Austrian Economics Wiki

"A claim for equality of material position can be met only by a government with totalitarian powers."
F.A.Hayek, Law, Legislation, and Liberty

Friedrich August von Hayek is one of the most eminent of the modern Austrian economists. Student of Friedrich von Wieser, protégé and colleague of Ludwig von Mises, and foremost representative of an outstanding generation of Austrian school theorists, Hayek was very successful in spreading Austrian ideas throughout the English-speaking world. "When the definitive history of economic analysis during the 1930s comes to be written," said John Hicks in 1967, "a leading character in the drama (it was quite a drama) will be Professor Hayek. . . . It is hardly remembered that there was a time when the new theories of Hayek were the principal rival of the new theories of Keynes".[1] Unfortunately, Hayek's theory of the business cycle was eventually swept aside by the Keynesian revolution. His work was again recognized when Hayek received, along with the Swede Gunnar Myrdal, the 1974 Nobel Memorial Prize in Economic Science. Hayek was a prolific writer over nearly seven decades; his Collected Works, currently being published by the University of Chicago Press and Routledge, are projected at nineteen volumes.

Life and Work[]

Hayek's life spanned the twentieth century, and he made his home in some of the great intellectual communities of the period. Born Friedrich August von Hayek in 1899 to a distinguished family of Viennese intellectuals, Hayek attended the University of Vienna, earning doctorates in 1921 and 1923. Hayek came to the University at age 19 just after World War I, when it was one of the three best places in the world to study economics (the others being Stockholm and Cambridge, England). Though he was enrolled as a law student, his primary interests were economics and psychology, the latter due to the influence of Mach's theory of perception on Wieser and Wieser's colleague Othmar Spann, and the former stemming from the reformist ideal of Fabian socialism so typical of Hayek's generation.

Like many students of economics then and since, Hayek chose the subject not for its own sake, but because he wanted to improve social conditions--the poverty of postwar Vienna serving as a daily reminder of such a need. Socialism seemed to provide a solution. Then in 1922 Mises published his Die Gemeinwirtschaft, later translated as Socialism. "To none of us young men who read the book when it appeared," Hayek recalled, "the world was ever the same again". Socialism, an elaboration of Mises's pioneering article from two years before, argued that economic calculation requires a market for the means of production; without such a market there is no way to establish the values of those means and, consequently, no way to find their proper uses in production. Mises's devastating attack on central planning converted Hayek to laissez-faire, along with contemporaries like Wilhelm Röpke[2], Lionel Robbins, and Bertil Ohlin.

It was around this time that Hayek began attending Mises's famed Privatseminar. Regular participants, who received no academic credit or other official recognition for their time, included Hayek, Gottfried von Haberler[3], Fritz Machlup[4], Oskar Morgenstern, Paul Rosenstein-Rodan, Richard von Strigl[5], Karl Schlesinger, Felix Kaufmann, Alfred Schütz[6], Eric Voegelin, Karl Menger, Jr., and others not so famous. For several years the Privatseminar was the center of the economics community in Vienna, attracting such visitors as Robbins from London and Howard S. Ellis from Berkeley. Later, Hayek became the first of this group to leave Vienna; most of the others, along with Mises himself, were also gone by the start of World War II.

Mises had done earlier work on monetary and banking theory, successfully applying the Austrian marginal utility principle to the value of money and then sketching a theory of industrial fluctuations based on the doctrines of the British Currency School and the ideas of the Swedish economist Knut Wicksell. Hayek used this as a starting point for his own research on fluctuations, explaining the origin of the business cycle in terms of bank credit expansion and its transmission in terms of capital malinvestments. His work in this area eventually earned him an invitation to lecture at the London School of Economics and Political Science and then to occupy its Tooke Chair in Economics and Statistics, which he accepted in 1931. There he found himself among a vibrant and exciting group: Robbins, J. R. Hicks, Arnold Plant, Dennis Robertson, T. E. Gregory, Abba Lerner, Kenneth Boulding, and George Shackle, to name only the most prominent. Hayek brought his (to them) unfamiliar views, and gradually, the "Austrian" theory of the business cycle became known and accepted. At the L.S.E. Hayek lectured on Mises's business-cycle theory, which he was refining and which, until Keynes's General Theory (text) came out in 1936, was rapidly gaining adherents in Britain and the U.S. and was becoming the preferred explanation of the Depression.

Hayek and Keynes had sparred in the early 1930s in the pages of the Economic Journal, over Keynes's Treatise on Money. As one of Keynes's leading professional adversaries, Hayek was well situated to provide a full refutation of the General Theory. But he never did. Part of the explanation for this no doubt lies with Keynes's personal charm and legendary rhetorical skill, along with Hayek's general reluctance to engage in direct confrontation with his colleagues. Hayek also considered Keynes an ally in the fight against wartime inflation and did not want to detract from that issue. Furthermore, as Hayek later explained, Keynes was constantly changing his theoretical framework, and Hayek saw no point in working out a detailed critique of the General Theory, if Keynes might change his mind again. Hayek thought a better course would be to produce a fuller elaboration of Böhm-Bawerk's capital theory, and he began to devote his energies to this project. Unfortunately, The Pure Theory of Capital (pdf) was not completed until 1941, and by then the Keynesian macro model had become firmly established.

The fortunes of the Austrian school have suffered a dramatic reversal with the next few years. First, the Austrian theory of capital, an integral part of the business-cycle theory, came under attack from the Italian-born Cambridge economist Piero Sraffa and the American Frank Knight, while the cycle theory itself was forgotten amid the enthusiasm for the General Theory. Second, beginning with Hayek's move to London and continuing until the early 1940s, the Austrian economists left Vienna, for personal and then for political reasons, so that a school ceased to exist there as such. Mises left Vienna in 1934 for Geneva and then New York, where he continued to work in isolation; Hayek remained at the L.S.E. until 1950, when he joined the Committee on Social Thought at the University of Chicago. Other Austrians of Hayek's generation became prominent in the U.S.--Gottfried von Haberler[3] at Harvard, Fritz Machlup and Oskar Morgenstern at Princeton, Paul Rosenstein-Rodan at MIT--but their work no longer seemed to show distinct traces of the tradition founded by Carl Menger.

At Chicago Hayek again found himself among a dazzling group: the economics department, led by Knight, Milton Friedman, and later George Stigler, was one of the best anywhere, and Aaron Director at the law school soon set up the first law and economics program. But economic theory, in particular its style of reasoning, was rapidly changing; Paul Samuelson's Foundations had appeared in 1947, establishing physics as the science for economics to imitate, and Friedman's 1953 essay on "positive economics" set a new standard for economic method. In addition, Hayek had ceased to work on economic theory, concentrating instead on psychology, philosophy, and politics, and Austrian economics entered a prolonged eclipse. Important work in the Austrian tradition was done during this period by Rothbard, Kirzner, and Lachmann[7], but at least publicly, the Austrian tradition lay mostly dormant.

When the 1974 Nobel Prize in economics went to Hayek, interest in the Austrian school was suddenly and unexpectedly revived. While this was not the first event of the so-called "Austrian revival," the memorable South Royalton conference having taken place earlier the same year, the rediscovery of Hayek by the economics profession was nonetheless a decisive event in the renaissance of Austrian economics. Hayek's writings were taught to new generations, and Hayek himself appeared at the early Institute for Humane Studies conferences in the mid-1970s. He continued to write, producing The Fatal Conceit in 1988, at the age of 89. Hayek died in 1992 in Freiburg, Germany, where he had lived since leaving Chicago in 1961.

There are several institutions founded in Hayek's name, including the Hayek Institute in Austria, the Friedrich A. von Hayek-Gesellschaft in Germany and F.A.Hayek Foundation in Slovakia.


Please consult the original text by Peter G. Klein for more references; reprinted with generous permission from the Mises Institute.

  1. Hicks, Sir John. 1967. Critical Essays in Monetary Theory. Oxford: Clarendon Press. p.203. Referenced via article source 2009-05-28.
  2. Shawn Ritenour. "Wilhelm Röpke (1899-1966): Humane Economist", Mises Institute, referenced 2009-05-24.
  3. 3.0 3.1 "Between Mises and Keynes An Interview with Gottfried von Haberler (1900-1995)", The Austrian Economics Newsletter Spring 2000 Volume 20, Number 1, referenced 2009-04-27.
  4. Mark Thornton. "Biography of Fritz Machlup (1902-1983)", Mises Institute, referenced 2009-05-24.
  5. Jörg Guido Hülsmann. "Richard von Strigl (1891-1942)", Mises Institute, referenced 2009-04-27.
  6. Peter Kurrild-Klitgaard. "The Viennese Connection: Alfred Schutz and the Austrian School"(pdf), The Quarterly Journal Of Austrian Economics Vol.6, no.2, referenced 2009-04-27.
  7. Peter Lewin. "Ludwig Lachmann (1906-1990): Life and Work", Mises Institute, referenced 2009-05-29.

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