Hayek E-Book

Andrew Gamble

• Herausgeber: John Wiley & Sons
• Kategorie: Geisteswissenschaft
• Serie: Key Contemporary Thinkers
• Sprache: Englisch

Seitenzahl: 436

Veröffentlichungsjahr: 2013

Beschreibung

Hayek has been one of the key liberal thinkers of the twentieth century. He has also been much misunderstood. His work has crossed disciplines - economics, philosophy and political science - and national boundaries. He was an early critic of Keynes, and became famous in the 1940s for his warnings that the advance of collectivism in western democracies was the road to serfdom. He was a key figure in the post-war revival of free market liberalism and achieved renewed notoriety and some political influence in the 1970s and 1980s as one of the chief intellectual inspirations for the New Right in Britain and the United States.

This book traces Hayek's intellectual formation in Austrian economics and English liberalism. It analyzes the main themes of his thought such as the idea of a market order, the nature of knowledge, the limits of government, and his critiques of socialism and conservatism, and assesses the originality and internal coherence of his account of liberalism and modernity as well as his interventions in policy debates. It argues that Hayek the social scientist has to be disentangled from Hayek the ideologue in order to appreciate the importance and implications of some of his insights into the nature of modern societies.

As a critical guide to one of the most influential thinkers of our times, this book is an indispensable source. It will be of interest to students in politics, economics and philosophy, as well as to all those interested in a comprehensive introduction to one of the most controversial thinkers of the twentieth century.

Leseprobe

Hayek

The Iron Cage of Liberty

Andrew Gamble

Polity Press

Copyright © Andrew Gamble 1996

The right of Andrew Gamble to be identified as author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988.

First published in 1996 by Polity Press in association with Blackwell Publishers Ltd.

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For Tom, Corinna, and Sarah

While it may not be difficult to destroy the spontaneous formations which are the indispensable bases of a free civilisation, it may be beyond our power deliberately to reconstruct such a civilisation once these foundations are destroyed.

Hayek, The Road to Serfdom

There is simply no other choice than this: either to abstain from interference in the free play of the market, or to delegate the entire management of production and distribution to the government. Either capitalism or socialism: there exists no middle way.

Mises, The Free and Prosperous Commonwealth

Contents

Preface

Acknowledgements

1  Introduction: Rethinking Hayek

The Crisis of Liberalism

The Liberty Crusade

Vienna

The Austrian School

London

The Turn to Politics

Hayek’s Project

The Critique of Socialism

2  Morals

Evolution, Progress, and Civilization

Two Types of Rationalism

Cosmos and Taxis

Individualism and Socialism

Freedom and Coercion

Abstract and Concrete

Social Justice

3  Markets

Methodological Individualism

The Impossibility of Socialism

Economic Calculation in the Socialist Commonwealth

Market Socialism

The Uses of Knowledge

The Theory of Competition

4  Politics

The Road to Serfdom

Socialism and National Socialism

Democracy

The Rule of Law

5  Conservatism

Hayek and Conservatism

Libertarianism

Neo-Conservatism

Limited Politics

6  A Constitution for Liberty

A Liberal International

The Mont Pèlerin Society

Law and Government

The United States Constitution

A Constitution of Liberty

7  The Economic Consequences of Keynes

Hayek and Keynes

The Middle Way

Inflation and Social Democracy

Think-tanks

Monetary Policy

Trade Unions

Public Spending

8  The Iron Cage of Liberty

Hayek and Weber

The End of History

The Modern State

Conservatism and Liberalism

The Future of Socialism

Knowledge, Co-ordination, and Institutions

Notes

Bibliography

Index

Preface

Hayek has long held a peculiar fascination for me, connected as he is with so many of the themes and problems which have interested me since I was a graduate student. Many of these obsessions appear in some form in these pages. David Held first suggested that I should turn some of my thoughts on Hayek into a book. I did not think it would take me as long as it has, and I am conscious of only having scratched the surface of some topics. The more I have explored Hayek, the more aware I have become of the complexity and range of his thought and the difficulty of some of the issues he raises, for which we lack answers. What I have tried to do here is to provide an assessment and a critical analysis of Hayek’s achievement, to indicate some of the limitations of his thought, and to suggest why he is still relevant to us.

One of my particular interests in Hayek is his role in the ideological change in the British Conservative party in the 1970s. One of the origins of this book, as well as much other work I have done in the last fifteen years, is the article ‘The Free Economy and the Strong State’ published in the Socialist Register in 1979. The exploration of Hayek as an ideologue remains one of the central themes of the book. But I have also become interested in the contrast between Hayek the ideologue and Hayek the social scientist, and the extent to which he failed to develop many of his insights because of the ideological closures he imposed on his work. These ideological closures have also been responsible for Hayek not reaching a wider readership. It has been too easy to dismiss him as engaged in a forlorn project to restore the liberalism of an earlier era. I hope to have shown that there is great deal more to Hayek than that.

I have incurred many debts in the writing of this book. An invitation to a Liberty Fund symposium on the relationship between ideas, interests, and circumstances was very valuable at an early stage, and I particularly benefited from conversations with Arthur Seldon, David Willetts, John Burton, and Norman Barry among others about some of the general themes of the book. Others from whom I have learnt a great deal include Raymond Plant, Richard Bellamy, Martin Durham, Hilary Wainwright, Andrew Denham, Rodney Barker, and Jeremy Shearmur. David Miliband invited me to give a presentation on Hayek to an Institute of Public Policy Research seminar which produced a lively exchange, and I have also benefited from seminar discussions at Kobe, Strathclyde, Manchester, Cambridge, the London School of Economics, Edinburgh, and Nuffield.

I owe most of all to the Department of Politics and the Political Economy Research Centre at the University of Sheffield for providing such a stimulating environment in the last few years in which to think about problems of political economy. I am particularly grateful for specific help, comments, conversations, and encouragement from Anthony Arblaster, Tim Bale, Michael Harris, Gavin Kelly, Michael Kenny, Ankie Hoogvelt, David Marquand, Brian McCormick, James Meadowcroft, Tony Payne, and Matthew Sowemimo.

Andrew Gamble

Acknowledgements

The author and publishers wish to thank the following for permission to use copyright material:

Routledge and The University of Chicago Press for extracts from Hayek: The Constitution of Liberty. Copyright © 1960 by Routledge. Copyright © 1960 The University of Chicago Press.

Every effort has been made to trace all the copyright holders, but if any have been inadvertently overlooked the publishers will be pleased to make the necessary arrangement at the first opportunity.

1

Introduction: Rethinking Hayek

Every social order rests on an ideology.

Hayek, Law, Legislation, and Liberty

When Hayek died in Freiburg on 23 March 1992, the obituaries paid tribute to him as a central figure in the intellectual history of the twentieth century. But the nature of his achievement remains controversial. In the course of his long life – he was born in Vienna on 8 May 1899 – he contributed to many different academic disciplines – economics, political science, the history of ideas, philosophy, and psychology – without being identified exclusively with any one of them. He was always a polymath. Speaking of his time at the University of Vienna, he once said, ‘In the University the decisive point was simply that you were not expected to confine yourself to your own subject.’1 He followed this principle throughout his academic career. In a century of increasing intellectual specialization, Hayek moved firmly in the other direction.

This fact alone would make it difficult to assess his achievement. But what makes it even harder is that he had two intellectual personas. He was a patient, thorough, wide-ranging scholar, who emerged as one of the most important and original thinkers of the century, but also as one of the century’s most renowned ideologues, a leading critic of all forms of socialism and collectivism and a passionate advocate of classical liberalism.

One of my purposes in this book is to argue that Hayek’s reputation as an ideologue has for long been a barrier to a wider appreciation of his intellectual contribution to social science. This is hardly surprising. The two are hard to disentangle, because Hayek for the most part saw no reason to keep them apart. His ideological views flow from the same methodological assumptions as his scientific work, and his writings are all part of the same intellectual project.

This is not how many have seen him, however. One view of his career quite common among his critics is that he was a failed economist who abandoned serious academic work in the 1940s for extravagant ideological polemics against even mild forms of state intervention. Having begun as a theoretical economist who made some contributions to business cycle theory and monetary theory from the Austrian school perspective during the 1930s, Hayek then found himself on the losing side in two major theoretical debates: the first with Maynard Keynes over monetary theory and the causes of the Depression, the second with Oscar Lange over the feasibility of economic calculation in a socialist economy. The apparent failure of his research programme and the conversion of so many economists to the new Keynesian paradigm persuaded Hayek to abandon theoretical economics midway through his career and take up social and political theory. Starting with The Road to Serfdom, published in 1944, which warned that even mild government intervention and redistribution could lead to totalitarianism, he became an implacable critic of all forms of socialism and collectivism, setting himself the task of restating and reviving the principles of nineteenth-century political and economic liberalism which he believed were in danger of being forgotten.

The substance in this view is that there was a major change of direction in Hayek’s career. In the 1930s he was a leading and respected member of the economics profession. Keynes’s view of him (which Hayek himself quotes) was that ‘of course he is crazy, but his ideas are also rather interesting’.2 Outside the narrow circle of professional economists, he was little known. The publication of The Road to Serfdom changed all that. It made Hayek a celebrity, particularly in the United States. Lecture tours, radio debates, and newspaper articles expounding his views followed. He received great adulation in some quarters, but in the economics profession he was no longer regarded by most as a serious figure. The economics department at the University of Chicago even refused to consider him for a chair. Eventually the Committee of Social Thought at Chicago came to the rescue, and appointed him to a chair in social and political theory. This marked the end of his formal career as an economist.

His reception among political scientists and social and political philosophers was little better, however. He was ignored or belittled for many years as pedlar of an antiquated, reactionary creed. His greatest book, The Constitution of Liberty, published in 1960, was regarded as a grand folly, a last spasm of nineteenth-century laissez-faire liberalism, which the world had left behind. Hayek was seen as a Don Quixote fighting enemies which only existed in his imagination. George Lichtheim wrote in his review:

With its remorseless extrapolation of the logic inherent in the liberal doctrine, its unflinching demonstration that individualism is incompatible with the vital needs of modern society, this massive work stands as both a timely warning to political philosophers and as an impressive monument to a myth.3

But Hayek was a more formidable figure than many of those who dismissed him in the 1950s and 1960s realized. In the 1970s and 1980s the ideology he had espoused for so long proved to be not so moribund after all, and by the 1990s new interest was beginning to be expressed in his economics, amidst realization that some of his insights had been neglected during the Keynesian and monetarist ascendancy of the previous forty years, and that he offered a way of thinking about economic co-ordination problems which had not been surpassed.4

The improvement in Hayek’s standing was closely linked with the revival of the fortunes of economic liberalism and its renewed ascendancy as public doctrine in both Britain and the United States. Hayek became one of the main inspirations for many of the currents of thought which made up the New Right of this period. He also belatedly began to receive academic recognition and public honours. But this hardly amounted to full rehabilitation. The partisanship of his followers and his association with conviction politicians like Margaret Thatcher only helped confirm the earlier image of him as an ideologue rather than a serious thinker.

Rescuing Hayek from fifty years of ideological stereotyping is not an easy task, and Hayek himself is often of little help. In time, however, the ideological components of Hayek’s work may fade, as his contribution to social science comes to be better understood. One of the arguments of this book is that some of Hayek’s most important insights remain undeveloped in his writings because of the ideological closures he imposed on his work. Often his questions are more interesting than his answers. Critics of Hayek, feeling themselves to be in the presence of an ideological adversary, have often concentrated on rebutting his arguments or criticizing his assumptions, rather than exploring his questions. Hayek often gives his opponents little incentive to do otherwise. But in the last ten years this has begun to change. It used to be the case that Hayek was taken seriously only by those who were ideologically sympathetic to his position. This is no longer true. There is especial interest in his economics, particularly his theory of knowledge and his theory of spontaneous order, and the methodological assumptions which underlie them. Beyond this, there is also a new appreciation of the strengths as well as the limitations of Hayek’s account of liberalism and modernity.

The first reason for rethinking Hayek is that the long ideological war of position in which he was involved throughout his life is over. Reflecting on Hayek is one way of reflecting on what was at stake in that struggle, and who had the better arguments. Hayek turns out to have been more right than wrong. Many of the earlier judgements of him were misplaced or misinformed. Hayek often had greater insight than his critics into the organization of modern society, even if some of his ideas are crudely expressed, or are expressed in such an extreme way that many who might otherwise have been sympathetic were led to reject them.

The second reason for rethinking Hayek is to assess his work as an account of the nature of modernity. Which of Hayek’s insights into social and economic organization transcend the ideological controversies in which he was involved? Confident declarations at the end of the twentieth century that not merely ideology but history itself is over have focused renewed attention on the meaning of modernity and the claims which are common to all versions of the modern project. Hayek provides a particular account of modernity and its economic, social, and political dimensions, based on arguments about the nature and distribution of knowledge in society and the relationship between reason and tradition.

The scope of his work and the scale of his achievement need to be registered. He may well prove to be one of the last Western thinkers to attempt to rethink from first principles the nature of Western civilization and the institutions and rules which are central to it. What spurred Hayek to do this was his desire to resist the encroachment of collectivism and socialism. If Hayek had not had an ideological vision of the modern world, he might be remembered now only for a scholarly technical contribution to economics, but the wider implications of his economic ideas for theories of knowledge and social order would not have emerged. What makes him of interest to us, and far more than just an ideologue, is that, like all truly great social and political thinkers, his thought is full of contradictions and tensions, and is capable of many different interpretations.5 He was operating at a level such that his insights in one field have implications which conflict with his assumptions or conclusions in other fields. Sometimes he himself was only partly aware of some of these implications, and sometimes he failed to develop them. But many of his ideas have a life beyond the particular ideological form he chose to give them, and raise general issues about the nature of modernity and social change which remain at the heart of contemporary social theory, even if many of his own answers are inadequate or flawed.

The Crisis of Liberalism

In order to understand Hayek’s work, it is therefore necessary to explore his ideological as well as his intellectual formation. Hayek was eighteen years old at the time of the Bolshevik Revolution in 1917, thirty-one when Hitler came to power, thirty-three when Roosevelt launched his New Deal, and thirty-seven when Keynes published his General Theory. He lived just long enough to witness the opening of the Berlin Wall in 1989 and the collapse of communism in Russia in 1991. He lived through the whole of the short twentieth century between 1917 and 1991: the destruction of the liberal global economic order and its state system, the rise and collapse of totalitarian movements and regimes, the Great Depression, the Second World War, the establishment and subsequent weakening of United States hegemony, the disappearance of the European colonial empires, the long boom, the growth of the state, and the cold war with communism.

During the first half of this period, liberalism as a public doctrine was widely perceived to be losing ground in its battle with new collectivist doctrines whose common feature was that they justified an extended role for the state. The doctrine of liberalism as it had developed in the nineteenth century was generally regarded as having declining relevance to the circumstances of advanced industrial societies. In the 1930s the slogan ‘Forward from Liberalism’ expressed a sentiment shared by many different movements and parties. Liberalism was seen as belonging to an era that was past.

The ideological challenge to liberalism came not just from totalitarian doctrines such as fascism and communism, but also from the programmes for social amelioration through state action which were increasingly adopted by parties of the Centre Right and Centre Left. As suffrages were extended and mass democracies created, so the pressure for increasing the scope and the scale of collectivist programmes of public provision in the fields of welfare, economic development, and military defence was intensified. The extension of democracy came to be seen as synonymous with the extension of the spending and regulatory powers of the state. Politicians became subject to the new discipline of winning support from the electorate and organized interests, making use of the new mass media. Old Liberal parties tended to be marginalized in a double sense. They were often slow to adjust to the requirements of the new mass politics, and they obstinately clung to their beliefs in the simple verities of free trade, balanced budgets, and laissez-faire. They were challenged by New Liberals, who developed liberal arguments to justify limited measures of intervention and redistribution, and by the collectivist wing of the socialist movement, which, in the new circumstances of an extended franchise, increasingly favoured using the agency of the state to achieve socialist goals.

The rise of collectivism as a public doctrine in the heartland of liberalism was the basic theme of A. V. Dicey’s Lectures on the Relation between Law and Public Opinion in England during the Nineteenth Century.6 Dicey argued that from around 1860 collectivist doctrines had begun to supplant individualist doctrines in their hold on public opinion, and that, as a result, legislation was increasingly reflecting collectivist principles, a trend he deplored. He pointed in particular to legislation on trade unions and social security. Individualist principles were everywhere on the defensive as the collectivist tide flowed in.

The anxieties of many liberals at the beginning of the twentieth century echoed the fears which had long been expressed by both conservatives and liberals about the dangers of democracy. The potential domination of the poor and the ignorant through the ballot-box appeared to threaten the maintenance of property rights and the rule of the wise and the best. Conservatives adjusted more readily to the challenge of mass democracy, seeking ways of mobilizing voters which could cut across class. Old Liberals found it much harder, partly because of their lack of sympathy with any form of collectivism.

The new collectivist doctrines could have taken a very long time to replace liberalism as the dominant public doctrine in Britain and the United States. But their triumph was speeded up by a series of cataclysmic events, in particular the two world wars and the Great Depression of the 1930s, which destroyed the liberal world order and undermined many liberal institutions. These events helped sustain claims that liberalism, whatever its merits, had simply become irrelevant as a guide to policy in increasingly interdependent and highly organized industrial societies.

The growing conviction in the first half of the twentieth century that the age of liberalism was over was reflected in two influential books of the 1940s, both written by citizens of the former Austro-Hapsburg Empire, who, like Hayek, ended up outside it: Karl Polanyi’s The Great Transformation and Joseph Schumpeter’s Capitalism, Socialism, and Democracy. Polanyi was a Hungarian, a socialist and an economic historian, Schumpeter an Austrian, a conservative and an economist. Both regarded the liberal order and liberal civilization of the nineteenth century as something that had passed away and could not be revived. Both saw the future as belonging to some form of collectivism or socialism.

Polanyi argued that the liberal order had finally come apart in the 1930s. The landmarks of this change were:

… the abandonment of the gold standard by Great Britain; the Five-Year Plans in Russia; the launching of the New Deal; the National Socialist Revolution in Germany; the collapse of the League in favour of autarkist empires. While at the end of the Great War nineteenth century ideals were paramount, and their influence dominated the following decade, by 1940 every vestige of the international system had disappeared and, apart from a few enclaves, the nations were living in an entirely new international setting.7

But Polanyi argued that the reasons for the disintegration of the liberal order went deeper. Nineteenth-century civilization was not destroyed by external attack or overthrown from within by social revolution; nor did it fall victim to some iron law of political economy, such as the falling rate of profit. The true reason, according to Polanyi, was different: it was the measures that society had been forced to adopt in order not to be annihilated by the action of the self-regulating market: ‘the conflict between the market and the elementary requirements of an organised social life … produced the typical strains and stresses which ultimately destroyed that society’.8

Polanyi argued that the market order was not a spontaneous, natural development, but the result of deliberate policy. It had given rise to great dynamism and progress, but at great cost, and socialist and conservative political movements had arisen to curb it. Polanyi thus traced the demise of the self-regulating market to the workings of the market order itself.

This was a conclusion with which Joseph Schumpeter was in substantial agreement, although his analysis of the causes was different. In Capitalism, Socialism, and Democracy he announced that the era of capitalist civilization was at an end. The future belonged to collectivism and socialism, in the sense of state ownership and control of the economy. Capitalism had undermined its own foundations. It had applied its utilitarian calculus of profit and loss to all the institutions which had protected its rise and given legitimacy to the social order. Capitalism now had to face its own rationalist weapons being turned upon itself. ‘Can Capitalism survive ?’, asked Schumpeter, replying: ‘No, I do not think it can.’9 The future industrial society would be collectivist, organized, and highly regulated. Polanyi and Schumpeter reflected a wide ideological consensus. Many liberals and conservatives hoped to avoid a full collectivization of society and the economy, but there was resigned acceptance of the need to extend further the powers of the state, in order to provide the security and the prosperity which would preserve the legitimacy of the social order. If liberals and conservatives did not help to reform market economies in this way, the initiative would pass to those advocating more drastic social change.

At the same time, however, as Polanyi and Schumpeter were making these predictions, Hayek was sounding a very different note. In The Road to Serfdom, published in 1944, he agreed that the trends were overwhelmingly pointing towards the triumph of collectivism and that liberals had become isolated. There was hardly anyone active in politics, he complained, who was not a socialist. But Hayek differed from Polanyi and Schumpeter in believing that there was nothing inevitable about this triumph of collectivism. It had come about through the ascendancy of a set of doctrines which were deeply flawed in their understanding of the basis of Western civilization and its success. Hayek claimed that the consequences of continued application of these doctrines would be so serious that they would be discredited, and there would be a return to the principles of classical liberalism.

Hayek’s certainty was rooted in his conviction that the basic ideas of nineteenth-century liberalism did not constitute just another ideology. They were grounded in reality, and provided the only possible doctrine to guide policy in modern society. Hayek believed as firmly in scientific liberalism as any Marxist in scientific socialism. The ideas of classical liberalism were true and relevant, while all other doctrines were literally utopian. They had no relevance to the modern world, and if an attempt were made to put them into practice, the outcomes would be not only quite different from what was intended, but highly damaging as well.

The Liberty Crusade

In 1947 Hayek helped to found the Mont Pèlerin Society, a liberal international, composed of liberal intellectuals from many disciplines dedicated to the recovery of liberal principles and the overthrow of collectivism. It built on an initiative first launched in 1938 in Paris, Le Colloque Walter Lippmann.10 At first, progress was slow. Although there was a recovery of liberalism and a decline in the appeal of collectivist ideas in many countries in the 1950s, there were few signs of a return to the old certainties of nineteenth-century liberalism. When Daniel Bell and others spoke of an end of ideology at the end of the 1950s,11 they meant that the ideological battle between individualism and collectivism had lost its intensity. As Lipset put it:

the fundamental political problems of the industrial revolution have been solved: the workers have achieved industrial and political citizenship; the conservatives have accepted the welfare state; and the democratic left has recognised that an increase in over-all state power carries with it more dangers to freedom than solutions for economic problems.12

Hayek believed that it was not enough to reach a compromise with the forces of collectivism, however. All the territory that had been lost must be reclaimed. Through his writings and other activities he played an important part in establishing independent research institutes and think-tanks, most significantly the Institute of Economic Affairs in Britain. Libertarian and liberal-conservative think-tanks and foundations grew rapidly in the 1970s and 1980s, in both Britain and the United States, and Hayek was universally recognized as the leading thinker and mentor of both libertarian and liberal-conservative strands in the New Right.13

The emergence of the New Right and the strength of the doctrines of neo-liberalism throughout the 1970s and 1980s and their espousal by influential political leaders and political movements in many countries signified the triumph of Hayek’s lonely crusade. From a position of great isolation and apparent irrelevance in the 1940s, he found himself thirty years later the acknowledged leader of the new political orthodoxy, the intellectual guide of prime ministers and presidents, the icon of a rapidly growing worldwide political movement, and the recipient of numerous honours, including the Nobel Prize for Economics and the Companion of Honour. The award of the former was ironic on two scores: first, because he received it for economics, a discipline which no longer recognized him as one of its leading figures, and second, because he shared it with Gunnar Myrdal, an economist of a very different methodological and political persuasion.

As the veteran of so many intellectual and political battles during the twentieth century, Hayek was understandably jubilant in his last years. ‘Surely’, he declared, ‘it is high time for us to cry from the house tops that the intellectual foundations of socialism have all collapsed.’14 Like an Old Testament prophet, he had stood firm and had proclaimed his faith while many around him who once shared his values had deserted the cause in the name of pragmatism and realism. In retrospect, he came to see the period between 1848 and 1948 as what he called the ‘socialist century’. But now it was over. The long wave of collectivism had spent itself. It had threatened, but in the end had not destroyed, the individualism that Hayek regarded as the foundation of Western civilization.

In the decades since 1948, the influence of socialism as a doctrine had waned, and socialist regimes had collapsed. The opening of the Berlin Wall in 1989 and the subsequent overthrow of Communist regimes throughout East and Central Europe, culminating in the downfall of communism in the Soviet Union in 1991, set the seal on the victory of liberalism. By the time of Hayek’s death in March 1992, the cause to which he had been intellectually and politically committed since the 1920s appeared to have triumphed.

Vienna

An appreciation of Hayek’s intellectual formation is crucial for understanding his thought, and it has received increasing attention in recent years. Friedrich August von Hayek was born into a well-established, well-connected Austrian family. His father was a doctor and a botanist, who never achieved his ambition of becoming a full university professor, but who instilled in his son the importance of science as a vocation. Through his mother, Hayek was related to Wittgenstein. He grew up during the last phase of the Austro-Hungarian Empire, at a time when Vienna was undergoing a remarkable burst of intellectual creativity in art, literature, music, science, philosophy, psychology, and economics.15

Hayek briefly served in the Austrian army in an artillery regiment on the Italian Front at the end of the First World War. He began his studies at the University of Vienna in November 1918. His main intellectual interest at this time seems to have been psychology, but he also had to think of a future career, so he enrolled for a law degree, in order to secure a qualification which would make him eligible to enter the legal profession or the civil service. What it also offered was a grounding in economics.

Despite the dislocations of the war, the University of Vienna still offered at this time a distinctive intellectual experience. This was crucial for Hayek’s intellectual formation, and gave him a breadth of outlook which he never lost. Among the approaches he encountered which had a profound influence on his social theory were the Austrian school of economics based on the works of Carl Menger; Kantian philosophy and the particular kind of liberalism which was associated with it; and the positivism of Ernst Mach and Moritz Schlick (founder of the Vienna circle), in philosophy and psychology.

The Austrian school of economics influenced his choice of topics to study, but his fundamental methodological and theoretical assumptions came from the philosophical positions on knowledge and mind that he adopted at a very early age, and never abandoned. John Gray has argued convincingly that the key to Hayek’s philosophical standpoint is to be found in The Sensory Order,16 a work of psychology and philosophy which was drafted in the 1920s but not published until 1952.17

The Sensory Order is based on Kantian assumptions about knowledge. First, direct knowledge of the physical world is impossible. We cannot know the world as it is. Secondly, the order that is found in our experience is constructed by our minds. It follows that it is impossible to have a complete knowledge of the world or to stand outside the world. All knowledge is partial and immanent, because the mind is seeking to make sense of a reality of which it is itself part. The task of philosophy, therefore, is a modest one. It has to discover the limits of reason, rather than elevate reason above experience or lay claim to a knowledge beyond experience.

Such a view of knowledge makes theory and theory building an indispensable feature of the human condition. All human beings have to theorize. There are no facts and no knowledge which exist independently of theory, the constant activity of human minds to construct an order out of the myriad experiences presented to them. Science is the activity which seeks a set of deductive principles which can provide a more comprehensive understanding of the phenomena of experience.

In some versions of Kantianism, such as the praxeological theory of Ludwig von Mises, the theory building proceeds without any empirical reference at all. The deductive principles once arrived at are claimed to be axiomatically true, tools for understanding empirical phenomena, but not capable of being refuted by them. Hayek never subscribed to this position. The influence of Mach and, later, Popper led him to accept that within the framework of concepts established by scientific theories there was a wide area in which empirical testing of hypotheses was relevant.18

Many of Hayek’s distinctive positions in social theory and liberal thought can be related to his Kantianism.19 Like Kant, he rejects natural rights as a basis for justice, seeing justice as based instead on procedural arguments, drawing on the Kantian-inspired conception of the Rechtsstaat. Order in both science and society depends on the identification of rules and conditions which can be universalized. The establishment and enforcement of these general rules provide the criteria for defining the character of the outcomes without determining in detail what those outcomes are.

In The Sensory Order Hayek argues that the human mind is engaged in a continuous process of classification and reclassification of experiences, and that the complexity of the classifications tends to increase, as human beings learn new ways of understanding and ordering their experience. Hayek distinguishes between the physical order of external events and the sensory order of the human mind. The sensory order is a microcosm, part of the macrocosm of the physical order, because the way in which the mind works through the central nervous system is part of the physical order. Hayek argues that the possibility of knowledge of the macrocosm comes about because of the formation of a microcosm within it (the human mind) which is capable of reproducing enough aspects of the macrocosm to allow the microcosm to continue to exist. However, there are strict limits to what can be achieved. It is impossible for something to classify something else unless it has a greater degree of complexity. As a part of the physical order, the human mind is less complex than the order it is seeking to understand. This implies that the human mind can never fully comprehend itself. The knowledge we gain of the world is necessarily partial and limited, and is dependent on the fact that there are certain recurrent patterns and general abstract rules which the human mind can grasp and reproduce. The more developed the human mind becomes, the more complex the classification systems it uses, and the greater the congruence, it is assumed, between the physical and the sensory order.

From this philosophical theory of mind, Hayek derived a lasting concern with the conditions which make knowledge of both the social world and the natural world possible and the limits to that knowledge. His work in economics, and subsequently in social and political theory, was an attempt to work through the implications of his philosophical ideas. But these ideas were themselves developed through his engagement with one of the most powerful intellectual perspectives current in Vienna – the Austrian school of economics.

The Austrian School

The Austrian school was based on the work of Carl Menger (1840–1921), professor at the University of Vienna from 1873 until his retirement in 1903. His two key books were Grundsätze der Volkswirtschaftslehre (1871), which was a seminal work in developing the subjective theory of value and the conception of marginal utility, and Untersuchungen über die Methode der Sozialwissenschaftlichen und der politischen Ökonomie insbesondere (1883), which launched the Methodenstreit between Austrian theoretical economics and the German historical school.

Hayek never met Menger personally, but he had already read the Grundsätze before entering university, where he attended the seminar of Friedrich von Wieser (1851–1926), one of the most important of the second-generation members of the Austrian school. Wieser was one of a number of economists, among them Eugen von Böhm-Bawerk, who were converted to Menger’s doctrine and played a key role in developing and communicating his ideas as a new and distinctive school.

Hayek always revered Wieser as his first teacher.20 But the more important intellectual influence upon him was Ludwig von Mises (1881–1973), a third-generation member of the school, who had been a member of Böhm-Bawerk’s seminar.21 Hayek began attending Mises’ seminar in the early 1920s, and this, more than anything else, appears to have been decisive in his intellectual formation. Wieser had inclined to Fabianism in his political views, offering a defence, for example, of progressive taxation. Hayek admits that his motive for studying economics was initially a Fabian desire to find ways to intervene in society to improve the position of the people. Mises shook him out of that. Hayek later wrote that it was insight into the economic problems of society that made him a radical anti-socialist. It was Mises who convinced him of what precisely those economic problems were.22