The Nobel Prize

Friedrich A. von Hayek (1899–1992)

Friedrich August von Hayek was born in Vienna, the then capital of the Austro-Hungarian Empire, in 1899. He studied at the University of Vienna where he obtained a doctorate in law in 1921 and a doctorate in political science in 1923. After a short spell of study in America, Hayek returned to Vienna to join a private seminar group led by Ludwig von Mises. Together with Mises he founded the Austrian Institute for Business Cycle Research in 1927 and served as its director until 1931. In 1931 he emigrated to England (later becoming a UK citizen) where he accepted the post of Tooke Professor of Economic Science and Statistics at the London School of Economics, a position he held until 1950. In 1950 Hayek moved to the United States, where he was appointed Professor of Social and Moral Sciences at the University of Chicago. In 1962 he left Chicago, and returned to Europe as Professor of Economics at the University of Freiburg in West Germany. He retired from Freiburg in 1967 (thereafter holding the title of Professor Emeritus) and then moved to the University of Salzburg in Austria in 1969 to accept a position as honorary professor. In 1977 he returned to Freiburg, remaining there until his death in 1992. In 1974 Hayek was awarded, jointly with Gunnar Myrdal, the Nobel Memorial Prize in Economics ‘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’ (Nobel Foundation, 2004).

In the early phase of his career the main focus of Hayek’s research was in the field of economics, in particular publications which significantly contributed to the development of the Austrian theory of business cycles (for example, Hayek, 1931; 1933; 1939) and the theory of capital (Hayek, 1941). In Monetary Theory and the Trade Cycle (a book first published in German in 1929 and subsequently translated and published in English in 1933) he analysed the causal role played by monetary factors in the trade cycle. Hayek showed how a boom financed by credit expansion, which exceeds the rate of voluntary saving, will end in crisis and unemployment. Credit expansion allows the market rate of interest (cost of borrowing) to fall below the natural rate (return on capital) and results in increased investment which cannot be sustained. After a period of time the price of consumer goods relative to producer goods will start to rise, as will the market rate of interest. When this occurs a crisis ensues as some investments cannot be profitably completed, resulting in a period of liquidation and higher unemployment. He criticised Keynesian policies which sought to expand consumer demand in order to reduce unemployment, believing that a depression must run its course.


From the 1940s onwards, Hayek redirected the main focus of his research away from economic theory to the fields of political and legal philosophy. This research included a study of comparative economic systems embracing socialism, capitalism, planning and the market system. In a famous and compelling book, The Road to Serfdom, published in 1944, he attacked socialism and economic planning, warning that the curtailing of individual freedom these implied would lead ultimately to the triumph of totalitarianism. Central to this argument was the role played by the ‘division of knowledge’ in society (see, for example, Hayek, 1945) and the importance of ‘spontaneous order’. Hayek argued that knowledge is fragmented and dispersed among individuals in society. In consequence it is impossible for a single central authority to acquire the total knowledge of all individuals and coordinate economic decisions efficiently. In contrast, the market system (a spontaneous order), which developed as the result of the byproduct of human actions rather than by conscious design, coordinates economic decisions made by millions of individuals far more effectively. In viewing the market as a process he emphasised the role the price system plays as a communication network, providing incentives to put information to its best uses, and he was strongly opposed to government interference in economic affairs. He also drew attention to the harmful effects of inflation, which he argued distorts the reliability of price signals.


In analysing how efficiently knowledge is used in different economic systems, Hayek studied the institutional and legal frameworks (for example, governing property rights) that exist in society. In doing so he demonstrated the ‘interdependence of economic, social and institutional phenomena’. In the 1960s and 1970s he focused his studies on philosophy, politics and economics (Hayek, 1967; 1978), and also published The Constitution of Liberty (Hayek, 1960), and Law, Legislation and Liberty (Hayek, 1973; 1976; 1979). A ‘libertarian’, he argued that laws that treat all citizens equally promote prosperity and was opposed to attempts to redistribute income in society.


In the field of economics, Hayek will be remembered for his work on: the theory of business cycles; criticising Keynesian expansionary aggregate demand policies to reduce unemployment; the harmful effects of inflation; and the benefits of free markets. In addition he made important contributions to the history of economic thought (for example, Hayek, 1951) and the philosophy of science (for example, Hayek, 1952a). Quite remarkably, his contributions spanned not just the fields of economic theory, the history of economic thought and the philosophy of science, but also psychology (for example, Hayek, 1952b) and political and legal philosophy. The legacy of Hayek in politics, philosophy and economics is considered in a three-volume collection of papers (Boettke et al., 2000).


Main Published Works
(1931), Prices and Production, London: George Routledge & Sons.

(1933), Monetary Theory and the Trade Cycle, London: Jonathan Cape.

(1939), Profits, Interest and Investment, London: Routledge & Kegan Paul. (1941), The Pure Theory of Capital, London: Routledge & Kegan Paul.

(1944), The Road to Serfdom, London: George Routledge; Chicago: University of Chicago
Press.

(1945), ‘The Use of Knowledge in Society’, American Economic Review, 35, September, pp. 519–30.

(1948), Individualism and Economic Order, London: Routledge & Kegan Paul; Chicago: University of Chicago Press.
(1951), John Stuart Mill and Harriet Taylor, London: Routledge & Kegan Paul; Chicago: University of Chicago Press.
(1952a), The Counter-Revolution of Science, Glencoe, IL: Free Press.
(1952b), The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology, London: Routledge & Kegan Paul; Chicago: University of Chicago Press.
(1960), The Constitution of Liberty, London: Routledge & Kegan Paul; Chicago: University of Chicago Press.
(1967), Studies in Philosophy, Politics and Economics, London: Routledge & Kegan Paul; Chicago: University of Chicago Press.
(1973), Law, Legislation and Liberty, vol. 1, London: Routledge & Kegan Paul; Chicago: University of Chicago Press.
(1976), Law, Legislation and Liberty, vol. 2, London: Routledge & Kegan Paul; Chicago: University of Chicago Press.
(1978), New Studies in Philosophy, Politics and Economics and the History of Ideas, London: Routledge & Kegan Paul; Chicago: University of Chicago Press.
(1979), Law, Legislation and Liberty, vol. 3, London: Routledge & Kegan Paul; Chicago: University of Chicago Press.
Post a Comment