Born in 1899 into comfortable circumstances in cosmopolitan and imperial Vienna, Hayek was a precocious if somewhat erratic learner, dabbling in many areas of science and literature. In all, his family, his city, and the young man himself fairly embodied the promise of the modern world. During World War I, Hayek spent a year in an artillery unit on the Italian front and, although his personal circumstances were little affected, he returned to a Vienna where the political and intellectual landscape had changed decisively. In some ways, explaining this social earthquake would be the theme of Hayek's career.
Hayek studied economics and his first real job was in a government agency where his supervisor was Ludwig von Mises, a key figure in the Austrian school of economics. Perhaps more than any other, this association was responsible for Hayek's shift from Fabianism to what he described as classical liberalism. Hayek moved easily through the rich and heated intellectual life of post-war Vienna belonging to private seminars and discussion groups where the latest works of Weber, Mach, Kelsen, Husserl, and others were debated. Hayek's work in economics earned him a research trip to the United States and, eventually, a position at the London School of Economics in 1931. For the next decade he wrote almost exclusively on economic matters, specifically the trade cycle. Though prominent, he was overshadowed as an economist by John Maynard Keynes, something that would continue until the 1970s, almost three decades after Keynes's death. In 1944, Hayek published the book that would make him famous, The Road to Serfdom. It sold well in England and even better in the United States. He savaged the reigning orthodoxy that to "save" capitalism a middle way involving state planning was essential. He seemed to show the inexorable logic by which planning not only subverts democracy and the rule of law, but leads to the very kind of totalitarianism that capitalism was intended to avoid. Planning, Hayek argued, is inherently arbitrary and inevitably requires the substitution of the opinions of a few for those of the many. He moved to the University of Chicago's Committee on Social Thought in 1950 and then in 1962 to the University of Freiburg, where he stayed until the end of his career. His physical and intellectual energies began to falter in the 1980s, and he died in 1992.
Bruce Caldwell's Hayek's Challenge is a carefully written, impeccably researched, and thoughtful book that is sure to become the standard in Hayek scholarship. Caldwell, a professor of economics at the University of North Carolina at Greensboro, is general editor of the University of Chicago's Collected Works of F. A. Hayek. Caldwell begins with an excellent series of chapters devoted to the Austrian School of economics, in which Hayek began his studies. The Austrian School grew up in opposition to Gustav Schmoller's German Historical School. Reacting against the abstract universalism of both natural rights theories and Adam Smith's economics, Schmoller argued for a historically-based social science that would amass data through empirical studies in the hope of some day distilling laws of historical development. What made the historical school a force, however, was its somewhat contradictory belief that despite the preliminary character of its studies it was also charged with giving sage—critics said flattering—advice to the Prussian state. The opposition to Schmoller was led by Austrian economist Carl Menger, who made the case for economic theory, outlining what he claimed was the essential and universal nature of economic choice: the relation between a person's needs and the goods that might satisfy those needs. He suggested also that the Historical School neglected one of the most important ways in which history operates: important social institutions such as law, language, money, markets, and even the state emerge through the unintended consequences of individual economic choices. It was out of this Methodenstreit that the economist Hayek was born.
One of the strengths of Caldwell's account is his discussion of Max Weber's lasting influence on Hayek. After his years at the University of Vienna, Hayek wanted to study with Weber, but the plan was derailed by the latter's death. Methodologically, Weber was in substantial agreement with the Austrians and he added one point of great importance, namely, the fact-value distinction. Caldwell tends to reduce Weber's great claim to a reaction against the political preachiness of the German professoriate. Nevertheless, he is right to stress its importance, a point to which we will return.
Hayek's lasting contribution to economic thought came when in the mid-1930s he began to rethink the presuppositions of economic theory. He came to see that the conventional assumption that individuals possessed "perfect" or complete knowledge to make their decisions is empirically false and reduces economic theory to an empty tautology. As he saw things, the essence of the economic problem is the scarcity and dispersed character of knowledge. The real economic problem is how to allocate knowledge so that it can be used in an efficient and timely fashion. Hayek argued that the free market, through the price system, conveniently conveys information to those who can use it best because they possess the local or particular knowledge to do so.
Hayek thought the implications of this insight numerous and important. It provided a powerful, indeed devastating, argument against socialism by pointing to the impossibility of efficient central planning: no planner or planning agency can acquire the information necessary to make the almost infinite number of daily decisions required in a modern economy. Hayek challenged socialism on what to many was its strongest ground—the promise of a better standard of living—and showed it wanting. There were implications also for mainstream economics. Hayek saw the market as an effective, though not perfect, mechanism for coping with uncertainty. Economic fluctuations are inevitable but the best way to deal with them is to allow the market's own adjustment mechanism to work. Government action, by way of Keynesian economic management, say, is certain to do worse.
At the methodological level, Hayek's rethinking had profound implications for how the discipline of economics understood itself. He thought the attempt to follow the natural sciences in aspiring to be a positive, predictive science fundamentally mistaken. The complexity of social life meant that, at best, what Hayek called "pattern predictions" are possible. Economists can predict very general trends based on an understanding of the actual conditions under which individuals make economic decisions. At first, Hayek thought that he was elaborating a distinctively human science, but later he came to believe that the only difference between the social and the natural sciences is the complexity of the phenomena under examination. In the natural sciences it is possible to isolate a few variables for analysis, while in the social sciences there are simply too many variables for precise predictions.
Caldwell concludes his fine book with a plea to take the history of economic thought more seriously. He hopes that an awareness of its various schools—something that served Hayek very well—will check the enthusiasm of economists for a reigning orthodoxy. It is hard to disagree with him. Recent studies have called into question the extent to which economists really pay attention to empirical evidence. Indeed, when and where an economist went to graduate school seem just as important for determining his or her views.
Hayek's turn to politics in The Road to Serfdom seems abrupt but, as Caldwell shows, there are important continuities, especially when considered along with its sequels, The Constitution of Liberty (1960) and the three volumes of Law, Legislation, and Liberty (1973-79). Following Menger, Hayek saw the market as an example of a "spontaneous order," that is, of an order that comes about as a result of human action but not as a result of human design. He came to believe that the idea of spontaneous order is widely applicable and central both to understanding society and to the preservation of liberty.
The political aspects of Hayek are taken up directly by Alan Ebenstein, a political theorist, in his useful book, Hayek's Journey. While it lacks the care and depth of Caldwell's, it gives a rapid-fire introduction to Hayek's intellectual career. Unlike the cautious Caldwell, Ebenstein is not afraid of big generalizations. He groups Hayek with Leo Strauss and John Rawls, suggesting that they may "perhaps…be considered the three greatest political philosophers of the twentieth century." He singles out Hayek as "the greatest philosopher of liberty in the twentieth century." These are claims worth considering.
Ebenstein's discussion of Hayek's surprising tolerance for some kinds of government intervention is a revealing place to start. As a libertarian, Ebenstein is uncomfortable with the degree to which Hayek encouraged state intervention in health, welfare, and many other public services so long as the rule of law (which he defined as truly general laws equally applicable to all) is observed and government monopolies are not created. Ebenstein observes that "Hayek did not really enunciate a principle for government interference. Rather he articulated the form that government interference should take, together with a preference that there should be less government rather than more." By failing to articulate a principle for distinguishing public and private concerns, Hayek remained true to the Weberian idea that social science is concerned with means to ends, not ends themselves.
This gap or limitation in Hayek's thought is evident as well in his idea of spontaneous order. Hayek embraced an idea of group selection as the mechanism of social evolution. Good ideas and practices result in social progress, bad ideas and practices in decline. As noted, good ideas and practices themselves are not the result of the efforts of a single or a few minds but of the accumulated wisdom of generations, which no individual can possess. We cannot fully grasp how society works and it therefore stymies our attempts at manipulation, but we can, Hayek suggests, understand the mechanism through which social progress takes place. Hayek was, by his own testimony, no conservative. He looked forward to the future, so long as it was delivered to us by the same spontaneous orders that had brought us to where we were.
How plausible is all this? Do good ideas always win out? Is the new always better than the old? Surely the answers are: not very, no, and no. For one thing, as Hayek emphasized, bad ideas often have tremendous power. Moreover, the success of an idea is only an argument in its favor if there is an agreement over what constitutes success, and this requires an agreement about ends. Socialism could be vanquished if both sides could agree that the argument with liberalism was really about the most efficient way to organize an economy. But what if the appeal of socialism is a matter of justice, or of the nobility of the class struggle? Would it not then have to be opposed on grounds of principle? How effective would an evolutionary argument be to a convinced multiculturalist afraid of globalization? Or to a religiously motivated totalitarian convinced that social progress is in fact the work of the devil?
One can and must acknowledge Hayek's contributions to economics and to defeating 20th-century totalitarianism, but these two books leave open the question of whether Hayek ever confronted the greatest task before those wishing to defend liberty: that of giving a rational, principled argument in its defense.