Fellow travellers: Hayek teaching at the London School of Economics in the late 1940s. Image: Paul Popper/Popperfoto via Getty Images

The remarkable influence of Friedrich Hayek

Modern free-market ideology owes much to the thought of an Austrian economist neglected for the first half of his life
November 3, 2022
Hayek: A Life, 1899–1950
Bruce Caldwell & Hansjörg Klausinger (RRP: £35)
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Everyone now agrees that Friedrich Hayek was an unusually influential intellectual. His writings are credited with inspiring a powerful pro-market revival in the late 20th century. Margaret Thatcher, Ronald Reagan and many other political leaders all declared that they had imbibed Hayek’s ideas at a formative stage. Thatcher recalled reading Hayek’s The Road to Serfdom while an 18-year-old undergraduate at Oxford. Fast forward half a century and another future prime minister, Liz Truss, is said to have been a member of the Oxford University Hayek Society, presumably while still a Liberal Democrat. Truss’s tax-cutting economic policies were incubated by think tanks who regard themselves as the keepers of the Hayekian flame. Yet this new biography by Bruce Caldwell and Hansjörg Klausinger of the first half of Hayek’s life tells a different story. Here we meet a Hayek who was widely believed to be intellectually defeated and marginal to mainstream politics. As such, it offers an opportunity to look again at Hayek as a historical rather than mythical figure.

The book has two strands: Hayek’s life, which in this period took him from Vienna to London to Chicago; and Hayek’s ideas, which moved from technical economics to sweeping political works. This is a long book—nearly 900 pages—but there are dramatic twists in both sides of the narrative that make for a propulsive read. The authors are expert guides to Hayek’s intellectual evolution. Both Caldwell and Klausinger have published many distinguished works on Hayek and the Austrian economic tradition in which he was raised. More unexpectedly, they are also perceptive guides to Hayek’s private life. The climactic personal drama of the book is Hayek’s divorce and remarriage, which precipitated his move to the United States and political proximity to the nascent American libertarian movement. In this, as in other respects, the personal and the political were intertwined in Hayek’s life. There is therefore enormous benefit to a book that brings both together. In short, Caldwell and Klausinger have triumphantly succeeded in their stated aim of writing “the definitive, full biography of FA Hayek”—for the years 1899 to 1950, at any rate. A second volume is promised to cover the period up to his death in 1992.

Although he stopped using the title in later life, Hayek was born with the family name “von Hayek”. Any aristocratic connotations are misleading, however, as members of the “lower nobility” of imperial Austria, including the Hayeks, were chiefly professionals of various sorts. Hayek’s father was a doctor, his mother the daughter of a university professor. Hayek grew up as part of the Austrian bourgeoisie, served in the First World War in an artillery regiment and returned to Vienna in 1918 to find that the political assumptions of his youth had been overturned by the turmoil of total war. The collapse of the Austro-Hungarian monarchy had left Hayek a citizen of an uncertain new Austrian republic.

Hayek attended the University of Vienna—initially studying law, along with philosophy and psychology—before gravitating to economics. He settled on the subject for free-market reasons: he believed he was likely to get a better job. As it happened, though, Vienna was the birthplace of the famous “Austrian School” of economics. A tradition that spanned several generations of scholars by the time Hayek entered university, the Austrian School was known for its economic liberalism and austere commitment to economic theory derived from deductive reasoning rather than empirical study. Hayek was deeply influenced by this approach and was mentored by one of the rising names in Austrian economics, Ludwig von Mises, an implacable and irascible opponent of socialism in all its guises.

Hayek first approached Mises with a letter of introduction from another professor that described Hayek as a “promising economist”. Mises responded: “Promising economist? I’ve never seen you at my lectures.” Also relevant was that Mises was Jewish in a society riven by antisemitism. Caldwell and Klausinger document the gap that opened between Hayek and his immediate family as far-right politics became more influential in Austria. Hayek’s father was involved in an antisemitic medical organisation; his mother supported the Anschluss; one of his brothers went on to join the Nazi party. Hayek’s commitment to liberalism put him at odds with his closest relatives.

Hayek moved to London to take up a post at the London School of Economics in 1931. There he became a close friend of Lionel Robbins, a dynamic economist well known for his espousal of market liberalism. Hayek arrived at the LSE before either Austria or Germany turned fascist, so the move seems to have been motivated more by a lack of academic opportunities in Austria rather than any apprehension about the state’s political trajectory.

Hayek was by now a married man. He proposed to Helena (Hella) von Fritsch, after his first love, Helene (Lenerl) Bitterlich, married someone else. (Hayek was too diffident to express his feelings towards Lenerl.) Apparently there was a strong physical resemblance between the two women.

Intellectually isolated: Friedrich Hayek  playing chess with himself in Cambridge  during the Second World War. Image courtesy of the estate of FA Hayek Intellectually isolated: Friedrich Hayek playing chess with himself in Cambridge during the Second World War. Image courtesy of the estate of FA Hayek

Intellectually isolated: Friedrich Hayek playing chess with himself in Cambridge during the Second World War. Image courtesy of the estate of FA Hayek

Caldwell and Klausinger show how important Britain was to Hayek’s intellectual development. The LSE in the 1930s was a remarkable institution populated by outstanding scholars, many on the left. In the LSE senior common room, Hayek rubbed shoulders with many characters that he disagreed with politically, such as RH Tawney, Harold Laski, Evan Durbin and the School’s director, William Beveridge, later the author of the 1942 report that laid the groundwork for the welfare state. This was an aspect of British social life that Hayek admired: the combination of rigorous academic debate in the classroom with more lighthearted discussions afterwards over dinner.

Hayek’s exposure to the British intelligentsia of the 1930s changed the emphasis of his research. His early work had focused on the business cycle, pushing forward the Austrian argument that booms and slumps were caused by banks creating too much credit. A recession was therefore a painful but necessary reassertion of market forces. Hayek was fatalistic about how much government could do to counteract downturns, a position at odds with the economic activism offered by John Maynard Keynes. Hayek and Keynes duly had some acerbic exchanges, with Keynes describing Hayek’s 1931 book Prices and Production as “one of the most frightful muddles I have ever read, with scarcely a sound proposition in it.”

Although Hayek in his turn criticised Keynes in the 1930s, Caldwell and Klausinger show that, by the time the LSE moved to Cambridge to flee the Blitz, Hayek had established a cordial, personal relationship with Keynes, who was at King’s College in the city. At this time he became more concerned with the rising popularity of socialism in Britain. Whereas Keynes sought to keep a broadly market economy intact by expanding state spending, socialists sought to introduce public ownership of industry and use the state rather than markets to allocate resources. Hayek’s celebrated argument, developed from the late 1930s until the publication of The Road to Serfdom in 1944, was that these policies were precisely what had led to the totalitarian regimes of Nazi Germany and the Soviet Union (although the wartime alliance meant that The Road to Serfdom scrupulously focused only on the Nazi regime).

As capitalist economies reeled from the impact of depression, Hayek seemed to be prosecuting a losing case

Initially, Hayek sought to show an English-language audience that continental European debates had already made a lot of progress in critiquing the economics of socialism. Mises, for example, had argued that in the absence of market price signals there would be no basis for rational economic calculation in a socialist economy: people would simply not know how to allocate resources efficiently. Socialist economists countered that a central planning board would be in a better position to set prices because it would be able to comprehend the requirements of the whole economy. Hayek’s rejoinder was that economic knowledge could not be aggregated in that fashion because it was only accessible locally, to individuals acting on their own preferences. Markets were essential, argued Hayek, because they coordinated that dispersed knowledge.

This was later regarded as an important idea. At the time, however, as capitalist economies reeled from the impact of depression and Soviet central planning rose in prestige, Hayek seemed to be prosecuting a losing case. The discipline of economics, populated by a new generation of socialists and Keynesians, was increasingly unfriendly terrain for Hayek. In response, he unexpectedly pivoted to intellectual history. Hayek sought to demonstrate that totalitarianism had been produced by mistaken philosophies rather than by class conflict or economic depression. This was a bold approach at a time when Marxist materialism was becoming the fashionable model of social explanation. Hayek focused on the emergence of the 19th-century idea that the social sciences could use the same methods and achieve the same predictive accuracy as the natural sciences. This “scientism”, developed by French positivists and socialists, was in Hayek’s view the origin of the disastrous idea that experts possessed the necessary technical knowledge to plan the economy.

Precisely why this idea was so disastrous was what Hayek then set out in The Road to Serfdom, a frequently misunderstood book that Caldwell and Klausinger provide a careful account of. It did not make any strong claims about social welfare provision or even Keynes-style reflationary spending. Instead, it argued that attempts to plan an economy by replacing market mechanisms with government decisions will inevitably come into conflict with value pluralism. Hayek agreed that planning could work during the Second World War, since there was widespread agreement on the overriding goal of victory. But in peacetime, when citizens have diverse preferences about what to produce and consume, an interventionist state will find itself inexorably drawn into favouring some individual preferences over others—and enforcing its plan coercively. The subversive twist to Hayek’s argument was that he claimed to have witnessed this before, in Austria and Germany, as well-meaning socialists inadvertently paved the way for fascism by introducing economic planning. His British socialist friends were quite wrong, Hayek thought, to attribute the rise of the Nazis to the failures of interwar capitalism.

Apart from anything else, this was the book of someone who felt left out. Unlike nearly all his leading economist colleagues, Hayek’s Austrian background meant that he was not required for wartime service: The Road to Serfdom was his contribution to the war effort. It had a huge impact, particularly in the US where it was condensed by Reader’s Digest and eagerly championed by American libertarians. Hayek capitalised on his new fame by founding the Mont Pèlerin Society in 1947. Believing that socialism had flourished because intellectuals had turned the political debate against markets, Hayek’s logical next step was to bring together disillusioned economic liberals from across the world to reverse that ideological trend.

Meanwhile his personal life had imploded. Hayek had remained in contact with his first love Lenerl. After the war he sought a divorce from his wife. Hella refused to grant it and an acrimonious breakup of the family (they had two children) ensued. The only way Hayek was able to access a divorce was by taking a temporary position at the University of Arkansas, which enabled him to use the state’s laxer marriage laws. Although this story has been told before, Caldwell and Klausinger draw on new sources to give an unsparing account that is unflattering to Hayek, even allowing for the fact that the restrictive British divorce laws at that time were a recipe for human misery. Lionel Robbins cut off all contact with Hayek, believing him to have treated Hella abominably.

Hayek married Lenerl in 1950 and, since they faced an arctic welcome in London circles, they moved to Chicago. His salary at Chicago University was paid not by the university but by the Volker Fund, an American charitable foundation supporting libertarian causes. The next chapter of Hayek’s life, in which his ideas became hugely influential in the US and Britain, had begun. That will be the subject of the second volume. If it is as good as this one, we are in for a treat.