The Father of Free Markets Is Not Who You Think
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”
– John Maynard Keynes
I first picked up Friedrich Hayek’s The Road to Serfdom in college.
I still remember how instantly compelling I found his insights.
Economically, Hayek argued that Soviet-style central planning didn’t work.
Politically, he pointed out that collectivism – whether pursued by the “right” in Nazi Germany or the “left” in the Soviet Union – led inevitably to tyranny.
Morally, Hayek noted even well-intentioned social policies gave government bureaucracies too much power, ultimately oppressing their citizens’ freedom and liberty.
When I shared my enthusiasm for Hayek’s ideas in my seminars, the intense blowback from my professors perplexed me.
Naively, I was unaware that Hayek had become an icon of the political right…
And that both Margaret Thatcher and Ronald Reagan had often cited Hayek as inspiration for their policies.
The irony is that Hayek’s intellectual stock has skyrocketed since then.
Following the debates surrounding the financial bailouts of 2008, The Road to Serfdom became the No. 1 best-seller on Amazon in June 2010.
Hayek’s ideas are as relevant today as they have ever been.
It’s ironic that an Austrian-born economist’s focus on limited government, free markets and liberty reflects so well the basic instincts of many Americans today.
Who Was Friedrich Hayek?
Hayek was born into an academic family in the Austro-Hungarian Empire in 1899.
He earned his academic stripes by completing two doctorates at the University of Vienna in the 1920s.
In 1931, Hayek was plucked from the bush leagues of Austrian academia to fill a prestigious chair at the London School of Economics.
Hayek promptly positioned himself as a rival to the English economist John Maynard Keynes at Cambridge.
Hayek’s clash with Keynes focused on the role of the government in managing the Great Depression.
With the publication of Keynes’ The General Theory of Employment, Interest and Money in 1936, Hayek lost the debate.
I believe Hayek’s loss was due as much to style as to substance.
Keynes was flamboyant, quotable and brilliant. He was also the ultimate insider.
In contrast, Hayek was cerebral, rambling and nerdy. He was an outsider with a strange accent.
Hayek’s Major Contributions
Hayek received the Nobel Prize in economics in 1974 for his technical work on the credit-driven boom-bust cycles of economies.
For many economists, winning a Nobel Prize represents the pinnacle of achievement.
Not so for Hayek.
Hayek was exceptionally learned. He made significant contributions not only to economics but to political philosophy and psychology as well.
1. Hayek the Economist
For much of the 1930s, the global economy was mired in the Great Depression.
Keynes argued that increased government spending was the key to getting economies back on track. Hayek countered that a government spending money for its own sake was merely wasteful. Moreover, throwing fuel on the fire by printing money just postponed the painful adjustments needed to heal the economy.
Hayek’s solution? Let things work themselves out rather than print money to paper over what ails the economy.
You see echoes of the Keynes-Hayek debate in today’s financial press every day.
2. Hayek the Political Philosopher
Hayek wrote The Road to Serfdom as a warning to postwar Western governments about the perils of collectivism.
In the eyes of academics, however, the popularity of The Road to Serfdom sealed Hayek’s fate as a non-economist.
The University of Chicago was a stronghold of free market economics. Yet even it refused to give Hayek a post in economics in 1950, exiling him instead to its newly created “Committee on Social Thought.”
Hayek fleshed out his thoughts in The Constitution of Liberty. In this 20th-century restatement of the principles of liberal constitutionalism, Hayek argued that liberty was the key to wealth.
3. Hayek the Psychologist
Throughout his life, Hayek emphasized the limits of human knowledge.
None of us is very smart alone. My knowledge is minuscule – as is yours.
All information is dispersed across the economy. That’s why business owners will always know better what’s right for them than any government bureaucrat armed with a plan.
In Hayek’s mind, concrete street smarts trounced abstract book smarts any day.
Why Hayek Matters
The mainstream economics profession has done its best to marginalize Hayek.
My college economics textbook failed to even include Hayek’s name in the index.
Yet Hayek’s ideas play a crucial role in today’s world.
That’s because Hayek acts as a counterweight to the almost uniformly socialist tendencies among academics.
And Hayek’s ideas have impacted the world far beyond the ivory tower.
So let me leave you with my favorite Hayek anecdote.
In 1975, an advisor tried to convince future prime minister Margaret Thatcher that the Conservative Party should avoid the extremes of left and right.
Thatcher interrupted him, reached into her briefcase and took out a copy of The Constitution of Liberty and said, “This is what we believe!” and slammed Hayek’s book down on the table, ending the debate.
His ideas thus inspired the United Kingdom’s abandonment of its socialism of the ’70s.
Hayek’s greatest legacy is the impact of his ideas across the world, from Chicago to London and beyond.
I’ll be exploring more of his ideas on liberty and wealth in the weeks to come.