No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Twelve: Money Mischief 294 GREAT ECONOMISTS IN HISTORY FRIEDRICH A. HAYEK 1899-1992 Friedrich Hayek is arguably the greatest Austrian economist since Carl Menger; certainly he is the Austrian with the most influence outside the Austrian school. His work is even today widely quoted by economic scholars who have never read Von Mises ( Great Economist of chapter 1). Ludwig Von Mises’ protégé, Hayek, wrote deeply in economic theory and then beyond, ultimately writing well-regarded works on legal and political theory. Hayek was very bright, earning two doctorates from the University of Vienna—one in Law (1921), the other in political science (1923). After a brief stint in America working at the National Bureau of Economic Research, Hayek returned to Austria and teamed with Mises to form a similar organization (Skousen, p. 297). While studying with Von Mises, he absorbed Mises’ iron clad logic against socialism and became a leading figure studying business cycles. Hayek took Mises’ short skeleton theory from The Theory of Money and Credit and operationalized it into a full-blown Austrian Business Cycle Theory. Hayek predicted the 1929 stock market crash, and after it occurred he had a complete theoretical description to explain it. Mises’ private seminars attracted world-wide attention, and Lionel Robbins from the London School of Economics (LSE) came and heard Hayek present his theories during one of the seminars. Robbins found Hayek’s argument so compelling that he brought him back to London to provide an LSE opponent to stand up to J.M. Keynes. Hayek’s lectures at LSE were subsequently published in the book Prices and Production , which was the most profound application of Capital Theory the economics profession had ever seen; it took the world by storm. For Austrian capital theory, the cure for the bust was to not let the boom get going in the first place. Bad investments needed to be liquidated and capital reallocated. Hayek had no easy solution to the mess of the Great Depression, and when Keynes finally wrote the General Theory, his famous quip “in the long run we’re all dead” seemed a fitting rebuttal to Hayek. “Hayek may be right, but he’s irrelevant if he has no answer to our problem,” thought the profession. As other economists abandoned Hayek (even Lionel Robbins!), Hayek continued writing influential articles on knowledge and how the price system and markets coordinate economic activity. His 1944 book The Road to Serfdom was a best seller, and Hayek turned to political and legal theory. While Hayek was abandoned in favor of Keynesian “New Economics,” Hayek (and Mises) were ultimately vindicated by Hayek’s winning the 1973 Nobel Prize and the subsequent fall of communism. Mises and Hayek were truly a “dynamic duo.” Photograph of Friedrich A. Hayek 1 Essential Hayek: Who is F.A. Hayek?