LSE economist and Nobel Prize laureate Friedrich August von Hayek was one of the key figures of the 20th century, writes Lachezar Grudev in this short biography of Hayek’s time at LSE, rivalry with John Maynard Keynes, and the wider impact of his work. In 2024, the Hayek scholarship celebrates three jubilees marking his 125th birth anniversary, the 80th anniversary of publishing his bestseller The Road to Serfdom and the 50th anniversary of him receiving the Nobel Prize.
Friedrich August von Hayek was an Austrian economist and social philosopher who belonged to the leading intellectual figures of the 20th century. He received a Nobel Prize in Economic Sciences in 1974 jointly with his intellectual rival the Swedish economist Gunnar Myrdal “for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena” (NobelPrize.org). Hayek developed a significant proportion of these ideas as a professor at the London School of Economics and Political Science (LSE).
Hayek was born in Vienna on 8 May 1899 as the son of August and Felicitas (née Juraschek). Hayek’s family was very well connected with the leading Viennese intellectuals. After graduating high school in 1917, Hayek experienced the tragedies of the First World War when, as a soldier on the Italian front, he was seriously wounded. From 1918 to 1923, Hayek studied Law and Economics at the University of Vienna. From 1923 to 1924 he spent one year at Columbia University in New York where he became acquainted with the new statistical research methods and English literature on political philosophy. From 1927 to 1931, Hayek was the director of the Austrian Institute for Business Cycle Research, whose foundation was initiated by his mentor Ludwig von Mises (1883–1973). From Mises, Hayek learnt a lot about political economy and social philosophy. In particular, Mises’s argument about the economic impossibility of socialism would play an enormous role in Hayek’s later research programme.
Hayek’s path to LSE
Hayek’s early research focused on the business cycle phenomenon. This was the topic of his habilitation thesis Monetary Theory and the Trade Cycle (1929). Such a thesis was an important prerequisite to starting an academic career in the German language region. The business cycle phenomenon describes the economic fluctuation where economic booms and depressions are connected and follow each other on a cyclical basis. In 1928, Hayek defended his thesis with a lecture “The Paradox of Saving” at the University of Vienna. This was published as a paper in the following year. Lionel Robbins, who was transforming the economic department of LSE to a well-renowned research institute by attracting the greatest minds of the time, found the paper’s arguments so convincing that he invited Hayek to deliver a series of lectures. These lectures took place from 27 to 30 January 1931. With Robbins’s support, these lectures were later published as a book titled Prices and Production (1931). These lectures were considered such a success that Hayek was offered the Tooke Chair of Economic Science and Statistics at LSE, which he accepted in 1931. He interpreted this offer as one of the luckiest moments in his life. Hayek was the leading figure at LSE until 1950 when he moved to the University of Chicago. In 1962, Hayek went to Freiburg in Southern Germany where he joined the Economic Faculty of the University of Freiburg. From 1969 to 1977, Hayek was an honorary professor at the University of Salzburg. In 1977, he returned to Freiburg, where he lived until his death in 1992.
Hayek versus Keynes
Prices and Production was considered the counterpart to John Maynard Keynes’s Treatise on Money (1930). Keynes was then the formative figure of the Cambridge economic department. Hayek’s student and future Nobel Prize laureate John R Hicks would later remember the battle between LSE and Cambridge as the most dramatic academic event in the early 1930s. Keynes and Hayek agreed upon credit creation as the main source of economic fluctuations. However, they diverged regarding how this credit creation affected the structure of the economy. Hayek demonstrated that commercial banks increased credit provision by lowering interest rates. This caused a relative inflation, which was characterised by distorting the prices in the economy. Entrepreneurs based their production plans on these wrong prices. In their activity to fulfil their plans, entrepreneurs realised that prices did not convey the right information. The moment of truth could be defined as an outbreak of crises when entrepreneurs realised losses. Due to these losses, they had to dismiss workers, which created unemployment in the economy. The persistence of crises depends on how the prices can adjust so that the profits of enterprises are restored, and workers can be reemployed. This explanation was based on the Austrian theory of capital. This theory inspired the young LSE generation such as Hicks, the Hungarian economist Nicholas Kaldor and the socialist thinker Abba Lerner. However, Hayek’s fame was short-lived because Keynes won the battle with his General Theory of Employment, Interest and Money in 1936. Even though Hayek’s former pupils changed camp and went to Keynes, they continued using Hayek’s ideas about capital theory without acknowledging their Austrian master. The culmination of Hayek’s economic research was the highly complicated book The Pure Theory of Capital (1941).
The Road to Serfdom
During the LSE years, Hayek also participated in the Socialist Calculation Debate. The common theme of the British Intelligentsia was that capitalism was doomed to crises so that they envisaged a centrally planned economy as the better and more stable alternative to the apparently unstable market economy. Hayek continued Mises’s arguments that prices and production cannot be planned, because production quantities are based on expected prices. Prices are the result of demand and supply, which in turn is influenced by myriad factors that no individual or planning board can ever know. The problem of knowledge was the central theme in the paper “Economics and Knowledge”, which Hayek delivered as a presidential address to the London Economic Club in 1936. Hayek discussed how modern economics was forgetting that we are talking about human beings who have limited knowledge which refers only to these circumstances for which she or he cares in order to achieve her/his individual plan. So, economy was populated by individuals with fragmented knowledge and economists should raise the question how this dispersed knowledge should be coordinated so that desirable results, such as the wealth of society and economic growth were promoted. Most of these arguments made up the crucial message of the bestseller The Road to Serfdom, which Hayek published in 1944 and which brought him international fame. This book is still considered as one of the most influential books written in the twentieth century.
Hayek’s Economics at LSE
The ideas developed in his writings help us understand Hayek’s choice of lectures and seminars at LSE. Prices and Production was opened by a history of monetary theory, which even impressed the LSE banking and monetary expert Theodore E Gregory. That is why Hayek taught “Principles of Currency” and “Monetary Theory” during the first academic year. Jointly with Robbins and Arnold Plant, he taught “Problems of Applied Economics”. From 1934 onward, Hayek taught “Capital, Interest and Fluctuations” and “Theory of Value”. Hayek and Robbins organised the famous “Grand Seminars”, which were an instrumental institution for LSE academic life. This seminar was for graduate students who discussed theories following recent publications on, for example, imperfect competition and international trade. On Hayek’s request, in 1931/1932, the Seminar discussed capital theory and in 1932/1933, the problem of collectivist economics.
The LSE period belongs to Hayek’s most productive stages in his research programme. Hayek was also one of the editors of the LSE-based journal Economica, where influential articles on economic theory were published. After leaving the School, Hayek was not forgotten. In 1972, LSE made Hayek an Honorary Fellow. In 1981, he delivered a lecture commemorating the 50th anniversary of Prices and Production. Then, a memorial plaque was unveiled by the then LSE Director Ralf Dahrendorf (1929–2009). These events demonstrated how much LSE respected Hayek’s role in turning the economic department to a well-renowned research institute.
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References
Boettke, Peter J. 2018. Friedrich A. Hayek: Economics, Political Economy and Social Philosophy. London: Palgrave Macmillan.
Caldwell, Bruce and Hansjörg Klausinger. 2022. Hayek: A Life 1899–1950. Chicago: University of Chicago Press.
Grudev, Lachezar. 2023. “Technological Progress as the Only Source of Economic Growth? Friedrich A. Hayek’s Critical Assessment of Growth of Technological Knowledge as a Decisive Factor for Economic Growth.” In: Friedrich A. Hayek’s Theory on Social Change, herausgegeben von Peter J. Boettke, Erwin Dekker und Chad van Schoelandt, Lanham: Lexington Books, S. 1–30.
Hayek, Friedrich A. 1929a. Geldtheorie und Konjunkturtheorie. Vienna: Holder-Pichler-Tempsky. Translated as Monetary Theory and The Trade Cycle. London: Jonathan Cape. Rpt.
Hayek, Friedrich A. 1929b. “Gibt es einen Widersinn des Sparens?” Zeitschrift für Nationalökonomie 1 (3): 387–487. Translated as “Paradox of Saving” in Profits, Interest and Investment, London: George Routledge & Sons Ltd: 199–264.
Hayek, Friedrich A. 1931. Prices and Production. London: George Routledge & Sons.
Hayek, Friedrich A. (ed.) 1935. Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism. London: Routledge.
Hayek, Friedrich A. 1937. “Economics and Knowledge.” Economica 4 (13): 33–54.
Hayek, Friedrich A. 1944. The Road to Serfdom. London: George Routledge & Sons.
Hayek, Friedrich A. (1963) 1995. “The Economics of the 1930s as Seen from London.” In Contra Keynes and Cambridge: Essays, Correspondence, edited by Bruce Caldwell, 49–73. Vol. 9 of The Collected Works of F A Hayek. Chicago: University of Chicago Press.
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Kolev, Stefan. 2024. “When Liberty Presupposes Order: F. A. Hayek’s Contextual Ordoliberalism.” Journal of the History of Economic Thought 46 (2): 288–311.
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