Hayek's Market Republicanism

The Limits of Liberty

Sean Irving

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429750731
• Edition: 1
• Topic: Economía
• Subtopic: Historia económica

Friedrich Hayek was the 20th century's most significant free market theorist. Over the course of his long career he developed an analysis of the danger that state power can pose to individual liberty. In rejecting much of the liberal tradition's concern for social justice and democratic participation, Hayek would help clear away many intellectual obstacles to the emergence of neoliberalism in the last quarter of the 20th century.

At the core of this book is a new interpretation of Hayek, one that regards him as an exponent of a neo-Roman conception of liberty and interprets his work as a form of 'market republicanism'. It examines the contemporary context in which Hayek wrote, and places his writing in the long republican intellectual tradition.

Hayek's Market Republicanism will be of interest to advanced students and researchers across the history of economic thought, the history of political thought, political economy and political philosophy.

1 Government and the business cycle

Hayek’s understanding of freedom emerged from his economic theory. For the first 20 years of his career he worked as an economist, concerned with technical issues relating to the role of money in the business cycle. Hayek (2014) conceived of the economy in abstract terms and considered it to be self-correcting and tending towards equilibrium over time: that in the absence of exogenous shocks, supply and demand would gravitate towards a balanced state, even if they never reached the idealised perfect state of equilibrium central to neoclassical economics (Hayek, 1948b; Caldwell, 1988).

Over the 1920s and ‘30s, Hayek argued that it was not possible to model economic activity based on data and aggregates of the sort that had begun to be compiled by governmental organisations and bodies associated with the League of Nations (Slobodian, 2018, pp. 55–90). Hayek did not regard this information as a reflection of the real economy at any given point and so rejected the conclusion of the 1923 Annual Report of the US Federal Reserve which stated that ‘control of the quantity of money could be used to assure the stabilisation of economic activity’ (Kresge, 1999). If the data could not be relied upon to present an accurate depiction of the economy, then any attempt to pursue policies of stabilisation were bound to be misguided from the start. It was, therefore, ill-advised to attempt to use monetary policy to stimulate the economy during an economic downturn, as to do so would only lead to further distortions. It is not the case, however, that Hayek regarded the economy as stable or as always yielding beneficial outcomes. The business cycle was an unfortunate but inevitable aspect of a money economy. Crucially, over this period, Hayek became convinced that it was governments that posed the greatest threat to the effective functioning of this cycle as a result of their growing desire to intervene in it.

Hayek’s early work

Having lived through the inflationary crises of the period after the First World War, Hayek was well aware of the impact that fluctuations in the value of money can have on society. Austria’s inflationary wartime policies, combined with a move from a gold to a dollar standard, had rendered the war bonds, bought primarily by families of an upper middle class standing similar to the von Hayeks, worthless.¹ On his return from the Italian front in 1918, Hayek enrolled at the University of Vienna. Although his degree was in jurisprudence, with some courses on Roman law under Moriz Wlassak leaving a lasting impression, ‘the decisive point was simply that you were not expected to confine yourself to your own subject’ (Hayek, 1994, p. 43). This willingness, and ability, to write on a range of subjects would remain with him throughout his career. Nonetheless, Hayek’s primary interests lay in psychology and economics. Indeed, he had only turned to the law in order to proceed to one of these subjects, but the war had left no psychology professors teaching at the university. Recognising also that ‘economics at least had a formal legitimation by a degree, while in psychology you had nothing’, when he completed his jurisprudence degree in 1921, he began a second in the study of economics under the broadly Fabian professor, Friedrich von Wieser, which he completed in 1923. Despite Wieser’s deep personal impression on Hayek as a teacher, he was later to recall,

I now realize – I wouldn’t have known it at the time – that the decisive influence was just reading Menger’s Grundsätze. I probably derived more from not only the Grundsätze but also the Methodenbuch, not for what it says on methodology but for what it says on general sociology.

(Hayek, 1994, p. 49)

Although Carl Menger, the founder of Austrian School of economics, was bound to have been an influence, it was at some remove. Instead, it was Ludwig von Mises who played the major role in Hayek’s early personal and professional development. In later discussions, Hayek remembered how his first economic ideas, along with those of many others of his generation, were of a socialist or semi-socialist nature and how he even found himself in trouble at the Gymnasium for reading a socialist pamphlet during his divinity lesson (Hayek, 1994, p. 40). After the war socialism seemed to be in the ascendant. In Hungary, separated from Austria following the revolution brought on by the pressures of war, Béla Kun established a short-lived Soviet Republic (Borsányi, 1993). Hayek’s home city would become known as ‘Red Vienna’ over the course of the 1920s because of the dominance of socialists in local government (Beniston, 2006). In the university itself, he recalled, most of the students were, at least initially, strongly inclined towards socialism. Hayek recognised that it was Mises’s (1981) work, Socialism: An Economic and Sociological Analysis that ‘gradually but fundamentally altered the outlook of many of the young idealists returning to their University studies after World War One. I know’ he remembered, ‘for I was one of them.’ (Hayek, 1992, pp. 126–159).

After graduating, it was Mises who helped Hayek secure his first job in the temporary government agency the Austrian Office of Accounts. One of the great advantages of the job was that his salary was indexed to inflation. (Hayek, 1994, p. 60). This enabled him, despite the crisis, to save enough money by the beginning of 1923 to travel to the US in order to work as a research assistant to Jeremiah Jenks, whom he had met in Vienna in 1922, at New York University. When he arrived, he found ‘that Professor Jenks had left for a vacation and given instructions that he was not to be disturbed’. Hayek was forced to look for work. ‘I was finally accepted as a dishwasher in a Sixth Avenue restaurant – but I never actually started on it’ he recalled, ‘since an hour before I was to report to work a telephone call came through saying that Professor Jenks had returned and was prepared to employ me’. (Hayek, 1994, p. 56)

One of Hayek’s reasons for wanting to spend time in America was the advanced state of its mathematical economic models, based upon the belief, expounded by Wesley Clair Mitchell, and before him Thorstein Veblen (1899, 1915), that the acquisition of facts could explain economic phenomena. Such ‘institutionalism’ was in many regards the American inheritance of the Methodenstreit. This had been the 19th century confrontation between the younger German Historical School, led by Gustav Schmoller and those they dismissively referred to as the Austrian School, led by Menger. Fundamentally the dispute was about the nature of economics: whether it is a science based on atemporal precepts, as held by the Austrians or, rather, a form of historical enquiry, as maintained by the Historical School. The implications of either position remain far reaching. If it is a science, following its own inherent rules, then the state must recognise definite limits on the extent to which it is possible to direct the economy. Yet, if economic order is always historically contingent, as much the product of politics as its own motive force, then it might be possible to shape and direct it. Hayek regarded the American Institutionalists as the ‘spiritual successors’ of the German Historical School, drawing on Joseph Schumpeter’s 1926 observation that all that was necessary was to ‘change the relative emphasis put upon statistical and historical materials in this picture and we have even to details, the position that Schmoller held throughout his life’ (Mitchell, 1937, pp. 37–38).

The Austrian position was heavily informed by the work of the classical economists such as David Hume, Adam Smith and Claude-Frédéric Bastiat. Yet Menger’s greatest legacy is his critique of the labour theory of value, so central to classical political economy. Instead, he posited the concept of marginal utility which holds that the utility, and hence the amount an individual is willing to pay for a unit of a particular good, declines the more one consumes. According to this theory, rather than value inhering in some objective quality, such as labour time expended it is, by contrast, entirely subjective. Manger arrived at the position that marginal utility was the determinant of value at the beginning of the 1870s, at approximately the same time as William Stanley Jevons in Britain and Leon Walras in Switzerland and all seem to have arrived at the position independently (Stigler, 1950a, 1950b).

Despite this departure from the classical school, Menger’s work conforms to Adam Smith’s conception of the economy as the product of interaction between economic actors according to the division of labour. Economic development occurs over time, the result of humanity’s innate propensity to ‘truck, barter and exchange’ (Smith, 1976b, p. 25). This is Smith’s famous concept of ‘the invisible hand’, a force that seemingly guides the market towards beneficial outcomes. The concept constitutes perhaps Smith’s most famous phrase although he uses it only three times (Smith, 1976a, p. 184, 1976b, p. 456, 1980, p. 4; Rothschild, 1994). It is an idea to which Menger (1985) subscribed although unlike Smith who, contrary to the interpretations of much 19th century German scholarship, had maintained the importance of sympathy as set out in his The Theory of Moral Sentiments (Haller, 2000; Tribe, 2008), Menger held that self-interest alone would result in invisible hand type outcomes. Hayek certainly regarded Menger as an inheritor of Smith’s logic and it is a comparison he draws repeatedly. (Hayek, 1967c, p. 94, 1982b, p. 22, 1978h, pp. 267–269).² From an Austrian perspective the great contributions of Smith, his contemporary David Hume, and before them Bernard Mandeville, had been their conceptions of the economy, and thus society more broadly, as the product of an evolutionary development brought about by freely interacting individuals (Hayek, 1978g; Petsoulas, 2001).

Given that Hayek’s own work was firmly of the Austrian tradition, his desire to go to America, where the influence of the institutionalists was ascendant, reveals a level of intellectual curiosity. It seems reasonable to assume that he went to familiarise himself with the ideas of his intellectual adversaries. ‘What I found most interesting and instructive’ he later reflected ‘was the work done on monetary policy and the control of industrial fluctuations connected on the one hand with the Harvard Economic Service and on the other with the new experiments in central banking policy of the Federal Reserve System.’ (Hayek, 1984a). With the money from Jenks and a studentship he was able to register for a PhD at New York University entitled ‘Is the Function of Money Consistent with an Artificial Stabilization of Purchasing Power?’ (Kresge, 1999, p. 5). Hayek brought academic habits from the University of Vienna, with its loosely structured timetables and study patterns, with him to America. Rather than work on his thesis he instead attended lectures at Columbia given by Wesley Clair Mitchell (1913), who had founded the National Bureau of Economic Research in New York and whose work, Business Cycles, had influenced much of the profession. He also used the time to work on his first article, which examined recent American approaches to monetary theory (Hayek, 1999a).

Hayek’s (1999b) second article, ‘Monetary Policy in the United States after the Recovery from the Crisis of 1920’, introduced German readers to new American approaches to the question. The US Federal Reserve had been established in 1913 and already Hayek was raising the question, ‘did the central banking system really offer the best possible remedy for the known weaknesses of the credit organization in the United States?’ (Hayek, 1999b, pp. 145–146). Based upon aggregated data of the sort produced by the institutionalists around Mitchel, it was widely argued that the Fed should make full use of a discretionary monetary policy. As Bruce Caldwell has explained, ‘If the price level (as measured by some statistically constructed index number) rose beyond a certain point, the Fed banks would follow restrictive policy in order to slow economic activity. If it fell they would do the reverse’ (Caldwell, 2004, p. 152). In his 1928 article, ‘Intertemporal Price Equilibrium and Movements in the Value of Money’, Hayek built upon his earlier objections to such ambitions and sought to ‘provide a theoretical argument against a monetary policy of stabilisation’ (Kresge, 1999, p. 30). This article also led him to consider the now largely forgotten work of William Trufant Foster and Waddill Catchings who advocated the concept of underconsumption. Hayek’s critique of their work in ‘The Paradox of Saving’ foreshadowed his later criticisms of Keynes (Hayek, 1995a, p. 74–120). In the article, he emphasised the way in which the general price level lags behind the overall cycle, rendering it an ‘unhelpful, potentially destabilising, guide to monetary policy’ (Caldwell, 2004, p. 152; Arena, 2002).³ Hayek’s American doctorate was never completed, but the question of whether prices should be stabilised by means of government and central bank measures to alter domestic monetary arrangements was one that occupied him for the rest of his life. By the end of the 1920s, therefore, Hayek had developed the fundamentals of an economic theory that stressed that it was the self-correcting tendencies of the market that must be relied upon and warned against government intervention.

The gold standard and the central banks

On returning from the United States, Hayek reoccupied his position at the Office of Accounts, until Mises was able to establish the Austrian Institute for Business Cycle Research, which Hayek was to head from 1927 until 1931, when he was invited by Lionel Robbins, who had been impressed by ‘The Paradox of Saving’, to the London School of Economics to deliver a series of lectures (Hayek, 1994, p. 67; Howson, 2011). The lectures, published together as Prices and Production, developed Hayek’s earlier critique of discretionary monetary policy and were in large part a response to John Maynard Keynes’s 1930 work A Treatise on Money. In it, Keynes (2012b) had argued that there was no automatic correction mechanism within the economy that would balance saving and investments. When savings became too high, often in response to social and economic uncertainty, economic downturns would occur, and it was this that had produced the persistent mass unemployment Britain had experienced in the 1920s. Although the book was written with the economic sluggishness of 1920s Britain in mind, its logic underpinned his subsequent explanation of the depression of the early 1930s, presented in The General Theory of Employment Interest and Money. Prompted by that later crisis, however, Keynes began to think that there might be something intrinsically deficient in the capitalist system, rather than downturns being the result of exogenous shocks. What government must do, he argued, is adopt counter cyclical measures, such as higher public spending, which might reduce unemployment and kick-start the economy.

In the 1929 general election, David ...

Table of contents

• Cover
• Half Title
• Series
• Title
• Copyright
• Dedication
• Contents
• Acknowledgements
• Introduction
• 1 Government and the business cycle
• 2 The socialist calculation debates
• 3 Liberalism true and false
• 4 Hayek’s market republicanism
• 5 The danger of ‘unlimited’ democracy
• 6 Inflation and social justice
• 7 A market republican constitution
• 8 Market republican money
• 9 Liberal authoritarianism and market republicanism
• Conclusion
• Index