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Pause for a moment from the parade of nonsense that is American
public life and consider the source of great ideas that would
dramatically improve our world. The life and work of economist Friedrich
August von Hayek (1899-1992), born 100 years ago, is cause for
celebration because they have helped lead the revival of the idea of
liberty in a century of socialism.

He was educated in Austria in the early part of this century, but it
was Ludwig von Mises’ 1923 book, Socialism, that first jarred
Hayek away from the fashionable collectivism of his Vienna
contemporaries. He went on to become a close colleague and collaborator
of Mises, first in shaping the business cycle theory that would later
win him the Nobel Prize in economics, and
later in battling the rise of Keynesianism.

In the 1930s, Hayek was one of the few economists to decry the
monetary debasement taking place all over the world. Far from digging
the world out of depression, he warned, inflating the money can only
disrupt international trade and generate further declines in the
standard of living.

Instead, he urged the restoration of an authentic gold standard,
whereby paper money was fully convertible into gold at a fixed rate.
This system would not only prevent inflation, said Hayek; it would
facilitate international trade and rein in government power.

The Misesian theory of the business cycle was also essential to his
critique of paper money. When the central bank distorts interest rates
downward, it subsidizes capital investment out of proportion to savings,
leading to an artificial economic boom. The bust follows when the
central bank curbs credit expansion to prevent higher prices, or when
the exaggerated optimism
of investors gives way to the realities of the underlying economic
structure.

For this reason, Hayek was a severe critic of lender-of-last-resort
banking policies. Instead, he thought banks should function like any
other market institution, being neither hobbled by regulations nor
subsidized through a central bank like the Fed. If his view had
prevailed, the dollar would still be as good as gold, the Asian bust and
the bailout mania of the last ten years would not have occurred, and the
world economy would be in much better shape.

Note too that money expansion rates have sometimes run into double
digits this year, and with Greenspan keeping the lid on the interest
rates he controls, one wonders if the present stock market boom is
entirely justified. As Hayek explained, credit expansion doesn’t have to
show up in prices to cause underlying damage that isn’t revealed until
it is too late.

Hayek also collaborated with Mises in debunking the fallacies of
socialism. It was not an economic system, he said, so much as a system
of control that empowered the total state. Hayek further argued that
central planners could not have access to all the information necessary
to coordinate production and exchange for an entire economy.

Like Mises himself, Hayek broadened his interests beyond economic
studies during and after the Second World War. His classic, The Road
to Serfdom
, spelled out the institutional links between socialism
and tyrannical political controls, and said that no society could be
free in the absence of a capitalist system of economics.

The book shocked the intelligentsia in Britain and the U.S. because
he saw no strict line demarcating Italy’s fascism and Germany’s national
socialism from Soviet socialism, which at the time were seen as polar
opposites of right and left. Moreover, he saw no strict line demarcating
these systems from America’s New Deal and Britain’s Fabian planning.
They all exalted the state above the individual and stood in opposition
to the classical idea of liberty.

His studies of law and society, gathered in his three-volume Law,
Legislation and Liberty
, decried the rise of egalitarianism and
“distributive justice” implied in the welfare state. As opposed to the
legal uncertainties of special-interest legislation, he favored the
classical rule
of law, which held that established general rules applied to the whole
population.

Also in these years, Hayek began to develop a systematic critique of
the rise of “scientism” in the study and management of society. Society
cannot be designed and redesigned by intellectuals; it must evolve
according to the interests and voluntary behavior of people with
localized knowledge. It’s a message that needs to be heard and
understood by every school of social
science in the West.

Mises was critical of Hayek’s later work in several respects. In
books such as The Constitution of Liberty, Hayek had conceded too
much to the social democrats, permitting a range of government
interventions that were neither necessary nor genuinely compatible with
a free society. Further, Murray Rothbard has argued that Mises provided
a more fundamental and devastating critique of socialism.

Nonetheless, Hayek was an enthusiastic backer of the Mises
Institute
at its founding and served on the
board of advisers in the years before his death. And the Nobel Prize he
won in 1974 served to introduce a new generation of students into the
Austrian tradition and the classically liberal ideal. F. A. Hayek was a
champion of freedom and good scholarship in a century when these virtues
were extremely scarce.

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