Business cycle Ludwig von Mises had earlier applied the concept of
marginal utility to the value of money in his
Theory of Money and Credit (1912) in which he also proposed an explanation for "industrial fluctuations" based on the ideas of the old
British Currency School and of Swedish economist
Knut Wicksell. Hayek used this body of work as a starting point for his own interpretation of the business cycle, elaborating what later became known as the
Austrian theory of the business cycle. Hayek spelled out the Austrian approach in more detail in his book, published in 1929, an English translation of which appeared in 1933 as
Monetary Theory and the Trade Cycle. There, Hayek argued for a monetary approach to the origins of the cycle. In his
Prices and Production (1931), Hayek argued that the business cycle resulted from the
central bank's inflationary
credit expansion and its transmission over time, leading to a capital misallocation caused by the artificially low interest rates. Hayek argued that "the past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process". Hayek's analysis was based on
Eugen Böhm von Bawerk's concept of the "average period of production" and on the effects that monetary policy could have upon it. In accordance with the reasoning later outlined in his essay "The Use of Knowledge in Society" (1945), Hayek argued that a monopolistic governmental agency like a central bank can neither possess the relevant information which should govern supply of money, nor have the ability to use it correctly. In 1929, Lionel Robbins assumed the helm of the
London School of Economics (LSE). Also in 1931, Hayek crititicised
John Maynard Keynes's
Treatise on Money (1930) in his "Reflections on the pure theory of Mr. J.M. Keynes" and published his lectures at the LSE in book form as
Prices and Production. For Keynes, unemployment and idle resources are caused by a lack of effective demand, but for Hayek they stem from a previous unsustainable episode of easy money and artificially low interest rates. Others who responded negatively to Hayek's work on the business cycle included
John Hicks,
Frank Knight and
Gunnar Myrdal, who, later on, would share the
Sveriges-Riksbank Prize in Economics with him. Kaldor later wrote that Hayek's
Prices and Production had produced "a remarkable crop of critics" and that the total number of pages in British and American journals dedicated to the resulting debate "could rarely have been equalled in the economic controversies of the past". Lionel Robbins himself, who had embraced the Austrian theory of the business cycle in
The Great Depression (1934), later regretted having written the book and accepted many of the Keynesian counter-arguments. Hayek never produced the book-length treatment of "the dynamics of capital" that he had promised in the
Pure Theory of Capital. At the
University of Chicago, Hayek was not part of the economics department and did not influence the rebirth of neoclassical theory that took place there (see
Chicago school of economics). Milton Friedman also commented on some of his writings, saying "I think
Prices and Production is a very flawed book. I think his [
Pure Theory of Capital] is unreadable. On the other hand,
The Road to Serfdom is one of the great books of our time". In 1935, Hayek published
Collectivist Economic Planning, a collection of essays from an earlier debate that had been initiated by Mises. Hayek included Mises's essay in which Mises argued that rational planning was impossible under socialism. Socialist
Oskar Lange responded by invoking
general equilibrium theory, which they argued disproved Mises's thesis. They noted that the difference between a planned and a free market system lay in who was responsible for solving the equations. They argued that if some of the prices chosen by socialist managers were wrong, gluts or shortages would appear, signalling them to adjust the prices up or down, just as in a free market. Through such a trial and error, a socialist economy could mimic the efficiency of a free market system while avoiding its many problems. Hayek challenged this vision in a series of contributions. In "Economics and Knowledge" (1937), he pointed out that the standard equilibrium theory assumed that all agents have full and correct information, and how, in his mind, in the real world different individuals have different bits of knowledge and furthermore some of what they believe is wrong. In "
The Use of Knowledge in Society" (1945), Hayek argued that the price mechanism serves to share and synchronise local and personal knowledge, allowing society's members to achieve diverse and complicated ends through a principle of spontaneous
self-organization. He contrasted the use of the price mechanism with central planning, arguing that the former allows for more rapid adaptation to changes in particular circumstances of time and place. Thus, Hayek set the stage for
Oliver Williamson's later contrast between markets and hierarchies as alternative co-ordination mechanisms for economic transactions. He used the term
catallaxy to describe a "self-organizing system of voluntary co-operation". Hayek's research into this argument was specifically cited by the Nobel Committee in its press release awarding Hayek the Nobel prize.
Philosophy of science During World War II, Hayek began the Abuse of Reason project. His goal was to show how a number of then-popular doctrines and beliefs had a common origin in some fundamental misconceptions about the social science. Ideas were developed in
The Counter-Revolution of Science in 1952 and in some of Hayek's later essays in the philosophy of science such as "Degrees of Explanation" (1955) and "The Theory of Complex Phenomena" (1964). In
Counter-Revolution, for example, Hayek observed that the hard sciences attempt to remove the "human factor" to obtain objective and strictly controlled results: Meanwhile, the soft sciences are attempting to measure human action itself: He notes that these are mutually exclusive and that
social sciences should not attempt to impose
positivist methodology, nor to claim objective or definite results:
Psychology Hayek's first academic essay was a psychological work titled "Contributions to the Theory of the Development of Consciousness" (
Beiträge zur Theorie der Entwicklung des Bewußtseins) In
The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology (1952), Hayek independently developed a "
Hebbian learning" model of learning and memory—an idea he first conceived in 1920 prior to his study of economics. Hayek's expansion of the "Hebbian synapse" construction into a global brain theory received attention in neuroscience,
cognitive science, computer science and
evolutionary psychology by scientists such as
Gerald Edelman,
Vittorio Guidano and
Joaquin Fuster.
The Sensory Order can be viewed as a development of his attack on scientism. Hayek posited two orders, namely the sensory order that we experience and the natural order that natural science revealed. Hayek thought that the sensory order actually is a product of the brain. He described the brain as a very complex yet self-ordering
hierarchical classification system, a huge network of connections. Because of the nature of the classifier system, richness of our sensory experience can exist. Hayek's description posed problems to
behaviorism, whose proponents took the sensory order as fundamental. Hayek argued that closer economic ties without closer political ties would lead to more problems because interest groups in nation-states would best be able to counter the internationalisation of markets that comes with closer economic ties by appealing to nationalism. Much of his time in the pro-federalist and pan-European groups was spent arguing with pro-federal and pan-European democratic socialists over the proper extent of a world federal government. Hayek argued that such a world government should do little more than act as a negative check on national sovereignties and serve as a focal point for collective defense. As the Cold War heated up, Hayek grew more hawkish and he pushed his federal proposals onto the backburner in favour of more traditional public policy proposals that acknowledged and respected the sovereignty of nation-states. Yet Hayek never disavowed his famous call for "the abrogation of national sovereignties" and his lifetime of work in the area of international relations continues to attract attention from scholars searching for federalist answers to contemporary problems in international relations.
Social and political philosophy Two traditions in the theory of liberty In the latter half of his career, Hayek made a number of contributions to
social and
political philosophy which he based on his views on the limits of human knowledge and the idea of spontaneous order in social institutions. He argues in favour of a society organised around a market order in which the apparatus of state is employed almost (though not entirely) exclusively to enforce the legal order (consisting of abstract rules and not particular commands) necessary for a market of free individuals to function. These ideas were informed by a moral philosophy derived from
epistemological concerns regarding the inherent limits of human knowledge. Hayek argued that his ideal individualistic and free-market polity would be self-regulating to such a degree that it would be "a society which does not depend for its functioning on our finding good men for running it". Hayek discusses the contrasting traditions of liberty—British and French—in the theory of freedom. The British tradition, influenced by thinkers like David Hume and Adam Smith, emphasises the organic growth of institutions and the spontaneous evolution of society. It recognises that political order arises from the cumulative experience and success of individuals, rather than from deliberate design. In contrast, the French tradition, rooted in Cartesian rationalism, seeks to construct a utopia based on a belief in the unlimited powers of human reason. The French tradition, that Hayek called constructivist rationalism, gained influence over time, partly due to its assumptions about human ambition and pride. However, according to Hayek, the British tradition, with its emphasis on the gradual development of civilization and the role of individual freedom, provides a more valid theory of liberty.
Spontaneous order Hayek viewed the
free price system not as a conscious invention (that which is intentionally designed by man), but as
spontaneous order or what Scottish philosopher
Adam Ferguson referred to as "the result of human action but not of human design". For instance, Hayek put the price mechanism on the same level as language, which he developed in his price signal theory. Hayek attributed the birth of civilisation to
private property in his book
The Fatal Conceit (1988). He explained that
price signals are the only means of enabling each economic decision maker to communicate
tacit knowledge or
dispersed knowledge to each other to solve the economic calculation problem. Hayek's concept of the market as a spontaneous order has been applied to ecosystems to defend a broadly non-interventionist policy. Like the market, ecosystems contain complex networks of information, involve an ongoing dynamic process, contain orders within orders and the entire system operates without being directed by a conscious mind. On this analysis, species takes the place of price as a visible element of the system formed by a complex set of largely unknowable elements. Human ignorance about the countless interactions between the organisms of an ecosystem limits our ability to manipulate nature. Hayek's price signal concept is in relation to how consumers are often unaware of specific events that change market, yet change their decisions, simply because the price goes up. Thus pricing communicates information.
Criticism of collectivism Hayek was one of the leading academic critics of collectivism in the 20th century. In
The Road to Serfdom, Hayek wrote: Hayek posited that a central planning authority would have to be endowed with powers that would impact and ultimately control social life because the knowledge required for centrally planning an economy is inherently decentralised, and would need to be brought under control. Hayek also wrote that the state can play a role in the economy, specifically in creating a safety net, saying: There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision. Hayek's argument has been criticized as a
slippery slope argument and therefore fallacious. Peter Boettke has argued that this is a fundamental misunderstanding of the book and Hayek's point is about what central planning directly entails, not what it is likely to lead to. "
The Denationalisation of Money" is one of his literary works, in which he advocated the establishment of competitions in issuing moneys.
Social safety nets With regard to a
social safety net, Hayek advocated "some provision for those threatened by the extremes of indigence or starvation due to circumstances beyond their control" and argued that the "necessity of some such arrangement in an industrial society is unquestioned—be it only in the interest of those who require protection against acts of desperation on the part of the needy". Summarizing Hayek's views on the topic, journalist
Nicholas Wapshott has argued that "[Hayek] advocated mandatory universal health care and unemployment insurance, enforced, if not directly provided, by the state".
Critical theorist Bernard Harcourt has argued further that "Hayek was adamant about this". In 1944, Hayek wrote in
The Road to Serfdom: In 1973, Hayek reiterated in
Law, Legislation and Liberty: There is no reason why in a free society government should not assure to all, protection against severe deprivation in the form of an
assured minimum income, or a
floor below which nobody need to descend. To enter into such an insurance against extreme misfortune may well be in the interest of all; or it may be felt to be a clear moral duty of all to assist, within the organised community, those who cannot help themselves. So long as such a uniform minimum income is provided outside the market to all those who, for any reason, are unable to earn in the market an adequate maintenance, this need not lead to a restriction of freedom, or conflict with the
Rule of law. Political theorist Adam James Tebble has argued that Hayek's concession of a social minimum provided by the state introduces a conceptual tension with his epistemically derived commitment to
private property rights,
free markets, and
spontaneous order. Hayek's views on social welfare policies have also been the subject of criticism. Critics contend that his opposition to government intervention in the economy fails to recognize the need for social safety nets and other forms of support for vulnerable populations. Furthermore, it has been argued that his views on welfare policy contradict his views on social justice.
Criticism of "social justice" Although Hayek believed in a society governed by laws, he disapproved of the notion of "
social justice". He compared the market to a game in which "there is no point in calling the outcome just or unjust" and argued that "social justice is an empty phrase with no determinable content". Likewise, "the results of the individual's efforts are necessarily unpredictable, and the question as to whether the resulting distribution of incomes is just has no meaning". He generally regarded government redistribution of income or capital as an unacceptable intrusion upon individual freedom, saying that "the principle of
distributive justice, once introduced, would not be fulfilled until the whole of society was organized in accordance with it. This would produce a kind of society which in all essential respects would be the opposite of a free society".
Chandran Kukathas argues that Hayek's defence of liberalism is unsuccessful because it rests on presuppositions that are incompatible. The unresolved dilemma of his political philosophy is how to mount a systematic defence of liberalism if one emphasizes the limited capacity of reason.
Norman P. Barry similarly notes that the "
critical rationalism" in Hayek's writings appears incompatible with "a certain kind of fatalism, that we must wait for evolution to pronounce its verdict".
Milton Friedman and
Anna Schwartz argue that the element of paradox exists in the views of Hayek. Noting Hayek's vigorous defense of "invisible hand" evolution that Hayek claimed created better economic institutions than could be created by rational design, Friedman pointed out the irony that Hayek was then proposing to replace the monetary system thus created with a deliberate construct of his own design.
John N. Gray summarized this view as "his scheme for an
ultra-liberal constitution was a prototypical version of the philosophy he had attacked".
Bruce Caldwell wrote that "[i]f one is judging his work against the standard of whether he provided a finished political philosophy, Hayek clearly did not succeed", although he thinks that "economists may find Hayek's political writings useful".
Dictatorship and totalitarianism Hayek sent
António de Oliveira Salazar a copy of
The Constitution of Liberty (1960) in 1962. Hayek hoped that his book—this "preliminary sketch of new constitutional principles"—"may assist" Salazar "in his endeavour to design a constitution which is proof against the abuses of democracy". Hayek visited Chile in the 1970s and 1980s during the
Government Junta of general
Augusto Pinochet and accepted being appointed Honorary Chairman of the
Centro de Estudios Públicos, the think tank formed by the economists who transformed Chile into a free market economy. In a letter to the
London Times, he defended the Pinochet regime and said that he had "not been able to find a single person even in much maligned Chile who did not agree that personal freedom was much greater under Pinochet than it had been under
Allende". Hayek admitted that "it is not very likely that this will succeed, even if, at a particular point in time, it may be the only hope there is", but he explained that "[i]t is not certain hope, because it will always depend on the goodwill of an individual, and there are very few individuals one can trust. But if it is the sole opportunity which exists at a particular moment it may be the best solution despite this. And only if and when the dictatorial government is visibly directing its steps towards limited democracy". For Hayek, the distinction between authoritarianism and totalitarianism has much importance and he was at pains to emphasise his opposition to totalitarianism, noting that the concept of transitional dictatorship which he defended was characterised by authoritarianism, not totalitarianism. For example, when Hayek visited Venezuela in May 1981, he was asked to comment on the prevalence of totalitarian regimes in Latin America. In reply, Hayek warned against confusing "totalitarianism with authoritarianism" and said that he was unaware of "any totalitarian governments in Latin America. The only one was Chile under Allende". For Hayek, the word "totalitarian" signifies something very specific, namely the intention to "organize the whole of society" to attain a "definite social goal" which is stark in contrast to "liberalism and individualism". He claimed that democracy can also be repressive and totalitarian; in
The Constitution of Liberty he often refers to
Jacob Talmon's concept of
totalitarian democracy.
Immigration, nationalism and race Hayek was skeptical about international immigration and supported
Thatcher's anti-immigration policies. In
Law, Legislation and Liberty he elaborated: Freedom of migration is one of the widely accepted and wholly admirable principles of liberalism. But should this generally give the stranger a right to settle down in a community in which he is not welcome? Has he a claim to be given a job or be sold a house if no resident is willing to do so? He clearly should be entitled to accept a job or buy a house if offered to him. But have the individual inhabitants a duty to offer either to him? Or ought it to be an offence if they voluntarily agree not to do so? Swiss and Tyrolese villages have a way of keeping out strangers which neither infringe nor rely on any law. Is this anti-liberal or morally justified? For established old communities I have no certain answers to these questions. He was mainly preoccupied with practical problems concerning immigration: There exist, of course, other reasons why such restrictions appear unavoidable so long as certain differences in national or ethnic traditions (especially differences in the rate of propagation) exist-which in turn are not likely to disappear so long as restrictions on migration continue. We must face the fact that we here encounter a limit to the universal application of those liberal principles of policy which the existing facts of the present world make unavoidable. He was not sympathetic to
nationalist ideas and was afraid that mass immigration might revive nationalist sentiment among domestic population and ruin the postwar progress that was made among Western nations. He additionally explained: However far modern man accepts in principle the ideal that the same rules should apply to all men, in fact he does concede it only to those whom he regards as similar to himself, and only slowly learns to extend the range of those he does accept as his likes. There is little legislation can do to speed up this process and much it may do to reverse it by re-awakening sentiments that are already on the wane. and on another occasion he ridiculed the decision to award the
Nobel Peace Prize to
Martin Luther King Jr. He also made negative comments about awarding the Prize to
Ralph Bunche,
Albert Luthuli, and his LSE colleague
W. Arthur Lewis who he described as an "unusually able West Indian negro". While Hayek gave somewhat ambiguous comments on the injustices of Apartheid and proper role of the state, some of his Mont Pelerin colleagues, such as
John Davenport and
Wilhelm Röpke, were more ardent supporters of South African government and criticized Hayek for being too soft on the subject.
Inequality and class In
The Constitution of Liberty, Hayek wrote: Yet is it really so obvious that the tennis or golf professional is a more useful member of society than the wealthy amateurs who devoted their time to perfecting these games? Or that the paid curator of a public museum is more useful than a private collector? Before the reader answers these questions too hastily, I would ask him to consider whether there would ever have been golf or tennis professionals or museum curators if wealthy amateurs had not preceded them. Can we not hope that other new interests will still arise from the playful explorations of those who can indulge in them for the short span of a human life? It is only natural that the development of the art of living and of the non-materialistic values should have profited most from the activities of those who had no material worries. Hayek was against high
taxes on inheritance, believing that it is natural function of the family to transmit standards, traditions and material goods. Without transmission of property, parents might try to secure the future of their children by
placing them in prestigious and high-paying positions, as was customary in socialist countries, which creates even worse injustices. He was also strongly against
progressive taxation, noting that in most countries additional taxes paid by the rich amount to insignificantly small amount of total tax revenue and that the only major result of the policy is "gratification of the envy of the less-well-off". He also claimed that it is contrary to the idea of equality under the law and against democratic principle that the majority should not impose discriminatory rules against the minority. == Influence and recognition ==