F. A. Hayek must have sensed something in the wind at about the time I interviewed him in Los Angeles in May 1977. In the 1930s and 40s, Hayek had been the second most famous economist on the planet, best known as John Maynard Keynes's intellectual sparring partner. On the fundamental questions of economic policy, the debate pitting Professor Hayek of the London School of Economics against Professor Keynes of Cambridge University sparked a memorable confrontation between classical economics and the new-fangled "macroeconomics" of Lord Keynes's 1936 General Theory.
The Keynesians swept academic arguments in a virtual shut-out. With Keynes's death in 1945, in fact, Hayek (and the classical trade cycle theory) quickly faded from public view. Economic policy entered a golden age of "demand management" in which the business cycle was rendered obsolete, and Hayek moved out of economic theory altogether. In 1950 he went to the University of Chicago, where he chaired the Committee on Social Thought, finishing his career at the University of Freiberg (1962-68) and the University of Salzburg (1968-77). He embarked upon major contributions in such new fields as psychology (The Sensory Order, 1952), political theory (The Constitution of Liberty, 1960), and law (Law, Legislation & Liberty, Volumes I-III, 1973-79).
He was wise to steer clear of economics. For his quibble with Keynes was not the only humiliation he had suffered in rarified theoretical discourse. The famous Socialist Calculation Controversy was prompted by the Austrian critique of central planning. From the 1920s until the '40s, Hayek and his countryman Ludwig von Mises argued that socialism was bound to fail as an economic system because only free markets—powered by individuals wheeling and dealing in their own interest—could generate the information necessary to intelligently coordinate social behavior. In other words, freedom is a necessary input into a prosperous economy. But even as Hayek's elegant essay extolling market prices as the signals of a rational economy was hailed as a seminal contribution upon its publication in the American Economic Review in 1945, shrewd socialist theorists proved to the satisfaction of their peers that central planning could be streamlined so as to solve, with really big computers, the very information problem that F. A. Hagek had so courteously exposed.
Losing a scholarly debate or two is not the worst that can befall a buman being of talent, and Hayek was not destroyed. He went on to publish brilliant work in subsequent years. But within the economics profession it is no secret that Hayek was an academic outcast, a throwback, a marginal character whose ideas had been neatly disproven to all reasonable men in the scientific journals of his day.
But then something bizarre happened. The late 20th century decided to provide a reality check on the academic scribblers. The 1960s and '70s saw post-war prosperity ignite into an inflationary spiral in the very countries that had embraced Keynesianism (mainly the United States and the U.K.). Shocking to the peer-review process, which had rigorously proven otherwise on many occasions, full employment could not be maintained via off-the-shelf Keynesian bromides. The traditional therapy-stimulate consumption and penalize savings with a healthy infusion of government deficit spending-was now being refereed by the real world, and the results were found "nonrobust." The macro models of Cambridge, Harvard, Berkeley, and MIT fell apart, and by the 1980s the very solutions that Keynes had hustled were being painfully thwacked as precisely the root of our troubles. Suddenly the old classical medicine-savings, investment, balanced budgets, competition, and productivity growth-were popularly claimed to be the economic-policy goal of good government. Even the politicians, so bubbly to receive Keynes's prescription for government spending as the magical elixir with which to treat an ailing economy, had publicly abandoned Keynesianism.
And the possibility of rational economic planning under socialism? Yes, we ran that experiment as well. The Third World tried it and promptly dropped to income levels last recorded in the Pleistocene Epoch. The Second (Communist) World tried it in massive police-state doses and...well...dissolved.
The trends away from Keynesianism in the West and from socialism everywhere else were just beginning to assert themselves when Hayek-out of the economics profession for, essentially, 30 years-was surprisingly awarded a Nobel Prize in Economics in 1974. Quickly, he was transformed from goofball to guru. And not without justification. By the late 1970s-with the Labor, Democratic, and Social Democratic parties (oh come on, you remember them: Think, now think!) still in power in London, Washington, and Bonn-Hayek's vision had already spotted global political movements on the horizon. The glacial worldwide policy shifts of the 1980s were cautiously anticipated by Hayek in this (never before published) interview. He seemed to sense that soon it would not be a sign of disrespect to be dubbed the greatest philosopher of capitalism since Adam Smith.
Sometimes you have to live a long time just to be proved right. When Friedrich August von Hayek, born in 1899, died March 23 in Freiberg, Germany, he had outlived both Keynes and Marx. Happily for the human race, so have his ideas.
[Contributing Editor Thomas W. Hazlett interviewed Hayek in 1977, shortly before starting graduate school in economics at the University of California, Los Angeles.]
Reason: Of your bestselling The Road to Serfdom, John Maynard Keynes wrote: "In my opinion it is a grand book.... Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement." Why would Keynes say this about a volume that was deeply critical of the Keynesian viewpoint?
Hayek: Because he believed that he was fundamentally still a classical English liberal and wasn't quite aware of how far he had moved away from it. His basic ideas were still those of individual freedom. He did not think systematically enough to see the conflicts. He was, in a sense, corrupted by political necessity. His famous phrase about, "in the long run we're all dead," is a verv good illustration of being constrained by what is now politicallv possible. He stopped thinking about what, in the long run, is desirable. For that reason, I think it will turn out that he will not be a maker of long-run opinion, and his ideas were of a fashion which, fortunately, is now passing away.
Reason: Did Keynes turn around in his later years, as has frequently been rumored?
Hayek: Nothing as drastic as that. He was fluctuating all the time. He was in a sort of middle line and he was always concerned with expediency for the moment. In the last conversation I had with him (about three weeks before his death in 1945), I asked him if he wasn't getting alarmed about what some of his pupils were doing with his ideas. And he said," Oh, they're just fools. These ideas were frightfully important in the 1930s, but if these ideas ever become dangerous, you can trust me—I'm going to turn public opinion around like this." And he would have done it! I'm sure that in the post-war period Keynes would have become one of the great fighters against inflation.
Reason: Was the Keynes thesis that govemment spending is needed to bolster aggregate demand in times of unemployment correct at one time?
Hayek: No. Certainly not. But, of course, I go much further than this. I believe that if it were not for govemment interference with the monetary system, we would have no industrial fluctuations and no periods of depression.