Madsen Pirie: Hayek and His Legacy
Updated: Feb 10
This summary was written by Matteo Baccaglini, President.
On Wednesday 30 October 2019, we were delighted to welcome Dr. Madsen Pirie, President of the Adam Smith Institute, to speak to the Oxford Hayek Society at Merton College on the subject of: ‘Hayek and His Legacy’.
Madsen delivered a fascinating interview on the topic of our namesake, Friedrich August von Hayek (1899-1992), a leading figure of the Austrian School of Economics. Madsen, who knew Hayek personally, talked about what Hayek was like in person, and his main contributions in business cycle theory, against centralised state planning and in inflationary theory.
Madsen also discussed the relationship between Hayek and his contemporaries, including his friend and famed philosopher Sir Karl Popper and former Prime Minister Margaret Thatcher.
The interview was chaired by Matteo Baccaglini, President of the Oxford Hayek Society. Courtesy of the Institute of Economic Affairs, we were able to distribute some copies of the Readers' Digest of The Road to Serfdom (1944), Hayek's most widely-read publication.
Did you know Hayek personally? What was he like?
Yes, I grew to know Hayek quite well over the years, through the biannual conferences of the Mont Pelerin Society and from our meetings in London: twice a year, he would spend an afternoon at the Adam Smith Institute, sitting on our sofa and talking to us.
He was very engaging. He had a rye, almost mischievous sense of humour which doesn’t come out in his writings. He would come out with many quite amusing quips, say: “When I first joined the Reform Club, I thought everybody was so old; now I’m the oldest person in the Club!”
When I was a student at St. Andrews, we nominated him to become the Rector of the University. He wasn’t elected, though he gave a creditable performance – I think he came third out of seven or so – so not bad for someone who lived in Vienna! It was generally reckoned that he hadn’t won because he was too old.
When I told him, years later, that all of the other candidates that he stood against were all dead, he laughed like a drain. He thought that it was very amusing that the one who’d been rejected as too old in fact outlived all the others!
Hayek was immensely courteous. He never, ever accused an opponent of anything other than intellectual error. He was extremely polite: he never raised his voice. He would outargue people slowly and with impeccable manners. He was the gentleman scholar in every way. It was a privilege to know him.
What were Hayek’s biggest influences?
Hayek had the fortune to grow up in post-war Vienna. At the time, Vienna was an absolute powerhouse. There was Ludwig von Mises, Alfred Adler, Karl Popper – it was like a miniature Enlightenment, all in Vienna. I wish I’d been there! It’s the kind of atmosphere one dreams of – all people in one city. His student days there were spent amongst the most awesomely-brilliant scholars of the 20th century.
It’s comparable to the Scottish Enlightenment: you hear of Adam Smith and David Hume going to taverns several nights a week, discussing politics, philosophy and economics over pints with equally-brilliant company.
Hayek’s big influences were his two teachers, Eugen Böhm von Bawerk, who was another leading light of the Austrian School of Economics, and Ludwig von Mises, whose lectures he attended and for whom he worked as an assistant for some time.
To the horror of 'pure' Austrian economists, Hayek once said that he could never quite go along with the ideas of his beloved mentor, von Mises. He agreed with his conclusions but could never quite take his methodology.
Hayek was an empiricist. Von Mises was a deductivist, a part of a long line that starts with Aristotle and goes through St. Thomas Aquinas and presently Ayn Rand and Murray Rothbard. This line assumes that there are some undeniable axioms from which you can deduce a free-market economy.
Hayek said he couldn't go along with this because it closes off the learning process: we have to learn from the experience of the world of observation and if it's all deductive, then experience plays no part in that. Therefore, we now call Hayek an empirical Austrian, rather than a deductive Austrian.
Hayek’s early contributions were on business cycle theory. How did they differ from traditional accounts?
Business cycle theories had been studied since the 19th century. Everyone wondered: ‘Why does this happen? Why do all economies have their cycles of ups and downs, booms and busts? Why is it so methodical and systematic?’
The cycle always seems to occupy the same timeframe, roughly repeating every eight to eleven years. In 1875, William Stanley Jevons, known for introducing maths to economics, actually posited that it was to do with sunspots – that is, when dark spots temporarily appear on the Sun’s surface. Jevons thought that these affect the weather, and therefore agricultural output, and that ripples through the rest of the economy. It’s a lovely idea but the statistics don’t bear it out.
Essentially, Hayek said that the business cycle is caused by central bankers and politicians. Politicians like a booming economy because it puts people in jobs and raises wages, so voters happily return the government at the next election. Politicians don’t like downturns and try to avoid them.
So the government intervenes. Central bankers lower the interest rate at the instruction of the government. That sends false signals, making it cheap to borrow and encouraging long-term investment for things for which there isn’t really a demand: it’s only because the government has made money artificially cheap. The market rate for money – the natural interest rate – is determined by the proportion of savers to borrowers, and becomes much higher than the central bank’s interest rate.
So investors commit themselves to factories and so on – stuff that takes years to come online, by which time the money dries up, the demand isn’t there and so we get the bust! And the bust makes people behave cautiously for a few years, until the next election comes about and the politicians get back to their old tricks, and the cycle goes on.
That was Hayek’s contribution. Central bankers and politicians cause the business cycle when they lower interest rates, causing a mismatch with the market rate for money.
When we think of Hayek nowadays, we think of his argument against centrally-planned economies. What was Hayek’s gripe with them?
Hayek thought that we should all plan, but that planning should be done by individuals, not the government. So Hayek was against central planning, not individual planning.
Governments don’t have as much at stake as individuals. They know less about the circumstances of individuals than the individuals themselves do. If you plan from the centre, how on earth can you collect the information in time to act on it?
In The Use of Knowledge in Society (1945), Hayek gives the example of the estate agent: they know their locality, how property prices change, and the market demand. If the government had to collect that information, convey it to the centre and then make decisions based on it, it wouldn’t make them half as good as the estate agents on the ground, collecting information on a daily basis and tracking the changing market.
Hayek's The Road to Serfdom (1944) became one of the most popular books of the time. Why?
The Road to Serfdom (1944) wasn’t actually the best-selling book of the time: its abridged version in Readers’ Digest was. This was a widely-read compendium, published monthly, of books and articles that had appeared in the previous month. They ran an abridged version of Hayek’s Road to Serfdom as their book of April 1945. That reached millions of people.
Why did it sell so much? We were post-war; the world was going socialist. Hayek was saying in The Road to Serfdom that if you take a few steps down that road, the temptation to take a few more steps is very, very large.
For example, suppose that the government decides to subsidise wheat. This makes the wheat artificially more profitable than it really is relative to what markets would do in the absence of government. Let the government repeat this for other interest groups that start lobbying it – say, steelworkers will lose their jobs, so we’ll give them a little something – and eventually you reach the end of the road, where people have very little freedom to allocate their own resources because they’re all going into taxes to support this chain of subsidies and price supports.
All this fell on receptive ears because people had just come out of the Gestapo in World War II and here was Hayek saying that even a socialist government with benign intentions will end up taking increasing steps down that road. Hayek didn’t actually say that it would end with the Gestapo, though Winston Churchill famously did – and that claim was reckoned to have hurt him in the 1945 post-war election.
The decades after the War were Keynesian in their dogma and policy. Why didn’t Hayek win?
John Maynard Keynes dominated the third quarter of the 20th century. Keynes said what politicians wanted to hear: you can do something about recessions; you can mend downturns; you can park money in infrastructure. Politicians loved to hear that they could actually do something. So it was for political reasons that Keynes enjoyed that supremacy.
But of course, Hayek said that this is only good for a time. Nemesis would come after the hubristic thinking that you could control the economy. And sure it did.
It was Hayek that lived in a sideshow and the wilderness until 1974, when he was awarded the Nobel Prize for Economic Sciences alongside Gunnar Myrdal. He later said that in the late 1960s and early 1970s, he hadn’t felt very well. Years later, he discovered that he’d had two silent heart attacks. But the Nobel Prize was like a triple bypass: it gave him a completely renewed lease of life. He went on a world tour and conquered all before him.
Hayek dominated the fourth quarter of the 20th century. By then, Keynes was old hat and neoliberalism, globalisation, free trade – those were pure Hayek for the last 25 years of the century.
What did Hayek have to say about inflation?
Hayek said that fundamentally, inflation is caused by government. Friedman was the famous monetarist, but von Mises, Hayek and the whole Austrian school take the same view that inflation is an increase in the money supply.
This can be done by printing banknotes, government credit, or lowering interest rates – but when you increase the availability of money and credit in the economy, you send out signals. When the same amount of money chases the same amount of goods, that’s fine. When an increased amount of money is not matched by an increased amount of goods, then people bid against each other and prices go up.
In A Tiger by the Tail (1972), Hayek pointed out that when governments create a little bit of inflation, they have to create a little bit more, then a little bit more, and a little bit more. So you’ve got the tiger by the tail: if you let go of the tiger, it’ll bite you, but if you keep holding on, it’ll get angrier and it’ll be even more horrendous when it does bite you.
When government puts money into the economy, it doesn’t go into the whole economy: it’s not like putting icing on the cake where it’s easily spread across the entire surface. It goes into the economy at the point in which the government puts it. Think of honey being poured out from a jar: it makes a little mound, then ripples outwards.
For example, suppose that the government decided to put money into the car industry. Cars would become relatively cheaper and people would buy more of them – not because there was a real demand for more cars; it’s just that the government has made them artificially cheaper with the extra credit. So motor manufacturers expand their factories and hire extra workers and so on. But it’s not real, and when it stops, all those extra factories and workers and so on get laid off. The solution? Don’t grab the tiger by the tail in the first place.
Was Hayek opposed to equality and social justice?
Hayek was opposed to equality of outcome, or the notion that we should design society so that everybody ends up with the same amount of resources, wealth, income and so on.
Nor did Hayek want equality of opportunity. I put it to him once how ensuring every child in every family had equality of opportunity - the same number of books, exposure to cultural museums, and so on - would mean enormous state intervention in family life. And he agreed. He thought any attempt to make people equal in outcome or life circumstances (that is, opportunity) would be destructive of freedom.
Instead, Hayek just wanted opportunity. I'm a product of that - a grammar school boy who used public libraries. I had opportunities. They weren't equal to those my age that went to Eton and had private libraries of their own. But they were opportunities.
What equality he was in favour of was equality before the law. As William Pitt, Pitt the Elder, said in his speech against the Cider Bill of 1763 – an unpopular bill that introduced levies on cider:
"The poorest man may in his cottage bid defiance to all the forces of the Crown. It may be frail; its roof may shake; the wind may blow through it; the storm may enter; the rain may enter; but the King of England cannot enter – all his force dares not cross the threshold of the ruined tenement!"
Hayek also supported a certain moral equality: people are morally-equivalent to each other. I can’t demand that the world be designed so that Madsen Pirie gets everything that he wants. So let’s broaden it so that everyone agrees with me – let the world be designed so that everybody gets what they want. So people are morally equivalent to each other: if one person is free to make their own decisions, so should everyone else be.
What was Hayek’s distinction between law and legislation?
In his three volumes of Law, Legislation and Liberty (1973-9), Hayek said that legislation is pieces of paper passed by parliaments. But law is the way we have discovered, over time, to behave with each other and which rights we accord to one another so that we can enjoy the same rights ourselves.
Some legislation passed by parliaments codifies law. But it isn’t law because Parliament has said so and written it down: it is law because it is part of a tradition that has evolved over millennia.
Hayek was in favour of the rule of law. But it is possible that legislation can violate the rule of law.
There’s an interesting distinction if anyone is interested in Brexit – I said the B-word, you knew I would – that under English common law, you may do whatever the law does not prohibit, but on the continent, you may do only whatever the law says you can do. Hayek's view on the law comes close to English common law. But its contrast with European legal systems is a mismatch of culture and part of the reason why we are leaving the European Union.
What would Hayek think about the European Union?
Hayek was very sceptical of its centralised planning and regulatory regime - how it tries to make everything the same. He favoured regulatory and monetary competition. His answer to inflation was to abolish central banks and let currencies compete with each other; the euro doesn't subscribe to this philosophy.
When New Labour was considering taking us into the euro, I proposed that we should instead abolish legal tender - that is, the right to be paid in pound sterling - and merely allow the euro to compete with the pound. I cheekily suggested that people would get used to the euro that way and we would get the best of both worlds, knowing that it wouldn't happen because the pound would outperform the euro.
What did Hayek call the Three Sources of Human Values?
In 1978, Hayek delivered a lecture at the London School of Economics where he suggested three sources of human value. I was at that lecture – that was interesting!
The values we think up. ‘Everyone should think this; let’s have a society in which people behave like this’ – etc. This is pretty inconsequential.
The values we inherit biologically. We were hunter-gatherers for three million years, during which time we acquired the morality of the hunting pack. For example: the kill doesn’t last, so we share out the spoils of the hunt with the tribe and everyone gets a share; you look after the young and the old; etc.
The values we have acquired culturally. We have been farmers for 12,000 years. The move from hunting to agriculture meant that we could store value. You cannot store value as a hunter: the carcass goes back to the earth. But you can store surplus grains in silos and you can trade: agricultural products don’t go bad. You can trade. Hayek called this the Great Society.
In our day-to-day lives, we live in two societies. We live firstly in our families and communities, where everyone knows, loves and cares for each other. We live secondly in the Great Society, where we don’t know everyone and we don’t know whom we can trust. So the Great Society requires a different set of behavioural rules – say: honesty, contract, enforcement of contract, property rights, etc.
But our instincts, formed over millions of years, are for hunter-gatherer societies, and our set of behavioural rules for living in the Great Society – in which we have lived for only a few thousand years – often go against those older instincts. People often slip over one set of rules into the domain of the other.
So Hayek warned against the atavistic socialism always intruding - there was a sharp intake of breath when he used that word because all these students of the LSE had thought of socialism as scientific, but here was Hayek calling it savage, animal-like!
Hayek went on to say that every century, a new religion comes along. If it respects family, property, freedom, and so on, it survives. The false religions that don't survive last about seventy years: the first generation introduces it full of enthusiasm; their children go through the motions; then their children's children get rid of it because it doesn't work.
Curiously enough, the USSR almost flawlessly followed this pattern - it officially lasted sixty-nine years, from 1922 to 1991.
In a postscript to The Constitution of Liberty (1960), Hayek wrote an essay protesting that he was not a conservative. You challenged him, saying that he was a conservative.
In 1987, we wrote a tribute book to Hayek. Various scholars wrote chapters on him. I mischievously wrote the postscript: Why FA Hayek is a Conservative.
Hayek got the wrong end of the stick about conservatism. He thought that it was about conserving the status quo. In 1960, the status quo was mixed economy socialism and nationalised industries. He didn’t want to conserve those, but the Conservative Party did, so he concluded that he wasn’t a conservative.
My case is that that is not what conservatism is. Conservatism is not about conserving the status quo, or an outcome. Conservatism is about conserving a process. For conservatives, change should take place organically, spontaneously, by individuals making decisions. It should not be imposed by the government, academics, or any other authority. In a single letter: change should be evolutionary, not revolutionary. Hayek believed this, so he was a conservative.
I put two mischievous words into my mischievous essay. The conservative seeks to retain – or restore. Sometimes, the conservative must restore the spontaneity of society that has been lost to socialism. That is what Margaret Thatcher did.
What was Hayek’s relationship with Margaret Thatcher?
Hayek got on extremely well with Thatcher.
Initially, Hayek was quite critical when she was first elected because of the slow progress of change. Hayek was disappointed by the first labour union reform bill, drafted by minister Jim Prior. He had previously written a letter to The Times saying that the government had failed to grasp the nettle: the unions had to be reformed or all was lost.
Of course, what Hayek didn’t realise was that Thatcher was going to do it salami slice by salami slice: bit by bit until, had the unions known at the beginning where it would have ended, they would never have agreed to anything in the first place. Hayek came to admire Thatcher’s political savvy and realised she knew a lot more than he did about politics.
And Thatcher adored Hayek. He would have a private dinner with her twice a year at Number 10. She lapped it up – she loved it!
There was a very iconic moment during a Conservative Party policy meeting in the late 1970s. They were discussing various policies the party could adopt and someone had prepared a paper arguing for some middle-way centrism. She interrupted the presentation and slammed down The Constitution of Liberty on the table, declaring: ‘This is what we believe!’ It’s a famous incident – classic Margaret Thatcher – and it really happened.
The latest student society in Oxford is the Oxford Karl Popper Society. What was the relationship between the two academics?
I knew both Popper and Hayek. Popper was the sharper of the two – quick, linear, logical and Newtonian. He would see right through to the end of your argument very quickly. Hayek, however, was the wiser. He would pause, lean back, put his hands together, think about what you’ve said and then when he came out with a reply, he would draw on so many sources from so many disciplines that you felt you’d be getting the ultimate answer.
They were friends, of course, and they influenced each other. Hayek liked Popper’s view of the scientific method – conjecture and refutation; you invent a theory and then you test it to see if you can prove it wrong. He immediately began to apply and incorporate that idea into his own thinking about markets: you introduce a new product or process; either it survives or it doesn’t. That he took from Popper’s frame of work. It is a mirror of evolution – mutation and selection.
Popper also said that, of all the people he had encountered, Hayek was the one person whose ideas “coordinated” most with his own – not matched or echoed but coordinated. They were part of the same process.
What was Hayek's greatest intellectual contribution?
Until a week ago, I had supposed that it was his reworking of Adam Ferguson's notion of spontaneous order - that is, the distinction between products of human action and human design; what evolves spontaneously and what is imposed artificially.
For example, take language. That is a product of human action. It evolved spontaneously: nobody wrote down the rules for language - actually they tried it once and it didn't work; it was called Esperanto - and we all learned language spontaneously by speaking to each other and learning from our parents. By the time we were each two years old, we all had an amazingly-sophisticated grasp of grammar.
But in preparing for this, I've come to think that Hayek's greater intellectual contribution was the idea that knowledge is dispersed - like the example of the estate agent earlier. No single person, no single government, has all the knowledge needed to understand the economy, but we individually know our bit and the market brings it all together. That's a more profound idea than spontaneous order - the fact that the market is actually a repository of knowledge. Milton Friedman, of course, explained it best in his retelling of Leonard Read's I, Pencil (1958) essay.
At the turn of the century, the Adam Smith Institute named Hayek its man of the century. Do you stand by that?
He wasn’t the most influential person of the 20th century – that might have been Lenin, Mao or Stalin. They were far more influential than Hayek was. But we were looking for the most benign influential person of the century – and that was Hayek.
He did a lot more good for the common lot of humanity – for raising the lives and expectations and prospects of billions of people – than any of these mass murderers. It was Hayek’s ideas that were behind the great enrichment caused by globalisation and free trade. His ideas have lifted a billion people out of subsistence and starvation.
I stand by our decision.
Dr. Madsen Pirie is the President of the Adam Smith Institute, an influential neoliberal thinktank in London which he cofounded in 1978. He served on the advisory panel of British Prime Minister John Major and is a member of the Mont Pelerin Society, an international network of pro-liberty academics founded by FA Hayek, and Mensa, the society for high IQ Brits. An alumnus of the Universities of Edinburgh, St Andrews and Cambridge, he was formerly a Professor of Philosophy at Hillsdale College, Michigan.