Rothbard’s Split Decision on Hayek

What did Murray Rothbard think of Friedrich Hayek? In essence, he admired Hayek as a great Austrian economist but dissented from his politics. Rothbard was a libertarian: Hayek was a classical liberal.

Here is what he says about Hayek as an economist: “Converted from Fabian socialism by Ludwig von Mises’s devastating critique, Socialism, in the early 1920s, Hayek took his place as the greatest of the glittering generation of economists and social scientists who became followers of Mises in the Vienna of the 1920s, and who took part in Mises’s famed weekly privatseminar held in his office at the Chamber of Commerce. In particular, Hayek elaborated Mises’s brilliant business cycle theory, which demonstrated that boom-bust cycles are caused, not by mysterious defects inherent in industrial capitalism, but by the unfortunate inflationary bank credit expansion propelled by central banks. Mises founded the Austrian Institute for Business Cycle Research in 1927 and named Hayek as its first director. Hayek proceeded to develop and expand Mises’s cycle theory, first in a book of the late 1920s, Monetary Theory and the Trade Cycle. He was brought over to the London School of Economics in 1931 by an influential English Misesian, Lionel Robbins. Hayek gave a series of lectures on cycle theory that took the world of English economics by storm and were published quickly in English as Prices and Production. Remaining at a permanent post at the London School, Hayek soon converted the leading young English economists to the Misesian-Austrian view of capital and business cycles, including such later renowned Keynesians as John R. Hicks, Abba Lerner, Nicholas Kaldor, and Kenneth E. Boulding.  . . One of the reasons for the swift diffusion of Misesian views in England in the 1930s was that Mises had predicted the Great Depression, and that his business cycle theory provided an explanation for that harrowing event of the 1930s. Unfortunately, when Keynes came back with his later model, the General Theory in 1936, his brand new ‘revolution’ swept the boards, swamping economic opinion, and converting or dragging along almost all the former Misesians in its wake.”

He admired in particular Hayek’s criticism of Keynesian economics and regretted that he did not write a full length demolition of The General Theory: Here is what he says: “F.A. Hayek subjected J.M. Keynes’s early Treatise on Money (now relatively forgotten amid the glow of his later General Theory) to a sound and searching critique, much of which applies to the later volume. Thus, Hayek pointed out that Keynes simply assumed that zero aggregate profit was just sufficient to maintain capital, whereas profits in the lower stages combined with equal losses in the higher stages would reduce the capital structure; Keynes ignored the various stages of production; ignored changes in capital value and neglected the identity between entrepreneurs and capitalists; took replacement of the capital structure for granted; neglected price differentials in the stages of production as the source of interest; and did not realize that, ultimately, the question faced by businessmen is not whether to invest in consumer goods or capital goods, but whether to invest in capital goods that will yield consumer goods at a nearer or later date. In general, Hayek found Keynes ignorant of capital theory and real-interest theory, particularly that of Böhm-Bawerk, a criticism borne out in Keynes’s remarks on Mises’s theory of interest. In later years Hayek conceded that the worst mistake of his life was to fail to write the sort of devastating refutation of the General Theory that he had done for the Treatise, but he had concluded that there was no point in doing so, since Keynes changed his mind so often. Unfortunately, this time there was no demolition by Hayek to force him to do so.”

Rothbard also admired Hayek’s most popular book. The Road to Serfdom, which shows that statism leads to despotism. “During World War II, at a low point in the fortunes of human freedom and Austrian economics, in the midst of an era when it seemed that socialism and communism would inevitably triumph, Hayek published The Road to Serfdom (1944). It linked the statism of communism, social democracy, and fascism, and demonstrated that, just as people who are best suited for any given occupations will rise to the top in those pursuits, so under statism, ‘the worst’ would inevitably rise to the top. Thanks to promotion efforts funded by J. Howard Pew of the then Pew-owned Sun Oil Company, The Road to Serfdom became extraordinarily influential in American intellectual and academic life.”

Rothbard wasn’t completely favorable to Hayek as an economist, though. He thought that  after Hayek won the Nobel prize and attracted worldwide attention, he  eclipsed Mises, the more forthright and greater economist. Further, in the years after that, Hayek deviated from Misesian orthodoxy more and more: “In 1974, perhaps not coincidentally the year after his mentor Ludwig von Mises died, F.A. Hayek received the Nobel Prize. The first free-market economist to receive that honor, Hayek was accorded the prize explicitly for his elaboration of Misesian business cycle theory in the 1920s and ‘30s. Since both Mises and Hayek had by that time dropped down the Orwellian memory hole of the economics profession, many economists were sent scurrying to find out who this person Hayek might be, thus helping give rise to a renaissance of the Austrian School. Hayek’s receipt of the Nobel at this time was deeply ironic, since after World War II his ideas began to diverge increasingly from those of Mises and thus acquire acclaim from latter-day Hayekians who are scarcely familiar with the work which had made Hayek eminent to begin with. To the extent that Hayek remained interested in cycle theory, he began to engage in shifting and contradictory deviations from the Misesian paradigm— ranging from calling for price-level stabilization, in direct contrast to his warning about the inflationary consequences of such measures during the 1920s; to blaming unions instead of bank credit for price inflation; to concocting bizarre schemes for individuals and banks to issue their own newly named currency.”

As I said at the outset, Rothbard did not like Hayek’s political views, which were compromising and not clearly thought out. He tended to muddle though issues rather than examine them rigorously, as Mises had done: “Increasingly, Hayek’s interests shifted from economics to social and political philosophy. But here his approach differed strikingly from Mises’s ventures into broader realms. Mises entire lifework is virtually a seamless web, a mighty architectonic, a system in which he added to and enriched monetary and cycle theory by wider economic political and social theories. But Hayek, instead of providing a more elaborate and developed system, kept changing his focus and viewpoint in a contradictory and muddled fashion.”

Rothbard identified a fundamental philosophical mistake that led to Hayek’s deviations and inconsistencies. He was an irrationalist. “His major problem, and his major divergence from Mises, is that Hayek, instead of analyzing man as a rational, conscious, and purposive being, considered man to be irrational, acting virtually unconsciously and unknowingly. Since Hayek was radically scornful of human reason, he could not, like John Locke or the Scholastics, elaborate a libertarian system of personal and property rights based on the insights of human reason into natural law. Nor could he, like Mises, emphasize man’s rational insight into the vital importance of laissez-faire for the flourishing and even survival of the human race, or of foregoing any coercive intervention into the vast and interdependent network of the free-market economy. Instead, Hayek had to fall back on the importance of blindly obeying whatever social rules happened to have ‘evolved,’ and his only feeble argument against intervention was that the government was even more irrational, and was even more ignorant, than individuals in the market economy. It is sad commentary on academia and on intellectual life these days that Hayek’s thought, possibly because of its very muddle, inconsistency, and contradictions, should have attracted far more scholarly dissertations than Mises’s consistency and clarity. In the long run, however, it will be all too obvious that Mises has left us a grand intellectual and scientific system for the ages whereas Hayek’s lasting contribution will boil down to what was acknowledged by the Nobel committee—his elaboration of Misesian cycle theory.”

One aspect of Hayek’s social thought made Rothbard especially unhappy. Because of his widespread fame, the left can say, “Even Hayek supports the welfare state,” as if you would have to be a rightwing extremist to favor getting rid of the welfare state. And if, like Rothbard, you want to get rid of the state altogether, you must really be a nut job. Rothbard complained about this long before Hayek won the Nobel Prize. The Volker Fund asked him to comment on a draft of Hayek’s The Constitution of Liberty, and what resulted was a letter written in January 1958: “F.A. Hayek’s Constitution of Liberty is, surprisingly and distressingly, an extremely bad, and, I would even say, evil book. Since Hayek is universally regarded, by Right and Left alike, as the leading right-wing intellectual, this will also be an extremely dangerous book.  The opposition can always say: ‘but even ‘Hayek’ admits …’ The only tenable conclusion is that any Volker Fund or any other support for this book will be self-destructive in the highest degree. . .This then, is the face that F.A. Hayek will present to the world in his Constitution of Liberty. It is a face such that, if I were a young man first getting interested in political questions, and I should read this as the best product of the ‘extreme Right,’ I would become a roaring leftist in no time, and so I believe would almost anyone. That is why I consider this such a dangerous book and why I believe that right-wingers should attack this book with great vigor when it appears, instead of what I am sure they will do: applaud it like so many trained seals. For (1) Hayek attacks laissez-faire and attacks or ignores the true libertarians, thus setting up the ‘even Hayek admits’  line; and (2) his argument is based on a deprecation or dismissal of both reason and justice, so that anyone interested in reason or justice would tend to oppose the whole book. And because of Hayek’s great prominence in the intellectual world, any failure by extreme right-wingers to attack the book with the implacable vigor it deserves will inordinately harm the right-wing cause that we all hold dear.”

Let’s do everything we can to learn from Hayek’s genuine contributions but to remember always that Rothbard and Mises were far greater thinkers!

The Best of Llewellyn H. Rockwell, Jr.