Russ Roberts

Caldwell on Hayek

EconTalk Episode with Bruce Caldwell
Hosted by Russ Roberts
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Bruce Caldwell of Duke University and the General Editor of the Collected Works of F. A. Hayek, talks with EconTalk host Russ Roberts about Hayek, his life, his ideas, his books, and articles. The conversation covers Hayek's intellectual encounters with Keynes, Hayek's role in the socialist calculation debate, Hayek's key ideas, and a discussion of which of Hayek's works are most accessible.

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0:36Intro. [Recording date: January 4, 2011.] F. A. Hayek, having a very good run; rap video by John Papola and Russ on Hayek's ideas, over 2 million hits on youtube. Love song to Hayek by Dorian Electra, 44,000 hits on youtube. Hayek's Road to Serfdom hit number 1 on Amazon thanks to an endorsement discussion by Glenn Beck. He's very relevant and we're going to talk about why. Plan is to talk about his life, ideas, and his work. Give us a brief sketch of his life. Hayek contemporaneous with the 20th century; born in 1899, died in 1992; was interested in him to study because he was there during a period when economics really changed. He participated in and also opposed some of those changes. Good figure to study for economics as well as himself. Born in Vienna, served during WWI, following the war went to the U. of Vienna. Student of Friedrich von Wieser, got his degrees in the early 1920s. Had a number of distinguished classmates: Fritz Machlup and Gottfried Haberler, Oskar Morgenstern, one of the founders of game theory was also a fellow student. One of his professors--a little unclear from the record--Ludwig von Mises; worked with him in a temporary office. After getting to know Mises a little bit, when he finished his second degree in 1923 he went off to the United States for about 15 months. Most famous economist he met there was Wesley Clair Mitchell, one of the fathers of American institutionalism, someone just about to become the President of the American Economic Association (AEA), and Hayek sat in on his class on Types of Economic Theory. Mitchell was a formative figure in the National Bureau of Economic Research (NBER), and their collection of data. You call him an institutionalist and that covers a lot of ground, but what he's still considered by many to be important to understand was his emphasis on the importance of data, which of course Hayek is going to spar with him a little bit over time. One of the interesting aspects of this whole story is that Hayek grew up in the Austrian tradition, which had as one of its opponents at the end of the century the German Historical School--which had an old and younger German historical school. The younger one was headed up by Gustav Schmoller, who said: What we need to do is gather statistics, and it's premature to try to have a theoretical understanding of social phenomena until we've gathered a sufficient amount of statistics and then we can start at some point in the future theorizing. So this was a school the Austrians had sparred with, and after WWI was over the German Historical School for a variety of reasons ended up being fairly discredited; not able to be helpful during WWI. If you say we just have to gather statistics but we can't really put them together in a meaningful way and contribute to the war effort, this wasn't viewed as helpful. Not anticipated or written anything about things like the hyperinflation. Hayek gets to the United States and hears Wesley Clair Mitchell, and he's saying what we need to do is collect statistics--the same sorts of things that Schmoller had been saying. Although Mitchell was much more sophisticated about the way he intended to use the statistics to help experts manage an economy. Not a socialist by any means, but he was somebody who thought that science could be used to restructure society in better ways and that it was the responsibility of people like him and those helping the NBER to do so. So, Hayek was in the bizarre position of sitting in on this guy's class and hearing him as kind of the avant garde American economist spouting ideas that he in his own experience had felt had been discredited. Russ: I took two classes on macroeconomics from Robert Lucas, and that's my only understanding of Mitchell until I read Hayek's challenge; and I learned from Lucas that Mitchell was a very important figure because he understood that you have to have stylized facts--you can't have--all the data you need but you have to know what's to be explained. Ironically, Lucas learned Mitchell and also from Hayek. Data without theory is meaningless, sort of like information without a filter. If you search the web without Google, you are going to spend a lot of time searching. What makes Google useful is it filters. Need some kind of theory. The German school didn't think you should have too much theory. That's going to make it a lot harder. You've captured well the difference between the two approaches. From Hayek's Austrian viewpoint, he was going to see some of the similarities between the two approaches. The German Historical School were basically conservative imperialists, and that was something that Mitchell was not at all. So there were lots of other dimensions where they differed, as well. So, he comes to the United States briefly, then back to Europe. Sat in on Mises's seminar; got married, is working in Vienna, and gets invited to the London School of Economics (LSE). Gives four lectures there, early 1931--these are published as Prices and Production. This leads to an invitation to come to the LSE as a visiting professor for a year; this ultimately turns into a named chair. So he stays at the LSE from 1932 through 1950. Very important period in his life. Starts out engaging in a big debate with John Maynard Keynes about their respective theories of the business cycle. Ends up debating people like Frank Knight over capital theory. Has debates with a variety of colleagues at the LSE as well as others on the merits of socialist planning. This is when he starts writing his works on "Economics and Knowledge"--that's the name of an article he published; begins his contributions to the knowledge problem. By the end of the decade, he's working on a large project that ultimately results in a number of publications during the war but most importantly The Road to Serfdom in 1944.
9:35Let's talk a little about two things I'm interested in, one of which came up in a recent podcast with Pete Boettke on Mises. I remarked on the fact that it seems interesting and a little strange that Hayek is so famous, and Mises less so for the socialist debate. Pete suggested, partly because Mises was writing in German, and here was Hayek writing in English in this formative period in the 1930s. But he was Mises's student, if not literally in the classroom, in the seminar and certainly when he worked for him at the Chamber of Commerce. What's your thoughts on the relative impact of Mises and Hayek on the calculation debate and the feasibility of socialism? Strange. I actually would have thought Mises would have been more associated with the critique of socialism. In the American context, where The Road to Serfdom is a well-known work, that might explain it. Mises, though, was the person who pointed out the difficulty of getting rational production under a system where the state owns the means of production. You don't have prices for factors of production. Essential insight there in his article back in 1920. It was published in German, but it was reproduced in Hayek's Collectivist Economic Planning, his book of 1935, which is basically the book which initiated the English language socialist calculation debate. Hayek had two pieces in the book--an introductory piece and a concluding piece that ended up being up being reproduced in his collection Individualism and Economic Order, so he had those two pieces, but the middle part of the book was translations of articles, and Mises's seminal article was there as well. The point of the book was Hayek saying: The British intelligentsia is very interested in debating the merits of socialism; this debate has already been had and there are some important contributions that are in other languages that you are not aware of. To the extent Hayek might be better known it might be because of something like The Road to Serfdom being so well-known in the popular mind. To anyone who knows the debates, Mises's central role is unmistakable. No doubt, but it is Hayek who spars with Oskar Lange, and Oskar Morgenstern. The middle 1930s were certainly a time when Hayek was very active and visibly involved with this intellectual enterprise. And all of that took place in the English language. But Mises was sparring with people in German publications as well. Interesting how that played out.
12:49Let's talk about the business cycle debate between Keynes and Hayek. Hayek writes in 1931 in Prices and Production; John Maynard Keynes's The General Theory comes out in 1936. Keynes had an earlier book--Treatise on Money--1930. So Hayek writes a scathing review of that. There's a sort of historical puzzle as to why he was relatively silent about The General Theory, and you could conclude that he lost. Keynes's theory took the field and the world stopped paying attention to the Austrian business cycle theory. What's your take on that history? The exchange that they had when Hayek first arrived in London was very significant for both of them. Hayek wrote a strong, two-part critical review over Treatise on Money; Keynes responded to the first part in between when the first one came out in August and the next one came out in March of the next year--I think in November. He concedes to some extent Hayek's criticisms, but also attacks Hayek's own book. Unusual. Entertaining. As good as it gets in academia--two people just going at it in the journals. It was colorful language. Keynes was one of these extraordinary writers who it's just impossible not to just read--he writes with such color and verve. Good match to watch. So, this was their initial encounter. Both of them had utilized the work of the Swedish economist Knut Wicksell, and Hayek I think had the better part of the initial encounter simply because Hayek read German. Wicksell had written in German, three books; Hayek knew all of them, integrated aspects of them into his own work whereas Keynes did not read German very well and said as much in his book Treatise on Money and did not incorporate all the things Wicksell had said into his own work. For a variety of reasons, Keynes rethinks his approach. There's the whole story about people at Cambridge who were offering him criticisms; the introduction of the multiplier and other ideas that end up being part of the Keynesian corpus. He published his book in 1936 and it becomes quite famous. But at the same time Hayek is also working on revisions of his own work starting as early as 1933-1934--said this whole average period of production is something I'm not happy with that I took from Bohm-Bawerk. If you take a look at Larry White's introduction Hayek's The Pure Theory of Capital you get some idea of the problems Hayek was having trying to put this book together. He has correspondence with Fritz Machlup where Machlup in the United States says to him: When are you going to send these chapters? And Hayek responds: They're almost ready; and then the next letter from Hayek he says he tore them up, starting over again, not going to do that section. Struggles and struggles, and when he finally publishes his revised work that was supposed to be integrating capital theory into a monetary theory of the economy, it's The Pure Theory of Capital. So he's done the capital theory part. He has a few chapters at the end of that book that speak to some of the monetary issues. But basically it's clear he has not accomplished what he wanted to do. It comes out also in 1941; the world is at war, not going to get the kind of notice that Keynes's book did. Now the full story of the Keynesian ascendancy and the elements that went into it is actually a very rich story that probably don't have time to go into. It was a whole combination of things that ended up being able to explain that. It was a fairly quick ascendancy; certainly by the time the war was over, Hayek has a famous recollection of Keynes where he said: Keynes probably would not have been that comfortable with many of the things that go under the label of economics, and the last time I saw him he said he was so confident in his ability to turn around public opinion that he said if these problems start to arise and inflation starts to rear its ugly head, I can turn public opinion around like that; and he clicks his fingers. And then, as Hayek said--six weeks later he was dead. What struck me in reading your account of it in Hayek's Challenge was, one, a parallel with Schumpeter, who also struggled to produce his great work on business cycle theory, who before 1936 was considered one of the world's great economists. And Keynes eclipsed them both with a terribly flawed work. I think if either of them had written it, they wouldn't have been comfortable publishing it. Part of the reason for both Hayek and Schumpeter, that their stars were eclipsed by Keynes, was their acceptance that this problem was "too hard." I think that really was Hayek's last word on business cycle theory. It wasn't so much: it's all about monetary theory. Rather it was: it's too hard. Nothing to be ashamed of that you can't build a complete model of capital theory. I think the modeling part--the complexity of the model that could be anything close to being adequate was too complex. I think you quote Lucas, a modern Nobel Laureate, much later in terms of his work on the business cycle theory, saying: Hayek and others didn't have the tools. But I think it's not clear we have the tools still. We'll come back to that. One other thing important to emphasize: Keynes's work in 1936 was not the first work on business cycle theory in economics; and his adherents often act like it was. There were a lot of people trying to understand why economies rose and fell. It was an old problem. David Laidler and also Bradley Bateman are two people who have articles that basically say: All of these things we think about the Keynesian revolution are wrong. He didn't invent macroeconomics; there was stuff going on before him; some of these ideas that were claimed to be new were not. This is not to take away from Keynes as a public intellectual or his importance of impact in terms of the 20th century. But just in terms of the history--well, this is what historians of economics do. They go back and they say all these popular images are wrong in these various ways.
21:46So, WWII comes and as a macroeconomist, Hayek and other Austrians eclipsed by the ascendancy of Keynes. But at the end of WWII, Hayek writes his most influential book for the public at large, The Road to Serfdom. The story behind that is that he didn't plan to write it. He planned a much bigger work--project called the Abuse of Reason Project. Supposed to be a two-volume work. The first volume was tracing how the twin ideas of socialism and what he called "scientism"--that is to say, the sort of thing that he saw exhibited by Wesley Clair Mitchell, the idea that we can use science to reshape society in ways that would make it work more rationally--a very appealing idea and he encountered it everywhere in the course of his life in the 1920s and 1930s. It certainly was part and parcel of the logical positivism he had encountered in Vienna in the 1920s; the Mises seminar, members of that also members of the Vienna Circle of Logical Positivism, fully aware of this movement, which provided the philosophical justifications for a worldview of science transforming society in progressive ways. He encounters it in the person of Mitchell in the 1930s; he comes to the LSE, which was founded by Fabian Socialists in 1895; they were sufficiently confident of the truth of socialism that they didn't care about hiring someone like a Hayek because they figured the truth will out, but this is an important scholar so we are happy to have him on the faculty; and he encounters the ideas there. And when he looked at the historical evolution of these ideas, what he envisioned was: It started back in the French Revolution days, at the Ecole Polytechnique; the engineers of this Ecole were also associating with people like Henri St. Simon and Auguste Compte--father of positivist ideas and positivism. The idea was the trace the spread of those ideas from France to Germany to Britain to the United States. In each place it would take on certain national characteristics according to the contingency of the period in which it entered. In the United States it was the Progressive Movement--the idea that experts, armed with the most modern tools, could do better by shaping and steering. And he also mentioned institutionalism in his outline. But he doesn't mention progressivism itself, but this is exactly the idea. Give us a little background on Positivism and Logical Positivism. What are they and why are they important for this? This would be the philosophical foundation for many of these ideas. Logical Positivism began in Vienna in the 1920s--the Vienna Circle of Logical Positivism is often the way it is referred to. These philosophers were saying: what is it that makes science really different? Looked at a number of different sources of the problems: How do you distinguish a scientific statement from a non-scientific statement? Well, we do it by testing the statements. What counts as a good test? Is the statement verifiable, falsifiable? What does it mean to make a scientific explanation? For example, covering law models. Not familiar to someone who doesn't do this much, but the general idea is that we want to be able to distinguish scientific from non-scientific thought. So, how did that contribute to scientific socialism--that idea, that seems fairly plausible and a good idea--that you should be able to test a theory using data--which I associate with Logical Positivism. How did that get permuted into: We need to run the country. So, the social science expert in the Vienna Circle of Logical Positivism was Otto Neurath, somebody who was very critical. Was in Bohm-Bawerk's seminar with Mises and in Mises's memoirs he talks scathingly about Neurath. Had great respect for many of the other socialists debating with Bohm-Bawerk but he had no patience for Neurath. Neurath propounded a view called War Economy: The capitalist system is defective; what we should do is have a moneyless system where everything is planned from the center, and we have central planning of this sort when the government takes over control of the apparatus, and we should just simply continue this after the war in the peacetime economy. We'd get rid of all of the defects of capitalism, we'd produce goods that met people's needs as opposed to according to profits; went down the list of reasons why this would be a successful system. What does that have to do with Logical Positivism? That's the part I'm confused about. This is what prompted Mises to react to Neurath and write about socialism and the problems of socialism. Directly: Neurath--and this was also true of Mitchell, by the way--would be critical of standard economics because it made reference to things like subjective value. Well, subjective value is something that is in somebody's mind and it causes them to act. Well, if you are scientific, you want to endorse, instead of that sort of psychology, behaviorism, where you don't make reference to any kind of subjective values. What you do is make reference to observable states. So, the philosophical position of Logical Positivism emphasizes testing and making reference to observable phenomena. The interpretation was that that same sort of approach within the social sciences would be to get rid of all this kind of theory that made reference to things like subjective values. Which is basically what neoclassical marginalism does.
29:29Back to the Abuse of Reason Project. That was to be the first volume. The second volume was: What are the consequences in the 20th century? That would be based on an article Hayek had written in the late 1930s called "Freedom in the Economic System." Part Two ends up being The Road to Serfdom. He ends up being not able to finish the spread of these ideas from country to country. He did a little on France and he has an article on scientism and the study of society. The second volume, about 1941 or 1942, he says in a letter to Machlup--changes his mind, says he is going to do a shorter, more popular piece. And he explains in a letter to Jacob Viner, another American economist, saying: I'm not so worried about the outcome of the war; I'm a little worried about the outcome of the peace. He was hearing the same sorts of arguments--we should continue planning after WWII, the same sort we've got during the war. The same sorts of arguments made in Vienna by Neurath were being made by British socialists like Harold Lasky in party meetings and popular pamphlets. And there was a great deal of romance about the Soviet Union, that turned out to be quite untrue but at the time was seen as a great goal. That pretty much went away with the show trials and the pact with Hitler. The bloom was off the rose. Certainly in the earlier 1930s that was true. It was less easy to have any kind of sympathy for the Soviets except for the fact they were allies against Hitler during the war. So, he writes The Road to Serfdom, it comes out in 1944 as part of this project. 1947, we have the Mont Pelerin Society; and he leaves LSE in 1950. Goes for a semester to the U. of Arkansas. Why? Because they had very relaxed divorce laws in that state. That would make a good movie! Love story for Friedrich Hayek! Goes on to the U. of Chicago, where he is on the Committee for Social Thought. Not in the Economics Department. That's another one of those juicy stories that we wish we had more information about--exactly why the economics department declined to invite him when it was first being proposed in 1948 or so. All sorts of explanations that have been proffered. Some of them are that they didn't like being asked by somebody from outside to hire this guy--because he was getting outside funding. That actually sounds very plausible to me. Others say, well, it was because of the type of economics he was doing; and particularly given the Cowles Commission, which at that time at Chicago--basically a group of econometricians--obviously not going to be as sympathetic to Hayek's work because Hayek was one of these people who didn't have much faith in econometrics at the time. Another possibility is The Road to Serfdom had discredited him. I don't think that's true. Milton Friedman himself has said he didn't think that played a role. But there have been all sorts of conjectures about why. Because it was too popular a work, not because they disagreed with him, right? Well, The Road to Serfdom was viewed as a reactionary work at the time it was published. It's one of the ways in which you can really measure how the world has changed. I had a great conversation with the historian of economics Mark Blaug when I was editing The Road to Serfdom--I said, I'm doing this work for the Hayek Collected Works. He said: I read that book and it was just garbage, it was so reactionary! And I said: You ought to try reading it now, and see what you think. And he came back to me and said: You know, you are right. If you read it in that particular period, where everybody who is a member of the intelligentsia said we don't know exactly which system we want to put into place, but it's probably going to be some sort of mixed system; and you have Hayek saying, you know this is potentially the road to serfdom--certainly the way it was read was, if you do this, you are going to be like the Nazis. So, people who had these kinds of feelings are going to end up setting up a situation in which the jackboots are going to be on the ground in Britain. I contest some of the specific readings that people have made about what Hayek's intent was in The Road to Serfdom, but that was the popular image of it. If you go in reading it with that popular image--well, a lot of people didn't even read it. They just knew it was going to be something they disagreed with. So, he comes to Chicago, the Committee on Social Thought--which is an interdisciplinary department at Chicago, which has a few of them and that's one of them. He's there for how long? Till 1962, and the major things published while there were, early his book on psychology, The Sensory Order, published in 1952; and then his big book on political theory, political philosophy, and history: The Constitution of Liberty. One way to think of it is: Some people who knew Hayek and liked The Road to Serfdom were sympathetic it turns out--John Maynard Keynes, who was quite complimentary about The Road to Serfdom in a letter to Hayek, said: But the real question is: How much planning by the state do we allow? You say there's good planning for a competitive order, and bad planning. How do we distinguish among these? What kind of criteria do we use? How do we know the good stuff from the bad stuff? You've offered a good criticism of socialism, but we need to know more about what your vision of a good society is. The Constitution of Liberty is a way of responding to that--not a direct response, not a blueprint, but it lays out the principles of a free society in a way I think is quite compelling. And then where does he go? From there, in 1962 he goes to the U. of Freiburg through most of the 1960s he spends about 5 years in Salzburg, then back to Freiburg. In 1974, this is when he gets the Nobel Prize; this is with a Swedish economist named Gunnar Myrdal. A Swedish sociologist, right? He had a book on monetary equilibrium published in the 1930s published at the same time Hayek was writing on monetary economics, so the Prize mentions that both of them made important contributions to economic theory early in their career and that later in their career they branched out and looked at other areas. So, it's basically putting them in the same kind of camp as economists who then made broader contributions. Neither one of them it turns out were particularly happy about the fact that they had the other one as a co-recipient. Myrdal was a socialist. Basically, yes.
38:12So, where is Hayek at that point? At that point would either have been at the end of his time in Salzburg or just moved back to Freiburg. In terms of his intellectual life, in the mid-1960s he started working a lot on individual articles on ideas about complex phenomena, but also on his final great work in political philosophy, Law, Legislation, and Liberty, which is published in three volumes in 1973, 1976, and 1978 I think. So, he was in the midst of putting that out. At the very end of the 1970s he has an idea of a grand debate between the socialists and classical liberals. He tries to put this together unsuccessfully, but it is the impetus for his absolute final work, The Fatal Conceit, which ends up being published in 1988. You mentioned being the general editor of the Collected Works--this was the first volume in the Hayek Collected Works, his last book was published as the first volume. It was edited by W. W. Bartley, III--Bill Bartley, who was a philosopher, who studied under Karl Popper and who was to have been Popper's as well as Hayek's biographer; had lots of interviews with Hayek that have appeared in various places, are quite rich; but he ends up dying before Hayek does, in 1991; Hayek died in 1992. Another editor--Stephen Kresge--and then I took over from Kresge in the early 2000s. So, when Law, Legislation, and Liberty comes out, he's an old man, in his late 70s by the time the last volume comes out. The Fatal Conceit comes out when he's 89, and there is of course, for Hayek fans out there--there is some dispute about how much of that book is Hayek and how much is Bartley. Absolutely. And you mentioned before we started our talk that we had spent some time in the Hayek archives and one of the things you will find out there are about a gazillion little postcards, 3x5 cards, index cards that he would write down his thoughts on that he would organize when he was writing anything. Well, this works well if you are Hayek working from these things. But basically by 1985, his health really deteriorated. He didn't really travel for the next 7 years until he died. But even before that you can see this a little bit in Charlotte Cubitt, his secretary, memoirs--his mental capacity kind of weakening even in the early 1980s. In her recounting, he would hand her things and ask her to kind of sharpen up the English--she was a secretary but she was a native English speaker. He would go back and forth between the two of them. And then Bartley was getting involved in terms of trying to organize these file cards. And you can tell from the book itself--it doesn't have any footnotes. It has these little indented parts that I presume were things that were taken off these cards. So, it's just very hard and there are elements of the book that, anyone who knows Bartley's work, are very Bartleynian. Section on evolutionary ethics, which appears at the end of one of the chapters, is pure Bartley. So, there is certainly debate about how much of this should be taken as an important piece of Hayek's work just because of its mixed--the fact that so many different people contributed to it. Two things about it. One, to me it's the most readable of Hayek's books, which is consistent with it either being highly edited, or worse, written, by someone else. And, other than those passages you refer to which are very Bartleyesque in tone, it's certainly true intellectually to Hayek's work. It's not a betrayal; there's nothing in it that seems to contradict things that Hayek had written before. I just find it to be a remarkably provocative, you could call it a restatement, of ideas Hayek had written. So, whether he literally wrote it or whether it could be viewed as an overview of some of his ideas, very rich. Those familiar with Hayek's work will see all sorts of elements in it that have appeared in his earlier works, and as you say, expressed in clear prose. If you take the Epilogue to Law, Legislation, and Liberty, whole elements of that are clearly there in The Fatal Conceit. And there are extensions. Talking about cultural evolution and recent work that had appeared that would support some of the ideas that he had about that. I'm with you on that. The question is the extent to which he himself endorsed the new ideas that are there--that's the only question. It's not so much that he is reversing himself anywhere. It's that: How important are these ideas that hadn't appeared in his earlier work to his belief system. Two other comments. One is a suggestion of a friend: I tried to read Bartley's work, Retreat to Commitment, very Hayekian thesis about reason; I found it very difficult going. So, it's not like Bartley was the most lucid of phrase-makers. Second: The Fatal Conceit has two of my favorite Hayek quotes, one about the micro and macro cosmos, which I think I found a version of in the note cards, not exactly word-for-word. The other of course about the dangers of taking the love of family out into the larger community--the idea that socialism is so deeply appealing to us because we have this love of family--we should treat everyone like family. He calls that the road to tyranny, doesn't want to import the model of prices into the family; and that this schizophrenia is what we have to deal with as humans. I love that quote. The other quote is to illustrate to men how little they really know about what they imagine they can design. That quote, I couldn't find in the notecards. There are a lot of them, hundreds of thousands of them there in the archive, so I can't say I looked at every one of them; but again, that's not the most stylistically elegant quote; it's very Hayekian in structure. Hopeful that it's his.
46:29One comment on his life before we turn to his ideas I'd like you to comment on is his winning the Nobel Prize. He must have been in many ways a very lonely man, at least intellectually. You've given in this brief sketch so many ways in which he was viewed as a reactionary, debating with so-and-so; he was aligned against the intelligentsia--all the intellectual circles he ran in, the one place that might have embraced him intellectually, philosophically might have been the U. of Chicago in the 1960s or 1970s, not when he was there and he wasn't even in the Economics Department. Winning the Nobel Prize must have been quite satisfying. I think it was. In his interviews, he mentions that he actually felt he was depressed in parts of the 1960s, and this had physical aspects to it. He said in an interview that this kind of made things better, that he felt better. I think equally important though, is that he was aware of the rebirth of interest in Austrian economics that was starting to take place in the 1970s. I was at New York University (NYU) from 1981 to 1982; Ludwig Lachmann would come to NYU every semester; I would spend every Friday morning for a couple of hours talking with him, fascinating, very rich intellectual environment, lots of interesting people participating in the NYU seminars. Other sorts of summer schools. He was aware of this; he was in Menlo Park for some of these periods, visiting at the Hoover Institute. I think that that really made him feel like things were turning around. This was important because a lot of the 1970s was fairly depressing in terms of economics. Keynes and his ideas were continuing to be triumphant; economy in the 1960s was doing great but in the 1970s saw this much darker turn; must have been pretty unpleasant. One thing I didn't mention was the publication of Denationalization of Money in the 1970s as well, a time when he is returning to issues of monetary economics, talking about competitive issue of currency as a reaction to the stagflation of the 1970s. Consistent with his earlier work about the central bank's role in the business cycle. Well, this part is a little bit tricky. He actually wrote different things at different times in his life about monetary arrangements. You see different things from the 1930s to the 1950s to the 1970s. Lachmann, delightful man, when we would talk about certain issues--I'd say: Well, what do you think Hayek thought about this? And he'd say: Which Hayek? So at different points in time, Hayek had different ideas.
50:13Let's talk about which of his many ideas are still important and relevant today, part of his legacy. Something that has been getting lots of attention, especially in the current downturn, is Austrian business cycle theory and elements of it that are still quite interesting to consider given recent events--the whole idea that downturns take place when the market rate of interest is held below the natural rate would be the way someone in a Wicksellian framework would put it. Long periods of low interest rates end up affecting the structure of production in ways that are not sustainable. You get a misallocation of capital goods, is the way it was in his model. If you take a look at the American and other countries' housing glut, this would be a good portrait of the idea that he had in mind. Certainly the idea that you can somehow stimulate your way out of these sorts of problems--and this is a controversial point, you'd need to have Larry White on your program--we've had him, talked about this, and it's complex. So maybe right now I'll just refer your listeners to your podcast with Larry White. What I wanted to mention is that while he may have gone back and forth on his own position and what can be done in a proactive way, he doesn't seem to have ever endorsed the Keynesian aggregate demand stimulus story, right? In his Nobel Prize story, he explicitly mentions the challenges of solving unemployment by spending money. Dealing with aggregates--he distrusted the whole notion of aggregates and you can see this back in his writings in the 1920s, before the Great Depression came along--the idea that you can manipulate something as complex as an economy by looking at aggregate statistics which actually in and of themselves are constructions of a person's mind is something he rejected throughout. Of course, the Keynesian program depended crucially on this, and stimulated the collection of these aggregate statistics that were supposed to be used by policy makers to fine-tune the economy. So, we have his contributions to business cycle theory and his skepticism about Keynesianism. If we go further from there, in the overview of his life, in his debates in the 1930s, I think he came up with additional arguments about the limitations of socialism. Some of these were building on Mises's arguments, so if we recall, Mises said: If you've got state ownership of the means of production--which is what socialism is--you don't have prices for factors of production; if you don't have prices for factors of production, firms can't make rational decisions about what input mixes they need to make; and when you multiply the millions of firms in the economy and the sorts of decisions that each one has to make in their interdependence, you've got real problems. Response to this by Oskar Lange, a market socialist, said: We ought to put a bust up on Mises in the Central Hall of the Central Planning for Ministry for pointing out the importance of prices, but we don't need to worry about getting rid of socialism because we can simply adjust prices up and down--if we see an oversupply of goods, we'll adjust prices; if we seem an undersupply we'll just price in the other direction; and we can just simply make these adjustment and just duplicate the workings of the economy. And this was precisely where Hayek came into the debate and said: Your image of what we're able to do is unrealistic. I think the best statement, though this is not directly responsive so much to Lange, of his idea is contained in "The Use of Knowledge in Society." So, I know later you are going to ask me which things people should read--that would be the first one. In it he paints a picture of how easy it would be--all of these allocation problems would be easy--if we had full information. Given tastes and preferences, given income, and this is what our models often say we have. Assume. But the whole point in the world is that we don't have this knowledge. The way the world is actually configured is knowledge is dispersed, so different people have different bits of knowledge. And some of their knowledge is inconsistent with other people's knowledge. Some think it's going to be a very hot summer, so they'll be producing suntan lotion; other people anticipate a cold summer, so they'll be producing umbrellas, so they'll be wrong. How do all these people get meshed? On top of it, and this is stuff he has later--this local knowledge, this knowledge of time and place, some of it is tacit; and this is reflecting the ideas of Polanyi later--knowledge that I have been working in this particular market for 20 years, I know these particular market signs, I may not be able to explicate to somebody else why but I have enough knowledge of these markets to make these particular decisions. All these individuals with these little bits of knowledge are making these decisions. That's the first half of the story. The second half is: What do they base it on? They see all these prices that are out there in the world and their little corner of the world that they are responding to; but every one of their actions feeds into those prices. Somebody's buying more, somebody's buying less; all of that feeds into the prices that everybody else sees. And this is an ongoing, complex process. This is the marvel, as he put it in that article, of the price mechanism--that it is on the one hand something we look at to make our decisions, but then all of our decisions get reflected in that array of prices. Constantly changing. So, he says, basically you can explain his response to Lange would be: Well, good luck, buddy! The biggest computer in the world isn't going to help you solve that problem. Later people have said: Well, supercomputers can do this now; maybe we can do it. I think the answer to that is: Show me. Show me in a township where that can happen, no less the world economy or national economy.
58:10That really brings us to his other idea, that you and I talked about before we started this interview--the idea of emergent order, that there are things that are the product of human action but not human design, and that the price system--and Hayek started with this the way we all do--once you put the word "system" in there you start to suggest someone must have created this system. But that it's not created by any one person, instead the result of all of our actions together--that understanding that phenomenon is the central problem of social science. I think that hits the nail exactly on the head. Other examples of this are certainly the formation of money. Adam Smith and Carl Menger both talked about how money emerges, not because somebody invents it, but because it enables people to solve problems. If I want scotch and I produce running shoes, and you are the scotch producer, but you want a table, I have to take my running shoes to somebody who produces a table--got this three-way trade problem. And actually the consumer of the scotch--I just want to say this for the record--is not the producer. Or even worse case, where both of us are consuming the scotch. So, you end up by having the emergence of money, specialization, trade is enhanced, division of labor is enhanced--you get these remarkable results that redound to everyone's benefit but it's not like anyone went out and invented it. Unintended consequences--consequences of human action but not of human design. So, market prices are a similar phenomenon. Language is often pointed out as one of these social institutions--which you write Menger used as an example. I believe that's right. In Thomas Sowell's book Knowledge and Decisions, which is a Hayekian book; but it goes back to at least Menger. Hayek was often remarking on Darwinians before Darwin, too, versus some of these ideas being written on as social phenomena before they entered into the writings of natural scientists. This is a central idea in his work. Steve Horowitz has mentioned how his writings on the capital structure reflect a structure that can be changed, but it can't be changed quickly and it's all interconnected. Certainly Hayek's work on the sensory order, where he describes the working of human consciousness, where if you look around the room you see chairs and rugs and pictures on the wall but actually this is the product of a gazillion neuronal firings in a hugely hierarchical system that ends up producing consciousness as we know it. Certainly the synapses are not planning to produce this consciousness, but it does. So he sees these sort of complex, self-organizing systems in natural phenomena as well as social phenomena. That certainly became a hugely important theme in his later work; and certainly people working at Santa Fe working on complex social orders, when they read Hayek, I'm sure they say: Yeah, this is the same sort of social idea we're getting at.
1:01:49So, we have the business cycle theory, the impracticality of socialism; tied to that we have the idea that there are these emergent orders that are undersigned and yet crucial to civilization that are steered unintendedly by prices and by other social constructs. Anything else you want to emphasize about his ideas? Sure. I think a central part of his ideas, Hayek's mission, was to reconstruct liberalism for the 20th century. So, he like many people--Jacob Viner, Roepke, Keynes--rejected pure laissez faire. What does that mean? If you asked each of them, they might come up with a different sense of institutions, but each of them believed that a market system works well if it's embedded within a set of other social institutions. These are things like a democratic polity, well-defined a protected set of property rights--property rights are exchangeable, stable arrangements operating under the rule of law--where everyone is equal under the rule of law, where there's a protected private sphere of interaction, where you justify government coercion only if it is used to end coercion of people by other people. That's the direct reason for coercion--you give the monopoly of coercion to the government so that it can try to do good in terms of trying to minimize other sorts of coercion. He came up with ideas, in very general terms, of the sets of institutions that need to accompany markets for markets to work well. And this is where he becomes a controversial figure amongst some of the Austrian camp, because someone who will remain nameless but who is a close friend of mine in the Austrian camp put it about The Constitution of Liberty--he loved Hayek's defense of liberty in the first third of the book and then he gave it all away in the last two-thirds of the book. So, he actually did not add on to his--he would allow for a lot more intervention on the grounds--he might disagree with it personally, but it would be permitted under a system in terms of the way I am defining it in terms of this book and not be inconsistent with liberty. And for somebody for whom, for example, taxation is a form of coercion--he was not an anarcho-capitalist. But as you wrote, he was not a conservative, either. He was somewhere in between. His own kind of libertarian. Right; and he didn't like the word "libertarian," either, apparently. Old whig--that was the phrase he liked to use, which of course makes everybody--that ain't comin' back. Not going to get into the general lexicon.
1:05:20Let me propose one other idea, which is certainly consistent with what we've talked about but that I view as an important contribution of Hayek. We talked about the idea of scientism, which is this idea that it's dangerous to use the tools of science for purposes they are not useful for or successful for pursuing--which would include much of modern macroeconomics for Hayek. But the whole Abuse of Reason Project, even though he never wrote that book the way he intended, the first volume, certainly much of his essays and books in the 1950s and onwards were about his skepticism of the power of reason and expertise. Very much as what I see as the pragmatist school--not meaning practical in the common sense but in the philosophical sense of being respectful of tradition and culture even when reason seems to suggest it could be improved. Is that a fair assessment? Right, and my earlier work before I was writing about Hayek was in a strange field called economic methodology. Has to do with what does it have to do with economics being a science, and is it a science? How do we talk about that? Seemed to me that Hayek's basic insight, going back to the 1920s--a lot of my book is pursuing this theme over time--is about the limits of social science, what we can do as opposed to what we wish we could be able to do. That quote you like so much from The Fatal Conceit is very much, I think, a central Hayekian insight. He talked about scientism in the 1940s and he contrasted the sciences and the natural sciences. I argue in my book that by the 1950s he was no longer drawing it as a contrast between natural and social sciences, but instead a contrast between sciences that study simple versus complex orders and complex phenomena. It's within the latter that economics is included. He said you can make pattern predictions but not specific predictions; we can't do any of the things we would need to do if we want to intervene successfully in social phenomena. That's a central insight. It's a sobering one. It really does try to force people to try to think about what we would be able to know before we could accomplish this sort of change. Hayek said: You look at the world and it could be better; but you have to really ask that question before you commit resources. I have to add, it seems to me, the Hayekian/Austrian insights are pretty good here, but if you couple them with the kind of Public Choice insights about how actual decisions get made in government, and the interests and the effects on government policies, it ends up making you really depressed about the prospects for successful government intervention. And I think this is what is the foundation for people who say: I think government is not necessarily malignant; I think it's just so difficult for government to get it right--you don't have the knowledge, and you have these incentive effects--maybe a smaller government will at least allow less of that kind of manipulation to occur. Worth mentioning that Hayek was not against planning. He was against central planning for most things, and he thought the less there was of that, the more we can plan. The more the state plans, the more difficult planning is for individuals. One of his pithy statements from The Road to Serfdom. One of the other comments I'd make on the science debate is: economics as a science is more like biology than like physics. But we never ask biologists to do what we ask economists to do--which is, if we plan 17 more redwoods in this forest, what's going to happen to the bird population in this corner? Those are the kind of precision biologists don't have and don't pretend to have; but that's 90% of what the world asks of economists. Like Hayek, I think we should just say: We can't do that. Hard for some people to have those words come out of their mouth.
1:10:06Let's talk about what should people read to get started. "Use of Knowledge in Society." "Individualism, True and False"--article, essay published in 1946, lecture delivered in 1945, lays out contrast between the Scottish enlightenment version of individualism that we've been discussing in terms of unintended consequences, versus individualism that is atomistic. In some ways you can view this as a critique of socialism. But it also could be a criticism of ideas that underly economic theory. This book, Individualism and Economic Order contains a number of great essays. "The Meaning of Competition" is one, where he says: Anyone who has studied microeconomics has learned about perfect competition and the way decisions are made and he says the worst thing you can do is to think that what you want to do is make the world look like that, because actually, where real competition occurs is not equilibrium but out of equilibrium--it's rivalrous competition. So those are three nice essays. Movement from the Road to Serfdom to the Constitution of Liberty can be viewed as a step. If you didn't want to read The Road to Serfdom you could take a look at "The Economic System," his 1939 essay in which he articulates some of the ideas. I would just add "The Pretence of Knowledge," his Nobel Prize lecture, accessible. Then, in the books, what would you read. All of them of course! Some order? The Road to Serfdom because it's so much in the news, but if you have more time, either The Constitution of Liberty or Law, Legislation, and Liberty. People who are sympathetic to the Austrian viewpoint really split over which one of those they prefer, so I'm not going to make a judgment on that. Either one of those; and there are individual chapters within them that get at the Hayekian ideas. It's only if you've really had a lot of coffee that you want to sit down and try to get through Prices and Production or The Pure Theory of Capital or The Sensory Order. I think Monetary Theory and the Trade Cycle is accessible to some extent. And the Fatal Conceit is accessible. Makes me sad that some people say: Who is this Hayek guy? I guess I'll read The Road to Serfdom. I didn't find it a fraction as interesting. For articles, Hayek really has to hit the nail on the head. He has to say what he has to say in a certain amount of space. Whereas with the books, he goes all over the place, lots of footnotes, it can be tedious. I think if you get access to the articles you are going to have a much richer experience. "Use of Knowledge in Society"--I have yet to find a person who reading that didn't say: Wow!

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COMMENTS (13 to date)
Robert Kennedy writes:

Nicely done. I learned a lot about the dynamics of his life & times, which was very informative. And I learned about what I should read next. It is disappointing to consider the possibility that Hayek was not completely responsible for his most famous quote but so be it.

Miles Stevenson writes:

What did Mises & Hayek get wrong? I think that would be a great follow-up podcast.

As much as you have convinced me to champion the Austrian perspective, I'm interested to hear what modern Austrian thinkers disagree with Mises & Hayek about.

After all, as brilliant as Darwin was, half of his most important scientific contributions turned out to be wrong!

bluhawkk writes:

Fascinating podcast.

I keep hearing that Keynesian economics is predominant at most universities. Is this true, and if so, why?

Do politicians view application of Keynes theory as more politically palatable?

Jeremy H. writes:

Caldwell recommends a few articles from "Individualism and Economic Order." The entire book is available online:

http://mises.org/resources/4015/Individualism-and-Economic-Order

xian writes:

feel so close to u right now.....bravo.

intellectual history & biographical stuff is always top-shelf...but hitchens/orwell has yet to b beat on that score (likely cuz of the guest).

wish u wouldve fleshed out more the "y im not a conservative" angle of hayek and his support of state/collective interventions more.

everyone knows "the road to serfdom", "the use of knowledge in society" arguments and the threats of a too powerful state. these r easy to discuss. we all agree.

illuminate the nuances, econtalk. the nuances r where things get interesting. dichotomy and the "two worlds" ideas r the most difficult. here, ull challenge urself/urselves and ur listeners.

on what substrate/rules does our freedom evolve/express itself? we're the only creatures that might decide that.

im struck by the fact that von humboldt's critique in "the sphere and duties of government" is never applied to other top-down organized power structures- like corporates. which these days, r approaching and grasping for power once only enjoyed by the state (if only by absorbing/commandeering it)

n e way...luv u!


Ben writes:

I have been waiting for over a year for Roberts to have Caldwell on the podcast. Now he needs to be on again, to solely discuss his book Hayek's Challenge.
It is one of the most influential books I have ever read. It should be handed out to any college student studying any of the social sciences. Good job, thanks for finally getting this intellectual hero on the show. Caldwell makes it OK for all of us Hayekians to think the way we do.

Greg Linster writes:

This was a great talk! Thanks for the recommended reading material; I'm looking forward to diving into it.

theyenguy writes:

Though I am not an Austrian Economist, I present three of Friedrich August Hayek’s statements, from his book The Road To Serfdom (1944)

He stated: “the very men most anxious to plan society (are) the most dangerous if allowed to do so — and (they are) the most intolerant of the planning of others” page 93.

And: “It is, as it were, the lowest common denominator which unites the largest number of people. If a numerous group is needed, strong enough to impose their views on the values of life on all the rest, it will never be those with highly differentiated and developed tastes — it will be those who form the ‘mass’ in the derogatory sense of the term, the least original and independent, who will be able to put the weight of their numbers behind their particular ideals.Moreover, tyrants will often “be able to obtain the support of all the docile and gullible, who have no strong convictions of their own but are prepared to accept a ready-made system of values if it is only drummed into their ears sufficiently loudly and frequently” page 138.

And: “Independence and self-reliance, individual initiative and local responsibility, the successful reliance on voluntary activity, noninterference with one’s neighbor and tolerance of the different, respect for custom and tradition, and a healthy suspicion of power and authority: Almost all the traditions and institutions in which democratic moral genius has found its most characteristic expression, and which in turn have molded the national character and the whole moral climate of England and America, are those which the progress of collectivism and its inherently centralistic tendencies are progressively destroying” page 219.

My response to Mr Hayek is that bible prophecy of Revelation 13:1-18 reveals that God has ordained a collective, that is a collectivist future, for mankind, and I provide the details in the linke article A Sovereign System, A Sovereign King And A Sovereign Banker To Rule Planet Earth, Bible Foretells

http://theyenguy.wordpress.com/2010/08/15/a-sovereign-system-a-sovereign-king-and-a-sovereign-banker-to-rule-planet-earth-bible-foretells

David writes:

Russ,

I've really enjoyed your biographical podcasts on Mises and Hayek. I am hoping that they are part of a series. I few weeks ago (I don't remember what podcast) you mentioned that you recently interviewed Robert Skidelsky, the biographer of Keynes. I think it would be really interesting to have a couple of more biographical podcasts -- on Keynes and Friedman perhaps.

David writes:

Xian,

You mentioned how much you enjoyed the Hitchens/Orwell interview. I don't think I commented to that particular podcast, but I remember Hitchens speaking about Orwell's reporting of the Spanish Civil War. If you are interested in that subject, there is an old article by Noam Chomsky you might like. Written in 1969, it is called "Objectivity and Liberal Scholarship". It has been reproduced in a recent compilation of Chomsky's articles on anarchism -- "Chomsky on Anarchism". Using Orwell as one of its primary sources, the article discusses the Spanish Civil War in detail. I remember when I listened to the Hitchen's podcast, I was a little surprised that he did not mention Chomsky's earlier work on the subject. But, then again, they had a fairly public falling out over the Iraq War.

Mike Linksvayer writes:
I tried to read Bartley's work, Retreat to Commitment, very Hayekian thesis about reason; I found it very difficult going. So, it's not like Bartley was the most lucid of phrase-makers.
Retreat to Commitment is a completely delightful read. I'd love to hear a contemporary pan/comprehensively critical rationalist philosopher on EconTalk.
Kevin Crystal writes:

Russ,

Thanks for another great podcast. I've been listening for a few years now and think you do a great job. I only wish the majority of Americans could understand the principles contained in these audio files.

Kevin

xian writes:

thanks david...roberts speaking to chomsky would b an interesting podcast on classical liberalism, maybe a touch of human behavior/nature, as a linguist...

thought a hayek podcast would get more chatter...

i dont know where to put this, but there's no podcast on bastiat.

"There are historical grounds for placing pro-market libertarianism on the left. In the first half of the 19th century, the laissez-faire liberal economist Frederic Bastiat sat on the left side of the French National Assembly with other radical opponents of the ancien régime, including a variety of socialists."

http://www.amconmag.com/blog/libertarian-left/

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