. Wallis, and Barry A. Weingast. 2009. Violence and
Social Orders: A Conceptual Framework for Interpreting Recorded Human
History. Cambridge: Cambridge University Press.
Robbins, Lionel. 1937. Economic Planning and International Order. London:
Macmillan.
———. 1971. Autobiography of an Economist. London: Palgrave Macmillan.
Rummel, R.J. 1994a. Death by Government, 25. New Brunswick: Transaction
Publishers.
———. 1994b. Death by Government, 83. New Brunswick: Transaction
Publishers.
———. 1994c. Death by Government, 111. New Brunswick: Transaction
Publishers.
Skidelsky, Robert. 1992. John Maynard Keynes Volume 2: The Economist as Savior,
1920–1937. New York: Penguin.
Vaughn, Karen I. 1999. Hayek’s Implicit Economics: Rules and the Problem of
Order. Review of Austrian Economics 11 (1–2): 129–144.
Wagner, Richard E. 2010. Mind, Society, and Human Action: Time and Knowledge
in a Theory of Social Economy. New York: Routledge.
White, Matthew. 2011. Source List and Detailed Death Tolls for the Primary
Megadeaths of the Twentieth Century. http://necrometrics.com/20c5m.htm.
Accessed 5 July 2018.

2
Hayek: An Overview of His Life
and Work

Introduction
Though I have stated that this work is not a proper biography, some biographical information is not only unavoidable, but also appropriate. Let
us begin with an overview of Hayek’s life and work. F. A. Hayek passed
away on March 23, 1992, at the age of 92. His first academic publication
was in the 1920s and his last was in the late 1980s. Bruce Caldwell’s intellectual biography of Hayek, Hayek’s Challenge (2004), focuses on the various critical points of contestation that Hayek faced in developing his
unique contributions to economics, political economy, and social philosophy. Caldwell does an outstanding job of discussing the methodenstreit, the marginalist revolution, the emergence of macroeconomics, the
development of formal modeling and sophisticated statistical testing, and
Hayek’s complicated role in all these professional disputes. Hayek, indeed,
faced huge intellectual challenges during his long career. But as Bruce
Caldwell has put it, this also creates a challenge for those writing about
Hayek and his ideas:
The volume of Hayek’s work provides another daunting challenge for
interpreters. Hayek lived from 1899 to 1992, and his writings span seven
© The Author(s) 2018
Peter J. Boettke, F. A. Hayek, Great Thinkers in Economics,
https://doi.org/10.1057/978-1-137-41160-0_2

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decades. Worse, he was incredibly prolific. Even worse, he did not restrict
himself to economics, making contributions in fields as diverse as psychology, political philosophy, the history of ideas, and social-science
methodology. (Caldwell 2004, 4)

Hayek’s depth and breadth was probably unmatched among twentieth-­
century economists, and was more in keeping with the grand tradition of
moral philosophy and political economy as it was practiced from Adam
Smith to John Stuart Mill. There is certainly little doubt that Hayek was
among the most prodigious classical liberal scholars of the twentieth century. Though his 1974 Nobel Prize was in Economic Science, his scholarly endeavors extended well beyond economics. At the time of his death,
he had 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. On Google Scholar, his article “The Use of
Knowledge in Society” (1945) has been cited over 11,000 times, while
his classic works in political economy The Road to Serfdom (1944), The
Constitution of Liberty (1960), and Law, Legislation and Liberty (1973,
1976, 1979) all have over 5000 citations each. Finally, his work in theoretical psychology, The Sensory Order (1952a), has also received close to
1000 citations. Moreover, in a study by David Skarbek (2009) on the
Nobel Prize lectures, Hayek was the second most cited author by the
other Nobel Prize winners in their own official Nobel lectures.1
Hayek was born into a family of intellectuals in Vienna on May 8,
1899. During the early years of the twentieth century, the theories of the
Kenneth Arrow is the most cited. Also see Boettke (1999, xiv–xv), where I compare the general
citation pattern of Hayek with his peers and argue that his analytical impact in modern economics
is less than what it should be. Though in this citation study, the pattern does show an increasing
interest in Hayek from relative neglect in the 1970s (Social Science Citation Index (SSCI) citations
less than 100 per year) to extreme interest in the late 1980s and 1990s (SSCI citations in the
200–300 range per year). But those citations are more likely in the broad social science journals
rather than the main scientific journals of economics. See the appendix A, where an updated citation study is provided, and appendix B, where the list of the 20 most influential articles in the
American Economic Review (AER) are listed and “The Use of Knowledge in Society” is among those
selected. Also see the Living Bibliography on Hayek that I collected in the process of researching
this book with the assistance of my graduate students (Boettke 2018).
1

Hayek: An Overview of His Life and Work

17

Austrian School of Economics, sparked by Menger’s Principles of
Economics ([1871] 1953), were gradually being formulated and refined
by Eugen von Böhm-Bawerk, his brother-in-law, Friedrich Wieser, Joseph
Schumpeter, and Ludwig von Mises. Hayek’s grandfather was an academic colleague and friends with Böhm-Bawerk and Wieser. His father
was a physician and botanist. Hayek grew up in an atmosphere of science
and scholarship. “Hayek would later say,” Caldwell writes, “that he grew
up thinking that being a university professor was the highest of all callings” (2004, 135). His initial academic interests, like those of his father,
were in biology. However, the economic and political consequences of
WWI, particularly the breakdown of the Austro-Hungarian Empire,
drew his interests away from the natural sciences to the social sciences.
Outside of his academic interests, his hobbies were mountain climbing
and skiing (Hayek [1978] 1983, 397).
Economics at the University of Vienna was integrated with the study
of law. Hayek began his studies at the University of Vienna in November
1918, earning his first doctorate in law in 1921, and his second doctorate
in political economy in 1923. As a student, Hayek studied law, psychology, and economics, before specializing in economic theory. He recalled
attending one of Ludwig von Mises’s classes as a student, but found
Mises’s anti-socialist position too strong for his liking. Friedrich Wieser,
who was more or less a Fabian socialist, and a very distinguished professor, offered an approach that was more attractive to Hayek at the time,
and Hayek became his pupil. Hayek would eventually do his first original
work in economic theory dealing with the problem of imputation under
the guidance of Wieser. Yet, ironically, it was Mises, through his devastating critique of socialism published in 1922, who became his mentor
throughout the 1920s and set Hayek on the research path he would pursue in philosophy, politics, and economics throughout his long career.2
It is important to realize that at this time, as Hayek has stressed, the Austrian school of economics
was not at all understood in an ideological sense. The Menger/Böhm-Bawerk/Mises branch was well
known for its liberalism, but that was not seen as essential to the scientific contributions of the
school, which were not tied to any political philosophy, but were, instead, focused on marginal utility analysis. See Hayek’s preface to the 1981 edition of Socialism (Mises [1922] 1981) for its impact
on him (and others of his generation). Lionel Robbins in the UK would be similarly impacted upon
reading Mises’s Socialism in 1923 and began efforts to secure the translation of Mises’s work in to
English at that time. See Lionel Robbins, Autobiography of an Economist (1971, 106) and Susan

2

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After graduating in 1921, Hayek was hired by Mises via an introduction from Wieser to work in a government office set up for the primary
purpose of the settlement of prewar private debts between nations as part
of the Treaty of Versailles of 1919. Hayek worked under Mises’s direct
supervision in this office until 1927, interrupted only by his visit to the
USA. In 1927, Mises helped Hayek establish the Austrian Institute for
Business Cycle Research, which Hayek directed. When Hayek left for the
LSE in 1931, Oskar Morgenstern assumed the directorship until he himself emigrated to the USA.
The best way to understand Hayek’s vast contributions to economics
and classical liberalism is to view them in light of the study of social
cooperation laid out by Mises. Mises, the great system builder, provided
Hayek with this research program. Hayek became the great dissector 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”
(1978, 17).
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 stressed how working in close collaboration with Mises was a great stimulus for original thought when he
agreed strongly with the conclusions that Mises reached, but not necessarily the analysis used to reach these conclusions. As Hayek put it: “I was
always influenced by Mises’s answers, but not fully satisfied by his arguments. It became very largely an attempt to improve the argument, which
I realized led to correct conclusions. But the question of why it hadn’t
persuaded most other people became important to me; so I became anxious to put it in a more effective form.…Being for ten years in close
contact with a man with whose conclusions on the whole you agree but
whose arguments were not always perfectly convincing to you, was a
great stimulus” ([1978] 1983: 13; 176).
Howson’s Lionel Robbins (2011, 135) for a description of Robbins’s enthusiasm for this “revolutionary” work on the economic problems of socialism.

Hayek: An Overview of His Life and Work

19

In 1923, Hayek traveled to the USA to observe and study the latest
statistical techniques that were being developed to study industrial fluctuations. Hayek spent time both at New York University (NYU) and at
Columbia. At NYU, Hayek worked as a research assistant to Jeremiah
Jenks and submitted work toward earning a PhD. At Columbia, he visited Wesley Clair Mitchell, who was pioneering the empirical approach
to business cycles that would define the early National Bureau of
Economic Research (NBER) approach. However, Hayek’s financial situation had deteriorated over the year, and news of a much-needed fellowship from the Rockefeller Foundation that would have enabled him
financially to stay in the USA failed to reach him in time, so almost
destitute, he boarded a ship to return to Europe. Upon his return to
Vienna, Hayek continued his work with Mises, and they established the
Austrian Institute for Business Cycle Research. During his trip to the
USA, Hayek had already begun to draft “The Monetary Policy of the
United States After the Recovery from the 1920s Crisis” ([1925] 1984),
which sought to apply the Mises-Wicksell theory of the business cycle to
contemporary events.
Building on Mises’s 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] 1933), analyzed the effects of credit expansion on the
capital structure of an economy.
Publication of that book prompted an invitation for Hayek to lecture
at the LSE. 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.
Hayek’s 1930–1931 lectures at the LSE were received with such great
acclaim that he was called back and appointed Tooke Professor of
Economic Science and Statistics. At age 32, Hayek had secured one of the
more prestigious appointments in the economics profession. As he has
said in an interview with Axel Leijonhufvud, “When you get an appointment as a professor in London at 32, you take it” (Hayek [1978] 1983).
The Mises-Hayek theory of the trade cycle explained the “cluster of
errors” that characterizes the cycle. Credit expansion, made possible by

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P. J. Boettke

the artificial lowering of interest rates, misleads businessmen, who are led
to engage in ventures that would not otherwise have appeared profitable.
The false signal generated by credit expansion leads to a malcoordination
of the production and consumption plans of economic actors. This malcoordination first manifests itself in a “boom,” and then, later, in a “bust”
as the time pattern of production adjusts to the real pattern of savings
and consumption in the economy.

Hayek Versus Keynes
Soon after Hayek’s arrival in London, he crossed swords with John
Maynard Keynes. The Hayek-Keynes debate was perhaps the most fundamental debate in monetary economics in the early twentieth century.
Beginning with his essay, “The End of Laissez-Faire” (1926), Keynes presented his position in the language of pragmatic liberalism. As a result,
Keynes was heralded as the “savior of capitalism,” rather than being
viewed as a critic of the existing order. The Hayek-Keynes debate was of
a different nature than Hayek’s debate with the market socialists, but
ultimately turned on similar issues related to the nature of the price system and the institutional infrastructure within which economic activity
takes place.
Hayek believed he had pinpointed the fundamental problems with
Keynes’s economics—his failure to understand the role that interest rates
and the capital structure play in a market economy. Because of Keynes’s
habit of using aggregate (collective) concepts, he failed to address these
issues adequately in A Treatise on Money (1930). Hayek pointed out that
Keynes’s aggregation tended to redirect the analytical focus of the economist away from examining how the industrial structure of the economy
emerged from the economic choices of individuals.
Keynes did not take kindly to Hayek’s criticism. Hayek had accused
Keynes of dropping the capital theory and microeconomic analysis of
intertemporal coordination from the Wicksellian system. Those elements in the Wicksellian system were being developed by Mises and
Hayek. In essence, Hayek was criticizing Keynes for not incorporating
the Mises-­Hayek work into his analysis, despite the fact that Keynes’s

Hayek: An Overview of His Life and Work

21

work was written before Mises’s Theory of Money and Credit had been
translated into English, and before Hayek had published Prices and
Production. Keynes chose to respond at first by attacking Hayek’s
Prices and Production. As Keynes wrote: “The book, as it stands, seems
to me to be one of the most frightful muddles I have ever read, with
scarcely a sound proposition in it beginning with page 45, and yet it
remains a book of some interest, which is likely to leave its mark on
the mind of the reader. It is an extraordinary example of how, starting
with a mistake, a remorseless logician can end up in bedlam” (1931,
394). Rather than judging the Mises-Hayek theory of industrial fluctuations as one of the first systematic attempts to integrate micro and
macro and provide a choice-theoretic foundation for industrial fluctuations and economic coordination more generally, Keynes judged
the effort as a muddle. This would remain the professional consensus
basically for the next 40 years until the microfoundations and rational
expectations revolution in macroeconomics took hold in the 1970s
and 1980s.
But Keynes’s second intellectual move was equally interesting and
proved very effective as well. Keynes claimed that he no longer believed
what he had written in A Treatise on Money, and turned his attention to
writing another book, The General Theory of Employment, Interest, and
Money (1936), which, in time, became the most influential book on economic policy in the twentieth century. As Mark Blaug remarks in his
Economic Theory in Retrospect (Blaug 1997, 642), never before had we
seen such a quick and complete conversion of the profession to the new
paradigm as we saw in the decade after the publication of The General
Theory. Throughout the USA and Europe, Keynesian thought dominated
economic discourse. The entire discipline of economics was transformed
as a result, and the discipline that Hayek was trained in—and practiced—
seemed to vanish as he was still working out the implications of his own
thinking.
Rather than attempting to criticize directly what Keynes presented in
his General Theory, Hayek turned his analytical attention to refining capital theory. Hayek was convinced that the essential point to convey to
Keynes and the rest of the economics profession concerning monetary
policy lay in working out the implications of a consistent and coherent

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capital theory.3 Thus, Hayek proceeded to set forth his thesis in The Pure
Theory of Capital ([1941] 2007). However correct his assessment may
have been, this book, Hayek’s most technical, was his least influential. In
the eyes of the public, Keynes had defeated Hayek. Hayek lost standing
in the profession and with students.
During this time, Hayek was also involved in another grand debate in
economic policy—the socialist calculation debate, triggered by a 1920
article by Mises ([1920] 2012) that stated that socialism was technically
impossible because abolishing private property in the means of production would mean no market prices for capital goods. Without prices
guiding production decisions, economic planning would be lost amid the
sea of economic possibilities. Socialist planning, Mises demonstrated,
would not be able to calculate the opportunity cost of alternative investment plans. The Socialist Planner would not know, for example, whether
to build railroad tracks out of platinum or steel due to the inability to
engage in rational economic calculation. Mises had refined this argument
in 1922 in Socialism: An Economic and Sociological Analysis ([1922] 1981),
the book which had profoundly impressed the young Hayek (and the
young Lionel Robbins). Hayek developed Mises’s argument further in
several articles during the 1930s. In 1935, he collected and edited a series
of essays on the problems of socialist economic organization: Collectivist
Economic Planning (1935), in which Mises’s original 1920 article was
published in English for the first time. Mises’s Socialism was also translated and published in English in 1936 due to the efforts of Hayek and
Robbins. Hayek would write additional essays critiquing the model of
“market socialism,” which had been developed by Oskar Lange and Abba
Lerner to respond to Mises and Hayek. These essays were later collected
in Individualism and Economic Order ([1948] 1980). Moreover, Robbins
published Economic Planning and the International Order in 1937.
Again, the economics profession and the intellectual community in
general did not view Hayek’s criticism as decisive in the dispute. The
socialist calculation debate of the 1930s took place on two levels—as a
It is probably important to note that Hayek believed that Keynes’s argument in The General Theory
would not have any lasting impact on the economics profession because it was based on an assumption of abundance rather than scarcity, an assumption that causes “confusion among economists
and even the wider public” ([1941] 2007, 341).
3

Hayek: An Overview of His Life and Work

23

technical question of economic theory and as an outgrowth of the progressive, social, cultural, and philosophical approach to modernity. As a
proposition of economic theory, following Mises’s original challenge in
1920, economists had developed in more detail the perfectly competitive
model and refined the general equilibrium concept central to neoclassical
economics. The early Austrian economists viewed themselves as squarely
in the scientific mainstream of neoclassical economics that was emerging
in the late nineteenth and early twentieth centuries. But by the 1930s, it
was becoming increasingly clear to Mises, and especially Hayek, that the
neoclassical tradition of price determination modeled as a simultaneous
system of equations within a perfectly competitive economy had diverged
significantly from the Austrian school’s understanding of the theory of
price formation through the “higgling and bargaining” in the entrepreneurial and competitive market economy. Competition in the model of
perfect competition was no longer seen as a rivalrous activity, but instead,
as an equilibrium state of affairs with a set of corresponding optimality
conditions. To the Austrian economists, in contrast, the competitive market process emerges out of the ongoing exchange relations and productive
activities that are engaged in by economic participants and the institutions within which these activities take place.4
The strategic move made by Oskar Lange and Abba Lerner was in
developing the model of market socialism analogous to the Walrasian
auctioneer and the tâtonnement process under general competitive equilibrium. Simply stated, market socialism would substitute a Central
In a letter to Fritz Machlup dated July 31, 1941, where Hayek is responding to a request by
Machlup to comment on the early drafts of Monopoly and Competition: “Let me only say I was
particularly pleased to see that your developments fit in so well with my methodological views and
that in many ways border on views on competition which I hoped myself some time to develop.
You more or less imply what I always stress, that competition is a process and not a state, and that
if it were ever ‘perfect’ in the strict sense it would at the same time disappear.” Also see Mises’s Notes
and Recollections ([1940] 2013), where he describes the Austrian approach as one focusing on the
real-world dynamics of price formation and market coordination in opposition to the equilibrium
theorizing of other branches of neoclassical economics. In a letter Mises wrote to Hayek in 1941
after attending the American Economic Association (AEA) meetings, he refers to “our” method of
“process analysis.” The modern Austrian school (e.g. Kirzner) mantra of methodological individualism, radical subjectivism, and market process analysis was evident from Menger to Mises and was
understood as common knowledge among the Viennese students of the tradition. Also see Erwin
Dekker, The Viennese Students of Civilization (2016) for a discussion of the core ideas in the Austrian
tradition, and especially the intellectual community in the 1920s and 1930s.
4

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P. J. Boettke

Planning Board and instruct managers of state-owned firms to follow an
optimality rule of P=MC and produce at that level that minimizes average costs as the guide to production. If the essence of either the capitalist
or socialist system was captured in the simultaneous equation system of
general competitive equilibrium, then the institutional background of
private property or collective ownership should not matter for the
achievement of optimality in allocation and production decisions. They
argued that such a response to Mises (and to Hayek) effectively answered
the challenge of economic calculation. Production could in fact be rationalized under socialism. Lange argued that his model had demonstrated
that socialist economies in theory could achieve the same optimality
results as those achieved in the market, and also that socialist planning
would outperform capitalist economies in practice since under socialism,
the problems of monopolistic exploitation and the instability of business
cycles would be eliminated. In addition, the injustice of the capitalist
system would be overcome because distribution would be determined
through socialist and democratic deliberation.
Alongside the technical economic theory arguments for market socialism, there was also a general cultural sense that modern science and technology had delivered mankind into such an advanced state of affairs that
more rational control over the economy was not only possible, but a
moral imperative. Had not modern science given man the ability to control and design society according to moral rules of his own choosing? The
planned society envisioned under socialism was supposed to be not only
as efficient as capitalism, but also morally superior with its promise of
social justice. Moreover, it was considered the wave of the future. Only a
reactionary, it was argued, could resist the inevitable tide of history. Not
only had Hayek appeared to lose the technical economic debate with
Keynes and the Keynesians concerning the causes of business cycles, but
his general philosophical perspective was increasingly seen as decidedly
out of step with the march of progress.
The experience of the 1930s and 1940s dramatically shaped Hayek’s
subsequent research program. Why was it that economists trained in the
early neoclassical tradition got so offtrack from the fundamental questions of the monetary economy, the capital structure, the price system,
and the competitive market process? The discerning reader of Hayek will

Hayek: An Overview of His Life and Work

25

see in his “Trend of Economic Thinking” (1933) the claim that neoclassical economics provides the proper analytics for studying the problems
of economic coordination in a systematic way, yet by the time that same
reader is confronting “Economics and Knowledge” (1937), let alone “The
Use of Knowledge in Society” (1945), she will see that Hayek is arguing
that the preoccupation among neoclassical theorists with the equilibrium
conditions is causing confusion rather than illumination.
In order to understand the events of the previous decade, Hayek undertook two important foundational scientific and scholarly moves in the
1940s. He began his “Abuse of Reason” project critical of the underlying
philosophical and methodological underpinnings of modern social science, and also took an “institutional turn” in his research to draw attention
to the institutional framework within which economic activity takes place.
Both new directions are interrelated, and deeply connected to his analytical perspective as a technical economist. As I have argued elsewhere, “the
most productive reading of Hayek is one which sees the common thread
in his work from psychology to economics to the philosophy of science to
political science to law and finally to philosophical anthropology and
social theory. The common thread is decisive epistemic turn to comparative
institutional analysis” (Boettke 1999, xv, emphasis in original).

The Road to Serfdom
In response to the debate first with Keynes and then with the market
socialists, Hayek continued to refine the argument for economic liberalism. The problems of socialism that he had observed in Nazi Germany
and that he saw beginning in Britain led him to write The Road to Serfdom
(1944). Hayek pointed out that if socialism required the replacement of
the market with a central plan, then an institution must be established
that would be responsible for formulating this plan. He referred to this
institution as the Central Planning Bureau. To implement the plan and
to control the flow of resources, the bureau would have to exercise broad
discretionary power in economic affairs. Yet, the Central Planning Bureau
in a socialist society would have no market prices to serve as guides and
no means of knowing which production possibilities were economically

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feasible. The absence of a pricing system, Hayek said, would prove to be
socialism’s fatal flaw. Mises’s essential criticisms were indeed correct and
had to be the starting point of any discussion of the economic problems
of socialism.
In The Road to Serfdom, Hayek argued that since the Central Planning
Bureau could not base decisions on economic criterion, those in positions of power would base decisions on some other basis. The economic
logic of the situation would give rise to the organizational logic of socialist planning. Thus, there was good reason to suspect that those who
would rise to the top in a socialistic regime would be those who had a
comparative advantage in exercising discretionary power and were willing
to make unpleasant decisions. And it was inevitable that these powerful
men would run the system to their own personal advantage. The economic problem with socialism led directly to the political problem of
socialism. The Road to Serfdom thus presented to advocates of socialism
the political realities inherent in granting a single institution these kinds
of powers over economic affairs.5
Totalitarianism is not a historical accident that emerges solely because
of a poor choice of leaders under a socialist regime. Totalitarianism,
Hayek shows, is the logical outcome of the institutional order of socialist
planning.
Why was it so hard for Hayek to penetrate not only the popular imagination with this message, but more importantly, the intellectual imagination of professional economists who he thought would be his ally in
As Keynes famously commented on Hayek’s The Road to Serfdom in a letter dated June 28, 1944,
“In my opinion it is a grand book. … Morally and philosophically I find myself in agreement with
virtually the whole of it: and not only in agreement with it, but in deeply moved agreement.”
Keynes goes further and states his disagreement, arguing for a “middle way” course, which Hayek
found to be inherently unstable: “I come finally to what is really my only serious criticism of the
book. You admit here and there that it is a question of knowing where to draw the line. You agree
that the line has to be drawn somewhere [between free-enterprise and planning], and that the logical extreme is not possible. But you give us no guidance whatever as to where to draw it. In a sense
this is shirking the practical issue. It is true that you and I would probably draw it in different
places. I should guess that according to my ideas you greatly underestimate the practicability of the
middle course. But as soon as you admit that the extreme is not possible, and that a line has to be
drawn, you are, on your own argument, done for since you are trying to persuade us that as soon
as one moves an inch in the planned direction you are necessarily launched on the slippery path
which will lead you in due course over the precipice” Reprinted in John Maynard Keynes, Activities
1940–1946. Shaping the Post-War World: Employment and Commodities (1980, 385).
5

Hayek: An Overview of His Life and Work

27

the battle of ideas against historicism and collectivism? To answer this
question, Hayek turned his attention away from technical economics
and concentrated on restating the principles of classical liberalism. Hayek
had pointed out the need for market prices as conveyors of dispersed
economic information. He showed that attempts to replace or control
the market lead to a knowledge problem. Hayek also described the totalitarian problem associated with placing discretionary power in the hands
of a few. These insights led him to examine the intellectual prejudices
that blind men from seeing the problems of government economic
planning.
During the 1940s, Hayek published a series of essays in professional
journals examining the dominant philosophical trends that prejudiced
intellectuals in a way that did not allow them to recognize the systemic
problems that economic planners would confront. These essays were later
collected and published as The Counter-Revolution of Science ([1952b]
1979). The Counter-Revolution provides a detailed intellectual history of
“rational constructivism” and the problems of “scientism” in the social
sciences. It is in this work that Hayek articulates his version of the Scottish
Enlightenment project of David Hume and Adam Smith of “using reason
to whittle down the claims of Reason.” Modern civilization was threatened by the abuse of reason, specifically by rational constructivists trying
to consciously design the modern world that had placed mankind in
chains of his own making.
In 1950, Hayek moved to the University of Chicago,6 where he taught
until 1962 in the Committee on Social Thought. While there, he wrote
The Constitution of Liberty (1960). This work represented Hayek’s first
systemic treatise on classical liberal political economy. Beginning with
the work that had resulted in The Road to Serfdom, Hayek had wanted to
call attention to the framework assumed in economic analysis and highThough beyond the scope of this book, the circumstances of this decision are worth noting here.
Hayek married his first wife, Helen Berta Maria von Fristch, on August 4, 1926, with whom he had
two children, Christine Maria Felicitas in 1929 and Laurence Joseph Heinrich in 1934 (Ebenstein
2003, 44). Hayek later recounted the circumstances of the marriage, his subsequent divorce, and
remarriage: “I married on the rebound when the girl [Helen Bitterlich] I had loved, a cousin, married somebody else. She is now my present wife. But for 25 years I was married to the girl whom I
married on the rebound, who was a very good wife to me, but I wasn’t happy in that marriage. She
refused to give me a divorce, and finally I enforced it” (Hayek [1978] 1983, 395).
6

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light its importance. Basic economics begins with the assumption of
clearly defined and strictly enforced private property rights which forms
the basis of mutually beneficial exchange between the parties. Private
property and freedom of contract embodied in the rule of law is the
assumed background. But it was so far in the background of analysis by
the 1930s and 1940