Hayek: A Collaborative Biography

On 9 August 1974, Richard Nixon resigned to avoid impeachment; on 29 April 1975, the United States scuttled from their Embassy in Saigon - optics that were interpreted as defeats for the ‘International Right’. Yet in 1975, Margaret Thatcher became leader of the Conservative Party; and in 1976 Ronald Reagan almost unseated a sitting Republican Party President. Pivotal to the ‘turn to the Right’ was Friedrich ‘von’ Hayek’s 1974 Nobel Prize for Economic Science - awarded for having used Austrian Business Cycle Theory to predict the Great Depression: ‘For him it is not a matter of a simple defence of a liberal system of society as may sometimes appear from the popularized versions of his thinking.’ The evidence suggests that Hayek’s fraudulent assertion was uncovered at the University of Chicago in the early 1930s – but not reported. The most likely explanation is self-censorship - for reasons of ideological correctness, fund raising and residual deference to the Second Estate. Four indirect tests suggest that ‘free’ market economists have - in other instances and presumably for fund-raising motives - suppressed embarrassing ‘knowledge’: which suggests that they were perfectly capable of suppressing ‘knowledge’ about Hayek’s non-prediction of the Great Depression. With respect to the Nobel Prize and thus his ability to reach a wider audience, Hayek was fortune in having two loyal ‘intermediaries’: Lionel Robbins and Fritz Machlup who were – and probably felt themselves to be – ‘socially’ inferior to ‘von’ Hayek.

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ARCHIVAL INSIGHTS INTO THE EVOLUTION OF ECONOMICS

HAYEK: A COLLABORATIVE BIOGRAPHY Part XV: The Chicago School of Economics, Hayek’s ‘luck’ and the 1974 Nobel Prize for Economic Science

Edited by

Robert Leeson

Archival Insights into the Evolution of Economics

Series Editor Robert Leeson Stanford University Stanford, CA, USA

This series provides unique insights into economics by providing archival evidence into the evolution of the subject. Each volume provides biographical information about key economists associated with the development of a key school, an overview of key controversies and gives unique insights provided by archival sources. More information about this series at http://www.palgrave.com/gp/series/14777

Robert Leeson Editor

Hayek: A Collaborative Biography Part XV: The Chicago School of Economics, Hayek’s ‘luck’ and the 1974 Nobel Prize for Economic Science

Editor Robert Leeson Stanford University Stanford, CA, USA

Archival Insights into the Evolution of Economics ISBN 978-3-319-95218-5 ISBN 978-3-319-95219-2  (eBook) https://doi.org/10.1007/978-3-319-95219-2 Library of Congress Control Number: 2018946165 © The Editor(s) (if applicable) and The Author(s) 2018 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Printed on acid-free paper This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Contents

Part I  Hayek’s Luck 1

‘I Have Been Lucky in This Game’ 3 Robert Leeson

2

The Tobacco, Obesity and Fossil Fuel Lobby—‘As Happy as Hell’ 69 Robert Leeson

3

1–15: Residual Reverence Towards the Second Estate 91 Robert Leeson

4

16–20: Loyal ‘Intermediaries’ 127 Robert Leeson

5

21–24: ‘I Desire to Preserve Correct Relations in Public’ 161 Robert Leeson

v

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6

25: Suppression, the Dogs That Didn’t Bark and the Emerging Chicago School of Economics 193 Robert Leeson

7

31 Conclusions About Hayek’s Nineteen Thirty-One ‘Prediction’ 215 Robert Leeson

Part II  Myrdal and Machlup 8

The Saving/Investment Explanation of Business Cycles in Hayek and Myrdal: Similarities and Differences 273 Adrián de León Arias

9

Machlup and Hayek: Filiation of Ideas and Ambition 289 Carol M. Connell

Part III  The Chicago School of Economics 10 Friedman and Hayek’s Converging Ideas on Freedom and the State 327 Birsen Filip 11 Chicago Economics in the Making, 1926–1940: A Further Look at United States Interwar Pluralism 373 Luca Fiorito and Sebastiano Nerozzi Index 419

Chronology

1894/1895: Milton Friedman’s parents leave the Habsburg Empire for America. 1907/1908: Adolf Hitler relocates to Vienna and absorbs the prevailing anti-Semitic culture co-created by prominent proto-Nazi families like the von Hayeks. 1909–1938: Mises works as a lobbyist for the Lower Austrian Chamber of Commerce and Industry. 1912: Mises’ becomes the quasi-official theorists of the Austro-German business sector with his Theorie des Geldes und der Umlaufsmittel (Theory of Money and Credit). Hitler embraces a popularized version of Austrian Business Cycle Theory as a tool with which to destroy democracy. 1914–1918: the ‘Great’ War between the dynasties. 1917–1918: the Romanovs, Hohenzollerns and Habsburgs are overthrown. April 1919: the status of ‘German Austrian citizens’ ‘equal before the law in all respects’ is forcibly imposed on the Habsburg Second Estate by what ‘von’ Hayek denigrates as a ‘republic of peasants and ­workers’: coats of arms and titles (‘von,’ ‘Archduke,’ ‘Count’ etc) are abolished the Adelsaufhebungsgesetz (the Law on the Abolition of Nobility). vii

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Violators face fines or six months jail—‘von Hayek and ‘von’ Mises become common criminals. 1926: Mises is impressed by the ‘commercial success’ of monthly reports of American business cycle Institutes: ‘The price of an annual subscription was on the order of $100, a small fortune at the time.’ 1927: Mises establishes the Austrian Institut für Konjunkturforschung (Austrian Institute for Economic Research) ‘mainly to provide Hayek with a suitable position.’ 1927: Mises proposes to become the intellectual Führer of a NaziClassical Liberal Pact (‘Ludendorff and Hitler’ are among the ‘Fascists’ praised). March 1928: Hayek’s Institute predicts a cyclical recovery starting in Austria. June 1929: Hayek’s Institute assessed conditions in the USA: ‘Because of the comparatively strong position of the money market, it was believed that these adverse developments would probably not lead to a crisis followed by a depression but rather to a further sharp tightening of the money market.’ October 1929: Hayek’s Institute stated that ‘it can be emphatically emphasised that, given a smooth and undisturbed development of the financial and political situation, all the prerequisites seem to be given to make a new upswing possible within a few months.’ October 1929: the Wall Street Crash. 1930: the American banking system collapses. 1932: advised by his ‘Austrian’ Treasury Secretary (Andrew Mellon), Herbert Hoover becomes a one-term President. 1929–1934: the deflation promoted by ‘von’ Hayek and ‘von’ Mises intensifies the Great Depression and undermines democracy in Germany (1933), Austria (1934) and elsewhere. 23 September 1930: Hayek writes to the Rockefeller Foundation requesting funds for a ‘Foundation Program in Economic Stabilization’—but makes no mention of his ‘spring of 1929’ or ‘February 1929’ prediction about the Great Depression. 27–30 January 1931: ‘von’ Hayek gives the University of London Advanced Lectures in Economics.

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February 1931: the editors of the University of Chicago Journal of Political Economy, Frank Knight and Jacob Viner, publish Carl Theodore Schmidt’s analysis of ‘The Austrian Institute for Business Cycle Research,’ which reports that Hayek’s Institute ‘makes no pretence of offering a definite basis for the prognosis of cyclical fluctuations.’ May 1931: the financial crisis spreads to Europe via Vienna’s CreditAnstalt. June 1931: in his Foreword to the first edition of Hayek’s Prices and Production, Lionel Robbins uses a serfdom analogy: ‘I am bound to say that [Austrian theory] seems to me to fit certain facts of the American slump better than any other explanation I know. And I cannot think that it is altogether an accident that the Austrian Institut für Konjunkturforschung, of which Dr. Hayek is director, was one of the very few bodies of its kind which, in the spring of 1929, predicted a setback in America with injurious repercussions on European conditions.’ As a result, Hayek ‘expected nothing less’ than a job offer from the LSE. 22 September 1931: ‘von’ Hayek arrives in London to begin a one year Visiting Professorship: ‘it was really from the first moment arriving there that I found myself for the first time in a moral atmosphere which was completely congenial to me and which I could absorb overnight.’ June 1932: Hayek explains that the ‘central theme’ of his Monetary Theory and Trade Cycle is a ‘critique of the programme of the “Stabilizers”.’ 1 August 1932: the Tooke Professorship of Economic Science and Statistics is revived for ‘von’ Hayek. September 1932: Robbins provides a glowing Introduction to Hayek’s Monetary Theory and the Trade Cycle about ‘Professor von Hayek, until recently Director of the Austrian Institut fur Konjunkturforschung, now Tooke Professor of Economic Science and Statistics in the University of London.’ 5 March 1933: After lunch with Hayek, John Maynard Keynes reflects: ‘what rubbish his theory is—I felt today that even he was beginning to disbelieve it himself.’ 1933: in an essay on ‘The Current Status of Business Cycle research and its Prospects for the Immediate Future,’ Mises fails to mention Hayek’s ‘prediction’ of the Great Depression.

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March 1934: Mises becomes a card-carrying Austro-Fascist and member of the official Fascist social club. March 1934: Hayek begins a 16-year crusade to persuade his wife to give him a divorce. June 1934: Robbins publishes his Austrian-account of The Great Depression. August 1934: In the Preface of the second edition of Prices and Production, ‘v Hayek’ thanks Robbins for his ‘help’—Robbins had ‘asked Hayek to remove his laudatory introduction in his first edition.’ 1936: Hayek declines to respond to Keynes because ‘I rather expected that when he thought out The General Theory, he would again change his mind in another year or two; so I thought it wasn’t worthwhile investing as much work.’ August 1936: Adolph O. Berger’s University of Chicago Department of Economics dissertation on ‘The Forecasting Methods and Results of the Austrian Institute for Business Cycle Research’ provided evidence which contradicted the Hayek/Robbins (and later Machlup/Nobel) assertion: with qualifications, the forecasting results of the Austrian Institute for Business Cycle Research ‘do not compare very favourably with those of the American services.’ Berger summarized Hayek’s June 1929 Institute assessment of conditions in the USA and the October 1929 assertion about ‘a new upswing possible within a few months’ (as cited above). 1936: between February and November, Hayek’s attitude towards Knight appeared to have been, at least in part, transformed from sarcasm to reverence. G.L.S. Shackle notes that Hayek’s ‘attitude had noticeably softened towards Frank Knight.’ 1945–1950: Hayek instructs his lawyers to go jurisdiction shopping to find a location to ‘enforce’ the divorce that his wife refuses to give him so that he can marry his cousin. To finance his post-divorce life, Hayek seeks employment in the USA but the University of Chicago department of economics refuses to even consider him. Knight and Friedman are reportedly among the ‘blackballers.’ 1945–1946: Mises becomes ‘Visiting Professor’ at New York University and a full-time employee (‘spiritus rector’) of the Foundation for Economic Education (FEE). Friedman and George Stigler are disgusted by those with whom they are about to form a ‘free’ market ‘Pact’ (the

Chronology     xi

Mont Pelerin Society). Stigler refers to FEE’s Leonard Read and Orval Watts as ‘those bastards.’ 1947: Hayek establishes the fully funded Mont Pelerin Society and invites (along with Knight) a solitary female, Veronica Wedgewood who (according to a University of Chicago ‘oral tradition’) was Knight’s lover. Mises ‘hits the roof ’ at the suggestion of a ‘Pact’ with the Chicago School of Economics—and stomps out saying ‘You’re all a bunch of socialists.’ 1950: when Hayek abandons his first wife and children, Robbins leaves the Mont Pelerin Society, and severs all links with the amoral Hayek who has (for the second time?) ‘deceived’ him. Friedman is also repulsed. 1960: Hayek dedicated The Constitution of Liberty to ‘the members of the Mont Pelerin Society and in particular to their two intellectual leaders, Ludwig von Mises and Frank H. Knight.’ 1960: the death of Hayek’s first wife facilitates a reunion between Hayek and Robbins. Hayek falls into a year-long suicidal depression. 1961: Robbins praises Hayek’s ‘moral ardour.’ 1961: Hayek argues that ‘It is at least possible … that the use of so severe a form of coercion as conscription may be necessary to ward off the danger of worse coercion by an external enemy.’ 1962: at a banquet in honour of Hayek, Mises states that Hayek had published ‘several excellent essays’ during his time at the Austrian Institute for Economic Research—but Mises makes no mention of Hayek’s prediction of the Great Depression. 1963: in Human Action, Mises lobbies for the Warfare State: ‘He who in our age opposes armaments and conscription is, perhaps unbeknown to himself, an abettor of those aiming at the enslavement of all.’ 1963–1964: in A Monetary History of the United States, 1867–1960, Friedman and Anna Schwartz described the ‘Great Contraction.’ Friedman presumably began his first ‘plucking model’ assault on Austrian business cycle theory about this time. 1966: As the Vietnam War intensifies, Mises again lobbies for conscription and the Warfare State. 1968: The Chicago School’s W. Allen Wallis declares that ‘nothing is more opposed to our ethical, religious, and political principles than

xii     Chronology

taking bodily control of a person and forcing him to submit totally to the will of others.’ 1968: The Swedish Central Bank announces the inauguration of a Nobel Prize for Economic Sciences. 1969: Hayek sinks into his second prolonged suicidal depression (which lasts until 1974). August 1970: in Autobiography of an Economist, Robbins declines to mention the Mont Pelerin Society and his rift with Hayek; describes in detail his conflict with Keynes; states that his friendship with Hayek ‘was an especially happy one’; and justifies his attachment to the Austrian School: ‘I was acting in good faith and with a strong sense of social obligation … I had become the slave of theoretical constructions which, if not intrinsically invalid as regards logical consistency were inappropriate to the total situation which had then developed and which therefore misled my judgement.’ Hayek reflects that Robbins had ‘one extremely likeable habit. He’s the most loyal friend of anyone you could meet. But if he were asked his memories of Harold Laski or Beveridge, it would be honest but it would not be true. Much embellished. Because they were close friends of his.’ February 1971: Murray Rothbard states that it was ‘deplorable’ that Friedman and his followers ‘have never paid attention to the achievement of Ludwig von Mises’ and his Austrian business cycle theory. Friedman’s ‘purely monetarist’ approach was ‘almost the exact reverse of the sound—as well as truly free-market—Austrian view.’ Friedman was the enemy—‘the Establishment’s Court Libertarian.’ September 1971: the Nobel Selection Committee receives the ‘appraisal’ of Hayek’s worthiness for a Nobel Prize that they had requested from Fritz Machlup—Hayek’s close friend, fellow Austrian School economist and founding Mont Pelerin Society member: ‘In a comment which Hayek published in the Monthly Reports of the Austrian Institute for Economic Research (as its Director) in February 1929 he boldly predicted that crisis and downturn in the United States might be imminent. With these warnings, which came true with a vengeance, Hayek had introduced one of the main themes of his monetary theory of the investment cycle.’

Chronology     xiii

5–9 September 1971: Machlup, Hayek and other Board members met to plan the 25th Mont Pelerin Society anniversary meeting. 1972: at the 25th Mont Pelerin Society anniversary meeting, ‘President’ Friedman unsuccessfully attempts to sever the institutional link (a divorce?) between the Austrians and the Chicago School of Economics by proposing the winding-up of the Society. 27 January 1973: what Friedman calls a ‘major stain on our free society’—military conscription—ends: and the all-volunteer armed force is instituted. 1974: in ‘Homage to Hayek,’ Hayek’s LSE colleague, Arnold Plant, makes was no mention of Hayek’s ‘prediction’ of the Great Depression. June 1974: at the first Koch-funded Austrian revivalist conference, delegates compete with each other over what Friedman described as ‘rotten bastard’ proposals: the speed with which non-Austrian (i.e., aristocratic, tax-exempt and academic) ‘entitlements’ could be eliminated—forcing wounded veterans, the famine-stricken, the old, the sick, the young and the poor to seek private charity. September 1974: the Nobel Prize Selection Committee reports that Hayek ‘tried to penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.’ December 1974: ‘Professor von Hayek’ is invited ‘to accept from the hand of His Majesty the King the 1974 Prize in Economic Science dedicated to the memory of Alfred Nobel.’ 1975: after a gap of 44 years, Hayek asserts: ‘I was one of the only ones to predict what was going to happen. In early 1929, when I made this forecast, I was living in Europe which was then going through a period of depression. I said that there’s no hope of a recovery in Europe until interest rates fell, and interest rates would not fall until the American boom collapses, which I said was likely to happen within the next few months. What made me expect this, of course, was one of my main theoretical beliefs, that you cannot indefinitely maintain an inflationary boom.’

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1977–2006: Friedman relocates to the Hoover Institution where disciples of ‘von Hayek and ‘von’ Mises are being recruited - one, ‘Dr’ Kurt Leube, has no post-secondary qualifications. From 1987 to 1992, the ‘Mises University at Stanford University’ appeared to have a privileged existence. One of the ‘star’ speakers is Rothbard who delivers a mendacious lecture on ‘The Future of Austrian Economics.’ 1979: Hayek again asserts: ‘At the time I was so convinced that this was an overexpansion that, as you perhaps know, at the beginning of 1929 I predicted the American crash. One could foresee this very clearly.’ 1982: the Ludwig von Mises Institute is established. 1984–1988: Leube’s Hoover Institution publications (The Essence of Hayek, The Essence of Stigler and The Essence of Friedman) are immediately followed by Friedman’s ‘plucking model’ attack on the Austrian business cycle model (after a gap of 24 years). 1991: Friedman published ‘Say “No” to Intolerance’—which targets Mises. 1992: Hayek dies—but his for-posthumous-consumption oral history interviews continue to be suppressed. 1992: the Rothbardian deflation-promoting Boettke arrives at the Hoover Institution as a National Fellow: Friedman lets him know he is ‘a pain in the ass.’ 1993: Friedman publishes his ‘plucking model’ attack (after a further gap of five years). 1993: Rothbard, the Academic Vice President of the tax-exempt Ludwig von Mises Institute, celebrates the first bombing of the World Trade Center and becomes, in effect, a spotter for Al-Qaeda by suggesting other New York buildings to bomb. 1994: in ‘A New Strategy for Liberty,’ Rothbard establishes an Austrian School ‘Outreach’ to ‘Redneck’ militia groups. The ‘least’ Austrians could do ‘is accelerate the Climate of Hate in America, and hope for the best.’ 1994: the defamatory content of Hayek on Hayek challenges the reverential ‘knowledge’ of loyal Austrians. 1998: in the tax-exempt Human Action The Scholars Edition, Mises’ lobbying for the Warfare State and conscription is silently corrected through deletion.

Chronology     xv

1998: Friedman informs the Mises Institute Senior Fellow, Walter Block, that ‘I believe Hayek has been a great force for good and has done a great deal to promote an appreciation of the role of markets in a free society. He deserves better than your self-satisfied diatribe.’ In response, Block complains about ‘economic fascism, the economic system employed by Nazi Germany, and Mussolini’s Italy. In these cases, there was a thin veneer of private property rights, but the underlying economic reality was one of government control.’ Friedman informs Block: ‘you are a fanatic who finds it absolutely impossible to understand the thinking of anybody other than himself. It is time to close our discussion.’ 2000: Block describes the Austrian School ‘united front’ with NeoNazis. 2003: after seven decades (and almost half a century of intense academic dispute), the 1932–1934 evidence about Friedman’s Chicago ‘oral tradition’ is—for the first time—examined and reported (and largely absolves Friedman from the criticism levelled at him). 2007: Mises’ card-carrying Austro-Fascist status is reported (after being suppressed for almost three-quarters of a century). 2007: The Road to Serfdom Texts and Documents The Definitive Edition may have earned Bruce Caldwell $1 million in a single month on the back of ‘puffing’ Fox News’ conspiracy theorist, Glenn Beck. 2010: in the Washington Post, Caldwell—a major ‘free’ market fundraiser—illustrates their Use of Knowledge in Society: ‘Hayek himself disdained having his ideas attached to either party.’ 2010/2012: referring to the 1929 American crash, Hansjörg Klausinger confirmed: ‘there is no textual evidence for Hayek predicting it as a concrete event in time and place’; we lack ‘convincing evidence of a prediction that conformed to what Robbins suggested in his foreword.’ 2011: in The Constitution of Liberty The Definitive Edition, Hayek’s motive for writing the book—to market to ‘Fascist’ dictators such as António de Oliveira Salazar—is silently corrected through deletion.

Part I Hayek’s Luck

1 ‘I Have Been Lucky in This Game’ Robert Leeson

1 ‘Von’ Hayek’s Luck In 1974, Friedrich ‘von’ Hayek received the Nobel Prize for Economic Science for having predicted the Great Depression and for his ‘conclusion’ that ‘only by far-reaching decentralization in a market system with competition and free price-fixing is it possible to make full use [emphasis added] of knowledge and information.’1 Four years later, Hayek (1978) reflected that it was his ‘general view of life that we are playing a game of luck, and on the whole I have been lucky in this game.’ He described his own knowledge: ‘I know certain events which were extremely lucky, that I had luck in many connections.’2 Hayek (1978) also promoted dictators: ‘After all, there have been good dictators in the

R. Leeson (*)  Stanford University, Stanford, CA, USA e-mail: [email protected] R. Leeson  Notre Dame Australia University, Fremantle, WA, Australia © The Author(s) 2018 R. Leeson (ed.), Hayek: A Collaborative Biography, Archival Insights into the Evolution of Economics, https://doi.org/10.1007/978-3-319-95219-2_1

3

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past … it will depend, from country to country, whether they are lucky or unlucky in the kind of person who gets in power.’3 Luck was central to Hayek’s (1979) political philosophy and denial of the concept of social justice: the distribution of income was like ‘bad health’ or ‘the stupidity’ or ‘the lack of beauty of some people’: it’s all in the same category. And since we owe our wealth to a system in which prices tell people what to do, and these prices must be the source of their income, prices which tell people what to do cannot be prices which correspond to any sort of merit or desert. They must be different. We have found out – we haven’t designed it – we have found out that playing a game which is partly a game of chance, and partly a game of skill, is the best method of organising our affairs. But once we have agreed to play a game because it’s efficient, you can’t no longer afterwards say that the results have been unjust. As long as nobody has cheated, there’s nothing unjust about it. Even if you lose in the game.

Hayek’s (1994, 77) appointment to the London School of Economics (LSE) was ‘luck from beginning to end.’ What ‘game of chance’ and ‘game of skill’ was ‘von’ Hayek playing? A legitimate noble title requires a legitimate royal source: a fons honorum (the ‘fountainhead’ or ‘source of honor’). Hayek (1978) reflected that the ‘Great’ War was a ‘great break in my recollected history.’4 It also broke the Habsburg nobility: coats of arms and titles (‘von,’ ‘Archduke,’ ‘Count,’ ‘Ritter,’ etc.) were abolished on 3 April 1919 by the Adelsaufhebungsgesetz, the Law on the Abolition of Nobility. Violators face fines or six months jail. Republics transform ‘subjects’ into ‘citizens’: the status of ‘German Austrian citizens’ ‘equal before the law in all respects’ was forcibly imposed on Austrian nobles (Gusejnova 2012, 115). Henceforth, ‘von’ Hayek and Ludwig ‘von’ Mises became common criminals—facing fines and six months jail. The Habsburg-born, Austrian-educated Arthur Koestler (1950, 19) described some of the affected: ‘Those who refused to admit that they had become déclassé, who clung to the empty shell of gentility, joined the Nazis and found comfort in blaming their fate on Versailles and the Jews. Many did not even have that consolation;

1  ‘I Have Been Lucky in This Game’     5

they lived on pointlessly, like a great black swarm of tired winter flies crawling over the dim windows of Europe, members of a class displaced by history.’5 According to Mises (2008 [1956], 15), ‘the fool’ releases feelings in ‘slander and defamation. The more sophisticated … sublimate their hatred into a philosophy.’6 Hayek (1978) denigrated those who stripped him of his intergenerational entitlements as ‘a republic of peasants and workers’7; and in promoting political ‘Fascism,’ Mises (1985 [1927], 42–43) sought to undermine ‘everywhere ridiculous’ democracy: ‘Those of the old regime had displayed a certain aristocratic dignity, at least in their outward demeanor. The new ones, who replaced them, made themselves contemptible by their behavior.’ In his Völkischer Beobachter newspaper, Adolf Hitler promoted Austrian business cycle theory for the same reason that Hayek and Mises did: The government calmly goes on printing these scraps of paper because, if it stopped, that would be the end of the government. Because once the printing presses stopped - and that is a prerequisite for the stabilisation of the mark - the swindle would at once be brought to light … Believe me, our misery will increase. The scoundrel will get by … The reason: because the State itself has become the biggest swindler and crook. A robbers’ State! … If the horrified people notice that they can starve on billions, they must arrive at this conclusion: we will no longer submit to a State which is built on the swindling idea of the majority. We want a dictatorship. (Cited by Heiden 1944, 131–133; Shirer 1960, 87; Noakes and Pridham 1994, 19)

In Austria and Germany, the fledgling democracies that emerged after the ‘Great’ War between the dynasties perished in the ‘von’ Hayek- and ‘von’ Mises-intensified Great Depression (Leeson 2018a). Based on ‘Conversations and interviews with Hayek I, Salzburg, 1971–77. Tapes in my possession,’ Kurt Leube (2003a, 13) reported that ‘von Hayek’ and ‘von Mises’ supported Anschluss with Germany: ‘von Hayek’

6     R. Leeson

had grown to manhood within an intellectual milieu formed by individuals who had become accustomed to playing a leading role in a large cosmopolitan multi-national state … Their society had disappeared and the new Austria was simply unable to offer the type of opportunities for leadership which Hayek and his social class had come to expect.

Hayek’s (1978) family ‘tradition … made us feel that a university professor was the sum of achievement, the maximum you could hope for, but even that wasn’t very likely. It reminds me that my closest friend predicted that I would end as a senior official in one of the ministries.’8 Hayek’s (1978) ‘determination to become a scholar was certainly affected by the unsatisfied ambition of my father’ to acquire the title of full university professor: I grew up with the idea that there was nothing higher in life than becoming a university professor.9 At the age of thirty-two, when you’re offered a professorship in London you just take it. [Laughter] I mean, there’s no problem about who’s competing. It was as unexpected as forty years later the Nobel Prize. It came like something out of the clear sky when I never expected such a thing to happen, and if it’s offered to you, you take it. It was in ‘31, when Hitler hadn’t even risen to power in Germany; so it was in no way affected by political considerations.10

Previously, Hayek (1978) had held a Privatdozent at the University of Vienna which ‘allowed one to lecture but practically to earn no money. When I finally achieved it, what I got from student fees just served to pay my taxi, which I had to take once a week from my office to give a lecture at the university. That’s all I got from the university.’ This Privatdozent had been derived in a corrupt, sponsor-driven environment (see below)—and wherever he was employed, Hayek ‘imported’ this ‘free’ market academic corruption. Hayek (1978) detected gullibility in his American admirers: ‘I began with a tone of profound conviction, not knowing how I would end the sentence, and it turned out that the American public is an exceedingly grateful and easy public … I went through the United States for five weeks doing that stunt [laughter] everyday, more or less … I think

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I ought to have added that what I did in America was a very corrupting experience. You become an actor, and I didn’t know I had it in me. But given the opportunity to play with an audience, I began enjoying it [Laughter].’11 ‘Free’ market ‘knowledge’ has been ‘constructed’ by four malevolently mentally ill individuals: Ayn Rand (1905–1982), who explicitly wrote fiction; plus Mises (1881–1973), Hayek (1899–1992) and Murray Rothbard (1926–1995), who masqueraded their ideological agenda as ‘science.’ Their ‘knowledge’ is ‘spread’ by what Hayek (1978) contemptuously called ‘the intellectuals, which I have long ago defined as the secondhand dealers in ideas. For some reason or other, they are probably more subject to waves of fashion in ideas and more influential in the American sense than they are elsewhere.’12 These disciples have embraced the title of ‘worst inferior mediocrities’ (Hayek 1949, 426– 427; 1978) in return for ‘property’: academic tenure and ‘1%’ financial elite status (Chapter 3). Their ‘thoroughly Hitlerian contempt for the democratic man’ is sometimes expressed in code. Rothbard was the first person Ralph Raico (2013) had met who defended ‘a fully voluntary society—nudge, nudge.’ Hayek had a visceral dislike of Jews and non-whites, especially the ‘negro.’ He informed Neil McLeod of the Liberty Fund that he wished to change his bank because his current branch had ‘gone negro’: dealing with non-whites made him feel ‘uncomfortable.’13 According to Peter Boettke (2012a, 7) ‘in Oxford, because an endowment guaranteed a teacher’s salary, the professors had long ago given up even the pretense of teaching.’14 Boettke’s salary from a public university—George Mason University (GMU)—is, at least in part, an endowment from Charles Koch. Referring to a card-carrying AustroFascist, one of Boettke’s GMU Ph.D. graduates reports: Pete often says ‘love Mises to pieces,’ by which he means never lose sight of why you entered the discipline in the first place. There are norms and standards amongst mainstream economists, and he encourages students to be able to converse in that language, but he always stresses the need to keep the raw enthusiasm. (Evans 2010, 79)

8     R. Leeson

After attending ‘an absolutely wonderful Liberty Fund conference organized by Bruce Caldwell on Hayek’s critique of scientism,’ Boettke (2007), the President of Hayek’s Mont Pelerin Society (MPS), describes what passes for the disinterested pursuit of ‘knowledge’ in the ‘free’ market: he was completely convinced of the correctness [emphasis added] of Rothbardian conclusions in economics and politics, but I do not find the way he reached those conclusions persuasive. So I am trying to find alternative theoretical and empirical means to derive Rothbardian conclusions … I am searching for an alternative argumentative structure on how to get there, and alternative historical/empirical illustrations to meet the evidence burden that must be met professionally to advance these ideas.

Hayek’s Sensory Order is remembered by Richard Stern (the Helen A Regenstein Professor of English and American Literature at the University of Chicago): he ‘looked unapproachable, haughty, as if he were sniffing something disagreeable in his mustache, although I didn’t feel patronized by him’ (cited by Ebenstein 2003, 180). Hayek’s (1978) ‘present attempt is to say, yes, we rely on traditional instincts, but some of them mislead us and some not, and our great problem is how to select and how to restrain the bad ones.’15 These ‘instincts, of course, are the source of most of our pleasure in the whole field of art. There it’s quite clear; but how you can evoke this same sort of feeling [emphasis added] by what comes essentially to these rules of conduct which are required to maintain this civilized society, I don’t know.’16 Rothbard (1973) sycophantically reported that Mises’s death takes away from us not only a deeply revered friend and mentor, but it tolls the bell for the end of an era: the last living mark of that nobler, freer and far more civilized era of pre-1914 Europe. Mises’s friends and students will know instinctively [emphasis added] what I mean: for when I think of Ludwig Mises I think first of all of those landmark occasions when I had the privilege of afternoon tea at the Mises’s: in a small apartment that vir-tually breathed the atmosphere of a long lost and far more civilized era. The graciousness of Mises’s devoted wife Margit; the precious volumes that were the remains of a

1  ‘I Have Been Lucky in This Game’     9

superb home library destroyed by the Nazis; but above all Mises himself, spinning in his inimitable way anecdotes of Old Vienna, tales of scholars past and present, brilliant insights into economics, politics and social theory, and astute comments on the current scene.

Shortly before the announcement of his Nobel Prize, Hayek (1975a [1974])—after five years of suicidal depression—stated that he was ‘sure there are some facts in this sense which must tie facts for all human beings with whom we can communicate, whose structure of mind [emphasis added] is sufficiently similar to our own so that some intercommunication is possible.’ Four years later, Hayek (1978) explained why he had lost interest in capital theory: I’ve become much too interested in the semi-philosophical policy problems–the interaction between economics and political structure.17 You see, I believe [Joseph] Schumpeter is right in the sense that while socialism can never satisfy what people expect, our present political structure inevitably drives us into socialism, even if people do not want it in the majority. That can only be prevented by altering the structure of our so-called democratic system. But that’s necessarily a very slow process, and I don’t think that an effort toward reform will come in time. So I rather fear that we shall have a return to some sort of dictatorial democracy, I would say, where democracy merely serves to authorize the actions of a dictator. And if the system is going to break down, it will be a very long period before real democracy can reemerge.18

Hayek (1978) sought to promote the ‘spontaneous’ order—‘complex, self-maintaining structures.’19 Asked about the ‘bigger methodological muddle,’ Hayek explained to James Buchanan that economics was constrained by the ‘general problem of having complex phenomena. You encounter this already in the field of biology, to a very large extent. You certainly encounter it in the theory of biological evolution, which has not made any prediction—it can’t possibly make any predictions. I think it’s true of linguistics, which is the most similar in structure to economics.’20 Economics and linguistics were ‘very similar in their problems.’21

10     R. Leeson

Hayek (1978) described himself as an ‘intuitive genius, not really a strict logical reasoner’ (Chapter 4).22 He must have been amazed at the sycophancy of those who kept him financially and emotionally afloat—telling Leo Rosten: ‘Our society is built on the fact that we serve people whom we do not know.’23 Two self-appointed members of the First Estate—the Presuppositionalist public stoning theocrat, Gary North, and the Mormon missionary, CIA ‘intelligence’ officer, and FreedomFest founder, Mark Skousen, knocked on the Freiburg door labelled ‘Prof. Dr. Friedrich A. von Hayek’ (Ebenstein 2003, 317) to be told by ‘von’ Hayek (1994, 107) that he ‘was a law abiding citizen and completely stopped using the title von.’ But Hayek (1994, 37) also referred to the minor title of nobility (the ‘von’) which the family still bears. [emphasis added]

The Times (17 December 1931) reported that ‘von Hayek’ had been appointed to the University of London Tooke Professorship; at the LSE Hayek was known as ‘von Hayek’; he wore his family coat of arms on his signet ring (Ebenstein 2003, 75, 298). In Frederic Benham’s (1932, v) British Monetary Policy, his LSE colleague, ‘Professor von Hayek,’ was thanked. The Times (19 October 1932) published a letter from ‘von’ Hayek (and three LSE colleagues, T. E. Gregory, Arnold Plant and Lionel Robbins) on ‘Spending and Saving Public Works from Rates.’ Over half a century later—with Hayek’s approval—the shield of his coat of arms was reproduced on the cover of The Fatal Conceit: The Errors of Socialism (1988) (Cubitt 2006, 274).24 In and out of Austria, professionally and personally, Hayek repeatedly attached the illegal ‘von’ to his name—including, symbolically, his Economica essay on ‘The Maintenance of Capital’ (1935).25 Yet, in a letter to The Times, Hayek (14 November 1981) professed deep indignation that ‘von’ had been attached to his name: perhaps even Labour MPs could be ‘shamed’ into not answering arguments by reference to ‘descent.’ After British naturalization in 1938, he did not, he claimed, generally use it himself in that form.26

1  ‘I Have Been Lucky in This Game’     11

Hayek’s (1978) mendacious ‘principle’ was ‘that I will not ask, under any circumstances, what is politically possible now. I concentrate on what I think is right and should be done if you can convince the public. If you can’t, well it’s so much the worse, but that’s not my affair.’27 At the Austrian University of Salzburg, where he worked from 1969 to 1977, his notepaper was headed ‘PROF. F. A. von HAYEK’— and on this notepaper, Hayek (8 October 1977) had written to editor of The Times, William Rees-Mogg, making a calculation about what was politically possible: in order to win electoral support from ‘rank and file’ labour union members, Hayek insisted that The Times push Mrs. Thatcher to obtain a ‘mandate’ to strip labour unions of their privileges.28 The following year, Hayek successfully nominated ReesMogg for MPS membership.29 Presumably, The Times didn’t publish the ‘descent’ letter (sent from ‘Prof. Dr. Friedrich A. von Hayek’) because although at least some employees knew that Hayek was lying they wished to keep his ‘free’ market powder dry. Did Hayek (1978) regard the British as gullible? In 1931, ‘it was really from the first moment arriving there that I found myself for the first time in a moral [emphasis added] atmosphere which was completely congenial to me and which I could absorb overnight … at once I became in a sense British, because that was a natural attitude for me, which I discovered later. It was like stepping into a warm bath where the atmosphere is the same as your body.’30 Hayek (7 February 1948) informed a potential sponsor that the period for which he felt ‘morally’ obliged to stay with his wife and two teenage children was approaching its end.31 The reason Hayek (1994, 126) accepted the Chicago position ‘was in the first instance solely that it offered the financial possibility of that divorce and remarriage.’ It led to Hayek’s ‘abdication’ from the LSE and his instalment as Professor of Social and Moral Science at the University of Chicago’s Committee on Social Thought. In the ‘free’ market, deferential ‘instincts’ respond to the incentives of the cash nexus. In The Definitive Edition of The Road to Serfdom, Caldwell (2007, x) reported that ‘Walter Morris was instrumental in the creation of the Collected Works project, and the Morris

12     R. Leeson

Foundation has been constant in its support throughout the years. I first sought financial support for the project at the Mont Pèlerin meetings in London in October 2002, and John Blundell of the Institute of Economic Affairs’ provided a fellowship. Hayek (1978) told Robert Chitester: ‘The whole traditional concept of aristocracy, of which I have a certain conception—I have moved, to some extent, in aristocratic circles, and I like their style of life. But I know that in the strict commercial sense, they are not necessarily honest.’32 Charlotte Cubitt (2006, 10, 122) reported that when he was caught in the ‘cheating matter’—stealing, or double-dipping, from ‘educational charities’ to maintain his aristocratic lifestyle—Hayek ‘just laughed, said he did not mind in the least, that all his professional considerations had been based on financial considerations.’ When his sponsor, Walter Morris, complained to Cubitt about being ‘deceived [,] Hayek laughed, and told me that he had wanted to have nothing to do with this but did not mind being told about it as an anecdote.’ The epistemological foundation of Hayek’s Nobel Prize was an evidence-free anecdote about having predicted the Great Depression. In 2018, a string of sex-abuse allegations and financial crises obliged the Swedish Academy to abandon that year’s award of a Nobel Prize for Literature. During a sabbatical at a North American think tank, a member of the Nobel Prize Selection Committee reportedly told anyone who would listen that there had been pressure to reward the Swede, Gunnar Myrdal—but that he was intensely disliked by those doing the selecting (in addition to being a prominent opponent of war crimes in Vietnam). In this highly charged political environment, a compromise was reached: Myrdal was both elevated and incensed by pairing him with Hayek, someone he detested. Gustav Jörberg (1927–1997), an associate member of the 1993 Nobel Prize Selection Committee, told a Lund University seminar that it had been decided that Myrdal’s discomfort would be maximized by the pairing because Hayek had ‘paired’ with his wife, Alva, in an extra-marital affair. Should the Nobel Prize for Economic Sciences be suspended—at least until an explanation is provided for how a transparent fraud came to be rewarded in 1974?

1  ‘I Have Been Lucky in This Game’     13

On the road to the Nobel Prize, Hayek encountered at least 25 episodes of luck; combined, perhaps, with the three of the abstractly presented personal misfortunes listed above: his ‘ugly Fritz’ childhood label, ‘bad [mental] health,’ plus ‘stupidity’ for not having ‘the wit to say, “Let’s get married”’ to his cousin before leaving for America in 1923 (cited by Ebenstein 2003, 32).33 These chapters will examine aspects of this ‘luck’— while also reflecting on the extraordinary influence as a sovereign producer that accrues to all recipients of the Nobel Prize for Economic Science— especially those like Hayek who seek policy influence.

2 Producer Sovereignty In Socialism: An Economic and Sociological Analysis, Mises (1951 [1932], 385) argued that monopoly was exceedingly rare: ‘Perhaps the nearest approach to such a monopoly was the power to administer grace to believers, exercised by the medieval Church. Excommunication and interdict were no less terrible than death from thirst or suffocation.’ Mises used this type of producer sovereignty to promote consumer sovereignty. Gottfried Haberler was a witness at Mises’ wedding, and Fritz Machlup’s doctoral dissertation ‘The Gold Exchange Standard’ (Die Goldernwährung ) was dedicated to Mises, his supervisor and ‘spiritual father’ (Mises 1984, 34, 202). Subsequently, Machlup (1981) went to extraordinary lengths to find employment for Mises: but when he and Haberler began to favour the price mechanism (with respect to the price of foreign exchange), Mises refused to speak to them for ‘several years.’ When Machlup tried to speak to Margit Mises (1984, 146) at the 1965 Stresa MPS meeting, Mises pulled his wife away from Machlup. ‘I don’t want you to talk to him,’ he said. ‘I don’t want you ever to talk to him again … He was in my seminar in Vienna … he understands everything.’

At New York University, Israel Kirzner (2001) promotes Austrian Truth: ‘the truth is that for [Rothbard’s] teacher, Ludwig von Mises, consumer sovereignty is a term which importantly and valuably captures

14     R. Leeson

the essential function of the free-market economy.’ Yet, Mises—as if to illustrate the functioning of the ‘free’ market—repeatedly stole (plagiarized) the concept from Frank A. Fetter (Leeson 2015a, chapter 7). When not expressing delight at his own manipulative practises, Hayek (1978) projected the image of a martyred scientist: ‘in intellectual circles, at least until quite recently, I was a rather doubtful figure.’ Presumably referring to the University of Chicago economics department, Hayek continued: ‘There was one instance about four or five years after I had published The Road to Serfdom, when a proposal of an American faculty to offer me a professorship was turned down by the majority. It was one of the big American universities.’ But he was unconcerned because he was a scientist: I had a long period, which I didn’t particularly mind, when at least among the intellectuals my reputation was very low-down indeed. I think it has recovered very slowly in more recent years, perhaps since I published The Constitution of Liberty (1960) which seems to have appealed to some people who did not completely share my position. So it has been slowly rising again. But in a way, you know, I didn’t mind, because I hadn’t been particularly happy with my predominantly political reputation in the forties and fifties, and later my reputation rested really again on my purely scientific work, which I didn’t particularly mind.34

Hayek combined contempt for economists with his own ‘principle’: we are training, unfortunately, far too many and certainly many more than ought to go into academic life. And I don’t mind even people of first-class quality going into politics. All I’m saying is they no longer have the right approach to the purely abstract theoretical work. They are beginning to think about what is politically possible, while I have made it a principle never to ask that question. My aim is to make politically possible what in the present state of opinion is not politically possible.35

In his LSE ‘Hayek Memorial Lecture presented in cooperation with the Mises Institute’ on ‘Hayek and Market Socialism: Science, Ideology, and Public Policy,’ one of Kirzner’s disciples and North’s fellow Presuppositionalist insisted that ‘one must read Mises and Hayek’s

1  ‘I Have Been Lucky in This Game’     15

arguments as two sides of the same coin’ (Boettke 2004). According to Boettke (2016a), ‘Mises’s economics informed his political theory, not the other way around.’ Yet Hayek (1999 [1977], 132) explained that ‘free’ market ‘scholarship’ led to an imaginary ‘spontaneous’ Utopia: ‘I have often had occasion to explain, but may never have stated in writing that I strongly believe that the chief task [emphasis added] of the economic theorist or political philosopher should be to operate on public opinion to make politically possible what today may be political impossible.’ In Chile in 1981, Hayek praised the ‘spontaneous’ order and complained that Milton Friedman ‘maintains that since we have created institutions, we can change them as we want. This is an intellectual mistake. It is an error. It is false’ (cited by Caldwell and Montes 2014a, 50; 2014b; 2015a, 303–304). Referring to journalists, Hayek (1978) also stated: ‘It’s impossible in that situation to be strictly honest, but it’s not their fault. It’s the fault of the institutions which we have created.’36 At the University of Vienna, institutional corruption was required to obtain an academic position: You were very much dependent on the sympathy, or otherwise, of the professor in charge. You had to find what was called a Habilitations-Vater, a man who would sponsor you. And if you didn’t happen to agree with the professor in charge, and there were usually only two or three—in fact, even in a big subject like economics, there were only two or three professors— unless one of them liked you, well there was just no possibility.37

With respect to The Road to Serfdom, Hayek (1978) was never quite happy with the title, which I really adopted for sound. The idea came from [Alexis de] Tocqueville, who speaks about the road to servitude; I would like to have chosen that title, but it doesn’t sound good. So I changed ‘servitude’ into ‘serfdom,’ for merely phonetic reasons.38

To obtain the ‘title’ of University of London Professor of Economics, Hayek changed ‘had not’ into ‘had’ predicted the Great Depression. The year before receiving the ‘title’ of Nobel Prize for Economic Science, Hayek (1973, 61–62) explained how ‘free’ market ‘science’ could assist:

16     R. Leeson

What helpful insights science can provide for the guidance of policy consists in an understanding of the general nature of the spontaneous order, and not in any knowledge of the particulars of a concrete situation, which it does not and cannot possess … The only theory which in this field can lay claim to scientific status is a theory of the order as a whole.

That Hayek had predicted the Great Depression was ‘undisputed.’ On a Nobel Prize ‘victory tour’ of the USA, Hayek (1975b) described the producer sovereignty that underpinned his ‘correct’ ‘scientific knowledge’: If we take as premises some undisputed facts, which everybody accepts as facts of daily observation, we can logically deduce from them certain consequences, which permit only one answer to the problem. In other words, if we deduce certain consequences from admitted facts, by logically correct argument, the truth of our deductions has to be accepted. You might object that I have left out some facts, and that the result would have been different if I had not neglected those other facts. Well, my answer to this objection would be: quote the facts, please, and I shall be quite willing to consider them. We have been talking about this problem for a hundred years, and nobody has yet mentioned any generally admitted facts which would essentially modify my conclusions.

Referring to the 1929 American crash, Hansjörg Klausinger (2010, 227; 2012, 172, n10) reported the ‘facts’: ‘there is no textual evidence for Hayek predicting it as a concrete event in time and place’; we lack ‘convincing evidence of a prediction that conformed to what Robbins (2012 [1931]) suggested in his foreword.’

3 Property: ‘Reflections on Becoming an Austrian Economist and Staying One’ Hayek (1978) told Buchanan—the ‘George Mason Nobel Laureate’— that economic ‘science’ was driven by shallow emotions: ‘There’s no emotional disappointment in the other fields when you recognize that you can’t find out certain things; but so many hopes are tied up with the

1  ‘I Have Been Lucky in This Game’     17

possible control and command over economic affairs that if a scientific study comes to the conclusion that it just can’t be done, people won’t accept it [emphasis added] for emotional reasons.’39 How do cult followers respond when confronted with evidence that undermines their faith? In an Institute of Economic Affairs journal, Kirzner (1995) expressed shock by the contrast between his apriori ‘knowledge’ and the archival reality as revealed by Hayek on Hayek an Autobiographical Dialogue (1994): the book ‘jars one’s view of one of this century’s most eminent thinkers’: Those familiar with Hayek’s extraordinarily far-flung and prolific scientific contributions know [emphasis added] him to be the detached, calm scholar, always thoroughly objective and dispassionate, always obviously taking great pains to ensure the accuracy of his observations and the validity of his judgements … the definitive impression of austere and magisterial eminence, both intellectually and morally. There is nothing in this book (or any other book) which can erase the truth contained in this conventional picture [emphasis added] of Hayek.

Kirzner (1995) lamented about the reported evidence: ‘Unfortunately, however, this book does project an image which is decidedly less impressive.’ In Fascism versus Capitalism, Llewellyn Rockwell Jr. (2013, 96–98), the co-founder of the Ludwig von Mises Institute, described the process by which Hayek’s co-leader of the fourth generation leader of the Austrian School constructed Truth: The scene was recalled to me the way miracles are described in the Gospels … There is another respect in which we can all emulate Murray [Rothbard]. He was fearless in speaking the truth. He never let fear of colleagues, fear of the profession, fear of editors or political cultures, stand in the way of his desire to say what was true. This is why he turned to the Austrian tradition even though most economists at the time considered it a dead paradigm. This is why he embraced liberty, and worked to shore up its theoretical and practice rationale at a time when the rest of the academic world was going the other way … This fearlessness, courage, and heroism applied even in his political analysis.

18     R. Leeson

According to Rockwell (1998), In a line from Virgil, which Mises, as a young boy, chose as his lifetime motto, we are told: ‘Do not give into evil, but proceed ever more boldly against it.’ For Mises, this was not just an abstract tenet of personal morality. He thought this stance was essential to the preservation of civilization itself.

Rockwell (2013, 72, 114) described the ‘100 years’ of Austrian ‘we told you so’ and no-room-at-the-inn martyrdom. Having left his ‘beloved Vienna,’ Mises watched the world go through a shredding of civilization. The Nazis ransacked his old apartment in Vienna, and stole his books and papers … he was in his mid-50s and he was nearly homeless.

Fascism versus Capitalism was dedicated ‘To the Patrons of this book, and all who support the work of the Mises Institute.’ Was it fear of jeopardizing sponsor-funding that prevented Rockwell from reporting that Mises (1985 [1927], 49, 51) had declared ex cathedra: ‘Fascism’ had ‘saved European civilization’? Or that Mises was a card-carrying Austro-Fascist and member of the official Fascist social club (Hülsmann 2007, 677, n149): footnote ‘knowledge’ that had been suppressed for over seven decades (1934–2007)—almost as long as the suppression of ‘knowledge’ about Hayek’s non-prediction of the Great Depression (1931–2010)? Mises had been hired as lobbyist for an employer trade union (1909– 1938; 1946–1969), as in effect had Hayek (1950–1992). Mises (1996 [1929], 13) bemoaned: He who timidly dares to doubt the justification of the restrictions on capitalists and entrepreneurs is scorned as a hireling of injurious special interests or, at best, is treated with silent contempt. Even in a discussion of the methods of interventionism, he who does not want to jeopardize his reputation and, above all, his career must be very careful. One can easily fall under the suspicion of serving ‘capital.’ Anyone using economic arguments cannot escape this suspicion.

1  ‘I Have Been Lucky in This Game’     19

And in Liberalism in the Classical Tradition, Mises (1985 [1927], 158) stated: ‘If modern civilization were unable to defend itself against the attacks of hirelings, then it could not, in any case, remain in existence much longer.’ Referring to ‘the thing taking over,’ Hayek (1978) lied to Jack High: ‘I’ve always made it my rule not to be concerned with current politics, but to try to operate on public opinion. As far as the movement of intellectual opinion is concerned, it is now for the first time in my life moving in the right direction.’40 Rockwell (1998) celebrated: ‘there is a huge network of young professors, and even some department heads and deans, who actively seek people who have graduated from our programs. In particular, Ph.D. economists with a Misesian bent are suddenly in high demand.’ Hayek’s (1961) philosophy revolved around concern about ‘what has long been recognized as one of the most harmful and obnoxious forms of coercion, that dependent on some other man’s opinion.’41 Dependent on Hayek’s post-Nobel Prize ‘opinion,’ several universities were coerced into employing his ‘secondhand dealers in opinion.’ Hayek (1978) explained to Buchanan how ‘the thing’ could take over: I have an idea the thing is on the whole effective via its effect on the teaching profession. And probably that generation which has been brought up during the last thirty years is a lost generation on that point of view. I don’t think it’s hopeless that we might train another generation of teachers who do not hold these views, who again return to the rather traditional conceptions that honesty and similar things are the governing conceptions. If you persuade the teaching profession, I think you would get a new generation brought up in quite a different view. So, again, what I always come back to is that the whole thing turns on the activities of those intellectuals whom I call the ‘secondhand dealers in opinion,’ who determine what people think in the long run. If you can persuade them, you ultimately reach the masses of the people.42

According to Hayek (1961, 2011 [1960], 186), ‘To do the bidding of others is for the employed the condition of achieving his purpose’:

20     R. Leeson

the terms on which somebody is prepared to render me services cannot be regarded as coercion: however important the service in question may be to me, so long as his action adds to the range of my choice something which I desire and which without his action would not be available to me, he places me in a better position than that in which I would be without his action—however high the price he makes me pay … Though both the possibility for the coercer to foresee the action of the coerced, and the former’s desire to bring about this action, are necessary conditions for coercion, they are not sufficient. To constitute coercion it is also necessary that the action of the coercer should put the coerced in a position which he regards as worse than that in which he would have been without that action … Surely no change in the environment of a person which merely adds to his previously existing range of opportunities an additional one can without violence to language be called coercion. However certain I may be that somebody will be glad to buy from me a commodity if I offer it to him at a certain price, and however much I may gain from the sale, it would be ridiculous to suggest that I have coerced him by an offer which he regards as a clear advantage.

What is the ‘objective function’ (that which is to be maximized) of someone who declines a fully funded Ph.D. from a first-class institution in favour of a fourth rate Ph.D. in a school awash with Koch funding? In ‘What Does It Take to Get Into GMU’s Econ PhD Program?’ Boettke (2006) asserted that he and his fellow ideologues ‘had all obtained admission’ to the University of California Los Angeles, Yale, New York University (NYU), and Chicago Ph.D. programmes and received ‘offers of financial support.’ All four of these schools apply academic standards: possibly to avoid the risk of being taught and examined by those who were not in the pay of the Tobacco, Obesity and Fossil Fuel lobby. Boettke (2006) ‘choose to attend GMU because of the unique educational program it offered.’ According to Boettke (2006), if an applicant to the GMU Ph.D. programme fails to obtain the necessary grades: ‘The only offsetting factor to these competitive scores is letters of recommendation from professors that are known to the staff and willing to push their student in our unique areas of strength at GMU (Austrian economics,

1  ‘I Have Been Lucky in This Game’     21

experimental economics, law and economics, public choice, and religion and economics). Still a student cannot be significantly under those baseline scores and get admitted to the program, and the opportunities for funding from the department are non-existent if you are under those scores (though’—presumably referring to the Koch brothers—‘there maybe [sic ] some private funding).’ Hayek (1974) devoted his career and his Nobel Lecture to ‘The Pretense of Knowledge.’ For Mises (2009 [1978 (1940)], 87), ‘suffering from delusions of grandeur’ was the ‘occupational disease of German professors.’ In ‘10 Austrian Vices and How to Avoid Them,’ Daniel B. Klein complained about the quality of his GMU students: You are not a philosopher. Your reader can tell this … Many Austrians have a tendency to think that economists they agree more with are ‘better’ economists than those they disagree more with. This is not true … Most economists will have no idea what you’re talking about if you tell them you’re working on ‘capital theory’ … you are not going to do this. Do not pretend otherwise. In fact, ‘grand theory’ or ‘treatises’ of all kinds should be avoided until you’re a full professor or 65, which ever comes first. Nearly all Austrians at one point have these delusions of grandeur, but they are just that—delusions.43

According to the Wall Street Journal, ‘roughly 75%’ of Boettke’s GMU Ph.D. students have gone on to teach at the tertiary level (Evans 2010)—adding, no doubt, to the 5000+ members of Koch’s ‘academic network.’ Through fraudulent recommendations, ‘von’ Hayek (1978) coerced various universities to employ his unqualified disciples: ‘That I cannot reach the public I am fully aware. I need [emphasis added] these intermediaries.’44 In one instance, he ennobled his library assistant as ‘Dr.’ so as to facilitate his employment as a full Professor of Economics at an American public university, despite knowing that his intellectual deficiencies had prevented him from obtaining an undergraduate degree.45 Others needed religious faith:

22     R. Leeson

In spite of these strong views I have, I’ve never publicly argued against religion because I agree that probably most people need it. It’s probably the only way in which certain things, certain traditions, can be maintained which are essential … I have had little religious background, although I might add to it that having grown up in a Roman Catholic family, I have never formally left the creed. In theory I am a Roman Catholic. When I fill out the form I say ‘Roman Catholic,’ merely because this is the tradition in which I have grown up. I don’t believe a word of it. [laughter]46

Mises had probably as great an influence on me as any person I know. On political ideas, I think the same is true of the two men I mentioned before in another connection: Tocqueville and Lord [John] Acton … when I had called that first meeting on Mont Pèlerin [meaning: ‘Pilgrim Mountain’], which led to the formation of the Mont Pelerin Society, I had already had the idea we might turn this into a permanent society, and I proposed that it would be called the Acton-Tocqueville Society, after the two most representative figures. Frank Knight put up the greatest indignation: ‘You can’t call a liberal movement after two Catholics!’ [laughter] And he completely defeated it; he made it impossible. As a single person, he absolutely obstructed the idea of using these two names, because they were Roman Catholics.47

For two consecutive summers, Caldwell asked the editor of the Archival Insights into the Evolution of Economics series to arrange pilgrimage accommodation at the hotel where Hayek had stayed while visiting Stanford University. Before retiring to the bed that Hayek may have slept in, Caldwell indulged in late-night fantasies about meeting the founder of his religion’s New Testament—and speculating about how they would have responded to each other. Such behaviour suggests blind faith, not disinterested scholarship. With respect to the Old Testament: Caldwell (2008) reviewed Guido Hülsmann’s (2007, 677, n149) Last Knight of Liberalism which reported that Mises was a card-carrying Austro-Fascist (member 282632) and member 406183 of the official Fascist social club. Caldwell’s only

1  ‘I Have Been Lucky in This Game’     23

concern was that Hülsmann had violated his inherited ‘private property’ by citing from the Hayek Archives without his permission. Caldwell (2017) also complained to the History of Economics Society (HES) community that had elected him their President that Philip Mirowski and Edward Nik-Khah (2017) had derived a conclusion by ‘adding the bracketed phrase [Epistemology is governed by] to a series of sentences taken from’ Hayek. The ‘Fascists’ that Mises (1985 [1927], 49, 51) praised included ‘Germans and Italians,’ ‘Ludendorff and Hitler’—but Caldwell’s (2008) rectified this through posthumous ventriloquism by adding a bracketed word: Mises only promoted ‘[Italian] Fascism.’ Caldwell (2017) also insisted that Mirowski and Nik-Khah ‘ignore or dismiss inconvenient facts’ and that ‘Hayek and other neoliberals were throughout their careers opponents of police states.’ But Hayek’s co-leader of the fourth generation Austrian School of Economics sought to establish a Police State with only notional controls on the coercive power of the State: Take Back the Streets: Crush Criminals. And by this I mean, of course, not ‘white collar criminals’ or ‘inside traders’ but violent street criminals – robbers, muggers, rapists, murderers. Cops must be unleashed, and allowed to administer instant punishment, subject of course to liability when they are in error. Take Back the Streets: Get Rid of the Bums. Again: unleash the cops to clear the streets of bums and vagrants. Where will they go? Who cares? Hopefully, they will disappear, that is, move from the ranks of the petted and cosseted bum class to the ranks of the productive members of society [Rothbard’s bold]. (Rothbard 1992)

On 11 September 1973, General Augusto Pinochet seized power in a military coup in Chile. A few weeks before the announcement of his 1974 Nobel Prize for Economic Sciences, Hayek informed Seigen Tanaka (1974): ‘It may be said that effective and rational economic policies can be implemented only by a superior leader of the philosopher-statesman type under powerful autocracy. And I do not mean a communist-dictatorship but rather a powerful regime following democratic principles.’48

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Hayek (3 August 1978) complained to The Times: ‘I have not been able to find a single person even in much maligned Chile who did not agree that personal freedom was much greater under Pinochet than it had been under Allende.’ Pinochet’s Police State murdered (or made to disappear) 3197 trade unionists and political opponents; 20,000 were officially exiled and their passports marked with an ‘L’; and about 180,000 fled into exile—approximately 2% of the population (Wright and Oñate 2005, 57; Montes 2015, 7). Hayek was contemptuous of what he dismissed as Amnesty International’s ‘bunch of leftists’ who publicized evidence about Pinochet’s human rights abuses (Farrant and McPhail 2017). In 1981, Hayek returned to Chile, where the Pinochet regime had recently adopted a new constitution, named after Hayek’s (1960) Constitution of Liberty. During this visit, Hayek told El Mercurio: ‘As long-term institutions, I am totally against dictatorships. But a dictatorship may be a necessary system for a transitional period. At times it is necessary for a country to have, for a time, some form or other of dictatorial power. As you will understand, it is possible for a dictator to govern in a liberal way. And it is also possible for a democracy to govern with a total lack of liberalism. Personally, I prefer a liberal dictator to democratic government lacking in liberalism. My personal impression … is that in Chile … we will witness a transition from a dictatorial government to a liberal government … during this transition it may be necessary to maintain certain dictatorial powers.’ In a second interview with El Mercurio, Hayek praised temporary dictatorships ‘as a means of establishing a stable democracy and liberty, clean of impurities’: the ‘Chilean miracle’ had broken, among other things, ‘trade union privileges of any kind’ (O’Brien 1985, 179; Robin 2013, 2015). In The Road to Serfdom, Hayek (2007 [1944], 156) cited approvingly Benjamin Franklin persuasive aphorism: ‘Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.’ Hayek (1978) revealed to Rosten that this, too, was Austrian propaganda: it ‘will be a very slow process’ to reconstruct the spontaneous order:

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I rather fear that before we can achieve something like this, we will get something like what [J. L.] Talmon [1960] has called ‘totalitarian democracy’—an elective dictatorship with practically unlimited powers. Then it will depend, from country to country, whether they are lucky or unlucky in the kind of person who gets in power. After all, there have been good dictators in the past; it’s very unlikely that it will ever arise. But there may be one or two experiments where a dictator restores freedom, individual freedom.49

Hayek’s (1978) ‘secondhand dealers in ideas—have to play a very important role and are very effective. But, of course, in my particular span of life I had the misfortune that the intellectuals were completely conquered by socialism.’50 Rosten was horrified to discover—apparently for the first time—what he had been conquered by: I can hardly think of a program that will be harder to sell to the American people. I’m using ‘sell’ in the sense of persuade. How can a dictatorship be good?

Hayek (1978) replied: ‘Oh, it will never be called a dictatorship; it may be a one-party system.’ Somewhat pathetically, Rosten whimpered: ‘It may be a kindly system?’ As if to reassure a child, Hayek replied: A kindly system and a one-party system. A dictator says, ‘I have 9 percent support among the people.’51

In ‘Friedrich Hayek and His Visits to Chile,’ Caldwell and Leonidas Montes (2014a, 3, n8; 2014b; 2015a, 263, n8) assert that ‘The fascism charge regarding Mises is based on a couple of sentences taken from his book Liberalism in the Classical Tradition … He was offering a comment on a pressing issue of the day … We might simply point out the other obvious fact that, as a Jew and a classical liberal, Mises was persona non grata among both the Nazi and Stalinist regimes … He is as unlikely a candidate for being considered a fascist as he is for being a communist.’

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Two years after the publication of Adolf Hitler’s (1939 [1925]) Mein Kampf, Mises (1985 [1927], 49, 51) issued a blunt ‘eternal’ instruction: ‘It cannot be denied [emphasis added] that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history.’ The ‘similar movements’ of ‘bloody counteraction,’ which Mises referred to, include the French anti-Semitic ‘l’Action Française ’ plus ‘Germans and Italians.’ ‘Italians’ obviously referred to Benito Mussolini, and Mises’ (1985 [1927], 44) reference to ‘Ludendorff and Hitler’ just as obviously refers to the 1923 Ludendorff-Hitler-putsch. Newspapers’ reports of the 1923 Munich Beer Cellar putsch stated that as a prelude to a march on Berlin, ‘Hitlerites stormed through the town and invaded first class restaurants and hotels in search of Jews and profiteers’ (Walsh 1968, 289). In Mein Kampf, Hitler (1939 [1925], 518) asserted: ‘At the beginning of the war, or even during the war, if 12,000 or 15,000 of these Jews who were corrupting the nation had been forced to submit to poison gas … then the millions of sacrifices made at the front would not have been in vain.’ Two years later, Mises (1985 [1927], 49) predicted that ‘The deeds of the Fascists and of other parties corresponding to them were emotional reflex actions evoked by indignation at the deeds of the Bolsheviks and Communists. As soon as the first flush of anger had passed, their policy took a more moderate course and will probably become even more so with the passage of time [emphasis added].’ Two-thirds of a century later, the Jewish-born Rothbard (1994a, b) defended Byron De La Beckwith, Sr. (the anti-Semitic Klu Klux Klan assassin of the African-American voter registration activist, Medgar Evers, who was convicted because he was politically ‘incorrect’), Silvio Berlusconi (a ‘dedicated free-marketeer’), Mussolini (because he had a reluctant ‘anti-Jewish policy’), Islamo-Fascists, and those described as ‘neo-fascists.’ Rockwell (2011) provided a ‘free’ market answer to the question ‘What is Fascism?’

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Fascism is the system of government that cartelizes the private sector, centrally plans the economy to subsidize producers, exalts the police state as the source of order, denies fundamental rights and liberties to individuals, and makes the executive state the unlimited master of society. This describes mainstream politics in America today. And not just in America. It’s true in Europe, too. It is so much part of the mainstream that it is hardly noticed any more … The fascist economic model has killed what was once called the American dream.

Rockwell (2011) sought to enlist donors: ‘I can think of no greater priority today than a serious and effective antifascist alliance. In many ways, one is already forming … It is also made of the millions of independent entrepreneurs who are discovering that the number one threat to their ability to serve others through the commercial marketplace is the institution that claims to be our biggest benefactor: the government.’ According to Rockwell (1998), ‘the invading National Socialists regarded [Mises] as perhaps the most dangerous intellectual opponent of their ideology.’ Liberalism in the Classical Tradition remains the most solid and compact statement of the classical-liberal view of society and economy. As Ralph Raico has argued, it was this work that firmly entrenched the idea of private property at the very center of the classical-liberal agenda. In doing so, Mises was the first to clearly distinguish the old liberalism from the new, even as the new liberals were working to blur the lines for purposes of their own ideological advancement.

According to Mises (1993 [1964], 36), Edwin Cannan (1861–1935) was ‘the last [emphasis added] in the long line of eminent British economists.’ The British Fascisti was established in 1923. Six years later, Hayek (1995 [1929], 68–70), while praising Edwin Cannan’s ‘fanatical conceptual clarity’ and his ‘kinship’ with Mises’ ‘crusade,’ noted that British-Austrians had failed to realize the necessary consequences of the whole system of Classical Liberal thought: ‘To be sure, it must be added at once [emphasis added] that Cannan by no means develops economic liberalism to its ultimate consequences with the same ruthless

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consistency as Mises.’ According to Caldwell (1995, 70, n67), Hayek was probably referring to Liberalism in the Classical Tradition in which Mises (1985 [1927], 19, 49) insisted that The program of liberalism, therefore, if condensed into a single word, would have to read: property [Mises’ emphasis] … All the other demands of liberalism result from this fundamental demand … The victory of Fascism in a number of countries is only an episode in the long series of struggles over the problem of property.

Caldwell’s epigone-generation co-leader insists that Mises and Hayek had ‘intertwined research programs’: both were advocates of the private property market order and attempts to dehomogenize Mises and Hayek on the issue of private property and knowledge are mistaken. (Boettke 2004)

Hayek (1978) sought to supplement the rhetorical weakness that he detected in Mises: I just learned he was usually right in his conclusions, but I was not completely satisfied with his argument. That, I think, followed me right through my life. I was always influenced by Mises’s answers, but not fully satisfied by his arguments. It became very largely an attempt to improve the argument, which I realized led to correct conclusions. But the question of why it hadn’t persuaded most other people became important to me; so I became anxious to put it in a more effective form.52

Boettke (2016a) told a Foundation for Economic Freedom (FEE) audience that Mises ‘is a story of scientific glory and personal courage in a very dark time in human history.’ Also for a FEE audience, Rockwell (2011) put Mises’ promotion of fascism into a more effective form: ‘Fascism has no new ideas, no big projects—and not even its partisans really believe it can accomplish what it sets out to do. The world created by the private sector is so much more useful and beautiful than anything the state has done that the fascists have themselves

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become demoralized and aware that their agenda has no real intellectual foundation … Their world is falling apart. Ours is just being built. Their world is based on bankrupt ideologies. Ours is rooted in the truth about freedom and reality. Their world can only look back to the glory days. Ours looks forward to the future we are building for ourselves … We possess the only weapon that is truly immortal: the right idea. It is this that will lead to victory.’ Twelve years before the Nazi-Soviet Pact, Mises sought to become the intellectual Führer of a Nazi-Classical Liberal Pact. In ‘The Argument of Fascism’—part of ‘The Foundations of Liberal Policy’—Mises (1985 [1927], 49, 50) stated that if fascism ‘wanted really to combat socialism, it would have to oppose it with ideas.’ Mises would provide those ideas: ‘There is, however, only one idea that can be effectively opposed to socialism, viz., that of liberalism.’ Fascist ‘moderation is the result of the fact that traditional liberal views still continue to have an unconscious influence on the Fascists.’ Presumably referring to himself, Mises (1985 [1927], 49) continued: ‘Many people approve of the methods of fascism, even though its economic program is altogether antiliberal and its policy completely interventionist, because it is far from practicing the senseless and unrestrained destructionism that has stamped the Communists as the archenemies of civilization. Still others, in full knowledge of the evil that Fascist economic policy brings with it, view fascism, in comparison with Bolshevism and Sovietism, as at least the lesser evil. For the majority of its public and secret supporters and admirers, however, its appeal consists precisely in the violence of its methods.’ The devout Roman Catholic Rockwell (1998) objected to ‘the misuse of religion, whereby we are taught to treat national symbols as sacred, worship the presidency, and regard the political and bureaucratic class as some sort of exalted ecclesiocracy.’ Rockwell celebrated: ‘we are only restoring our faith in our families, our neighborhoods, our companies, ourselves, and our Creator.’ And liberty was manifesting itself: ‘In Alabama, students at nearly every high-school commencement in the state defied the unconstitutional fiat of an occupying federal judge, by praying.’

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In New York, Mises deferred to ‘His Majesty, Kaiser Otto,’ ‘Imperial Highness.’ In mid-April 1942, Mises advised the Habsburg Pretender how a ‘restoration could be achieved’ (Hülsmann 2007, 818).53 As Hayek was writing The Road to Serfdom, the Austrian School philosopher and National Review columnist, Erik ‘Ritter von’ Kuehnelt-Leddihn (pseudonym F. S. Campbell), published The Menace of the Herd (1978 [1943]). ‘God and Gold’ Austrian School reconquistadors embrace restored monarchy, or anything but democracy (Hoppe 2001), Pope and Monarch, supported by a ‘natural aristocracy’ (Rockwell 1994), and a ‘small, self-perpetuating oligarchy of the ablest and most interested’ (Rothbard 1994c). As the President of the Ludwig von Miss Institute put it, democracy is a sham that should be opposed by all liberty-loving people. Voting and elections confer no legitimacy whatsoever on any government, and to the extent a democratic political process replaces outright war it should be seen as only slightly less horrific. (Deist 2017)

Archduke Otto von Habsburg (1912–2011) was aged six when his father lost ‘his’ property following the ‘Great’ War between the dynasties. The Habsburg Pretender was full of hope: ‘There is an extraordinary revival of religion in France … I never would have thought one could dare to say in France’ what President (2007–2012) Nicolas Sarközy de Nagy-Bocsa (whose paternal ancestor had been elevated into the Hungary nobility in 1628 for his role in fighting the Ottoman Empire) is ‘saying – that the separation of church and state in France is wrong.’ After the fall of the Berlin Wall, ‘many’ of the 400-strong ‘Von Habsburg clan have staked claims to properties previously confiscated by the Communists’ (Watters 2005; Morgan 2011). According to the Sydney Morning Herald, ‘Sarkozy posted a photograph of himself taking a pickaxe to the Berlin Wall on his Facebook page, describing how he rushed to Berlin on November 9, 1989, and crossed through Checkpoint Charlie on the first day the gates opened.’ But subsequent research indicated that he was not even in Berlin on that day.54 In March 2018, Sarkozy was taken into police custody, interrogated about an alleged Libyan interference in the 2007 French elections, and formally charged with bribery and accepting illegal campaign contributions.

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Hayek (1949, 420–421) distinguished between ‘the real scholar or expert and the practical man of affairs’ and non-propertied intellectuals who were ‘a fairly new phenomenon of history.’ Their humble social backgrounds deprived them of what Hayek regarded as a central qualification: ‘experience of the working of the economic system which the administration of property gives.’55 Caldwell may have acquired a million dollars in ‘private property’ in a single month on the back of the ‘puffing’ of The Road to Serfdom Texts and Documents The Definitive Edition by Rupert Murdoch’s conspiracy theorist, Glenn Beck (Leeson 2015b). And with his middle-class salary from the taxpayers of Virginia, Boettke (2015)—the ‘Charles Koch Distinguished Alumnus, The Institute for Humane Studies,’ and the ‘vice president and director of the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Cente as well as the BB&T [Branch Banking and Trust Company] Professor for the Study of Capitalism’—lives in a ‘different world than the 99%’ and ‘I’d like to make more money.’56 From (in ascribed status terms), the New Jersey lower middle class, Boettke (2012b), who sits atop the ‘free’ market food chain, describes Mises and Hayek as ‘the silver spoon in my mouth.’ Rockwell (1998) celebrated the ‘free’ market: ‘California passed a smoking ban that invaded the property of every business in the state. Now, the statewide pastime is to violate this ban in public displays of the right to smoke.’ Like all ‘free’ market advocates, Boettke (Society for the History of Economics, 20 May 2014) poses as an apostle of academic standards—complaining that the evidence about Hayek’s fraud and Mises’ card-carrying Fascist party status was ‘intellectual pollution … intellectual malpractice’ (Chapter 2). Evidence on the University of California, San Francisco website led ‘Corporate Corruption of Science’ to conclude that Boettke was on the ‘cash-for-comments’ network of the tobacco industry: ‘each op-ed now earned the economists $3000. Presentations made to conferences earned them $5000.’57 Hayek spanned a tangled web around the property-seeking members of the tobacco- and carbon-funded MPS— these chapters examine how this has affected ‘knowledge’ dynamics and public policy.

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4 The Four Gospels As noted above, Caldwell (2017) insisted that Mirowski and Nik-Khah (2017) ‘ignore or dismiss inconvenient facts’ about Hayek. Kirzner (1995, 56, 57) concluded that Hayek on Hayek, ‘for all its flaws, is likely to be one of the most widely quoted source works on Hayek’s life and scholarly achievements in the years to come … Certainly no future Hayek scholar will be able to ignore this revealing and informative volume.’ The four ‘gospels’ (foundational pillars) of Caldwell’s Austrian Truth have been derived by ignoring Hayek on Hayek (plus the other inconvenient archival and public evidence): Hayek that made a point of keeping his disagreements with opponents on a professional level. (Caldwell 2004, 147; 2016, 11; Caldwell and Montes 2014a, 17; 2014b; 2015a, 275)58

The archival evidence (of which Caldwell is the ‘free’ market monopolist) reveals that within weeks of arriving at the University of Chicago, Hayek began targeting academics for liquidation. Lawrence Klein, the Keynesian, Jewish-born recipient of the 1980 Nobel Prize for Economic Science, was one of the victims (Leeson 2017). Hayek on Hayek also reveals that with very few exceptions, Hayek (1994, 85, 95) slurred both his competitors and his supporters: ‘I don’t keep my mouth shut; my stories about [Harold] Laski and [William] Beveridge can be rather malicious.’ Hayek asserted that Beveridge suffered from erectile dysfunction: citing his partner (and later wife): ‘He isn’t man enough; he isn’t man enough. I know.’ In the Washington Post, Caldwell (2010) asserted that ‘Hayek himself disdained having his ideas attached to either party.’59

Yet the public and archival evidence reveals that Hayek was a party political operative who scripted a press conference for Ronald Reagan and advised which of Mrs. Margaret Thatcher’s ‘wet’ cabinet minister must be sacked (Leeson 2017).

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Hayek always insisted that he was a supporter of democracy, but that democracy had to be limited. (Caldwell and Montes 2014a, 52; 2014b; 2015a, 305)

But Hayek (1978) was very precise: ‘I believe in democracy as a system of peaceful change of government; but that’s all its whole advantage is, no other.’60 Caldwell and Montes (2015b) asserted: ‘It has even been suggested that he [Hayek] suffered from depression.’ (Kresge and Wenar [sic] 1994, 130–131)61

The ‘suggestion’—which was not a suggestion—came not from Stephen Kresge and Leif Wenar but from Hayek (1994, 130–131) who, in the supplementary volume to The Collected Works of F.A. Hayek, referred not only to his ‘depression’—from which he had been ‘suffering for almost two years’—but also to an earlier ‘severe depression which lasted exactly a year’ (1960–1961). The Hayek Archives—which Caldwell seeks to monopolize—provide more detail. After the premature death of his first wife, Hayek lost about a decade to mental illness (1960–1961, 1969–1974, 1985–). Friedman (22 July 1969) suggested to Ralph Harris that the Caracas MPS meeting should ‘do something about Hayek’—such as a dinner in his honour.62 From the IEA, Harris (16 September 1970) offered to supply Hayek with the name of a doctor who had treated him for depression.63 Hayek (28 January 1971) declined to recommend anyone to Leland Yeager to fill one or two academic openings for Hayekians at the University of Virginia because there were hardly any trained economists with ‘any’ interest in the problems he had been working on for the last two decades.64 In 1973, ‘von’ Hayek polled last as Chancellor of the University of St Andrews, behind the Old Etonian, Baron Ballantrae, the last British-born Governor-General of New Zealand, and Sir Thomas Malcolm Knox, a Hegel scholar.65 Popper (3 May 1974) told Hayek that there was ‘no need’ to be depressed.66 In Zurich in 1919–1920, Hayek (1994, 64) worked in the laboratory of the brain anatomist, Constantin von Monakow, ‘tracing fibre bundles through the different parts of the human brain.’ von Monakow and S. Kitabayashi (1919) had just published ‘Schizophrenie und Plexus

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chorioidei’ in Schweizer Archiv für Neurologie und Psychiatrie (Swiss Archives of Neurology and Psychiatry—a journal von Monakow had founded in 1917). In 1991, he told his second wife to put him—not in a nursing home—but into a lunatic asylum, yet their doctor said he was in perfect physical shape. His hallucinatory experiences exhausted him … Sometimes he would see things in vivid shapes, green meadows, writing on the wall, and even perceived sounds. No matter how strongly Mrs. Hayek would deny the reality of these apparitions he would insist that he had seen and heard them. On one such occasion he was so distressed because she would not believe him that he clutched my hand and said that the presence of persons and their singing had lasted for nine hours. (Cubitt 2006, 355–356)

Hayek’s mental illness manifested itself in obsessive self-interest and extreme mood swings: he was being ‘looked after by a psychiatrist and a neurologist’ (Cubitt 2006, 168). Hayek (1978) explained that ‘it would sound so frightfully egotistic in speaking about myself—why I feel I think in a different manner. But then, of course, I found a good many instances of this in real life.’67 After his second prolonged bout of suicidal depression, Hayek always carried a razor blade with which to slash his wrist; he wanted to know ‘where “the poison,” that is arsenic, could be obtained.’ During his third bout, the second Mrs. Hayek instructed Cubitt (2006, 89, 111, 168, 168, 174, 188, 188, 284, 317, 328) not to let her husband near the parapet of their balcony. When asked ‘What did Hayek think about subject x?’ his fellow Austrian-LSE economist (1933–1948), Ludwig Lachmann (1906–1990), would routinely reply: ‘Which Hayek?’ (Cited by Caldwell 2006, 112). Cubitt noted that Hayek became ‘upset’ after reading an article on schizophrenia, and ‘wondered whether he thought it was referring to himself or Mrs. Hayek.’ The 1974 Nobel Prize exacerbated this personality split: Walter Grinder detected ‘almost two different people’ (Ebenstein 2003, 264).

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5 Chicago and Their Austrian ‘Other Half’: Repulsive Attraction This Archival Insights into the Evolution of Economics series provides a systematic archival examination of the process by which economics is constructed and disseminated. All the major schools will be subject to critical scrutiny; a concluding volume will attempt to synthesize the insights into a unifying general theory of knowledge construction and influence. One conclusion emerges from the Hayek a Collaborative Biography section: ‘free’ market ‘knowledge’ is sui generis. For the last six decades of his life, Friedman (1912–2006) was attracted to the abstract ‘free’ market advocacy of the Austrian School of Economics—while being repulsed by the sordid reality of its devotees. In 1946, Leonard Read invited Friedman and George Stigler to write about rent control—and then insisted that they delete a paragraph. They ‘refused to delete it, stating that instead of doing so we would withdraw permission to publish and forego the modest fee the foundation [of Economic Education, FEE] had offered us … we were certainly justified in being outraged by what happened subsequently’ (Friedman and Friedman 1998, 150–151). Orval Watts informed Stigler that FEE had invested ‘several thousand dollars’ in their essay— which they would prefer to see wasted rather than publish what they disapproved of. Both Friedman and Stigler insisted that it was ‘essential’ that they see the galleys before publication (Hammond and Hammond 2006, 20, 22, 35). Although the paragraph was not deleted, ‘without asking our permission an anonymous “Editor’s Note” (no editor was mentioned by name in the pamphlet) was appended to the paragraph’ which stated that ‘the authors fail to state …’ Friedman and Stigler ‘regarded this note, which in effect accused us of putting equality above justice and liberty as inexcusable and for some years we refused to have anything to do with the foundation or with Leonard Read’ (Friedman and Friedman 1998, 150–151). Stigler referred to Read and Watts as ‘those bastards’ (Hammond and Hammond 2006, 33). In A Monetary History

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of the United States, 1867–1960, Friedman and Anna Schwartz (1963, chapter 7) described the ‘Great Contraction.’ Friedman (1969 [1964]) presumably began his first ‘plucking model’ assault on Austrian business cycle theory about this time. In 1971, Rothbard (2002 [1971], 37, 40, 48, 53) stated that it was ‘deplorable’ that Friedman and his followers ‘have never paid attention to the achievement of Ludwig von Mises’ and his Austrian business cycle theory. Friedman’s ‘purely monetarist’ approach was ‘almost the exact reverse of the sound—as well as truly free-market—Austrian view [Rothbard’s emphasis].’ Friedman was the enemy—‘the Establishment’s Court Libertarian’ (Chapter 7). In 1972, Friedman tried (unsuccessfully) to sever the institution ties between the Austrian and the Chicago Schools of Economics—by using his authority as President to dissolve the MPS. And at the June 1974 revivalist meeting in South Royalston, Vermont, Austrians competed with each other over what Friedman described as ‘rotten bastard’ proposals: the speed with which non-Austrian (i.e. aristocratic, tax-exempt and academic) ‘entitlements’ could be eliminated—forcing wounded veterans, the famine-stricken, the old, the sick, the young and the poor to seek private charity.68 Those members of Rose Friedman’s family who had not emigrated ‘all died in the Holocaust. We have never learned where or how.’ In 1950, while Milton worked on the Schuman Plan, Rose experienced trauma: it was very difficult for her to let their two children ‘run freely as they were accustomed to do at home because always there was the nagging fear that they might suddenly disappear. Of course I knew that they were no Nazis in the park that somehow there was always in my subconsciousness those terrible stories about what happened to Jewish children during the Nazi era. That trip to Germany haunted me for many years’ (Friedman and Friedman 1998, 3, 180). In June 1974, when Rothbard, Lachmann, North, Kirzner, Richard Fink, Walter Block, Mario Rizzo, Richard Ebeling et al. initiated the Koch-funded, Orwellian-named, ‘Institute of Humane Studies’ Austrian revival, one of the conference highlights was baiting Milton and Rose in person with the accusation that their son detected ‘latent fascist tendencies’ in his father: ‘Murray Rothbard made the whole affair fun’ (Shenoy 2003).

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The 1975 Hillsdale College MPS meeting was devoted to ‘von’ Hayek: ‘Few other scholars, if any, have adorned the social sciences in our time as Hayek has done,’ as Shenfield asserted in the brochure.69 According to an article in Buckley’s National Review, the climax of this tax-exempt meeting was George Roche III toasting Queen Elisabeth II accompanied by a mood of sheer bliss … as if an Invisible Hand had prankishly arranged a sneak preview of Utopia … Such fellowship is of course much enhanced in the vicinity of the bar, which was open three times a day … What we could not expect was the pampering and elegant food that attended us from beginning to end … One fellow disappeared into the service regions with a bottle of champagne for the staffers, and almost immediately a fresh bottle appeared on his table. It was magic … Clearly, unseen benefactors had picked up the tab; otherwise Hillsdale’s budget would have rocketed into federal orbit … It was lovely. (Wheeler 1975)

Hayek’s co-recipient of the 1974 Nobel Prize for Economic Science, Myrdal, told his daughter that the greatest moment in his life was when he stood at the Princeton train station ‘with the manuscript of American Dilemma [the Negro Problem and Modern Democracy 1944] in my hands – ready! All that I had lived for’ (Bok 1996, xii–xxi). For Hayek, the moment came in 1984 when he met the Queen of England: Hayek told his daughter-in-law that after a twenty-minute audience he was ‘amazed by her. That ease and skill, as if she’d known me all my life.’ Afterwards, when Hayek was returned to the Reform Club, he reflected: ‘I’ve just had the happiest day of my life’ (cited by Ebenstein 2001, 305). He now had a post-nominal honour as the Queen’s Companion of Honour, ‘CH,’ to compensate him for the 1919 loss of his prefix ‘von.’ Friedman’s Free to Choose television series was well received at Buckingham Palace: in 1983, Queen Elizabeth II told him (at a party on her boat in San Francisco harbour): ‘I know you. Philip [the Duke of Edinburgh] is always watching you on the telly.’ Rose Friedman observed that Prince Phillip was ‘very interested in social policy and well-informed on the issues we talked about.’ In 1947, on the ‘expenses

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paid’ trip to Mont Pelerin, Friedman (and Stigler and Aaron Director) had crossed the Atlantic aboard Cunard’s Queen Elizabeth: it was ‘George’s and my first trip abroad’ and ‘marked the beginning of my active involvement in the political process’ (Friedman and Friedman 1998, 158–159, 569). After the President of Hayek’s MPS, Bruno Leoni, was hacked to death by an underworld business associate, Roche emerged as the premier ‘free’ market fund-raiser and morality promoter. In 1999, Roche became a fund-raising liability after Lissa Jackson Roche confessed to her husband, George Roche IV, that for nineteen years she had been having sex with his father. Hours later, Lissa apparently committed suicide by firing a bullet into her brain (Rapoport 2000). George Roche III was President Reagan’s Director of the National Council on Educational Research (1984–1986); William Bennett, Reagan’s Secretary of Education (1985–1988), resigned from the Roche replacement search committee because he suspected a Hillsdale College cover-up (Carson 1999). When California State University, Hayward/East Bay abruptly changed Leube’s status from full Professor of Economics to Professor Emeritus, he told the university magazine: ‘I have never claimed a Ph.D. or similar in any way, nor was there any deliberate act of deception or the slightest attempt to mislead anyone … the reasons for this vendetta … are not known to me’ (cited by Coleman 2002, 1). ‘Dr. Kurt R. Leube’ (1976–1977) is an authority on ‘Hayek’s Perceptions of the “Rule of Law”’,70 and ‘Dr. Kurt Leube’ (1984a) is the author of the onepage ‘Essay: Hayek, Orwell, and The Road to Serfdom’ published in Prometheus, the Journal of the Libertarian Futurist Society … founded in 1982 to recognize and promote libertarian science fiction. The LFS is a tax-exempt nonprofit group with an international membership of libertarians and freedom-loving science fiction fans who believe cultural change is as vital as political change in achieving freedom. After all, imagination is the first step in envisioning a free future—and the peace, prosperity and progress that can take humankind to the stars … People come to libertarianism through fiction.71

When Hayek abandoned his first wife and two children to marry his cousin, Robbins was worried about the prospect of ‘damage to causes

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with which Hayek had been associated.’ But as noted above, Hayek stated that all of his ‘professional considerations had been based on financial considerations’ (Cubitt 2006, 10, 67, 122). For Hayek, his own status and income out-trumped ideology: a position perfectly consistent with Austrian perceptions about Human Action (Mises 1963, 1966, 1998). With respect to ideology, Hayek (1978) described the problem: The good scientist is essentially a humble person. But you already have the great difference in that respect between, say, the scientist and the engineer. The engineer is the typical rationalist, and he dislikes anything which he cannot explain and which he can’t see how it works. What I now call constructivism I used to call the engineering attitude of mind, because the word is very frequently used. They want to direct the economy as an engineer directs an enterprise. The whole idea of planning is essentially an engineering approach to the economic world.72

Three decades before, in Individualism and Economic Order ‘Socialist Calculation I. The Nature and History of the Problem,’ Hayek (2009 [1948], 121) also reflected: ‘The increasing preoccupation of the modern world with problems of an engineering character tends to blind people to the totally different character of the economic problem and is probably the main cause why the nature of the latter was less and less understood.’ In 1948, while marketing The Road to Serfdom in America, Hayek delivered a Mises-organised lecture on ‘Why I am not a Keynesian.’73 Two years later, Hayek became the American sales agent for the engineering-derived Keynesian Phillips Machine74 and recruited Machlup as a sub-agent.75 Under a section entitled ‘The Moral Hazard of Being Honest,’ Leube (2003b [2001], 10, 15–16) provided a manifesto for the free-loading half of the ‘free’ market—reflecting about ‘considerations of reputation and especially peer pressure’: there were times when it becomes senseless and even stupid to remain honest … situations are often faked to capitalise on any legal or semi-legal opportunity to exploit the collective system.

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‘Dr. Kurt Leube’ contributed to Ebeling and Lissa Jackson Roche’s (1999, ix, 51–67) Hillsdale College The Age of Economists: from Adam Smith to Milton Friedman. George Roche III (1976) provided the opening chapter (‘The Relevance of Friedrich A. Hayek’) in Machlup’s Essays on Hayek, and Friedman (1976, xxi) provided the Foreword: Over the years, I have again and again asked fellow believers in a free society how they managed to escape the contagion of their collectivist intellectual environment. No name has been mentioned more often as the source of enlightenment and understanding than Friedrich Hayek’s. I cannot say that for myself, since I was influenced in this direction by my teachers at the University of Chicago before I had come to know Hayek or his work. But I, like the others, owe him a great debt … his powerful mind, his moral courage, his lucid and always principled exposition have helped to broaden and deepen my understanding of the meaning and the requisites of a free society.

The following year, Hayek (1992 [1977]) described Friedman as an arch-positivist who believes nothing must enter scientific argument except what is empirically proven. My argument is that we know so much detail about economics, our task is to put our knowledge in order. We hardly need any new information. Our great difficulty is digesting what we already know. We don’t get much wiser by statistical information except in gaining information about the specific situation at the moment. But theoretically I don’t think statistical studies get us anywhere.

In 1977, Friedman relocated to the Hoover Institution where disciples of ‘von’ Hayek and ‘von’ Mises were being recruited: from 1987 to 1992, the ‘Mises University at Stanford University’ appeared to have a privileged existence. One of the ‘star’ speakers was Rothbard (1990), who delivered a mendacious lecture on ‘The Future of Austrian Economics,’ and one of these recruits, ‘Dr.’ Leube, has no post-secondary qualifications. Leube attempted to patch-over the breaches between Chicagoans and Austrians with three Hoover Institution publications: The Essence

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of Stigler (Leube and Moore 1986), The Essence of Friedman (Leube 1987) and The Essence of Hayek in which he falsely stated that in February 1929, ‘Hayek became the first [emphasis added] to predict the coming crisis in the United States’ (Leube 1984b, xix). These three volumes were immediately followed by Friedman’s (1988) Hoover Institution Working Paper revitalizing his ‘plucking model’ attack on the Austrians—after a gap of almost a quarter of a century. In 1991, Friedman (2017 [1991]) published ‘Say “No” to Intolerance’—which targeted Mises. In 1992, the deflation-promoting Boettke (2012b) arrived at the Hoover Institution as a National Fellow: Friedman let him know that he was ‘a pain in the ass’ (Chapter 7). Boettke (2016b) instructed his GMU students and other to celebrate ‘Rothbard’s birthday. He would have been 90 today if his life wasn’t cut tragically short … So let me just say, take some time today young Austrian economists and celebrate Rothbard’s work—you (or any of us) would not be where we can be as academic economists today where it not from Rothbard’s amazing work in galvanizing a modern Austrian school of economics.’ The World Trade Center was bombed on 26 February 1993, killing six and injuring hundreds; the ‘Blind Sheik,’ Omar Abdel-Rahman, apparently an al-Qaeda affiliate, was sentenced to life imprisonment. Six months after the attack, Rothbard (1993) declared: the ‘A-rabs’ under investigation ‘haven’t done anything yet. I mean, all they’ve done so far is not assassinate former President George Bush, and not blow up the UN building or assassinate [United States Senator] Al D‘Amato.’ Rothbard became in effect a spotter Al-Qaeda: ‘I must admit I kind of like that bit about blowing up the UN building, preferably with [UN Secretary General] Boutros Boutros-Ghali inside.’ In ‘A New Strategy for Liberty,’ Rothbard (1994d) believed that he had solved the ‘coordination problem’ between Austrian economists and ‘Redneck’ militia groups: A second necessary task is informational: we can’t hope to provide any guidance to this marvellous new movement until we, and the various parts of the movement, find out what is going on. To help, we will feature a monthly report on ‘The Masses in Motion.’ After the movement finds

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itself and discovers its dimensions, there will be other tasks: to help the movement find more coherence, and fulfil its magnificent potential for overthrowing the malignant elites that rule over us.

Rothbard (1994e) explained that ‘the least’ Austrians could do ‘is accelerate the Climate of Hate in America, and hope for the best.’ According to Rockwell (2011), ‘Statism is the great lie. Statism gives us the exact opposite of its promise. It promised security, prosperity, and peace; it has given us fear, poverty, war, and death … In the end, this is the choice we face: the total state or total freedom. Which will we choose? If we choose the state, we will continue to sink further and further and eventually lose all that we treasure as a civilization. If we choose freedom, we can harness that remarkable power of human cooperation that will enable us to continue to make a better world … Their world is rooted in the corpse of the nation-state … truly the silent killer.’ Also according to Rockwell (1998), Mises ‘warned of the dangers that war posed to economic freedom, rightly identifying the militarized economy as a species of socialism.’ What a ‘joy to have as our hero a man whose ideas we can embrace so completely, without fear that his deviations or contradictions will be thrown back in our faces. He is a model and ideal, and his ideals are the standard which all principled proponents of liberty can be confident in celebrating.’ Simultaneously, the tax-exempt Ludwig von Mises Institute published Mises (1998) Human Action the Scholars Edition in which Mises’ (1963, 282; 1966, 282) lobbying for conscription and the Warfare State was silently eliminated: ‘He who in our age opposes armaments and conscription is, perhaps unbeknown to himself, an abettor of those aiming at the enslavement of all.’ Friedman (13 March 1998) informed Block (2006), the Mises Institute Senior Fellow, that ‘I believe Hayek has been a great force for good and has done a great deal to promote an appreciation of the role of markets in a free society. He deserves better than your selfsatisfied diatribe.’ In response, Block (10 April 1998) complained about ‘economic fascism, the economic system employed by Nazi Germany, and Mussolini’s Italy. In these cases, there was a thin veneer of private

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property rights, but the underlying economic reality was one of government control.’ Friedman (6 June 1998) informed Block: ‘you are a fanatic who finds it absolutely impossible to understand the thinking of anybody other than himself. It is time to close our discussion.’ Block (2000, 40) described the Austrian School ‘united front’ with Neo-Nazis: I once ran into some Neo-Nazis at a libertarian conference. Don’t ask, they must have sneaked in under our supposedly united front umbrella. I was in a grandiose mood, thinking that I could convert anyone to libertarianism, and said to them, ‘Look, we libertarians will give you a better deal than the liberals. We’ll let you goosestep. You can exhibit the swastika on your own property. We’ll let you march any way you wish on your own property. We’ll let you sing Nazi songs. Any Jews that you get on a voluntary basis to go to a concentration camp, fine’ … The problem with Nazism is not its ends, from the libertarian point of view, rather it is with their means. Namely, they engaged in coercion. But, the ends are as just as any others; namely, they do not involve invasions. If you like saluting and swastikas, and racist theories, that too is part and parcel of liberty. Freedom includes the right to salute the Nazi flag, and to embrace doctrines that are personally obnoxious to me. Under the libertarian code, you should not be put in jail for doing that no matter how horrendous this may appear to some. I happen to be Jewish, and my grandmother is probably spinning in her grave as I write this because we lost many relatives in the Nazi concentration camps.

6 Volume Overview The HES is the vehicle through which devotees of ‘von’ Hayek and ‘von’ Mises seek academic respectability. Boettke (2014) describes historians of economic thought as ‘gullible’: they play ‘ideological checkers’ while he plays ‘scholarly chess.’ And at the 2016 Duke University HES conference, Caldwell and Montes’ (2014b, 2015a) academically unpublishable ‘Friedrich Hayek and His Visits to Chile’ won the ‘Craufurd Goodwin Best Article in the History of Economics Prize.’76 It had been published unrefereed in the ‘refereed,’ Rothbard-founded, Boettkeedited Review of Austrian Economics.

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Hayek’s Nobel Prize (9 October) was announced two months after Richard Nixon resigned in the face of almost certain impeachment (9 August): ‘What did he know and when did he know it?’ These chapters will examine the ‘knowledge’ dynamics within the economics profession—and the ‘free’ market branch in particular—which has kept silent the details of Hayek’s numerous frauds. The framework used will be Goodwin’s—the long-time Duke University History of Political Economy editor (1969–2009)—who in conversation expressed concern about the Austrian colonization of his community and is the author of ‘The Heterogeneity of the Economists’ Discourse: Philosopher, Priest, and Hired Gun’ (1988). Four indirect tests suggest that ‘free’ market economists have—in other instances and presumably for fund-raising motives—suppressed embarrassing ‘knowledge’: which suggests that they were perfectly capable of suppressing ‘knowledge’ about Hayek’s non-prediction of the Great Depression. But what of other non-‘free’ market economists? In Economic Policy: Thoughts for Today and Tomorrow, Mises (2006 [1979], 89) stated that ‘Capitalists have the tendency to move toward those countries in which there is plenty of labor available and at which labor is reasonable.’ There are ‘plenty’ of Koch-funded academics— about 5000: in an oral history interview about Rutgers University (the State University of New Jersey), John Cullity (1991) described the objections to Koch money—but other economists appear to be more ‘reasonable’ (Chapter 2). Hayek was introduced to the Austrian School of Economics by Othmar Spann—‘The Philosopher of Fascism.’ By 1928, Spann sought to become the official ideologue of the Austria Heimwehr (‘Home Defence’), a private military organization similar to the Nazi SS (Schutzstaffel or ‘Protective Front’), and in 1929, he delivered the inaugural address to the League of Struggle for German Culture in front of Hitler, Alfred Rosenberg and other Nazis. One aspect of Hayek’s ‘luck’ was that after Spann discarded him, he was taken up and sponsored by Friedrich ‘von’ Wieser and Ludwig ‘von’ Mises. In London in 1931, Hayek encountered deference from Robbins. He recruited what he called the ‘worst inferior mediocrities’ to ‘do his bidding.’ Chapter 3 examines fifteen aspects of Hayek’s luck that facilitated his employment

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at the LSE. Apparently because of deference, his ‘secondhand dealers in opinion’ did not report his fraud about having predicted the Great Depression. With respect to the Nobel Prize and thus his ability to reach a wider audience, Hayek was fortune in having two loyal ‘intermediaries’: Robbins and Machlup who were—and probably felt themselves to be—‘socially’ inferior to ‘von’ Hayek. Robbins withdrew his Foreword to the 1935 edition of Hayek’s Prices and Production, presumably because he had been alerted that in the 1931 edition he had uncritically repeated Hayek’s fraud about having predicted the Great Depression. When Hayek abandoned his first wife and two children to marry his cousin, Robbins was worried about the prospect of ‘damage to causes with which Hayek had been associated.’ In 1950, Robbins resigned from the MPS and severed all links with Hayek after being seriously ‘deceived’ (presumably, for the second time). The death of Hayek’s abandoned first wife facilitated a reconciliation which persuaded Robbins in his 1971 Autobiography to ‘embellish’ the facts—as Machlup’s recommendation that Hayek be awarded a Nobel Prize was under consideration. Neither did Hayek’s ‘free’ market Chicago School associates alert the wider audience to the evidence that contradicted Robbins’ 1931 Foreword assertion. The two Chicagoans who apparently uncovered the fraud—Adolph O. Berger and Schmidt and Carl Theodore Schmidt—did not (at least in writing) pursue the implications of their discovery, and neither did Knight nor Jacob Viner: the Non-Use of Knowledge in Society (Chapter 4). The 1974 Nobel Prize Selection Committee rewarded Hayek because he had ‘predicted’ the Great Depression and ‘For him it is not a matter of a simple defence of a liberal system of society as may sometimes appear from the popularized versions of his thinking.’ Non-free market economists, such as the Indian Nobel laureate, Amartya Sen, asserted that that Hayek insisted ‘that any institution, including the market, be judged by the extent to which it promotes human liberty and freedom.’ But Sen and the Academy of Sciences may have been unaware of the specifics of Hayek’s ‘defence of a liberal system of society.’ Hayek defended the ‘civilization’ of apartheid from the American ‘fashion’ of ‘human rights’ and described ‘human rights’ as a ‘trick’ perpetrated by Marxists.

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Unlike the low ascribed status Friedman, Hayek advocated extrajudicial killings, ‘shooting in cold blood,’ for the ‘thousands, probably tens of thousands’ that he at least pretended to object to: ‘Neither legal scruples nor a false humanitarianism should prevent the meeting out of full justice to the guilty individuals.’ General Pinochet’s death squads adopted a similar approach towards those connected with the democratically elected Allende government: Pinochet’s 1980 Constitution is named after Hayek’s Constitution of Liberty. Critics often invoke Friedman’s connection to Pinochet—but there were, apparently, no demonstrations when ‘von’ Hayek was awarded the 1974 Nobel Prize, nor when President George H. W. Bush awarded him the 1991 Presidential Medal of Freedom: ‘he foresaw freedom’s triumph … How magnificent it must be for him to witness his ideas validated before the eyes of the world. We salute him’ (Chapter 5). After Robbins withdrew his Foreword to the 1935 second edition of Prices and Production, Hayek apparently did not repeat his fraud about having ‘predicted’ the Great Depression—until he was awarded the 1974 Nobel Prize for Economic Science. Shortly before the announcement of his Nobel Prize, Hayek predicted ‘continued inflation’ and the disappearance of ‘the free market and free institutions’: ‘What I expect is that inflation will drive all the Western countries into a planned economy via price controls.’ Five years later—just before the onset of the low-inflation ‘Great Moderation’—Hayek played Cassandra again: ‘I must witness the heads of governments of all Western industrial countries promising their people that they will stop the inflation and preserve full employment. But I know that they cannot do this.’ Hayek’s abysmal forecasting record was matched by his (and Mises’) post-1931 silence about his alleged ‘prediction.’ Of the nine possible explanations why Hayek was unacceptable to the Economics Department, the most likely one is that they feared being tainted by his fraud: ‘It was all right to have him at the University of Chicago so long as he wasn’t identified with the economists.’ As Stigler explained, to get a ‘professorship at a major American university’ required that ‘a professor be at least tolerably honest’ (Chapter 6). Hayek was self-consciously a religious figure—a ‘Trickster,’ inviting, indeed, encouraging, posthumous exposure. Referring to the

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‘spontaneous’ order, Hayek asserted ‘that there are in the surrounding world a great many orderly phenomena which we cannot understand and which we have to accept.’ No evidence has ever been presented which obliges us to accept Robbins’ assertion about Hayek having predicted the Great Depression; likewise with respect to Machlup’s Nobel Prize recommendation report for Hayek; and the same holds for the Nobel Prize justification for the 1974 award. Friedman tried to effect a ‘divorce’ between the emerging Chicago School of Economics and the Austrian ‘other half ’ of the MPS. Yet his personal and academic repulsion for Austrians did not manifest itself in any published comment about Hayek’s fraudulent prediction. The same holds for Knight and Robbins. Chapter 7 presents thirty-one conclusions—firm, tentative and speculative—about the ‘feet of clay’ that underpinned Hayek’s invisible hand. In Chapter 8, Adrián de León Arias examines the analytical and historical context of Hayek’s and Myrdal’s writings, identifying similarities and differences in their business cycle explanations. In Chapter 9, Carol Connell examines the relationship between Hayek and his life-long friend, Machlup; their joint effort to secure an academic position for Mises; Machlup’s effort on behalf of the US publication of the Road to Serfdom; and the pivotal role he played in obtaining a Nobel Prize for the suicidally depressed Hayek. Like Hans Kelsen, Machlup was a ‘typical Viennese gentleman … ready to tailor his argument so as to make it appear as pleasing as possible to whatever audience he was at the moment addressing himself to’ (Silverman 1984, 75), and, like William Hutt, Machlup aspired to a Nobel Prize for himself— he kept a list: ‘Possible Nobelists Sharing the Prize with Me.’ In Chapter 10, Birsen Filip examines the concept of freedom as formulated by Hayek and Friedman. The key component of their respective concepts of freedom was labelled negative freedom (or ‘freedom from’) by Sir Isaiah Berlin (1969) in his Four Essays on Liberty. Both Friedman and Hayek formulated conceptions of freedom that primarily revolve around the concepts of economic freedom and negative freedom. Advocates of positive freedom view distributive justice as an important concept in creating the conditions required for positive freedom. Filip argues that the respective ideas of freedom formulated

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by Friedman and Hayek only attained the level of abstract freedom (a minimalist form) and therefore should be discarded from political, economic, social and philosophical discourse. The Chicago School of Economics has a distinct—and influential— ideology: 69% of Chicago Ph.D. students agreed that ‘Neoclassical economics is relevant for the economic problems of today’; but only 24% agreed at Columbia. 84% of Chicago students agreed that ‘inflation was primarily a monetary phenomenon,’ while only 7% agreed at MIT. When asked if ‘the distribution of income in developed countries should be more equal,’ Chicago (16%) students agreed, while 60% agreed at Yale. And 16% of Chicago students agreed that ‘imperfect competition was very important,’ while 47% agreed at Harvard (Colander and Klamer 1987, Tables 5 and 6; Colander 2008). While this is clear evidence of producer sovereignty, Chicago graduates (who are recruited through rigorous academic competition) would object the label that Hayek (1978) used for Buchanan’s benefit: ‘secondhand dealers in opinion.’ In response, Buchanan asked: ‘And you don’t see a necessity for something like a religion, or a return to religion, to instill these moral principles?’ to which Hayek replied: Well, it depends so much on what one means by religion. You might call every belief in moral principles, which are not rationally justified, a religious belief. In the wide sense, yes, one has to be religious. Whether it really needs to be associated with a belief in supernatural spiritual forces, I am not sure. It may be. It’s by no means impossible that to the great majority of people nothing short of such a belief will do.77

The upper reaches of the Austrian School academic hierarchy can be reached by the ideologically pure. Lissa Jackson Roche arrived at Hillsdale as a freshman in fall 1975, ‘four years after George III had taken over as president, primed by her education for sexual adventure.’ She ‘began her high school education [emphasis added] by flying to the Caribbean and becoming a passenger on a large sailing ship that housed what was then known as the Flint School, also known as the Boats, a floating academy whose purpose was to instill into young minds the philosophy of Ayn Rand’ (Jones 2000).

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According to the Executive Vice President of the Cato Institute, in the 1960s Ayn Rand was becoming a ‘major cultural presence. She drew overflow crowds at colleges from Yale to Wisconsin to Lewis and Clark. She wrote a column for the Los Angeles Times. She was interviewed by Alvin Toffler in Playboy ’: And in 1967 her celebrity was officially recognized by an invitation to appear on the Tonight Show with Johnny Carson. Those who remember it say that Carson was so fascinated that he scrapped his other guests and kept her on for the whole show. (Boas 2012)

In 1967, Ebeling’s (2016) road to the Hillsdale College ‘Ludwig von Mises Professorship of Economics’ began through what appears to be a cult-grooming operation: When I was about seventeen, and living in Hollywood, I met two men who introduced me to the works of Ayn Rand. I ran into them at a restaurant called ‘Hody’s’ that was at the corner of Hollywood and Vine. Drawing me into a conversation, they asked if I had ever heard of Ayn Rand. I replied that I had heard of the Rand Corporation, but was an ‘Ayn’? They handed me a copy of Ayn Rand’s Capitalism: the Unknown Ideal, and told me to read it and come back in three days.

Apparently unable to gain admission to university, Ebeling (2016) enrolled in college. His ‘first economics class, the assigned textbook was the seventh edition of Keynesian economist, Paul Samuelson’s [1967] Economics ’ (the eighth edition was published in 1970). In ‘1972, while still an undergraduate student,’ Sacramento State College became a university (California State University at Sacramento),78 and in 1973, Ebeling (2010, xvi) was a CSU ‘undergraduate.’ Undergraduate degrees are usually completed in three years: Ebeling believes he took a degree but doesn’t apparently know whether it was ‘B.S.’ or a ‘B.A. in Economics (1976).’79 It took him 24 years to complete a Ph.D. from Middlesex Polytechnic/University, but, in the meantime, he apparently earned a living as a ‘New York University Post Doctoral Fellow’ (Leeson 2018b).

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Ebeling was recruited by Caldwell to edit The Collected Works of F. A. Hayek: Hayek and the Austrian Economists: Correspondence and Related Documents (forthcoming). According to his Heartland Institute website Dr. Richard M. Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He conducts courses such as ‘Leadership, Entrepreneurship, and Capitalist Ethics’ as well as ‘The Morality and Economics of Capitalist Society.’80

Mark Skousen was abruptly dismissed as FEE President after he invited Rudy Giuliani—the Mayor of New York City who is regarded in the ‘free’ market as being insufficiently right-wing—to be the keynote speaker for FEE’s annual Liberty Banquet. Ebeling succeeded Skousen as FEE President—both promoted Hayek’s fraud that externalities had been invented by a gunrunner for Stalin (Leeson 2015b). FEE became ‘home’ to the adolescent Boettke (2018): Richard [Ebeling] is the master historian of the liberal tradition and of the Austrian School of Economics … I wish them [Ebeling and his wife] all the best in this endeavor to educate the young on the first-princples [sic] of liberty and basic economics. When I was watching Richard speak I got goose bumps remembering Leonard Read demonstrating with the Lamp of Liberty how the flame of truth never burns out and how the remnant through self-education and effective communication can make sure that the flame grows. Everyone should send their students to FEE, and better yet if you can get them to do so, get your children to make a sojourn to FEE and be enlightened by the Ebelings.

What would happen if children objected to being forced by their parents to go to FEE—which Hayek (to Arthur Seldon 28 August 1975) described as a mere ‘propaganda’ set-up?81 According to North— Boettke’s fellow Presuppositionist and the ‘Ludwig von Mises Institute Rothbard Medal of Freedom’ holder: ‘When people curse their parents, it unquestionably is a capital crime. The integrity of the family must be maintained by the threat of death.’ North provided ‘many reasons’

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for stoning children: ‘First, the implements of execution are available to everyone at virtually no cost.’ Moreover, executions are community projects—not with spectators who watch a professional executioner do ‘his’ duty, but rather with actual participants. (Cited by Olson 1998)

Koestler (1957, 170) reflected: The ‘gallows’ are not only a symbol of death, but also a symbol of cruelty, terror and irreverence for life; the common denominator of primitive savagery, medieval fanaticism and modern totalitarianism. It stands for everything that mankind must reject if it is to survive.

Perhaps Boettke would prefer to see the ‘flame grow’ by burning dissenting children at the stake? Hayek’s ‘closest disciple,’ ‘Dr.’ Leube was unable to pass his undergraduate units in economics at the University of Salzburg, and after five years of studying undergraduate economics, the academic fraud, Sudha Shenoy obtained a lower second-class degree in economic history— below the conventional cut-off point for entry into graduate school. She obtained lifetime academic tenure not through the ‘market process’ but by special pleading from Hayek and the National Tertiary Education Union (of which she was a voluntary member). At a ‘free’ market conference dinner, Shenoy approached Hayek and asked if she could be his official biographer … I heard Hayek reply to Sudha, ‘yes, you may be my official biog-rapher, but on one condition, and one condition only: namely, you must first become fluent in German.’ Sudha accepted, but never even learned to count from eins to zehn. (Blundell 2014, 99–100)

Boettke (2010, 60) had one attempt to obtain educational qualifications outside the ‘free’ market and had to restart his undergraduate degree at Grove City College: ‘except for the intervention of the [basketball] coaching staff, I never would have been admitted.’ After almost

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four decades studying and teaching economics, Boettke is still unable to distinguish between a price and a quantity (Leeson 2018a). The intense dispute over Friedman’s version of the Chicago oral tradition continued for almost half a century until the relevant evidence was reported—Friedman’s 1932–1933 University of Chicago lecture notes (Leeson 2003). In Chapter 11, Luca Fiorito and Sebastiano Nerozzi shed new light on the nature and evolution of interwar Chicago economics. John M. Clark was the undisputed leader of the Chicago Department of Economics during the heyday of institutionalism—his departure for Columbia University in 1927 allowed the restructuring of the Ph.D. courses according to a different and more analytical approach already represented in the Department by Viner; the recruitment of Knight, Henry Schultz and Henry C. Simons further shifted the balance towards neoclassical theory. In 1933, the qualifying test in Economic Theory was divided into two major fields: ‘price and distribution theory’ plus ‘money and business cycles.’ Monetary theory was growing in importance and the ‘Chicago monetary tradition’ emerged. Is it surprising that in 1945, the emerging Chicago School of Economics sought to protect its reputation by refusing to recruit Hayek?

Notes 1. https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1974/press.html. 2. Friedrich Hayek, interviewed by Jack High date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 3. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 4. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 5. Wieser (1983 [1926], xxxix) expressed similar sentiments: ‘The inconceivability of the World War was followed by the inconceivability of inner decay … How could this all have happened? Had life not lost all of its meaning?’

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6. Mises (2008 [1956]) was describing The Anti-Capitalist Mentality. 7. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 8. Friedrich Hayek, interviewed by Earlene Craver date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 9. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 10. Friedrich Hayek, interviewed by Axel Leijonhufvud date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 11. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 12. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 13. Hayek Papers Box 34.17. 14. Boettke was comparing Oxford with Adam Smith’s Glasgow. 15. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 16. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 17. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 18. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 19. Friedrich Hayek interviewed by Robert Bork 4 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 20. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/).

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21. Friedrich Hayek, interviewed by Jack High date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 22. Friedrich Hayek, interviewed by Thomas Hazlett 12 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 23. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 24. Hayek (20 October 1987) to Bartley. Hayek Papers Box 126.4. 25. Hayek Papers Box 12.19. 26. Hayek Papers Box 170, https://www.margaretthatcher.org/document/ 117176. 27. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 28. https://www.margaretthatcher.org/document/117129. 29. Hayek Papers Box 87.10. 30. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 31. Hayek Papers Box 58.19. 32. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 33. Ebenstein was quoting William Letwin, one of Hayek’s students, who was quoting or paraphrasing what Hayek had told him. 34. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 35. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 36. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 37. Friedrich Hayek, interviewed by Earlene Craver date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/).

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38. Friedrich Hayek interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 39. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 40. Friedrich Hayek, interviewed by Jack High date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 41. Hayek (1961) was referring to ‘administrative despotism which is the greatest danger to individual liberty today.’ 42. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 43. http://austrianeconomists.typepad.com/weblog/2007/03/austrian_ vices_.html. 44. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 45. Hayek Papers Box 27.1. 46. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 47. Friedrich Hayek interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 48. Hayek Papers Box 52.28. 49. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 50. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 51. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 52. Friedrich Hayek, interviewed by Earlene Craver date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/).

56     R. Leeson

53. Mises wrote that there was ‘no contradiction between national self-determination and a monarchical regime, provided that the monarchy was established by a free referendum.’ 54. https://www.smh.com.au/world/sarkozys-i-was-there-questioned20091110-i7h4.html. 55. ‘Though nobody will regret that education has ceased to be a privilege of the propertied classes, the fact that the propertied classes are no longer the best educated and the fact that the large number of people who owe their position solely to the their general education do not possess that experience of the working of the economic system which the administration of property gives, are important for understanding the role of the intellectual.’ 56. http://www.peter-boettke.com/curriculum-vita/, Accessed 5 January 2018. 57. ‘Boettke appears to have been recruited to the Tobacco Institute’s Economists Network as one of three academics operating in Michigan. However he doesn’t appear to have delivered much … if anything at all. The curiosity is why he was kept on their books for so long. He appears to have attracted their attention because he was becoming the foremost promoter of Hayekian economics.’ http://sciencecorruption. com/ATN166/01477.html. 58. In addition to the false assertion contained in the first part of his ‘definitive’ hagiographic biography, Caldwell (2016, 11)—in a chapter for a GMU volume edited by Boettke and Virgil Storr—asserted that ‘Hayek had throughout his career been known for keeping his disagreements with opponents on a professional level.’ And in the Review of Austrian Economics Caldwell and Montes (2014a, 17; 2014b; 2015a, 275) assert that ‘Hayek had throughout his career been known for keeping his disagreements with opponents on a professional level.’ 59. ‘Even though Hayek himself disdained having his ideas attached to either party, he nonetheless provided arguments about the dangers of the unbridled growth of government’ (Caldwell 2010). 60. Friedrich Hayek interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 61. ‘Por una serie de razones, Hayek no estaba contento. Su estado de ánimo afectó su trabajo intelectual. Incluso se ha sugerido que sufrió una depresión’ (Kresge y Wenar 1994, 130–131). 62. Hayek Archives Box 154.1. 63. Hayek Archives Box 19.19.

1  ‘I Have Been Lucky in This Game’     57

4. Hayek Archives Box 55.22. 6 65. Ballantrae, 3261 votes, Knox, 1924 votes, ‘von’ Hayek, 990 votes. Hayek Archives Box 55.13. 66. Hayek Archives Box 44.1. 67. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 68. Conversation with David Henderson (7 July 2011), who attended the 1974 revivalist conference and heard Friedman make the remark. 69. Davenport Archives Box 38.5. 70. Hayek Papers Box 119.5. 71. http://www.lfs.org/index.htm. 72. Friedrich Hayek interviewed by Robert Bork 4 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 73. Hayek Papers Box 38.24. 74. The Phillips Machine (MONIAC) is on display in a variety of places, including the Science Museum, London, and the University of Leeds. 75. Machlup suggested that the Harvard Keynesian, Seymour Harris, might be interested in the purchase. Hayek Papers Box 36.17. 76. http://historyofeconomics.org/awards-and-honors/best-article-prize/. 77. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 78. http://sacramento.stateuniversity.com/. 79. http://www.citadel.edu/root/csb-faculty-staff/48-academics/schools/ business/badm/22431-ebelinghttp://www.citadel.edu/root/images/ business_administration/2016_faculty_cvs/ebeling_cv_2016.doc.pdf. Accessed 15 April 2017. 80. https://www.heartland.org/about-us/who-we-are/richard-ebeling, 81. http://www.margaretthatcher.org/document/114609, Hayek Papers Box 27.6.

Archival Insights into the Evolution of Economics (and Related Projects) Friedman, M. F. (2017 [1991]). Say ‘No’ to Intolerance. In R. Leeson & C. Palm (Eds.), Milton Friedman on Freedom. Stanford, CA: Hoover Press.

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Leeson, R. (Ed.). (2003). Keynes, Chicago and Friedman. London: Pickering and Chatto. Leeson, R. (Ed.). (2015a). Hayek: A Collaborative Biography Part II Austria, America and the Rise of Hitler, 1899–1933. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (Ed.). (2015b). Hayek: A Collaborative Biography Part III Fraud, Fascism and Free Market Religion. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (2017). Hayek: A Collaborative Biography Part VII ‘Market Free Play with an Audience’: Hayek’s Encounters with Fifty Knowledge Communities. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (2018a). Hayek: A Collaborative Biography Part VIII The Constitution of Liberty: ‘Shooting in Cold Blood’ Hayek’s Plan for the Future of Democracy. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (2018b). Hayek: A Collaborative Biography Part XII: Liberalism in the Classical Tradition, Austrian Versus British. Basingstoke, UK: Palgrave Macmillan. Robin, C. (2015). Wealth and the Intellectuals: Nietzsche, Hayek, and the Austrian School of Economics. In R. Leeson (Ed.), Hayek: A Collaborative Biography: Part V Hayek’s Great Society of Free Men. Basingstoke, UK: Palgrave Macmillan.

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Boettke, P. J. (2004). Hayek and Market Socialism: Science, Ideology, and Public Policy. The LSE Hayek Memorial Lecture Presented in Cooperation with the Mises Institute. https://mises.org/library/hayek-andmarket-socialism-science-ideology-and-public-policy. Boettke, P. J. (2006, March 18). What Does It Take to Get Into GMU’s Econ PhD Program? Coordination Program. http://www.coordinationproblem. org/2006/03/what_does_it_ta.html. Boettke, P. J. (2007, November 11). Hayek a Misesian, Boettke a Rothbardian. Coordination Problem. http://austrianeconomists.typepad.com/weblog/2007/ 11/hayek-a-misesia.html. Boettke, P. J. (2010). Reflections on Becoming an Austrian Economists and Libertarian, and Staying One. In W. Block (Ed.), I Chose Liberty Autobiographies of Contemporary Libertarians. Auburn, AL: Ludwig von Mises Institute. Boettke, P. J. (2012a). Living Economics: Yesterday, Today, and Tomorrow. Oakland: Independent Institute and Universidad Francisco Marroquin. Boettke, P. J. (2012b, April 2). Interview with Peter Boettke. Rationality Unlimited. https://rationalityunlimited.wordpress.com/2012/04/02/interviewwith-peter-boettke/. Boettke, P. J. (2014, June 7). Robert Leeson, Hayek and the Underpants Gnomes. Coordination Problem. http://www.coordinationproblem.org/2014/ 06/robert-leeson-hayek-and-the-underpants-gnomes.html. Boettke, P. J. (2015, January 21). Exclusive Interview. Peter Boettke: The Transformative Rise of Austrian Economics. Daily Bell. http://www. thedailybell.com/exclusive-interviews/anthony-wile-peter-boettke-thetransformative-rise-of-austrian-economics/. Boettke, P. J. (2016a, October 17). Ludwig von Mises, the Academic. Foundation for Economic Education. https://fee.org/articles/ludwig-vonmises-the-academic/. Boettke, P. J. (2016b, March 2). Happy 90th Birthday to Murray N. Rothbard (1926–1995). Coordination Problem. http://www.coordinationproblem. org/2016/03/happy-90th-birthday-to-murray-n-rothbard-1926-1995.html. Boettke, P. J. (2018, February 14). Economists and the Public. Coordination Problem. http://www.coordinationproblem.org/. Bok, S. (1996). Foreword. In O. Clayton (Ed.), An American Dilemma Revisited: Race Relations in a Changing World. New York: Russell Sage Foundation. Caldwell, B. (1995). Editorial Notes. In B. Caldwell (Ed.), Contra Keynes and Cambridge The Collected Works of F.A. Hayek. Chicago: University of Chicago Press.

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Klausinger, H. (2010). Hayek on Practical Business Cycle Research: A Note. In H. Hagemann, T. Nishizawa, & Y. Ikeda (Eds.), Austrian Economics in Transition: From Carl Menger to Friedrich Hayek (pp. 218–234). Basingstoke: Palgrave Macmillan. Klausinger, H. (Ed.). (2012). Editorial Notes. In F. A. Hayek, Business Cycles Volume VII the Collected Works of F. A. Hayek (H. Klausinger, Ed.). Chicago: University of Chicago Press. Koestler, A. (1950). Arthur Koestler. In R. Crossman (Ed.), Communism: The God that Failed. New York: Harper and Row. Koestler, A. (1957). Reflections on Hanging. London: Macmillan. Kuehnelt-Leddihn, E. M. (pseudonym Campbell, F. S) (1978 [1943]). The Menace of the Herd: Or, Procrustes at Large (Studies in Conservative Philosophy ). New York: Gordon Press. Leube, K. R. (1976–1977). Hayek’s Perceptions of the ‘Rule of Law.’ Intercollegiate Review, (Winter), 105–110. Leube, K. R. (1984a). Biographical Introduction. In K. R. Leube & C. Nishiyama (Eds.), The Essence of Hayek. Stanford, CA: Hoover Institution Press. Leube, K. R. (1984b, July). Essay: Hayek, Orwell, and the Road to Serfdom. Prometheus, 2(3). Leube, K. R. (Ed.). (1987). The Essence of Friedman. Stanford, CA: Hoover Institution Press. Leube, K. R. (2003a). Some Remarks on Hayek’s The Sensory Order. Laissez Faire, 12–22. http://laissezfaire.ufm.edu/images/7/79/Laissezfaire18_2.pdf. Leube, K. R. (2003b). On Some Unintended Consequences of the Welfare State. Free Market Foundation Occasional Papers, 4, 4. Leube, K. R., & Moore, T. G. (Eds.). (1986). The Essence of Stigler. Stanford, CA: Hoover Institution Press. Machlup, F. (1981). Ludwig von Mises: A Scholar Who Would Not Compromise. In J. L. Andrews Jr. (Ed.), Homage to Mises: The First Hundred Years: Commemorative Papers for the Ludwig von Mises Centenary (pp. 19–27). Hillsdale: Hillsdale College Press. Mirowski, P., & Nik-Khah, E. (2017). The Knowledge We Have Lost in Information: The History of Information in Modern Economics. New York: Oxford University Press. Mises, L. (1951 [1932]). Socialism: An Economic and Sociological Analysis (J. Kahane, Trans.). London: Jonathon Cape. Mises, L. (1963). Human Action A Treatise on Economics (2nd ed.). New Haven: Yale University Press.

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Mises, L. (1966). Human Action A Treatise on Economics (3rd ed.). Chicago: Henry Regnery. Mises, L. (1985 [1927]). Liberalism in the Classical Tradition (R. Raico, Trans.). Auburn, AL: Mises Institute. Mises, L. (1993 [1964]). Indefatigable Leader. Remarks by Ludwig von Mises on the Occasion of Henry Hazlitt’s 70th Birthday, on November 28, 1964. In H. Sennholz (Ed.), The Wisdom of Henry Hazlitt. New York: The Foundation for Economic Education. http://www.mises.ch/library/ Hazlitt_Wisdom_of_HH.pdf. Mises, L. 1996. A Critique of Interventionism (H. Sennholz, Trans.). Auburn, AL: Ludwig von Mises Institute. Mises, L. (1998). Human Action: A Treatise on Economics the Scholars Edition. Auburn, AL: Ludwig von Mises Institute. Mises, L. (2006 [1979]). Economic Policy: Thoughts for Today and Tomorrow. Auburn, AL: Ludwig von Mises Institute. Mises, L. (2008 [1956]). The Anti-capitalist Mentality. Auburn, AL: Ludwig von Mises Institute. Mises, L. (2009 [1978 (1940)]). Memoirs. Auburn, AL: Ludwig von Mises Institute. Mises, M. (1984). My Years with Ludwig von Mises (2nd ed.). Cedar Falls, IA: Center for Futures Education. Montes, L. (2015). Friedman’s Two Visits to Chile in Context. http://jepson.richmond.edu/conferences/summer-institute/papers2015/LMontesSIPaper.pdf. Morgan, L. (2011, July 18). End of a Royal Dynasty as Otto von Habsburg is Laid to Rest… with His Heart Buried in a Crypt 85 Miles Away. MailOnline. http://www.dailymail.co.uk/news/article-2015994/End-Royaldynasty-Otto-von-Habsburg-laid-rest–heart-buried-crypt-85-miles-awaydifferent-country.html. Myrdal, G. (1944). An American Dilemma: The Negro Problem and Modern Democracy. New York: Harper and Brothers. Noakes, J., & Pridham, G. (Eds.). (1994). Nazism 1919–1945 Volume 1 The Rise to Power 1919–1934: A Documentary Reader. Exeter: University of Exeter Press. O’Brien, P. J. (1985). Authoritarianism and the New Economic Orthodoxy The Political Economy of the Chilean Regime, 1973–1985. In P. J. O’Brien & P. A. Cammack (Eds.), Generals in Retreat: The Crisis of Military Rule in Latin America. Manchester: Manchester University Press.

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Olson, W. (1998 November, 1). Invitation to a Stoning: Getting Cozy with Theocrats. Reason. Raico, R. (2013, February 20). An Interview with Ralph Raico. Mises Institute. https://mises.org/library/interview-ralph-raico-0. Rapoport, R. (2000). Hillsdale: Greek Tragedy in America’s Heartland. Oakland, CA: RDR Books. Robbins, L. C. (2012 [1931]). Foreword. In Hayek, F. A. Business Cycles Volume VII the Collected Works of F. A. Hayek (H. Klausinger, Ed.). Chicago: University of Chicago Press. Robin, C. (2013). The Hayek-Pinochet Connection: A Second Reply to My Critics. http://crookedtimber.org/2013/06/25/the-hayek-pinochet-connectiona-second-reply-to-my-critics/. Roche, G. (1976). The Relevance of Friedrich A. Hayek. In F. Machlup (Ed.), Essays on Hayek. New York: New York University Press. Rockwell, L. (2011). What is Fascism? The Free Market, 29(7, Fall). https:// mises.org/library/what-fascism-1. Rockwell, L. H., Jr. (1994, December). The Cognitive State. Rothbard Rockwell Report, 18–19. http://www.unz.org/Pub/RothbardRockwellReport-1994dec00018. Rockwell, L. H., Jr. (1998). Mises and Liberty. ‘This Was the Keynote Address at the Ludwig von Mises Institute’s New Building Dedication and Conference on the Great Austrian Economists, June 5–6, 1998, in Auburn, Alabama.’ Mises Institute 15 September. https://mises.org/library/ mises-and-liberty. Rockwell, L. H., Jr. (2013). Fascism Versus Capitalism. Auburn, AL: Ludwig von Mises Institute. Rothbard, M. N. (1973, October). Ludwig von Mises: 1881–1973. Human Events, 20, 7. Rothbard, M. N. (1990). The Future of Austrian Economics. Mises University at Stanford University. http://www.youtube.com/watch?v=KWdUIuID8ag. Rothbard, M. N. (1992, January). Right-Wing Populism: A Strategy for the Paleo Movement. Rothbard Rockwell Report, 5–14. http://rothbard.altervista.org/articles/right-wing-populism.pdf. Rothbard, M. N. (1993, August). Who Are the Terrorists? Rothbard Rockwell Report, 4(8). http://www.unz.org/Pub/RothbardRockwellReport-1993aug00001. Rothbard, M. N. (1994a, May). Those Jury Verdicts. Rothbard Rockwell Report, 5(5). http://www.unz.org/Pub/RothbardRockwellReport-1994may-00009.

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Rothbard, M. N. (1994b, July). Revolution in Italy! Rothbard Rockwell Report, 5(7). http://www.unz.org/Pub/RothbardRockwellReport-1994jul-00001. Rothbard, M. N. (1994c). Nations by Consent: Decomposing the NationState. Journal of Libertarian Studies, 11(1), 1–10. Rothbard, M. N. (1994d, October). A New Strategy for Liberty. Rothbard Rockwell Report, 5(10). http://www.unz.org/Pub/Rothbard RockwellReport-1994oct-00001. Rothbard, M. N. (1994e, September). Invade the World. Rothbard Rockwell Report, 5(9). http://www.unz.org/Pub/RothbardRockwellReport-1994sep00001. Rothbard, M. N. (2002 [1971]). Milton Friedman Unravelled. Journal of Libertarian Studies 16(4, Fall), 37–54. https://mises.org/library/miltonfriedman-unraveled-0. Samuelson, P. (1967). Economics (7th ed.). New York: McGraw Hill. Shenoy, S. (2003, Winter). An Interview with Sudha Shenoy. Austrian Economics Newsletter, 1–8. http://mises.org/journals/aen/aen23_4_1.pdf. Shirer, W. L. (1960). Rise and Fall of the Third Reich. London: Secker and Warburg. Silverman, P. (1984). Law and Economics in Interwar Vienna Kelsen, Mises and the Regeneration of Austrian Liberalism. University of Chicago PhD, Department of History, Faculty of the Division of the Social Sciences. Talmon, J. L. (1960). The Origins of Totalitarian Democracy. Britain: Secker & Warburg. Tanaka, S. (1974, May 17). What Will Happen to the World as Keynesian Economic Theories Are Disproved? Views of Professor Hayek, a WorldFamous Authority on Inflation Sought. Shuukan Post. von Monakow, C., & Kitabayashi, S. (1919). Schizophrenie und Plexus Chorioidei. Schweizer Archiv für Neurologie und Psychiatrie, 5, 378–392. Walsh, M. C. (1968). Prologue A Documentary History of Europe 1848–1960. Melbourne, Australia: Cassell. Watters, S. (2005, June 28). Von Habsburg on Presidents, Monarchs, Dictators. Women’s Wear Daily. http://www.wwd.com/eye/people/ von-habsburg-on-presidents-monarchs-dictators. Wheeler, T. (1975, September 26). Mont Pelerin Society: Microeconomics, Macrofellowship. National Review. Wieser, F. (1983 [1926]). The Law of Power. Lincoln: University of NebraskaLincoln, Bureau of Business Research. Wright, T. C., & Oñate, R. (2005). Chilean Diaspora. In C. R. Ember, M. Ember, & I. Skoggard (Eds.), Encyclopedia of Diasporas: Immigrant and Refugee Cultures Around the World (Vol. II, pp. 57–65). New York: Springer.

2 The Tobacco, Obesity and Fossil Fuel Lobby—‘As Happy as Hell’ Robert Leeson

1 An Overview of the Argument Plus Indirect Test (1) The evidence suggests that Hayek’s fraudulent assertion about having predicted the Great Depression was uncovered at the University of Chicago in the early 1930s—but not reported. The most likely explanation is self-censorship—for reasons of ideological correctness and deference: GMU’s Buchanan (1992, 130) observed that at Mont Pelerin Society (MPS) meetings there was ‘too much deference accorded to Hayek, and especially to Ludwig von Mises who seemed to demand sycophancy.’ What happened to this ‘knowledge’? What happened to the for-posthumous-consumption oral history interviews that Hayek left?

R. Leeson (*)  Stanford University, Stanford, CA, USA e-mail: [email protected] R. Leeson  Notre Dame Australia University, Fremantle, WA, Australia © The Author(s) 2018 R. Leeson (ed.), Hayek: A Collaborative Biography, Archival Insights into the Evolution of Economics, https://doi.org/10.1007/978-3-319-95219-2_2

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They are being disciple-suppressed—presumably for fund-raising reasons (Leeson 2015, chapter 2).

2 Indirect Test (2) Another indirect test of this hypothesis is provided by examining how ‘free’ market historians handle evidence that could jeopardize their fund-raising. In The Definitive Edition of The Road to Serfdom, Caldwell (2007, 21) complained about ‘pundits of the day’ taking ‘tacks’: George Soule, for example, was quick to label [Hayek] ‘the darling of the Chamber of Commerce.’ The left-leaning PM newspaper launched an exposé showing how business interests promoted the ‘selling’ of Hayek’s message. The author’s concluding sentences capture well many people’s perception of the reception of the book in America: ‘Hayek’s book—and the Look and Reader’s Digest treatments of it—gave big business a wonderful opportunity to spread distrust and fear of the New Deal. Big business seized the opportunity.’

Yet the British Embassy in Washington reached similar conclusions: the Reader’s Digest was ‘in effect the voice of Big Business’ and ‘Wall Street looks on Hayek as the richest goldmine yet discovered and are peddling his views everywhere … Professor Hayek should not be surprised if he is invited to address the Daughters of the American Revolution to provide them with the latest weapons against such sinister social incendiaries as Lord Keynes and the British Treasury’ (Nicholas 1981, 534–535). Caldwell (2007, 21) continued: The worst of the lot, Herman Finer’s scabrous Road to Reaction, was also picked out for mentioning by Hayek in the 1956 foreword. The overarching message of the book was evident in its very first sentence: ‘Friedrich A. Hayek’s The Road to Serfdom constitutes the most sinister offensive against democracy to emerge from a democratic country for many decades.’ According to Finer, Hayek’s call for constitutionalism and advocacy of the rule of law was indicative of his antidemocratic biases, the ‘very essence’ of Hayek’s argument being ‘the idea that democracy is dangerous

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and ought to be limited [unattributed emphasis]. Toward the end of the book (published, we remember, in 1945) we find Finer remarking on ‘the thoroughly Hitlerian contempt for the democratic man so perfectly expressed by Hayek.’

Caldwell’s merits as a historian do not, it seems, extend to handling evidence that may impair the fund-raising potency of his hero: Hayek (1978) repeatedly insisted that democracy was dangerous and proposed, instead, ‘a system of really limited democracy.’1 For current consumption, Hayek (1978) described Finer’s (1945) Road to Reaction—one of the few printed attacks on his integrity—as an expression of hatred towards the LSE rather than a critique of The Road to Serfdom. After Finer’s (1898–1969) death, Hayek trivialized the critique: I think I can now tell you the story behind it. Herman Finer had come to hate the London School of Economics, and particularly Harold Laski, because when he had come to the United States and war broke out, he had asked for a leave, an extension of leave, and it was denied him because he was needed for teaching. He was so upset about this that he turned against the London School of Economics, and particularly Laski. Then it happened that I was the first member of the London School of Economics on which he could release all his hatred of the place. So I had to suffer for Harold Laski. [laughter]2

Hayek informed Finer that while he did not wish to have any ‘contact’ with him, ‘I desire to preserve correct relations in public’ (cited by Caldwell 2004, 148, n19). When debating the nobility, ‘correct relations in public’ may involve not reporting academic fraud—especially for ‘free’ market comrades. In for-posthumous-consumption oral history interviews, Hayek confirmed that Finer’s interpretation of The Road to Serfdom was largely correct (Leeson 2015, chapter 3). Peter Boettke (Society for the History of Economics, 20 May 2014) described the evidence about Hayek’s fraud and Mises’ card-carrying Fascist party status as ‘intellectual pollution … I personally would consider the posts that have gone on concerning Hayek to border on

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intellectual malpractice for a historian of ideas … Can we PLEASE return to the real business of SHOE [Society for the History of Economics] rather than this?’ Boettke, the president of Hayek’s MPS, is funded by polluters who seek to avoid full-cost pricing: What business is he in? In an oral history interview about Rutgers University (the State University of New Jersey), John Cullity (1991) recalled that ‘hiring’ in the 1960s was a ‘much more informal process than we have now.’ Helen Cook, the Economics Chair, contacted Columbia University and Columbia said, Hey, there’s a job over at Rutgers in Newark. So I called up, and she said, ‘Well, come on over’ … And I was interviewed for 15 minutes or so by Helen. I guess she said to me, ‘Want to step outside for a second or two?’ And she and Morris [Beck] talked for a minute or so. And she said, ‘Okay. You’ve got the job.’

Has the ‘free’ market now embraced more formal hiring practices? According to The Wall Street Journal, in 1998 after multiple academic failures, a ‘friend’ arranged for Boettke to receive a lifetime income from the taxpayers of Virginia (Evans 2010). Was Boettke’s (2010a) ‘friend’ Charles Koch? I have met many of our donors through the years and they are wonderful individuals who care passionately about liberty and economic education and economic scholarship. Both Charles and David Koch are the same way. They care passionately about the cause of economic and political liberty and they have generously provided significant funds to support numerous efforts. I have had many conversations with Charles over the years, including about research priorities for a free [emphasis added] society. He has never once tried to influence what I was working on, or the way I was working on it. He is a man of great intelligence and intellectual curiosity … Charles is someone I admire and am grateful to for both his support and his professional friendship over the years.

Simultaneously, in I Chose Liberty Boettke (2010b) published ‘Reflec­ tions on becoming an Austrian Economist and Staying One.’ Charles Koch told Brian Doherty (2007, 409–410): ‘when you have something that’s not working, you have to cut your losses.’ Documents

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obtained under Freedom of Information reveal that in 2010, Boettke was between two back-to-back deals (2007 and 2011) involving Koch, Mercatus and GMU. Because of the ‘important role’ Boettke played, Mercatus (8 April 2011) agreed to provide GMU with $22,645 each year for a decade in return for GMU providing Boettke with ‘an increase of $30,000.00 in annual salary effective 8/25/2011 and any additional benefits or consideration that would normally be conveyed as part of standard compensation of a faculty member at George Mason University’ (GMU).3 Boettke described Fink as ‘an amazingly dynamic leader’ (cited by Doherty 2007, 430). To defend Big Tobacco, Fink pretended that he represented the forgotten man—those Franklin D. Roosevelt had immortalized in his 1932 campaign to overcome the Austrian-promoted Great Depression.4 But in Fink’s self-interested fantasy, the forgotten man was a sentimental front for plutocrats. Cullity (1991) reflected about this Rutgers academic hire of the 1970s: he ‘had something, some charisma there that Richie has, that attracts people who have enormous amounts of money.’ Fink told Cullity ‘Koch would like to give us some money if we could formalize a relationship … I think I can get a lot of money from this guy.’ And he sent a guy in.

This ‘guy,’ George Pearson, told Cullity ‘Mr. Koch would like to help Richie and people like Richie. And he wants—he would like, if you’re interested, if you guys would give in the course of a year a course in Austrian economics in the fall and in the spring … And we’ll be able to help the department in many, many ways.’ Scholarships to students, able students and so forth. Moneys for seminars and so forth and so on. Ah, terrific! Richie was hired, again.

Joseph Salerno and two ‘kids’ were also hired: Tyler Cowan and ‘Kathy Curtis … I think we got, over the course of the next two years, something in the neighborhood of $200,000 from this Koch Foundation, which we used for all kinds of different purposes … We set up seminar programs.’

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Cullity thought that Koch money funded ‘people who had all kinds of different political ideologies’ but named only three (all ‘free’ market proponents): Martin Feldstein, Gottfried Haberler and James Buchanan. But then it ended fast. Richard Fink did not have his Ph.D. yet. He was finishing a Ph.D. at NYU. And he was getting flak from the administration. He hadn’t had his Ph.D. … And he got these letters … He was vital to the whole thing. So at one point he just simply said to us, ‘I don’t need this aggravation. I’ll leave.’ And he quit. And that was the end of the relationship. When he went, Mr. Koch went. And all that money went out the window. Richard went down to George Mason University and brought all that money down there with him. And a lot more … And Richie Fink has gone onto much bigger things since then. But that was the end of that. There was an ideological problem.

Cullity named two Rutgers dissenters—Eva Hirsch and Beth Nemi— but as far as the rest of the department was concerned, ‘we were just happy as hell that it was around because it meant that there were resources that were coming into the department that were making life a lot nicer for everyone in the department.’ The tobacco industry—which has a long history of misrepresenting scientific evidence—is responsible for more than 440,000 deaths annually in the USA. In ‘The Creation of Industry Front Groups: The Tobacco Industry and “Get Government Off Our Back”,’ Dorie Apollonio and Lisa Bero (2007) document the process by which R.J. Reynolds funded Koch’s ‘Citizens for a Sound Economy’ (CSE). On behalf of CSE’s members—described as individuals with ‘limited resources’—Fink lobbied the National Economic Committee against proposed tax increases: the ‘trust’ of our members is ‘something we take very seriously.’5 CSE offered to ‘develop and run print, radio, and television advertising inside the Beltway and in targeted states. They will generate letters and phone calls to Congress from constituents. CSE will also educate Members of Congress and their staffs by preparing and distributing policy papers, conducting congressional education events, and meeting

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directly with offices.’6 Roy Marden—Heartland Institute ‘policy expert,’ MPS member and Philip Morris’ Corporate Affairs Policy Analyst and Manager of Industry Affairs—was the ‘recommender’ for numerous ‘free’ market ‘Public Policy’ funding requests to the tobacco industry.7 In 1988, Fink wrote to the Surgeon General to promote inaction because ‘Government policies towards smoking are highly controversial and they excite strong emotions among smokers and non-smokers alike.’ Samuel Chilcote—president of The Tobacco Institute—thanked Fink for his ‘sound economic views and sensible business judgments’ and urged others to imitate his lobbying: ‘We are encouraging other pro-tobacco trade witnesses to attend the meeting and be prepared to speak up. A member of our staff will monitor the meeting.’8 In March 2018, GMU announced a $5 million Koch Foundation donation to the economics department to create three faculty positions (Larimer 2018). On 27 July 2009, Fink signed an agreement (on behalf of Koch) with Tyler Cowen (Mercatus) and GMU regarding the funding of Professors of Economics who would not dispassionately evaluate arguments and evidence but instead ‘advance the understanding and acceptance [emphasis added]’ of ‘free market processes and principles.’ Boettke and other Koch recipients are supervised and monitored by an ‘Advisory Board’ consisting of one Koch representative, one Mercatus representative plus a third mutually agreed overseer. In return for Koch funding, they are obliged to undertake ‘Teaching in a Capitol Hill campus course or event’ and produce ‘highly credible research’ that supported the free market, while ‘Participating in a minimum of three Mercatus fundraising or public relations events.’ Although Koch provided the funds, GMU appears to provide the salaries (thus, perhaps, avoiding the need for a disclaimer about conflict of interest). At an Association of Private Enterprise Education (APEE) panel on ‘Being a Liberty-Advancing Academic,’ Boettke was taped as stating: Basically, to run a center or to be a person on a campus that has impact, you have to be viewed as, kind of, a version of a gorilla. Either from a tiny gorilla to, like, the big eight hundred pound gorilla. And the more you’re the eight hundred pound gorilla the more you’re able to, like, get your way. (Cited by Kotch 2016)

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John Boehner (11 May 2018)—who in 2015 lost his ability to function as Speaker of the US House of Representatives because of the Kochinfluenced ‘Freedom Caucus’—stated that American universities are so party politicized that everyone on Capitol Hill knows what an economist is going to say before they testify.9 This implies that academic ‘Representatives’—‘hirelings’ who ‘do the bidding’ of the Tobacco, Obesity and Fossil Fuel (TOFF) industries—are just a ‘third party’ force. In ‘A G.O.P. Leader Tightly Bound to Lobbyists,’ the New York Times reported that Boehner ‘maintains especially tight ties with a circle of lobbyists and former aides representing some of the nation’s biggest businesses, including Goldman Sachs, Google, Citigroup, R.J. Reynolds, MillerCoors and UPS’ who ‘have contributed hundreds of thousands of dollars to his campaigns’ (Lipton 2010). He had a ‘K Street Kitchen Cabinet.’10 In 2016, the heavy smoking Boehner joined the board of tobacco company Reynolds American (Egan 2016). In 1995, Boehner distributed campaign contributions from tobacco industry lobbyists on the House floor as members of the House of Representatives were considering how to vote on tobacco subsidies (Milbank 2006). In 1999, the United States Department of Justice filed a lawsuit against the major cigarette manufacturers and two industry-affiliated organizations.11 In response, the tobacco industry formed a ‘Mobilization Universe.’12 As early as 1985, Fink—‘On behalf of the 220,000 members of Citizens for a Sound Economy’—used Mises’ plagiarized concept of ‘consumer sovereignty’ to lobby to protect the tobacco industry from full-cost pricing: ‘The American people should be left free to, first, decide if they want to smoke, and second to buy tobacco from whomever [Fink’s emphasis] they choose at the market-set price.’13 According to Ryan Stowers (vice president of the Charles Koch Foundation), Koch has built (purchased?) a ‘network of 5,000 scholars.’14 The Fink-signed contract states that to comply with Internal Revenue Service regulations: ‘The professorship shall be operated exclusively for charitable and educational purposes … and no part of the activities of the professor shall consist of carrying on or otherwise attempting to influence legislation.’15 At the APEE, Boettke was recorded as stating: ‘The third party payer is government. Right?

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So this is the economics of the university. Not saying, by the way, from a Libertarian point of view that it’s the best thing in the world, but, you have to recognize and take advantage of it in building programs.’ A communications team helps the centre has political ‘impact’ and the university label offered ‘political advantages’: When we think about a university center there’s all this intellectual activity happening and there’s an opportunity to leverage it over and over and over again. These media people are able to book radio, television, different sorts of appearances … They can also play an interesting role in engaging with different kinds of stakeholders in these social institutions. That can mean arranging state legislative testimony to make sure that, you know, these kinds of ideas have a seat on the table in public policy. (Cited by Quinlan 2016)

Three days after a judge scrutinized GMU’s earlier refusal to release documents, GMU President Angel Cabrera (28 April 2018) wrote to faculty stating that the donor agreements ‘fall short of the standards of academic independence I expect any gift to meet’ (cited by Larimer 2018). In the Cato Policy Report, Hayek (1984)—a tax-evading kleptocrat— bemoaned ‘government abuses of money.’ Charlotte Cubitt (2006, 10, 122) reported that when he was caught in the ‘cheating matter’— stealing, or double-dipping, from ‘educational charities’ to maintain his aristocratic lifestyle—Hayek ‘just laughed, said he did not mind in the least, that all his professional considerations had been based on financial considerations.’ David Koch told Doherty (2007, 409): ‘If we’re going to give a lot of money, we’ll make darn sure they spend it in a way that goes along with our intent. And it they make a wrong turn and start doing things we don’t agree with we withdraw funding. We do exert that kind of control.’ Do such ‘financial considerations’ change behaviour? Is Boettke a disinterested scholar or a loyal ‘TOFF’ hireling? Boettke (2010b) claims to operate ‘in the interest of full disclosure.’16 But the case for the ‘free’ market can only be made by suppressing evidence. Boettke (2018a) described his mission: ‘Let us get on with our task of being students of civilization, social critics of policy regimes,

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and teachers to our fellow citizens. We need to empower the people with knowledge. That is, I contend, the public purpose of economics.’ And in his Mercatus Centre ‘Living Bibliography of Works on Hayek,’ Boettke (2018b) pretends to offer a list of ‘all [emphasis added] works in the social sciences and humanities that discussed Hayek’s contributions.’ When translated from the Austrian, ‘all’ means roughly half—the 200 or so chapters in Hayek: A Collaborative Biography have been silently deleted from Boettke’s list.17 This suggests that in MPS circles, evidence about Hayek’s fraud must—for ‘financial considerations’—be suppressed.

3 Indirect Test (3) In 2014, when Hayek: A Collaborative Biography emerged as non-hagiography project, three ‘scholars’ withdrew their chapters. One— Ross Emmett—is co-director of Michigan State University’s Center for Innovation and Economic Prosperity which provides ‘opportunities for public private partnerships that promote innovation and economic prosperity’ and aims to allow ‘the public to obtain nonpartisan policy advice.’18 Emmett refused to explain why he was withdrawing his chapter. Did John Hardin (2015)—director of university relations at the Charles Koch Foundation—provide an explanation in the Wall Street Journal: Our grant agreement at Michigan State University, another recent target, is typical of the programs we support. It also illustrates the a­ bsurdity of the political attacks. The grant, about $20,000 a year, enabled ­political-theory professor Ross Emmett to design and launch an extracur­ ricular reading group for interested students. The group included a twoweek discussion of Karl Marx’s ‘The Communist Manifesto.’ After that, the group discussed two books—G.A. Cohen’s ‘Why Not Socialism?’ and ‘Why Not Capitalism?’ by Jason Brennan. As Prof. Emmett has written, he hopes the reading group will give students a chance ‘to discern and make judgments about truth, to engage ideas and decide for ourselves.’

Hardin (2015) complained about Koch’s critics: ‘Rather than engage in a vigorous and civil debate about the merits of different ideas, they seek to prevent those with which they disagree from ever being heard.’

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Wake Forest’s Richard Whaples—the SHOE gatekeeper who deci­ des which books will be reviewed and by whom—chose Richard Ebeling—a devotee of Hayek and Mises and Heartland Institute policy ‘expert’ who, after four decades as an academic, is still apparently without an independently refereed publication—to review Hayek: A Collaborative Biography Part I. Ebeling (2013) clearly had not read the book before reviewing it—he didn’t know how many chapters there were nor who wrote the chapters.19 Whaples (email to Leeson 9 May 2018) agreed to receive review copies of Hayek: A Collaborative Biography Parts II–VI but refused to forward them to reviewers because unnamed individuals—presumably Ebeling, Boettke and Caldwell— were ‘very negative’ about the project. Evelyn Forget is the 2018 History of Economics Society President, Professor in the Department of Community Health Sciences at the University of Manitoba and an adjunct scientist with the Manitoba Centre for Health Policy.20 Whaples is editor of the Independent Review—the journal of the Independent Institute which is funded by Philip Morris, Exxon and the David H. Koch Charitable Foundation. In 1992, under Robert Higgs the Independent Institute ‘took over the administration of the tobacco industry’s cash for Comments Economists Network from Robert Tollison, James Savarese and the Center for Public Choice.’21 Documents on the University of California, San Francisco, website led ‘Corporate Corruption of Science’ to conclude that Higgs—Whaples’ predecessor as editor of the Independent Review—‘was paid to write letters, op-ed articles, and to appear at witnesses at Congressional inquiries, local ordinance hearings and the like, spouting tobacco industry propaganda, while declaring himself to be a lilywhite ethical economist, who’s only concern was the public well-being.’22

4 Indirect Test (4) In ‘How One State is Fixing Higher Education Will other states follow North Carolina’s example?,’ the Heartland Institute’s Jane Shaw (2018) described how ‘the Republican-backed legislature is taming the

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16-campus University of North Carolina system.’ Shaw, a past APEE president and past president of the John W. Pope Center for Higher Education Policy, seeks to ‘cure’ higher education: ‘The cure must come from the outside—the diagnosis, the medicine, and even the administration of the medicine. The Pope Center is integrally involved in all three. We offer criticism and positive proposals but also work with faculty, trustees, administrators, and legislators to promote better policies.’23 According to Hayek (1949, 420–421), although their ‘knowledge may often be superficial and their intelligence limited,’ intellectuals were the ‘organs which modern society has developed for spreading knowledge and ideas, and it is their convictions and opinions which operate as the sieve through which all new conceptions must pass before they can reach the masses.’24 Hayek (28 August 1975) told Arthur Seldon that the Foundation for Economic Education (FEE) was a mere ‘propaganda’ ‘setup.’25 Illustrating the Austrian ‘interpretation’ of history, the ‘hyped-up’ Boettke (2016) told a FEE audience that Mises ‘is a story of scientific glory and personal courage in a very dark time in human history.’ Mises was a full-time FEE employee and its ‘true spiritus rector’ (literal translation: ‘Führer,’ ‘leader’) (Hülsmann 2007, 884). According to Caldwell—who is a member of FEE’s Faculty Network— his ‘Friedrich Hayek and His Visits to Chile’ (Caldwell and Montes’ 2014a, b; 2015) was the ‘Winner of the Foundation of [sic] Economic Education (FEE) 2015 Best Article Award.’ The Director of Research at the John W. Pope Center for Higher Education Policy is George Leef, Ebeling’s former Northwood University colleague and book review editor of FEE’s The Freeman.26 Caldwell’s (2004, xi, 344, n16) Hayek’s Challenge was funded by the John W. Pope Foundation and the Liberty Fund (who hosted a conference to discuss a preliminary draft of the volume). According to its 2013–2014 Annual Report, Duke University’s Centre for the History of Political Economy (CHOPE) was ‘founded in 2008 with a significant grant from the John W. Pope Foundation’ (Caldwell 2014); in fiscal year 2014–2015, CHOPE received $175,000 from the Pope Foundation.27

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According to its mission statement, ‘The Pope Foundation supports organizations that work to advance free enterprise—the same system that allowed Variety Wholesalers to flourish—for future generations of Americans. To achieve those ends, the Pope Foundation supports a network of organizations in North Carolina that advocate for free markets, limited government, individual responsibility, and government transparency.’ With regard to ‘Education support,’ the ‘Pope Foundation believes that Americans have a duty to teach the next generation about the blessings of liberty.’28 The Pope Foundation is the sixth largest contributor to what Robert Brulle (2014, 687, Fig. 1, 681) described as the ‘Climate Change Counter Movement’ (CCCM). Referring to private sector transparency, Brulle reported that ‘there is evidence of a trend toward concealing the sources of CCCM funding through the use of donor directed philanthropies.’ In December 2013, Whitney Ball, the president of the Donors Trust and Donors Capital Fund, ‘said the organisation had no say in deciding which projects would receive funding. However, Ball told the Guardian last February that Donors offered funders the assurance their money would never go to Greenpeace’ (Goldberg 2013). Instead, they are committed to ‘Building a Legacy of Liberty.’29 Lawson Bader, Ball’s successor as president of both Donors Trust and Donors Capital Fund, was formerly president of the Competitive Enterprise Institute and vice president at GMU’s Mercatus Centre.30 In recent years, Donors Trust has received more than $3.2 million from the ‘Knowledge and Progress Fund,’ which is chaired by Charles Koch (Bennett 2012).31 In fiscal year 2014–2015, the Pope Foundation provided GMU’s Orwellian-named Institute for Humane Studies with $655,000.32 Doherty (2007, 409, 413, 416–417, 430) described the ‘bizarre gravitational shifting as Planet Koch adjusted everyone’s orbits, inclining them toward Wichita and then San Francisco which … became the center of Kochian libertarianism by the late 1970s.’ According to Caldwell, ‘With the recently awarded Koch grant,’ CHOPE’s ‘funding totals approximately $11 million.’33 Perhaps CHOPE is unaffected by David Koch’s ‘we withdraw funding’ ‘kind of control’ that accompanies

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Koch ‘academic’ grants (cited by Doherty 2007, 409). Or perhaps not. Caldwell and Montes’ (2014a, 1) ‘Friedrich Hayek and His Visits to Chile’ was ‘presented’ at a CHOPE ‘workshop at Duke University’ where none of its defects were apparently corrected. Caldwell is CHOPE’s Director. The University of Turin’s Giando­ menica Becchio—a CHOPE Fellow (2009–2010) and Visitor (2014– 2015)—presented ‘Austrian Economics and Development: the Case of Sudha Shenoy’s Analysis’ at the NYU ‘Colloquium on Market Institutions and Economic Processes’ before published it in the Review of Austrian Economics. Becchio (2018) hagiographically presents Shenoy as the seminal ‘fourth generation’ Austrian female economist who ‘claimed that any policymaking [emphasis added] as well as government’s intervention are either useless or dangerous, having two main dysfunctional effects, which are often interrelated; namely, make development slower (or even stop it), and increase corruption.’ In the Review of Austrian Economics, economic illiteracy is, it seems, combined with other types—she thanked ‘Mario Rizzo, Joseph Salerno, and … two anonimous [sic] referees.’ Documents on the University of San Francisco website led ‘Corporate Corruption of Science’ to conclude that NYU’s Rizzo was on the tobacco lobby’s ‘list of cash-for-comments economists.’34 According to Becchio (2017, 2018), ‘Following Hayek’s suggestions’ in The Road to Serfdom (1944), Shenoy ‘regarded interventionism as a way to a dangerous escalation towards corruption, illiberalism, and even totalitarianism.’ And ‘Following Hayek (1948), Shenoy’s aversion against any government intervention had a fundamental part in her own battle for true liberalism. Any other political framework will have two effects: to stop development and growth and to lead towards forms of totalitarianism … Shenoy defined the Rule of Law as a legal system grounded on a concept of selective justice.’ For her non-existent ‘Order of Liberty’ biography (which was listed as ‘forthcoming’ on her cv for almost three decades), Shenoy borrowed and refused to return—despite repeated requests—Hayek’s family heirlooms (Leeson 2015, chapter 2). After five years of studying undergraduate economics, Shenoy was awarded a lower second-class degree in

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economic history—below the conventional cut-off point for entry into graduate school. Only through ‘intervention’ by Hayek was she able to obtain lifetime employment—at the taxpayers’ expense—as a tenured academic at the University of Newcastle, Australia. Shenoy (2003) was ‘surprised by the reception’ to Hayek’s (1972) Tiger by the Tail The Keynesian Legacy of Inflation (which she edited): For months after, we had ‘tigers’ running through the financial press. Keynes’s unassailability died between the first and second editions, and I realized while preparing the second edition that I could now say anything I wanted [emphasis added]. The first had to be very cautious because Keynes was still very much alive.

John Maynard Keynes opposed inflation, and stagflation had been initiated by a long-time anti-Keynesian MPS member, Arthur Burns, Nixon’s Federal Reserve Chair (1970–1978) (Leeson 1999, 2003). According to Shenoy (2003), Stagflation was the ‘cause of Keynes’s decline. Apart from the Austrian theory, there was no intellectual way of dealing with it. So this was a big moment for the Hayekian theory.’ The Institute of Economic Affair’s John Blundell (2008) reported that ‘This was soon followed by membership of the MPS to which she was elected at the Montreux, Switzerland, meeting in 1972 aged just under 30. Her LSE friend Ed Feulner was also elected at that meeting aged just over 30.’ In an IEA press release on privatization, their employee (1970–1977), ‘Dr Sudha Shenoy,’ was listed as the authority to be contacted.35 Thrice, Caldwell (2004, 317, n34; 2005, 56; 2008, 701–702)— who examined Shenoy’s Ph.D. and recommended that it be passed— repeated her fraud. Tobacco is—and in the West, was—marketed minus the relevant knowledge of the relevant scientific community: addiction and health consequences; climate change scepticism is marketed by denying the validity of the overwhelming consensus of the relevant scientific community; and Becchio (2017, 2018) fails to mention Shenoy’s fraud (Leeson 2013, 202).

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Notes 1. Friedrich Hayek, interviewed by Jack High date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 2. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 3. https://ia601507.us.archive.org/34/items/FOIA7GMU2007Mercatus CenterFullinwiderProfessorship/FOIA%209%20GMU%202011% 20Mercatus%20Center%20Peter%20Boettke%20BB&T%20 Professorship%20Pay%20Increase.pdf. 4. https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/#id= ykkx0035. 5. https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/#id= ykkx0035. 6. http://www.energyandpolicy.org/richard-fink-the-koch-brothers-big-tobacco-man-behind-the-kochtopus-curtain/. 7. https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/#id= qznn0073. 8. https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/#id= nqcl0049. 9. Boehner was responding to a question from the audience after a public lecture at Notre Dame University Australia. 10. https://archive.nytimes.com/www.nytimes.com/imagepages/2010/09/ 12/us/politics/12boehner-graphic.html?action=click&contentCollection=Politics&module=RelatedCoverage&pgtype=article®ion=Marginalia. 11. https://www.justice.gov/civil/case-4. 12. https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/#id= zlkd0175. 13. https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/#id= yfcj0069. 14. https://www.youtube.com/watch?v=dUhX-Tt1vZM&feature=youtu. be. 15. http://apps.washingtonpost.com/g/documents/local/donor-agreementbetween-the-mercatus-center-and-george-mason-university-to-fund-afaculty-position/2930/.

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16. We also are at a state university [GMU] so we receive tax payer support as well in the interest of full disclosure. 17. https://ppe.mercatus.org/essays/living-bibliography-works-hayek. 18. https://acadgov.msu.edu/sites/default/files/content/Steering-Committee/ MIProsperityCenter-VisionStatement2006-03-07.pdf. 19. ‘The volume does not “conclude with a further brief discussion of Hayek, Bartley and Karl Popper on “justificationism” and the abuse of reason, also written by Leeson.’ There are two further chapters: Chapter 11, an ‘Interview with Stephen Kresge,’ and Chapter 12, written by Werner Erhard, the founder of Erhard Seminar Training. The chapter on justificationism and the abuse of reason was written by Rafe Champion’ (Leeson SHOE, 2 February 2014). 20. http://umanitoba.ca/faculties/health_sciences/medicine/units/chs/faculty_and_staff/fac_forget.html. 21. https://www.sourcewatch.org/index.php/Independent_Institute. 22. http://sciencecorruption.com/ATN172/00838.html. 23. https://www.jamesgmartin.center/2015/02/what-ive-learned-atthe-pope-center/. 24. ‘It is not surprising that the real scholar or expert and the practical man of affairs often feel contemptuous about the intellectual, are disinclined to recognize his power, and are resentful when they discover it. Individually they find the intellectuals mostly to be people who understand nothing in particular especially well and whose judgement on matters they themselves understand shows little sign of special wisdom. But it would be a fatal mistake to underestimate their power for this reason. Even though their knowledge may often be superficial and their intelligence limited, this does not alter the fact that it is their judgement which mainly determines the views on which society will act in the not too distant future. It is no exaggeration to say that, once the more active part of the intellectuals has been converted to a set of beliefs, the process by which these become generally accepted is almost automatic and irresistible. These intellectuals are the organs which modern society has developed for spreading knowledge and ideas, and it is their convictions and opinions which operate as the sieve through which all new conceptions must pass before they can reach the masses.’ 25. http://www.margaretthatcher.org/document/114609. Hayek Papers Box 27.6. 26. https://evolllution.com/author/george-leef/.

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27. 28. 29. 30. 31.

https://jwpf.org/grants/. http://jwpf.org/grants/focus-areas/education/. http://www.donorstrust.org/. http://www.donorstrust.org/news-notes/donorstrusts-new-ceo/. http://www.forbes.com/sites/lauriebennett/2012/03/31/tracking-kochmoney-and-americans-for-prosperity/#1d35731c1822. 32. https://jwpf.org/grants/. 33. https://sites.duke.edu/brucecaldwell/. Accessed 9 April 2018. 34. ‘There is no record of him actively providing witness or op-ed services to the tobacco industry.’ http://sciencecorruption.com/ATN182/ 01008.html. 35. MPS Archives Box 2.7.

Archival Insights into the Evolution of Economics (and Related Projects) Leeson, R. (1999). Keynes and the Keynesian Phillips Curve. History of Political Economy, 31(3), 494–509. Leeson, R. (Ed.). (2003). Keynes, Chicago and Friedman. London: Pickering and Chatto. Leeson, R. (Ed.). (2013). Hayek: A Collaborative Biography Part I Influences from Mises to Bartley. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (Ed.). (2015). Hayek: A Collaborative Biography Part II Austria, America and the Rise of Hitler, 1899–1933. Basingstoke, UK: Palgrave Macmillan.

References Apollonio, D., & Bero, L. (2007). The Creation of Industry Front Groups: The Tobacco Industry and ‘Get Government off Our Back.’ American Journal of Public Health, 97(3), 419–427. Becchio, G. (2017, October 30). Austrian Economics and Development: The Case of Sudha Shenoy’s Analysis. New York University’s Colloquium on Market Institutions and Economic Processes. Mimeo. http://as.nyu.edu/ content/dam/nyu-as/econ/documents/2017-fall/papers_fall-2017/colloquium/NYU_Shenoy_Becchio%20(1).pdf.

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Becchio, G. (2018, January 6). Austrian Economics and Development: The Case of Sudha Shenoy’s Analysis. Review of Austrian Economics. Online. https://doi.org/10.1007/s11138-017-0409-9. Bennett, L. (2012, March 31). Tracking Koch Money and Americans for Prosperity. Forbes. http://www.forbes.com/sites/lauriebennett/2012/03/31/ tracking-koch-money-and-americans-for-prosperity/#210bb7bc1822. Boettke, P. J. (2010a, January 25). Exclusive Interview. Peter Boettke: The Transformative Rise of Austrian Economics by Anthony Wile. Daily Bell. Boettke, P. J. (2010b). Reflections on Becoming an Austrian Economist and Staying One. In W. Block. (Ed.). I Chose Liberty. Auburn, AL: Ludwig von Mises Institute. Boettke, P. J. (2016, October 17). Ludwig von Mises the Academic. Foundation for Economic Education. https://fee.org/articles/ludwig-vonmises-the-academic/. Boettke, P. J. (2018a, February 14). Economists and the Public. Coordination Problem. http://www.coordinationproblem.org/. Boettke, P. J. (2018b). Living Bibliography of Works on Hayek. Mercatus Centre. https://ppe.mercatus.org/essays/living-bibliography-works-hayek. Blundell, J. (2008, September 19). Sudha R. Shenoy, Fondly Remembered. IEA.  https://iea.org.uk/blog/sudha-r-shenoy-1943-2008-rememberedfondly. Brulle, R. (2014). Institutionalizing Delay: Foundation Funding and the Creation of U.S. Climate Change Counter-Movement Organizations. Climatic Change, 122(4), 681–694. Buchanan. J. (1992). I Did Not Call Him ‘Fritz.’ Personal Recollections of F.A. v Hayek. Constitutional Political Economy, 3(2), 129–135. Caldwell, B. (2004). Hayek’s Challenge: An Intellectual Biography of F.A. Hayek. Chicago: University of Chicago Press. Caldwell, B. (2005). Recovering Popper: For the Left? Critical Review, 17(1– 2), 49–68. Caldwell, B. (2007). Introduction. In The Road to Serfdom Texts and Documents the Definitive Edition. Chicago: The University of Chicago Press. Caldwell, B. (2008). Hayek on Mill. History of Political Economy, 40(4), 689–704. Caldwell, B. (2014). Center for the History of Political Economy 2013–2014 Annual Report (CHOPE Summer). http://hope.econ.duke.edu/sites/hope. econ.duke.edu/files/Summer%202014%20Annual%20Report.pdf.

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Caldwell, B., & Montes, L. (2014a, August). Friedrich Hayek and His Visits to Chile (CHOPE Working Paper No. 2014-12). Caldwell, B., & Montes, L. (2014b, September 26). Friedrich Hayek and His Visits to Chile. Review of Austrian Economics. First online. Caldwell, B., & Montes, L. (2015). Friedrich Hayek and His Visits to Chile. Review of Austrian Economics, 28(3), 261–309. Cullity, J. (1991, August 2). Preserving Memory: Newark and Rutgers in the 1960’s and 1970’s. An Interview with John Cullity. Conducted by Gilbert Cohen. https://rucore.libraries.rutgers.edu/rutgers-lib/40839/. Doherty, B. (2007). Radicals for Capitalism: A Freewheeling History of the Modern. American Libertarian Movement. New York: Public Affairs. Ebeling, R. M. (2013, February). Review of Hayek: A Collaborative Biography, Part I: Influences, from Mises to Bartley. EHNet. http://eh.net/ book_reviews/hayek-a-collaborative-biography-part-i-influences-from-mises-to-bartley/. Egan, M. (2016, September 15). Heavy Smoker John Boehner Joins Tobacco Company’s Board. CNN Money. http://money.cnn.com/2016/09/15/ investing/john-boehner-smoking-joins-tobacco-company/. Evans, K. (2010, August 28). Spreading Hayek, Spurning Keynes. Professor Leads an Austrian Revival. Wall Street Journal. Finer, H. (1945). The Road to Reaction. Chicago: Quadrangle Books. Goldberg, S. (2013, December 21). Conservative Groups Spend Up to $1bn a Year to Fight Action on Climate Change. Guardian. http://www.theguardian.com/ environment/2013/dec/20/conservative-groups-1bn-against-climate-change. Hardin, J. (2015, May 26). The Campaign to Stop Fresh College Thinking. Wall Street Journal. https://www.charleskochfoundation.org/news/ckfs-johnhardin-publishes-op-ed-wall-street-journal-academic-freedom/. Hayek, F. A. (1944). The Road to Serfdom. Chicago: University of Chicago Press. Hayek, F. A. (1948). Individualism and Economic Order. London: Routledge. Hayek, F. A. (1949). The Intellectuals and Socialism. University of Chicago Law Review, 16(3), 417–433. Hayek, F. A. (1972). Tiger by the Tail the Keynesian Legacy of Inflation (S. Shenoy, Ed.). London: Institute of Economic Affairs. Hayek, F. A. (1978). Oral History Interviews. Centre for Oral History Research, University of California, Los Angeles. http://oralhistory.library.ucla.edu/). Hayek, F. A. (1984). Exclusive Interview with F.A. Hayek (Cato Policy Report May–June). https://www.cato.org/policy-report/mayjune-1984/exclusiveinterview-fa-hayek.

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Hülsmann, J. G. (2007). Mises: The Last Knight of Liberalism. Auburn, AL: Ludwig von Mises Institute. Kotch, A. (2016, June 24). Inside Charles Koch’s Plot to Hijack Universities Across America and Spread His Radical ‘Free-Market’ Propaganda. Alternet. https://img.alternet.org/investigations/inside-charles-kochs-plot-hijackuniversities-across-america. Quinlan, C. (2016, May 13). Proof That Koch-Backed Professors Are Using Universities To Spread Right-Wing Policies. Think Progress. https://thinkprogress.org/proof-that-koch-backed-professors-are-using-universities-tospread-right-wing-policies-5457ffb61ae9/. Larimer, S. (2018, April 24). George Mason Gets Koch Money. Now, this Group Wants to Know More. Washington Post. https://www. washingtonpost.com/local/education/george-mason-gets-koch-money-now-this-group-wants-to-know-more/2018/04/24/dfc7ccda-4766-11e8827e-190efaf1f1ee_story.html?utm_term=.fc3eb7443d10. Lipton, E. (2010, September 11). A G.O.P. Leader Tightly Bound to Lobbyists. New York Times. https://www.nytimes.com/2010/09/12/us/politics/12boehner.html?pagewanted=all. Nicholas, H. G. (Ed.). 1981. Washington Dispatches 1941–45 Weekly Political Reports from the Washington Embassy. Chicago: University of Chicago Press. Shaw, J. (2018, March 21). How One State Is Fixing Higher Education: Will Other States Follow North Carolina’s Example? Heartland Institute. https://www.heartland.org/news-opinion/news/how-one-state-is-fixinghigher-education. Shenoy, S. (2003). An Interview with Sudha Shenoy. Austrian Economics Newsletter, Winter, 1–8. http://mises.org/journals/aen/aen23_4_1.pdf.

3 1–15: Residual Reverence Towards the Second Estate Robert Leeson

1 Recruitment to the London School of Economics 1. Four fortuitous events distanced Hayek from his family’s promotion of the Nazis: a romantic involvement with a Jewish girl (Hennecke 2000, 33; Scharrenborg 2015); a favourable early exposure to the Jewish-born J. Herbert Fürth; his sponsorship by the Jewish-born Ludwig ‘von’ Mises; and his relocation to London before the Austrian civil war and Nazi takeover (1934–1938). The Ahnenpaß (ancestor passport) was the Nazi certification of ‘Aryan lineage’: the Law for the Restoration of the Professional Civil Service excluded those with one non-Aryan parent or grandparent.

R. Leeson (*)  Stanford University, Stanford, CA, USA e-mail: [email protected] R. Leeson  Notre Dame Australia University, Fremantle, WA, Australia © The Author(s) 2018 R. Leeson (ed.), Hayek: A Collaborative Biography, Archival Insights into the Evolution of Economics, https://doi.org/10.1007/978-3-319-95219-2_3

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Genealogical ‘research’ flourished under the Nazis. Hayek (1978) described his cousins, the Wittgensteins, as ‘three-quarters Jewish’1: he was determined to establish his own Aryan ancestry. According to Hayek (1994, 61–62), accents could reveal religious origins. ‘Von’ Hayek (9 September 1939) informed the BBC that he had discovered a ‘blemish’ in their broadcast into Germany: a ‘very unpleasant voice’ that ‘will inevitably be taken by most German listeners as that of a Jew and in consequence deprived the broadcast, and even what preceded it, of most of its effect. I am personally convinced that it actually was a Viennese Jew speaking.’ ‘Von’ Hayek (15 October 1939) proposed the establishment of a Propaganda Commission: it was however ‘important, in view of the prejudices existing not only in Germany, not to have a person of Jewish race or descent on the Commission’ (cited by Leeson 2015a, chapter 2). At the University of Vienna, the Jewish people in Hayek’s ‘mixed group’ constantly discussed ‘Has he a Jewish accent?’—but Hayek (1994, 61–62) was ‘not allowed to speak about Jewish things.’ His curiosity about his ancestry evolved out of an overheard ­conversation about his family being Jewish, while staying in the home of Eugenie Schwarzwald, who ran a progressive school which the second Mrs. Hayek, Helene Bitterlich, attended: In Vienna there was a certain amount of speculation in the Jewish community [about whether my family was Jewish]. One of the things that amused me: My younger brother Heinz, who in every other respect had a face that could be much less Jewish than mine, actually had dark hair, black hair; and it just so happened that in one of the summers I spent in the Schwartwalds’ summer home, I happened to overhear a conversation among the Jewish circle, when my brother arrived, to the effect that he looked Jewish. My own curiosity about this led me to spend a great deal of time researching my ancestors. I have full information for five generations in all possible directions … so far back as I can possibly trace it, I evidently had no Jewish ancestry whatsoever.

Dr. Heinrich (Heinz) ‘von’ Hayek spent the Third Reich injecting chemicals into freshly executed victims of the Nazis. According to one of his colleagues, his victims may not have been dead when his

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‘experiments’ began. He was a Scharführer (non-commissioned officer) in the Sturmabteilung (SA, Storm Detachment, Assault Division or Brownshirts), and from 1934 to 1935, Führer in the Kampfring der Deutsch-Österreicher im Reich (Hilfsbund ), an organization of GermanAustrians living in Germany that displayed a Swastika in its regalia (Hildebrandt 2013, 2016). Interned in the Würzburg de-Nazification camp—in the American, rather than the Russian sector—Heinrich, after a few interrogations, was shown a copy of the Reader’s Digest version of The Road to Serfdom. When Heinz identified the author as his brother, he was told: ‘You are free to go’ (cited by Blundell 2007, 146– 147). A close personal—as opposed to family—connection to the Nazis may have disqualified his brother, from consideration as a ‘right wing’ Nobel Prize balance to the ‘left wing’ Gunnar Myrdal. Myrdal had been co-chair of the International Commission of Inquiry into US War Crimes in Indochina (Barber 2008, 160); post-Vietnam America, Myrdal (1973, 278) insisted, needed to go through ‘a catharsis in order to be at peace with itself.’ In contrast, Hayek (1992a [1945], 223) promoted war crimes: ‘shooting in cold blood’ (Chapter 4). According to Hayek (1978), the composition of the interwar Viennese intellectual groups was ‘connected with what you might call the race problem, the anti-Semitism. There was a purely non-Jewish group; there was an almost purely Jewish group; and there was a small intermediate group where the two groups mixed.’2 Hayek’s (1994, 61) own family was in ‘the purely Christian group; but in the university context I entered into the mixed group.’ The phrase ‘purely Christian’ appears to mean proto-Nazi or anti-Semitic. Hayek’s childhood friend, Fürth (20 April 1984), informed his brother-in-law, Gottfried Haberler, that Hayek’s family ‘adhered to Nazism long before there was an Adolf Hitler.’3 Fürth (23 March 1992) also told Paul Samuelson that Hayek’s father was the president of a ‘highly nationalistic society of “German” physicians’ who competed with the politically neutral general Medical Association. Hayek’s mother was ‘equally nationalistic, and mad at me because I had “seduced” her son from nationalism.’4 Hayek explained to Charlotte Cubitt (2006, 17, 51) that his mother was ‘converted to Nazism by a woman friend’; Hitler’s success was due to his appeal to women, ‘citing

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his mother as another example.’ To ‘his certain knowledge,’ Nazism ‘had been actively upheld [in Austria] long before it had reached Germany.’ Hayek’s initial Nazi trajectory appeared to be unpromising. Hayek (1978) had been introduced to Austrian economics through Othmar Spann—‘The Philosopher of Fascism’ (Polanyi 1934, 1935)—who, ‘being a young and enthusiastic man, for a very short time had a constant influence on all these young people. Well, he was resorting to taking us to a midsummer celebration up in the woods, where we jumped over fires and—It’s so funny [Laughter].’5 By 1928, Spann sought to become the official ideologue of the Austria Heimwehr (‘Home Defence’), a private military organization similar to the Nazi SS (Schutzstaffel or ‘Protective Front’); in 1929, he delivered the inaugural address to the League of Struggle for German Culture in front of Hitler, Alfred Rosenberg and other Nazis (Wistrich 2012, 236). In the Journal of Political Economy (JPE ), Frank Knight (1931) noted that Spann affects to deduce … the political doctrine of fascism … from his organic economics and sociology and for which he has become ‘notorious’ among those who profess to dislike it. (See also Landheer 1931)

Through Spann, Hayek (1978) was directly exposed to the PanGermanist revolt of young upper-class men who identified nationality with race. Hayek’s (1978) younger brother, Erich, was ‘full time drawn into that circle’6; according to Mises (1944, 94–96), such people became ‘obedient and faithful slaves of Hitler.’ Heinz had initially been barred from post-war university employment under de-Nazification laws (Cubitt 2006, 51)—a similar fate would surely have befallen his elder brother. But in 1921, after a period in which Hayek (1994, 54) was regarded as ‘one of [Spann’s] favourites, he in effect turned me out of his seminar by telling me that by my constant carping criticism I confused the younger members.’ Using his dissembling word, ‘curious,’ Hayek (1978) described Spann as being similar to himself: ‘a very curious mind, an original mind.’7 2. Hayek’s (1978) second stroke of luck was that—having been rejected by Spann—he was embraced by Friedrich ‘von’ Wieser:

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a most impressive teacher, a very distinguished man whom I came to admire very much, I think it’s the only instance where, as very young men do, I fell for a particular teacher. He was the great admired figure, sort of a grandfather figure of the two generations between us. He was a very kindly man who usually, I would say, floated high above the students as a sort of God.8 And he had very little personal contact with his students, except when, as I did, one came up afterwards with an intelligent question. He at once took a personal interest in that individual … Personally I ultimately became very friendly with him; he asked me many times to his house. How far that was because he was a contemporary and friend of my grandfather’s, I don’t know.9 I first flattered myself that [it was because] I had gone up to him once or twice after the lecture to ask intelligent questions, but later I began to wonder whether it was more the fact that he knew I was against some of his closest friends. [Laughter]10

Fürth (26 February 1992) reported to Haberler, that Wieser was anti-Semitic.11 According to Eugen-Maria Schulak and Herbert Unterköfler (2011, 42), Wieser was labelled a ‘Fascist’ because his magnum opus Gesetz der Macht (The Law of Power, 1983 [1926]) contains ‘anti-Semitic statements and an abstract Führerkult … as well as sources indicating the contrary.’12 But he was not so clearly identified with ‘Fascism’ as Spann (Leeson 2017a). 3. Hayek’s third stroke of luck was that immediately after graduation, he had the ‘good fortune’ to be employed by ‘von’ Mises, who became his sponsor (cited by Hutchison 1994, 214). 4. Referring to his January 1931 London School of Economics (LSE) lectures which became Prices and Production (2012 [1931]), Hayek (1978) explained that he had been ‘extremely lucky. In fact, I owe my career very largely to a fortunate accident.’ He had been working on a contribution to a great textbook on money was a part of the history of money and monetary theory. So I arrived in London to lecture on monetary theory better informed about the English monetary discussions of the nineteenth century than anyone in my audience, and the great impression I made was really knowing all about the discussions at the beginning of the nineteenth century, which even [LSE Professor T.E.] Gregory didn’t know

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as intimately as I did at that time. Of course, nobody knew why I had this special knowledge, but it became extremely useful. The first lecture of Prices and Production really gives a sketch of the development of these ideas.13

5. His first American trip (1923–1924) had serendipitous professional consequences. During his stay, Hayek read Wesley Clair Mitchell’s (1916) ‘Role of Money in Economic Theory’ and on his return to Vienna wrote to Mitchell asking for a copy (3 June 1926). Mitchell’s essay had stimulated him to attempt to provide some of the ‘missing links’ between orthodox economic theory and theory that was applicable to the processes of ‘modern’ economic life.14 During Hayek’s visit, William Trufant Foster and Waddill Catching (1923) published Money, which Hayek (3 June 1926) informed Mitchell was ‘admirable.’15 Hayek (1978) ‘knew I could have started on in an assistantship or something for an economic career, I didn’t want to. I still was too much a European and didn’t the least feel that I belonged to this society.’16 His exposure to Foster and Catching assisted the start of his academic career. Hayek (1978) recalled: while I was in America, I got interested in the writings of Foster and Catchings, and there was then this competition for the best critique of Foster and Catchings, in which I did not take part. I afterwards regretted this, because I thought the products were all so poor that I could have done better. When I had to give my formal lecture for being admitted to the honorary position of Privatdozent, I chose a critique of Foster and Catchings on the title ‘The Paradox of Saving’ for that lecture. I published it in German, and Lionel Robbins read that particular essay, which led him to invite me to give the lectures in London. In those lectures I drew on what I had done for my textbook on money, and of course the move to—Well, then I was asked by Robbins—I think it was even before, or was it when I was giving the lectures?—to do the review [1931; 1932] of [John Maynard] Keynes’s [1930] Treatise.17

6. Hayek’s (1978) business-cycle model was still at an elementary stage:

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The ideas themselves were also due almost to an accident. When I came back from the United States in ‘24, I wrote an article on American monetary policy since the Federal Reserve Act, which had a passage suggesting that an expansionist credit policy leads to an overdevelopment of capital goods industries and ultimately to a crisis. I assumed that I was just restating what Mises was teaching, but Haberler, who was as much a pupil of Mises, said, ‘Well, it needs explanation; that is not sufficient.’ So I first put in that article a very long footnote—about [number] 25—sketching an outline of what ultimately became my explanation of industrial fluctuations.18

This premature state of Hayek’s (1978) business-cycle theory facilitated rhetorical clarity: At this moment, when I had in my mind a clear conception of the theory, but hadn’t worked it out in detail, I uniquely had the faith in my being able to give a simple explanation without being aware of all the difficulties of the problem. And in this fortunate position, I was asked to give these lectures. So I gave what I still admit is a particularly impressive exposition of an idea, which if I had become aware of all the complications, I couldn’t have given. A year later it probably would have been a highly abstruse argument which nobody in the audience would have understood. But at this particular fortunate juncture of my development, I was able to explain it in a way which impressed people, in spite of the fact that I still had considerable difficulties with English.19

7. Using his dissembling word, ‘curious,’ Hayek (1978) described the residual, neo-feudal ‘spontaneous’ order: ‘the curious thing is that in the countryside of southwest England, the class distinctions are very sharp, but they’re not resented. [Laughter] They’re still accepted as part of the natural order.’20 For Ayn Rand’s benefit, ‘von’ Mises (23 January 1958) described a manifestation of this ‘spontaneous’ order: ‘You have the courage to tell the masses what no politician told them: you are inferior and all the improvements in your conditions which you simply take for granted you owe to the effort of men who are better than you.’21 And in Liberalism in the Classical Tradition, Mises (1985 [1927], 115) provided

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the foundations of the ‘spontaneous’ order: ‘There is, in fact, only one solution: the state, the government, the laws must not in any way concern themselves with schooling or education. Public funds must not be used for such purposes. The rearing and instruction of youth must be left entirely to parents and to private associations and institutions. It is better that a number of boys grow up without formal education than that they enjoy the benefit of schooling only to run the risk, once they have grown up, of being killed or maimed. A healthy illiterate is always better than a literate cripple.’ For much of its history, America was peopled by those escaping from—and concerned to create an alternative to—the European ‘spontaneous’ order. The son of the Comte and Comtesse de Crèvecœur migrated to America, became naturalized in New York as John Hector St. John (1735–1813), and published ‘What is an America’ in Letters from an American Farmer (1997 [1782], 40) in which he observed that the American ‘is arrived on a new continent; a modern society offers itself to his contemplation, different from what he had hitherto seen. It is not composed, as in Europe, of great lords who possess every thing and a herd of people who have nothing. Here is no aristocratical families, no court, no kings, no bishops, no ecclesiastical domination, no invisible power giving to a few a very visible one.’ Seven years later, Kaiser Josef II elevated the Hayeks from the Third to the Second Estate and the French Revolution began. St. John joined the Société des Amis des Noirs (Society of the Friends of the Blacks), while Hayek (1978) had a visceral dislike of ‘negroes,’ ‘detestable’ Indians, and the ‘fundamentally dishonest’ ‘people of the eastern Mediterranean,’ including Jews.22 When confronted with the prospect of having to deal with African Americans, Hayek (5 March 1975) informed Neil McLeod at the Liberty Fund that he wished to find an alternative to his ‘gone negro’ Chicago bank.23 Hayek (1978) told James Buchanan that the ‘spontaneous’ order would have to be reconstructed ‘by several experiments in new amendments in the right direction, which gradually prove to be beneficial, but not enough, until people feel constrained to reconstruct the whole thing.’24 This involved changing institutions—for example,

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the club-based voting system of the ‘Model Constitution’ that Hayek (1984, 382–405) sought to persuade General August Pinochet to adopt. According to the Daily Telegraph, when Prince Charles of England ‘was forced to sit down and thumb his way through the pages of Burke’s Peerage to find a suitable candidate’ for marriage, Lucia Santa Cruz introduced ‘him to the ways of love’: Pressure from above, and from public opinion, dictated that as heir to the throne he should secure a favourable marriage, meaning at that time either a foreign princess or the daughter of a senior British aristocrat. (Wilson 2013)

In Chile in 1981, Hayek complained to Lucia Santa Cruz about early influences: Friedman grew up in the tradition of the [National] Bureau of Economic Research [NBER] under Mitchell’s influence. He maintains that since we have created institutions, we can change them as we want. This is an intellectual mistake. It is an error. It is false. In this sense, Milton is more constructivist than I am. (Cited by Caldwell and Montes 2014a, 50; 2014b; 2015, 303–304)

During his first American visit, the ‘eager young men’ of the NBER ‘swore’ by Mitchell: Hayek (1992a [1963], 35–36) ‘was drawn into that circle, and I learned a great deal about descriptive statistical work; in fact, I owe part of my later career to the fact that I learned the technique of time-series analysis at that time and was the only person in Austria who knew it. So I became director of that new institute of business-cycle research.’25 In 1927, Mises established the Austrian Institut für Konjunkturforschung (Austrian Institute for Economic Research) ‘mainly to provide Hayek with a suitable position’ (Hülsmann 2007, 454, 566, 577). In 1927, Hayek (1994, 89) was introduced to the London and Cambridge Economic Services and was the ‘first to organize a meeting of Konjunkturinstituten in Vienna, and then London repeated this and of course invited me.’ Hayek (26–28 June 1928) participated in the Conference of Economic Services;

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William Beveridge, the LSE Director and Chairman of London and Cambridge Economic Services, was elected Chairman of the first session on ‘Monetary Situation and Policies.’26 8. Hayek’s family connections may have enhanced his reputation in England. Referring to Hayek’s cousin, Ludwig Wittgenstein, Keynes (18 January 1929) informed his wife, Lydia Lopokova, that ‘God has arrived’: Wittgenstein was an ‘almost legendary figure among the Cambridge elite’ (Monk 1991, 255–256). In spring 1928, Dennis Robertson took Hayek (1992a [1977], 178) for a walk through the Trinity College Fellow’s Gardens, where they encountered Wittgenstein. In 1927, Allyn Abbott Young (1876–1929) had been recruited by Beveridge to fill chair vacated by the retirement of Edwin Cannan (1861–1935). In March 1929, Young (who had also attended the June 1928 Conference of Economic Services) died of pneumonia during an influenza epidemic. In December 1930, Robbins proposed to Beveridge that Jacob Viner (1892–1970) be offered the vacant chair—but Viner declined. Beveridge invited Hayek (1899–1992) to give the University of London Advanced Lectures in Economics (27–30 January 1931), which, according to Robbins (1971, 127), were a ‘sensation.’ Hayek and Robbins first corresponded after Hayek had accepted the lecture invitation; Beveridge then proposed that Hayek be offered the vacant chair; Robbins consulted with Gregory before a decision was made (Howson 2011, 7). 9. In October 1930, Robbins made a passionate defence of free trade to the Committee of Economists of the Economic Advisory Council in the face of what he must have regarded as Cambridge vacillations by Keynes. According to Robbins (1971, 152), Keynes ‘intimated … that my presence was no longer desired at the final meeting of the Committee.’ Keynes published his tariff proposals in March 1931 (Howson 2011, 7); in May 1931, Beveridge (1931) and a group of LSE economists including Robbins, Arnold Plant, George Schwartz and John Hicks restated the free-trade cause in Tariffs: the Case Examined. In the previous few months, Plant and Schwartz had just been recruited to the LSE, and Hicks had been promoted to lecturer (Howson 2011, 170; Robbins 1971, 126; Hayek 1946, 23–24). The free-trade connection may have played a significant part in the decision to recruit Hayek to the LSE.

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A formal offer was sent to Hayek on 27 April 1931 (Howson 2011, 7). Shortly afterwards, Oskar Morgenstern told Hayek in the elevator in the Vienna Chamber of Commerce elevator (in the building where the Institute then had its offices) ‘We are going to enter the office, you are going to look through your mail, and you will find a letter inviting you to be a professor at the London School.’ After ‘they both laughed,’ and after opening his mail, ‘not saying a word, Hayek handed the [offer] letter to Morgenstern, and they looked at each other in a chilling silence’ (Ebeling 2001). Hayek (1994, 78) arrived in London on 22 September 1931 to begin a one-year Visiting Professorship.27 The ‘minutes of the board meeting at which Morgenstern was appointed as Hayek’s successor make it clear that this was considered a temporary assignment,’ since Hayek’s appointment at the LSE was ‘expected to be for no more than a year or two’ (Ebeling 2001). The Tooke Professorship of Economic Science and Statistics was revived for Hayek on 1 August 1932.28

2 ‘Free’ Market ‘Intellectuals’: Recruitment Through ‘Specious’ Visions 10. Aristocratic Austrians appear exotic.29 As Hayek (1978) perceptively noted, ‘there are certainly many ordering principles operating in forming society, and each is of its own kind.’30 In ‘Hayek the Answer Man,’ the Washington Post reported that he ‘is everything you want an 83-yearold Viennese conservative economist to be. Tall and rumpled. A pearl stickpin in his tie. A watch chain across his vest, even though he wears a digital on his wrist. An accent which melds German Z’s with British O’s.’ With ‘lovely aristocratic ease,’ he became a ‘favorite of conservative economists from Irving Kristol to William Buckley.’ While Hayek described the ‘spontaneous formation of an order’ as ‘extremely complex structures’ and the market as ‘an exo-somatic sense organ,’ the staff of the Heritage Foundation ‘hover around him with a combination of delight and awe that makes them seem like small boys around a football hero’ (Allen 1982).

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Armen Alchian explained to Hayek (1978): When I read [Fritz Machlup’s] work I can see the man talking, I can hear him, just by the words that come out. And somewhat similarly with you, when I read your work, I can see you standing there talking, because the sentences of your written material are very much like your oral sentences. They are well phrased, well put together. The first time I ever heard you–I think maybe it was at [the Mont Pelerin Society meeting at] Princeton in maybe ‘57; I’m not sure where–you got up and gave a spontaneous lecture, and all I could say was, ‘I don’t know what he was saying, but how can he phrase that so beautifully, so elegantly?’ You’ve always done that; that’s a remarkable talent that some have. How did you develop it, or was it just natural?31

11. To Austrian ‘UnAmericans,’ Vienna is the ‘City of Dreams’ (Leonard 2011, 83, 122). Hayek received an anonymous letter (from the academic fraud, Sudha Shenoy; 23 July 1975) which quoted his opening remarks at the ‘second’ revivalist conference (June 1975): ‘why economists with no geographical connection with Vienna should nevertheless choose to call themselves Austrian.’ The letter explained that for conference participants spiritually and intellectually Vienna will always be our home: and we will always return to the charge against the forces of macro-darkness now threatening to overwhelm the world, carrying aloft the intellectual flag of Austria-Hungary … we still love you: and we feel that by continued association with us, we may yet show you the light and truth of anarcho-Hayekianism … And so, ladies and gentlemen, I give you two toasts to victory in the future, and to the best legacy of Vienna to the world, Professor Hayek [emphases in original].32

Obsequious and devious Austrian devotees, such as Murray Rothbard (1973), regretted that We could not, alas, recapture the spirit and the breadth and the eru-dition; the ineffable grace of Old Vienna [emphasis added]. But I feverently hope that we were able to sweeten his days by at least a little … But oh, Mises, now you are gone, and we have lost our guide, our Nestor, our friend. How will we carry on without you? But we have to carry on,

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because anything less would be a shameful be-trayal of all that you have taught us, by the example of your noble life as much as by your immortal works. Bless you, Ludwig von Mises, and our deepest love goes with you.

In England, Hayek also discovered this ineffability (a taboo that prohibits the use of language). Using one of his dissembling words, Hayek (1978) stated: ‘the curious thing is that in the countryside of southwest England, the class distinctions are very sharp, but they’re not resented [Laughter]. They’re still accepted as part of the natural order.’33 When asked ‘What is it about you that makes you feel comfortable with the British?’ Hayek replied: The strength of certain social conventions which make people understand what your needs are at the moment without mentioning them … The way you break off a conversation. You don’t say, ‘Oh, I’m sorry; I’m in a hurry.’ You become slightly inattentive and evidently concerned with something else; you don’t need a word. Your partner will break off the conversation because he realizes without you saying so that you really want to do something else. No word need to be said about it … I felt at home among the English because of a similar temperament … at the moment I arrived in England, I belonged to it.34

12. Hayek (1976, 189, n25) knew that he was operating in an environment in which the quasi-religious aura surrounding neo-feudal status still lingered-on, but with diminished reverence. As an aristocratic Austrian he was able to lord-it-over the socially deferential; while knowing that his middle-class British children could not (at least to the same extent). In 1940, he was offered the opportunity sending his children to relative safety: this obliged him to consider the ‘relative attractiveness of social orders as different as those of the USA, Argentina and Sweden …’ For himself, with a developed personality, ‘formed skills and tastes, a certain reputation and with affiliations with classes of particular inclinations,’ the Old World was optimal; but for the sake of my children who still had to develop their personalities, then, I felt that the very absence in the USA of sharp social distinctions which would favour me in the Old World should make me decide for

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them in the former. (I should perhaps add that this was based on the tacit assumption that my children would there be based with a white not with a coloured family).

13. Llewellyn Rockwell Jr. (2013, 96–98), the founder of the Ludwig von Mises Institute, described the process by which Hayek’s co-leader of the fourth-generation leader of the Austrian School constructed Truth: ‘The scene was recalled to me the way miracles are described in the Gospels’ (Chapter 1). Again using one of his dissembling words, Hayek (1978) reflected: I am in a curious conflict because I have very strong positive feelings on the need of an ‘un-understood’ moral tradition, but all the factual assertions of religion, which are crude because they all believe in ghosts of some kind, have become completely unintelligible to me. I can never sympathize with it, still less explain it.

In response, Robert Chitester encouraged Hayek to penetrate beneath the veil of the ‘free’ market religion that he had constructed: That’s fascinating because one of the things that has occurred to me—it’s an irritant, a frustration–because of my own personal desires to communicate certain precepts, is that the sense that motivates the ‘religious’ person is something that is very powerful. In a way, if one could find a way to use that motivation as a basis of support and understanding for, say, the precepts of a liberal free society, it could be extremely effective.

Hayek (1978) sidestepped the question: In spite of these strong views I have, I’ve never publicly argued against religion because I agree that probably most people need it. It’s probably the only way in which certain things, certain traditions, can be maintained which are essential. But I won’t claim any particular deep insight into this. I was brought up essentially in an irreligious family. My grandfather was a zoologist in the Darwinian tradition. My father and my maternal grandfather had no religious beliefs. In fact, when I was a boy

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of I suppose eight or nine, I was presented with a children’s Bible, and when I got too fascinated by it, it somehow disappeared [Laughter]. So I have had little religious background, although I might add to it that having grown up in a Roman Catholic family, I have never formally left the creed. In theory I am a Roman Catholic. When I fill out the form I say ‘Roman Catholic,’ merely because this is the tradition in which I have grown up. I don’t believe a word of it. [Laughter]

Chitester tempted Hayek with a rephrase: ‘Do you get questions about religion? I would assume a lot of people confuse your interest in a moral structure with religion.’ Hayek (1978) replied by referring to the thirty-five-year-old Shenoy: Very rarely. It so happens that an Indian girl, who is trying to write a biography of myself, finally and very hesitantly came up with the question which was put to Faust: ‘How do you hold it with religion?’ [Laughter] But that was rather an exceptional occasion. Generally people do not ask. I suppose you understand I practically never talk about it. I hate offending people on things which are very dear to them and which doesn’t do any harm.

Chitester pushed further: ‘Doesn’t your thinking in terms of a moral structure–the concept of just conduct–at least get at some very fundamental part of religious precepts?’ Hayek (1978) then described the religious structure of his ‘knowledge’: ‘Yes, I think it goes to the question which people try to answer by religion: that there are in the surrounding world a great many orderly phenomena which we cannot understand and which we have to accept. In a way, I’ve recently discovered that the polytheistic religions of Buddhism appeal rather more to me than the monotheistic religions of the West. If they confine themselves, as some Buddhists do, to a profound respect for the existence of other orderly structures in the world, which they admit they cannot fully understand and interpret, I think it’s an admirable attitude.’35 Austrians cling tenaciously to what even fellow ‘free’ market advocates detect to be a religion. Arnold Harberger (1999, 2000) observed:

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There was a great difference in focus between Hayek (the Austrians) and Chicago as a whole. I really respect and revere those guys. I am not one of them, but I think I once said that if somebody wants to approach economics as a religion, the Austrian approach is about as good as you can get. If a person like myself is giving a long, two-hour seminar, and there are a bunch of faithful Austrians in the audience and I happen to deviate from something that derives from these first principles, maybe just giving a side remark doesn’t matter, but they will come and pounce on me after this. They’d say, ‘How could you dare do such a thing? How could you support evil? or… socialism.’

According to Harberger (2000), Chicagoans didn’t teach ideology, or what I call the Austrian side of economics, economics as a religion, but rather economics as a science, so our vision—certainly my own vision, which I believe is shared by nearly all or all of my colleagues at Chicago—is that the forces of the market are just that: They are forces; they are like the wind and the tides; they are things that if you want to try to ignore them, you ignore them at your peril, and if you understand that they are there, working their way, if you find a way of ordering your life that is compatible with these forces, indeed which harnesses these forces to the benefit of your society, that’s the way to go.

In contrast, for the Austrians: ‘It’s as if there is a very pretty but highly complex picture out there, which is perfectly harmonious within itself, you see, and if there’s a speck where it isn’t supposed to be, well, that’s just awful for the Austrians. Well, us guys who live looking at the real world, which is always a mess, you see, and nothing ever fits perfectly, so for us, it’s kind of a different world.’ As if to illustrate Harberger’s conclusion: in ‘Game Theory and the Dark Side of Envy,’ Richard Ebeling (2011) lamented that Robert Leonard’s (2010) Von Neumann, Morgenstern and the Creation of Game Theory revealed how Morgenstern increasingly turned against his ‘Austrian’ roots, ridiculing in print Mises’s views on economic theory and policy, and telling his various economist friends that he considered F. A. Hayek’s work

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on money and business cycles to be ‘worthless’—some of the very contributions that resulted in Hayek being awarded the Nobel Prize in Economics in 1974! Even worse, after 1934, with Hayek now a professor at the London School of Economics, and Mises teaching in Geneva, Switzerland, Morgenstern attempted to portray himself as the ‘leader’ of the Austrian School in an Austria that was now a fascist-type authoritarian dictatorship. He worked as a senior advisor to the Austrian government, often offering policy advice far removed from a free market perspective. And in his 1934 book, The Limits of Economic Policy, he expressed impatience with democratic government compared to an authoritarian system. (When the book appeared in English in 1937, he deleted its anti-democratic passages.) In addition, Leonard points out that Morgenstern’s diary from this period is sprinkled with often heavily anti-Semitic sentiments, in spite of the fact that many of the members of the Austrian School at this time were Jewish (including Mises), and who had been among those encouraging and supportive of his own work and professional advancement.

Some Austrians illustrate Leon Festinger’s dictum that ‘Humans are not a rational animal, but a rationalizing one.’ Because Mises and Hayek legitimized argumentum ad hominem, Austrians attribute the reporting of adverse evidence to personality defects. Ebeling (2011) had the ‘privilege’ of having Morgenstern as a professor at New York University, just before his death in 1977. He was an excellent lecturer, and very generous with his time to share his ideas and memories of the ‘old Vienna days,’ with someone interested in the history of the Austrian School. This is what made Leonard’s book so much of a shock. It shows an unflattering, dark side of a fascinating man. A man who, at least during that earlier period between the two World Wars, too frequently demonstrated envy, arrogance, and prejudice against some of the very people who helped make his own professional success possible.

Israel Kirzner’s (1995) ‘certain sense of dismay’ resulted from the cognitive dissonance experienced when confronted with what lay behind Hayek’s (1994, 85, 95) aristocratic charm: ‘I don’t keep my mouth shut; my stories about Laski and Beveridge can be rather malicious.’

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Shortly after Beveridge recruited him to the LSE (and thus made his ‘professional success possible’), Hayek (1994, 66–67, 84–85, 95; 1995 [1966], 240) concluded ‘every’ departmental committee meeting with Beveridge delendus est (‘thus I believe we must destroy Beveridge’); but discovered that ‘not one of them understood what I was saying’ because they lacked Hayek’s classical education. As a more potent tactic, Hayek (1994, 85) spread stories about Beveridge’s alleged erectile dysfunction (Dahrendorf 1995, 156). In public, Hayek (1949, 423, n2) promoted himself as someone who could ‘hardly ever attribute to opponents anything beyond intellectual error.’36 In reality, Hayek told his secretary and appointed biographer that he and his fellow European émigrés sat in the ‘sardonic corner’ of the LSE Common Room making ‘malicious’ comments about the competence of their English colleagues (Cubitt 2006, 5). 14. The appeal to antiquity or tradition (argumentum ad antiquitatem ) is a logical fallacy—yet Austrians and their opponents extrapolated from aristocratic charm to academic integrity. Rothbard (1973; 1990a), the Academic Vice President of the Ludwig von Mises Institute, declared that Mises had ‘a mind of genius blended harmoniously with a personality of great sweetness and benevolence. Not once has any of us heard a harsh or bitter word escape from Mises’ lips.’ He was ‘unbelievably sweet.’ With respect to his reputation for ‘abrasiveness,’ Rothbard (1990a)—unbelievably—asserted: ‘I never saw it.’ Simultaneously, Rothbard (1990b) recalled that after a comment about monopoly theory, Mises called him ‘a Schmollerite. Although nobody else in the seminar realized it, that was the ultimate insult for an Austrian.’37 Hayek (1978) appeared to be the only person from whom Mises would tolerate dissent: ‘I believe I’m the only one of his disciples who has never quarrelled with him.’38 Mises had ‘dramatic’ breaks with Robbins, Haberler, Machlup, etc. (Hülsmann 2007, 698). Machlup (14 March 1941) informed Hayek that the Mises ‘problem’ seemed ‘insoluble’: they knew how difficult it is to make Mises ‘listen’ to an opponent’s argument and discuss it in a ‘friendly’ spirit. Machlup then listed the topics that Mises would not even discuss—including anything that assumed unemployment. Wartime required more ‘patience’ and less ‘dogmatism’—non-devotees

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would not tolerate Mises’ ‘lack of the former and excess of the latter.’ Machlup had little hope for him. The only possibility was that the war would call so many economists to Washington that a university might be obliged to use him to fill a temporary academic opening.39 Hayek (1995 [1935], 64) regarded both opponents and potential recruits as vulnerable to fashion: Cannan was valuable because he was ‘so remote from all fashionable trends prevailing in his discipline during his lifetime …’ In contrast, ‘v. Hayek’ (1942, 385) demeaned Nicholas Kaldor (1942) for having embraced ‘the now fashionable opinion.’ Hayek (1978) outlined his producer sovereignty strategy for revolution: I’m sure you can’t operate any other way. You have to persuade the intellectuals, because they are the makers of public opinion. It’s not the people who really understand things; it’s the people who pick up what is fashionable opinion. You have to make the fashionable opinion among the intellectuals before journalism and the schools and so on will spread it among the people at large.40

To his disciples, ‘von’ Mises ‘brought to the rest of us the living embodiment of the culture and the charm of pre-World War I Vienna … spinning in his inimitable way anecdotes of Old Vienna … in a small apartment that virtually breathed the atmosphere of a long lost and far more civilized era’ (Rothbard 1973). Disciples also created bogus but fashionable opinions about Hayek’s supposedly ethereal virtues. Eamon Butler (1983, 11–13), Director of the Adam Smith Institute, asserted that as a prelude to understanding Hayek his Contribution to the Political and Economic Thought of Our Time, it was necessary to understand ‘Hayek’s Character and Influence’: ‘Hayek’s manners both in print and in person are impeccable … those who know him are agreed that in his writings and in person he approaches as near to the ideal of the liberal scholar as perhaps human frailty will admit.’ And G. L. S. Shackle (1981, 234) described Hayek as ‘Aristocratic in temper and origins; physically, morally and intellectually fearless; clear and incisive in thought; the embodied principle itself of following the logic where it leads; the soul of scholarly generosity.’ ‘Unfailingly gentle and courteous,’ Hayek projected the image of ‘a private person of great

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courtesy and Old World reserve’ (Rothbard 1973, 1990a). Even critics, such as Robert Skidelsky (1992, 456), describe Hayek as ‘courteous.’ Nadim Shehadi (1991, 386) reported that Hayek’s LSE was ‘described as a court.’ According to Hayek (1978), Tibor Scitovsky’s father brought him to me from Budapest … to London and wanted somebody who was familiar with Central European conditions. So he came to me and brought a young boy saying, ‘Will you look after him a little while he is a student; this is his first time in a foreign country.’41

Hayek’s story is false: Scitovsky (1910–2002) was twenty-five when he arrived at the LSE as a graduate student in 1935 and had studied economics at Cambridge in 1930–1931 (Colander and Landreth 1996, 204–205). Hayek presumably mentioned the father to illustrate his own aristocratic status: As the ‘de’ indicates, [de Scitovsky] was born into a noble family; his father held the post of Foreign Minister. (Arrow et al. 2004)

Scitovsky’s father was ‘from high-school days … a close friend of the Hungarian Prime Minister’ (Scitovsky cited by Colander and Landreth 1996, 205). Disciples such as Ronald Hamowy (2003) detected neo-feudal undertones in Hayek’s Mont Pelerin Society: ‘As is customary, the [1974] Mt. Pelerin meetings were held in one of the most expensive hotels in the city as befitted the fact that almost all attendees were either think-tank executives traveling on expense accounts, South American latifundia owners, for whom hundred-dollar bills were small change, or the officers of the Society itself, a self-perpetuating oligarchy who, thanks to its members’ dues, traveled around the world in first-class accommodations.’ Yet Hamowy (2002) was incapable or unwilling to report the archival evidence that revealed Hayek to be an intense racist and anti-Semite (Leeson 2015a, chapter 3). As editor of The Definitive Edition of The Constitution of Liberty (2011 [1960]), Hamowy silently corrected through deletion Hayek’s motive for writing the book: to market to ‘Fascist’ dictators such as António de Oliveira Salazar (Chapter 6).

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Politicians were mesmerized by ‘von’ Hayek’s truth. Richard Nixon’s Treasury Secretary, William E. Simon (1978), dedicated A Time for Truth to his wife and my children, so that they can never say, at some future time, ‘Why weren’t we told?’

Simon (1978, 123, 125) described the precise phenomenon described by F.A. Hayek in his Nobel lecture called ‘The Pretense of Knowledge.’ For forty years the American ship of state has been lunging erratically towards economic disaster, with no awareness of its direction, guided only by the ‘pretense of knowledge,’ by intellectual fraud … without such a clear conscious reversal, we must continue to lurch towards economic disaster—down what Hayek has long called ‘The Road to Serfdom.’

In 1984, Hayek ‘confirmed’ the authenticity of the transparently fraudulent diary which ‘revealed’ that externalities had been invented by a gunrunner for Stalin (Leeson 2015b). Four decades earlier, Hayek (2007 [1944], v) protested: When a professional student of social affairs writes a political book, his first duty is plainly to say so. This is a political book … But, whatever the name, the essential point remains that all I shall have to say is derived from certain ultimate values. I hope I have adequately discharged in the book itself a second and no less important duty: to make it clear beyond doubt what these ultimate values are on which the whole argument depends. There is, however, one thing I would like to add to this. Though this is a political book, I am as certain as anybody can be that the beliefs set out in it are not determined by my personal interests.

In for-posthumous-general-consumption oral history interviews, Hayek explained what these ‘ultimate’ values’ were: fraud. The Road to Serfdom, he explained, had been written for personal interests: to allow the ‘old aristocracy’ to resume their ascribed status and to drive the ‘new aristocracy’—labour trade unionists and elected politicians—back down the road back to serfdom (Leeson 2015a, chapter 3).

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Classical Liberalism advanced with the retreat of the entitlements associated with the Divine Right of Kings and ‘old’ aristocrats (Leeson 2017b). Hayek apparently revealed to one biographer the connection between these neo-feudal overtones and his ‘true’ political philosophy and intentions. Denis Bark (2007, 1, 13–14, 18) provided a sympathetic account of ‘the role of aristocratic rule in Europe ’ and the associated ‘practice of patronage ’ and lamented that ‘the power of the Austro-Hungarian, German, and Russian monarchies had disappeared’ and been replaced by ‘the new aristocrats ’ [Bark’s emphases]. Hayek’s (1944) Road to Serfdom was an assault on these new aristocrats: Hayek ‘did not refer to the new aristocrats, but that is whom he was writing about.’ 15. The ‘free’ market revival was facilitated through a ‘knowledge’ dissemination process that Hayek (1978) designed to supplement the rhetorical weakness that he detected in Mises: I was always influenced by Mises’s answers, but not fully satisfied by his arguments. It became very largely an attempt to improve the argument, which I realized led to correct conclusions. But the question of why it hadn’t persuaded most other people became important to me; so I became anxious to put it in a more effective form.42

Hayek (1978) needed transmission vehicles for the arguments that he presented to justify Mises’ conclusions: what I call the intellectuals, in the sense in which I defined it before–the secondhand dealers in ideas–have to play a very important role and are very effective. But, of course, in my particular span of life I had the misfortune that the intellectuals were completely conquered by socialism. So I had no intermediaries, or hardly any, because they were prejudiced against my ideas by a dominating philosophy. That made it increasingly my concern to persuade the intellectuals in the hopes that ultimately they could be converted and transmit my ideas to the public at large.43

According to Hayek (2011 [1960], 186), ‘To do the bidding of others is for the employed the condition of achieving his purpose.’ But Hayek (1949, 426–427; 1988, 53) was also aware of that he had recruited ‘inferior mediocrities’:

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it seems to be true that it is on the whole the more active, intelligent, and original men among the intellectuals who most frequently incline toward socialism, while its opponents are often of an inferior calibre. [Nobody] who is familiar with large numbers of university faculties (and from this point of view the majority of university teachers probably have to be classed as intellectuals rather than as experts) can remain oblivious to the fact that the most brilliant and successful teachers are today more likely than not to be socialists, while those who hold more conservative political views are as frequently mediocrities; the higher we climb up the ladder of intelligence, the more likely we are to encounter socialist convictions. Rationalists tend to be intelligent and intellectual; and intelligent intellectuals tend to be socialists.

Referring to the ‘mere trash’ read by those who ‘lack discrimination,’ ‘von’ Mises (2008 [1956], 51–52) asserted: ‘The tycoon of the book market is the author of fiction for the masses.’ Hayek (1978) described American intellectuals as both fickle and influential: in the USA, The Road to Serfdom received unmeasured praise from people who probably never read it … For some reason or other, [intellectuals] are probably more subject to waves of fashion in ideas and more influential in the American sense than they are elsewhere. Certain main concerns can spread here with an incredible speed … I used to define what the Germans call Bildung, a general education, as familiarity with other times and places. In that sense, Americans are not very educated. They are not familiar with other times and places, and that, I think, is the basic stock of a good general education. They are much better informed on current affairs … I doubt whether the Americans are book readers. You see, if you go to a French provincial town, you’ll find the place full of bookstores; then you come to a big American city and can’t find a single bookstore.44

‘Knowledge’ illustrated ‘von’ Hayek’s (1992b [1977]) agenda—the previous year, these non-existent American bookstores also revealed his contempt for the lower orders: I was quite depressed two weeks ago when I spent an afternoon at Brentano’s Bookshop in New York and was looking at the kind of books most people read. That seems to be hopeless; once you see that you lose all hope.

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Science like religion is community-based knowledge; the scientific method, however, requires that asserted knowledge can be replicated. ‘Replication in Empirical Economics’ came rather late (Dewald et al. 1986); the non-replication of Hayek’s Great Depression assertion came even later (Klausinger 2010, 227). Hayek (1978) was contemptuous of the ‘worst’ inferior mediocrities that he recruited to ‘do his bidding’: Of course, scientists are pretty bad, but they’re not as bad as what I call the intellectual, a certain dealer in ideas, you know. They are really the worst part. But I think the man who’s learned a little science, the little general problems, lacks the humility the real scientist gradually acquires. The typical intellectual believes everything must be explainable, while the scientist knows that a great many things are not, in our present state of knowledge. The good scientist is essentially a humble person.45

According to Hayek (1949, 428), intellectuals, ‘unencumbered by much knowledge of the facts of present-day life,’ were recruited through visions: socialist thought owes its appeal to the young largely to its visionary character; the very courage to indulge in Utopian thought is in this respect a source of strength to the socialists which traditional liberalism sadly lacks … The intellectual, by his whole disposition, is uninterested in technical details or practical difficulties. What appeal to him are the broad visions, the specious comprehension of the social order as a whole which a planned system promises.

Hayek regarded socialism as ‘just another religion’ (Cubitt 2006, 60); to recruit intellectuals, Hayek (1949, 422–423) needed to offer a new liberal program which appeals to the imagination. We must make the building of a free society once more an intellectual adventure, a deed of courage. What we lack is a liberal Utopia … The main lesson which the true liberal must learn from the success of the socialists is that it was their courage to be Utopian which gained them the support of the intellectuals and therefore an influence on public opinion which is daily making possible what only recently seemed utterly remote.46

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The Institute of Economic Affairs (IEA) fulfilled Hayek’s (1978) intermediary role: ‘I oughtn’t to praise them because the suggestion of the Institute came from me originally; so I let them on the job, but I’m greatly pleased that they are so successful.’47 After October 1946, Mises was a full-time employee of the Foundation for Economic Education (FEE), which Leonard Read had just established (Hülsmann 2007, 851, n26). For public consumption, Hayek 1992a [1968], 259, 262) declared: what FEE, ‘with Leonard Read at its head, and all of his co-fighters and friends are committed to is nothing more nor less than the defence of civilisation against intellectual error … I mean it literally … [Read is] a profound and original thinker’ who could be relied upon ‘not only to spread the gospel’ but also ‘to contribute to the development of ideas’ [Hayek’s emphasis]. Hayek also told Cubitt (2006, 144) that Anthony Fisher, the IEA co-founder, was not ‘intellectually gifted’; and Hayek (28 August 1975) was obliged to make a ‘confidential’ reply to Arthur Seldon, the other IEA co-founder, apologizing for having apparently stated that he regarded the IEA as a ‘mere popularizing propaganda’ institution. The IEA, he assured Seldon, was superior to FEE’s ‘propaganda’ efforts (the Irvington ‘setup’).48 According to Hayek (1949, 420–421), although their ‘knowledge may often be superficial and their intelligence limited,’ intellectuals were ‘the organs which modern society has developed for spreading knowledge and ideas, and it is their convictions and opinions which operate as the sieve through which all new conceptions must pass before they can reach the masses.’49 For the benefit of a FEE audience, Boettke (2016) described the Austrian Truth about Mises: His is a story of scientific glory and personal courage in a very dark time in human history. He stood against those forces with the tools of reason embedded in economic science at its finest, and he survived courageously and in doing so provides us with an exemplar of scientific economist, scholar of political economy, and bold and creative social philosophy.

‘Frank Knight’s First Law of Talk’ was that ‘Cheaper talk drives out of circulation that which is less cheap’ (cited by Patinkin 1973, 807). For Knight (1951, 5; 1967, 782)

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it’s not ignorance that does the most damage, but knowin’ so derned much that ain’t so’ - that is, ‘prejudice.’50

Knight (1949, 436–437, 441, 443) noted that Hayek’s intermediaries could at most select the ideas to be ‘pushed.’ Like any good merchant, they decide what will ‘go,’ so use persuasion (a form of coercion) in an effort to hasten its adoption and take the erudite.

Knight also cautioned that the ‘difference between Church and party’ had become ‘nominal … this has been the normal state of society backed up by religion; the typical attitude is to thank God for priest and prince and pray the divine blessing upon them.’ Knight, noting that ‘What Hayek says about recruitment of personnel seems rather superficial but I cannot go into detail,’ appeared to issue a caution to Hayek’s intermediaries: The ultimate begetting sin of the ‘intellectuals’ is oversimplification— because it is that of those who elect them to interpret and formulate their own thinking.

Notes 1. Friedrich Hayek, interviewed by Earlene Craver 1978 (Centre for Oral History Research, University Angeles, http://oralhistory.library.ucla.edu/). 2. Friedrich Hayek, interviewed by Earlene Craver 1978 (Centre for Oral History Research, University Angeles, http://oralhistory.library.ucla.edu/). 3. Fürth Papers. Hoover Institution. Box 5. 4. Fürth Papers. Hoover Institution. Box 6. 5. Friedrich Hayek, interviewed by Earlene Craver 1978 (Centre for Oral History Research, University Angeles, http://oralhistory.library.ucla.edu/).

date unspecified of California, Los date unspecified of California, Los

date unspecified of California, Los

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6. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 7. Friedrich Hayek, interviewed by Earlene Craver date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 8. Friedrich Hayek, interviewed by Earlene Craver date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 9. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 10. Friedrich Hayek, interviewed by Earlene Craver date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 11. Fürth Archives Hoover Institution Box 6. Fürth was Professor of Economics at Lincoln University, the Catholic University, Washington, the American University, Washington, International University of Luxembourg, Lecturer at the Foreign Service Institute, economic specialist with the Federal Reserve Board, Chief of the Eastern European and Near Eastern Section, the Western European and Commonwealth Section and the International Financial Operations Section; and Associate Adviser, Adviser and Associate Economist, and Consultant to the Federal Open Market Committee. 12. With Hayek, Fürth co-founded the Geistkreis from which ‘girls’ were excluded: ‘the women, who were excluded from the Geistkreis-Stephanie Browne, Helene Lieser, and Ilse Minz--were all members of the Mises seminar but not of the Geistkreis.’ Hayek (1978) also sought to exclude his childhood friend: ‘Well, [Fürth] wasn’t really an economist. He learned a lot of economics by that association [the Geistkreis ], but he was not primarily interested in economics. He finally made use of this when he had to go to the United States to get a position as an economist, but in Vienna he was not an economist.’ Axel Leijonhufvud asked: ‘He went to the Federal Reserve Board once he came here?’ Hayek replied: ‘Well, no, I think he began with a teaching post at one of the Negro universities in Washington.’ Friedrich Hayek, interviewed by Axel Leijonhufvud date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory. library.ucla.edu/).

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13. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 14. Hayek Papers Box 38.28. 15. Hayek Papers Box 38.28. 16. Friedrich Hayek, interviewed by Earlene Craver date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 17. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 18. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 19. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 20. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 21. https://mises.org/library/ludwig-von-misess-letter-rand-atlas-shrugged. 22. ‘I don’t have many strong dislikes. I admit that as a teacher—I have no racial prejudices in general—but there were certain types, and conspicuous among them the Near Eastern populations, which I still dislike because they are fundamentally dishonest. And I must say dishonesty is a thing I intensely dislike. It was a type which, in my childhood in Austria, was described as Levantine, typical of the people of the eastern Mediterranean. But I encountered it later, and I have a profound dislike for the typical Indian students at the London School of Economics, which I admit are all one type—Bengali moneylender sons. They are to me a detestable type, I admit, but not with any racial feeling. I have found a little of the same amongst the Egyptians—basically a lack of honesty in them.’ Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 23. Hayek Papers Box 34.17. 24. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/).

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25. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 26. Conference minutes. Hayek Papers Box 128.22. 27. Statement by the LSE Director 13 March 1950. Hayek Papers Box 35.13. 28. Statement by the LSE Director 13 March 1950. Hayek Papers Box 35.13. 29. Some Hayekians refer to Miseans as ‘swamp Austrians’: but in Auburn, Alabama, Mises is known as The Last Knight of Liberalism (Hülsmann 2007). 30. Friedrich Hayek, interviewed by Jack High date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 31. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 32. Hayek Papers Box 26.28. 33. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 34. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 35. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 36. Hayek was citing Joseph Schumpeter’s (1946, 269) review of The Road to Serfdom. 37. https://mises.org/journals/aen/aen11_2_1.asp. 38. Friedrich Hayek, interviewed by Axel Leijonhufvud date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 39. Hayek Papers Box 36.17. 40. Friedrich Hayek, interviewed by Thomas Hazlett 12 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 41. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/).

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42. Friedrich Hayek, interviewed by Earlene Craver date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 43. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). Apart from financial intermediaries (banks), the term ‘intermediary’ has more often been used by religious rather than economic communities. When used by Cannan (1932, 366–367, 370) in his Royal Economic Society Presidential address promoting wage cuts, a footnote had to be added to explain that it was designed to replace the term ‘capitalist employers.’ Hayek (1978) asserted that Cannan was subverting the sovereignty of a producer: ‘Marshall established almost a monopoly, and by the time I came to England, with the exception of the London School of Economics, where Edwin Cannan had created a different position, and where Robbins was one of the few economists who knew the literature of the world—he drew on everything—England was dominated by Marshallian thinking.’ Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 44. ‘But intellectuals in England received it in the spirit in which it was written; while here I had, on the one hand, unmeasured praise from people who probably never read it, and a most abusive criticism from some of the intellectuals.’ Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 45. Friedrich Hayek interviewed by Robert Bork 4 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 46. What we lack is a liberal Utopia, a program which seems neither a mere defense of things as they are nor a diluted kind of socialism, but a truly liberal radicalism which does not spare the susceptibilities of the mighty (including the trade unions), which is not too severely practical, and which does not confine itself to what appears today as politically possible. We need intellectual leaders who are willing to work for an ideal, however small may be the prospects of its early realization. 47. Friedrich Hayek, interviewed by Thomas Hazlett 12 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/).

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48. http://www.margaretthatcher.org/document/114609 Hayek Papers Box 27.6. 49. It is not surprising that the real scholar or expert and the practical man of affairs often feel contemptuous about the intellectual, are disinclined to recognize his power, and are resentful when they discover it. Individually they find the intellectuals mostly to be people who understand nothing in particular especially well and whose judgement on matters they themselves understand shows little sign of special wisdom. But it would be a fatal mistake to underestimate their power for this reason. Even though their knowledge may often be superficial and their intelligence limited, this does not alter the fact that it is their judgement which mainly determines the views on which society will act in the not too distant future. It is no exaggeration to say that, once the more active part of the intellectuals has been converted to a set of beliefs, the process by which these become generally accepted is almost automatic and irresistible. These intellectuals are the organs which modern society has developed for spreading knowledge and ideas, and it is their convictions and opinions which operate as the sieve through which all new conceptions must pass before they can reach the masses. 50. Friedman initially planned to introduce his 1967 Presidential address to the American Economic Association with a reference to Knight’s words (see Chapter 4). Friedman Papers Box 49.9.

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Beveridge, W. (1931). Tariffs: The Case Examined. London: Longmans, Green. Blundell, J. (2007). Waging the War of Ideas. London: Institute of Economic Affairs. Boettke, P. J. (2016, October 17). Ludwig von Mises, the Academic. Foundation for Economic Education. https://fee.org/articles/ludwig-von-mises-the-academic/. Buchanan, J. (1991). Frank Knight. In E. Shills (Ed.), Remembering the University of Chicago: Teachers, Scientists, and Scholars. Chicago: University of Chicago Press. Butler, E. (1983). Hayek His Contribution to the Political and Economic Thought of Our Time. New York: Universe Books. Caldwell, B., & Montes, L. (2014a, August). Friedrich Hayek and His Visits to Chile (CHOPE Working Paper No. 2014-12). Caldwell, B., & Montes, L. (2014b, September 26). Friedrich Hayek and His Visits to Chile. Review of Austrian Economics. First Online. Caldwell, B., & Montes, L. (2015). Friedrich Hayek and His Visits to Chile. Review of Austrian Economics, 28(3), 261–309. Cannan, E. (1932). The Demand for Labour. Economic Journal, 42(167), 357–370. Cassidy, J. (2000, June). The Hayek Century. Hoover Digest, 3. http://www. hoover.org/publications/hoover-digest/article/6405. Colander, D., & Landreth, H. (1996). The Coming of Keynesianism to America: Conversations with the Founders of Keynesian Economics. Cheltenham, UK: Edward Elgar. Cubitt, C. (2006). A Life of August von Hayek. Bedford, UK: Authors On Line. Dahrendorf, R. (1995). LSE: A History of the London School of Economics and Political Science, 1895–1995. Oxford: Oxford University Press. Dewald, W. G., Thursby, J. G., & Anderson, R. G. (1986). Replication in Empirical Economics: The Journal of Money, Credit and Banking Project. American Economic Review, 76(4), 587–603. Ebeling, R. (2001). F.A. Hayek: A Biography Review of Friedrich Hayek: A Biography by Alan Ebenstein. New York: Palgrave, St. Martin’s Press and Ludwig von Mises Institute. https://mises.org/daily/638/FAHayek-A-Biography. Ebeling, R. (2011). Game Theory and the Dark Side of Envy. In Defence of Capitalism and Human Progress Northwood University. http://defenseofcapitalism.blogspot.com.au/2011/12/game-theory-and-dark-side-of-envy-by.html. Foster, W. T., & Catching, W. (1923). Money. Boston: Houghton Mifflin. Hamowy, R. (2002). A Note on Hayek and Anti-Semitism. History of Political Economy, 34(1), 255–260.

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Hamowy, R. (2003). Memories of Rothbard and Hayek. LewRockwell.com. http://www.lewrockwell.com/2003/07/murray-n-rothbard/memories-ofrothbard-and-hayek/. Harberger, A. (1999, March). Interview with Arnold Harberger. An Interview with the Dean of the ‘Chicago Boys.’ The Region. http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3569. Harberger, A. (2000). Interview: Commanding Heights. PBS. http://www.pbs. org/wgbh/commandingheights/shared/minitext/int_alharberger.html. Hayek, F. A. (1931). Reflections on the Pure Theory of Money of Mr. J. M. Keynes. Economica, 11(33), 270–295. Hayek, F. A. (1932). Reflections on the Pure Theory of Money of Mr. J. M. Keynes (continued). Economica, 12(35), 22–44. Hayek, F. A. (1942). A Comment. Economica, 9(36), 383–385. New Series. Hayek, F. A. (1944). Road to Serfdom. Chicago: University of Chicago Press. Hayek, F. A. (1946). The London School of Economics 1895–1945. Economica, 13(49), 1–31. February New Series. Hayek, F. A. (1949). Intellectuals and Socialism. University of Chicago Law Review, 16(3), 417–433. Hayek, F. A. (1976). Law, Legislation and Liberty, Volume 2: The Mirage of Social Justice. Chicago: University of Chicago Press. Hayek, F. A. (1978). Oral History Interviews. Centre for Oral History Research, University of California, Los Angeles. http://oralhistory.library.ucla.edu/. Hayek, F. A. (1984). The Essence of Hayek (K. Leube & C. Nishyiama, Ed.). Stanford, CA: Hoover Press. Hayek, F. A. (1988). The Fatal Conceit the Errors of Socialism. Vol 1 The Collected Works of F.A. Hayek (W. W. Bartley III, Ed.). Chicago: University of Chicago Press. Hayek, F. A. (1992a). The Fortunes of Liberalism. Vol 4 The Collected Works of F.A. Hayek (P. G. Klein, Ed.). Chicago: University of Chicago Press. Hayek, F. A. (1992b [1977], July). The Road from Serfdom. Reason. http:// reason.com/archives/1992/07/01/the-road-from-serfdom/5. Hayek, F. A. (1994). Hayek on Hayek an Autobiographical Dialogue. Supplement to The Collected Works of F.A. Hayek (S. Kresge & L. Wenar, Ed.). Chicago: University of Chicago Press. Hayek, F. A. (1995). Contra Keynes and Cambridge. The Collected Works of F.A. Hayek (B. Caldwell, Ed.). Chicago: University of Chicago Press. Hayek, F. A. (2007 [1944]). The Road to Serfdom Texts and Documents the Definitive Edition (B. Caldwell, Ed.). Chicago: University of Chicago Press.

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Hayek, F. A. (2011 [1960]). Constitution of Liberty Definitive Edition. The Collected Works of F.A. Hayek (R. Hamowy, Ed.). Chicago: University of Chicago Press. Hayek, F. A. (2012). Business Cycles Volume VII The Collected Works of F.A. Hayek (H. Klausinger, Ed.). Chicago: University of Chicago Press. Hennecke, H. J. (2000). Friedrich August von Hayek: Die Tradition der Freiheit. Düsseldorf: Verlag Wirtschaft und Finanzen. Hildebrandt, S. (2013). Wolfgang Bargmann (1906–1978) and Heinrich von Hayek (1900–1969): Careers in Anatomy Continuing Through German National Socialism to Postwar Leadership. Annals of Anatomy Anatomischer Anzeiger, 195(4), 283–295. http://www.sciencedirect.com/science/article/ pii/S0940960213000782. Hildebrandt, S. (2016). The Anatomy of Murder Ethical Transgressions and Anatomical Science During the Third Reich. New York: Berghahn. Howson, S. (2011). Lionel Robbins. Cambridge: Cambridge University Press. Hülsmann, J. G. (2007). Mises: The Last Knight of Liberalism. Auburn, AL: Ludwig von Mises Institute. Hutchison, T. (1994). The Uses and Abuses of Economics Contentious Essays on History and Method. London: Routledge. Kaldor, N. (1942). Professor Hayek and the Concertina-Effect. Economica, 9(36), 359–382. New Series. Keynes, J. M. 1930. Treatise on Money (2 Vols.). New York: Harcourt, Brace and Company. Kirzner, I. (1995, March 1). Review of Hayek on Hayek an Autobiographical Dialogue. Economic Affairs, 15(2), 57–58. Klausinger, H. (2010). Hayek on Practical Business Cycle Research: A Note. In H. Hagemann, T. Nishizawa, & Y. Ikeda (Eds.), Austrian Economics in Transition: From Carl Menger to Friedrich Hayek (pp. 218–234). Basingstoke: Palgrave Macmillan. Knight, F. H. (1931). The History of Economics by Othmar Spann. Journal of Political Economy, 39(2), 258–260. Knight, F. H. (1949). World Justice, Socialism, and the Intellectuals. The University of Chicago Law Review, 16(3), 434–443. Knight, F. H. (1951). The Role of Principles in Economics and Politics. American Economic Review, XLI(1), 1–29. Knight, F. H. (1967). Laissez Faire: Pro and Con. Journal of Political Economy, 75(6), 782–795. Landheer, B. (1931). Othmar Spann’s Social Theories. Journal of Political Economy, 39(2), 239–248.

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Leeson, R. (Ed.). (2015a). Hayek: A Collaborative Biography Part II Austria, America and the Rise of Hitler, 1899–1933. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (Ed.). (2015b). Hayek: A Collaborative Biography Part III Fraud, Fascism and Free Market religion. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (2017a). Hayek: A Collaborative Biography Part VII ‘Market Free Play with an Audience’: Hayek’s Encounters with Fifty Knowledge Communities. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (2017b). Hayek: A Collaborative Biography Part IX The Divine Right of the ‘Free’ Market. Basingstoke, UK: Palgrave Macmillan. Leonard, R. (2010). Von Neumann, Morgenstern, and the Creation of Game Theory: From Chess to the Social Sciences. Cambridge: Cambridge University Press. Leonard, R. (2011). The Collapse of Interwar Vienna: Oskar Morgenstern’s Community, 1925–50. History of Political Economy, 43(1), 83–130. Mises, L. (1944). Bureaucracy. New Haven: Yale University Press. Mises, L. (1985 [1927]). Liberalism in the Classical Tradition (R. Raico, Trans.). Auburn, AL: Mises Institute. Mises, L. (2008 [1956]). The Anti-capitalist Mentality. Auburn, AL: Ludwig von Mises Institute. Mitchell, W. C. (1916). Role of Money in Economic Theory. American Economic Review, 6(1), 140–161. Monk, R. (1991). Ludwig Wittgenstein: The Duty of Genius. London: Vintage. Myrdal, G. (1973). Against the Stream: Critical Essays on Economics. New York: Pantheon. Patinkin, D. (1973). Frank Knight as Teacher. American Economic Review, 63(5), 788–810. Polanyi, K. (1934). Othmar Spann: The Philosopher of Fascism. New Britain, 3(53), 6–7. Polanyi, K. (1935). The Essence of Fascism. In D. Lewis, K. Polanyi, & J. Kitchen (Eds.), Christianity and the Social Revolution. London: Gollancz. Robbins, L. C. (1971). Autobiography of an Economist. London: Macmillan. Rockwell, L. H., Jr. (2013). Fascism Versus Capitalism. Auburn, AL: Ludwig von Mises Institute. Rothbard, M. N. (1973). Ludwig von Mises: 1881–1973. Human Events, 20, 7. Rothbard, M. N. (1990a). The Future of Austrian Economics. Mises University at Stanford University. http://www.youtube.com/watch?v=KWdUIuID8ag. Rothbard, M. N. (1990b). The Science of Liberty. An Interview with Murray N. Rothbard. The Austrian Economics Newsletter. http://mises.org/journals/ aen/aen11_2_1.asp.

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Scharrenborg, R. (2015). A Young Man in Vienna—Life in Early 20th Century Austria and Its Possible Impact on the Initial Development of Hayek’s Thought. In R. Leeson (Ed.), Hayek: A Collaborative Biography Part One Influences: From Mises to Bartley. Basingstoke, UK: Palgrave Macmillan. Schulak, E. M., & Unterköfler, H. (2011). The Austrian School of Economics A History of Its Ideas, Ambassadors, and Institutions (A. Oost-Zinner, Trans.). Auburn, AL: Ludwig von Mises Institute. Schumpeter, J. A. (1946). Review of The Road to Serfdom by Friedrich A. Hayek. Journal of Political Economy, 54(3), 269–270. Shackle, G. L. S. (1981). F.A. Hayek, 1899–. In D. P. O’Brien & J. R. Presley (Eds.), Pioneers of Modern Economics in Britain. London: Macmillan. Shehadi, N. (1991). The London School of Economics and the Stockholm School in the 1930s. In L. Jonung (Ed.), The Stockholm School of Economics Revisited. Cambridge: Cambridge University Press. Simon, W. E. 1978. A Time for Truth. New York: McGraw Hill. Introduction by Milton Friedman. Foreword by F.A. Hayek. Skidelsky, R. (1992). The Economist as Saviour 1920–1937. New York: Penguin. St. John, J. H. (1997 [1782]). Letters From an American Farmer. Oxford: Oxford University Press. Wieser, F. (1983 [1926]). The Law of Power. University of Nebraska-Lincoln: Bureau of Business Research. Wilson, C. (2013, November 10). Prince Charles and His Relationships. Telegraph. http://www.telegraph.co.uk/news/uknews/prince-charles/10436036/ Prince-Charles-and-his-relationships.html. Wistrich, R. (2012). Who’s Who in Nazi Germany. New York: Routledge.

4 16–20: Loyal ‘Intermediaries’ Robert Leeson

1 Robbins and Machlup, Knight and Viner According to Friedrich ‘von’ Hayek (1949, 423), intellectuals judged new ideas not by their specific merits but by the readiness with which they fit into his general conceptions, into the picture of the world which he regards as modern or advanced. It is through their influence on him and on his choice of opinions on particular issues that the power of ideas for good and evil grows in proportion to their generality, abstractness, and even vagueness. As he knows little about the particular issues, his criterion must be consistency with his other views and suitability for combining into a coherent picture of the world. Yet this selection from the multitude of new ideas presenting themselves at every moment creates

R. Leeson (*)  Stanford University, Stanford, CA, USA e-mail: [email protected] R. Leeson  Notre Dame Australia University, Fremantle, WA, Australia © The Author(s) 2018 R. Leeson (ed.), Hayek: A Collaborative Biography, Archival Insights into the Evolution of Economics, https://doi.org/10.1007/978-3-319-95219-2_4

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the characteristic climate of opinion, the dominant Weltanschauung of a period, which will be favorable to the reception of some opinions and unfavorable to others and which will make the intellectual readily accept one conclusion and reject another without a real understanding of the issues.

Hayek (1949, 422) sought to recruit disciples from this source: ‘We need intellectual leaders who are willing to work for an ideal, however small may be the prospects of its early realization.’ With respect to the Nobel Prize and thus his ability to reach a wider audience, Hayek was fortune in having two loyal ‘intermediaries’: Lionel Robbins (1898–1984) and Fritz Machlup (1902–1983). Both were—and probably felt themselves to be—socially inferior to ‘von’ Hayek. As Erik Maria ‘Ritter von’ Kuehnelt-Leddihn (1992) explained: ‘with the exception of Fritz Machlup, the original Austrian school consisted of members of the nobility … [Hayek] descended from a family ennobled at the end of the eighteenth century by the Holy Roman Emperor.’ Robbins (1971, 24, 91)—who was thirty-one when he first encountered Hayek—had a ‘love affair with Vienna, its setting and its culture’: not having attended a high-status, fee-paying public school, he may have been resentful about being outside the ‘old school tie’ network (Howson 2011, 19). Robbins (1971, 11) concluded that he made ‘no outstanding intellectual discoveries’; John Maynard Keynes described him, ungenerously, as a ‘suburban intellectual’ (Phelps Brown 1987, 609). Hayek (1978) appeared to quantify Robbins’ limitations: he ‘might have written the textbook for this generation.’1 These limitations led Robbins (1971, 107) to uncritically repeat untruths—presumably derived from Hayek (1994, 59)—about the reasons the University of Vienna did not wish to employ Mises (Klausinger 2012, 4, n5). Hayek (1978) found contrasting mental attributes in the two editors of the University of Chicago’s Journal of Political Economy: Frank Knight was the ‘muddlehead. [Laughter] … There were some people who had no reason to think [emphasis added] because they had the answer ready on everything from the literature they had read. Frank Knight was one of the people who had to think through everything before he

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formed—… Knight was a more profound but much less systematic thinker; Jacob Viner had a rounded system, where he attempted to reconcile everything with everything else. Viner could have written a very good textbook.’2 In Socialism An Economic and Sociological Analysis, Mises (1951 [1932], 85, 87, 90) explained that ‘In the life of a genius, however loving, the woman and whatever goes with her occupy only a small place … Genius does not allow itself to be hindered by any consideration for the comfort of its fellows even of those closest to it.’ Hayek (1978) detected two types of thinkers: the ‘intuitive genius, not really a strict logical reasoner’3; and ‘the master of his subject’4: the modern specialist is very frequently not an educated person. He knows only his particular field, and there he thinks, particularly if he is in any of the mechanical subjects, that he ought to be able to explain everything, and that he can master the detail of it.5

In print, he was more circumspect: ‘I never wrote [it] up because it would sound so frightfully egotistic in speaking about myself.’ Robbins, Machlup and [Eugen Ritter von] Böhm-Bawerk were in the latter category, while Keynes, Friedrich ‘von’ Wieser, Othmar Spann and himself were in the intuitive genius category: ‘it’s just because I don’t remember what is the standard answer to a problem and have to think it out anew that occasionally I get an original idea.’6 Spann had ‘a very curious mind, an original mind’ (Hayek 1978).7 Referring to one ‘genius,’ Hayek (1978) stated: ‘You know, [Keynes 1919] had done the trick about the peace treaty. And ever since, he believed he could play with public opinion as though it were an instrument.’8 And referring to another: ‘what I did in America was a very corrupting experience. You become an actor, and I didn’t know I had it in me. But given the opportunity to play with an audience, I began enjoying it.’9 Hayek told Nadim Shehadi: ‘I could never have had the influence I did if it hadn’t been for Robbins’ (cited by Howson 2011, 206). Hayek’s (1978) business cycle model had started as a ‘very long footnote … an outline of what ultimately became my explanation of industrial fluctuations.’10 In the Foreword to the first edition of Prices and

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Production (reprinted in Business Cycles, in Hayek’s Collected Works ), Robbins (2012 [1931], 172) asserted that Hayek had extended this footnote to predict the Great Depression: I am bound to say that [Austrian theory] seems to me to fit certain facts of the American slump better than any other explanation I know. And I cannot think that it is altogether an accident that the Austrian Institut für Konjunkturforschung, of which Dr. Hayek is director, was one of the very few bodies of its kind which, in the spring of 1929 [emphasis added], predicted a setback in America with injurious repercussions on European conditions.

Hayek must have either written (or co-written with Oskar Morgenstern, his associate and successor) these Institute reports. 16. Hayek’s sixteenth stroke of luck was that in 1971, the Nobel Prize Selection Committee invited Machlup—his close friend, fellow Austrian School economist and founding Mont Pelerin Society member—to write an ‘appraisal’ of his worthiness for a Nobel Prize, which he completed in September 1971 (Chapter 9).11 Like Hans Kelsen, Machlup was a ‘typical Viennese gentleman … ready to tailor his argument so as to make it appear as pleasing as possible to whatever audience he was at the moment addressing himself to’ (Silverman 1984, 75).12 It was a sentimental moment: between 5 and 9 September 1971, Machlup and Hayek and other Board members met to plan the 25th Mont Pelerin Society anniversary meeting to be held in 1972.13 It was also an anxious moment: Hayek’s friends knew that he had been largely incapacitated by suicidal depression since 1969 (Chapter 1). Machlup’s (1974, 500) Swedish Journal of Economics article (based on his glowing Nobel Prize recommendation report for Hayek) stated: In a comment which Hayek published in the Monthly Reports of the Austrian Institute for Economic Research (as its Director) in February 1929 [emphasis added], he boldly predicted that crisis and downturn in the United States might be imminent. With these warnings, which came true with a vengeance, Hayek had introduced one of the main themes of his monetary theory of the investment cycle.

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Gottfried ‘von’ Haberler (1975) plagiarized this falsehood: It was in the monthly report of the Business Cycle Institute, I think it was February 1929, that he boldly predicted the imminence of a crisis and a business cycle downturn in the United States.

So too did Kurt Leube (1984, xix) in the Hoover Institution’s Essence of Hayek: in February 1929, ‘Hayek became the first [emphasis added] to predict the coming crisis in the United States.’ 17. The seventeenth stroke of luck was also associated, possibly causally, with his first year-long depression (1960–1961). When Hayek abandoned his first wife and two children to have unrestricted access to his cousin (whose conversation and cooking he could barely tolerate), Robbins was worried about the prospect of ‘damage to causes with which Hayek had been associated’ (Cubitt 2006, 67). Robbins resigned from the Mont Pelerin Society—whose aims he had drafted. The premature death of Hayek’s first wife in July 1960 appeared to have lifted the ‘shun’ which enabled Robbins (1971, 128) to state that his association with Hayek ‘was an especially happy one.’ In his Autobiography, Robbins (1971) documented in verbatim detail his conflict with Keynes—but only made laudatory references to Hayek. Robbins (27 September 1960) wrote to Hayek (presumably c/o the Reform Club) saying that he had passed a ‘vaguely familiar but unidentifiable figure’ at the Reform the previous evening, who had later been identified by Jacques Kahane (Howson 2011, 846–847).14 This led to reconciliation—encouraged by Machlup—at Laurence’s Hayek’s wedding (15 July 1961), captured in photographic form in Hayek on Hayek (1994, plate 27): ‘A friendship was resumed after the interval of the Chicago years.’ As Stephen Kresge’s (1994, 35) hagiographic ‘Introduction’ explained: ‘It may take more political and economic disasters for the lesson to sink in, but we do seem to be learning that while the mind – reason – cannot impose a pattern of its own making on the world, it can discover and understand the patterns out of which life emerges … spontaneous orders of distinctly Hayekian characteristics … Hayek lives.’

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But Hayek—assisted by Robbins, Machlup and the Nobel Prize Selection Committee—had imposed a fraudulent pattern of his own making on the world. Robbins knew that Hayek was amoral and must also have known that he had been deceived about the ‘prediction’ of the Great Depression: but shortly after the reconciliation, in a review of ‘Hayek on Liberty’ in the London School of Economics journal (Economica ), Robbins (1961, 81) praised Hayek’s ‘moral ardour.’ In the Preface to the second edition to Prices and Production, Hayek (2012 [1935], 180) thanked Robbins for ‘help with all my publications, including the present second edition of this book’—from which Robbins’ Foreword had been withdrawn. When Hayek sent Robbins a later edition of Prices and Production, Robbins (24 June 1976) reflected on the ‘exciting days’ and the ‘inspiration’ with which Hayek had infected the LSE in the early 1930s.15 Had the first Mrs. Hayek enjoyed a normal life expectancy, or had Robbins not forgiven Hayek and referred to the scandal in his Autobiography, the Academy of Sciences may have looked elsewhere for a 1974 co-recipient. 18. The eighteenth stroke of luck symbolizes Hayek’s fortune. Milton Friedman speculated that the Academy of Sciences and the Selection Committee ‘feared criticism’ by giving the 1974 Prize to the ‘extreme leftist,’ Myrdal, and so linked him to the ‘notorious rightist,’ Hayek. This appears to be the most likely explanation.16 Friedman may have heard some inside information from one of his ‘closest friends,’ Sune Carlson, who sat on the Selection Committee that rewarded both himself and Hayek (Friedman and Friedman 1998, 78; see also Laidler 2013; Leeson 2013, 30).17 Without apparently checking the evidence, the Nobel citation repeated the Hayek/Robbins/Machlup assertion under the heading ‘The Functional Efficiency of Economic Systems’: von Hayek’s contributions in the field of economic theory are both profound and original. His scientific books and articles in the twenties and thirties aroused widespread and lively debate. Particularly, his theory of business cycles and his conception of the effects of monetary and credit policies attracted attention and evoked animated discussion. He tried to

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penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.18

Four months later, Hayek (1975) told an American Enterprise Institute audience: For forty years I have preached that the time to prevent a depression is during the preceding boom; and that, once a depression has started, there is little one can do about it. My advice was com-pletely disregarded as long as the boom lasted. Now suddenly, when my prediction has come true and we have reached the stage where, in my opinion, little can be done about the inevitable reaction which has set in, people suddenly turn to me and ask for my opinion. I am very much tempted to answer, ‘Well, if you had listened to me before, you wouldn’t be in that mess.’ Of course, I do not mean you—I mean the public in general.

In the 23 months before Hayek was awarded his Nobel Prize (11 January 1973–1976 December 1974), the Dow Jones Industrial Average lost over 45% of its value. The Nobel Prize Committee was implicitly asserting that had Hayek been listened-to in 1929, outcomes may have been different. However, Adolph O. Berger (1936, 137) provided evidence which contradicted the Hayek/Robbins (and later Machlup/Nobel) assertion: with qualifications, the forecasting results of the Austrian Institute for Business Cycle Research ‘do not compare very favourably with those of the American services.’ Specifically, in November 1928 Hayek’s Institute asserted that the position of the US Federal Reserve and its member banks was ‘strong enough to be able to continue an expansion of credit for a long period of time yet; and the time of the great economic crisis is probably still far distant.’ Berger summarized the June 1929 Institute assessment of conditions in the USA: Because of the comparatively strong position of the money market, it was believed that these adverse developments would probably not lead to a crisis followed by a depression but rather to a further sharp tightening of the money market.

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In July 1929, the conclusions of the Harvard Economic Service were cited: ‘some reduction of business activity but no crisis was to be expected, such a reduction of activity probably not to occur until after the summer.’ In October 1929, Hayek’s Institute stated: it can be emphatically emphasised that, given a smooth and undisturbed development of the financial and political situation, all the prerequisites seem to be given to make a new upswing possible within a few months. (Berger 1936, 87–88, 182)

Berger (1936, 173) discussed the Institute’s ‘fallacious forecasts’; chapter XII (‘Business Cycle and Forecasting Theory, Cycle Theory on which the Work of the Institute is Based’) was devoted to Hayek’s Monetary Theory and the Trade Cycle (1933) and his Prices and Production (2012 [1931]) in which Robbins’ (2012 [1931], 172) assertion was made—yet there was no discussion of Robbins’ claim which later underpinned the 1974 Nobel Prize. In his editorial introduction to Contra Keynes and Cambridge, Bruce Caldwell (2009, 11) noted that most interwar business cycle institutes ‘died out after failing to foresee the coming Depression.’ Referring to the 1929 American crash, Hansjörg Klausinger (2010, 227; 2012, 172, n10) confirmed: ‘there is no textual evidence for Hayek predicting it as a concrete event in time and place’; we lack ‘convincing evidence of a prediction that conformed to what Robbins suggested in his foreword.’ Kresge (2013), who succeeded William Warren Bartley III as general editor of The Collected Work of F.A. Hayek, discovered that ‘Hayek was very, very careless about his references. Sometimes he would remember something but not remember it exactly, and sometimes would not go back and check.’ Hayek (1978) informed Armen Alchian that ‘I always get the best formulations of my ideas after they have already been on paper.’19 In the absence of documentary evidence—including the oral history tapes that Austrians are determined to suppress (Leeson 2015, chapter 2)—we can only presume that Hayek (during an implicit job interview process) verbally assured Robbins that he had predicted the Great Depression and that, for whatever reason, neither Robbins, Machlup, the Nobel Prize Selection Committee nor the Academy of Sciences checked the evidence.

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2 Knight: A Second Chicago Oral Tradition? 19. Hayek’s nineteenth—and possibly most important—stroke of luck was that for apparently personal and ideological reasons, his ‘free’ market Chicago School associates did not alert the wider audience to the evidence that contradicted Robbins’ assertion. ‘The Chicago School of Anti-Monopolistic Competition’ was first explicitly defined and described by a Mont Pelerin Society member, Edward Chamberlin (1957, 296); only then did economists begin to refer to Chicago as a School (Stigler 1988, 150). Paul Samuelson (1983, 7) recalled Knight stating: ‘If there is anything I can’t stand it’s a Keynesian and a believer in monopolistic competition.’20 In 1947, Hayek simultaneously created both the Mont Pelerin Society and a distinct and higher profile for Knight’s Department: before the Mont Pelerin Society, ‘There was no Chicago School of Economics’ (Stigler 1988, 148).21 Hayek’s choice for the ‘expenses-paid’ inaugural Mont Pelerin Society meeting suggests a Chicagoan bias: (current) Knight, Friedman and his brother-in-law, Aaron Director; plus (past and future) Harry Gideonse and George Stigler (Friedman and Friedman 1998, 158)—yet their inclusion was problematic for the Austrian cause. Ludwig ‘von’ Mises (2009 [1946]) objected to the presence atop Mont Pèlerin of those who had ‘endorsed by and large the critical part of the socialist program’ and whose names would, presumably (like their predecessors) fall ‘into oblivion.’22 At the inaugural meeting, Friedman recalled vigorous controversy over such issues as the role of religion and moral values in making possible and preserving a free society; the role of trade unions, and the appropriateness of government action to affect the distribution of income. I particularly remember a discussion of this issue, in the middle of which Ludwig von Mises stood up, announced to the assembly ‘You’re all a bunch of socialists,’ and stomped out of the room, an assembly that contained not a single person who, even by the loosest standards, could be called a socialist. (Friedman and Friedman 1998, 161)23

In the judgement of one distinguished historian of economic thought (and Stigler-supervised Ph.D. student), Knight was responsible for ‘killing off whatever respectability remained of the Austrian theory of

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capital’ (Blaug 1985, 118). Friedman devoted considerable energy to providing what he hoped would be a ‘decisive refutation’ of the Austrian business cycle model: I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse. (Friedman 1969 [1964], 261–284; 1972, 396–397; 1988, 1993, 1999; see also Hammond 1992)

Friedman and Stigler were part of the ‘Knight affinity group’ at Chicago (Reder 1982, 7). Harberger (2000), a Chicago student (1946–1950) who took or audited all of Knight’s offerings before becoming a Chicago faculty member (1953–1991),24 observed that the Austrian ‘picture is derived from the first principles of natural law, the nature of man … and then you just follow logically, logically, logically, like Aristotle, down to this very complex vision of reality, which has its own internal architecture and beauty, you see, and it is a flaw that mars that beauty that these guys always react against.’25 In a review of ‘The Rights of Man and Natural Law,’ Knight (1944, 128, 133) noted that Natural law has served as a defense for any existing order against any change and as an argument for change in any direction. Prior to the eighteenth century, natural law was chiefly a support for order and authority; since then ‘natural rights’ have played the opposite role as an appeal of the individual against government. Finally, the ‘nature’ from which law or rights are derived has borne every possible relation to ‘God’ or the gods.

In the thirteenth century, the Roman Catholics Church exerted hegemony over much of Europe. According to Knight, later doctrine expressed in the Council of Trent (1545–1547), the Syllabus of Errors (1864) and the Acts of the Vatican Council (1870) suggested

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nothing so much as the Marxian ideal of an educational dictatorship, but with the church in the role of the party. However, the state would not ‘wither away,’ giving place to an anarchist utopia, but would be preserved as an administrative organ of the church (as in the ideal of the Middle Ages) in a social order in which authority and obedience would be the moral cornerstone … the quasi-religious character of both fascism and communism is a familiar observation.

Religion divided the Mont Pelerin Society. Hayek reflected that his attempted fusion between atheists and faith-followers ‘seemed hopeless; that the two factions were not inclined to leave the religious differences lie idle.’ Following a visit to an old monastery, Frank Knight was moved to deliver an ‘atheistic sermon,’ and ‘one of six people sitting with them got up and moved to another table’ (Shearmur 2015). Knight continuously provoked the religious: a Catholic priest in clerical garb who enrolled in one of his courses obtained a refund after complaining that he had ‘registered for a course in the History of Economic Thought, not one in the misdeeds of the Catholic Church’ (cited by Friedman and Friedman 1998, 37). Knight’s (1951, 2, 28) American Economic Association presidential address further illustrated the problem. Knight likened Hitler and Stalin to the Pope as examples of ‘absolute authority.’ People had ‘not been taught to approach problem in terms of knowledge and understanding, but to obey some ancient rule, as interpreted by those in power, or follow some new prophet.’ Not surprisingly, in 1947 Knight sabotaged the name and quasi-religious direction that Hayek (1978) planned for his new libertarian society: ‘the Acton-Tocqueville Society, after the two most representative figures’ (Chapter 1).26 Leo Rosten (1908–1997), a University of Chicago graduate student in political science, recalled that Knight took students very seriously; he would get annoyed, he would argue, he would show his discontent, and then he would suddenly go into, ‘But don’t you realize the theological implications?’ when you were talking about the Federal Reserve Bank or something.

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Hayek (1978) replied: ‘When I knew him in the fifties, of course, he was preoccupied with religion. Though he was always fundamentally atheistic in the anti-religious attitude, his greatest interest was religion.’27 In a review of Hayek’s (1949) ‘The Intellectuals and Socialism,’ Knight (1949, 435–436, n3) emphasized that there were no ‘ideaological’ [sic ] differences are involved as far as I know. Both he and myself are ‘liberals’ in the now largely antiquated meaning of the term, which once implied individual liberty but has generally been turned upside-down to stand for state paternalism.

According to Hayek (1978), relations with Knight were ‘Personally, very good28;’ during his time in Chicago (1950–1962), ‘Just Frank Knight and his group were the people whom I got along with.’29 According to Ross Emmett (2011, 60), Knight supported the establishment of the Mont Pelerin Society—but opposed Hayek’s recruitment by the Chicago Economics Department and offered less-than-enthusiastic support for the publication of Hayek’s (1944) The Road to Serfdom by the University of Chicago Press. Knight (1932, 443, n4) could also have made Hayek’s Nobel Prize impossible by openly referring to the contrary evidence about his alleged Great Depression prediction: ‘Between propagandist and truth seeker and disseminator in the social field, the difference in standpoint is so opposed that the actual relation is likely to be one of hostility rather than cooperation as far as contemporaries were concerned.’ Knight had a ‘feud’ with one of his Chicago colleagues, Paul Douglas, and was unable to get along with others such as Viner (Friedman and Friedman 1998, 43; Reder 1982, 6). In contrast, Hayek (1978) recalled that he and Knight had ‘several very friendly controversies. I think we were always more puzzled by each other than anything else. It was not a real meeting of minds. With great effort, you know, we had some serious discussions, but somehow we were talking mostly at cross-purposes.’ James Buchanan interjected: ‘Certainly on the capital theory. [Laughter] I’ve always wondered why, knowing Knight very well as I did–of course later–and knowing his work and his interests, why

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he, in a sense, got diverted intellectually into capital theory. For years he spent attacking the Austrians, essentially. Hayek (1978) responded: ‘He was frightfully dogmatic about it. He asserted that he was absolutely certain, and he had very few arguments to justify it.’30 Buchanan, one of Knight’s graduate students, continued: ‘But he always said that he accepted the view–essentially the Austrian view–for a long time, but he somehow got converted away from it. I don’t know exactly what was the-.’ Hayek (1978) interrupted: ‘Yes, what led him to this I don’t know … I always assumed it must have been some very early teaching which he had absorbed and to which he had stuck; he hadn’t done any further thinking about it, but he felt that it was one of the foundations of his economics, to which he had to stick.’ Buchanan pressed further: ‘But you weren’t at [the University of ] Chicago at that time; so there were no direct-’; Hayek again interrupted: ‘Oh, no. I can’t say I didn’t know him when we had the controversy, but I had just met him once or twice in various places. But it was only when I came to Chicago that I really came to know him. It was very late, when his interest was much more religion than economics.’31 When Hayek relocated to the Committee on Social Thought at the University of Chicago in 1950, Knight was aged 64, so ‘very late’ seems a somewhat unusual description. Indeed, Buchanan (1991, 248– 249) noted that the 1950s were part of Knight’s (1885–1972) ‘middle years’; he was academically active until the end of his life. In ‘Laissez Faire: Pro and Con,’ Knight (1967, 783, 789, 794) complained about the ‘nonsense’ published by laissez faire advocates. Eight pages were devoted to the ‘pretentiously detailed history’ and ‘supreme absurdity’ of Hayek’s discussion of opportunity and equality of opportunity in The Constitution of Liberty: The social problem of freedom centres in power and its use in relation amongst persons and between them and society or its agents. The definition of freedom as the opposite (or absence?) of coercion (p. 149) does not mention persuasion – a highly important form of power over others that is very unequal and is recognised in law as ‘duress.’

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Many of Knight’s criticisms of Hayek could be widely or narrowly interpreted: ‘We only learn what ought to be – according to Professor Hayek’s ideals and wishful thinking.’ Hayek apparently didn’t wish to speculate about why Knight had been so agitated about Austrians. Alchian asked: ‘But there was an episode when I first heard of your work through Prices and Production and, let me call it the debate, or discussion, with Knight over The Pure Theory of Capital. Do you have any memories of that, or stories you might tell us?’ Hayek (1978) changed the subject away from Knight: No, it was really a very distant affair. I had known Knight slightly; he had been on a visit to Vienna in the twenties, but I didn’t know him at all well. All the discussions in which I got involved, except with Keynes, whom I knew fairly well, were really with distant targets of persons who were not live figures to me: Knight, [Arthur C.] Pigou, whom I also came to know later quite well. There was still another one I got engaged in–one or two Germans and some others. Those were all discussions with distant figures and were not really continued as discussions. I commented on their work once and left it at that.32

After Alchian pressed again, Hayek (1978) retreated to generalities: ‘You know, of course. Knight was a very puzzling figure. He was a man of such intelligence, and yet capable of going so wrong on particular points–for the moment only, though; a year later he would see it. But he got committed to a particular thing and pursued it to its bitter end, even when it was wrong.’33 Hayek (1978) reflected that Knight was completely unpredictable as to what position he would take … I know no person more difficult to describe, and who was capable of taking the most unexpected positions on almost anything. But he was extraordinarily stimulating, even in conversation. And his influence was wholly beneficial. It’s hardly an exaggeration to say that all the leading economic theorists in this country above the age of fifty, or even forty-five, come out of the Frank Knight tradition, even more than the Harvard tradition. Earlier it was the [Frank W.] Taussig tradition and Harvard, but in the generation slightly younger than myself, I think nearly all the first-class economists at one time or another have been pupils of Frank Knight.34

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Robbins was Knight’s (1953, 289) ‘personal friend as well as a comrade in a common struggle’; yet Knight accused Robbins of making overzealous attempts to promote fellow-travelling economists. Knight was referring to Robbins’ defence of classical economists—yet the criticisms could apply equally to Robbins’ earlier promotional statements about Hayek. According to Knight, discussion about the general ideal of freedom was impossible if those recognized as leaders ‘ride off furiously in every direction’ especially if they find their tasks in providing antidotes to each other’s poisons. Within wide limits, agreement, in society at large and amongst it’s ‘leaders’ is more important than ‘truth’; for order is the very essence of society and prior even to freedom.

In 1950, Robbins began a decade-long ‘shun’ of Hayek for abandoning his wife and children; Knight (1953, 289) criticised Robbins for defending classical economists ‘against false and immorally motivated imputation of immoral motivations.’ Hayek (1978) recalled that the first four chapters of Risk, Uncertainty and Profit, which of course Knight [1921] did when he was very young, or relatively young, was at that time the best summary of the current state of theory available anywhere. Robbins, when I came to London [1931], was giving his students the first chapter of Risk, Uncertainty and Profit as an introduction to economic theory, and it was then the best one which was available.35 Robbins used the first introductory chapters of the book as an elementary textbook on economics. My students were all brought up on it; so I had to study it very carefully.36

Hayek’s (2012 [1931]) Prices and Production was carefully studied in Chicago: as a graduate student, Friedman took notes from it. Although his notes begin with ‘Lecture I,’ he also presumably read the Great Depression ‘prediction’ that Robbins (2012 [1931]) attributed to Hayek’s Institute.37 Knight must have been aware of the inaccuracy of Robbins’ assertion: in a JPE analysis of ‘The Austrian Institute for Business Cycle Research,’ Carl Theodore Schmidt (1931a, 102–103) analysed the monthly reports

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and reported that the Institute ‘makes no pretence of offering a definite basis for the prognosis of cyclical fluctuations.’ Berger (1936, 6, 17, 61–62) reiterated that ‘it was clear’ that business cycle forecasting was not a ‘stressed’ part of its ‘announced purpose.’ From the outset, the Institute emphasized that ‘no business cycle theory’ was ‘sufficiently complete’ for forecasting purposes; however, the Institute did predict a cyclical recovery starting in Austria in March 1928. Hayek (1978) recalled that ‘Knight visited us once in Vienna:’ in May 1930, at the Austrian Institute for Business Cycle Research, at Morgenstern’s invitation (Emmett 2011, 59–60; Hülsmann 2007, 674).38 Morgenstern was Hayek’s associate and in 1931 succeeded him as Institute Director and so must have known that Hayek had not predicted the Great Depression. In 1934, Morgenstern began to ‘publish works with a markedly less Austrian orientation’ (Hülsmann 2007, 576, n26); openly proclaiming that Hayek’s contribution to business cycle theory was worthless (Leonard 2010).39 Between 1928 and 1945, the JPE was edited by Knight and Viner with ‘the cooperation of other members of the Department of Economics of the University of Chicago.’ Arthur Marget’s (1932, 261) highly favourable JPE review of the first edition of Hayek’s Prices and Production referred to Robbins’ ‘altogether admirable’ Foreword in which it was asserted that in post-war English-language terms, only Dennis Robertson’s (1926) Banking Policy and the Price Level was comparable. Four months later, Knight (1932, 443) insisted in the JPE that an effort should be made to ‘maintain a distinction between truth and propaganda.’ Knight (19 December 1932) wrote to Morgenstern: ‘I wish he [Hayek] or someone would try to tell me in a plain grammatical sentence what the controversy between [Piero] Sraffa and Hayek is about. I haven’t been able to find anyone on this side who has the least idea.’ Knight (4 May 1933) also reflected to Morgenstern: In general I’m in a perfectly low ‘depression’ over the state of economics, and the Hayek-Sraffa altercation with which my [capital] essay is remotely connected is a case in point. (Cited by Lawlor and Horn 1992, 318, n1)

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Knight (5 October 1933) told Walter Smith: ‘I am so depressed that it is really serious for my work. I feel that the regime of liberty has been a failure, or an experiment with negative results, that it has shown the incapacity of large masses of people to reach any sound conclusion by thinking and discussion’ (cited by Burgin 2009, 522, n36). Knight (1933, 1934a, 1935a, b, c, 1936a) was highly critical of the Austrian School of Economics: the role allocated to ‘liberty’ in Robbins’ methodological analysis was specifically criticized (1934b, 237). Indeed, Knight (1936b, 425) referred to Robbins’ Essay on the Nature and Significance of Economic Theory as ‘good sales talk.’ Knight (5 October 1933) noted in correspondence that he was ‘absolutely convinced that [Austrian capital] theories are completely wrong – but what is truth?’ Liberalism had freed truth-seeking from the shackles of tradition; but Knight worried that the quest for truth was being replaced by the quest for applause and the manipulation of public opinion. (Emmett 1997, 248, 321)

Economics, Knight (1940, 5, n2) insisted, was ‘not a fairy story.’40 Knight (1939) was intensely preoccupied with the multi-faceted subject matter of his Economica essay on ‘The Ethics of Liberalism.’ During the Great Depression, Hayek promoted labour ‘liquidation’— the ‘central theme’ of Hayek’s (1933, 16–17) Monetary Theory and Trade Cycle was a ‘critique’ of the programme of the ‘Stabilizers.’ In contrast, Chicagoans promoted stabilization and stimulatory remedies. Viner, Lloyd Mints, and Henry Schultz all participated in the 1931 and 1932 Harris Foundation Round Tables. On 26 June 1931, Schultz and Carter Goodrich (Columbia University) presented a paper, ‘Are Wage Cuts a Remedy for Unemployment?’ Sumner Slichter appeared to summarize the anti-Austrian academic consensus: ‘From the standpoint of the United States … I wonder if the wage issue … isn’t becoming pretty academic … I think it is practically a dead issue in this depression’ (cited by Davis 2012, 74–76). Hayek and Mises promoted the deflation which intensified the Great Depression (White 2008; Magliulo 2018; Glasner 2018). One-term President Herbert Hoover (1952, 30) reported that he had been receiving (Austrian-style) policy advice from Treasury Secretary, Andrew Mellon:

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liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate … it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.

In December 1931, German Chancellor Heinrich Brüning reduced most wages by 10–15%; unemployment rose from one-sixth to onefifth of the German labour force (Galbraith 1975, 173; Haberler 1986, 425). On 30 January 1933, Adolf Hitler was appointed Chancellor of a coalition government. At Chicago, Knight and Viner were the departmental ‘stars’ (Friedman and Friedman 1998, 35). On 30 January 1932, Viner formed a committee to draft a statement of expansionary recommendations to President Hoover; on 16 March 1933, the first Chicago Plan of Banking Reform was sent to President Franklin Roosevelt’s Secretary of Agriculture. It was signed by eight Chicagoans, Knight, Mints, Director, Douglas, Schultz, Henry Simons, Albert G. Hart and Garfield Cox. Knight added: ‘I think Viner really agrees but doesn’t believe it good politics’ (cited by Phillips 1995, 192).41 In the JPE, Machlup (1935, 578, 621–622) sought to rebut Knight’s attempt to ‘discard as worthless tools’ much of Austrian capital and business cycle theory: ‘Why the boom is doomed is explained by the [Austrian] investment cycle theory.’ In reply, Knight (1935a, 625) noted that as Machlup observed ‘it is a truism that agents maintain themselves until they are liquidated, but he prefers to ignore the fact that as capital they are not liquidated short of a general liquidation of society.’ Berger’s (1936) ‘The Forecasting Methods and Results of the Austrian Institute for Business Cycle Research’ was a University of Chicago Department of Economics Master’s Degree dissertation. In November 1935, Hayek was elected President of the London Economic Club, a distinguished society founded in the last decade of the nineteenth century. Robbins (1928) delivered his most famous paper on ‘The Representative Firm’ to the Club; at least two visiting Chicagoans also read papers: in 1934, Schultz; and in 1939, Knight on ‘The Problem of Economic Dynamics’ (Marcuzzo and Sanfilippo 2008; McDonald 2004, 70–74; Howson 2011, 155, 250, 320).

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Such Presidential addresses provided a distinguished platform (e.g. Plant 1934): in the 1930s, the Club was part of the competition for influence between the LSE and Cambridge. Hayek (1978) described himself as ‘very unhappy’ at the time—but associated his discomfort with his new privileged platform: I was very unhappy about having to give the presidential address to the Economic Club [10 November 1936]. Then I hit on that subject … ‘Economics and Knowledge’ … the one which marks the new look at things in my way … it was really the beginning of my looking at things in a new light … I started my own way of thinking … It was several ideas converging on that subject. It was, as we just discussed, my essays on socialism, the use in my trade-cycle theory of the prices as guides to production, the current discussion of anticipation, particularly in the discussion with the Swedes on that subject, to some extent perhaps Knight’s [1921] Risk, Uncertainty and Profit, which contains certain suggestions in that direction–all that came together. And it was with a feeling of a sudden illumination, sudden enlightenment, that I–I wrote that lecture in a certain excitement. I was aware that I was putting down things which were fairly well known in a new form, and perhaps it was the most exciting moment in my career when I saw it in print … Sometimes in private I say I have made one discovery and two inventions in the social sciences: the discovery is the approach of the utilization of dispersed knowledge [emphasis added], which is the short formula which I use for it; and the two inventions I have made are denationalization of money and my system of democracy.42

In ‘Economics and Knowledge,’ Hayek (1937) proposed to reconstruct much of economics around Knight’s insights: the empirical element in economic theory–the only part which is concerned not merely with implications but with causes and effects and which leads therefore to conclusions which, at any rate in principle, are capable of verification – consists of propositions about the acquisition of knowledge … I think that the field in which, as one would expect, the discussion of the assumptions concerning foresight first attracted wider attention was the theory of risk. The stimulus which was exercised in this connection by the work of Frank H. Knight may yet prove to have a profound influence far beyond its special field. Not much

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later the assumptions to be made concerning foresight proved to be of fundamental importance for the solution of the puzzles of the theory of imperfect competition, the questions of duopoly and oligopoly. Since then, it has become more and more obvious that, in the treatment of the more ‘dynamic’ questions of money and industrial fluctuations, the assumptions to be made about foresight and ‘anticipations’ play an equally central role and that in particular the concepts which were taken over into these fields from pure equilibrium analysis, like those of an equilibrium rate of interest, could be properly defined only in terms of assumptions concerning foresight. The situation seems here to be that, before we can explain why people commit mistakes, we must first explain why they should ever be right.

In correspondence in 1934, Knight told Hayek he rejected his assertion that systematic exposition rather than the meeting of specific questions [emphasis added] is the way to ‘advance knowledge.’ (Cited by Emmett 2011, 59–60)

If Knight asked specific questions about Hayek’s alleged use of Austrian theory to predict the Great Depression this may have surfaced only in a second Chicago oral tradition. When in 1968 the Swedish Central Bank announced the establishment of the Nobel Prize for Economic Science, Don Patinkin (1922– 1995) and Harry Johnson (1923–1977) immediately attempted to elbow Friedman out of the ‘queue’ with the accusation that he was a ‘crook’ who had been ‘inventing history’ and had indulged in ‘scholarly chicanery.’ Patinkin tried to enlist Knight and Viner: but Knight replied that he had ‘retired,’ while Viner, who left Chicago for Princeton in 1946, denigrated post-Mont Pelerin Society Chicagoan economics as ‘ideologically loaded.’ Johnson asserted that Friedman (1972, 941) had ‘invented’ the oral tradition for some ‘noble or nefarious purpose’ (Leeson 2003, 111–112, 244, 263)—but this failed to prevent Friedman’s 1976 Nobel Prize. If Hayek’s ‘prediction’ of the Great Depression had more publically been revealed to be an ‘invention,’ he would surely not have received the 1974 Nobel Prize for Economic Science.43

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David Levy recalls Knight walking out as Hayek lectured (Knight was sitting in the middle of one of the front rows, so his departure was obvious to everyone present—‘knowledge’ that was presumably transmitted to a wider audience).44 According to Friedman, Knight’s ‘speciality was debunking’ (cited by Overtveldt 2007, 72): if, as seems likely, Knight was aware that Hayek had not used Austrian business cycle theory to predict the Great Depression why did he not debunk Hayek for this false claim? It appears that Patinkin and Johnson may have had, at least in part, personal motives: their spot in the Nobel Prize queue. Both Knight (1885–1972) and Viner (1892–1970) were on the Nobel Prize short-list (Lindbeck 1985, 52); both were also close to death. By 1933, Knight and Douglas (his University of Chicago colleague and later Democratic Party Senator) had stopped talking to each other: in a letter, Douglas complained to Knight that he had been portraying him in ‘personal conversation and your public speeches and what you have said to many others that you regard me as something of a charlatan and a demagogue’ (cited by Stigler 1988, 184). Immediately after World War II, Douglas (1972, 128) complained that ‘Knight was now openly hostile, and his disciples seemed to be everywhere.’ If ideological issues were a consideration: in the year before the announcement of the establishment of the Nobel Prize, Knight (1967, 782) noted that laissez faire had recently ‘become almost a dirty word.’ If personal issues were a consideration: in 1969, Hayek—an improbable candidate for the Prize (Söderberg et al. 2013)—had fallen into a deep depression (which may have tempered personal criticisms).

3 Schmidt and Berger 20. Nigel Lawson (1980)—who oversaw the 1986 Hayek-inspired ‘Big Bang’ deregulation of the financial system—stated that the ‘distinctive feature of the new Conservatism’ is its ‘rejection’ of false trails and its return to the mainstream. Old lessons have had to be painfully relearned. The old consensus is in the process of being re-established. To the extent that new Conservatives turn to new sages—such as Hayek and

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Friedman—that is partly because what those writers are doing is avowedly reinterpreting the traditional political and economic wisdom of [David] Hume, [Edmund] Burke and Adam Smith in terms of the conditions of today; and partly because, as specialists in economics (although Hayek in particular is a great deal more than that) they are of particular interest in an age in which, for better or worse, economic policy has achieved a centrality in the political debate which it never enjoyed in, say, the golden age of Disraeli and Gladstone.

In 2007, financial deregulation contributed to the first run on a Britain bank since the ‘golden age of Disraeli and Gladstone.’ Lawson (1980) continued: the essential point is that what we are witnessing is the reversion to an older tradition in the light of the failure of what might be termed the new enlightenment. This is important, politically, not in the sense of some kind of appeal to ancestor-worship or to the legitimacy of scriptural authority: it is important because these traditions are, even today, more deeply rooted in the hearts and minds of ordinary people than is the conventional wisdom of the recent past … as Hayek has cogently pointed out in his essay on ‘The Use of Knowledge in Society,’ individual agents acting on imperfect information can operate a market economy quite successfully. An effective price system does not require the chimera of ‘perfect competition’: prices are still the most efficient signals we have for transmitting the minimum necessary information about consumer wants and investment opportunities. If not enough shoes are being produced, citizens do not have to sign petitions or lobby Parliament, nor do bureaucrats have to go out into the streets to conduct surveys of need. Instead, a businessman will discover he can sell his stock for a higher price and will order more from his suppliers. The point is as important as it is elementary.

Hayek’s twentieth stroke of luck relates to the apparent non-use of Schmidt’s and Berger’s ‘knowledge in society.’ Berger’s (1907–1996) thesis failed to make an impact on the profession: he later worked outside academia for the US Bureau of Labor Statistics (he was also President of the Chicago Chapter of the American Statistical Association, 1955–1956). Schmidt, however, after finishing his Berkeley Ph.D. thesis on Cyclical fluctuations in Germany economy, 1924–1930

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(1931b), published the NBER German Business Cycles 1924–1933 (1934), The Plough and the Sword: Land, Labor and Property in Fascist Italy (1938), The Corporate State in Action: Italy Under Fascism (1939) and American Farmers in the World Crisis all of which were favourably reviewed in the JPE and elsewhere (Goldschmidt 1935; Douglas 1938; Spengler 1940; Taylor 1941). In an American Economic Review assessment of Guenter Reimann’s The Vampire Economy Doing Business Under Fascism, Schmidt (1940, 134), by then at Columbia University, noted— without mentioning the Austrian School of Economics—the Misean delusion: many ‘business-men in Germany and Italy … welcomed the movements of Hitler and Mussolini as weapons that would destroy the threat of openly anti-capitalist forces, but they have learnt that these weapons are also destructive of their security.’45 Schmidt’s work influenced Myrdal’s (1944) An American Dilemma: The Negro Problem and Modern Democracy to which the 1974 Nobel Prize Selection Committee and the Academy of Sciences ‘attached great importance’46; but Schmidt’s (1931a) JPE ‘The Austrian Institute for Business Cycle Research’ appeared to have had no discernible influence on economics.

Notes 1. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 2. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 3. Friedrich Hayek, interviewed by Thomas Hazlett 12 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 4. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 5. Friedrich Hayek interviewed by Robert Bork 4 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/).

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6. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 7. Friedrich Hayek, interviewed by Earlene Craver date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 8. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 9. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 10. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 11. Machlup (19 November 1974) to Hayek. Hayek Papers Box 36.18. 12. Hayek (1978) could not object to this national stereotyping because this was his own mode of discourse (Chapter 5). Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http:// oralhistory.library.ucla.edu/). 13. Hayek Papers Box 74.30. 14. Hayek Papers Box 46.25. 15. Hayek Papers Box 46.25. 16. This judgement may, of course, be contradicted or modified when the Nobel archives are released. 17. Coincidentally, Carlson encouraged the ‘romance’ between Milton and Rose while all three were University of Chicago students (Friedman and Friedman 1998, 39). 18. http://www.nobelprize.org/nobel_prizes/economics/laureates/1974/ press.html 19. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 20. Samuelson (1967, 108, n5, 113, 116, 138), reflecting on ‘Chamberlin’s imperishable vision,’ predicted that ‘reality will falsify many of the important qualitative and quantitative predictions of the competitive model … Chamberlin, Sraffa, [Joan] Robinson and their contemporaries have led economists into a new land from which their critics will

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never evict us … Chicago economists can shout until they are blue in the face that there is no elegant alternative to the theory of perfect competition … it is significant that [Alfred] Marshall’s remaining defenders among theorists tend to be those satisfied with perfect competition as an approximation to reality.’ 21. Knight was also associated with the philosophy department. 22. Gideonse was specifically mentioned by Mises (Hülsmann 2007, 866). 23. Laurence Moss (2005, 447) noted that there was a ‘hagiographic quality’ to Mises’ New York University seminar that he attended in the mid1960s: One category of attendee was ‘the occasional graduate students who needed the credits in order to obtain their degrees. They would ask specific questions about current monetary or fiscal policies, suggesting an affinity for Keynesian nostrums, and would speedily receive icy cold stares from the second category, diehards participating in that seminar. The diehards were a motley collection of Mises’s friends, protectors, and benefactors. They formed a physical protective belt around Mises and stared down all who would dare to question or disbelieve.’ 24. Email from Harberger (2 January 2014) to the author. 25. http://www.pbs.org/wgbh/commandingheights/shared/minitext/int_ alharberger.html. 26. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 27. Hayek (1978) added: ‘But you knew he also knew the history of economics very well; he knew exactly—In that respect, he was quite unlike Keynes. You could hardly mention an ancient or nineteenth-century economist and Knight wouldn’t know all about it.’ Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 28. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 29. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 30. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/).

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31. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 32. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 33. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 34. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 35. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 36. Friedrich Hayek, interviewed by Jack High date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 37. Friedman Papers Box 120.2 ‘Reading Notes’ 1932–1933. 38. Friedrich Hayek, interviewed by Jack High date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 39. Hayek (1978) asserted: ‘Well, I don’t want to be unkind to my old friend, the late Oskar Morgenstern, but while I think his book is a great mathematical achievement, the first chapter which deals with economics is just wrong. I don’t think that game theory has really made an important contribution to economics, but it’s a very interesting mathematical discipline.’ University of California at Los Angeles oral history interview with Jack High. 40. ‘As Whitehead has said of natural science, economics is not a fairy tale.’ 41. Viner may have declined to sign because of the close proximity to his employment as special assistant to U.S. Treasury Secretary Henry Morgenthau (1934–1937). 42. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 43. Oral traditions have to be treated carefully for obvious and not so obvious reasons. At his fingertips—or more accurately, in a drawer a few

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feet away from his desk—Friedman had the evidence that could—in 1969—have revealed that a large part (but not all) of his claims about the Chicago oral tradition was accurate. It never occurred to him to check his own Mints lecture notes (Leeson 2003). 44. http://pl842.pairlitesite.com/tag/committee-on-social-thought/. 45. At Chicago, Simons, Director, Knight, Douglas, Viner, Gideonse, Mints, John Nef and Theodore Yntema all deemed Columbia to be superior to Harvard (Samuelson 2003, 464). 46. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1974/press.html. Myrdal referenced Schmidt’s American Farmers in the World Crisis.

Archival Insights into the Evolution of Economics Glasner, D. 2018. Hayek, Gold, Deflation and Nihilism. In R. Leeson (Ed), Hayek: A Collaborative Biography Part XIII: ‘Fascism’ and Liberalism in the (Austrian) Classical Tradition. Kresge, S. (2013). Interview with Stephen Kresge. In R. Leeson (Ed.), Hayek: A Collaborative Biography Part I Influences: From Mises to Bartley. Basingstoke, UK: Palgrave Macmillan. Laidler, D. (2013). The 1974 Hayek-Myrdal Nobel Prize. In R. Leeson (Ed.), Hayek: A Collaborative Biography Part I Influences: From Mises to Bartley. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (Ed.). (2003). Keynes, Chicago and Friedman (2 Vols.). London: Pickering and Chatto. Leeson, R. (2015). Hayek, Heroism and Hagiography. In R. Leeson (Ed.), Hayek: A Collaborative Biography Part II Austria, America and the Rise of Hitler, 1899–1933. Basingstoke, UK: Palgrave Macmillan. Magliulo, A. (2018). Before Hitler: The Expansionary Program of the Brauns Commission. In R. Leeson (Ed.), Hayek: A Collaborative Biography Part XIII: ‘Fascism’ and Liberalism in the (Austrian) Classical Tradition. Basingstoke, UK: Palgrave Macmillan. Shearmur, J. (2015). The Other Path to Mont Pelerin. In R. Leeson (Ed.), Hayek: A Collaborative Biography Part IV England, the Ordinal Revolution and the Road to Serfdom, 1931–1950. Basingstoke, UK: Palgrave Macmillan.

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Söderberg, G., Offer, A., & Bjork, B. (2013). Hayek in Citations and the Nobel Memorial Prize. In R. Leeson (Ed.), Hayek: A Collaborative Biography Part I Influences: From Mises to Bartley. Basingstoke, UK: Palgrave Macmillan.

References Berger, A. O. (1936, August). The Forecasting Methods and Results of the Austrian Institute for Business Cycle Research. MA dissertation, Department of Economics, Division of Social Sciences, University of Chicago. Blaug, M. (1985). Frank Knight. In Great Economists Since Keynes. Brighton, UK: Edward Elgar Buchanan, J. (1991). Frank Knight. In E. Shills (Ed.), Remembering the University of Chicago: Teachers, Scientists, and Scholars. Chicago: University of Chicago Press. Caldwell, B. (2009). Introduction. In F. A. Hayek, Contra Keynes and Cambridge The Collected Works of F.A. Hayek (B. Caldwell, Ed.). Chicago: University of Chicago Press. Chamberlin, E. H. 1957. Towards a More General Theory of Value. New York: Oxford University Press. Cubitt, C. 2006. A Life of August von Hayek. Bedford, England: Authors On Line. Davis, J. R. (2012). A Study in Caricatures: Keynes and the Classics at the 1931–1932 Harris Foundation Meetings. International Journal of Business, Humanities and Technology, 2(6), 74–80. Douglas, P. (1938, July 13). Mussolini’s Agricultural Policy. Review of The Plough and the Sword by Carl T. Schmidt. New Republic, p. 286 Douglas, P. (1972). In the Fullness of Time: The Memoirs of Paul H. Douglas. New York: Harcourt Brace Jovanovich. Emmett, R. B. 1997. ‘What is Truth’ in Capital Theory?: Five Stories Relevant to the Evaluation of Frank Knight’s Contribution to the Capital Controversy. In J. B. Davis (Ed.), New Economics and Its History: History of Political Economy 29 (1997 Supplement). Durham: Duke University Press. Emmett, R. (2011). Discussion and the Evolution of Institutions in a Liberal Democracy Frank Knight Joins the Debate. In A. Farrant (Ed.), Hayek, Mill and the Liberal Tradition. New York: Routledge. Friedman, M. F. (1969). Monetary Studies of the National Bureau. In The Optimum Quantity of Money and Other Essays, 261–284. Chicago: Aldine.

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Friedman, M. F. (1972). Comment on the Critics. Journal of Political Economy, 80(5), 951–977. Friedman, M. F. (1988, December). The ‘Plucking Model’ of Business Cycle Fluctuations Revisited (Working Papers in Economics E-88-48), Hoover Institution. Friedman, M. F. (1993). The ‘Plucking Model’ of Business Cycle Fluctuations Revisited. Economic Inquiry, 31(April), 171–177. Friedman, M. F. (1999). Mr. Market Interview. Hoover Digest, 1(January). http://www.hoover.org/publications/hoover-digest/article/6459 Friedman, M. F., & Friedman, R. D. (1998). Two Lucky People. Chicago: University of Chicago Press. Galbraith, J. K. (1975). Money Whence It Came, Where It Went. New York: Viking. Goldschmidt, R. W. (1935). Review German Business Cycles, 1924–1933 by Carl T. Schmidt. Journal of Political Economy, 43(2), 402–404. Haberler, G. (1975). A Discussion with Friedrich A. von Hayek: Held at the American Enterprise Institute on April 9, 1975. Washington: American Enterprise Institute. Haberler, G. (1986). Reflections on Hayek’s Business Cycle Theory. Cato Journal, 6(2), 421–435. Hammond, J. D. (1992). An Interview with Milton Friedman on Methodology. History of Economic Thought and Methodology, 10, 91–118. Harberger, A. (2000). Interview. Commanding Heights. PBS. http://www.pbs. org/wgbh/commandingheights/shared/minitext/int_alharberger.html. Hayek, F. A. (1933). Monetary Theory and the Trade Cycle (N. Kaldor & H. M. Croome, Trans.). New York: Harcourt Brace. Hayek, F. A. (1937). Economists and Knowledge. Economica, New Series 4(February), 33–54. Hayek, F. A. (1944). Road to Serfdom. Chicago: University of Chicago Press. Hayek, F. A. (1949). The Intellectuals and Socialism. University of Chicago Law Review (Spring), 16(3), 417–433. Hayek, F. A. (1975). In G. Haberler, A Discussion with Friedrich A. von Hayek: Held at the American Enterprise Institute on April 9, 1975. Washington: American Enterprise Institute. Hayek, F. A. (1978). Oral History Interviews. Centre for Oral History Research, University of California, Los Angeles. http://oralhistory.library.ucla.edu/. Hayek, F. A. (1994). Hayek on Hayek an Autobiographical Dialogue. Supplement to The Collected Works of F.A. Hayek (S. Kresge & L. Wenar, Eds.). Chicago: University of Chicago Press.

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Hayek, F. A. (2012). Business Cycles Volume VII The Collected Works of F.A. Hayek (H. Klausinger, Ed.). Chicago: University of Chicago Press. Hoover, H. (1952). The Memoirs of Herbert Hoover, Vol. 3: The Great Depression 1929–1941. New York: Macmillan. Howson, S. (2011). Lionel Robbins. Cambridge: Cambridge University Press. Hülsmann, J. G. (2007). Mises: The Last Knight of Liberalism. Auburn, AL: Ludwig von Mises Institute. Keynes, J. M. (1919). The Economic Consequences of the Peace. London: Macmillan. Klausinger, H. (2010). Hayek on Practical Business Cycle Research: A Note. In H. Hagemann, T. Nishizawa, & Y. Ikeda (Eds.), Austrian Economics in Transition: From Carl Menger to Friedrich Hayek (pp. 218–234). Basingstoke: Palgrave Macmillan. Klausinger, H. (Ed.). (2012). Editorial Notes. In F. A. Hayek, Business Cycles Volume VII The Collected Works of F.A. Hayek. Chicago: University of Chicago Press. Knight, F. H. (1921). Risk, Uncertainty and Profit. New York: Houghton Mifflin. Knight, F. H. (1932). The Newer Economics and the Control of Economic Activity. Journal of Political Economy, 40(4), 433–476. Knight, F. H. (1933). Capitalistic Production, Time and the Rate of Return. In Economic Essays in Honor of Gustav Cassel. London: George Allen & Unwin. Knight, F. H. (1934a). Capital, Time and the Interest Rate. Economica, New Series 1, 257–286. Knight, F. H. (1934b). The Nature of Economic Science in Some Recent Discussion. American Economic Review, 24(2), 225–238. Knight, F. H. (1935a). Comment. Journal of Political Economy, 43(5), 625–628. Knight, F. H. (1935b). Professor Hayek and the Theory of Investment. Economic Journal, 45(March), 77–94. Knight, F. H. (1935c). The Theory of Investment Once More: Mr. Boulding and the Austrians. Quarterly Journal of Economics, 50(November), 36–67. Knight, F. H. (1936a). The Quantity of Capital and the Rate of Interest. Journal of Political Economy, 44(August and October), 433–463, 612–642. Knight, F. H. (1936b). Review of Lionel Robbins’ Theory of Economic Policy and the History of Doctrine. Ethics, 63(4), 276–292. Knight, F. H. (1939). Ethics and Economic Reform 1. The Ethics of Liberalism. Economica New Series, 6(21), 1–29. Knight, F. H. (1940). ‘What Is Truth’ in Economics? Journal of Political Economy, 48(February), 1–32.

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Knight, F. H. (1944). Review of The Rights of Man and Natural Law by Jacques Maritain; Doris C. Anson. Ethics, 54(2), 124–145. Knight, F. H. (1949). World Justice, Socialism, and the Intellectuals. The University of Chicago Law Review, 16(3), 434–443. Knight, F. H. (1951). The Role of Principles in Economics and Politics. American Economic Review, XLI(1), 1–29. Knight, F. H. (1953). Theory of Economic Policy and the History of Doctrine. Review Article on The Theory of Economic Policy in English Classical Political Economy, by Lionel Robbins. Ethics, 63(July), 276–292. Knight, F. H. (1967). Laissez Faire: Pro and Con. Journal of Political Economy, 75(6), 782–795. Kresge, S. (1994). Introduction. In F. A. Hayek, 1994. Hayek on Hayek an Autobiographical Dialogue. Supplement to The Collected Works of F.A. Hayek (S. Kresge & L. Wenar, Eds.). Chicago: University of Chicago Press. Kuehnelt-Leddihn, E. R. (1992). The Road from Serfdom. National Review, 44(8), 32. Lawlor, M., & Horn, B. (1992). Notes on the Hayek-Sraffa Exchange. Review of Political Economy, 4, 317–340. Lawson, N. (1980, August 4). The New Conservatism (Lecture to the Bow Group). https://www.margaretthatcher.org/document/109505 Leeson, R. (Ed.). (2013). Hayek: A Collaborative Biography Part I Influences from Mises to Bartley. Basingstoke, England: Palgrave Macmillan. Leonard, R. (2010). Von Neumann, Morgenstern, and the Creation of Game Theory: From Chess to the Social Sciences. Cambridge: Cambridge University Press. Leube, K. R. (1984). Biographical Introduction. In K. R. Leube & C. Nishiama (Eds.), The Essence of Hayek. Stanford, CA: Hoover Institution Press. Lindbeck, A. (1985). The Prize in Economic Science in Memory of Alfred Nobel. Journal of Economic Literature, 23(1), 37–57. Machlup, F. (1935). Professor Knight and the ‘Period of Production’. Journal of Political Economy, 43(5), 577–624. Machlup, F. (1974). Friedrich Von Hayek’s Contribution to Economics. Swedish Journal of Economics, 76(December), 498–531. Marcuzzo, M. C., & Sanfilippo, E. (2008). Dear John, Dear Ursula (Cambridge and LSE, 1935): Eighty-Eight Letters Unearthed. In R. Scazzieri, A. Sen, & S. Zamagni (Eds.), Markets, Money and Capital: Hicksian Economics for the Twenty First Century. Cambridge: Cambridge University Press. Marget, A. (1932). Review of Prices and Production by Friedrich A. Hayek; Preise und Produktion by Friedrich A. Hayek. Journal of Political Economy, 40(2), 261–266.

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McDonald, D. (2004). Clara Collet 1860–1948: An Educated Working Woman. London: Routledge. Mises, L. (1951 [1932]). Socialism: An Economic and Sociological Analysis (J. Kahane, Trans.). London: Jonathon Cape. Mises, L. (2009). Observations on Professor Hayek’s Plan. Libertarian Papers, 1(2), 1–3. http://www.libertarianpapers.org/articles/2009/lp-1-2.pdf. Moss, L. (2005). Richard A. Musgrave and Ludwig von Mises: Two Cases of Emigrè Economists in America. Journal of the History of Economic Thought, 27(4), 443–450. Myrdal, G. (1944). An American Dilemma, Volume 1: The Negro Problem and Modern Democracy. New York: Harper and Row. Overtveldt, J. V. (2007). The Chicago School How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business. Chicago: Agate. Phelps Brown, E. H. (1987). Lionel Charles Robbins. Proceedings of the British Academy, LXXIII, 601–630. Phillips, J. R. (1995). The Chicago Plan and New Deal Banking Reform. New York: M.E. Sharpe. Plant, A. (1934, February). The Economic Theory Concerning Patents for Inventions. Economica New Series, 1(1), 30–51. Reder, M. (1982). Chicago Economics: Permanence and Change. Journal of Economic Literature, 20(1), 1–38. Robbins, L. C. (1961). Hayek on Liberty. Economica New Series, 28, 66–81. Robbins, L. C. (1971). Autobiography of an Economist. London: Macmillan. Robbins, L. C. (2012 [1931]). Foreword. In F. A. Hayek, Business Cycles Volume VII The Collected Works of F.A. Hayek (H. Klausinger, Ed.). Chicago: University of Chicago Press. Robertson, D. 1926. Banking Policy and the Price Level: An Essay in the Theory of the Trade Cycle. London: P. S. King. Samuelson, P. A. (1967). The Monopolistic Competition Revolution. In R. Kuenne (Ed.), Monopolistic Competition Theory: Studies in Impact: Essays in Honor of Edward H. Chamberlin. New York: Wiley. Samuelson, P. A. (1983). Economics in a Golden Age. In E. C. Brown & R. M. Solow (Eds.), Paul Samuelson and Modern Economic Theory. New York: McGraw Hill. Samuelson, P. A. (2003). Reflections on the Schumpeter I Knew Well. Journal of Evolutionary Economics, 13, 463–467. Schmidt, C. T. (1931a). The Austrian Institute for Business Cycle Research. Journal of Political Economy, 39(1), 101–103.

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Schmidt, C. T. (1931b). Cyclical Fluctuations in German Economy, 1924–1930. Ph.D., University of California, Berkeley. Schmidt, C. T. (1934). German Business Cycles 1924–1933. New York: National Bureau of Economic Research. Schmidt, C. T. (1938). The Plough and the Sword. New York: Columbia University Press. Schmidt, C. T. (1939). The Corporate State in Action: Italy Under Fascism. New York: Oxford University Press. Schmidt, C. T. (1940). Review of Guenter Reimann’s The Vampire Economy Doing Business Under Fascism. American Economic Review, 30(1), 134–136. Schmidt, C. T. (1941). American Farmers in the World Crisis. New York: Oxford University Press. Silverman, P. (1984). Law and Economics in Interwar Vienna Kelsen, Mises and the Regeneration of Austrian Liberalism. Ph.D., Department of History, Faculty of the Division of the Social Sciences, University of Chicago. Spengler, J. J. (1940). Review The Corporate State in Action: Italy Under Fascism by Carl T. Schmidt; Fascist Economic Policy: An Analysis of Italy’s Economic Experiment by William G. Welk. Journal of Political Economy, 48(1), 128–130. Stigler, G. J. (1988). Memoirs of an Unregulated Economist. Chicago: University of Chicago Press. Taylor, H. C. (1941). Review American Farmers in the World Crisis by Carl T. Schmidt. Journal of Political Economy, 49(4), 515–517. White, L. H. (2008). Did Hayek and Robbins Deepen the Great Depression? Journal of Money, Credit and Banking, 40, 751–768.

5 21–24: ‘I Desire to Preserve Correct Relations in Public’ Robert Leeson

1 Kaldor, Scitovsky and Thomas 21. Friedrich ‘von’ Hayek’s twenty-first stroke of luck was that those who had personal and ideological motives for reporting his non-prediction apparently failed to do so—at least in print. Nicholas Kaldor arrived at the London School of Economics (LSE) as a student in 1927, became a research assistant in 1930 and assistant lecturer in 1932. Kaldor co-translated ‘von’ Hayek’s (1931) ‘The “Paradox” of Savings’ for Economica and his (1929) Geldtheorie und Konjunkturtheorie into Monetary Theory and the Trade Cycle (1933): he ‘occasionally freely admitted that in his beginnings he was a Hayekian’ (Hayek 1994, 86). Kaldor’s (1932) first article, on ‘The Economic

R. Leeson (*)  Stanford University, Stanford, CA, USA e-mail: [email protected] R. Leeson  Notre Dame Australia University, Fremantle, WA, Australia © The Author(s) 2018 R. Leeson (ed.), Hayek: A Collaborative Biography, Archival Insights into the Evolution of Economics, https://doi.org/10.1007/978-3-319-95219-2_5

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Situation of Austria,’ relied heavily on the publications of Hayek’s Institute for Business Cycle Research. Hayek (1978a) asserted that the Keynesian revolution ‘probably should be called a Kaldorian revolution.’1 And ‘I think Kaldor through the Beveridge Report [1942], has done more to spread Keynesian thinking than almost anybody else.’2 Hayek initially failed to force Kaldor out of the LSE: ‘in the end, we had the problem that both Kaldor and [Abba] Lerner were clearly such exotic figures that we couldn’t keep them both in the department. And one of very few points on which Robbins and I ever disagreed was which of the two to retain. [Laughter]’ Armen Alchian asked: ‘I’d heard that there was a dispute. My impression or recollection–you needn’t correct it or say it’s right or wrong–was that you favored Lerner and he favored Kaldor.’ Hayek (1978a) replied: ‘Yes, that’s perfectly correct.’ Presumably referring to pre-interview comments, Alchian replied to Hayek’s suggestion that Kaldor not Lerner should have left the LSE for America with ‘Oh, you’ve wished that all your life.’3 According to Nadim Shehadi (1991, 386), Lionel ‘Robbins asked Kaldor not to lecture his students on Keynes because it would confuse them, and even attended his class to make sure he did not. Gunnar Myrdal was invited to give a talk and was prevented from coming.’4 During World War II, Kaldor complained that Hayek was excluding him from examining duties: ‘probably the only instance in recorded history of an academic demanding to be given more examination scripts to mark.’ Kaldor suspected a Robbins-Hayek coordinated anti-Keynesian conspiracy; after the war, he didn’t return with the LSE to London (King 2009, 56). Hayek (1978a) asserted that while at the LSE (1935–1938), he and Tibor Scitovsky ‘got on very well together. I believe he did his thesis under Lionel Robbins.’5 Scitovsky recalled that he and many of his fellow students ‘sensed the faculty’s inability to deal with economic reality’; there were ‘pretty violent fights’ in LSE seminars between Kaldor et al. and Robbins and Hayek: ‘we students faced the difficult but challenging problem of how to pass our examinations. For we knew that the senior faculty clung to its rights of setting and grading examination papers … we did not want to be dishonest and write answers which we

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knew were wrong but would please the examiners … you really had to do some pretty hard thinking how to operate in that highly charged environment’ (cited by Colander and Landreth 1996, 207–208). Scitovsky told Shehadi (1991, 387) that he ‘had fears that if he used Keynesian terms he would fail.’ During Hayek’s second prolonged depression (1969–1974), Kaldor (1970) attacked ‘The New Monetarism’ which had been ‘assiduously propagated from across the Atlantic by a growing band of enthusiasts, combining the fervour of early Christians with the suavity and selling power of a Madison Avenue executive. And it is very largely the product of one economist with exceptional powers of persuasion and propagation: Professor Milton Friedman of Chicago.’ Kaldor complained that with some disciples it was ‘difficult to discover just what it is they believe in, just where the new doctrine ceases to be a matter of semantics and becomes a revelation with operational significance.’ After Hayek’s Nobel Prize, in The Scourge of Monetarism, Kaldor (1986, xxiv–xxiiv) disparaged the ‘extreme dogmatism and complete lack of intellectual coherence’ of the ‘Austrian, rather than Chicagoan, variety (represented by the writings of Professors Hayek and Mises).’ Intellectual conversions can occur for a variety of reasons. According to one biographer, Kaldor became a Keynesian shortly after the publication of the General Theory (Thirlwall 1987, 24–31). Implausibly from a chronological perspective, Hayek (1994, 86) asserted: ‘I think it was Keynes’ [1930] Treatise which convinced him and got him around to the other side. And he worked closely with Beveridge.’ Kaldor recalled that he ‘abandoned’ free market ideology ‘well before the appearance of Keynes’ General Theory ’ (cited by King 2009, 56). Hayek (1978a) sought pity from both Alchian (‘I was the first Central European student who came over on his own without a Rockefeller [Fellowship]’)6 and Axel Leijonhufvud: You see, I was the only one who did not come away in the comfort of the Rockefeller Foundation. All the later visitors visited America very comfortably and could travel and see everything. My case was unique. I was the only one who came on his own, at his own risk, and with practically no money to spare, and who lived for the whole of a fifteen-month period

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on sixty dollars a month. It would have been miserable if I hadn’t known that if I was in a real difficulty I would just cable my parents, ‘Please send me the money for the return.’ But apart from this confidence that nothing could really happen to me, I lived as poorly and miserably as you can possibly live.7

Hayek (1978a) then revealed the reason to Leo Rosten: ‘It was before the time of the Rockefeller Foundation; so it was at my own risk and expense.’8 When did Kaldor become contemptuous of Hayek? Kaldor (1937, 208, n13) thanked Milton Friedman for assistance in understanding Frank Knight’s criticisms of Hayek. In 1935, Kaldor visited Chicago on a Rockefeller Fellowship and had many ‘interesting discussions, particularly about capital theory’ with Friedman and (presumably) others (Friedman and Friedman 1998, 247; King 2007, 2009, 18–19). In 1935, the ‘tone’ of the Hayek-Kaldor correspondence became ‘unfriendly’ (Ingrao and Ranchetti 2005, 396); in May 1935, Robbins made inquiries about retaining Lerner rather than Kaldor (Colander and Landreth 1996, 113). According to another of his biographers, Kaldor’s (1937) ‘Annual Survey of Economic Theory: The Recent Controversy on the Theory of Capital’ provided ‘an intense, respectful and rather uninteresting account of the analytical differences between Hayek and the Chicago capital theorist Frank Knight, but there is a sting in the tail. In the final two pages of the survey Kaldor slides his stiletto into Austrian capital theory, silently and without warning but with fatal effect’ (King 2007, 41). Kaldor (1937, 202–203) also criticized Knight for deriving conclusion that were ‘frequently clothed in paradoxical sentences which are intended to challenge the mind but without a sufficient indication of where to turn to uncover those mental processes which must have led up to them.’ At the University of Chicago in 1935, Kaldor presumably also met Albert G. Hart, one of Friedman’s fellow Chicago graduate students and later a co-author (Hart et al. 1964; Friedman and Friedman 1998, 40). Hart (1995, ix–x) had visited Hayek and Oskar Morgenstern in 1930–1931 and had assisted Hayek (2012 [1931], 175; [1934], 180) in

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his Prices and Production. Hart worried about political controls stifling entrepreneurship; he also expressed anti-Austrian sentiments: watching the rise of Hitler ‘taught me early the political dangers of letting the complex modern economy run itself.’ In ‘Professor Hayek and the Concertina Effect,’ Kaldor (1942, 359, 363, 372) ridiculed as ‘fallacious’ and ‘non-existent or insignificant’ Hayek’s business cycle explanations: ‘blind alleyways of economic speculation’ which must be ‘abandoned altogether’ before any ‘reasonably consistent explanation of the trade cycle can be reached.’ Kaldor admitted to initially being among the ‘fascinees … On second thoughts the theory was by no means so intellectually satisfying as it appeared at first.’ Kaldor cited Hayek: ‘Naturally, the entrepreneur strives to attain the maximum absolute and not relative profit; we must therefore start from something fixed and given, or else the whole edifice will vanish into thin air.’ He then related the discomfort to a particular school: ‘By “the whole edifice” he presumably means the competitive equilibrium theory of economics.’ Keynes told Kaldor that his ‘Concertina Effect’ ‘attack on poor Hayek is not merely using a sledge hammer to crack a nut, but on a nut which is already decorticated’ (cited by Thirlwall 1987, 47). According to Geoffrey Harcourt (1988, 162), Kaldor discovered ‘certain incoherencies which Hayek could never satisfactorily explain.’ Kaldor recalled that ‘At first [Hayek] was terribly for me. But then when I discovered he was so silly I sort of teased him, made him look ridiculous, contradicted him in seminars’ (cited by Ebenstein 2003, 63). When asked if Kaldor left ‘you for Beveridge and Keynes. Is there some story there?’ Hayek (1994, 86) replied: ‘difficult to say.’ However, Kaldor (10 April 1981) taunted Hayek: If you talk about the ‘lost generations of Keynesians’ what about the (even older) ‘lost generations of Hayekians’ [*like myself ] who believed in Prices and Production?9

Brinley Thomas (1934, 212), who had just returned to the LSE from a two-year travelling scholarship in Germany and Sweden, concluded:

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It was no coincidence that the phenomenal advance of the Nazi party was contemporaneous with Dr Brüning’s ‘Heroic’ emergency decrees and that its electoral strength began to ebb … when the policy of extreme deflation had been followed by mild expansion.

Thomas also referred positively to Myrdal’s expansionary proposals. According to Shehadi (1991, 386), the LSE at this time ‘was described as a court’: the neoclassical favourites got promotion and the Keynesians non-favourites, including Thomas and Lerner, were ‘gradually weeded out.’10 Thomas (1991, 390) concurred: ‘The ruling powers were passionate believers in freedom, and this included the freedom to adjust the constraints within which freedom was exercised by the non-favourites. The main type of adjustment was postponement of tenure.’ Terence Hutchison (1994, 230–231) first met Hayek on the day that Austria and Germany were united through Anschluss: ‘The impression was of a rigid, unflinching, officer-like sense of duty.’11 In his Memoirs, Hugh Dalton (1953, 116) noted that Robbins had become an ‘addict of the Mises-Hayek anti-Socialist theme’; ‘variety’ tended to disappear, and the LSE began to teach a ‘more uniform brand of right wing economics.’ In 1932, Dalton wrote to a friend that the ‘Robbins-Hayek tendency (and they have several echoes on the staff) is very retrograde’ (cited by Pimlott 1985, 215). According to Shehadi (1991, 385), at least from about 1934, suppression was evident at the LSE: ‘The reaction of the “Old Guard” of the department, that is, of Hayek and Robbins, was to try to restrict the divulgence of these [anti-Austrian] ideas.’ Shehadi cited Dalton, who on a visit to Germany in the spring of 1933 noted that ‘Geistige Gluchschaltung [intellectual coordination] is the Nazi ideal in education. There is something of this too in the economics department of the school of economics.’ Twelve years before the Nazi-Soviet Pact, Mises (1985 [1927]) sought to become the intellectual Führer of a Nazi-Classical Liberal Pact; the Austrian School of Economics maintains a ‘united front’ with ‘NeoNazis’ (Block 2000, 40, chapter 1); and George Mason University students of economics are obliged to read Peter Boettke’s ‘Coordination Problem’ blog.

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2 Galbraith and ‘Knowledge’ Communities When asked if there were ‘facts that could have an integrity for all time,’ Hayek (1975 [1974]) referred to knowledge communities: ‘I am sure there are some facts in this sense which must tie facts for all human beings with whom we can communicate, whose structure of mind [emphasis added] is sufficiently similar to our own so that some intercommunication is possible. It may well be that there are other things which appear as facts or are only that subjectively, for a more limited circle who have more in common than merely that minimum which is required in order to be able to communicate at all. And it may well be that there are certain things which are facts only to people who make very specific presuppositions which you can actually point out.’ Hayek (1978b) told an American Enterprise Institute audience about his plan to organize a great public dis-cussion on the question ‘Was socialism a mistake?’ I gained the support of twelve fellow members of the Mont Pelerin Society to act as a team in the affirmative, and our plan was to challenge a similar team from the other side to a public discussion, which we hoped to hold in Paris early this year.

The plan failed in large part because ‘our efforts to raise funds from the capitalists was a failure. Evidently, the capitalists did not have an interest in the intellectual defence of capitalism. In fact, the largest offer I got was from the leading man in German banking, who, on my request for an amount of 400,000 German marks, presented me with 3,000 German marks.’ Hayek had planned to rig (weaken) the opposition. According to Hayek (1961), John Kenneth Galbraith’s The Affluent Society (1998 [1958]) was part of the competition for intermediaries: ‘Professor Galbraith’s thesis has been most enthusiastically received by the intellectuals of the British Labour Party where his influence bids fair to displace that of the late Lord Keynes.’ Although Galbraith had a Ph.D. (1934), ‘von’ Hayek (1978a) regarded him as being outside his own community: ‘I don’t think there could ever be any communication

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between Mr. [sic ] Galbraith and myself. I don’t know why, but it’s a way of thinking which I think is wholly irresponsible and which he thinks is the supreme height of intellectual effort. I think it’s extremely shallow. I go so far as that when in this recent plan, which had to be postponed, of challenging an opposite group of socialist intellectuals, he was one of three [emphasis added] whom I would exclude. I won’t use the exact phrase, which would be libelous and which I don’t want to be recorded, but he and two others I on principle excuse because they think in a way with which I could not communicate.’12 Galbraith (2004, x) authored The Economics of Innocent Fraud: Truth For Our Time: an examination of how ‘out of the pecuniary and political pressures and fashions of the time, economics and larger economic and political systems cultivate their own versions of truth.’ While Hayek is not mentioned, D. McCloskey (1986, 184) described the ‘bitterness beyond reason’ directed at Friedman. But Galbraith (1998 [1958]) did refer to Hayek’s status-bound approach: an understanding of our economic discourse requires an appreciation of one of its basic rules: men of high position are allowed, by a special act of grace, to accommodate their reasoning to the answer they need. Logic is only required by those of lesser rank. Finally, it was argued, with no little vigour, that expanding government posed a grave threat to individual liberties. ‘Where distinction and rank is achieved almost exclusively by becoming a civil servant of the state … it is too much to expect that many will long prefer freedom to security.’13

In a footnote, Galbraith (1998 [1958], 199, n5) referenced Hayek’s (1944, 98) The Road to Serfdom: ‘As a retrospective reward for this and similar if more technical thought, Professor von Hayek received the Nobel Prize in Economics in 1974.’ The 1974 Hayek/Myrdal balance had a Galbraith (1977)/Friedman and Freidman (1980) television counterpart. In Age of Uncertainty, Galbraith (1977, 213) referred to Austrian liquidation policy advice and its consequences in the Hoover and Brüning administrations: but only Robbins and Joseph Schumpeter were associated with this advice. In his ‘Gunnar

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and Alva Myrdal’ lecture at the City University of New York, Galbraith (1986 [1975], 404–405) suggested that the Keynesian Revolution could have been called the Myrdal revolution, and that Hayek had ‘one of the finest and most untouched of late-eighteenth century minds.’ In the mid-1970s, what looked like becoming ‘The Myrdal Century’ became ‘The Hayek Century’ (Cassidy 2000). In the 1976 edition of My Years with Ludwig Mises, there is no mention of Ronald Reagan; in the 1984 edition, Margit Mises (1984, 186, 198) reported that President [George] Roche [III] of Hillsdale College has introduced an annual series of ‘Mises Lectures’ at the college. Among other famous speakers was Ronald Reagan, who, in 1979, held a widely acclaimed Mises lecture.

Margit Mises also cited Reagan’s 100th birthday reflection about Mises: ‘one of the greatest economic thinkers in the history of Western Civilisation … It is my fervent hope that the torch of freedom he ignited in the minds of a few thousands will one day make his dream a reality for the people of all nations.’ The Reagan Administration (1981–1989) was a high-water mark for the policy influence of Mont Pelerin Society members (Austrians and Chicagoans): of 76 economic advisers on his 1980 campaign staff, 22 were MPS members (Peterson 1996). In his History of Economics the Past as Present, Galbraith (1987, 191–192)—betraying a curious misunderstanding of the countervailing power of this employer trade union knowledge community—merely expressed mild contempt for ‘the orthodox faith’ gathering at Mont Pelerin Society meetings for ‘discussion and mutual admiration… No one spoke for intransigent resistance to reform so powerfully as did Friedrich von Hayek.’

3 Keynes, Sraffa, Kahn and Joan Robinson Galbraith (1981, 31) complained that his nomination as President of the American Economic Association had been (unsuccessfully) resisted by a past AEA President and personal friend: Friedman. In choosing

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the AEA Richard T. Ely Lecturer, Galbraith ‘never had any hesitation. I immediately chose Joan [Robinson]; the only person I would have chosen if Joan had not been available was Gunnar Myrdal’ (cited by Turner 1989, 165). In ‘Second Crisis in Economic Theory,’ Robinson (1972, 1–3) referred to the first: While the controversy about public works was developing, Professor Robbins sent to Vienna for a member of the Austrian school to provide a counter-attraction to Keynes. I very well remember Hayek’s visit to Cambridge on his way to the London School. He expounded his theory … The general tendency seemed to show that the slump was caused by consumption.

Richard Kahn asked a specific question: ‘Is it your view that if I went out tomorrow and bought a new overcoat that would increase unemployment?’ Turning to a backboard full of triangles, ‘Yes’ Hayek replied, ‘but,’ pointing to his triangles on the board, ‘it would take a very long mathematical argument to explain why.’ Robinson appeared to be contemptuous both of her audience—‘this throng of superfluous economists’—and of Hayek: ‘This pitiful state of confusion was the first crisis of economic theory that I referred to.’ According to Mark Blaug (1985a, 118; 1985b, 237), in the 1930s, Knight and Piero Sraffa simultaneously, but independently, made Austrian capital and business cycle theory unrespectable. In The Making of Keynes’ General Theory, Kahn (1984, 181–182) reflected about the emerging ‘breach’ among British economists: The ‘breach’ was the result of Friedrich von Hayek being brought from Vienna in 1931 … Hayek breached doctrines which were in direct opposition to Keynes. Possibly wrongly in Cambridge we had the impression that the intention was to set Hayek up as an idol to serve as an antidote to Keynes.

Hayek’s January 1931 Cambridge lecture left his audience ‘completely bewildered. Usually a Marshall Society talk is followed by a lively and protracted barrage of discussions and questions. On this occasion there was complete silence. I felt I had to break the ice.’

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In ‘A few remembrances of Friedrich von Hayek (1899–1992),’ Paul Samuelson (2009) recalled Kahn’s ‘simple oral 1932 statement’: ‘If Hayek believes that the spending of newly printed currency on employment and consumption will worsen our current terrible depression, then Hayek is a nut.’

4 Friedman’s Prediction of Stagflation 22. Hayek’s twenty-second stroke of luck appears paradoxical: he had largely disappeared from professional sight, at least relative to other prospective Laureates (Söderberg et al. 2013). Austrian economics had been abandoned by Hayek’s British promoter: in 1966, Robbins declared in the House of Lords that ‘In the inter-war period when mass unemployment actually prevailed, I was on the wrong side’ (cited by Kahn 1984, 184). Robbins’ (1971, 154–155) Austrian-orientation was a matter of ‘deep regret’—he regarded his Great Depression (1934) as ‘something’ which he ‘would willingly see forgotten.’ The Oxford philosopher Anthony Quinton (1967, 2) described Hayek’s political philosophy as a ‘magnificent dinosaur.’ In Shackle’s (1967) The Years of High Theory: Invention and Tradition in Economic Thought 1926–1939, ‘von Hayek’ was mentioned for having contributed to Austrian capital theory, writing ‘Economics and Knowledge,’ and editing a collection in which a Myrdal essay was published. Hicks (1967, 203) noted that Hayek’s economic writings are ‘almost unknown to the modern student.’ In ‘The Hayek Story,’ Hicks (1967, ix, 203), referring to Prices and Production, reflected: ‘Something, one has long realised, has gone wrong with it; but just what? The question has been nagging at me.’ Hicks concluded that ‘When the definitive history of economic analysis during the nineteen thirties comes to be written, a leading character in the drama (it was quite a drama) will be Professor Hayek.’ Hayek was not mentioned in Joan Robinson’s (1971, 87) Economic Heresies Some Old fashioned Questions in Economic Theory; however, in the chapter on ‘Prices and Money,’ Robinson uncritically accepted Patinkin’s erroneous attack on Friedman: adding that there was an ‘unearthly mystical element’ in Friedman’s thought. Any lingering

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memories of Hayek’s non-prediction of the Great Depression were overtaken by Friedman’s (1968) successful AEA Presidential prediction of stagflation.14 At the Federal Reserve under the Nixon Administration (1970–1978), Arthur Burns (who joined the Mont Pelerin Society in its second year) stoked the ‘Great Inflation’ that created the economic and social crisis from which Hayek and his Society came to be regarded as saviours.

5 Slum Dwellers 23. Immediately before Hayek’s Nobel Prize, George Stigler and Kenneth Arrow (the recipients of the 1982 and 1972 Nobel Prizes, respectively) reinvigorated two of his themes: ‘Economics and Knowledge’ (Hayek 1937) and ‘The Use of Knowledge in Society’ (Hayek 1945). Arrow (1974) devoted his AEA Presidential address to ‘Limited Knowledge and Economic Analysis’; Stigler (1968, 171) noted that ‘information is a valuable resource: knowledge is power. And yet it occupies a slum dwelling in the town of economics [emphasis in original].’ Myrdal was a socialist (Jackson 1990, 123); Hayek may have appeared to have been the perfect balance because, according to the Nobel press release, he presented new ideas with regard to basic difficulties in ‘socialistic calculating,’ and investigated the possibilities of achieving effective results by decentralized ‘market socialism’ in various forms. His guiding principle when comparing various systems is to study how efficiently all the knowledge and all the information dispersed among individuals and enterprises is utilized. His conclusion is that only by far-reaching decentralization in a market system with competition and free price-fixing is it possible to make full use of knowledge and information.15

During a sabbatical at a North American think tank, a member of the Nobel Prize Selection Committee reportedly told anyone who would listen that there had been pressure to reward the Swede, Myrdal—but that he was intensely disliked by those doing the selecting (in addition

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to being a prominent opponent of war-crimes in Vietnam). In this highly charged political environment, a compromise was reached: Myrdal was both elevated and incensed by pairing him with Hayek, someone he detested. Gustav Jörberg (1927–1997), an associate member of the 1993 Nobel Prize Selection Committee, told a Lund University seminar that it had been decided that Myrdal’s discomfort would be maximized by the pairing because Hayek had ‘paired’ with his wife, Alva, in an extra-marital affair.

6 ‘Not a Matter of a Simple Defence of a Liberal System of Society’: Austrians and the Eternal ‘Merit’ of ‘Fascism’ 24. Nine years after the demise of the Habsburgs, Mises (1985 [1927], 49–50) aspired to become the intellectual Führer of a Nazi-Classical Liberal Pact. Mises agreed that ‘In order to assure success, one must be imbued with the will to victory and always proceed violently. This is its highest principle.’ But the ‘political tactics’ of Austrian Classical Liberals differed from Fascists because of the latter’s ‘complete faith in the decisive power of violence.’ To succeed, fascism would have to embrace Mises: ‘If it wanted really to combat socialism, it would have to oppose it with ideas. There is, however, only one idea that can be effectively opposed to socialism, viz., that of liberalism.’ Referring to Mises, Hayek (1978a) reflected: ‘Being for ten years [1921–1931] in close contact with a man with whose conclusions on the whole you agree but whose arguments were not always perfectly convincing to you, was a great stimulus.’16 In ‘The Cultural Background of Ludwig von Mises,’ Kuehnelt-Leddihn (n.d.) explained that during the ‘Great’ War, ‘von’ Hayek and ‘von’ Mises fought to prevent the ‘world from being made safe for democracy.’

‘Fascism’ (as defined by Mises) overthrew interwar democracy in Italy (1922), Spain (1923), Chile (1924), Poland (1926), Portugal (1926),

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Germany (1933), Austria (1934) and elsewhere. In Portugal, the Ditadura Nacioinal (National Dictatorship) of the authoritarian Estado Novo (New State) lasted until the 1974 Revolução dos Cravos (the Carnation Revolution)—just as the Nobel Prize selection committee were preparing that year’s reward: von Hayek’s ideas and his analysis of the competence of economic systems were published in a number of works during the forties and fifties and have, without doubt, provided significant impulses to this extensive and growing field of research in ‘comparative economic systems.’ For him it is not a matter of a simple defence of a liberal system of society as may sometimes appear from the popularized versions of his thinking.17

Charlotte Cubitt (2006, 19) reported that in 1977, Hayek ‘must have meant or hoped to influence’ General Augusto Pinochet during his visit to Chile because they shook hands, and then asked me to send him a copy of the last chapter of Law, Legislation and Liberty III, namely ‘A Model Constitution,’ along with a letter. Presumably to emphasise his point he also asked me to some days later to send the same to [Chilean Senator Pedro Ibáñez] though this time without any note from him.

The following year, Hayek (1978a) described his tactics to Robert Bork: Nobody could believe more strongly that a law is only effective if it’s supported by a state of public opinion, which brings me back—I’m operating on public opinion. I don’t even believe that before public opinion has changed, a change in the law will do any good. I think the primary thing is to change opinion on these matters … When I say ‘public opinion,’ it’s not quite correct. It’s really, again, the opinion of the intellectuals of the upper strata which governs public opinion. But the primary thing is to restore a certain awareness of the need [to limit] governmental powers which, after all, has existed for a very long time and which we have lost.18

Hayek (1978a) informed James Buchanan that his constitutional proposal was ‘received exceedingly friendly by the people whom I really

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respect, but that’s a very small crowd. I’ve received higher praise, which I personally value, for The Constitution of Liberty (1960) but from a very small, select circle.’19 While still at the University of Chicago, Hayek sent his Constitution of Liberty to the Portuguese dictator (1932–1968), António de Oliveira Salazar, in the hope that it might assist the dictator ‘in his endeavour to design a constitution which is proof against the abuses of democracy’ (Ebenstein 2003, 300; Fisher 2009, 327; Robin 2013; 2015; Farrant et al. 2012, 521). After winning a Nobel Prize, Hayek (1978a) objected to the currency devaluation associated with five ‘ennoblement’ in the first eleven years: Jan Tinbergen (1969), the ‘agitation’ specialist, Wassily Leontief (1973),20 Myrdal (1974), the West Indian, Sir Arthur Lewis (1979) and the Keynesian Lawrence Klein (1980). Previously, he had objected to the Nobel Peace Prize Selection Committee ‘ennobling’ three nonwhites: Myrdal’s (1944) American Negro collaborator, Ralph Bunche (1950), African National Congress President, Chief Albert Lutuli (1961), Martin Luther King (1964); plus a fourth, the later ennobled Nelson Mandela (1993) (Leeson 2015, chapter 3). When asked what his ‘attitude to black people was,’ Hayek said that he did not like ‘dancing Negroes.’ He had watched a Nobel laureate doing so which had made him see the ‘the animal beneath the facade of apparent civilisation.’ (Cubitt 2006, 23)

Had Hayek watched television footage of Bunche, Lutuli and King dancing during the Nobel Peace Prize banquet? Or was he referring to his LSE colleague, Lewis, who he described as an ‘unusually able West Indian negro’ (Cubitt 2006, 23)?21 In winning the Nobel Peace Prize, King, Lutuli, Bunche and (later) Mandela were lining themselves up for a sarcastic response from Hayek (1966, 35) about the ‘absurdity’ of delineating rights for ‘peasants, the Esquimo, and presumably the abominable snowman.’ After his first two trips visits to apartheid South Africa (1961 and 1963) and a little over a year after King’s Norwegian Nobel Lecture, ‘Professor F.A. von Hayek’ (1966) published ‘Misconception of Human Rights as Positive Claims’ in the Norwegian libertarian journal, Farmand, edited by

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Trygve Hoff, a founding member of the Mont Pelerin Society. This was the culmination of two related research projects that Hayek had undertaken after his first two trips to South Africa: in the first, Hayek (23 November 1963) received some articles from the Principal of University of Cape Town about the Broederbond which ‘completed’ his picture of South African politics22; in the second, he investigated the origins of the Universal Declaration of Human Rights. Hayek (1966, 33) discovered the source of the Nobel Peace Prize mischief: the British representatives on the committee that provided the ‘intellectual backbone’ of the Universal Declaration of Human Rights ‘were Professor H.J. Laski and E.H. Carr!’ Hayek declared that it was ‘meaningless to speak of rights in the sense of a claim on a spontaneous order, such as society constitutes, unless it is meant to imply that somebody has the duty of transforming this spontaneous order into an organisation, and thus to gain the power to control the result.’ Law, Legislation and Liberty: The Mirage of Social Justice also reveals Hayek’s (1976, 103) belief that human rights was essentially derived by combining ‘the old civil rights’ with rights derived from Marxism: the old civil rights and the new social and economic rights cannot be achieved at the same time but are in fact incompatible; the new rights could not be enforced by law without at the same time destroying that liberal order at which the old civil rights aim. The new trend was given its chief impetus through the proclamation by President Franklin Roosevelt of his ‘Four Freedoms’ which included ‘freedom from want’ and ‘freedom from fear’ together with the old ‘freedom of speech’ and ‘freedom of worship.’ But it found its definite embodiment only in the Universal Declaration of Human Rights adopted by the General Assembly of the United Nations in 1948. This document is admittedly an attempt to fuse the rights of the Western liberal tradition with the altogether different conception deriving from the Marxist Russian Revolution [emphases in original].

Hayek (1979, 202–203, n42) also referred to human rights as a ‘trick’ perpetrated by Marxists:

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In view of the latest trick of the Left to turn the old liberal tradition of human rights in the sense of limits to the powers both of government and of other persons over the individual into positive claims for particular benefits (like the ‘freedom from want’ invented by the greatest of modern demagogues) it should be stressed here that in a society of free men the goals of collective action can always only aim to provide opportunities for unknown people, means of which anyone can avail himself for his purposes, but no concrete national goals which anyone is obliged to serve.

According to Hayek (1976, 104), human rights could not be made universal within a system of rules of just conduct based on the conception of individual responsibility, and so require that the whole of society be converted into a single organization, that is, made totalitarian in the fullest sense of the word. We have seen that rules of just conduct which apply to everybody alike but subject nobody to the commands of a superior can never determine what particular things any person is to have. They can never take the form of ‘everybody must have so and so.’ In a free society what the individual will get must always depend in some measure on particular circumstances which nobody can foresee and nobody has the power to determine. Rules of just conduct can therefore never confer on any person as such (as distinct from the members of a particular organization) a claim to particular things; they can bring about only opportunities for the acquiring of such claims.

As an illustration of these ‘particular circumstances,’ Hayek (1978a)—a serial liar—had a skin colour theory of honesty: I don’t have many strong dislikes. I admit that as a teacher–I have no racial prejudices in general–but there were certain types, and conspicuous among them the Near Eastern populations, which I still dislike because they are fundamentally dishonest. And I must say dishonesty is a thing I intensely dislike. It was a type which, in my childhood in Austria, was described as Levantine, typical of the people of the eastern Mediterranean. But I encountered it later, and I have a profound dislike for the typical Indian students at the London School of Economics, which I admit are all one type–Bengali moneylender sons. They are to me

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a detestable type, I admit, but not with any racial feeling. I have found a little of the same amongst the Egyptians–basically a lack of honesty in them.23

To celebrate the 60th anniversary of The Road to Serfdom, the Indian recipient of the 1998 Nobel Prize for Economic Science, Amartya Sen (2004), informed readers of the Financial Times that Hayek insisted ‘that any institution, including the market, be judged by the extent to which it promotes human liberty and freedom.’ Sen and the Academy of Sciences may have been unaware of the specifics of Hayek’s ‘defence of a liberal system of society.’ Hayek (1978a) defended the ‘civilization’ of apartheid from the American ‘fashion’ of ‘human rights: You see, my problem with all this is the whole role of what I commonly call the intellectuals, which I have long ago defined as the second hand dealers in ideas. For some reason or other, they are probably more subject to waves of fashion in ideas and more influential in the American sense than they are elsewhere. Certain main concerns can spread here with an incredible speed. Take the conception of human rights. I’m not sure whether it’s an invention of the present [Carter] administration or whether it’s of an older date, but I suppose if you told an eighteen year old that human rights is a new discovery he wouldn’t believe it. He would have thought the United States for 200 years has been committed to human rights, which of course would be absurd. The United States discovered human rights two years ago or five years ago. Suddenly it’s the main object and leads to a degree of interference with the policy of other countries which, even if I sympathized with the general aim, I don’t think it’s in the least justified. People in South Africa have to deal with their own problems, and the idea that you can use external pressure to change people, who after all have built up a civilization of a kind, seems to me morally a very doubtful belief. But it’s a dominating belief in the United States now.24

Referring to the policies associated with Galbraith and Myrdal, Hayek (1979, 93) asserted: ‘What makes most Western economies still viable is that the organisation of interests is yet only partial and incomplete. If it were complete, we would have a deadlock between these organised

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interests, producing a wholly rigid economic structure which no agreement between the established interests and only the force of some dictatorial power could break.’ Pre-Nazi Germany could be characterized by a deadlock between organized interests. In his defining Austrian version of Liberalism, Mises (1985 [1927], 42–51) issued a permanent commandment: ‘It cannot be denied that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history.’ The ‘similar movements’ of ‘bloody counteraction’ that Mises praised included ‘Germans and Italians.’ ‘Italians’ obviously referred to Mussolini’s 1922 March on Rome; Mises’ (1985 [1927], 44) reference to ‘Germans’ and ‘Ludendorff and Hitler’ just as obviously refers to the 1923 Hitlerputsch (or beer cellar putsch ). For Mises, ‘Fascism’ was a supplement to Liberalism; or rather, Liberalism would provide the genuine intellectual framework that ‘Fascism’ lacked. This was antithetical to the Chicagoan understanding of Liberalism. The Ethics of Competition included the previously unpublished ‘Economic Theory and Nationalism’ in which Knight (1935, 242, 308– 309, 327) outlined a distinctly non-Austrian (if not actually anti-Austrian) agenda: • According to Knight, the Great Depression which led to perceptions about the ‘breakdown of capitalism’ had been caused by ‘a lack of a scientific monetary system with adequate government control.’ • A ‘secondary cause of the crisis and threatened breakdown has been the growth of monopoly; but again the most extreme advocates of individual economic freedom never defended monopoly.’ • Knight’s solution to income and wealth inequality was ‘a wise use of the taxing power.’ • In ‘Fascist-Nationalism Possible Alternatives to Liberalism,’ Knight detected that ‘essentially the same philosophy applies to communism as to fascism. Actual leadership is in the hand of a party composed of a small minority, and having an individual head.’ This was related

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to the ethics of competition: both ‘fascist’ and ‘communist’ schools incline to treat the truth or falsehood of propositions in economics as a matter of indifference, or even as illusory.’ Two months after Anschluss, Hayek’s LSE colleague, Arnold Plant (1938, 253), noted in Economica that Knight’s ‘Economic Theory and Nationalism’ was ‘surely of permanent value’ because it read as though it had been ‘inspired by a prophetic insight into the unhappy events of 1938.’ In the Washington Post, Caldwell (2010)—a major ‘free’ market fundraiser—illustrated their Use of Knowledge in Society: ‘Hayek himself disdained having his ideas attached to either party.’25 The archives—which Caldwell seeks to monopolize—tell a different story. In 1945—with Hayek’s approval—The Road to Serfdom played a surreptitious and possibly illegal role in election propaganda. Jeremy Shearmur (2006, 310) documented the ‘very specific, if not publicly acknowledged, contacts with the British Conservative Party in the 1940s’: they transferred part of the war-rationed paper supply that they had been allocated for the 1945 general election for an abridged version of Road to Serfdom. A Conservative Party Head Office functionary, Geoffrey Rippon (later a Monday Club M.P. and Cabinet Minister), coordinated the abridgement; which had been prepared by the Old Etonian M.P., Wing Commander Sir James Archibald, who insisted that in 1937 Guernica had been destroyed—not by aerial bombardment by the Luftwaffe’s Condor Legion at Franco’s behest but—by the Republicans (Leeson 2018). The frontispiece of the abridged Road to Serfdom version replaced statements from David Hume and de Tocqueville with an election statement taken from an interview with Kingsley Martin in which Winston Churchill stated: ‘The essential aspects of democracy are the freedom of the individual within the framework of laws passed by parliament, to order his life as he pleases, and the uniform enforcement of tribunals independent of the Executive.’ When the Ministry of Supply suggested that this abridged version should indicate that it was published for the Conservative Party, Cecil Franklin of Routledge replied that this would be difficult since the book ‘was originally written for the Liberal Party.’ Shearmur (2006, 312) noted that this statement ‘surely is just false.’

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Taking a campaign theme from The Road to Serfdom, Churchill used a Gestapo analogy to assert that socialism was ‘inseparably interwoven with Totalitarianism and the abject worship of the State’ (cited by Lane 2013, 52). Hayek, who had just returned from a Road to Serfdom promotional tour of the USA, ‘lunched at the Reform Club with John Wood and Stanley Denison the day after Churchill’s broadcast, and was evidently pleased that his ideas had been taken up with such gusto’ (Cockett 1995, 95). The leader of the Labour Party, Clement Atlee, described Churchill’s ‘Gestapo speech’ as a ‘second-hand version of the academic views of an Austrian professor, Friedrich August von Hayek’ (Lane 2013, 52). Hayek (1994, 106) complained that henceforth he was ‘officially in socialist terms, “Friedrich August von Hayek”.’ Hayek (1946) signed his February 1946 essay on ‘The London School of Economics, 1895-1945’ ‘FAH.’ Just before the announcement of his Nobel Prize, Hayek told an interviewer: ‘It may be said that effective and rational economic policies can be implemented only by a superior leader of the philosopher-statesman type under powerful autocracy. And I do not mean a communist-dictatorship but rather a powerful regime following democratic principles’ (Tanaka 1974). Hayek (1978a) was very precise about these ‘principles’: ‘I believe in democracy as a system of peaceful change of government; but that’s all its whole advantage is, no other.’26 In 1945, Churchill had asserted that ‘a Labour Government wouldn’t ‘allow free, sharp or violently worded expressions of public discontent… They would have to fall back on some form of Gestapo, no doubt very humanely [emphasis added] directed in the first instance’ (cited by Lane 2013, 52). Hayek (1978a) predicted a ‘return to some sort of dictatorial democracy, I would say, where democracy merely serves to authorize the actions of a dictator… Then it will depend, from country to country, whether they are lucky or unlucky in the kind of person who gets in power. After all, there have been good dictators in the past; it’s very unlikely that it will ever arise. But there may be one or two experiments where a dictator restores freedom, individual freedom.’ Rosten exclaimed: ‘I can hardly think of a program that will be harder to sell to the American people. I’m using ‘sell’ in the sense of persuade. How can a dictatorship be good?’ To which Hayek replied:

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‘Oh, it will never be called a dictatorship; it may be a one-party system.’ As if to illustrate the deference that disciples display towards those with producer sovereignty (or clerical authority), Rosten whimpered: ‘It may be a kindly [emphasis added] system?’ As if reassuring a frightened child, Hayek replied: A kindly system and a one-party system. A dictator says, ‘I have 9 percent support among the people.’27

Hayek (1978a) told Rosten that Americans were as unreliable as Harold Laski who ‘had become a propagandist, very unstable in his opinions.’ He had little hope for America: ‘But if I may say so–I hope you are not offended–I don’t believe the ultimate decision is with America. You are too unstable in your opinion, and if opinion has been turning in the right direction the last few years, it may be turning in the wrong direction again in the next few years. While it’s sometimes a great advantage to be able to change opinion very rapidly, it also creates a certain amount of instability. I think it must become a much more general movement, and for that reason, I am rather more hopeful about what is happening among the young people in Europe nowadays than what’s happening here, perhaps also because in Europe the intellectual tendencies are more likely to capture public opinion lastingly.’28 D. McCloskey recalled that in the early 1970s, Friedman prevented the University of Chicago from receiving money from the Shah of Iran in return for training economists because ‘We cannot make such an arrangement with a despot’ (cited by Schleisser 2010, 188). In 1982, in what may have been an oblique reference to Hayek, Friedman disputed the ‘myth that only an authoritarian regime can implement a free-market policy.’ Nevertheless, Friedman’s association with Pinochet resulted in ‘organised protests against me almost wherever I went, the largest being in Stockholm at the 1976 Nobel award ceremonies.’ In Sweden, he and his wife had round-the-clock police protection plus two bodyguards; as he rose to receive the award, someone in the hall shouted abusively about him and Chile before being ejected (Friedman and Friedman 1998, 406, 447; chapter 24, Appendix A; chapter 26).

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Academic critics, such as Kaldor (1986), often invoked the Pinochet connection: Friedman became the symbolic connection between the University of Chicago and the Catholic University of Chile (some of these ‘Chicago Boys’ participated in economic policy-making during the Pinochet dictatorship). The Friedmans named their memoirs Two Lucky People: but to avoid Chile-related demonstrators, they regularly attended speaking engagements by entering via the tradesman’s entrance. This was punishment for having provided Pinochet with advice about ending inflation and introducing a ‘healthy social market economy’ in a forty-five minute meeting plus a follow-up letter (Friedman and Friedman 1998, 399, 400, Appendix A). Naomi Klein’s (2007, 21, 64, 163) The Shock Doctrine the Rise of Disaster Capitalism is organized around Friedman (fifty-three index entries). There are six index entries for ‘von Hayek’ who was merely described, in passing, as Friedman’s ‘mentor … Friedman’s own personal guru … patron saint of the Chicago School.’ However, unlike Friedman, Hayek (1992 [1945], 223) advocated extra-judicial killings, ‘shooting in cold blood,’ for the ‘thousands, probably tens of thousands’ that he at least pretended to object to: ‘Neither legal scruples nor a false humanitarianism should prevent the meeting out of full justice to the guilty individuals …’.29 Pinochet’s death squads adopted a similar approach towards those connected with the democratically elected Allende government: Pinochet’s 1980 Constitution is named after Hayek’s Constitution of Liberty—an issue not even mentioned in The Definitive Edition (2011 [1960]). Yet there were, apparently, no demonstrations when ‘von’ Hayek was awarded the 1974 Nobel Prize, nor when President George H.W. Bush awarded him in absentia the 1991 Presidential Medal of Freedom: ‘we honor Professor Friedrich von Hayek for a lifetime of looking beyond the horizon. At a time when many saw socialism as ordained by history, he foresaw freedom’s triumph. Over 40 years ago, Professor von Hayek wrote that “the road to serfdom” was not the road to the future or to the political and economic freedom of man. A Nobel laureate, he is widely credited as one of the most influential economic writers of our century. Professor von Hayek is revered by the free people of Central

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and Eastern Europe as a true visionary, and recognized worldwide as a revolutionary in intellectual and political thought. How magnificent it must be for him to witness his ideas validated before the eyes of the world. We salute him.’30 In The Definitive Edition of The Road to Serfdom, Caldwell (2007, 21) described Hayek’s martyrdom at the hands of ‘pundits of the day’: The worst of the lot, Herman Finer’s scabrous Road to Reaction, was also picked out for mentioning by Hayek in the 1956 foreword. The overarching message of the book was evident in its very first sentence: ‘Friedrich A. Hayek’s The Road to Serfdom constitutes the most sinister offensive against democracy to emerge from a democratic country for many decades.’ According to Finer, Hayek’s call for constitutionalism and advocacy of the rule of law was indicative of his antidemocratic biases, the ‘very essence’ of Hayek’s argument being ‘the idea that democracy is dangerous and ought to be limited [unattributed emphasis].’ Toward the end of the book (published, we remember, in 1945) we find Finer remarking on ‘the thoroughly Hitlerian contempt for the democratic man so perfectly expressed by Hayek.’

In his Road to Reaction response to Road to Serfdom, Hayek’s LSE colleague, Finer (1945, 62, 70), stated that ‘Ludendorff is available for Hayek and his zealots to read.’ Finer also denied that those in Britain or the USA were afraid that the ‘common’ people will fall into the hands of a dictator because they have sufficient ability for their use in their own democratic practices to be the democratic masters of their own democratic form of government. But we know that Hayek would like to ‘curb’ the majority.

Finer’s book is somewhat frenzied and intemperate: yet he failed to fully understand or report Austrian School attitudes to democracy and dictatorships. Neither did Samuel Finer (2009 [1962], v) tackle the topic in his definitive The Man on Horseback: The Role of the Military in Politics, despite its dedication: ‘In recognition, gratitude and love to my great teacher and constant guide, my brother HERMAN.’ Hayek’s ‘defence of a liberal system of society’ through military dictatorship only became

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widely discussed after his death. And in for-posthumous-consumption oral history interviews, Hayek apparently confirmed the general correctness of Finer’s interpretation (Leeson 2015, chapter 3).

Notes 1. Friedrich Hayek interviewed by Jack High date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 2. Friedrich Hayek interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 3. Friedrich Hayek interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 4. In 1936, Robbins informed Kaldor that he hoped that Myrdal would give a couple of lectures at the LSE (Howson 2011, 290). 5. Friedrich Hayek interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 6. Friedrich Hayek interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 7. Friedrich Hayek interviewed by Axel Leijonhufvud date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 8. Friedrich Hayek interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 9. Hayek Papers Box 29.53. See also Ingrao and Ranchetti (2005, 396). 10. Shehadi (1991, 386) added John Hicks to the list of the weeded out. 11. The date of Anschluss is incorrectly given as Friday 11 May 1938. 12. Friedrich Hayek interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 13. Galbraith wrote much of The Affluent Society while house-sitting for Kaldor (Turner 1989, 164).

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14. An early draft of Friedman’s address cited Knight in the first paragraph: ‘it’s not ignorance that does the most damage, but knowin’ so derned much that ain’t so.’ Friedman Papers Box 49.9. 15. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1974/press.html. 16. Friedrich Hayek interviewed by Jack High date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 17. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1974/press.html. 18. Friedrich Hayek interviewed by Robert Bork 4 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 19. Friedrich Hayek interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 20. Friedrich Hayek interviewed by Jack High date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 21. In his history of the LSE, Ralf Dahrendorf (1995, plate 17, between 268 and 269) reproduced a photograph of academics dancing (a regular lunchtime activity). 22. Popper Papers Box 54.33. 23. Friedrich Hayek interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/. 24. Friedrich Hayek interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/. 25. ‘Even though Hayek himself disdained having his ideas attached to either party, he nonetheless provided arguments about the dangers of the unbridled growth of government’ (Caldwell 2010). 26. Friedrich Hayek interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 27. Friedrich Hayek interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/).

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28. Friedrich Hayek interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 29. Hayek’s advocacy related to the coordinated attempt to kick-over the traces of the Austrian origins of Hitler’s anti-Semitism and to portray Austria as Hitler’s victim. 30. http://bushlibrary.tamu.edu/research/public_papers.php?id=3642&year=&month= Hayek’s son received the 1991 award on his behalf.

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Sen, A. (2004, September20). An Insight into the Purpose of Prosperity. Financial Times. http://aubreyherbert.blogspot.com.au/2004/10/amartyasen-on-hayeks-road-to-serfdom.html. Shackle, G. L. S. (1967). The Years of High Theory: Invention and Tradition in Economic Thought 1926–1939. Cambridge: Cambridge University Press. Shearmur, J. (2006). Hayek, The Road to Serfdom, and the British Conservatives. Journal of the History of Economic Thought, 28, 309–314. Shehadi, N. (1991). The London School of Economics and the Stockholm School in the 1930s. In L. Jonung (Ed.) The Stockholm School of Economics Revisited. Cambridge: Cambridge University Press. Söderberg, G., Offer, A., & Bjork, B. (2013). Hayek in Citations and the Nobel Memorial Prize. In R. Leeson (Ed.), Hayek: A Collaborative Biography Part I Influences: From Mises to Bartley. Basingstoke, UK: Palgrave Macmillan. Stigler, G. J. (1968). The Organization of Industry. Chicago: University of Chicago Press. Tanaka, S. (1974, May 17). What Will Happen to the World as Keynesian Economic Theories Are Disproved? Views of Professor Hayek, a WorldFamous Authority on Inflation Sought. Shuukan Post, Hayek Papers Box 52.28. Thirlwall, A. (1987). Nicholas Kaldor. Brighton: Wheatsheaf. Thomas, B. (1934). Germany. In H. Dalton (Ed.), Unbalanced Budgets: A Study of the Financial Crisis in Fifteen Countries. London: Routledge. Thomas, B. (1991). Comment by Brinley Thomas. In L. Jonung (Ed.), The Stockholm School of Economics Revisited. Cambridge: Cambridge University Press. Turner, M. S. (1989). Joan Robinson and the Americans. London: Routledge.

6 25: Suppression, the Dogs That Didn’t Bark and the Emerging Chicago School of Economics Robert Leeson

1 Suppression 25. For Friedrich ‘von’ Hayek, death could be followed by the release of suppressed evidence. Referring to William Beveridge (1879–1963), Hayek (1978) confided in Leo Rosten: ‘I don’t mind putting this on the record now; there was an even more comic scene … One could talk at great length about this extraordinary person.’1 And five years after Ludwig ‘von’ Mises’ death, Hayek explained that ‘only now can I articulate why I was uncomfortable’ with Mises’ methodology (cited by Hutchison 1994, 223). Hayek’s (1978) professional timing was exquisite, specifying 2003 as the end of the suppression of sensitive information: ‘There’s no reason for [hesitation] when it’s after your lifetime … that, I think, ought R. Leeson (*)  Stanford University, Stanford, CA, USA e-mail: [email protected] R. Leeson  Notre Dame Australia University, Fremantle, WA, Australia © The Author(s) 2018 R. Leeson (ed.), Hayek: A Collaborative Biography, Archival Insights into the Evolution of Economics, https://doi.org/10.1007/978-3-319-95219-2_6

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to be under lock and key for the next twenty-five years.’2 Had Hayek (1899–1992) lived to be age 110, Hansjörg Klausinger’s (2010) revelation about the dubious foundations of his Nobel Prize would still have eluded this precise inter-temporal suppression requirement. Hayek’s 1929 alleged prediction of the Great Depression had apparently started as an oral job interview assertion in early 1931. Immediately after the Nobel Prize citation, Hayek—after a gap of forty-four years—repeated the claim—orally. In ‘Monex International presents an exclusive interview with Nobel laureate Dr Friedrich A. von Hayek,’ Gold and Silver Newsletter asked: ‘Our first question deals with your forecast in the 1920s that America was headed for a depression. We understand that you were one of the only economists to do so. Is that true?’ To which Hayek (1975a) replied: ‘Yes. I was one of the only ones to predict what was going to happen.’ His interviewer was obviously impressed: ‘How were you able to see what was going to happen?’ Hayek (1975a) explained: ‘I was one of the only ones to predict what was going to happen. In early 1929, when I made this forecast, I was living in Europe which was then going through a period of depression. I said that there’s no hope of a recovery in Europe until interest rates fell, and interest rates would not fall until the American boom collapses, which I said was likely to happen within the next few months. What made me expect this, of course, was one of my main theoretical beliefs, that you cannot indefinitely maintain an inflationary boom.’ Hayek (2009 [1979], 13) repeated this four years later: ‘At the time I was so convinced that this was an overexpansion that, as you perhaps know, at the beginning of 1929 I predicted the American crash. One could foresee this very clearly.’ Yet in November 1928, Hayek’s Institute had asserted that the position of the US Federal Reserve and its member banks was ‘strong enough to be able to continue an expansion of credit for a long period of time yet; and the time of the great economic crisis is probably still far distant.’ Adolph O. Berger (1936, 87–88, 182) summarized the June 1929 Institute assessment of conditions in the USA: Because of the comparatively strong position of the money market, it was believed that these adverse developments would probably not lead to a crisis followed by a depression but rather to a further sharp tightening of the money market.

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In July 1929, the conclusions of the Harvard Economic Service were cited: ‘some reduction of business activity but no crisis was to be expected, such a reduction of activity probably not to occur until after the summer.’ In October 1929, Hayek’s Institute stated: it can be emphatically emphasised that, given a smooth and undisturbed development of the financial and political situation, all the prerequisites seem to be given to make a new upswing possible within a few months.

Shortly before the announcement of his Nobel Prize, Hayek (1975a [1974])—after five years of suicidal depression—predicted ‘continued inflation’ and the disappearance of ‘the free market and free institutions’: What I expect [emphasis added] is that inflation will drive all the Western countries into a planned economy via price controls. Nobody will dare to stop inflation in an ordinary manner because as things are at present, to discontinue inflation will inevitably cause extensive unemployment. So assuming inflation stops it will quickly be resumed. People will find they can’t live with constantly rising prices and will try to control it by price controls and that of course is the end of the market system and the end of the free political order. So I think it will be via the attempt to regress the effects of a continued inflation that the free market and free institutions will disappear. It may still take ten years, but it doesn’t matter much for me because in ten years I hope I shall be dead.

The ‘Great Moderation’ (1982–2007) began three years after Paul Volcker was appointed chair of the Federal Reserve (Koenig et al. 2012). Hayek (1979, 3) outlined his ‘knowledge’: I find myself in an unpleasant situation. I had preached for forty years that the time to prevent the coming of a depression is during the boom. During the boom nobody listened to me. Now people again turn to me and ask how we can avoid the consequences of a policy about which I had constantly warned. I must witness the heads of governments of all Western industrial countries promising their people that they will stop the inflation and preserve full employment. But I know [emphasis added] that they cannot do this. I even fear that attempts to postpone the

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inevitable crisis by a new inflationary path may temporarily succeed and make the eventual breakdown even worse.

Some—though not many—noted Hayek’s abysmal forecasting record. Armen Alchian asked: ‘In Prices and Production [1935], on page 29 of the second edition, I ran across a sentence I didn’t remember you having made at that time. You made the prediction about the future, which turned out to be wrong, unfortunately. You said something to the effect–I don’t have the exact quotation–that in the future the theorists will abandon the concept of a general price level and concentrate on relative price effects in the change of the quantity of money.’ Hayek (1978) unintentionally indicated that this forecast had the same epistemological foundation as his Great Depression prediction: ‘It was a wish. [Laughter]’ Alchian pressed: ‘It was a wish, and I think it’s beginning to now come about. The recent work on monetary economics is emphasizing now more the relative price effect, but up to the very recent time it’s all been on general price level.’ Hayek (1978) joked again: ‘The future was just a little more recent than before [Laughter].’ Alchian then invited Hayek to undertake a forecast which sounds somewhat ludicrous: ‘Well, that may be correct. That leads me to a question I wanted to ask you, which is again a side issue and something I’d like to contemplate, but I’m unable to get anyplace. And that is predicting what it’s going to be like a hundred years from now. Have you ever tried that, and are you totally frustrated by it?’ Hayek replied: ‘No, I am much encouraged by the developments among the younger economists now.’ Alchian responded: By ‘frustration’ I meant not dislike but just the inability to– I feel helpless in trying to predict.

To which Hayek replied: ‘Well, after all, I now see that these things are having effects forty years later than I hoped they would.’3 Noting that the Austrian theory of the cycle ‘depends very heavily on business expectations being wrong,’ Jack High asked if predictive failure had ‘strengthened’ or weakened his faith. Hayek (1978) replied:

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On the whole, strengthen, although I see more clearly that there’s a very general schema which has to be filled in in detail. The particular form I gave it was connected with the mechanism of the gold standard, which allowed a credit expansion up to a point and then made a certain reversal possible. I always knew that in principle there was no definite time limit for the period for which you could stimulate expansion by rapidly accelerating inflation. But I just took it for granted that there was a built-in stop in the form of the gold standard, and in that I was a little mistaken [emphasis added] in my diagnosis of the postwar development. I knew the boom would break down, but I didn’t give it as long as it actually lasted. That you could maintain an inflationary boom for something like twenty years I did not anticipate. While on the one hand, immediately after the war I never believed, as most of my friends did, in an impending depression, because I anticipated an inflationary boom. My expectation would be that the inflationary boom would last five or six years, as the historical ones had done, forgetting that then the termination was due to the gold standard. If you had no gold standard–if you could continue inflating for much longer–it was very difficult to predict how long it would last. Of course, it has lasted very much longer than I expected. The end result was the same.4

Terence Hutchison (1981, 211) reflected on Hayek’s inconsistencies: initially making ‘strong claims for prediction and forecasting’ that he later repudiated. According to the National Bureau of Economic Research US business cycle Dating Committee, the 16-month recession that ended in March 1975 was followed by 58 months of expansion. Two recessions—6 months (January–July 1980) and 16 months (July 1981– November 1982)—were followed by 92 months of expansion.5 Between June 1975 and May 1980, Hayek made four more predictions: • For Gold and Silver investors, Hayek (1975a) asserted that there had been ‘an inflationary boom that has lasted thirty-five years – an unprecedented situation.’ Hayek then predicted that ‘you won’t get away with a mild depression. You may hope it will be a short one but it will be a depression … the likelihood is that we will be

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moving into a completely controlled economy with depression, and employment directly dependent on government spending on public works. Of course this is a situation from which it is very difficult to extradite yourself.’ • Three years later, Hayek (1978) again predicted another Depression: ‘I was just listening to the wireless here, where people were speaking about the inevitable depression. Oh, yes, I also know [emphasis added] a depression will come, but whether in six months or three years I haven’t the slightest idea. I don’t think anybody has [Laughter].’6 • In May 1980 (as Reagan clinched the Republican Presidential nomination), Hayek (1980) stated in the American Economic Council Report that Americans would get ‘very easily upset … it seems to me now that you will go through a phase of repressed inflation in which bureaucracy and government impose an extensive system of price and wage regulations which is so unsatisfactory that it will lead to some sort of political explosion.’ The response would depend on ‘the state of insight of the great masses, which in turn depends on what they have been taught by the media and the schools.’ Hayek (1978) also reflected: ‘one of my students once told me, that nearly everything I say about the methodology of economics amounts to a limitation of the possible knowledge. It’s true; I admit it.’7 • The Times (31 May 1980) published a letter from Hayek: ‘we probably have indeed reached the point where even a further increase of inflation cannot prevent the depression which we have made inevitable by past inflation. It is bound to last as long as we reduce the rate of inflation and the only thing we can do about it is to get it over as fast as possible.’8

2 Dogs That Didn’t Bark In retrospect, numerous dogs didn’t bark. At a 1962 banquet in honour of Hayek, Mises simply stated that Hayek published ‘several excellent essays’ during his time at the Austrian Institute for Economic Research. The American banking crisis was transmitted to Europe via

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the May 1931 collapse of the Austrian Credit-Anstadt bank: had Hayek predicted the Great Depression, he would have become an international sensation. Yet according to Mises, Hayek was virtually academically unemployable: ‘Political conditions in Austria made it rather questionable whether he would ever be appointed to a full professorship at an Austrian University. But England was, at that time, still free from prejudice against the free market economy’ (cited by Margit Mises 1984, 214). According to his biographer, during a 1926 visit to the USA, Mises observed how much money could be made through business cycle Institutes: he was ‘impressed by the commercial success of the monthly reports.’ The price of an annual subscription was about $100, a ‘small fortune at the time.’ Later, a member of the ‘sales team that marketed these reports,’ Frederick Nymeyer, became a ‘devoted Misesian’ and set up a publishing house, the Libertarian Press, to ‘disseminate’ Mises’ writings. Mises planned to use the ‘money generated through the sale of reports to fund young libertarian intellectuals, who had little chance of obtaining one of the rare positions at public universities.’ By April 1931, the ‘monthly reports of the Institut had a circulation of 500 copies’ (Hülsmann 2007, 576). Mises and his Institute needed academic respectability and funding—both of which would have been enhanced by publicity about Hayek’s alleged prediction. Eighteen months after the alleged prediction and four months before his first meeting with the somewhat reverential Lionel Robbins, Hayek (23 September 1930) wrote to Rockefeller Foundation requesting funds for a ‘Foundation Program in Economic Stabilization’ in which he stated: ‘The costs imposed by serious business depression—of demoralization, broken health, disorganized families, neglected children, lowered living standards, permanent insecurity, impaired morale, as well as financial distress—are so appalling when viewed socially as well as individually that no problem of this generation calls more clearly for solution than this of economic stabilization. It is no exaggeration to say that unless the problem can be solved or at least measurably reduced the present social order is in serious jeopardy … No more important contribution could be made by the Foundation to the wise development of that social planning and control which seems ultimately so

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necessary and inevitable if contemporary civilization is to survive’ (cited by Leonard 2011, 93). This would have been an opportune moment to refer to his ‘spring of 1929’ or ‘February 1929’ prediction about the Great Depression—had it been made. In 1928, Mises ‘undisputedly’ proclaimed that the Austrian approach was ‘widely accepted as the explanation of the cycle [emphasis in original]’ (Klausinger 2006, 621). It is inconceivable that Mises would not have referred to Hayek’s prediction—had it been made. However, even in a 1933 essay on ‘The Current Status of Business Cycle research and its Prospects for the Immediate Future,’ Mises (2006, chapter 4) did not bark. Indeed, in Mises’ (2006) The Causes of the Economic Crisis and Other Essays Before and After the Great Depression, there is only one mention of Hayek—in Frank Shostak’s (2006) Foreword: ‘Here we have the evidence that the master economist [Mises] foresaw and warned against the breakdown of the German mark, as well as the market crash of 1929 and the depression that followed. He presents his business cycle theory in its most elaborate form, applies it to the prevailing conditions, and discusses the policies that governments undertake that make recessions worse. He recommends a path for monetary reform that would eliminate business cycles as we have known them, and provide the basis for a sustainable prosperity. In foreseeing the interwar economic breakdown, Mises was nearly alone among his contemporaries—which is particularly interesting because Mises made no claim to possessing clairvoyant powers. To him, economics is a qualitative discipline… Mises’s theoretical insights led him to look more deeply, and to elucidate the impact of credit expansion on the entire structure of the capitalistic production process.’ Shostak (2006) continued: The essays were well known to contemporary German-speaking audiences. They had not come to the attention of English audiences until 1978, four years after F.A. Hayek had been awarded the Nobel Prize for, in particular, ‘his theory of business cycles and his conception of the effects of monetary and credit policies.’ In tribute to Hayek’s excellent contributions, the Austrian theory of the business cycle has long been called a Hayekian theory. But it might be more justly called the Misesian theory.

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According to Hayek (1992 [1944], 208), it was essential to subscribe to ‘certain moral standards’—including the ‘sacredness of truth.’ Just before the Nobel Prize was announced, Hayek (1975b [1974], 10) informed Reason that ‘a certain degree of truthfulness probably is also required and probably no society could function unless it could up to a certain point assume that people are truthful.’ Hayek (1978) also informed Robert Chitester: ‘And I must say dishonesty is a thing I intensely dislike.’9 Did Hayek take to the grave the secrets of what appears to be his fraudulent assertion about having predicted the Great Depression? Possibly not. Hayek (1978) reflected: ‘The whole traditional concept of aristocracy, of which I have a certain conception– I have moved, to some extent, in aristocratic circles, and I like their style of life. But I know that in the strict commercial sense, they are not necessarily honest.’10 ‘Von’ Hayek was ‘not necessarily honest’—indeed, the archival evidence clearly reveals that he was a fantasist, a serial liar and an academic fraud. Moreover, he apparently wanted these impressive manipulative skills to be revealed in posthumous biographies. Austrians delight in the label Harry Johnson (1982 [1975], 83) attached to Keynes: an ‘opportunist and an operator.’11 Yet Hayek apparently wished to be portrayed in the ‘Against the Stream’ biography that he was virtually dictating as cleverer than Keynes in this and other regards: he intentionally planned to leave the incriminating evidence in his Hoover Institution archives—although some of this evidence was removed by disciples before it arrived (Leeson 2013, 178). It is possible that this episode is discussed in one of the many Hayek oral history taped interviews that his disciples are suppressing (Leeson 2015, Chapter 2).

3 Non-recruitment to the University of Chicago Department of Economics Hayek played a pivotal role in Milton Friedman’s transformation from technical economist to public policy intellectual: his ‘rather casual… interest in public policy and political philosophy’ was transformed by

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The Road to Serfdom (1944), the Mont Pelerin Society (1947) and ‘by discussions with Hayek after he joined the university faculty in 1950’ (Friedman and Friedman 1998, 159, 160, 333). But according to anonymous Chicago sources, Friedman ‘spoke out against Hayek joining the economics department’ (Overtveldt 2007, 343). So too—according to Ross Emmett (2011, 60)—did Knight. Why was Hayek unacceptable to the emerging Chicago School of Economics? Eight explanations seem either unlikely or insufficient: • According to Hayek (1978): ‘I discredited myself with most of my fellow economists by writing The Road to Serfdom, which is disliked so much. So not only did my theoretical influence decline, most of the departments came to dislike me, so much so that I can feel it to the present day. Economists very largely tend to treat me as an outsider, somebody who has discredited himself by writing a book like The Road to Serfdom, which has now become political science altogether.’12 John Nef (1973, 37–38), who recruited Hayek to the Committee on Social Thought, repeated this assessment: economists regarded The Road to Serfdom as ‘too popular a work for a respectable scholar to perpetrate.’ But according to Friedman, ‘The Road to Serfdom would have been a plus not a minus… in terms of ideology the majority of the department was on Hayek’s side’ (cited by Ebenstein 2003, 174). • In 1945, Henry Simons proposed to establish an Institute for Political Economy to sustain or keep alive an element within the department: ‘Chicago economics still have some distinctively some traditional-liberal connotations and some prestige’ (cited by Coase 1993, 245–246). As Dean of the University of Chicago Graduate School of Business (1956–1962), W. Allen Wallis recruited Stigler: in 1946/1947, and Wallis declared that Hayek’s (1937) ‘Economics and Knowledge’ was ‘just phenomenal!’13 While for some other Chicago decision-makers, the Simons-connection may have worked against Hayek, it cannot explain the opposition from Knight and Friedman. • Hayek asserted that ‘The econometricians didn’t want me’ (cited by Ebenstein 2003, 175). Yet the econometricians were primarily in the Cowles Commission—with whom Friedman (particularly between

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1946–1948) was engaged in an ongoing dispute (Epstein 1987, 107). Lord Kelvin’s dictum, ‘when you cannot measure your knowledge is meagre and unsatisfactory’ is carved in stone above the entrance to the University of Social Science Research Building: Knight’s (possibly apocryphal) statement ‘And if you can’t measure it, measure it anyway’ captures his animosity towards the econometrics project (Friedman and Friedman 1998, 189, 197–198). Hayek would have been an ally in this regard. • When he relocated to the USA, Hayek was an energetic fifty-year old: his subsequent institutional contributions included not only the ‘Hayek Research Project’ (the ‘Free Market Study’) but also the Law and Economics Program. Neither on age nor on activity grounds, could any objection have been raised to his recruitment. • Hayek’s impending divorce would probably not have been decisive for the divorced Knight who was sympathetic: ‘Let the coincidence [of love and marriage] be the ideal, to be attained where practical even by rearrangements when mistakes have been made and discovered’ (cited by Nordquist and Emmett 2011, xxxix–xl).14 • Samuelson (2003, 464) reported that in the 1930s, the ‘Chicago ideology was an infantile eczema okay for one’s teens but much in need of outside sunshine.’ Later, the Chicago Economics Department prided itself on its ‘heterogeneity of policy views’: according to Stigler, it was the only department that in 1964 could have staffed a Council of Economic Advisers for either Presidential candidate, Lyndon Johnson or Barry Goldwater (Friedman and Friedman 1998, 192). On policy grounds, Hayek would have added an extra dimension to some policy debates while being largely in agreement with others. • Hayek’s analytical skills would have added to an economics departmental which subsequently recruited a Keynesian (Harry Johnson) and had tried unsuccessfully to recruit four more: Hayek’s successor as Tooke Professor at the LSE, A. W. H. Phillips, Samuelson, Robert Solow and James Tobin (Stigler 1988, 169).15 According to Friedman, the ‘department didn’t agree with [Hayek’s] economics. Prices and Production, his capital theory—if they had been looking around the world for an economist to add to their staff, their

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prescription would not have been the author of Prices and Production ’ (cited by Ebenstein 2003, 174). Yet most didn’t agree with Keynesian economics—but still tried to recruit those who did. • Hayek was unquestionably in the highest category as a theorist: the University of Chicago Press had just published The Pure Theory of Capital (2007 [1941]). In Friedman’s judgment, ‘Prices and Production is a very flawed book’ (cited by Ebenstein 2003, 81).16 Yet this criticism is inconsistent with the famous methodology that Friedman developed between 1947 and 1953 (Hammond 2009). Friedman (1953, 14) promoted theories as prediction-generators: Truly important and significant hypotheses will be found to have ‘assumptions’ that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense).

From Friedman’s methodological perspective, Prices and Production was flawed: the theory had not generated a successful prediction of the Great Depression—despite the Hayek–Robbins claim—but this is not how Friedman (at least in public) summarized his opposition to Hayek’s appointment. This leaves a ninth possibility that would—by itself—have been sufficient to exclude Hayek: an awareness of the possibility that the Schmidt-Berger research could reach a wider audience and thus undermine • Robbins’ (2012 [1931]) Foreword to the first edition of Prices and Production; • Hayek’s scientific credibility; and, by association, • the scientific credibility of the emerging Chicago School of Economic.17 In Nef ’s (1973, 37) summary: ‘It was all right to have him at the University of Chicago so long as he wasn’t identified with the economists.’18 Presumably referring to the University of Chicago economics department, Hayek (1978) continued: ‘There was one instance about

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four or five years after I had published The Road to Serfdom, when a proposal of an American faculty to offer me a professorship was turned down by the majority. It was one of the big American universities.’19 As Stigler (1959, 527) explained, to get a ‘professorship at a major American university’ required that ‘a professor be at least tolerably honest.’20

4 Hayek Mark I and Hayek Mark II? Hayek’s (1978) mental illness manifested itself in obsessive self-interest and extreme mood swings: from suicidal depression to what he called ‘frightfully egotistic’ feelings.21 When asked ‘What did Hayek think about subject x?’ his fellow Austrian-LSE economist (1933–1948), Ludwig Lachmann (1906–1990), would routinely reply: ‘Which Hayek?’ (cited by Caldwell 2006, 112). Cubitt noted that Hayek became ‘upset’ after reading an article on schizophrenia and ‘wondered whether he thought it was referring to himself or Mrs Hayek.’ The 1974 Nobel Prize for Economic Sciences exacerbated this personality split: Walter Grinder detected ‘almost two different people’ (Ebenstein 2003, 264). Hayek—who may not have been able to distinguish between truth and falsehood—was a serial liar: yet his charm and aristocratic demeanour appeared to protect him from most of the consequences of his dishonesty. Bruce Caldwell (2009, 316) was involved in a methodological dispute with Hutchison over whether there was a (Misean apriori) Hayek I and a (Popperian falsificationist) Hayek II: ‘the sort of interpretive argument that is common currency for historians of economic thought. And as is often the case in such matters, there was evidence on both sides. I would further submit that Hayek himself bears a considerable amount of the blame for the profusion of conflicting pieces of evidence. He frequently manages to say things that could support either argument.’ According to Caldwell, Hayek was never a methodological Misean; Hutchison had exaggerated Karl Popper’s influence. Yet Caldwell (2009, 316) also cited Hayek as stating in 1982 that ever since reading Popper’s

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Logic of Scientific Discovery in 1934 he had been a ‘complete adherent’ of Popper’s methodology. This account is consistent with that provided earlier by Hayek (1978): it took me a long time, really, to emancipate myself from [logical positivism]. It was only after I had left Vienna, in London, that I began to think systematically on problems of methodology in the social sciences, and I began to recognize that positivism in that field was definitely misleading. In a discussion I had on a visit to Vienna from London with my friend Haberler, I explained to him that I had come to the conclusion that all this Machian positivism was no good for our purposes. Then he countered, ‘Oh, there’s a very good new book that came out in the circle of Vienna positivists by a man called Karl Popper on the logic of scientific research’ [Logik der forschung 1934/1935; Logic of Scientific Discovery 1959]. So I became one of the early readers. It had just come out a few weeks before… to me it was so satisfactory because it confirmed this certain view I had already formed due to an experience very similar to Karl Popper’s… our environment in which we formed our ideas was very much the same. But our environment in which we formed our ideas was very much the same. It was very largely dominated by discussion, on the one hand, with Marxists and, on the other hand, with Freudians.22

Yet Hayek’s account is inconsistent with what he told Hutchison (15 May 1983): ‘the 1936 lecture was written and the lecture given and the before I knew anything about Popper’ (cited by Caldwell 2009, 323–324). It was also inconsistent with what he told Caldwell (29 September 1984): ‘I am sure [Popper] had no influence on my method in economics – certainly not yet in 1936 when I had only recently become acquainted with his Logik der forschung… at that time I did not know him personally’ (cited by Caldwell 2009, 323–324). Yet Hayek (1978) met Popper for the first time during a June 1936 LSE seminar presentation—which Hayek had arranged (Caldwell 2006, 114). Hayek clearly told different stories to different people. With respect to his alleged prediction of the Great Depression, there may have been a Hayek I (who was believed by his associates) and a Hayek II (who was not). The change—if it happened—may have taken place around 1934–1936.

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Hayek’s (1937, 33) ‘Economics and Knowledge’ Presidential address begins with a reference which appears to have some relevance for what may have been the discovery of his non-prediction: ‘The ambiguity of the title of this paper is not accidental. Its main subject is, of course, the role which assumptions and propositions about the knowledge possessed by the different members of society play in economic analysis. But this is by no means unconnected with the other question which might be discussed under the same title… In short, I shall contend that the empirical element in economic theory–the only part which is concerned not merely with implications but with causes and effects and which leads therefore to conclusions which, at any rate in principle, are capable of verification [emphasis added] – consists of propositions about the acquisition of knowledge.’ The Vienna circle sought to verify knowledge, while Popper sought to establish falsification criteria. Hayek (1978) claims to have been aware of the distinction immediately: ‘I found that Haberler had been rather mistaken by the setting in which the book had appeared. While it came formally out of that [Vienna] circle, it was really an attack on that system [Laughter].’23 Was Hayek asked, at this time, for verification of his prediction of the Great Depression? It seems to be almost a Freudian slip which Hayek corrected at the galley stage by adding a footnote reference to Popper: ‘Or rather falsification’ (Caldwell 2006, 115).

Notes 1. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 2. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 3. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 4. Friedrich Hayek, interviewed by Jack High date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/).

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5. http://www.nber.org/cycles/cyclesmain.html. 6. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 7. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http:// oralhistory.library.ucla.edu/). Hayek (1978) continued: ‘I have come to the conclusion that we’re in that field which someone has called organized complexity, as distinct from disorganized complexity.’ 8. http://www.margaretthatcher.org/document/114505. 9. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 10. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 11. http://cafehayek.com/2011/09/harry-johnson-on-keynes-2.html. 12. Friedrich Hayek, interviewed by Jack High date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 13. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). Alchian recalled that ‘I had that copy typed up to mimeograph for my students in the first course I gave here [at University of California at Los Angeles circa 1946]. And Allan [sic ] Wallace [sic ], whom I guess you must know, came through town one day, and I said, “Allan, I’ve got a great article!” He looked at it, started to laugh, and said, “I’ve seen it too; it’s just phenomenal!”’ 14. After his first marriage was dissolved (July 1927), Knight left his first wife and their four children in Iowa and relocated to the University of Chicago where he married his second wife (September 1929) and had two more children (Nordquist and Emmett and 2011, xxxix–xl). Friedman (1995) reflected that Hayek’s behaviour (towards his first wife) was inconsistent with the person he knew (or more realistically, the personality Hayek projected). 15. Friedman (29 March 1954) recommended to the Departmental Chair, Theodore Schultz, that Phillips was a ‘real possibility’ as a Chicago recruit. Friedman Papers Box 194.6.

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16. Friedman was ‘an enormous admirer of Hayek, but not for his economics. I think Prices and Production [1931] is a very flawed book. I think his capital theory book [The Pure Theory 1941] is unreadable. On the other hand, The Road to Serfdom [1944] is one of the great books of our time’ (cited by Ebenstein 2003, 81). 17. All self-respecting universities treat suspicions of cheating as a serious offence. Stigler wrote an internal report which led to the dismissal of one of the most policy-influential supply side economists from the University of Chicago after suspicions had been raised about a claimed Ph.D. which was, in fact, incomplete (Leeson 2003, 189, n7). Perhaps coincidentally, when he won the 1982 Nobel Prize for Economic Sciences and was asked about his opinion of Reagan’s supply side economics, Stigler responded that it was ‘a gimmick, a slogan to package certain ideas’ and added that the Administration’s grade was ‘maybe an incomplete’ (The Wall Street Journal 26 October 1982). 18. Nef ’s sentence was related to Hayek’s The Road to Serfdom, but appears to express a wider sense of apprehension on the part of the economists. 19. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 20. ‘It could be argued that there is one powerful factor making for conservatism: the inability of a very radical young economist to get a desirable university post. It is indeed true that a believer in the labor theory of value could not get a professorship at a major American university, although the reason would be that the professors could not bring themselves to believe that he was both honest and intelligent, and I hope they are not improper in their demand that a professor be at least tolerably honest and presumptively intelligent. But this argument is invalid, and not merely because one can be an economist without being a professor. It is improper because it concedes the case: it concedes that economists are conservative, and this is precisely my thesis.’ 21. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 22. Hayek continued: ‘I found that Haberler had been rather mistaken by the setting in which the book had appeared. While it came formally out of that circle, it was really an attack on that system [laughter].’

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Friedrich Hayek, interviewed by Earlene Craver 1978 (Centre for Oral History Research, University Angeles, http://oralhistory.library.ucla.edu/). 23. Friedrich Hayek, interviewed by Earlene Craver 1978 (Centre for Oral History Research, University Angeles, http://oralhistory.library.ucla.edu/).

date unspecified of California, Los date unspecified of California, Los

Archival Insight into the Evolution of Economics (and Related Projects) Koenig, E., Leeson, R., & Kahn, G. (Eds.). (2012). The Taylor Rule and Transformation of Monetary Policy. Stanford, CA: Hoover Press. Leeson, R. (2003). Ideology and the International Economy: The Decline and Fall of Bretton Woods. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (Ed.). (2013). Hayek: A Collaborative Biography Part I Influences: From Mises to Bartley. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (Ed.). (2015). Hayek: A Collaborative Biography Part II Austria, America and the Rise of Hitler, 1899–1933. Basingstoke, UK: Palgrave Macmillan.

References Berger, A. O. (1936, August). The Forecasting Methods and Results of the Austrian Institute for Business Cycle Research. MA dissertation, Department of Economics, Division of Social Sciences, University of Chicago. Caldwell, B. (2006). Popper and Hayek Who Influenced Whom? In I. Jarvie, K. Milford, & D. Miller (Eds.), Karl Popper a Centenary Assessment. Life and Times and Values in a World of Facts. Aldershot: Ashford. Caldwell, B. (2009). A Skirmish in the Popper Wars: Hutchison Versus Caldwell on Hayek, Popper, Mises and Methodology. Journal of Economic Methodology, 16(3), 315–324. Coase, R. (1993). Law and Economics at Chicago. Journal of Law and Economics, 36(1), 239–254. Ebenstein, A. (2003). Friedrich Hayek: A Biography. Chicago: University of Chicago Press.

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Emmett, R. (2011). Discussion and the Evolution of Institutions in a Liberal Democracy Frank Knight Joins the Debate. In A. Farrant (Ed.), Hayek, Mill and the Liberal Tradition. New York: Routledge. Epstein, R. (1987). A History of Econometrics. Amsterdam: North Holland. Friedman, M. F. (1953). Essays in Positive Economics. Chicago: University of Chicago Press. Friedman, M. F. (1995). Interview with Alan Ebenstein. Friedman, M. F., & Friedman, R. D. (1998). Two Lucky People. Chicago: University of Chicago Press. Hammond, J. D. (2009). Early Drafts of Friedman’s Methodological Essay. In U. Mäki (Ed.), The Methodology of Positive Economics: Reflections on the Milton Friedman Legacy. Cambridge: Cambridge University Press. Hayek, F. A. (1931). Prices and Production. London: Routledge and Kegan Paul. Hayek, F. A. (1935). Prices and Production (2nd ed.). London: Routledge and Kegan Paul. Reprinted 1967. New York: August M. Kelley. Hayek, F. A. (1937). Economists and Knowledge. Economica, 4(February), 33–54. New Series. Hayek, F. A. (1941). The Pure Theory of Capital. London: Routledge and Kegan Paul. Hayek, F. A. (1944). Road to Serfdom. Chicago: University of Chicago Press. Hayek, F. A. (1975a, June). Monex International Presents an Exclusive Interview with Nobel Laureate Dr. Friedrich A. von Hayek. Gold and Silver Newsletter. Newport Beach, CA: Monex International. Hayek, F. A. (1975b [1974]). Economics, Politics and Freedom. Reason February 4–10. http://reason.com/archives/2013/07/18/hayek-economicspolitics-freedom/2. Hayek, F. A. (1978). Oral History Interviews. Los Angeles: Centre for Oral History Research, University of California. http://oralhistory.library.ucla. edu/. Hayek, F. (1979). Unemployment and Monetary Policy: Government as Generator of the ‘Business Cycle’. San Francisco: Cato Institute. Hayek, F. A. (1980, May). This Month’s Interviews. F.A. Hayek (The American Economic Council Report 1.11). http://www.youtube.com/watch?v= 52tyPRsL3VQ. Hayek, F. A. (1992). The Fortunes of Liberalism. Vol 4 The Collected Works of F.A. Hayek (P. G. Klein, Ed.). Chicago: University of Chicago Press.

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Hayek, F. A. (2009 [1979]). A Conversation with Professor Friedrich Hayek. In D. Pizano (Ed.), Conversations with Great Economists: Friedrich A. Hayek, John Hicks, Nicholas Kaldor, Leonid V. Kantorovich, Joan Robinson, Paul A. Samuelson, Jan Tinbergen. New York: Jorge Pinto Books. Hülsmann, J. G. (2007). Mises: The Last Knight of Liberalism. Auburn, AL: Ludwig von Mises Institute. Hutchison, T. (1981). The Politics and Philosophy of Modern Economics Marxians, Keynesians and Austrians. New York: New York Press. Hutchison, T. (1994). The Uses and Abuses of Economics Contentious Essays on History and Method. London: Routledge. Johnson, H. G. (1982). On Economics and Society. Chicago: University of Chicago Press. Klausinger, H. (2006). From Mises to Morgenstern: Austrian Economics During the Ständestaat. Quarterly Journal of Austrian Economics, 9(3), 25–43. Klausinger, H. (2010). Hayek on Practical Business Cycle Research: A Note. In H. Hagemann, T. Nishizawa, & Y. Ikeda (Eds.), Austrian Economics in Transition: From Carl Menger to Friedrich Hayek (pp. 218–234). Basingstoke: Palgrave Macmillan. Leonard, R. (2011). The Collapse of Interwar Vienna: Oskar Morgenstern’s Community, 1925–50. History of Political Economy, 43(1), 83–130. Mises, L. (2006). The Causes of the Economic Crisis and Other Essays Before and After the Great Depression. Auburn, AL: Ludwig von Mises Institute. Mises, M. (1984). My Years with Ludwig von Mises. Cedar Falls, IA: Center for Futures Education. Nef, J. U. (1973). Search for Meaning the Autobiography of a Nonconformist. Washington: Public Affairs Press. Nordquist, G. L., & Emmett, R. (2011). Frank Hyneman Knight the Iowa Years. In R. Emmett (Ed.), Frank H. Knight in Iowa City, 1919–1928. Research in the History of Economic Thought and Methodology, 29(B), xi–liii. Overtveldt, J. V. (2007). The Chicago School How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business. Chicago: Agate. Popper, K. R. (1934/1935). Logik der forschung: zur erkenntnistheorie der modernen naturwissenschaft. Vienna: Springer. Popper, K. R. (1959). Logic of Scientific Discovery. London: Routledge. Robbins, L. C. (2012 [1931]). Foreword. In Hayek, F.A. Business Cycles Volume VII The Collected Works of F.A. Hayek (H. Klausinger, Ed.). Chicago: University of Chicago Press.

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Samuelson, P. A. (2003). Reflections on the Schumpeter I Knew Well. Journal of Evolutionary Economics, 13, 463–467. Shostak, F. (2006). Foreword. In L. Mises (Ed.), The Causes of the Economic Crisis and other Essays Before and After the Great Depression. Auburn, AL: Ludwig von Mises Institute. Stigler, G. J. (1959). The Politics of Political Economists. Quarterly Journal of Economics, 73(November), 522–532. Stigler, G. J. (1988). Memoirs of an Unregulated Economist. Chicago: University of Chicago Press.

7 31 Conclusions About Hayek’s Nineteen Thirty-One ‘Prediction’ Robert Leeson

In a History of Economics Lecture on ‘Hayek and His Lamentable Contemporaries,’ Murray Rothbard (n.d.) repeated verbatim a post-lecture conversation with Arthur Burns that took place decades before (1958). Burns, ‘who at that time had just resigned as head of the Council of Economic Advisors in the Eisenhower Administration,’ was giving the usual Keynesian policies … the Keynesian or the establishment program. So Burns was going into explaining this policy, and during the question period, unfortunately I was a brash young fellow at that time, I said, ‘Well, Professor Burns, what do you do if—since what the government’s supposed to be doing is pumping deficits during a recession, and take out spending or have higher taxes or surplus during a boom, what do you do if both are happening at the same time, as seems to be happening

R. Leeson (*)  Stanford University, Stanford, CA, USA e-mail: [email protected] R. Leeson  Notre Dame Australia University, Fremantle, WA, Australia © The Author(s) 2018 R. Leeson (ed.), Hayek: A Collaborative Biography, Archival Insights into the Evolution of Economics, https://doi.org/10.1007/978-3-319-95219-2_7

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right now? In other words, what do you do is there’s an inflation and a recession at the same time?’ His first reply was, ‘Well, there’s no problem there because the recession will soon be over,’ and so forth. I said okay, and it was soon over in ’58. But I said, ‘What happens, Professor Burns, if at some future date the same phenomenon would recur and intensify, we’ll have a severe recession along with an accelerating inflation? What then would you recommend?’ And he stopped for a moment and he said, ‘Well, in that case we’d all have to resign.’ They haven’t resigned. The rest, of course, is history … One of Rothbard’s laws of political science, that nobody ever resigns from government unless your hand is caught directly in the till.

Do Austrian School economics expect that non-Austrians are lying because they are aware of the own dishonesty? Reading between the lines is a hazardous and speculative activity: this is particularly true of Hayek who was ‘hardly capable of restating the ideas of another person because I read and embody what I like to my own thought. I cannot read a book and give an account of its arguments. I can perhaps say what I have learnt from it. But that part of the argument which is not sympathetic to me, I pass over’ (cited by Ebenstein 2003a, 3). As Kresge (2002, 504) noted: ‘More often than not [Hayek] did not make explicit the context in which his ideas needed to be understood.’ If Hayek did not provide the context, then we are entitled to investigate: Is it also legitimate to speculate about multiple contexts? Mark Blaug (1994, 1, 206) concluded: ‘If we want to explain the Keynesian Revolution, the astonishing speed with which Keynesian economics won professional approval, it would be difficult to deny that [John Maynard] Keynes’s personal biography was extremely relevant.’ Hayek’s personal biography may be equally relevant. However, the ethics of (published) conversation that governs the behaviour of economists is not generally conducive to accusations of fraud. In ‘Why Didn’t Hayek Review Keynes’ General Theory,’ Bruce Caldwell (1988, 545) noted that ‘Occasionally the more interesting question is, why did something that apparently should have happened, not happen?’ Caldwell (2004, 212) also provides a justification for trying to

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explain the inconsistencies in Hayek’s accounts: in his ‘Economics and Knowledge,’ ‘Hayek nowhere mentions Oskar Morgenstern as an influence’ and therefore a ‘conjecture’ about the relationship between the two was appropriate. Referring to Jacob Viner’s (1937) Studies in the Theories of International Trade, Paul Samuelson (1967, 107) reflected that it would be a ‘tedious detective operation to trace through’ the ‘unconscious contacts’ and influences between that Chicagoan and the London School of Economics (LSE). Archival research has uncovered suppressed evidence; perhaps only evidence-based speculation can illuminate the reasons for the suppression. Hayek claimed to have had at least two ‘I told you so’ moments: the 1989 fall of the Berlin Wall (Cassidy 2000) plus his 1929 prediction of the Great Depression. Hayek (1974) delivered his Nobel Lecture on ‘The Pretence of Knowledge’ almost mid-point between the Pretence (Robbins 2012 [1931]) and the Knowledge (Klausinger 2010). Since it took seven decades for this initially dispersed information to become coordinated by the market, economists are entitled to ask probing questions and to offer speculative explanations where evidence appears to be lacking or suppressed. Some firm or tentative conclusions emerge; plus some hypotheses, conjectures or speculative explanations. 1. Arnold Harberger’s (1999, 2000, 2016) observations about the Austrian religion are supported by the evidence. Hayek was, self-consciously, a religious figure—but not of the traditional JudeoChristian type: he was a ‘Trickster,’ inviting, indeed, encouraging, posthumous exposure. Alive, Hayek could manipulate people and situations; dead, he expected his disciples to reveal his cleverness. He misunderstood this market: most of the oral history tapes that he ‘armed’ his biographers with will, presumably, be destroyed, or at least remain forever suppressed (Leeson 2015a, chapter 2). Ludwig ‘von’ Mises ‘took great care to destroy any evidence—from receipts to love letters—anything that could have been useful to potential opponents. We can report on some of the more intimate episodes of his life only because of the private records stolen from his Vienna apartment by Hitler’s agents in March of 1938’ (Hülsmann 2007, xiii).

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Mises (2009 [1940]) wrote his Memoirs from the safety of neutral America: he clearly did not want to invite confrontations about his 1927 defence of ‘Fascism’ and his 1940 retreat to safety. In his Preface to the English language version of Liberalism in the Classical Tradition, Mises (1985 [1962], xviii) asserted that he had ‘not changed anything in the original text of the book and did not influence in any way [emphasis added] the translation made by Dr. Ralph Raico and the editing done by Mr. Arthur Goddard.’ In a footnote, Raico (2012, 258, n7), a Mises Institute Senior Fellow, revealed that Mises was lying: When I undertook to translate Liberalismus into English in the late 1950s, Mises at one point suggested that I include a translator’s note explaining the historical context of these and similar remarks on Italian [sic] Fascism. My reply, in retrospect mistaken, was that such a note was superfluous, since the grounds for the views he expressed in 1927 were obvious. The English translation appeared, unfortunately, without any such explanation. I had vastly underestimated the prevelance of historical cluelessness among Mises’s socialist critics.

In ‘The Mises We Never Knew,’ Rothbard (1978) revealed the Austrian ‘delight’ at being lied to by their religious leaders: When Ludwig von Mises was in his hale and hearty 70’s, those of us who were privileged to attend his graduate seminar at New York University used to gather with him after class for a snack at a local restaurant. One evening, after Mises, as so often happened, regaled us with mar-velous anecdotes of life in old Vienna, one student urged him to write an autobio-graphy to preserve his impressions in book form. It was the only time I ever saw this gentle man bristle, if ever so slightly. ‘Please, I am not yet old enough to write an autobiography.’ So much for that topic. No one had the temerity to point out to Mises that, in our current culture, many people, with absolutely nothing to say, publish their ‘autobiographies’ in their early 20’s. Imagine my surprise and delight when I discovered that Mises, unbeknownst to anyone, had written an autobiography in 1940, as soon as he arrived in the United States, and had entrusted it to the care of his devoted wife, Margit. Thirty years later, when Margit suggested

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that he write an autobiography, he replied: ‘You have my two handwritten folders. That is all people need to know about me.’ After Mises died in October 1973, at the age of 92, Margit remembered the folders. As the result of her diligence, the book has now been translated by his student Hans Sennholz, and published with loving care by another devoted [emphases added] Misesian, Frederick Nymeyer, of the Libertarian Press.

Within weeks of his instalment as Professor of Social and Moral Science at the University of Chicago’s Committee on Social Thought, Hayek and Nymeyer began targeting academics for liquidation (Leeson 2017a). 2. The ‘free’ market is a magnet for homosexuals seeking to escape legal and social prejudice, plus theocratic homophobes who seek to publically stone them to death. In defence of his Constitution of Liberty, Hayek (1961) addressed the defining concerns of these two subsets of the Austrian School of Economics. The second Mrs. Hayek professed ‘disgust’ about homosexuality; William Warren Bartley III, Hayek’s appointed biographer, would be ‘refused’ entry because of his homosexuality. After revelations about Keynes’ homosexuality, Hayek ‘now disliked Keynes more than ever’—adding that ‘homosexuality was one thing, finding partners was another’ (Cubitt 2006, 43, 95, 170, 347). Hayek abandoned his first wife and two children to have unrestricted access to his cousin and ‘first love,’ who’s conversation and cooking he could barely tolerate. Bartley—who reportedly died of AIDS-related cancer—spoke openly about his ‘Last Tango in Vienna’ authorized biographical conclusion: Hayek’s sexual activities with his second wife (but not, presumably, his first wife) resembled his own. When asked if there were ‘facts that could have an integrity for all time,’ Hayek (1975a [1974]) referred to knowledge communities: ‘I am sure there are some facts in this sense which must tie facts for all human beings with whom we can communicate, whose structure of mind [emphasis added] is sufficiently similar to our own so that some intercommunication is possible.’ It would be an exaggeration to suggest that the Austrian and Chicagoan branches of the (proto- and actual) Mont Pelerin Society feared the fate of Sodom and Gomorrah if the founder

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of their ‘social mind circle’ was revealed to have made a fraudulent claim. However, much of their intra-mind exchanges appeared to take place in code. For example, in The Constitution of Liberty, Hayek (2011 [1960], 200, 212) summarized Frank Knight’s position: ‘Coercion implies, however, that I still choose, but that my mind is made someone else’s tool because the alternatives before me have been so manipulated that the conduct that the coercer wants me to choose becomes for me the least painful one.’ Hayek continued: ‘He is not altogether deprived of the use of his capacities; but he is deprived of the possibility of using his knowledge for his own aims.’ Hayek then stated that ‘the pleasure or pain that may be caused by the knowledge of other people’s action should never be regarded as a legitimate cause for coercion. The enforcement of religious conformity, for instance, was a legitimate object of government when people believed in the collective responsibility towards some deity and it was thought that the sins of any member would be visited upon all. But where private practices cannot affect anybody but the voluntary adult actors, the mere dislike of what is being done by others, or even the knowledge that others harm themselves by what they do, provides no legitimate ground for coercion.’ In a footnote, Hayek added: ‘The most conspicuous instance of this in our society is the treatment of homosexuality’; and then cited Bertrand Russell: ‘If it were still believed, as it once was, that the toleration of such behaviour would expose the community to the fate of Sodom and Gomorrah, the community would have every right to intervene.’ Hayek commented: ‘But where such factual beliefs do not prevail, private practice among adults, however abhorrent it may be to the majority is not a proper subject for coercive action for a state whose object is to minimise coercion.’ There followed a coded dispute with the gay liberationist, Ronald Hamowy, in which the real topic—the civil rights of homosexuals—was never mentioned. In a critique of Hayek’s (1960) Constitution of Liberty, Hamowy (1961) sought ‘to indicate’ that Hayek’s ‘concept of freedom is fundamentally incompatible with the one which forms the basis of a consistent libertarianism.’ In response, Hayek (1961) displayed his sophisticated mind:

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I sympathize with Mr. Hamowy’s disappointment about my admission that I know of no way of preventing coercion altogether and that all we can hope to achieve is to minimize it or rather its harmful effects. The sad fact is that nobody has yet found a way in which the former can be achieved by deliberate action. Such a happy state of perfect freedom (as I should call it) might conceivably be attained in a society whose members strictly observed a moral code prohibiting all coercion. Until we know how we can produce such a state all we can hope is to create conditions in which people are prevented from coercing each other. But to prevent people from coercing others is to coerce them. This means that coercion can only be reduced or made less harmful but not entirely eliminated. How far we can reduce it depends in part on circumstances which are not in the control of that organ of deliberate action which we call government.

In the tax-exempt Definitive Edition of The Constitution of Liberty, Hamowy then silently corrected by deletion Hayek’s motives for writing the book—to market to dictators such as António de Oliveira Salazar in the hope that it might assist him ‘in his endeavour to design a constitution which is proof against the abuses of democracy’ (Ebenstein 2003a, 300; Fisher 2009, 327; Robin 2013, 2015; Farrant et al. 2012, 521). In the Prince, Niccolò Machiavelli (2015 [1532], 60) advised that ‘A prince ought to have two fears, one from within, on account of his subjects, the other from without, on account of external powers. From the latter he is defended by being well armed and having good allies, and if he is well armed he will have good friends, and affairs will always remain quiet within when they are quiet without, unless they should have been already disturbed by conspiracy; and even should affairs outside be disturbed, if he has carried out his preparations and has lived as I have said, as long as he does not despair, he will resist every attack.’ Hayek had been reading Machiavelli, but didn’t mention him by name, leaving the editor of The Definitive Edition of The Constitution of Liberty to suggest that Machiavelli was the source of Hayek’s quote about the ‘assumption’ of ‘political writers’ that ‘every man ought to be supposed a knave and to have no other end, in all his action, than private interest’ (Hamowy 2011, 120, n32).

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Viner’s (1961, 230) review essay on The Constitution of Liberty also focused on ‘Hayek on Freedom and Coercion.’ Viner concluded that Hayek’s evidence was insufficient to explain how he had ‘reached substantially unconditional conclusions.’ Viner cited Hayek: ‘All we know is that the ultimate decision about what is good or bad will be made not by individual human wisdom but by the decline of groups that have adhered to the “wrong” beliefs.’ Hayek’s (1978) ‘spontaneous growth, which led to the selection of the successful, leads to formations which look as if they had been intelligently designed, but of course they never have been intelligently designed nor been understood by the people who really practice the things’1; a ‘spontaneous’ order that had ‘been tested in evolution, by being selected as superior—by prevailing, because the groups which practice them were more successful than others—have proved their beneficial character.’2 Viner (1961, 235) noted ‘I do not see how that can be distinguished from ‘social Darwinism’ or from that ‘historicism’ which Hayek has elsewhere so persuasively warned us against’ (Leeson 2017b). Was Viner implicitly drawing an analogy with the dynamics of the highly successful Mont Pelerin Society (1947–)? According to Hayek (1978), ‘any deliberate attempt to correct the distribution [of income and wealth] according to supposed principles of social justice, is ultimately irreconcilable with a free society.’3 On a Nobel Prize ‘victory tour’ of the USA, Hayek (1975b) described the producer sovereignty that underpinned his correct ‘knowledge’: If we take as premises some undisputed facts, which everybody accepts as facts of daily observation, we can logically deduce from them certain consequences, which permit only one answer to the problem. In other words, if we deduce certain consequences from admitted facts, by logically correct argument, the truth of our deductions has to be accepted. You might object that I have left out some facts, and that the result would have been different if I had not neglected those other facts. Well, my answer to this objection would be: quote the facts, please, and I shall be quite willing to consider them. We have been talking about this problem for a hundred years, and nobody has yet mentioned any generally admitted facts which would essentially modify my conclusions.

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Austrian School dogma is beyond question: To be sure, it should not and need not be denied that there is one situation in which the temptation to deviate from the democratic principles of liberalism becomes very great indeed. If judicious men see their nation, or all the nations of the world, on the road to destruction, and if they find it impossible to induce their fellow citizens to heed their counsel, they may be inclined to think it only fair and just to resort to any means whatever, in so far as it is feasible and will lead to the desired goal, in order to save everyone from disaster. Then the idea of a dictatorship of the elite, of a government by the minority maintained in power by force and ruling in the interests of all, may arise and find supporters … It cannot be denied [emphases added] that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history. (Mises 1985 [1927], 45, 51)

Robert Chitester noted that the sense that motivates the ‘religious’ person is something that is very powerful. In a way, if one could find a way to use that motivation as a basis of support and understanding for, say, the precepts of a liberal free society, it could be extremely effective.

Presumably referring to the ‘spontaneous’ order, Hayek (1978) replied: ‘Yes, I think it goes to the question which people try to answer by religion: that there are in the surrounding world a great many orderly phenomena which we cannot understand and which we have to accept [emphasis added].’4 3. No evidence has yet been presented which obliges us to accept Lionel Robbins’ (2012 [1931], 172) assertion: ‘I cannot think that it is altogether an accident that the Austrian Institut für Konjunkturforschung, of which Dr. Hayek is director, was one of the very few bodies of its kind which, in the spring of 1929, predicted a setback in America with injurious repercussions on European conditions.’ Likewise with respect to Fritz Machlup’s (1974, 500) Nobel Prize recommendation report for

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Hayek: ‘in February 1929, he boldly predicted that crisis and downturn in the United States might be imminent.’ The same holds for the Nobel Prize justification for the 1974 award. This appears to contradict Assar Lindbeck’s (1985, 51) ‘conservative’ Nobel Prize selection criteria: ‘it is important to wait for criticisms and repeated tests of the relevance of the contributions.’ 4. According to Hayek (1978), economic ‘science’ was driven by shallow emotions: ‘There’s no emotional disappointment in the other fields when you recognize that you can’t find out certain things; but so many hopes are tied up with the possible control and command over economic affairs that if a scientific study comes to the conclusion that it just can’t be done, people won’t accept it for emotional reasons.’5 In late 1930 and early 1931, Robbins (1971, 152) was preoccupied by his dispute with the Committee of Economists: Keynes ‘read aloud to the committee a letter to the Secretary commenting very adversely on my emotional state … All this was unspeakably painful and anxious while it lasted.’ Robbins (11 November 1930) delivered a paper on ‘The New Argument for Protection’ at the London Economic Club. Hayek (20 January 1931) wrote to Robbins from Cambridge explaining that he was ‘horrified’ by Keynes’ radio talk on ‘spending and saving’ and was about to deliver a talk to the Marshall Society in which he would ‘attack’ Keynes. Robbins walked out prematurely at the last meeting of the Committee of Economists; on 27 January 1931, into his office walked a tall, powerful, reserved figure which announced itself quietly and firmly as ‘Hayek.’ (Howson 2011, 192, 194, 196)

According to Hugh Dalton (1986 [January 1932], 165), Robbins was captured by more than theoretical constructions: he was ‘bemused by modern Viennese theory, and by the personality [emphasis added] of Hayek, in particular.’ Susan Howson (2011, 192) noted: ‘The two men hit it off immediately.’ Hayek’s Prices and Production lectures were a ‘sensation’ (Robbins 1971, 127; Shackle 1981, 234). Presumably during this visit (January/February 1931), Hayek also verbally assured Robbins that he had predicted the Great Depression; Robbins’ (2012 [1931], 173)

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Foreword was dated June 1931. As a result, Hayek ‘expected nothing less’ than a job offer from the LSE (cited by Ebenstein 2003b, 54). 5. Robbins’ (2012 [1931]) assertion was made while Chicagoans were intensely preoccupied with the Great Depression. Amid this intellectual and policy turmoil, the two editors of the University of Chicago’s Journal of Political Economy (JPE ), Knight and Viner, must have been aware of Carl Theodore Schmidt’s (1931) JPE analysis of ‘The Austrian Institute for Business Cycle Research’ which cast doubt on the Hayek– Robbins assertion.6 6. Of the five doctoral theses on monetary issues submitted to the University of Chicago in the 1930s, Knight sat on two examination committees; Viner on three; and Mints on all five (Patinkin in Leeson 2003a, 108–109). Four cohorts must or may have been aware of Berger’s (1936) thesis on ‘The Forecasting Methods and Results of the Austrian Institute for Business Cycle Research.’ First, at least one member of the Chicago Department of Economics must have encouraged and supervised the thesis (which contains no expression of thanks to a supervisor). Second, more than one Chicago economists must have examined it. Third, given its topicality, the thesis was surely mentioned if not discussed within the department. Fourth, it seems likely that those with an intense interest in Austrian economics would have discussed the thesis with some intimate outsiders.7 7. This fourth cohort may have included the Milton and Rose Friedman, Aaron Director, George Stigler and W. Allen Wallis, with whom Robbins was ideologically and personally close.8 Berger’s (1936) 200-page thesis was, presumably, begun around the same time as Knight was launching his attack on Austrian capital theory. Simultaneously (1934–1936), Rose Director (later Rose Director Friedman) began a Ph.D. under Knight’s supervision on a history of capital theory (Stigler 1988, 181–190; Friedman and Friedman 1998, 43, 194, 249; Coase 1998).9 8. If Hayek did predict the Great Depression, then perhaps the evidence may ultimately emerge. Alternatively, Hayek may have made the prediction verbally and later embellished the story—in the context of an implicit job interview—by referring to the publications of his Research Institute. Both possibilities seem unlikely.10

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If Hayek did not predict the Great Depression, there appear to be three possible explanations. First, nobody found out until 2010— again, somewhat unlikely. Second, a small number of economists directly found out (Schmidt, Berger, Knight, Viner and, through them, Robbins); but the conventional rules of scholarly discourse or ideological motives (their community ‘social mind’) led to non-disclosure. Or third, a larger group of economists were indirectly informed and abided by an implicit non-disclosure contract. 9. If the discovery of the non-prediction was raised with Hayek (1978), he knew how to brush it off: The strength of certain [English] social conventions … make people understand what your needs are at the moment without mentioning them … The way you break off a conversation. You don’t say, ‘Oh, I’m sorry; I’m in a hurry.’ You become slightly inattentive and evidently concerned with something else; you don’t need a word. Your partner will break off the conversation because he realizes without you saying so that you really want to do something else. No word need to be said about it.11

10. The asymmetric information paradigm proposed a remedy for market failure: intermediaries can distinguish between ‘lemons’ and ‘peaches’ (Akerlof 1970). Hayek was contemptuous of the ‘worst inferior mediocrities’ that he had recruited: some may have known about the non-existent evidence but declined to make the matter public. For example, Ebeling (2001) noted that Alan Ebenstein (2001) offers almost no information about the period between 1927 and 1931, during which Hayek served as the first director of the Austrian Institute for Business Cycle Research in Vienna. Yet there is in fact quite a bit of material available about these years. A few years ago, my wife and I were given free access to the institute’s archives, and we photocopied virtually all the documents, papers, and conference materials, as well as minutes of board meetings covering the period from the institute’s founding in 1926 to its absorption into the German Institute for Economic Research following Hitler’s annexation of Austria in 1938.

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For reasons that he refuses to divulge, in 2011 Ebeling must have decided not to provide the chapter on Hayek’s Institute that he had been commissioned to write for the Archival Insights into the Evolution of Economics series.12 Ebeling uncritically repeated Hayek’s fraud that externalities had been invented by a gunrunner for Stalin, A. C. Pigou (Leeson 2015b), and was recruited by Caldwell to edit The Collected Works of F. A. Hayek: Hayek and the Austrian Economists: Correspondence and Related Documents (forthcoming). According to his Heartland Institute website Dr. Richard M. Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He conducts courses such as ‘Leadership, Entrepreneurship, and Capitalist Ethics’ as well as ‘The Morality and Economics of Capitalist Society.’13

From Cambridge, Massachusetts, Samuelson constructed a Keynesian intellectual empire in which condescension was matched by deference (Leeson 1998). The one-up Austrian posture was that ‘Cambridge [Massachusetts] lacked the style of Franz Josef ’s Vienna’ (Galbraith 1981, 49)14; Hayekians (with perhaps one exception—an Austrian-born Austrian) tend to mix occasional intellectual quibbles with blind obsequiousness towards their aristocratic leader. 11. Previous accounts have primarily focused on the ideological and theoretical realignments in the mid-1930s to explain Hayek’s humiliation. However, Hayek was aged thirty-one when he gave his ‘sensational’ Prices and Production lectures: Robbins was, according to Hayek (1978) ‘looking for allies’; Robbins ‘pounced … this is the thing we need to fight Keynes at the moment. So I was called in for this purpose.’15 Although Hayek was only thirty-six when the General Theory was published, he ‘remained a bystander as the Keynesian Revolution unfolded … The Austrian outpost at the LSE crumbled’ (Skidelsky 1992, 459, 573). Students defected from behind the ‘Austrian Wall.’ For example, Hayek (1978) ‘discovered Shackle … in a very literal sense. Shackle sent to me, when he was a schoolmaster in South Wales, an essay he’d written; nobody knew him. But I encouraged him to elaborate it for

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Economica. Then he came on a visit to London, and I’ve never seen a man more moved because he was speaking for the first time to a live economist. It seems to have been a great experience in his life, and I was very impressed and got him a scholarship at the London School of Economics.’16 For G. L. S. Shackle (1983a, 108, 115), reading Prices and Production in 1931 brought ‘astonishing excitement’; but in 1935, he decided instead to use his scholarship to interpret the General Theory in ‘Myrdal’s terms.’ Hayek (1978) found himself being demeaned in the Robbins–Hayek seminar: initially, ‘I more or less dominated discussion. [Laughter]’; shortly afterwards, as Alchian put it, Kaldor ‘took over.’17 In 1937, Galbraith (1981, 78) observed Kaldor’s disrespectful behaviour towards Hayek who was ‘only rarely able to speak.’ This ‘crumbling’ in the mid1930s is inconsistent with Hayek’s aristocratic personality: it requires an explanation. 12. Four years after Mises (1922, 435) asserted that ‘The Lord of Production is the Consumer’ (‘Der Herr der Produktion ist der Konsument ’), Hayek (1952 [1926], 555, 567) revealed an attitude that is inconsistent with disinterested scholarship: Wieser inspired an admiration coming close to worship among all who came under the spell of his powerful personality. Readers of his work cannot fail to be impressed by his human greatness and universality … The form of exposition raises this favorite child of the great man [Menger] far above the rank of ordinary scientific literature. Wieser’s [1983 (1926)] last book is a fitting demonstration of the general truth that a work which is carried by a great idea assumes the characteristics of a great piece of art. Having as its architect a sovereign master of science, it reaches a towering height above all indispensable detail and becomes related to artistic creation [emphasis added]. In this last work, where Wieser shakes off the fetters of specialization and disciplinary methods, his unique personality emerges in all its greatness, combining a universal interest in all fields of culture and art, worldly wisdom and experience, detachment from the affairs of the day, sympathy for the fellow-man, and freedom from narrow nationalism. In him the civilization of old Austria had found its most perfect expression.

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Hayek’s explanations are frequently unreliable. Shackle (1981, 236) referred to Prices and Production as having the ‘vitality and excitement of a work of art seen almost in the process of composition’, and Hayek’s recollections appear to fall into the same category. In a lecture at the University of Chicago, Hayek (1995 [1963], 60) stated that after publishing the second part of his review of Keynes’ (1930) Treatise, ‘it became known that Keynes had himself fundamentally altered his theoretical framework and was preparing a new and very different version. I must confess that it was partly due to the experience that when The General Theory appeared I did not return to the attack – out of a feeling that before one could complete a systematic examination, Keynes would probably have changed his views again. I have to the present day not quite got over the feeling that I had then shirked what should have been a plain duty.’ Using one of his dissembling words, ‘curious,’ Hayek (1978) later weaved a (fictitious?) conversation with Keynes into the story: I was asked by Robbins–I think it was even before, or was it when I was giving the lectures?–to do the review of Keynes’s [1930] Treatise. So I had a year or two which I invested in reviewing that thing. Again, this had a curious outcome, which is the reason why I did not return to the charge when he published The General Theory. When I published the second part of my essay on Keynes [1932], his response was, ‘Well, never mind, I no longer believe that.’ [Laughter]18

As Skidelsky (1992, 458–459) points out, ‘there is no support’ in the relevant correspondence for Hayek’s reconstruction. Hayek’s non-response to the General Theory allowed Skidelsky to speculate: ‘More likely, Hayek did not want to expose himself to another mauling from the Keynesians.’ After lunch with Hayek (and Piero Sraffa), Keynes (5 March 1933) reflected: ‘what rubbish his theory is – I felt today that even he was beginning to disbelieve it himself ’ (cited by Skidelsky 1992, 459). Given the extensive London–Cambridge interactions during the process of ‘discovering’ the General Theory, Hayek must have known that for rhetorical purposes Keynes was looking for a whipping boy—and

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that he was the ideal candidate. Hayek also presumably knew if his non-prediction was exposed in the General Theory his academic career could end ingloriously. William Beveridge, the LSE Director (1919– 1937), might even have dismissed him. At least in his early days, Keynes had a picture of the Norwegian playwright Henrik Ibsen on his wall. In Berlin in 1904, Keynes described a performance of Ibsen’s Wild Duck as ‘supremely acted.’ On 18 September 1933, Keynes’ wife, Lydia, made her acting debut; Keynes suggested that an Ibsen play might be perfect for her. Keynes’ writings were, like Ibsen’s, full of ‘overtones’ which may be ‘felt and heard by the sensitive’ (Skidelsky 1983, 122, 124; 1992, 423, 502–503, 530). Presumably because of Hayek’s bystander status, Keynes picked Pigou as his ‘classical’ whipping boy, a highly successful rhetorical trick (Leeson and Schiffman 2015): the ‘entertainment value of Mr. Keynes General Theory of Employment is considerably enhanced by its satiric aspect’ (Hicks 1937, 147). In an apparent reference to Hayek’s ‘tangled web,’ Keynes (1936, 183) cited from Ibsen: only an ‘extraordinarily clever dog’ could rescue Hayek (the wounded and suicidal ‘wild duck’) from the ‘tangle and all the rubbish’ that he had conjured up.19 13. Hayek (1978) described the corruption that was required to obtain an academic position at the University of Vienna: You were very much dependent on the sympathy, or otherwise, of the professor in charge. You had to find what was called a Habilitations-Vater, a man who would sponsor you. And if you didn’t happen to agree with the professor in charge, and there were usually only two or three–in fact, even in a big subject like economics, there were only two or three professors–unless one of them liked you, well there was just no possibility.20

Hayek (1994, 95; 1978) noticed that Robbins had ‘one extremely likeable habit. He’s the most loyal friend of anyone you could meet. But if he were asked his memories of Harold Laski or Beveridge, it would be honest but it would not be true. Much embellished. Because they were close friends of his’; ‘Robbins and I were thinking very much on the same lines; he became my closest friend, and still is.’21 Hayek may also have told Robbins that he was preoccupied: in 1936, with

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The Pure Theory of Capital (2007 [1941]) still five years from publication, Robbins informed Kaldor that ‘Hayek has finished the first draft of his book on capital’ (cited by Howson 2011, 290). Hayek (1978) also allocated to Robbins the role played by Beveridge in his recruitment process: ‘Robbins, of course, got me into the London School of Economics,’22 and Robbins did not, apparently, correct the record. 14. Hayek’s (1933) Monetary Theory and the Trade Cycle was a collaborative LSE venture: Kaldor was co-translator, and Robbins (1933, 8) provided a glowing Introduction (dated September 1932) about ‘Professor von Hayek, until recently Director of the Austrian Institut fur Konjunkturforschung, now Tooke Professor of Economic Science and Statistics in the University of London.’ Hayek (1978) was introduced to the Austrian School of Economics via ‘Othmar Spann, a very curious mind, an original mind, himself originally still a pupil of Menger’s … being a young and enthusiastic man, for a very short time had a constant influence on all these young people. Well, he was resorting to taking us to a midsummer celebration up in the woods, where we jumped over fires and—It’s so funny [Laughter], but it didn’t last long, because we soon discovered that he really didn’t have anything to tell us about economics.’23 Through Spann—‘The Philosopher of Fascism’ (Polanyi 1934, 1935)—Hayek was also directly exposed to the Pan-Germanist revolt of young upperclass men who identified nationality with race. Hayek’s (1978) younger brother, Erich, was ‘full time drawn into that circle’24; according to Mises (1944, 94–96), such people became ‘obedient and faithful slaves of Hitler.’ The abandonment of Hayek began in the mid-1930s: in the second edition of his Theory of Wages, Hicks (1963) referred to the first Hayekinfluenced edition (1932) as a ‘thoroughly bad book’ which ‘I should have been very happy if it could have been forgotten.’ In the Foreword to Hayek’s Price and Production, Robbins (2012 [1931], 172) preceded his uncritical repeat of Hayek’s fraudulent assertion about having predicted the Great Depression with a serfdom analogy: ‘I am bound to say that [Austrian Business Cycle Theory] seems to me to fit certain facts of the American slump better than any other explanation I know.’ Four decades later, Robbins (1971, 117) bemoaned: ‘I had become the slave

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of theoretical constructions which, if not intrinsically invalid as regards logical consistency were inappropriate to the total situation which had then developed and which therefore misled my judgement.’ Theoretical misjudgements are not usually defended by appeals to good faith—but this is how Robbins (1971, 154–155) justified his attachment to the Austrian School: ‘I was acting in good faith and with a strong sense of social obligation.’ According to Mark Skousen (2012), who interviewed Hayek in 1985, Robbins ‘asked Hayek to remove his laudatory introduction in his first edition.’ In his Autobiography, Robbins also ‘left many things unsaid … he made little mention of Hayek or Kaldor’ (Howson 2011, 671). But Robbins (1971, 154) did confess that he would ‘willingly’ see his Great Depression (1934) ‘forgotten.’ Did information emerge at this time which led Robbins to wish to forget his Prices and Production Foreword? Robbins ‘never mentioned’ the Mont Pelerin Society in his Autobiography (Howson 2011, 664); his Foreword to the first edition of Prices and Production was never mentioned or reproduced in the second edition. Instead, in the Preface dated August 1934, Hayek (1935, xiv) merely thanked Robbins for his ‘help.’ 15. According to Guido Hülsmann (2007, 632), Robbins ‘converted his friend Arnold Plant to the cause of Austrian economics.’ In ‘Homage to Hayek,’ Plant (1974, 169–170) testified from personal experience to the immense stimulus and direction which Hayek’s migration to this country gave to economic research in the 1930s, not only in London and economics faculties throughout the United Kingdom, but also in the international world of scholarship … Few of us who attended the seminars and lectures failed to be impressed by the welcome he gave to criticisms of his attempts to clarify the concepts of the effects of divergences between the monetary and the ‘natural’ rates of interest on economic structure of production, and of ‘neutral money.’

Yet Plant made was no mention of Hayek’s prediction of the Great Depression.

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16. Hayek (1936, 199–200) initially responded sarcastically to ‘Knight’s crusade against the concept of the period of investment.’ Lawrence White (2007, xxviii), in his editorial introduction to The Collected Works of F.A. Hayek, reflected: ‘Perhaps surprisingly the HayekKnight debate does not figure explicitly in The Pure Theory of Capital. All references to Knight with one exception are favourable.’ White (2007, xxix) suggested that Hayek had attempted to cosmetically transform a Chicago-Austrian dispute into a CambridgeCambridge dispute: Important differences between Hayek and Knight nonetheless remain evident in The Pure Theory of Capital. Hayek sharply criticised the approach (which he attributed to the Cambridge School, but which was in this respect akin to Knight’s) that treats one part of capital as being permanent and the other part as involving no waiting whatever: all the problems of capital are then evaded. Pervading the book is Hayek’s rejection of the Knightian propositions that (1) capital may be regarded as a homogenous fund; (2) the permanent maintenance of capital is to be taken for granted; (3) there is no economically meaningful distinction to be made between ‘original factors’ (land and labour) and capital; (4) inputs and outputs are synchronous, so production is essentially instantaneous, and concepts of time duration in production (the period of production or the investment period) are useless; and (5) production and consumption are simultaneous so it pointless to speak of ‘waiting.’

Shackle (1983b), who read ‘several’ draft version of The Pure Theory at Capital, noted: Hayek’s ‘attitude had noticeably softened towards Frank Knight’ (cited by White 2007, xxix). White also reflected: ‘It is not evident that Knight had persuaded Hayek of anything, however, other than the predominance of productivity over time-preference in explaining the interest rate (a position Hayek later reconsidered).’ Shackle (1981, 251, 253, 255) also noted that Hayek had previously been ‘engaged in seemingly irresolvable debate’ with Knight. Shackle generalized from what he had observed to be Hayek’s attitude to scholarship: ‘There must be some inspirational idea, some line to be followed, before a man can gather the moral and nervous force which such

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a task requires. He must be seized by a faith.’ Shackle summarized the ‘subjectivist standpoint’ of Hayek’s (1937) ‘Economics and Knowledge’: ‘For the individual in deciding his course, what he thinks is the case, is the case [emphasis in original].’ 17. Keynes’ (1936) General Theory established the case for discretion; the manifesto of a well-defined Chicagoan ‘rules party’ can be found in Henry Simons’ (1936a, 15, n13, 28) JPE ‘Rules versus Authorities in Monetary Policy.’ Simons was concerned about the ‘preservation of economic freedom and political democracy.’ The ‘opiates of monetary dictators’ could produce an ‘indefinite revolution-creating inflation; indeed, this seems to define the real threat of fascism in this country and the likely route towards it. If monopoly proves fatal to capitalism, inflation will be the announced cause of death.’ Having defined the ‘liberal creed,’ Simons (1936a, 1, 3–4, 14) noted that ‘economist-liberals are now on the defensive. On most fronts, however, their position is, or can be made, very strong intellectually.’ Simons sought to ‘provide a basis for ultimate consensus on definite proposals’ for a monetary system which could be held-to ‘unrationally – on faith – as a religion, if you please.’ Without mentioning Hayek or Mises, Simons concluded that ‘It is significant that the most stimulating contribution to recent discussions, namely neutral money, comes from a group of economists who have held firmly to the essential tenets of old-fashioned liberalism.’ Austrians are associated with ‘neutral money’; Simons also connected neutral money to the November 1933 revised Chicago Plan for Banking Reform. Simons’ JPE article was published in February 1936; Berger’s thesis on ‘The Forecasting Methods and Results of the Austrian Institute for Business Cycle Research’ was dated August 1936. Between his own February 1936 article and his November 1936 Presidential address, Hayek’s (1936, 1937) attitude towards Knight appeared to have been transformed from sarcasm to reverence. 18. Hayek (1978), who was aged thirty-seven in November 1936, described a revelation about ‘fictitious data of the economist’25: ‘until the middle thirties or late thirties, in my own age, I was a pure economist concerned with money, capital, industrial fluctuations. Then came one event in my life which really changed my outlook.’26 In 1936,

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Hayek may have been preoccupied with the fear that the previously dispersed Schmidt-Berger knowledge about his own fictitious data could become subjected to a ‘centrally directed order.’ Friedman claimed that his own Chicago oral tradition could ‘be read between the lines’ (cited by Leeson 2003a, 33): What can be read between other lines? Hayek (1978) described ‘a very funny circumstance which started it. One of my colleagues at the London School of Economics used to make fun of the use of [the word] data by economists, who were so anxious to assure themselves that there were data that they were speaking about given data. [Laughter] This talk about data made me aware that they are, of course, purely fictitious; that we are assuming these facts are given, but never say to whom they are given. This made it clear to me that the whole economic problem is a problem of utilizing widely dispersed knowledge which nobody possesses as a whole [emphasis added], and that determined my outlook on economics and proved extremely fertile. My whole interpretation of the market prices as the signals telling people what they ought to do all sprang from this one thing which I first outlined in a lecture to the London Economic Club in 1937 [sic ]. I think, while up to this point my work was conventional in the sense of just carrying on what existed, this was a new outlook I brought into economics.’27 Hayek must have observed that the market had—so far—failed to coordinate and report the knowledge that contradicted his alleged prediction: blocked, apparently, by Chicagoan producer sovereignty. Hayek (26 November 1981) informed Terence Hutchison (1994, chapter 10) that his 1936 ‘Economics and Knowledge’ presidential address was the formal beginnings of his own ‘independent thinking’ as an economist (i.e. independent from Mises). Hayek also told Hutchison that he had seen the ‘chief point’ a little earlier: at least part of ‘essential’ knowledge was derived from an economist’s ‘given familiarity with the process of economic thinking.’28 19. Shortly after Beveridge recruited him, Hayek (1994, 66–67, 84–85, 95; 1995 [1966], 240) concluded ‘every’ departmental committee meeting with Beveridge delendus est (‘thus I believe we must destroy Beveridge’), but discovered that ‘not one of them understood what I was saying’ because they lacked Hayek’s classical education. As a more

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potent tactic, Hayek (1994, 85) spread stories about Beveridge’s alleged erectile dysfunction (Dahrendorf 1995, 156). By 1935, relations between Beveridge and Robbins had also deteriorated. In his highly critical ‘Reflections on the School of Economics,’ Beveridge’s objected to the mathematical and theoretical direction of Robbins’ department. In defence, Robbins argued that there were only three economists who could be ‘regarded as being predominantly pure’: Hayek, Hicks and Kaldor. Robbins also asked: ‘Can these people at the School be blamed if they have been infected by this enthusiasm – if in their excitement at seeing Keynes and Hayek, Knight and Robertson walk through places where previously there had seemed unsurmountable barriers, they should have become a little one-sided in their interest? And do we really regret it?’ (cited by Howson 2011, 283–284). In ‘Economics and Knowledge,’ Hayek (1937) implicitly rebutted Beveridge’s objections: ‘We shall not get much further here unless we ask for the reasons for our concern with the admittedly fictitious state of equilibrium. Whatever may occasionally have been said by overpure economists, there seems to be no possible doubt that the only justification for this is the supposed existence of a tendency toward equilibrium. It is only by this assertion that such a tendency exists that economics ceases to be an exercise in pure logic and becomes an empirical science; and it is to economics as an empirical science that we must now turn.’ Referring to ‘a problem of the division of knowledge, which is quite analogous to, and at least as important as, the problem of the division of labor,’ Hayek (1937) claimed that ‘economics has come nearer than any other social science to an answer to that central question of all social sciences: How can the combination of fragments of knowledge existing in different minds [emphasis added] bring about results which, if they were to be brought about deliberately, would require a knowledge on the part of the directing mind which no single person can possess?’ Hayek outlined the ‘social mind’: To show that in this sense the spontaneous actions of individuals will, under conditions which we can define, bring about a distribution of resources which can be understood as if it were made according to a single plan, although nobody has planned it, seems to me indeed an answer

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to the problem which has sometimes been metaphorically described as that of the ‘social mind.’

20. The somewhat mystical concept of the ‘social mind’ can be interpreted in a variety of ways. In the decade before he left Vienna (1921– 1931), Hayek had co-created and participated in the invitation-only Geistkreis: ‘spirit circle’ or ‘thought circle’; his final years (1947–1992) were equally dominated by another ‘thought circle’: the Mont Pelerin Society. Faced with contempt in his own LSE seminar, Hayek conjured up the ‘social mind.’ Simultaneously, he sought to establish a ‘common front’: writing to Gottfried Haberler (15 March 1936): ‘The chance exists just now to isolate Keynes and to bring to a stand a common front of other Cambridge and London [economists]. These possibilities we would not jeopardize by putting Economica in the forefront of the attack. Pigou’s [1936] article will cause enough sensation’ (cited by Howson 2011, 372). 21. The size and scope of government, rules- or discretion-based policies, and the strength and function of competitive forces all became central to the major ideological split in economics. Hayek (1978) described a component of this 1936 ideological realignment: a ‘spontaneous order’ versus a ‘centrally directed order’ in which ‘what people have done in the past’ ceased to be a central concern: I think that was a decisive point of the change in my outlook. As I would put it now, [it elaborated] the conception that prices serve as guides to action and must be explained in determining what people ought to do— they’re not determined by what people have done in the past. No, you see The Road to Serfdom was really an advance sketch of a more ambitious book I had been planning before, which I meant to call ‘The Abuse and Decline of Reason.’ The abuse being the idea that you can do better if you determine everything by knowledge concentrated in a single power, and the consequent effects of trying to replace a spontaneous order by a centrally directed order. And the [results of the] decline of reason were the phenomena which we observed in the totalitarian countries. I had that in my mind, and that in fact became the program of work for the next forty years.29

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Part of this reconfiguration involved Hayek breaking-away from Mises who on 1 March 1934 became a card-carrying Austro-Fascist and a member of the official ‘Fascist’ social club (Hülsmann 2007, 677, n149)—an association that would not have helped Hayek’s assimilation into England.30 In 1936, Hitler remilitarized the Rhineland, British rearmament began, and so too did the Spanish Civil War. On 4 October 1936, British Union of Fascists Blackshirts were prevented from marching through the sizeable Jewish community of Cable Street, East London. In ‘The Government Steps In,’ Skidelsky (1975, chapter 22) described the resulting 1936 Public Order Act which outlawed the wearing of political uniforms in public. In 1938, presumably to avoid internment as an enemy alien in the forthcoming war, Hayek became a British citizen. Hayek experienced a U turn (methodological or otherwise) as he was writing his 1936 Presidential address. There were numerous reasons for retreating from Mises: referring to the consequences of liquidation, Hutchison (1994, 220) noted: ‘If Austrian economics seemed to lose grounds in the 1930s, the reason is obvious.’31 Hayek (1978) related his ‘dispersed knowledge’ deviation to a lifelong mission to provide better arguments for Mises’ political conclusions: ‘I would very definitely maintain that methodological individualism does lead to political individualism. I don’t think they [Miseans] would all admit it, but in the form in which I have now been led to put it–this idea of utilization of dispersed knowledge–I would maintain that our political conclusions follow very directly from the theoretical insights. But that’s not generally admitted. I’m not speaking about the opponents, of course, but among those of the original group, I think it’s even–Well, I think in the American Austrian school, yes, it is now generally admitted. The young people would not call one an Austrian who is not both a methodological individualist and a political individualist. But that applies to the younger school and was not the tradition.’32 22. In Socialism: An Economic and Sociological Analysis, Mises (1951 [1932], 85, 87, 90) explained that ‘In the life of a genius, however loving, the woman and whatever goes with her occupy only a small place … Genius does not allow itself to be hindered by any consideration for the comfort of its fellows even of those closest to it.’ With respect to

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women, ‘the sexual function,’ the urge to ‘surrender to a man,’ and ‘her love for her husband and children consumes her best energies’; anything more was ‘a spiritual child of Socialism.’ Hayek (2011 [1960], Acknowledgements) dedicated The Constitution of Liberty to ‘the members of the Mont Pelerin Society and in particular to their two intellectual leaders, Ludwig von Mises and Frank H. Knight.’ Females were excluded from Hayek’s first club, the Geistkreis: ‘it was impractical, under the then-existing social traditions, which created so many complications, to have a girl among us; so we just decided—Our name was even given [to us] by a lady whom you probably have met, who resented being excluded, and so gave us the name Geistkreis in order to ridicule the whole affair [Laughter].’33 Of the initial thirty-six Mont Pelerin Society attendees, only one female was invited: Veronica Wedgwood, a thirty-seven-year old, seventeenthcentury historian. Between 1934 and 1950, Hayek was obsessed with having unrestricted access to his cousin and subsequent wife34; there is a Chicago oral tradition that Knight and Wedgwood also had an intimate relationship.35 If this were true, this may explain why Hayek invited Wedgwood to take part in what Stigler called ‘a junket … to save liberalism’ (cited by Friedman and Friedman 1998, 158).36 23. As Hayek was having his speaking rights curtailed during LSE seminars, public silence descended at home. Hayek (6 March 1950) informed Karl Popper that he had been attempting to obtain a divorce from his first wife, Hella, since 1934.37 Hayek suggested that he and Hella visit his proposed second wife, Helene, in 1933; Hella refused and so shortly after the birth of their son (15 July 1934), Hayek ‘suddenly turned up’ in Carinthia and proposed the divorce that took sixteen years to accomplish. Hayek complained that Hella ‘refused to sleep with him for a whole year’ (Cubitt 2006, 64–65, 285). According to Laurence Moss’ (2013) entry in An Encyclopedia of Keynesian Economics, in later writings, starting at least as early as 1967, Hayek groped for a vocabulary that would properly capture and communicate his insights. The economy was definitely unlike a household, because a household manager must organize the goals and objectives of its members. In a

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market system, no Procrustean hierarchy of plans and purposes need be established. Experimentation with new methods of production, consumption and distribution in a framework of rivalrous competition and secure property rights was, roughly speaking, the ‘vision’ that increasingly characterized Hayek’s writings about the market system. He broke new ground when he distinguished between the character and order found in an organization formed for explicit purposes and with explicit rules (what the Greeks called a ‘taxis ’) and the character and order represented by a spontaneously formed market (what the Greeks called a ‘cosmos ’). Hayek later termed the latter a ‘catallaxy’ (roughly meaning a network of exchanges), thereby rejecting the household management metaphor once and for all.

For Ludwig M. Lachmann, one of Hayek’s LSE colleagues (1933– 1948), the ‘important issues in the world concerned rival schools of thought. He frequently employed metaphors of combat to describe his mission to advance the cause of Austrian economic’ (Lewin 1990; see also Caldwell 1991). Lachmann also told Ebeling (2001) that ‘dinner at Hayek’s home in London in the late 1930s was an awkward and embarrassing affair. By this time, Hayek and his first wife were not speaking to each other. At the dinner table, Lachmann carried on conversations with the two of them, but they said not a word to each other.’ Hayek (1994, 78, 83) reflected that Robbins, his Hampstead neighbour, was the ‘most loyal friend of anyone you could meet’; Robbins and his wife ‘became our [emphasis added] closest friends.’ Hayek reinforced this to Cubitt (2006, 63): Robbins had been ‘a family friend.’38 Robbins and his wife must have been aware of these family frictions: this may have provided a further incentive to be generous towards Hayek over his non-prediction. 24. Hayek (1994, 78, 83, 95) asserted that initially, he and Robbins ‘worked beautifully together’ until ‘I’m afraid he fell under Keynes’ influence’ and acquired ‘corrupt’ attitudes through government service. In 1950, three years after playing a pivotal role in the founding of the Mont Pelerin Society, Robbins severed all links with Hayek and his Society over his dishonestly obtained ‘bootleg’ divorce (Cubitt 2006, 67). In a draft letter, Robbins told Hayek that ‘you felt it necessary to

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deceive me [emphasis added] as to your intention in applying for leave’; Hayek told Popper that he thought Robbins ‘silly’ for objecting to being deceived (cited by Howson 2011, 704–705).39 Robbins’ outraged behaviour in 1950 would be even more explicable if this was the second time (i.e. in addition to 1931) Hayek had seriously deceived him. 25. Robbins was exceptionally generous to Knight and Viner. Robbins (1970) edited Jacob Viner: A Tribute: his admiration predates his Prices and Production Foreword. In 1931, Robbins told Viner that he was ‘pleased as a schoolboy’ at the prospect his joining the LSE: he could ‘not conceive of any happier prospect of having you permanently with us’ (Howson 2011, 195). Robbins (1971, 132) recalled that Viner’s (1937) LSE lectures on international trade ‘aroused a degree of interest comparable only comparable to that aroused by Hayek a couple of years before.’ Robbins didn’t meet Knight until May 1938; yet in 1934–1935, he assisted Viner, Friedman, Stigler, Wallis and Homer Jones in the production of his 50th birthday celebratory volume (Knight 1935; Stigler 1988, 19; Howson 2011, 320). Robbins and Knight also exchanged personal letters: in 1933, Robbins told Knight that he was ‘very unwell’ and ‘under doctor’s orders to confine [his] activities to work which was absolutely essential for the carrying on of the department.’ At the first Mont Pelerin Society meeting, Robbins invited Knight to visit the LSE for the 1948 summer term (Howson 2011, 172, 195, 239, 645–646, 665). Robbins (1971, 219) explained that during World War II, he and Viner shared ‘common goals; and shortly afterwards when he - and later on Frank Knight – favoured the LSE with some months’ residence to help out with our teaching problems and shared post-war austerity with my family, it ripened into a very close friendship.’ If Robbins knew or suspected that the fourth cohort included the Friedmans, Director and Stigler, this may partially explain his generosity to them also. Robbins told Stigler (1949) that it was the ‘universal opinion’ that his five March 1948 LSE lectures were the ‘best for the last eighteen years.’ In the early 1950s, when Friedman tried to convert him to flexible exchange rates, Robbins responded that ‘I found your observations intensely interesting and am inclined to think that you are

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right when you say that there is not so much between us as at first sight appeared.’ Friedman gave two LSE lectures in March 1952 and stayed with the Robbins family; shortly afterwards, Robbins spoke flippantly of ‘join[ing] the Friedman school at once’ (Leeson 2003b, 105; see also Howson 2011, 684, 743).40 The two families visited each other frequently during Milton and Rose Friedman’s (1998, 249, 251) year-long stay in Cambridge and elsewhere (1953–1954). In 1934, Director had been denied tenure at the University of Chicago because he had transferred his allegiances from Douglas to Knight—with whom he maintained a ‘continuing intimacy’ (Friedman and Friedman 1998, 194). In 1936, Director went to London (at Viner’s suggestion) to undertake research at the Bank of England. Denied access to the Bank of England data, Director gravitated towards the LSE (1937/1938) where he came into contact with Hayek and Robbins. To Knight, Robbins described Director’s ‘charm, his urbanity … his judgement … a perfectly civilised man’ (cited by Coase 1993, 244). Robbins told Viner that Director ‘captivates us all’ and had reinforced his conviction that Chicago economists were ‘now … easily the most important group in the world’ (cited by Howson 2011, 316). 26. As a postgraduate student and research assistant, Director’s sister, Rose, had an office next to Knight’s, and often had Christmas and Thanksgiving meals with the Knight family. For the rest of their lives, the Friedmans often prefaced a comment, ‘as Frank Knight would say.’ They, Wallis and Stigler, talked ‘almost nothing but economics, economics, economics’ (Friedman and Friedman 1998, 38, 50, 54). Wallis (1993, 775, 777) was more specific: ‘The dominant subject was Frank Knight: what did he say and what did he mean? … Out attitude towards Knight was essentially hero worship.’ Stigler (1988, 17–18) reflected: Knight’s influence derived from his ‘devotion to the pursuit of knowledge … a sense of unreserved commitment to truth.’ On Knight’s 49th birthday (7 November 1934), Friedman, Stigler, Wallis and Jones began to prepare for publication The Ethics of Competition and Other Essays in which Knight (1935, 355) reflected on the process by which an individual becomes

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as partial to his own ideas as he is to his own children … When an idea gains acceptance, other data are easily harmonised with it and made to conform it … we must recognise that there is in our field no objective test for separating either truth from opinion or the urge to promote an opinion ‘believed’ to be true from the craving for personal aggrandisement.

Knight may have detected an ethically unsound competition for influence between schools in the Hayek–Robbins assertion. In print, he sought to undermine Austrian theory without apparently mentioning Hayek’s Great Depression prediction. 27. This was also Friedman’s response. In A Monetary History of the United States, 1867–1960 (begun two years before Hayek’s recruitment to the University of Chicago and published the year after he left), Friedman and Anna Schwartz (1963, chapter 7) described the ‘Great Contraction.’ At Hayek’s 1962 farewell dinner at University of Chicago, Stigler, the Charles R. Walgreen Distinguished Service Professor of American Institutions and a distinguished historian of thought, suggested that the second Mrs. Hayek should ‘each day’ ask her husband what progress he has made in writing about the ‘evolution of the work of scholars.’41 When he returned to the University of Chicago to deliver the Charles R. Walgreen Lecture organized by Stigler, Hayek (1995, 49, 55) asserted: Perhaps I can anticipate my main point by saying that just as it seemed that we were succeeding in establishing a unified tradition in economic theory and abolishing all separate ‘schools,’ a new rift appeared which divided the economic theorists in different lines.

Hayek contrasted ‘the somewhat insular, purely Marshallian tradition of Cambridge and Oxford and the truly international synthesis of London.’ Friedman (1969 [1964]) presumably began his first ‘plucking model’ assault on Austrian business cycle theory about this time. In the mid-1980s, another aspect of Hayek’s academic ethics emerged: assisting his unqualified Austrian disciples to obtain tax-funded academic positions—through fraudulent recommendations.

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Those members of Rose Friedman’s family who had not emigrated ‘all died in the Holocaust. We have never learned where or how.’ In 1950, while Milton worked on the Schuman Plan, Rose experienced trauma: it was very difficult for her to let their two children ‘run freely as they were accustomed to do at home because always there was the nagging fear that they might suddenly disappear. Of course I knew that they would no Nazis in the park that somehow there was always in my subconsciousness those terrible stories about what happened to Jewish children during the Nazi era. That trip to Germany haunted me for many years’ (Friedman and Friedman 1998, 3, 180). In June 1974, when Ebeling (1974), Rothbard, Lachmann, Gary North, Richard Fink, Walter Block, Mario Rizzo, Israel Kirzner et al. initiated the Koch-funded, Orwelliannamed, ‘Institute of Humane Studies’ Austrian revival, one of the conference highlights was baiting Milton and Rose in person with the accusation that their son detected ‘latent fascist tendencies’ in his father: ‘Murray Rothbard made the whole affair fun’ (Shenoy 2003). In 1971, Rothbard (2002 [1971], 37, 40, 48, 53) stated that it was ‘deplorable’ that Friedman and his followers ‘have never paid attention to the achievement of Ludwig von Mises’ and his Austrian business cycle theory. Friedman’s ‘purely monetarist’ approach was ‘almost the exact reverse of the sound—as well as truly free-market—Austrian view [Rothbard’s emphasis].’ Friedman was the enemy, ‘the Establishment’s Court Libertarian’: wherever we turn, we find Milton Friedman, proposing not measures on behalf of liberty, not programs to whittle away the Leviathan State, but measures to make the power of that State more efficient, and hence, at bottom, more terrible. The libertarian movement has coasted far too long on the intellectually lazy path of failing to make distinctions, or failing to discriminate, of failing to make a rigorous search to distinguish truth from error in the views of those who claim to be its members or allies. It is almost as if any passing joker who mumbles a few words about ‘freedom’ is automatically clasped to our bosom as a member of the one, big, libertarian family. As our movement grows in influence, we can no longer afford the luxury of this intellectual sloth. It is high time to identify Milton Friedman for what he really is. It is high time to call a spade a spade, and a statist a statist.

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In 1972, Friedman had tried (unsuccessfully) to sever the institution ties between the Austrian and the Chicago School of Economics—by using his authority as president to dissolve the Mont Pelerin Society. In 1976–1977, he was awarded the Nobel Prize, retired from the University of Chicago and relocated to the Hoover Institution, where he found Director Glenn Campbell (1924–2001) recruiting ‘von’ Hayek’s and ‘von’ Mises’ disciples. In the British neoclassical tradition, Keynes (1924, 346) quoted from Alfred Marshall: I saw in a shop-window a small oil painting [of a man’s face with a strikingly gaunt and wistful expression, as of one ‘down and out’] and bought it for a few shillings. I set it up above the chimney-piece in my room in college and thenceforward called it my patron saint, and devoted myself to trying how to fit men like that for heaven.

In the Austro-American neoclassical tradition: Campbell—‘who was reared on a Canadian farm without running water and indoor plumbing’ (Martin 2001)—had a picture of ‘von’ Hayek on his wall. From 1987 to 1992 (Hayek’s death), the ‘Mises University at Stanford University’ appeared to have a privileged existence. One of the ‘star’ speakers was Rothbard (1990), who delivered a mendacious lecture on ‘The Future of Austrian Economics.’ One of these recruits—‘Dr’ Kurt Leube, ‘Abitur/Matura (B.A.) 1954–63,’ ‘Economic Philosophy at LSE (UK) 1963–65,’ ‘AJD, University Salzburg, 1971,’ ‘DLE,’ ‘Associate Professor of Economics’ at the University of Salzburg, Professor of Economics, California State University Hayward/East Bay—who has no post-secondary qualifications and was apparently responsible for this regular Misean presence on the Stanford campus.42 In 1986, when it became known that ‘Count’ Leube—the estranged son of a cement merchant—‘did not have the doctorate that he claimed to own,’ Bartley stated that ‘Leube would be thrown out of the country if he were found out’ (Cubitt 2006, 196, 237). Bartley was a regular attendee at Hoover Senior Commons. Within the Hoover Institution, Stigler and Friedman were perceived as the major focus of opposition to the recruitment of Hayek’s disciples

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(Cubitt 2006, 343). Leube—who had received a large amount of tax-exempt funding from Leonard Liggio to write about the apparently non-existent diaries of Eugen Ritter von Böhm-Bawerk—attempted to patch-over the breaches between Chicagoans and Austrians with three Hoover Institution publications: The Essence of Stigler (Leube and Moore 1986), The Essence of Friedman (Leube 1987) and The Essence of Hayek in which he falsely stated that in February 1929, ‘Hayek became the first [emphasis added] to predict the coming crisis in the United States’ (Leube 1984, xix). These three volumes were immediately followed by Friedman’s (1988) Hoover Institution Working Paper revitalising his ‘plucking model’ attack on the Austrians—after a gap of almost a quarter of a century. In 1991, Friedman (2017 [1991]) published ‘Say “No” to Intolerance’—which targeted Mises. But Friedman’s (1993) ‘plucking model’ remained unpublished for five years—why? The Friedmans (1998) described their lives in Two Lucky People. Milton was a likeable person and a generous correspondent who treated friends and foes as individuals—with one exception: members of the Austrian branch of the ‘free’ market school, a group he regarded as untrustworthy. When Boettke (2010, 64) first started teaching (and even today), I would listen to tapes of Rothbard lectures and try to imitate his ability to combine theory, history, and jokes to convey the principles of economics to those who are innocent of its teachings.

In 1992, the deflation-promoting Boettke arrived at the Hoover Institution as a National Fellow.43 On his Coordination Problem website, Boettke (2014) circulates an ‘underpants’ video to his GMU students and others together with a discussion of varieties of ‘masturbation.’ Friedman ‘turned to’ Boettke (2012) and said, what do you think? And I just said the same as you. Friedman loved debate and so when I said that he was like, you’re a pain in the ass. So I lost the opportunity to engage him. Now I was like a cheerleader and that was a big mistake.

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28. Friedman, Stigler, Wallis and Peter Bauer defined the non-Austrian component of the Mont Pelerin Society. In America, Friedman’s parents ‘spoke Hungarian only when they wanted to keep something from the children’ (Friedman and Friedman 1998, 21); Stigler’s mother migrated to America ‘from what was then Austria-Hungary (and her mother was in fact Hungarian).’44 When Bauer became a third ‘Budapest Lord,’ Hayek reminded Charlotte Cubitt (2006, 51) of his ascribed status: a ‘small … Jewish boy from Hungary’ and indicated ‘the size of a dwarf.’ Neither Stigler nor the diminutive and Jewish-born Friedman was ­deference-inclined: indeed, Friedman was generous regarding the intentions of others and lacked status-consciousness to a remarkable degree. If Friedman was aware of Hayek’s non-prediction, other motives must have kept him from publicizing the issue. Nine years after the demise of the Habsburgs, Mises (1985 [1927], 49–50) aspired to become the intellectual Führer of a Nazi-Classical Liberal ‘Pact.’ Mises agreed that ‘In order to assure success, one must be imbued with the will to victory and always proceed violently. This is its highest principle.’ But the ‘political tactics’ of Austrian Classical Liberals differed from Fascists because of the latter’s ‘complete faith in the decisive power of violence.’ To succeed, fascism would have to embrace Mises: ‘If it wanted really to combat socialism, it would have to oppose it with ideas. There is, however, only one idea that can be effectively opposed to socialism, viz., that of liberalism.’ Ideological communities do not, of course, necessarily follow changing geopolitical alignments; neither are they immune to them. In the three decades from the Russian Revolution to the onset of the Cold War (1917–1947/1948), ‘Fascists,’ Communists, capitalist democracies and Japan formed a variety of shifting alliances. ‘Fascists,’ ‘Germans and Italians,’ ‘Ludendorff and Hitler’ were included in Mises’ (1985 [1927]) Liberalism ‘Pact’; but in 1946/1947, he ‘went through the roof ’ when Hayek proposed to include Chicagoans and others in his Mont Pelerin Society. Mises wrote to Hayek: I am primarily concerned about the participation of Röpke, who is an outspoken interventionist. I think the same holds true for Brandt, Gideonse and Eastman. All three of them are contributors to the purely

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socialist—even though decidedly anti-Soviet—New Leader. (Cited by Hülsmann 2007, 865–866)

In April 1945, Max Eastman arranged for Reader’s Digest to publish an abridged version of Road to Serfdom; Karl Brandt was an agricultural economist at Stanford University; Harry Gideonse was President of Brooklyn College; and Wilhelm Röpke had recruited Mises to the Geneva Graduate Institute of International and Development Studies. The fault-lines of the ‘free’ market ‘Pact’ were profound and constantly threatened to ‘quake.’ Friedman described military conscription as a ‘major stain on our free society’ (Friedman and Friedman 1998, 381), while Hayek (1961) argued that ‘It is at least possible … that the use of so severe a form of coercion as conscription may be necessary to ward off the danger of worse coercion by an external Enemy.’ In Human Action, Mises (1963, 282; 1966, 282) lobbied for the Warfare State: ‘He who in our age opposes armaments and conscription is, perhaps unbeknown to himself, an abettor of those aiming at the enslavement of all.’ In contrast, in ‘Abolish the Draft,’ Wallis (1969) declared that ‘nothing is more opposed to our ethical, religious, and political principles than taking bodily control of a person and forcing him to submit totally to the will of others.’ Hayek had been introduced to the Reform Club on the evening of the general election (27 October 1931); taken as a guest by Robbins, to watch ‘our’ hopes for the old Liberal Party ‘collapse.’45 During the ‘Great’ War between the dynasties, conscription fatally weakened the Liberal Party: Sir John Simon resigned as Home Secretary and attacked the government in his resignation speech; and 35 Liberals voted against the Military Service Act of 1916. The deflation that Hayek and Mises promoted deepened the Great Depression—which further undermined faith in ‘old liberal’ principles such as free trade. After the publication of The Road to Serfdom (1944), Hayek became a Conservative Party political operative (Leeson 2017a). In An Overgoverned Society, Wallis (1976, 29) denigrated intellectuals who were not themselves capable of penetrating or profound analyses of ideas; they are what Friedrich Hayek calls ‘intellectual middlemen.’

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If Stigler (1965a, 4, 5) was aware of Hayek’s non-prediction, did it influence his analysis of the sociology of economic knowledge? Stigler had a model, or rather a strategy, to minimise if not eliminate the influence of ‘knowledge’ that he objected to (Leeson 2000, chapter 3). Stigler, who edited the JPE (1972–1991) longer than Knight and Viner, noted that ‘The techniques of persuasion … repetition, inflated claims, and disproportionate emphases … have preceded and accompanied the adoption on a large scale of almost every new idea in economic theory.’ This required ‘the techniques of the huckster.’ Stigler (1959, 522, 532) dissented from Hayek’s assertions about intellectuals having been captured by socialists: ‘My thesis is that the professional study of economics makes one politically conservative. If we are politically conservative, it is not surprising that ours is known as a dismal science in a period when the trend of policy has been strongly anti-conservative. And it is not without relevance that this characterization did not emerge and become popular until what [A.V.] Dicey [1919] called the age of collectivism had begun … We shall no doubt continue to bend before a strong wind, but I consider it a remarkable effect of our professional discipline that we shall not be contributing to the wind.’ Like Friedman, Stigler (1965b, 17) sought policy influence: in his American Economic Association Presidential address on ‘The Economist and the State,’ he stated ‘quite frankly, I hope that we become the ornaments of democratic society whose opinions on economic policy shall prevail.’ 29. Claire Friedland (1993, 780) reflected that Stigler, her academic collaborator, centred much of his work ‘around saving the damsel in distress, neoclassicism, from her attackers. Hence his work on the economics of information and the Coase Theorem … George’s loyalty also bordered on the irrational … his loyalty even extended to abstractions: the Chicago School or neoclassical economics.’ Classical Liberalism was an abstraction that united the Chicagoans and Austrians branches of neoclassicism. Robbins (1976, 9) contrasted ‘authoritarian systems,’ which tended to assume that ‘there will be no order anywhere unless it is enforced from above,’ with Hayek’s ‘powerful development’ of the ‘essence of Classical Liberalism’:

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within a suitable system of general rules and institutions, there will arise spontaneous relationships also deserving the term ‘order’ but which are self-sustaining and, within the limits prescribed by the rules, need no detailed and specific regulation.

In ‘Inside the Hayek Equation,’ Hayek (1979) explained that his political philosophy and notion of justice involved the acceptance of luck: ‘As long as nobody has cheated, there’s nothing unjust about it. Even if you lose in the game.’ By 1950, it was ‘common’ Mont Pelerin Society knowledge that Hayek had cheated on his wife and could have caused damage to the ‘free’ market ‘cause.’ Cubitt (2006, 35, 177, 264, 277), Hayek’s secretary and second appointed biographer, reported that Hayek also cheated on his income taxes, cheated libertarian think tanks out of money (by double dipping), may have cheated an insurance company and certainly allowed his disciples to cheat their way into taxfunded academic positions for which they were not qualified by providing them with dishonest recommendations. None of this cheating has, it seems, been reported by Hayek’s academic associates and disciples: Does this provide indirect information about the absence of public information about Hayek’s embellishing his way into the LSE (and subsequently into a Nobel Prize) by claiming to have ‘predicted’ the Great Depression? Hayek (1979) explained that his ‘one discovery in economics’ and the ‘guiding idea of my own development’ was that the ‘price system is really essential as a guide to enable people to fit into an order.’ Once prices are ‘influenced by political motives … they become misguiding, they mislead you rather guide you to the right thing … you could make an argument that if everything has to be run according to a strategic plan of fighting, you’re ordered to direct activities, and that in such a situation price controls might be desirable [emphases in original].’46 Chicagoans believed that they were fighting for common ‘free’ market goals with the Austrians: What would be the price (privately and within their ‘social mind’ knowledge community) of publically reporting that Hayek’s prediction had not happened? Does this help explain why economists were apparently mislead and misguided for almost seven decades (1931–2010)?

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30. Hayek (1994, 91) justified his failure to attack Keynes: ‘I wanted to strengthen his [wartime] influence against the inflationists.’ In addition to personal affinities, similar—if not stronger—ideological considerations may have discouraged Chicagoans from appearing to stab Hayek in the back. Before 1936, there was, to a large extent, an American proto-Keynesian policy consensus centred in Chicago and Columbia (Davis 1971). The first Chicago oral tradition relates to their use of Keynes’ money demand analysis in the period between the Treatise on Money (1930) and the General Theory (1936). Ideologically, analytically and temporally, the General Theory divided economists: subsequently, the Chicagoan assault on Keynes involved major ideological disagreements. The General Theory reconstructed the configuration: Chicagoans became persuaded that they had more goals in common with post-1936, ‘Economics and Knowledge’ Hayek than with the post-Treatise Keynes and his followers. Samuelson (1983, 7; 1996) recalled Knight stating: ‘If there is anything I can’t stand it’s a Keynesian and a believer in monopolistic competition’; ‘He’—Knight—‘really thought that Keynes was the devil … He didn’t believe in God, but he knew a devil when he saw one.’47 Keynes scribbled on Hayek’s review of the Treatise: ‘He evidently has a passion which leads him to pick on me, but I am left wondering what this passion is’ (cited by Skidelsky 1992, 457). In ‘Laissez Faire: Pro and Con,’ Knight (1967, 794) stressed that he had no wish to ‘pick on’ Hayek; in contrast, Albert G. Hart (12 January 1937) complained to Knight that his 1937 review of Keynes’ General Theory suggests that you are ‘out to get’ K. and have seized upon the first damaging interpretation of each passage you could hit upon. On several major points I am afraid you lay yourself open to the charge of setting up straw men.48

Knight (1951, 17) was apparently undeterred: Keynes, he argued, had driven economics ‘well back to the dark age.’ In his review of the General Theory, Simons (1936b) suspected that Keynes may ‘succeed in becoming the academic idol of our worst cranks

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and charlatans – not to mention the possibility of the book as the economic bible of a fascist movement.’ Knight (1937, 108, 119, 121) criticized what he regarded as Keynes’ ‘language of the soap box reformer’: he had made ‘wild overstatements’ and ‘does not say what he means’; his exposition regarding savings and investment ‘seemed calculated to conceal [certain] facts, though in them lies the core of the explanation of the depression and unemployment in accord with his own theory, if the latter is to be interpreted so as to make it defensible or intelligible.’ A similar criticism could have been made of the Hayek–Robbins assertion—but ideologically, the Chicagoans believed themselves to be largely on their side: they shared a large part of Hayek’s (1937) ‘social mind.’ In contrast, in ‘Social-Philosophical Implications of the New Theoretical System,’ Knight (1937, 119) complained that Keynes’ proposed socialization of investment couldn’t be carried far without largely ‘socializing’ economic life in general, and this means taking it out of business and putting it into politics.

According to Stigler, Friedman occupied the ‘de facto presidency of the unorganised Friends of Private Enterprise’ (cited by Overtveldt 2007, 91). Yet Friedman (2000) gave greater credit to Hayek’s (1944) Road to Serfdom which ‘was a very clear, definite statement of certain fundamental ideas. It was a passionate plea by a passionate man, and so it was very well written, and for those of us who were concerned about these kinds of issues, I think it had a tremendous impact … I’ve asked people who were in favor of free markets and free enterprise, who formerly had been of a different view, what caused them to change their mind. I’m talking particularly not about economists, not about professionals, but generally ordinary people, most of whom had been socialist or in favor of government control at one time and had come over to free markets. And two names have come up over and over again: Hayek on the one hand, The Road to Serfdom from Hayek, and Ayn Rand on the other, Atlas Shrugged and her other books.’ Hayek informed potential attendees to the first Mont Pelerin Society meeting that his purpose was to ‘inspire the common effort.’

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Machlup proposed that Robbins draft the Statement of Aims: according to Friedman, only Robbins could have succeeded in producing a widely acceptable draft (Howson 2011, 661, 664). Subsequently, the ‘Knight group’ at the University of Chicago comprised ‘Friends and Members of the Mt. Pelerin Society.’ These ‘key’ members of the Knight ‘cluster’ began to act ‘in a loosely coordinated fashion to advance their common ideas’ (Reder 1982, 9–10; 1987, 414). Friedman noted that in Cambridge, England, economists and their sherry parties were ‘segregated, not by race, but by ideology.’ On one side of the ideological divide, the Mont Pelerin Society ‘played a major role in preserving and strengthening liberal ideas’; ‘a turning point’ in the lives of many who attended its establishment (Friedman and Friedman 1998, 159–160, 245, 333). Motives can be elusive to accurately detect and report: but after writing the Introduction to the fiftieth anniversary edition of Road to Serfdom, Friedman (1994) explained that Hayek’s motive in founding the Mont Pelerin Society was to bring their side of the ideological divide ‘together and enable them to get comfort and encouragement from one another without having to look around to see who was trying to stab them in the back …’49 31. Hayek’s opponents were—compared to Friedman’s—remarkably restrained: his numerous false statements were only occasionally corrected. For example, Hayek (1978) stated that the Beveridge Report ‘was written by Mr. Nicholas Kaldor and not by Lord Beveridge’— which Kaldor stated in an interview was ‘not true’ (cited by Caldwell 2004, 175, n9). In contrast, in The Scourge of Monetarism, Kaldor (1986, 26) asserted that ‘Friedman’s assertions lack any factual foundations whatsoever. They have no basis in fact and it seems to me that he invented them on the spur of the moment.’ In 1984, Friedman believed that his ‘honesty and integrity’ had been impugned by a ‘spate of libellous and slanderous articles’ following a Bank of England report written by David Hendry and Neil Ericsson (cited by Hammond 1996, 199). The Guardian (15 December 1983) reported the Hendry and Ericsson paper under the title Monetarist’s guru ‘distorts his evidence.’

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Kaldor (1986, xix) pounced: ‘reading those criticisms makes it difficult to believe that in writing these elaborate yet worthless defences the authors were intellectually honest in the pursuit of truth.’ But Bartley told Hayek that when interviewed in 1984 for Hayek’s biography, Kaldor expressed just ‘wisecracks’ and negative feelings. (Cited by Leeson 2013, 189)

All scientific communities tend to be status-bound—ideally, the status should be ‘achieved.’ Yet Hayek’s success (and luck) is incomprehensible without reference to his ‘ascribed’ Habsburg status. Language conjures-up images: if, as Stigler (1968, 171) noted, information ‘occupies a slum dwelling in the town of economics’ what (possibly unconscious) implications did that have for academic interactions with the Brooklyn-born Friedman? Certainly, titles and non-academic status figure in academia. In a BBC debate, Friedman insisted on calling Thomas Balogh ‘Mr’ rather than ‘Lord.’ Infuriated ‘almost to the point of speechlessness,’ Balogh ‘correctly interpreted it as a mark of my lack of respect for him’ (Friedman and Friedman 1998, 247). The two ‘Budapest Lords,’ Balogh (1905–1985) and Kaldor (1908– 1986), were born in the capital of other half of the Austro-Hungarian Empire. The son of a barrister, Kaldor attended a ‘school for the elite’: ‘the deep mark of a privileged childhood remained in Kaldor’s attitude and demeanour for the whole of his life’ (Pasinetti 2009, 119; see also King 2009, 3). Balogh, also from a prosperous family, attended the same school (Morris 2007, viii). Both were (approximately) Hayek’s ‘acquired’ status equals. In the 1960s, Kaldor was known as a ‘two car socialist’ (King 2009, 10); ‘Lord’ Kaldor was apparently ‘miffed’ by Hayek’s 1984 elevation to the Companion of Honour (Leeson 2013, 189). Hayek (1994, 37) traced his ‘von’ back to a 1789 Habsburg ennoblement: the period in which his family were legally entitled to use this title corresponds to a specific neo-feudal episode in world history (1789–1919). Rose Friedman recalled that under the Romanovs, ‘Jews lived in fear of their Russian neighbours.’ In 1915, the Cossacks destroyed everything in her village of birth. Milton’s father acquired his surname in Budapest: ‘at one time I knew his original name.’

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In America, his mother worked in a ‘sweatshop’ and his father became a ‘petty trader of some kind’ (Friedman and Friedman 1998, 2, 6, 19–20). Kaldor reflected about the immediate post-war turmoil in his half of the ex-Habsburg Empire: ‘bewildering changes in social regimes from a monarchy to a liberal republic, then to a communist dictatorship lasting four months, followed by a military dictatorship soon moderated by the need to conform to the institutional framework of a parliamentary system desired by the victorious western powers’ (cited by King 2009, 3). Both Kaldor and Balogh must have known about the post-1919 ‘von’ illegality: yet both repeatedly referred to ‘von’ Hayek. For example, Balogh (1982, 214, n9) thought it regrettable that a Nobel Prize had been established ‘for what is essentially a political profession. Its simultaneous grant to Myrdal and von Hayek shows the absurdity of the whole conception.’ Hayek (1978) described Herman Finer’s (1945) Road to Reaction— one of the few printed attacks on his integrity—as an expression of hatred towards the LSE rather than a critique of The Road to Serfdom. After Finer’s (1898–1969) death, Hayek trivialized the critique: I think I can now tell you the story behind it. Herman Finer had come to hate the London School of Economics, and particularly Harold Laski, because when he had come to the United States and war broke out, he had asked for a leave, an extension of leave, and it was denied him because he was needed for teaching. He was so upset about this that he turned against the London School of Economics, and particularly Laski. Then it happened that I was the first member of the London School of Economics on which he could release all his hatred of the place. So I had to suffer for Harold Laski. [Laughter]50

Hayek informed Finer that while he did not wish to have any ‘contact’ with him, ‘I desire to preserve correct relations in public’ (cited by Caldwell 2004, 148, n19). When debating the nobility, ‘correct relations in public’ may involve not reporting academic fraud—especially for ‘free’ market comrades. In for-posthumous-consumption oral history interviews, Hayek confirmed that Finer’s interpretation of The Road to Serfdom was largely correct (Leeson 2015a, chapter 3).

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Notes 1. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 2. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 3. Friedrich Hayek, interviewed by Robert Bork 4 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 4. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 5. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 6. The readers of Hayek’s Institute publications were presumably looking for immediate business advantages: few, if any, would have read Robbins’ Foreword. Likewise, many articles—even in high-status journals—go largely unread or unacted upon. 7. A fifth cohort can probably be excluded from this knowledge community: non-intimate associates. Even after he retired in 1955, Knight hosted ‘bull sessions’ at his house, frequently with visiting academics (Friedman and Friedman 1998, 194). Had the Berger thesis been linked to the Schmidt article during these sessions, this would surely have surfaced in circles outside the University of Chicago. Harberger (10 January 2013 telephone conversation with the author) remembers nothing; the probability of outsiders being made aware of this issue seems remote. 8. Robbins may not have had much personal contact with Wallis. 9. This (never completed) Ph.D. was undertaken ‘after considerable discussion’ with Knight (Friedman and Friedman 1998, 51). Stigler informed Reder (1982, 7, n17) that his own was only one of two dissertations that Knight supervised to completion. 10. Presumably, the person (or persons) to whom Hayek made the prediction would probably have corroborated the story fairly shortly after the publication of Robbins’ Foreword.

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11. Friedrich Hayek, interviewed by Robert Chitester date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 12. Unanswered emails from Leeson to Ebeling (29 June 2011; 11 July 2011; 15 September 2011; 18 November 2011; 30 January 2012; 6 March 2012). 13. https://www.heartland.org/about-us/who-we-are/richard-ebeling. 14. Galbraith was referring to Schumpeter’s attitude. 15. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 16. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 17. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 18. Friedrich Hayek, interviewed by Armen Alchian 11 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 19. The Norwegian Knut Wicksell’s (1936 [1898]) Interest and Prices was translated into English by Richard Kahn; Hayek had previously provided an illustration from Keynes’ use or abuse of Wicksell’s natural rate of interest analysis: ‘Mr. Keynes ignores completely the general theoretical basis of Wicksell’s theory. But, none the less, he seems to have felt that such a theoretical basis is wanting, and accordingly he has sat down to work one out for himself … Would not Mr. Keynes have made his task easier if he had not only accepted one of the descendants of Böhm-Bawerk’s theory, but had also made himself acquainted with the substance of that theory itself?’ In the second part of the review, ‘von’ Hayek (1932, 25) referred to the ‘unsatisfactory state of English theory of capital’; Hayek (1931, 271, n2) suggested to ill-read ‘English readers’ that his own Prices and Production (2012 [1931]) might narrow the educational gap between the two Neoclassical branches. 20. Friedrich Hayek, interviewed by Earlene Craver date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/).

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21. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 22. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 23. Friedrich Hayek, interviewed by Earlene Craver date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 24. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 25. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/) (Buchanan’s summary). 26. Friedrich Hayek, interviewed by Robert Bork 4 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 27. Friedrich Hayek, interviewed by Robert Bork 4 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 28. Hayek Papers Box 26.8. 29. Friedrich Hayek, interviewed by James Buchanan 28 October 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 30. ‘Mises became a member on March 1, 1934 at the Patriotic Front’s Kammer branch office … [and] also a member of the “Werk Neues Leben,” a subdivision of the Patriotic Front.’ 31. In 1933–1934, the British Labour Party politician Hugh Gaitskell visited the Mises seminar and planned to make a new translation of BöhmBawerk’s Capital and Interest. Hülsmann (2007, 675, n144) provided an explanation for the failure to produce the translation: ‘Gaitskell opted instead for an acceleration of his career in politics, becoming Minister of Fuel and Power in the postwar British Labour government.’ Becoming a government Minister in 1947, however, cannot explain why a project undertaken in 1933–1934 was not completed. 32. Friedrich Hayek, interviewed by Axel Leijonhufvud date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/).

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33. Friedrich Hayek, interviewed by Axel Leijonhufvud date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 34. Perhaps coincidentally, in 1934 Austria collapsed into civil war and Hayek began pushing his wife for a divorce. 35. According to this (possibly scurrilous) oral tradition, the second Mrs. Knight was determined to prevent the associated correspondence becoming public (Knight allegedly stored Wedgwood’s letters at the University of Chicago from where his second wife was able to obtain them after his death). There is, however, no Knight-Wedgwood correspondence in Wedgwood’s Papers, University of Oxford, Bodleian Library. 36. In a 1978 interview, Knight’s second wife recalled that Knight was a prolific scholar: he ‘worked all the time … he worked and worked and worked.’ When offered a copy of a tribute to her late husband, she replied: ‘No that’s all right. Both of our children are indifferent, they’re interested but …’ She also recalled: ‘I had a problem. I have of course a trunk full of correspondence that Frank wrote with his …, brought to his brothers and his mother and father … all of his family letters, I just haven’t got the energy to try and file them and sort them out, they are in such a mess. I am tempted every once in a while to just chuck them out’ (Nordquist 2011, 6, 3, 10–11). According to the New York Times (1997), for almost seven decades, Wedgwood (1910–1997) had a ‘companion,’ Jaqueline Hope-Wallace. 37. Popper Papers Box 305.14. 38. According to Cubitt (2006, 63), Hayek had two ‘intimates, Robbins and Popper’ both of whom ‘had reason to be grateful to him.’ Hayek’s only friend was Walter Magg who died in 1917. 39. Hayek referred to Robbins’ ‘silly attitude to be hurt by not my having taken him into my confidence’ (cited by Howson 2011, 705). 40. Robbins was referring to exchange of letters in the Economist between Friedman and Richard Kahn. 41. Hayek Papers Box 116.10. 42. http://mises.org/pdf/specialreport.pdf. 43. https://www.peter-boettke.com/curriculum-vita/. 44. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1982/stigler-bio.html. 45. Hayek Papers Box 45.21. Correspondence 28 January 1985. 46. http://www.youtube.com/watch?v=52tyPRsL3VQ.

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47. http://www.zerohedge.com/news/2012-12-16/samuelson-frank-knightthought-keynes-was-devil-and-other-insights. 48. Albert G. Hart Papers, Rare Book and Manuscript Library, Columbia University. I am grateful to Luca Fiorito for drawing my attention to this correspondence. 49. ‘Hayek and I worked together in the Mont Pelerin Society and we were fostering essentially the same set of ideas. His Road to Serfdom book, the one you have there, which was published 50 years ago, was really an amazing event when it came out. It’s very hard to remember now what the attitude was in 1944–45. Throughout the Western world, the movement was toward centralization, planning, government control. That movement had started already before World War II. It started, really with the Fabian Society back in the late 19th century-George Bernard Shaw, the Webbs and so on. But the war itself and the fact that in war you do have to have an enormous amount of government control greatly strengthened the idea that after the war what you needed was to have a rational, planned, organized, centralized society and that you had to get rid of the wastes of competition. That was the atmosphere. Those of us who didn’t agree believed in what we would call a liberal society, a free society—19th century liberalism. There were quite a number of us in the United States and in Britain, but in the rest of the world they were very isolated, indeed. Hayek’s idea was to bring them together and enable them to get comfort and encouragement from one another without having to look around to see who was trying to stab them in the back, which was the situation in their home countries.’ 50. Friedrich Hayek, interviewed by Leo Rosten 15 November 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/).

Archival Insight into the Evolution of Economics (and Related Projects) Friedman, M. F. (2017 [1991]). Milton Friedman on Freedom (R. Leeson & C. Palm, Ed.). Stanford, CA: Hoover Press. Leeson, R. (1998). The Origins of the Keynesian Discomfiture. Journal of Post Keynesian Economics Summer, 20(4), 597–619. Leeson, R. (2000). The Eclipse of Keynesianism: The Political Economy of the Chicago Counter-Revolution. Basingstoke, UK: Palgrave Macmillan.

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Leeson, R. (Ed.). (2003a). Keynes, Chicago and Friedman (2 Vols.). London: Chatto and Pickering. Leeson, R. (2003b). Ideology and the International Economy the Decline and Fall of Bretton Woods. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (2013). Hayek’s Official Biographer: The Lost Insights of William Warren Bartley III. In R. Leeson (Ed.), Hayek: A Collaborative Biography Part I Influences: From Mises to Bartley. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (Ed.). (2015a). Hayek: A Collaborative Biography Part II Austria, America and the Rise of Hitler, 1899–1933. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (Ed.). (2015b). Hayek: A Collaborative Biography Part III Fraud, Fascism and Free Market Religion. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (2017a). Hayek: A Collaborative Biography Part VII ‘Market Free Play with an Audience’: Hayek’s Encounters with Fifty Knowledge Communities. Basingstoke, UK: Palgrave Macmillan. Leeson, R. (Ed.). (2017b). Hayek: A Collaborative Biography Part X: Eugenics, Cultural Evolution, and The Fatal Conceit. Basingstoke, UK: Palgrave Macmillan. Leeson, R., & Schiffman, D. (2015). The Triumph of Rhetoric: Pigou as Keynesian Whipping Boy and its Unintended Consequences. In R. Leeson (Ed.), Hayek: A Collaborative Biography Part III Fraud, Fascism and Free Market Religion. Basingstoke, UK: Palgrave Macmillan. Robin, C. (2015). Wealth and the Intellectuals: Nietzsche, Hayek, and the Austrian School of Economics. In R. Leeson (Ed.), Hayek: A Collaborative Biography: Part V Hayek’s Great Society of Free Men. Basingstoke, UK: Palgrave Macmillan.

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Hayek, F. A. (1979). Inside the Hayek Equation. Kyoto: World Research, Inc. Campus Studies Division. Hayek, F. A. (1994). Hayek on Hayek an Autobiographical Dialogue. Supplement to the Collected Works of F.A. Hayek (S. Kresge & L. Wenar, Ed.). Chicago: University of Chicago Press. Hayek, F. A. (1995 [1963]). Contra Keynes and Cambridge. The Collected Works of F.A. Hayek (B. Caldwell, Ed.). Chicago: University of Chicago Press. Hayek, F. A. (2007 [1941]). The Pure Theory of Capital. The Collected Works of F. A. Hayek (L. White, Ed.). Chicago: University of Chicago Press. Hayek, F. A. (2011 [1960]). The Constitution of Liberty Definitive Edition. The Collected Works of F.A. Hayek (R. Hamowy, Ed.). Chicago: University of Chicago Press. Hayek, F. A. (2012 [1931]). Business Cycles Volume VII the Collected Works of F.A. Hayek (H. Klausinger, Ed.). Chicago: University of Chicago Press. Hayek, F. A. (Forthcoming). The Collected Works of F. A. Hayek: Hayek and the Austrian Economists: Correspondence and Related Documents (R. M. Ebeling, Ed.). Chicago: University of Chicago Press. Hicks, J. R. (1937). Mr. Keynes and the ‘Classics’ a Suggested Interpretation. Econometrica, 5(2), 147–159. Hicks, J. R. (1963). Theory of Wages (2nd ed.). London: Macmillan. Howson, S. (2011). Lionel Robbins. Cambridge: Cambridge University Press. Hülsmann, J. G. (2007). Mises: The Last Knight of Liberalism. Auburn, AL: Ludwig von Mises Institute. Hutchison, T. (1994). The Uses and Abuses of Economics Contentious Essays on History and Method. London: Routledge. Kaldor, N. (1986). The Scourge of Monetarism. Oxford: Oxford University Press. Keynes, J. M. (1924). Alfred Marshall, 1842–1924. Economic Journal, 34(135), 311–372. Keynes, J. M. (1930). Treatise on Money (2 Vols.). New York: Harcourt, Brace and Company. Keynes, J. M. (1936). General Theory of Employment, Interest, and Money. New York and London: Harcourt, Brace. King, J. (2009). Nicholas Kaldor. New York: Palgrave Macmillan. Klausinger, H. (2010). Hayek on Practical Business Cycle Research: A Note. In H. Hagemann, T. Nishizawa, & Y. Ikeda (Eds.), Austrian Economics in Transition: From Carl Menger to Friedrich Hayek (pp. 218–234). Basingstoke: Palgrave Macmillan.

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Knight, F. H. (1935). The Ethics of Competition and Other Essays. London: Allen and Unwin. Knight, F. H. (1937). Unemployment: And Mr. Keynes’s Revolution in Economic Theory. The Canadian Journal of Economics and Political Science, 3(1), 100–123. Knight, F. H. (1951). The Role of Principles in Economics and Politics. American Economic Review, XLI(1), 1–29. Knight, F. H. (1967). Laissez Faire: Pro and Con. Journal of Political Economy, 75(6), 782–795. Kresge, S. (2002). Review Alan Ebenstein, Friedrich Hayek: A Biography. Journal of the History of Economic Thought, 24(4), 504–506. Leube, K. R. (1984). Biographical Introduction. In K. R. Leube & C. Nishiyama (Eds.), The Essence of Hayek. Stanford, CA: Hoover Institution Press. Leube, K. R. (Ed.). (1987). The Essence of Friedman. Stanford, CA: Hoover Institution Press. Leube, K. R., & Moore, T. G. (Eds.). (1986). The Essence of Stigler. Stanford, CA: Hoover Institution Press. Lewin, P. (1990). Biography of Ludwig Lachmann (1906–1990): Life and Work. Auburn, AL: Ludwig von Mises Institute. http://mises.org/ page/1456/Biography-of-Ludwig-Lachmann-19061990-Life-and-Work. Lindbeck, A. (1985). The Prize in Economic Science in Memory of Alfred Nobel. Journal of Economic Literature, 23(1), 37–57. Machiavelli, N. (2015 [1532]). The Prince. Enhanced Media. Machlup, F. (1974). Friedrich Von Hayek’s Contribution to Economics. Swedish Journal of Economics, 76(December), 498–531. Martin, D. (2001, November 28). W. Glenn Campbell, Shaper of Hoover Center, Dies at 77. New York Times. http://www.nytimes.com/2001/11/28/ us/w-glenn-campbell-shaper-of-hoover-center-dies-at-77.html. Mises, L. (1922). Die Gemeinwirtschaft: Untersuchungen über den Sozialismus. Germany: Gustav Fischer Verlag. Mises, L. (1944). Bureaucracy. New Haven: Yale University Press. Mises, L. (1951 [1932]). Socialism: An Economic and Sociological Analysis (J. Kahane, Trans.). London: Jonathon Cape. Mises, L. (1963). Human Action a Treatise on Economics (2nd ed.). New Haven: Yale University Press. Mises, L. (1966). Human Action A Treatise on Economics (3rd ed.). Chicago: Henry Regnery. Mises, L. (1985 [1927]). Liberalism in the Classical Tradition (R. Raico, Trans.). Irvington-on-Hudson, New York: Foundation for Economic Education.

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Mises, L. (1985 [1962]). Liberalism in the Classical Tradition (R. Raico, Trans.). Auburn, AL: Mises Institute. Mises, L. (2009 [1940]). Memoirs. Auburn, AL: Ludwig von Mises Institute. Morris, J. (2007). The Life and Times of Thomas Balogh: A Macaw Among Mandarins. Oregon: Sussex Academic Press. Moss, L. S. (2013). Hayek, Friedrich A. von. In T. Cate (Ed.) An Encyclopedia of Keynesian Economics (2nd ed.). Cheltenham, UK: Edward Elgar. New York Times. (1997, March 11). C.V. Wedgwood, 86, Storyteller of History. http://www.nytimes.com/1997/03/11/arts/c-v-wedgwood-86-storyteller-of-history.html. Nordquist, G. L. (2011). A Conversation with Ethel Verry Knight. In R. Emmett (Ed.), Frank H. Knight in Iowa City, 1919–1928 (pp. 1–14). Research in the History of Economic Thought and Methodology 29.B. Bingley: Emerald Group Publishing. Overtveldt, J. V. (2007). The Chicago School How the University of Chicago Assembled the Thinkers who Revolutionized Economics and Business. Chicago: Agate. Pasinetti, L. (2009). Keynes and the Cambridge Keynesians: A ‘Revolution in Economics’ to Be Accomplished. Cambridge: Cambridge University Press. Pigou, A. C. (1936). Mr. J.M. Keynes General Theory of Employment, Interest and Money. Economica, 3(10), 115–132. Plant, A. (1974). Selected Economic Essays and Addresses. London: Routledge and Kegan Paul. Polanyi, K. (1934). Othmar Spann: The Philosopher of Fascism. New Britain, 3(53), 6–7. Polanyi, K. (1935). The Essence of Fascism. In D. Lewis, K. Polanyi, & J. Kitchen (Eds.), Christianity and the Social Revolution. London: Gollancz. Raico, R. (2012). Classical Liberalism and the Austrian School. Auburn, AL: Ludwig von Mises Institute. Reder, M. (1982). Chicago Economics: Permanence and Change. Journal of Economic Literature, 20(1), 1–38. Reder, M. (1987). The Chicago School. In J. Eatwell, M. Milgate, & P. Newman (Eds.), The New Palgrave Dictionary of Economics. London: Macmillan. Robbins, L. C. (1933). Introduction to the Series. In F. A. Hayek, Monetary Theory and the Trade Cycle (N. Kaldor & H.M. Croome, Trans.). New York: Harcourt Brace. Robbins, L. C. (1934). The Great Depression. London: Macmillan.

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Robbins, L. C. (Ed.). (1970). Jacob Viner: A Tribute. Princeton, NJ: Princeton University. Robbins, L. C. (1971). Autobiography of an Economist. London: Macmillan. Robbins, L. C. (1976). Political Economy Past and Present a Review of Leading Theories of Economic Policy. London: Macmillan. Robbins, L. C. (2012 [1931]). Foreword. In F. A. Hayek, Business Cycles Volume VII The Collected Works of F.A. Hayek (H. Klausinger, Ed.). Chicago: University of Chicago Press. Robin, C. (2013, May 27). Nietzsche’s Marginal Children: On Friedrich Hayek: How Did the Conservative Ideas of Friedrich Hayek and the Austrian School Become Our Economic Reality? By Turning the Market into the Realm of Great Politics and Morals. The Nation. http://www.thenation.com/ article/174219/nietzsches-marginal-children-friedrich-hayek#ixzz2ZTvh L6s7. Rothbard, M. N. (1978, April). The Mises We Never Knew. Libertarian Review, pp. 37–38. Rothbard, M. N. (1990). The Future of Austrian Economics. Mises University at Stanford University. http://www.youtube.com/watch?v=KWdUIuID8ag. Rothbard, M. N. (2002 [1971]). Milton Friedman Unravelled. Journal of Libertarian Studies, 16(4), 37–54. Rothbard, M. N. (n.d.). Hayek and His Lamentable Contemporaries. http:// www.mises.org/document/2700/Hayek-and-His-Lamentable-Contemporaries. Samuelson, P. A. (1967). The Monopolistic Competition Revolution. In R. Kuenne, (Ed.), Monopolistic Competition Theory: Studies in Impact: Essays in Honor of Edward H. Chamberlin. New York: Wiley. Samuelson, P. A. (1983). Economics in a Golden Age. In E. C. Brown & R. M. Solow (Eds.), Paul Samuelson and Modern Economic Theory. New York: McGraw Hill. Samuelson, P. A. (1996). Samuelson: ‘Frank Knight Thought Keynes Was The Devil’ And Other Insights. Interview with Tyler Durden. http:// www.zerohedge.com/news/2012-12-16/samuelson-frank-knight-thoughtkeynes-was-devil-and-other-insights. Schmidt, C. T. (1931). The Austrian Institute for Business Cycle Research. Journal of Political Economy, 39(1), 101–103. Shackle, G. L. S. (1981). F.A. Hayek, 1899–. In D. P. O’Brien & J. R. Presley (Eds.), Pioneers of Modern Economics in Britain. London: Macmillan. Shackle, G. L. S. (1983a). A Student’s Pilgrimage. Banca Nazionale del Lavoro, 146(35), 107–116.

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Shackle, G. L. S. (1983b, Spring). Interview. Austrian Economics Newsletter. http://mises.org/journals/aen/aen4_1_1.asp. Shenoy, S. (2003, Winter). An Interview with Sudha Shenoy. Austrian Economics Newsletter. http://mises.org/journals/aen/aen23_4_1.pdf. Simons, H. C. (1936a). Rules Versus Authorities in Monetary Policy. Journal of Political Economy, 44, 1–30. Simons, H. C. (1936b, July 22). Review of John Maynard Keynes’ the General Theory of Employment, Interest and Money. The Christian Century, 2, 1016. Skidelsky, R. (1975). Oswald Mosley. London: Macmillan. Skidelsky, R. (1983). John Maynard Keynes Hopes Betrayed 1883–1920. London: Macmillan. Skidelsky, R. (1992). The Economist as Saviour 1920–1937. New York: Penguin. Skousen, M. (2012). Introduction. In Hayek’s Triangles: Two Essays on the Business Cycle. Baltimore, MD: Laissez Faire Books. Stigler, G. J. (1949). Five Lectures on Economic Problems. London: Longman. Stigler, G. J. (1959). The Politics of Political Economists. Quarterly Journal of Economics, 73(November), 522–532. Stigler, G. J. (1965a). Essays in the History of Economics. Chicago: University of Chicago. Stigler, G. J. (1965b). The Economist and the State. American Economic Review, 55(1/2), 1–17. Stigler, G. J. (1968). The Organization of Industry. Chicago: University of Chicago Press. Stigler, G. J. (1988). Memoirs of an Unregulated Economist. Chicago: University of Chicago Press. Viner, J. (1937). Studies in the Theory of International Trade. New York: Harper and Brothers. Viner, J. (1961). Hayek on Freedom and Coercion Review The Constitution of Liberty by F. A. Hayek. Southern Economic Journal, 27(3), 230–236. Wallis, W. A. (1969). Abolish the Draft. Science, 164(3864), 1. Wallis, W. A. (1976). An Overgoverned Society. New York: Free Press. Wallis, W. A. (1993). George J. Stigler. In Memoriam. Journal of Political Economy, 101(5), 774–779. White, L. (2007). Editorial Introduction. In The Pure Theory of Capital. The Collected Works of F.A. Hayek. Chicago: University of Chicago Press. Wicksell, K. (1936 [1898]). Interest and Prices (R. Kahn, Trans.). New York: Sentry Press.

Part II Myrdal and Machlup

8 The Saving/Investment Explanation of Business Cycles in Hayek and Myrdal: Similarities and Differences Adrián de León Arias

1 Introduction Friedrich von Hayek (1899–1992) and Gunnar Myrdal (1898–1987) developed new explanations for business cycles that went beyond monetary interpretations as a response to the historical developments of the period immediately following the Great Depression and analytical developments offered by Wicksell, the Cambridge School (Marshall, Pigou, and Robertson) and the Austrian School (mainly Mises).1 They established a relationship between business cycles and the disequilibrium between saving and investment levels. Myrdal and Hayek gave a ‘real’ dimension to the contemporary, mostly monetary, explanations of the time. This chapter analyses the similarities and differences of Hayek’s and Myrdal’s business cycle explanations. This is particularly relevant for contemporary business cycle analyses because they offer an explanation based on a dynamic disequilibrium between savings

A. de León Arias (*)  University of Guadalajara, Guadalajara, Mexico © The Author(s) 2018 R. Leeson (ed.), Hayek: A Collaborative Biography, Archival Insights into the Evolution of Economics, https://doi.org/10.1007/978-3-319-95219-2_8

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and investment that enriches the current analyses which tend to focus principally on monetary disequilibrium or price dynamics. In the light of their intellectual trajectories after the 1930s, it may seem awkward that both economists were awarded with the Nobel Prize in 1974, but few observers would have been surprised if that award had been delivered in 1933 (had it then existed). Both Hayek’s and Myrdal’s explanations of monetary equilibrium were widely reviewed and debated among economists during those years. Their echo is still reverberating in current analyses of business cycles, particularly regarding the role that monetary policy plays in each cycle. There were a significant number of similarities and differences between the careers of Hayek and Myrdal; both made some of their principal contributions to the fields of monetary theory and economic cycles in the 1930s though their intellectual contributions continued on different paths and topics into the 1980s. Also, it is important to note that German readers in 1933 were grateful to Hayek for allowing them to become familiar with Myrdal’s work just a year after its original publication in Swedish. Hayek (1933a) included the Myrdal’s ‘Der gleichgewischtsbegriff als Instrument der Geld-Theorestichen Analyse’ as a chapter in his edited Beiträge zur Geldtheorie. English readers had to wait until an expanded version of Myrdal’s (1965 [1939]) work was published under the title of Monetary Equilibrium. In this chapter, the widely studied analytical and historical context of Hayek’s and Myrdal’s writings will be examined in order to identify similarities and differences in their business cycle explanations. Their approaches most closely follow the path initiated by Wicksell and Robertson. In part three, the basic ideas of Hayek’s seminal work on ‘trade cycles’ will be presented. Myrdal’s developments on monetary cycles will be described in part four. In the conclusion, both perspectives will be compared and a critical evaluation of these ideas will be presented in the light of subsequent developments in economic analyses. This analysis will highlight that most of the similarities between Hayek’s and Myrdal’s explanations on business cycles come from their relationship to key concepts developed by Wicksell. This Swedish economist contributed to Hayek and Myrdal’s explanations by providing the concept of a credit-based economy (with a significant role for the

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banking sector; Laidler 1999, 38), the relevance of interest rates (market and real or natural) and an accumulative process in price dynamics as a response to a disequilibrium between those rates (Laidler 1999; Seccareccia 1992; Trautwein 1996; Mises 1996 [1936]). Furthermore, both of them were able to demonstrate through their methodology how to incorporate relevant institutional features into a more general equilibrium analysis. There are also a number of differences such as the relevance that they gave to the Wicksellian ‘intellectual heritage,’ as well as the immediate and intermediate-term consequences of natural or market interest rate inequality. For Hayek, the focus was on the dynamics of real capital, while for Myrdal, there was an emphasis on the expectations that were generated. In this regard, they were both able to demonstrate that the speed in the adjustment after an economic recession depends on the adjustment in the capital structure or the correct anticipation of expectations. Therefore, the adjustment mechanism in savings/investment is based on changes in the real capital structure (Hayek), and profit gains and losses in profits in a non-stationary dynamic context (Myrdal). Nonetheless, Hayek’s analysis placed more emphasis on the descendent phase of the business while Myrdal focused more in the phase immediately prior to economic recovery. Laidler (1999) believed that Myrdal’s explanation could be viewed as an ‘extension’ of Hayek’s more general approach since they both take advantage of the Wicksellian heritage. Nevertheless, it is argued in this chapter that by taking into consideration more recent literature and interpretations, Hayek’s and Myrdal’s explanations are two branches of the same tree. They are divergent, but a comparison between them helps us to identify their scope and limitations, giving economists an excellent tool to add to their kit.

2 Antecedents Beginning with the last decades of the nineteenth century and continuing into the post-World War I period, business cycle conceptualization was characterized either totally or partially as monetary disequilibrium:

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business cycles were viewed as phases of general price inflation or deflation. As a result, economic policies were based on the idea that monetary equilibrium (price stability) would eliminate or reduce the magnitude/amplitude of a given business cycle. Furthermore, during that period, authorities sought to obtain monetary equilibrium without the full operation of the gold standard during World War I, the Great Depression and its aftermath. As a result, monetary authorities in each country would decide, from time to time, either to abide by the gold standard or not. This created situations in which banking credit could be expanded without reference to a fixed monetary reserve or base. Thus, the concept of a monetary economy would become a totally credit-based economy. In 1899, in his analysis of credit-based economies, Wicksell developed a hypothesis on the relationship between interest rates and prices. His hypothesis, in particular, identified monetary equilibrium or price stability as determined by three conditions: a real or natural interest rate equal to market interest rates; a (desired) savings rate equal to (planned) investment; and price stability. Austrian economist Hayek and his Swedish counterpart Myrdal were widely acquainted with Wicksell’s hypothesis, and they were not unfamiliar with its potential to analyse monetary equilibrium in the context of the Great Depression.2 In particular, Hayek and Myrdal, using different methodological approaches, identified it as relevant to the concept of dynamic equilibrium: the equality between (desired) savings and (planned) investment. From that point on, development of their explanations would emphasize different aspects of a depressed economy. These explanations will be discussed in the following two sections.

3 Hayek’s Analysis of Business Cycles The majority of Hayek’s business cycle analysis was presented in Monetary Theory and the Trade Cycle (1933b [1929]) and Prices and Production (2008 [1931, 1935]).3 In addition, Profit and Interest and Investment was where Hayek (1975) dropped the assumption of full employment and examined the Wicksellian cumulative process in terms

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of fluctuations in output and employment that might be generated during the cycle. (This is described in Prices and Production. ) Hayek took Wicksell’s emphasis on the endogenous flow of credit because it was found to be natural partner to his views on production. He borrowed those ideas from contemporary Austrian writers of his time and, more particularly, from Eugen von Böhm-Bawerk. In a system of production in which productive inputs are tied up for a definite length of time, credit is advanced to shore up the financing of production flow. Hence, credit emerges from the demands placed on it by the production time-structure. Continuing with this idea, there is an advanced capital return rate defined by Wicksell as the ‘natural’ interest rate sustained by a specific production time-pattern in any self-reproducing productive system. Any variation in this perceived natural rate relative to the monetary rate set by the banking authorities could, however, lead to a modification of the underlying time-structure of output. In a dynamic setting where the natural rate might fluctuate widely from period to period due to technical progress, Hayek hypothesized that its variation relative to the monetary rate would affect the tempo of capital accumulation via the lengthening or shortening of the roundabout processes of production. In Prices and Production, Hayek began his analysis by arguing that at any given point in time, a community’s resources devoted to the production process could theoretically be organized into specific stages. The higher the stage of production, the more temporally remote the stage is from the consumer and, therefore, the more the economy is geared towards producing intermediate goods or, simply, investment goods. On the other hand, the lower the stage of production, the nearer the stage is to the consumer and, hence, the more the economy is involved in consumer-goods production. The aggregate shape of this production time-structure is not, however, arbitrary or determined exogenously. Rather, it depends on the public’s decision to allocate its income between consumption and savings. When the community saves, it communicates its desire that resources be placed in the higher stages of producing investment goods. If it engages in consumption spending, the public expresses its desire that factor resources be shifted to the lower stages of producing consumer goods. However, these desires on the part

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of individuals are transmitted through the capital market, whose role is to allocate the savings fund made available by the public to those wishing to invest in lengthier or more roundabout production methods. Unless there are institutional constraints to the proper working of the capital market, a natural or equilibrium rate of interest is determined. This rate then equates the real savings of the community with the desire of companies to accumulate. How then are such underlying real savings–investment relations disturbed? Hayek points to the existence of bank credit which arises from the emergence of a discrepancy between the natural rate and the monetary rate along Wicksellian lines. If the banking system were to behave as a neutral intermediary, instability leading to structural maladjustment could never occur since investment would be limited by the available savings fund as in a barter economy. However, as soon as the banking system can create credit-money independently of savings, the monetary interest rate can be held below the natural rate and thus give rise to problems of overinvestment. It is, for Hayek, the existence of an elastic money supply which brings an unsettling element into what is otherwise perceived to be a self-adjusting system. Suppose that a discrepancy between the natural and monetary rates occurs because of a rise in the natural rate. As long as the monetary interest rate is kept below the natural one, it remains profitable for enterprises to obtain loans to be used for investment purposes given the presumed lengthy period of production in any self-reproducing productive system and the transfer of resources away from the lower stages of production, owing to the increased profitability of projects of a more roundabout nature. As this shift towards more capitalistic production takes place, consumer goods become increasingly scarce. If the expansion had taken place by a voluntary reduction in consumption, the fall in demand for consumption goods would, according to Hayek, have released factor resources for the needs of the expanding investment-goods industries. Unfortunately, no such voluntary freeing of resources takes place, since the additional investment is financed by bank credit. In this case, consumption-goods prices must rise in such a way as to bring about a ‘forced savings’ equal to the proportion of total investment financed by the endogenous flow of credit-money.

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Since the consuming public has not sanctioned the modification in the production time-structure originating from the existence of an artificially low monetary interest rate, the forced savings associated with the rising prices of consumption goods will ultimately swing the pendulum in the opposite direction by making consumer-goods industry production more profitable for firms. The shortage of voluntary savings thus triggers a renewed transfer of resources from the higher to the lower stage of production, a reduction in output in the investment-goods sector relative to the consumption-goods sector and a large-scale abandonment of projects having longer gestation periods. The business cycle is thus seen largely as an endogenous see-saw movement that, as Hayek (2008 [1935], 101) pointed out, ‘Consists essentially in alternating expansions and contractions of the structure of capital equipment.’ In this respect, there is an embedded an underlying general pattern of economic behaviour which ‘Must always reoccur under the existing credit organization, and that it thus represents a tendency inherent in the economic system’ (Hayek 1933b [1929], 146–147). Can banking authorities counter the process which brings about the reversal of economic expansion through the injection of further credit-money? This artificial stimulus would merely serve to prolong the necessary restructuring in favour of less roundabout methods and make the inevitable collapse all the more severe: So long as the banks go on progressively increasing their loans it will, therefore, be possible to continue the prolonged methods of production or perhaps even extend them still further. But, for obvious reasons the banks cannot continue indefinitely to extend credit; and even if they could, the other effects of a rapid and continuous rise of price would, after a while, make it necessary to stop this process of inflation. (Hayek 2008 [1935], 89–90)

The only effective check against these cyclical maladjustments is a Wicksellian policy of raising interest costs whenever inflation occurs so as to abort the boom that must inevitably lead to a severe retrenchment in the demand for investment goods. In order to minimize the damages that credit-money can inflict on the ‘real’ economy, Hayek’s policy

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of ‘neutral money’ should be implemented. However, Hayek´s policy of neutral money was, for practical purposes, nothing more than a slightly modified version of the original Wicksellian norm for price-level stabilization. For Hayek (1984 [1933], 161), this meant ‘The stabilization of some average prices of the original factors of production,’ since these factor prices would provide the early warning signals of coming structural maladjustment and crisis. Historically, Hayek’s work emerges as the logical denouement and refinement of an approach developed originally by Wicksell and the classical forced-saving theorists, such as Thornton (1939 [1802]). The crisis occurs because of a shortage of voluntary savings. Only an austerity policy of higher interest rates, accompanied by a reduction in the flow of credit-money can prevent structural maladjustment at the origin of the crisis and re-establish the central stabilizing role that the capital market must play in setting priorities for financial disbursements.

4 Monetary Equilibrium as Business Cycle Analysis in Myrdal In this section, some ideas are developed that are related to business cycles in Myrdal’s (1965 [1939]) Monetary Equilibrium. The origins of these ideas can be traced back to the original Swedish text published in Ekonomisk Tidskrift, 1931. This was followed by the above-mentioned German translation and published as a chapter in the book edited by Hayek (1933a) in Vienna. (The revised English edition was published in 1939.) The main objective of this work was to study the concept and implications of monetary equilibrium in a different context. While this book was not directly related to business cycles, we may find analysis referring to them mostly in the context of the immediate phase of recovery after a recession. Myrdal prefaces his Monetary Equilibrium by pointing out that his essay constitutes an ‘immanent criticism’ of Wicksell’s work, which had remained at the centre of discourse in Sweden and Austria for such a long time. By pioneering a new approach, it was easier for

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Myrdal (1965 [1939], v) ‘to project his own ideas within Wicksell’s old framework’ which he viewed as a shell within which a distinct analytical approach could be developed. Despite his numerous references to Wicksell’s work, will be shown in this section, Myrdal’s particular analytic approach can be seen primarily as a specific offshoot of a research programme that is distinctly Wicksellian. During the 1930s, Myrdal found fertile ground for the application of his ideas in the writings of the Swedish Wicksellians, such as Davidson and Lindahl. They were particularly concerned with the appropriate norm for monetary stabilization. The central question, addressed by Myrdal (1965 [1939], 42) from the standpoint of Wicksell’s monetary theory, is ‘what do the properties of a price situation in a non-stationary course of events have to be in order that this situation can be characterized as a position of monetary equilibrium.’ In particular, Myrdal is concerned with the concept of equilibrium as it applies instrumentally at a particular point in time under conditions which are not stationary in the traditional sense as defined by static analysis, but where the dominant tendencies, including expectations, are in balance. It was during his discussion of monetary equilibrium at any given time that Myrdal introduced his decisive concepts of ex ante and ex post. The condition of monetary equilibrium, therefore, is fulfilled at a point in time in which the prospective or ex ante values are equal to the ex post or retrospective ones. Any deviations between these values would then give rise to a specific feedback mechanism determining the revision of expectations. Myrdal shows how his concept of monetary equilibrium is both of an instrumental character useful for practical policy matters and general enough to cover all the specific conditions for monetary equilibrium discussed by Wicksell. The three conditions identified by Wicksell, mentioned above, are that monetary equilibrium and, thus, economic stability may exist: when the market or monetary rate equals the natural rate of interest; the flows of (desired) savings and (planned) investment are in balance; and the price level is stable. In his criticism of Wicksell, Myrdal points out that none of these three conditions were meaningful on account of Wicksell´s use of highly questionable concepts. For instance, the first

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condition on the necessary equality between the monetary rate and the natural rate in Wicksell presupposes that we can define a so-called natural rate existing in natura in a meaningful way. This condition can be partially salvaged, according to Myrdal, if the natural rate is defined, instead, as an ex ante expectational variable giving the anticipated monetary return on an investment. In much the same way, Wicksell’s second condition on the equality between savings and investment also came under fire. For Myrdal, equilibrium in the capital market can only exist if we define savings and investment in ex ante terms. Ex post, such values are always equal in the accounting sense. Indeed, if one makes the appropriate modifications, the first and second Wicksellian conditions for monetary equilibrium would not be independent of each other and could collapse into one. Any discrepancy between ex ante saving and investment, leading ex post to realized capital gains or losses, would then automatically be reflected in the realized returns on investments relative to the monetary interest cost. Finally, Myrdal completely rejected Wicksell’s third condition whereby price stability is associated with a situation of monetary equilibrium. In a world in which prices are sticky because of institutional arrangements in the commodity and labour markets, Myrdal (1965 [1939], 142) warns that ‘the equilibrium character of a situation cannot… be characterized sufficiently by a mere study of the general price movements.’ Stable prices may simply hide the actual negative Wicksellian cumulative process underway in a world in which prices are relatively inflexible to changes in overall demand. Myrdal’s emphasis on the importance of expectations, however, brought him to modify dramatically the Wicksellian explanation of the crisis. As described in the latter section, in particular in the Hayekian formulation, a crisis is merely the visible outcome of a household voluntary savings shortage. The downward cumulative process reflects the transition from more- to less-lengthy or roundabout methods of production. In the Myrdalian view, increased savings necessarily intensifies a recession. This is explained by at least two reasons. Firstly, and most importantly, negative expectations affect a decline in consumption-good prices on investment-good values resulting from the higher savings rate. Secondly, given the existence of sticky wages, a downward Wicksellian

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process would put a further squeeze on profits and thus accelerate the decline in investment. Myrdal recognizes that in a Hayekian world in which credit-money would be non-existent, increased savings would have a mitigating effect on interest rates in the capital market and thus somewhat forestall the decline in investment. Yet, even in such an unlikely situation, negative expectations affecting the decline in consumption-good prices would most probably more than outweigh the possible beneficial effects of lower interest rates on investment ­spending. In all cases, Myrdal (1965 [1939], 107) argues that a ‘downward Wicksellian process has thus been brought about by increased savings, where, paradoxically enough, the increase in savings continuously results in a decrease of real capital formation.’ Like numerous underconsumption theorists of his time who were opposed to the Wicksellian forced sav­ing doctrine, Myrdal accepted the paradox-of-saving thesis. This was not because of the celebrated Keynesian effects that the resulting lower monetary incomes would have on the aggregate volume of savings, but essentially because of its negative price effects on investment. Along with other Wicksellian writers during the 1930s including Lindahl, Myrdal (1965 [1939], 119, 178) viewed the economic ­crisis as a downward Wicksellian process of deflation brought about by an incompatibility between ex ante saving and investment. Therefore, it is a monetary disequilibrium process fuelled by continually unrealized expectations. This downward process could come to an end either because of an exogenous change in expectations or because of an endogenous ‘shift in the distribution of incomes… in favor of classes which save less at the expense of those which save more.’ While this aspect of Myrdal’s analysis does have a somewhat Keynesian flavour, Myrdal’s explanation of unemployment does not. The underlying premise of Myrdal’s monetary equilibrium is that, in order for the system to function smoothly along a more stable path, there must be a correspondence between the actual and anticipated course of events. Hence, a norm for monetary policy must be one that seeks ‘to eliminate completely or at least to mitigate the business cycle.’ Consequently, this opened the door to government stabilization policies with a style somewhat reminiscent to that of Wicksell. Yet, Myrdal’s notion of stabilization meant something quite different from what

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Wicksell originally envisaged as much closer to the ‘functional finance’ views popularized during the post-war era (Lundberg 1985, 8; Lerner 1943). Essentially, ‘flexible’ prices disrupt the expectations of economic agents. Thus, the policy norm ought to be one that first tries to stabilize these latter prices by tying them to the ‘inflexible’ ones and then by guaranteeing that these inflexible prices should not be themselves violently disturbed. For instance, in discussing the situation of the Great Depression, Myrdal (1965 [1939], 195) wrote: A situation like the present… is obviously not one of monetary equilibrium. A depressive Wicksellian process has been in progress for several years with the result that even inflexible prices are slowly falling with some lag. In order to commence such a monetary policy, one must, naturally, increase prices to level which restores monetary equilibrium at the existing level of sticky prices. Only by this means can the progressive fall of sticky prices, accompanied by continually deepening depression, be prevented.

Since the prices of factor inputs were seen to form the bulk of the sticky prices during the 1930s, Hammarskjöld (1955 [1944], 152) demonstrated that stabilization policy came to signify income-maintenance over the cycle. In this section, some differences and similarities are identified in the Hayek and Myrdal explanations of business cycles. These similarities and differences will be described in a more comprehensive manner in the following section.

5 The Similarities and Differences Between Hayek’s and Myrdal’s Explanations of Business Cycles Laidler (1999, 13) offered a comparative approach to Austrian economics and the Stockholm School regarding money, cycles and unemployment. In this book, he argued that at first sight, they followed two divergent paths even though they were based on Wicksellian ideas such as the cumulative process and differences in natural and monetary

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interest rates in a credit-based economy. However, there are differences in the degree of coherence in the body of theory. In particular, The contrast between the macroeconomics of the Austrians and that of the Stockholm School is stark. Only two features are common to the two, namely, the dynamic nature of the analysis and the explicitly Wicksellian pedigree. It might seem, at first sight, utterly astonishing that two bodies of economic analysis, developed at the same time, and in response to the same theoretical puzzles bequeathed by a single person, could move apart so rapidly; but only at first sight, as we shall now see. (Laidler 1999, 52)

Laidler then points out that although Myrdal takes a more advanced approach than Hayek’s, they both used Wicksell as their main point of reference. His work contributed to Hayek’s and Myrdal’s explanations in providing the concept of a credit-based economy (with a significant role for the banking sector), the relevance of the interest rates (market and real or natural) and an accumulative process of price dynamics in response to a disequilibrium in those rates. There are also more similarities, such as their consideration of full employment levels in the economy as a long-term equilibrium factor where such levels in their dynamics were not accompanied by price stability, at least not at general level. They defined, with some limitations, a more specific price index to identify monetary equilibrium. For Myrdal, this was related to investment goods and their stickiness. In Hayek’s case, it was related to factor prices. In addition, both of them identified a limited efficiency for monetary policy in the recessive phase of the business cycle. They also disagreed on the efficiency of monetary rules. However, putting their similarities aside, the contents and composition of the Wicksellian concepts in their correspondent models were included in different way. In particular, this can be seen in their analyses of the specific impact of natural and market interest rates inequality. This was true in the case of Hayek in his work on the capital structure and for Myrdal in his analysis of expectations. Here, they took very divergent approaches. Related to this, the adjustment speed after the undesired variation in savings was quite different in both approaches as well as the adjustment mechanism of savings and investments in non-stationary dynamic context.

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It is also relevant to note that Hayek’s analysis focused more on the descendent phase of the cycle while Myrdal focused more in the recovery phase after the recession. A perspective that takes into account those differences is the one of Haberler (1964 [1937]). He classified Hayek’s explanation on business cycles into the group of ‘over-investment theories’ with an emphasis on monetary and real maladjustment. In particular, Haberler (1964 [1937], 319) defined this group as ‘Writers who believe that monetary forces operating under a particular form of credit organization (banking system) produce the disequilibrium between the lower and higher stages of production.’ It may be important to note that Haberler, while observing that this type of theory is frequently called the ‘Neo-Wicksellian one,’ did not actually include Wicksell in this group. Haberler (1964 [1937], 119) included Myrdal’s ideas in the group of ‘under-consumption theories.’ He defined them as theories that ‘are concerned with the alleged insufficiency either of money incomes or of expenditure on consumer goods out of those incomes.’ Nevertheless, he pointed out: ‘Under-consumption is a theory of crisis and depression rather than a theory of the cycle.’ It is argued in this chapter that by taking into consideration more recent literature and interpretations, Hayek’s and Myrdal’s explanations seem like two branches of the same tree; they are divergent, but a comparison between them helps us to identify their scope and limitations as part of economists’ toolkit. From here, the author also would suggest that in future research, a wide comparison of business cycle explanations among Hayek, the whole Swedish School and Robertson would provide a better understanding of the explanation of business cycles based on savings/investment decisions.

Notes 1. Hawtrey is not included as member of the Cambridge School due to Haberler (1964, 38, n1), pointing out that ‘It should be remembered that the present theory [monetary over-investment theory] has been developed independently of Mr. Hawtrey’s. Whether and to what extent

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they have historically a common origin in the Marshallian tradition and earlier English and Continental writers will not be discussed here.’ 2. In this respect, there is a similar analysis on interest and prices in the context of business cycles by the English economist Robertson (1989 [1949, 1926]). He developed an interesting explanation of that relationship without reference to Wicksell, see Robertson (ibid., viii). However, he did reference Cassel in that book—another Swedish economist who was Wicksell’s contemporary. 3. This book includes Hayek’s work published between 1929 and 1937 on money, capital, business cycle and comparative monetary institutions.

References Haberler, G. (1964 [1937]). Prosperity and Depression: A Theoretical Analysis of Cyclical Movements. London: George Allen & Unwin. Hammarskjöld, D. (1955 [1944]). The Swedish Discussion on the Ends of Monetary Policy. In R. Turvey (Trans.), International Economic Papers, No. 5. London: Macmillan. Hayek, F. A. (Ed.). (1933a). Beiträge zur Geldtheorie. Vienna: Springer. Hayek, F. A. (1933b). Monetary Theory and the Trade Cycle (N. Kaldor & H. M. Croome, Trans.). New York: Sentry Press. Hayek, F. A. (1975). Profit and Interest and Investment and Other Essays on the Theory of Industrial Fluctuations. New York: Augustus M. Kelley. Hayek, F. A. (1984). Money, Capital and Fluctuations: Early Essays. London: Routledge and Kegan Paul. Hayek, F. A. (2008). Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard. Auburn: Ludwig von Mises Institute. Laidler, D. (1999). Fabricating the Keynesian Revolution: Studies of the Inter-war Literature on Money, the Cycle, and Unemployment. Cambridge: Cambridge University Press. Lerner, A. P. (1943). Functional Finance and the Federal Debt. Social Research, 10(1/4), 38–51. Lundberg, E. (1985). The Rise and Fall of the Swedish Model. Journal of Economic Literature, 23(1), 1–36. von Mises, L. (1996 [1936]). The ‘Austrian’ Theory of the Trade Cycle. In R. M. Ebeling (Ed.), The Austrian Theory of the Trade Cycle and Other Essays. Auburn, AL: Ludwig von Mises Institute.

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Myrdal, G. (1965 [1939]). Monetary Equilibrium. New York: A.M. Kelley. Robertson, D. H. (1989 [1949]). Banking Policy and the Price Level: An Essay in the Theory of the Trade Cycle. Fairfield, NJ: August M. Kelly. Reprint of Fourth Printing (rev.), 1949. Seccareccia, Mario. (1992). Wicksellianism, Myrdal and the Monetary Explanation of Cyclical Crises. In G. Dostaler, D. Ethier, & L. Lepage. (Eds.) Gunnar Myrdal and His Works. Montreal: Harvest House. Thornton, H. (1939 [1802]). Enquiry into the Nature and Effects of the Paper Credit of Great Britain, 1802. London: George Allen and Unwin. Edited with an Introduction by F.A. Hayek. Trautwein, H. M. (1996). Money, Equilibrium, and the Business Cycle: Hayek’s Wicksellian Dichotomy. History of Political Economy, 28(1), 27–55.

9 Machlup and Hayek: Filiation of Ideas and Ambition Carol M. Connell

1 Introduction to Fritz Machlup: Change and Time Fritz Machlup’s (1902–1983) lifelong interest in monetary economics and methodology was shaped by the Europe of his university days (1920–1923), as well as by his specifically Austrian roots. He studied economics at the University of Vienna and wrote his doctoral dissertation, on the gold exchange standard, under the supervision of Ludwig von Mises. Machlup was part of the Mises circle, trained in the Privatseminar at Mises’ Chamber of Commerce offices in Vienna, sitting alongside Friedrich Hayek (1899–1992), Oscar Morgenstern, Felix Kaufmann and Alfred Schutz, discussing monetary theory and

C. M. Connell (*)  Koppelman-School of Business—Brooklyn College, City University of New York, New York City, NY, USA e-mail: [email protected] © The Author(s) 2018 R. Leeson (ed.), Hayek: A Collaborative Biography, Archival Insights into the Evolution of Economics, https://doi.org/10.1007/978-3-319-95219-2_9

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business-cycle theory, along with interdisciplinary issues in social science and methodology. Machlup also attended the Geistkreis, or Thought Circle, founded in 1921 by Hayek and J. Herbert Fürth (who later worked for the International Monetary Fund). The Geistkreis met after dinner in private homes: perhaps a dozen literary men, philosophers, psychologists and a sprinkling of economists including Gottfried Haberler. Hayek (1978) recounted the details in an interview with Axel Leijonhufvud: Felix Kaufmann speaking on scientific method, Eric Voegelin reading a paper on Rembrandt, Franz Glijck, the art and literary historian, speaking about Adalbert Shifter, Alfred Schutz on phenomenology, and Hayek himself on his book The Sensory Order.1 Like Hayek, Machlup has generally been classified as a ‘neoclassical’ economist although Langlois and Koppl (1991) and Koppl (1992) have positioned Machlup far from the neoclassical mainstream. A key problem for Machlup, as for Mises (1936) and Hayek (1945) and others in the Austrian tradition, was how economic actors adapt to unanticipated change. In ‘Marginal Analysis and Empirical Research,’ Machlup (1946) argued that the purpose of assuming profit maximization is not to predict everything a firm does, but instead to predict how it will react to changes in its environment, especially with respect to demand or costs. Far from the neoclassical mainstream, Machlup’s unconventional version of marginalism produces a process story appropriate for analysing exogenous changes and adjustments to those changes made by a representative ideal type who prefers more profit to less, knows of the exogenous change and knows how to adapt more or less profitably to that change (Langlois and Koppl 1991, 96). Machlup devised a four-part, partial-equilibrium adjustment model wherein the input is an ‘assumed’ change that causes other things to happen, and the output is the ‘deduced’ or predicted change. Both assumed change and deduced change can be empirically verified by observed data. The machine with all its parts furnishes the connection between the assumed cause, the input, and the deduced effect, the outcome. The machine consists of many parts, all of which represent assumptions or hypotheses of different degrees of generality. The so-called fundamental assumptions are a fixed part of the machine; they

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make the machine what it is; they cannot be changed without changing the character of the machine. All other parts are exchangeable. The exchangeable parts of Machlup’s model are a series of adjusting changes (neoclassical partial-equilibrium positions) caused by a sequence of individual actions and reactions that must be explained or accounted for in terms of the knowledge, preferences and expectations of the individuals doing the acting. Hence, the knowledge, preferences and expectations of the actors must provide sufficient cause for their actions and seem reasonable and understandable in common sense terms (Koppl 1992, 313). The model was used countless times in Machlup’s work, including his defence of Hayek in ‘Professor Knight and the “Period of Production”’ (1934), in The Economics of Sellers’ Competition (1952), and in Machlup’s (1958, 1982) own monetary problems research. In an article for Banca Nazionale de Lavoro (‘My Work on International Monetary Problems, 1940–1964’), Machlup (1982, 20) positioned this model squarely in the middle of ‘discussions of dollar shortage, payments balance, trade balance, exchange rates and so forth’ where the terms ‘equilibrium’ and ‘disequilibrium’ were bandied about as though they were good or bad and clearly visible from the data: To disabuse students of such views, I felt it necessary to write an article on ‘Equilibrium and Disequilibrium: Misplaced Concreteness and Disguised Politics’ …. The chief purpose of the essay [was] to show the dangers to clear analysis that may arise from the failure to notice the differences between analytical, descriptive and evaluative equilibrium concepts. But it went beyond making such distinctions and attempted to show that in descriptions of factual situations and in judgements of positive and negative values the pair of terms was redundant, confusing or both, whereas in abstract economic analysis it was an important methodological device, a mental tool helpful in suggesting ‘a causal nexus between different events or changes.’

Because the layman’s idea of a trade deficit is always a ‘disequilibrium’ of the balance of payments, Machlup (1982, 20) wanted to show the deficit as an adjustment or equilibrating change, following an antecedent disequilibrating change, for example, increased government spending,

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expansionary monetary policy, devaluation of a trading partner’s currency, receipt of foreign investment or any one of a number of possible actions. In defending Hayek, Machlup (1934, 581) addressed issues of change and time to argue against Frank Knight’s assertion that capital was perpetual and the notion of production period meaningless: Professor Knight is prepared to admit that ‘the notion of a lapse of time between production and consumption has practical meaning where society has to meet unanticipated changes in conditions.’ Apart from the theoretical and practical importance of unanticipated changes in conditions—it is not far from correct to call reality a continuous series of unanticipated changes—it is clear to me and many others that the ‘potentiality’ of change is always present and that the choice between alternatives (only one of which is to abstain from changing, and hence to repeat, former choices) is a category in economics … it is an economic problem of major importance to find out about the time distance between those present and future incomes, about the mentioned ‘interval,’ and about the mentioned ‘period.’ These ‘periods’ are important for the main problems of capital theory which is the theory of actual or potential changes in the quantity relationship between present and future services–or, in other words, the theory of distribution of services over time.

Hayek (1936, 205) argued in his own defence: It is not true that the periods which it is contended are necessarily lengthened when investment is increased are periods involved in the production of a particular type of product. They are rather periods for which particular factors are invested, and it would be better for this reason if the term ‘period of production’ had never been invented and if only the term ‘period of investment’ were used.

Hayek (1936, 205) provided an example: ‘It is not only conceivable, but it is probably a very frequent occurrence that an increase in the supply of capital may lead not to a change in the technique of production in any particular line of industry, but merely to a transfer of factors from industries where they have been invested for shorter periods

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to industries where they are invested for longer periods. In this case the periods for which one has to wait for any particular type of product have all remained unaltered, but the periods of investment of the factors that have been transferred from one industry to another have been lengthened.’ Increased capital leading to the transfer of factors to investment in more capital intensive industries parallels the work of Machlup’s student, Edith Penrose (1995, 49). Here, she discusses the managerial limit to the rate of expansion of the firm: First, the services available from the existing managerial group limit the amount of expansion that can be planned at any time because all plans for expansion absorb some of the services available from this group, and the larger and more complex the plans the more services will be required to digest and approve them on behalf of the firm. Regardless of the extent to which a firm may use managerial and industrial engineering consultants and similar advisory services to improve its organization, to test markets, and to suggest possible avenues of expansion, all advice and proposed plans have to be considered and approved somewhere within the firm’s own managerial hierarchy before action is taken. Secondly, the amount of activity that can be planned at a given time limits the amount of new personnel that can profitably be absorbed in the ‘next period.’

In his essay on statics and dynamics, Machlup (1959) categorizes the contributions of some 49 economists to change, adjustment and stasis—among them are Mises (number 34 on Machlup’s list), Hayek (40) and Machlup himself (45). According to Machlup’s categorization, for Mises ‘the method of all scientific work is to analyze the effect of the change of any one factor ceteris paribus … The assumption of perfect changelessness of all other conditions … is a fiction indispensable for science and for thinking in general.’ Further, Machlup writes Mises’ aim is the ‘explanation of change.’ Hayek’s dynamics, according to Machlup is one of the ‘intertemporal equilibrium’ theories, analysing the ‘fictitious state’ of ‘complete compatibility’ of ex ante plans at ‘successive moments in time.’ By contrast, Machlup (1959, 97–99) considers his own contribution to a dynamic theory the notion of ‘step-by-step

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adjustments …as sequences in time,’ showing ‘these movements from period to period’ and the effects of different ‘time sequences’ depending on ‘in what order [certain] steps are taken’ and on the ‘time intervals between the steps.’

2 Investment in Services Over Time—Hayek and the Period of Production For Machlup (1934, 581), Hayek’s (1967 [1931]) Prices and Production offered important clues to the relationship of the production period to a cycle theory in which money, credit, capital, production and timing were an ‘economic problem of major importance.’ As Hayek (1967 [1935], 104) wrote, ‘Only by studying the changes of the capitalistic structure of production will we learn to understand the factors which govern it, and it seems that the trade cycle is the most important manifestation of these changes. It is therefore not surprising that the study of the problems of the trade cycle should lead to the study of the theory of capital.’ As early as 1934, a year after Machlup had accepted a Rockefeller Grant and moved to the USA, he wrote to Hayek as well as to Haberler, Halm, Marschak and Strigl on the issue of the period of production.2 He was categorizing and sequencing the contributions to the history of ideas about the production period to cycle theory, putting his own contribution into the historical sequence. As he saw it, Böhm-Bawerk had explained the ‘roundaboutness’ of production. There is only one rate of interest at which ‘the length of the production period’ is adequate to the supply of capital (or in his words: to the supply of the subsistence fund). Wicksell explained that banks, by creating credit, can bid down the market rate of interest below ‘the natural rate of interest.’ By additional credit which enables investments with corresponding saving the price level is raised. Mises explained that the rise in the price level does not come about by linear advances of all prices, but that there is a lag of the prices of consumers’ goods behind prices of producers’ goods, and a lag in increasing money incomes, constituting ‘forced savings.’ The lags cause distortions (lengthening) of the

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production structure which, sooner or later, breaks down. The easy money policy of the banks is responsible for the business cycles. Hayek explained that not only a reduction of bank rates but technical progress with unchanged bank rates makes the market rate of interest underbid the equilibrium rate. Furthermore, in a society with increasing efficiency a bank rate which holds the private level stable would be below the natural rate and would cause cycles. Unemployment and reduced consumption are inevitable after the collapse. Depressions are periods of shortening the investment period and, therefore, similar to periods of capital consumption. Machlup explained that, apart from bank policy and from technical progress, changes in using and investing surplus cash balances initiate the cycle. Deflation must necessarily follow the breakdown. The illiquidity of the system is getting worse by artificial liquidity of the money market, since it retards the shortening of the investment period. Haberler suggested some qualifications regarding relative price changes in different stages of production and concerning secondary deflation. Strigl suggested some qualifications regarding the lag of consumers’ income behind the extended producers’ credit and the relative shrinkage in the production of certain intermediate goods.3 In his response to Knight’s criticism of Hayek and others in the Austrian School for notions of ‘length of the production process,’ ‘round-aboutness of production,’ ‘period of waiting,’ ‘period of production,’ ‘period of investment,’ ‘time structure of production,’ ‘period of maturing’ and similar terms, Machlup argues that the time-related concepts are essential to capital theory and, hence, essential to business-cycle theory. Capital is not a perpetual fund: A statement such as ‘all capital is inherently perpetual’ is of doubtful value. If it is limited to the case of an economy which is assumed to maintain, or to add to, its capital, it is but a repetition of the assumption. If it is stated as a fact, it is wrong… There was and is always the choice between maintaining, increasing or consuming capital. And past and ‘present’ experience tells us that the decision in favor of consumption of capital is far from being impossible or improbable. Capital is not necessarily perpetual. (Machlup 1935, 580)

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Capital investment and disinvestment are equally important in a society where property is privately owned, and the choice of one or the other belongs to the individual. It must be clear that at any moment of time the alternatives are open to change either direction, or to leave unchanged the relation between the current stream of consumption income and the future stream of consumption income, the latter partly being represented in the existing capital (which is the ‘capitalized’ value of future income). (Machlup, 1935, p. 580)

Time is always an issue because: The conditions under which such alternatives can be realized are dependent on the given production structure of the whole community and on the simultaneous choices on the part of the other individuals within the community. Dissaving and disinvesting by one individual can be offset by saving and investing by another individual….The problem of social ‘net’ investment or ‘net’ disinvestment is important, and its discussion calls for consideration of certain ‘time relations.’ (Machlup 1935, 580)

Machlup (1935, 585) argues that the time interval between the input of (productive) services and the ‘dependent’ output of (consumable) services is significant for a number of economic problems. While this time interval has been called by many names, Machlup supports Hayek’s suggestion, based on Jevons’ and Wicksell’s practice, to speak of the period of production as the ‘period of investment.’ The ‘average period’ as an expression for the distribution of services over time is limitedly serviceable: Imagine changing our plans, one day, simply by switching some units of labor to activities of later maturing yield. This switching may be expressed by saying that the average period of investment has been lengthened. But take another type of rearrangement, where some productive services are transferred from uses with quick maturity to uses with later maturity, but also some other productive services are transferred from uses with very late maturity to uses with medium-high futurity indices. Such a change in the distribution of services over time would be possible without any change in the ‘average.’ (Machlup 1935, 588)

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As always Machlup is interested in how fast or in what direction something is changing, not its average value. Hence, the shape of an investment (like the shape of a function) provides insight into what is happening, while the average does not (Machlup, 1935: p. 588). Machlup thinks in calculus, although he abhors any display of quantitative gymnastics.

3 The Services of Resources in Hayek’s The Pure Theory of Capital In his introduction to The Pure Theory of Capital, Lawrence H. White (2008) details Hayek’s struggle with the book. Beginning in 1934, Machlup began inquiring about the status of Hayek’s draft of the first part of Pure Theory of Capital. When the draft arrived a few months later, Machlup submitted extensive comments and suggestions for reorganization. By May 1936, Hayek had finished a complete first draft. By the end of summer 1936, Machlup had received 11 chapters and returned eight pages of line-by-line notes to Hayek, including eighty corrections of ‘resources’ to ‘services.’ In his first note, Machlup makes an overall comment on the book: ‘Careful application of terminology chosen! You distinguish resources and services from resources, but again and again you talk of resources where services are meant. I corrected only a part of these errors. You should go carefully through the whole manuscript in order to change all misplaced resources into services.’4 Line-by-line corrections of whole manuscripts became standard operating procedure for Machlup when he was invested in the content and the author. A very similar example of the line-by-line approach is Machlup’s work on The Patent Controversy of the Nineteenth Century (1950) with his Ph.D. student Edith Penrose and on her book The Theory of the Growth of the Firm (1959). The distinction between resources and the services of resources was important to both of these works. Of special importance to The Theory of the Growth of the Firm and its place in the economics and management literature is Penrose’s acknowledgement of the human and social capital of the entrepreneur as a primary shaper of the firm’s productive opportunity. As Nicolai Foss (1998, 2) writes,

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Penrose’s crucial distinction between resources and services, the notions of the ‘image’ and the ‘productive opportunity’ …, and the attention she pays to real managerial processes, and how these are manifested in the accumulation and leverage of resources and services.

The linkage between resources and the services of resources occurs because of the creative insights of the entrepreneur. Operating with the same resources, different entrepreneurs may generate entirely different services with these resources. The values, expectations, intent and knowledge of Penrose’s entrepreneur shape his image of the opportunity available in his environment, giving rise to the subjective opportunity set of the firm, to firm heterogeneity, to market demand and to differential demand fulfilment. Penrose had intended to define productive services very broadly to include the tangible resources on which present and future services of resources might be based, as she was still thinking through the meaning and implications of a theory in which the heterogeneity of resources was not only a source of present growth but a catalyst for continuous growth. In a letter to Penrose, Machlup (November 9, 1955) argues that productive services are indeed sometimes broadly defined to include labour, land, materials, capital/funds, and sometimes limited to managerial, entrepreneurial or executive services, but that Penrose’s growth theory will make sense only if it is confined to managerial, entrepreneurial and executive services. This narrowing of ‘productive services’ to include only instruments of human thought and decision-making proved to be useful and consistent with all other inputs to Penrose’s growth theory. The unused productive services of resources ‘shape the scope and direction of the search for knowledge’ (Penrose 1995, 70) hence change in the knowledge of the firm’s entrepreneurs and managers is essential to the growth process. How did the distinction between services of resources and resources affect the argument of The Pure Theory of Capital. Is there a link between Hayek, Machlup and Penrose that is made through the distinction between services and resources? The first appearance of both resources and services occurs in chapter 5 of Pure Theory of Capital. Hayek (1941, 50) writes, ‘Elementary Equilibrium Analysis Proceeds as if All Productive Resources Were

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Permanent …They are regarded as sources of services that will continue permanently to be available independently of any deliberate action to provide them.’ But this picture does not reflect reality, If we look at the productive resources of any society at a given moment, we will find that only a small part of them (even apart from the human beings themselves) will continue indefinitely to render useful services without any deliberate provision for their upkeep or replacement. They cannot therefore be regarded as ‘permanent’ or ‘self perpetuating.’

This applies to all useful services including those of human beings and their capacities, acquired through education and training. Hayek (1941, 51–52) holds the permanence or impermanence of resources is of fundamental importance to capital theory: The main point to be kept in mind is that what matters is not permanency in any absolute sense, but the opinion of the economic subject as to whether particular resources at his command will last throughout the period in which he is interested … What may be regarded as even more fundamental … is the fact that the future services of some resources cannot be anticipated, as they will continue to give the same services in the future no matter how they are used in the present, while the present use of the services of other resources decreases the amount of such services which will be available in the future…The underlying fact, and in a sense the most general aspect of the phenomenon under consideration, is the irreversibility of time which puts the future services of certain resources beyond our reach in the present and so makes it impossible to anticipate their use, whereas the present services of those resources can as a rule be postponed.

Capital itself is a convenient description of the aggregate of non-permanent resources… The majority of economists have succumbed at one time or another to the temptation to regard the stock of ‘capital’ as a quasi-homogeneous, quantitatively determined magnitude which can, like the supply of any other factor of production, be treated as a datum of economic analysis. (Hayek 1941, 294)

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Capital is embedded in resources which can be put to innumerable bundles of uses, performing different services, and creating for each entrepreneur and customer alike different and changing values depending on circumstances and subject to uncertainty. This is an interpretation shared by Machlup and Penrose, his student. If everything had always been correctly foreseen, and conditions always turned out to be what they were expected to be when the capital goods were created, there would never arise any problem of deciding how to use the existing capital goods. They would simply be put to the use for which they were made. It is only in connection with adjustment to unforeseen changes that the stock of capital goods has to be treated as a datum. But clearly it is precisely in this connection that it is not permissible to describe the stock as a single magnitude… (Hayek 1941, 296)

It is essential to go back to its real components and to describe it by a full enumeration and description of all its constituent parts. It also becomes necessary to make a systematic study of how those in command of capital goods will behave when they find that events are turning out differently from what they expected. Here, we should begin with a consideration of the concrete opportunities which will be open to them under the new conditions, and of their preferences for the income streams of different shapes between which they can now choose (Hayek 1941, 296). Edith Penrose’s (1995, 25) notion of the services of resources has been identified as the cornerstone of entrepreneur-led vision and enterprise in her theory of The Growth of the Firm: Strictly speaking, it is never resources themselves that are the inputs in the production process, but only the services that the resources can render. The services yielded by resources are a function of the way in which they are used–exactly the same resource when used for different purposes or in different ways and in combination with different types or amounts of other resources provides a different service or set of services. The important distinction between resources and services is not their relative durability; rather it lies in the fact that resources consist of a bundle of potential services and can, for the most part, be defined independently

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of their use, while services cannot be so defined, the very word ‘service’ implying a function, an activity. As we shall see, it is largely in this distinction that we find the source of the uniqueness of each individual firm.5

4 Input-Conversion-Output, Time and Interest in Hayek’s Triangle Hayek’s theory of the production period ties staged investment to the production of future consumption goods. Raw materials are turned into finished output, with associated costs and additions to value, after a series of stages of production. Hayek’s triangular diagram is interpreted below as a value chain with lowest value, earliest use inputs on the far left and highest value, latest use outputs on the far right. The concept reflects the added value of investment, conversion and time to the process. Hayek’s interpretation of the time dimension of production owes much to BöhmBawerk’s ‘roundaboutness’ of capitalistic production. Fundamentally, it is this model that management theory and practice accepts today as critical to value chain analysis. It is also strongly reminiscent of the stage gate financing of venture capital models, where the objective is to spend less in the learning phases of a new business investment and to spend more heavily when business assumptions are proven correct and the business is ready to scale up. In Hayek’s triangle, value (measured on the vertical axis) grows over prospective time (measured on the horizontal axis), a function of the contributions of labor, conversion, technology, distribution, marketing and other services to which the original resources have been put.6

As White (2008, 89) describes it,

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The temporal length of an economy’s equilibrium triangle – the duration of the periods it willingly waits between applications of inputs and consumption of resulting outputs – depends on the public’s ‘time-preference’ or how many units of one-period-distant future consumption people require to willingly sacrifice of one unit of present consumption.

Sometimes that sacrifice results in zero units of present consumption, when consumers opt to buy neither substitutes nor competitor goods. Increased voluntary saving by the public shifts the supply curve for loanable funds to the right and thereby lowers the interest rate. A lower interest rate signals to firms that the time is right to secure loans and invest in long-range projects otherwise too costly when interest rates are higher and revenues far off. An interest rate shift to the right might be due to voluntary saving, but similar shifts can be due to monetary expansion, when government intervenes to bolster a sagging economy. Here, government action has sent false signals to entrepreneurs who may invest more heavily in projects in the early stages of production because funds are cheap.

5 Government’s Role in the Boom and the Bust Prolonged periods of monetary expansion and easy credit produce both increased investment and increased consumption, resulting in a boom. According to Garrison (2002, para 6), As the market guides these projects into their intermediate and late stages, the underlying economic realities become increasingly clear, not all of the investment undertakings can be profitably completed. On the eve of the bust, distress borrowing allows some producers to finish their projects and minimize their losses. In this phase, the high interest rates bolstered by distress borrowing cause people to curtail their consumption and to save instead. The resources thus freed up constitute an explicit form of ‘forced saving’– a term used more broadly by Hayek to characterize all the boom-related commitments of resources that are at odds with consumers’ time preferences. With scope for sustaining the boom on the basis of forced saving severely limited, the economy is forced to adjust to a slower growth path.

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In ‘The Stock Market, Credit and Capital Formation,’ Machlup (1940, 100) calls the phenomenon ‘investment inflation’: In its original formulation the Mises-Hayek theory started out from a state of full employment and on this basis it was possible to argue that an investment inflation will draw productive factors away from the stages of production near to the consumers’ goods end,7 and that this situation is not tenable in the long run and is bound to lead to a reaction. It was easy to challenge this thesis of the ‘distorted structure of production’ by arguing that it becomes inapplicable if there is a supply of unemployed factors.

Hayek’s account of the collapse of 1929–1933 enjoys strong similarities with the capital and trade cycle theory of Machlup as well as Mises. A stock market run-up and increasing investment in producers’ goods industries and construction are symptoms of a period of artificially cheap credit. In ‘Can We Control the Boom,’ Machlup (1937) describes these factors in his look back to the period preceding the collapse of 1929: We find a really spectacular price rise only in the stock markets and real estate markets, while the industrial boom was almost exclusively one of increased volume…Here are a few figures from the 1929 boom: Industrial output rose from 1924 to 1929 by 25 per cent, or alone from 1927 to 1929 by 12 per cent; construction contracts awarded rose from 1924 to 1928 by 42 per cent; loans and investments by banks rose from 1924 to 1929 by 33 per cent; bank debits outside of New York (that is, outside of stock market transactions) rose from 1926 to 1929 by 78 per cent. It was thus a time of great technical improvement and thus of lower production cost, so that the monetary expansion did not express itself in the form of increased commodity prices. Otherwise, and usually, such monetary expansion shows itself both in higher volume and higher prices. All financial and industrial crises and depressions observed in the past two centuries were preceded by rapidly rising business activity, and so it was natural to take the rapidity or extent of the increase, the boom, as the cause of the breakdown.

Hayek (1979, 3) clearly establishes that government action to control the bust is misplaced:

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I find myself in an unpleasant situation. I had preached for forty years that the time to prevent the coming of a depression is during the boom. During the boom nobody listened to me. Now people again turn to me and ask how we can avoid the consequences of a policy about which I had constantly warned. I must witness the heads of governments of all Western industrial countries promising their people that they will stop the inflation and preserve full employment. But I know that they cannot do this. I even fear that attempts to postpone the inevitable crisis by a new inflationary path may temporarily succeed and make the eventual breakdown even worse.

In Fuhrer durch die Kriesenpolitik, Machlup (1934, 9) articulated a similar conclusion, but being Machlup, he ran through a catalogue of government policy prescriptions to deal with the bust and the reasons why they would prove unsuccessful: The effects of the credit expansion will not be seen in the foreign exchange prices when inflation runs parallel with foreign countries; they will also not be visible in the overall level of prices when the increased lending runs parallel with an increase in production; the credit expansion however will always influence the build up of production capacity. The American credit inflation of the years 1924-1929 is recognized neither in the forex rates or in the prices of commodities; the effects of the production build up however have sufficient strength such that they would not be overlooked due to changes in the relationship between individual prices, making the continuation of some manufacturing and the granting of new loans economically impossible. A slowdown or a cessation of the further credit expansion would normally happen much earlier as a result of the uncertain credit situation of the banks and the manufacturing companies. As soon as this is the case, a lack of capital immediately manifests itself: the crisis — a reduction in sales volume, mass unemployment, — occurs. If beforehand the economy was not all that wealthy, following such an artificial boom, it will be that much poorer and miserable. With stimulation via credit expansion it is not possible to create wealth or eliminate poverty; with the stimulation however one can temporarily conceal poverty and feign [fake] wealth, as we are enticed [seduced] to make purchases that we in fact can not really afford, and which, when one becomes [aware of ] the actual situation, for us lose their value. Then we are even poorer.

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Machlup’s (1934, 205–206) Fuhrer durch die Kriesenpolitik also considers monopolization a consequence of too much government intervention. We can see this thinking in Penrose’s (1995, 231) The Theory of the Growth of the Firm in her consideration of the impact of cheap credit on firm expansion, particularly the engagement by increasingly large firms in monopolistic activities: Let us maintain our assumption that the large firms in the economy are not restricted in their investment opportunities by the availability or cost of capital but only by the nature of their internal resources, including the quality and amount of the managerial services available to them. To simplify matters, let us further assume that the availability in the economy as a whole of real resources for investment is reflected in the total supply of funds for investment. It follows that the funds available at current interest rates will exceed the amount the large firms will absorb. If at the same time, the large firms are in a position to restrict severely the opportunities for investment of all other groups of firms, even a sharp fall in the rate of interest will not do much to stimulate investment, and the rate of growth of the economy will not only be lower than it would otherwise have been, but unemployment and even prolonged stagnation could be expected. I do not suggest that this is either an explanation of ‘secular stagnation’ or an important cause of depressions; I put it forward to bring out the type of underlying general effect that severe restrictions on entry may have. To produce such serious effects, restrictions on entry would have to be extraordinarily widespread. Although monopolistic restrictions on new competition do play some role in some of the theories of the business cycle they are rarely given pride of place, other factors usually being considered more important in the explanation of the periods of depressed activity in an economy.

6 Mises—A Problem Child: The Problems of Refugee Scholars In a recent paper on emigres and refugees from Nazi-occupied countries, Lebow (2012) distinguishes between the academics who read the patterns and emigrated early and those who fled as refugees. Many had a difficult

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time finding work at all; others discovered an academic climate very different from the German academic system. According to Lebow (2012, 12): The German professor was part of ‘a privileged caste with fairly high pay and extraordinarily high social prestige. The American college and university teacher enjoyed virtually none of these privileges.’ The German professor is a researcher, his American counterpart a teacher. The German professor often considered his students a nuisance.

Schumpeter and Haberler secured jobs at Harvard in 1936; Morgenstern at Princeton in 1938; Machlup first at the University of Buffalo (1935), Johns Hopkins (1947), Princeton (1950) and New York University (1971), and Hayek at the London School of Economics (1931) and the University of Chicago (1950). Similar to many émigrés, Machlup had visited the USA on a Rockefeller Foundation fellowship, had built a network of contacts and used his time in America to secure permanent employment. Krohn (1996, 184) estimates that 116 of the 189 economists who were dismissed from German-speaking Universities after 1933 sought employment in the USA; 25 in Great Britain. Fleck (1996, 208) found that of 589 social scientists (including 70 economists) working in Austrian universities in 1933, some 414 or 70% emigrated from Austria in the years immediately following. At the top of the list of receiving countries are the USA, 66%, and Great Britain, 17%. Machlup had gotten many of his family members out of Austria. Academics who knew that he had escaped and secured employment in the USA wrote asking his help. Machlup as well as Hayek encouraged friends and students to leave Europe and actively sought employment for them. No one was more important to them than Mises as the war widened. Hayek and Machlup loved him, honoured him, felt they owned him, as is clear from the quantity of correspondence about their former teacher, their unsuccessful attempts to place him in a US university and their frequent disparaging comments about his later work. Machlup (April 17, 1940) wrote to Hayek, ‘In the last weeks, I was very busy trying to arrange an American visit for Mises. There was a possibility that he could go to the University of California at

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Los Angeles for 1940-41. Unfortunately, he was too slow in his decision so that I am afraid the possibility is gone.’8 A few months later, Hayek (June 21, 1940) acknowledged his anxiety about Mises and Röpke. Had they managed to get out before the Locarno-Barcelona airline was stopped? He noted that Penrose [Ernest F., a professor at Berkeley and later husband of Edith Penrose] had secured appointments at UC Berkeley for both of them. Hayek noted that his ‘French Friend’ later [identified by Margit von Mises as Darius Milhaud] had secured a French transit visa for the two of them. Machlup (September 13, 1940) wrote, ‘The problem of Mises seems to be difficult. I tried in vain to reopen the matter with Los Angeles. They do not want to consider it now. I shall be in New York next Sunday and hear whether there are any other prospects in sight.’9 Hayek (October 13, 1940) reported on the German attacks and bombs ‘incredibly close.’ He returned to the subject of Mises: ‘I am very anxious for further news about Mises. The two letters I had from him since he escaped (one still from Lisbon) were extremely laconic, and I want more definite information because I hope that now that he is definitely established in the States I may succeed in obtaining permission to transfer at least part of his account.’ Hayek owed Mises money which we wished, at least in part, to repay in books. Hayek asked about their mutual friends in the States ‘Schutz, Frohlich, Furth, Vogelin.’ Are they well? He has heard nothing.10 In an oft-quoted response (November 12, 1940), Machlup celebrates his American citizenship and adds, Mises is still my problem child. My efforts to reopen the negotiations with Los Angeles – whose call Mises had turned down last March – were without success. Mises had some possibilities at New York University, but nothing has come out of this. He asked the neat salary of $6000 and this has probably spoiled his chances in New York. He has taken an apartment at 599 West End Avenue and has received some invitations for lectures, also one for a six weeks’ course to Mexico.11

Machlup then reports on their mutual friends: Schutz, Frohlich, Weisskopf, Mitz, Kaufman, Basch and Gertrude Lovasy are now happily employed; Schiff, Winternitz and Steffi Braun are still looking. And what can Hayek report on Rosenstein, Turgendhat, Balogh and Kaldor?

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About his own career opportunities, Machlup (September 17, 1941) reported that he had turned down an offer from Yale: The Yale offer which I declined was for the same position which had previously been offered to Frisch, Robbins, Myrdal, Viner, Schumpeter and probably a few more. The only difference was that by the time they came around to me the endowed chair had been taken away from the Department of Economics and given to another department, and that they had less money to offer because of budget restrictions. All private universities in this country are suffering from low income from endowments – low interest yield – and from falling registration because of the draft – reduced income from tuition fees. The universities are in a bad fix and may have to resort to salary cuts. Most vacant positions are not being filled, and those which are filled are given to cheaper men.

Machlup returned to Mises, ‘I missed Mises who had just finished his stay at a mountain resort in New Hampshire. I am sorry to say that no position was found for Mises.’12 Mises’s situation had not changed for the better by summer 1943. Machlup reports, ‘I saw Mises in New York a few weeks ago; no change in this case. He writes occasionally for the New York Times, but cannot find publication for two books which he has completed.’13 Criticism of Mises appears frequently in the letters. Machlup (October 21, 1943) wrote, ‘I am very unhappy about Professor Mises’ note which you published in the August number [of Economica ]. You did Mises a disservice by printing the conceited or impertinent first paragraph and I wish you had used you editorial prerogative of cutting it out. These five lines will make Mises an object of ridicule.’14 Hayek (July 30, 1944) wrote: ‘Mises’ book I have read and, though I am not entirely happy about it, even made some propaganda for it by writing about it and a few other books in the Sunday Times. There are very brilliant patches in it – but he has not got the gift to persuade. Incidentally, I have not heard from him so long that I wonder whether there is anything wrong with him?’15 Machlup (August 24, 1944) responded, ‘I haven’t seen Mises for several months, and I even neglected to write. I am ashamed of myself. The reason was that I didn’t know what to say about the book which he sent me. I never finished reading it, but most of what I saw was rather sad.’16

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In other hands, Mises appears far less hapless than the Machlup/ Hayek correspondence leads us to believe. Guido Hulsmann (2007) provides detail on Mises’s life after he departed Vienna in 1934. For six years, Mises taught at the Graduate Institute of International Studies in Geneva, Switzerland, founded and directed by William Emmanuel Rappard. The Graduate Institute was a haven for scholars escaping totalitarian regimes. Among faculty were Maurice Bourquin, professor of diplomatic history; Guglielmo Ferrero, professor of contemporary history; Michael A. Heilperin, professor of international monetary relations; Hans Kelsen, professor of international law; Mises, professor of international economic relations; Pitman Potter, professor of international political relations; and Wilhelm Röpke, professor of international economic relations (Ebeling 2000a). The Graduate Institute was funded by the Rockefeller Foundation, which also financed Mises’s first years in the USA before he obtained an appointment as a visiting professor in the Graduate School of Business Administration at New York University (NYU) in 1945. According to Ebeling (2008, 103), Mises ‘was almost totally dependent on annual research grants from the Rockefeller Foundation.’ The Rockefeller Foundation had arranged for Mises to have an association with the National Bureau of Economic Research (NBER) from 1940 to 1945, and during which time Mises received a salary funded by the Rockefeller Foundation. Several of the policy-oriented research papers that Mises wrote during his affiliation with the NBER are included and published for the first time in volume three of Selected Writings of Ludwig von Mises: The Political Economy of International Reform and Reconstruction, edited by Ebeling (2000b). After Mises landed a Visiting Professor position at NYU, where he remained until his retirement in 1969, his salary was paid for, not by NYU, but from funds contributed by the Volker Fund, run by Harold Luhnow, the nephew of the founder who figures in the Machlup/Hayek correspondence. The Volker Fund was the same generous private supporter that funded the first meeting of the Mont Pelerin Society in Vevey, Switzerland in April 1947, founded by Hayek, Mises, Friedman, Stigler and Popper.

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7 Machlup and the (American Edition of) The Road to Serfdom While Machlup and Hayek were unsuccessful in their efforts to secure a professorship for Mises, Machlup was an intrepid negociant on Hayek’s behalf as The Road to Serfdom neared completion. In August 1942, Hayek asked Machlup to help secure a US publisher: My book is unfortunately still not finished, although I have now a draft of everything except the last two chapters in typescript. I don’t know when I will be able to do them. They are meant to deal largely with post prospects, probably under the titles ‘The Totalitarians in Our Midst’ and ‘What Hope?’ I have already begun thinking about sending you what I have got, because I should like to try and get a separate American edition (provided that I can find a publisher here at all – the paper scarcity is making this somewhat doubtful.17

By January 21, 1943, Machlup was already on the case to secure a US publisher. The first publisher with whom he discussed the possibilities of publication was the Blakiston Company, which he served as editorial consultant. Blakiston was prepared to publish Hayek’s book, but thought they might not do a good job of selling a ‘trade book’ given they had no ‘trade department.’ Machlup decided to cast a wider net, writing to Macmillan New York. After an initial positive response, Machlup received a formal negative answer. Writing to Hayek, he said, You will probably be interested in their reasoning: ‘Frankly we are doubtful of the sale which we could secure for it, and I personally cannot feel that Professor Hayek is a little outside the stream of much of present day thought, both here and in England. It is of course possible that a year or so from now many of us may be thinking along these lines, but the chances seem to be very much against it. If, however, the book is published by someone else and becomes a best seller in the non-fiction world, just put it down to one of those mistakes in judgment which we all make.’18

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Machlup asked Hayek for a bit of direction: should he go forward with Blakiston or strive for Harpers, which had just published Schumpeter’s new book, Capitalism, Socialism and Democracy? Hayek was a bit miffed that Machlup had not expressed his own thoughts about the manuscript. Should Machlup extend his outreach to get the book published in the USA? Hayek (June 13, 1943) said he thought not; he intended to handle himself, possibly through Walter Lippmann.19 Hayek asked Machlup to send the manuscript to Lippmann. Machlup (August 9, 1943) reported that he had talked with Lippmann over the phone, sent him the manuscript and heard from him two days later that the book was already in the hands of Little, Brown & Company. Yes, Machlup had read four or five chapters: ‘I think it is grand stuff…Its readability would not only be improved by polishing up its style, but also by some judicious cuts and abbreviations.’20 If Lippmann could not get Little, Brown to publish, Machlup suggested ‘we try’ Norton, and then Harpers. Little, Brown did turn the book down, as Machlup wrote to Harry Gideonse, President of Brooklyn College, whose contacts with publishers Machlup trusted.21 Gideonse (September 15, 1943) wrote Machlup that he had discussed the matter with Ordway Tead, economic editor of Harpers. Gideonse also offered to write a preface for the work, if that would help. Tead was interested in seeing the manuscript and Gideonse asked Machlup to send it to him.22 Hayek had not yet heard about Little, Brown’s rejection, nor about Machlup’s continued efforts on his behalf, despite the insistence that Hayek had taken on the publication burden. Hayek said that he had had a conversation with Harry Gideonse who offered to help if the Lippmann contact failed.23 In a letter posted the same day (September 17, 1943), Machlup managed to fill Hayek in on all the details to date.24 News from Harpers was not good. Ordway Tead (September 25, 1943) responded to Machlup that the book was overlong and entirely negative in tone with no policy recommendations.25 Machlup (October 21, 1943) broke the rejection news to Hayek. He added that Aaron Director, who was also working alongside him at the Office of Alien

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Property Custodian in Washington, DC, had written to Knight and Henry Simons to interest the University of Chicago Press.26 Hayek put himself in Machlup’s hands, authorizing him to conclude any agreement concerning the American edition of Road to Serfdom.27 On November 22, 1943, Machlup had to report that neither Knight nor Simons had responded to his inquiry about the University of Chicago Press. He noted that Director was sending the manuscript to the University of Chicago Press. Should Chicago turn it down, Machlup was prepared to solicit Harvard, Yale and Princeton.28 In January 1944, Machlup had success to report: the University of Chicago Press had accepted The Road to Serfdom.29 The contract was signed by Machlup as Hayek’s authorized agent.30 It was Machlup who reported to Hayek on the terrific sales of book thus far and communicated a request from the Reader’s Digest to publish a condensation in the January or February 1945 issue. Machlup (December 7, 1944) also reported that Life Magazine stood ready to serialize after Reader’s Digest.31

8 Machlup, Hayek and the Nobel Prize In 1974, Hayek won the Nobel Prize in Economics. Officially known as The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, the award is made annually by the Royal Swedish Academy of Sciences. Although not one of the original five Nobel Prizes established by the 1895 will of Alfred Nobel, the award was established and funded in 1968 by the Sveriges Riksbank, the central bank of Sweden, on the 300th anniversary of the bank, and has been awarded annually since. In that year, Hayek shared the award with Gunnar Myrdal. In an article in the Journal of Economic Literature, economics award committee member Assar Lindbeck (1985, 45, 50) describes the 1974 award as recognition of the early, highly innovative contributions by both Hayek and Myrdal on business cycles and monetary phenomena included quite abstract theoretical structures, though not expressed in mathematical terms as is normal

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today. Their works dating from the early Forties, on the interrelations between some basic issues of economic, social and political organization and processes, are perhaps more clear-cut examples of ‘nonformalized innovative thinking … In the prize citation for Gunnar Myrdal and Friedrich von Hayek the Academy mentioned both their ‘pioneering work in the theory of money and economic fluctuations’ and ‘their penetrating analysis of the interdependence of economic, social and institutional phenomena.’

Perhaps no one was more stunned to receive word of the award that Hayek. As Machlup (November 19, 1974) explained, Perhaps I should explain to you the procedures of the Nobel Committee. In the first years of its operation, they asked literally hundreds of people for their nominations. Then they discussed the merits and divided nominees into several categories. For those in the top category they wanted appraisals from outside scholars. I was asked – in 1971 – to write my appraisal of your work. I completed this assignment in September of 1971. This whole procedure is, of course, rather confidential and the persons who are asked to write the reports on a nominee have to promise to keep this very secret. I have never told a soul about it. The secrecy ends, however, when a nominee actually receives the prize, for then the Committee undertakes to publish the report as an article in the Swedish Journal of Economics.32

Machlup added, ‘I was not a member of any Committee that had anything to do with the award of the Prize. I merely did the task for which I was commissioned and am glad that it has proved successful. Besides this sense of gratification, the study of your work was extremely profitable for my own education – rather, adult education.’ While Ebenstein (2001, 258) concludes that ‘Machlup was apparently among the nominators and nominated Hayek,’ Machlup was not a member of the committee. Traditionally, the members of the committee have been Swedish economists. In the years leading up to and including 1974, the members of the committee included: Bertil Ohlin, chairman (1969–1974), Stockholm School of Economics; Erik Lundberg (1969–1979), Stockholm School of Economics; Ingvar

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Svennilson (1969–1971), University of Stockholm; Herman Wold (1969–1980), University of Uppsala and University of Gothenburg, and Lindbeck (1969–1994), University of Stockholm. Machlup was very close to two members of the committee, Ohlin and Lundberg, both served on the Bellagio Group, the group of 32 economists Machlup assembled to re-examine the international monetary system, 1963–1977. Correspondence with Lundberg began in 1954. Machlup had invited Lundberg to Johns Hopkins as a visiting professor, which Lundberg later declined. His correspondence with Lundberg is substantial.33 Lindbeck (1985, 49) had more to say about the appeal of the work singled out in 1974: The award to Friedrich von Hayek and Gunnar Myrdal, too, had a strong interdisciplinary flavor. Though Hayek is perhaps known among economists mainly for emphasizing the information and incentive content of the price system, he has given particular attention to the importance for individual behavior of moral norms and the institutional framework, including the political constitution and the legal rules that define contracts and property rights. Hayek’s work is designed to provide a ‘view of the world’ or to give what Hayek has called ‘pattern prediction,’ rather than being a basis for immediate empirical tests. In this sense Hayek’s ambitions are closer to those of general equilibrium theorists like Debreu than to positivists like Friedman and Stigler.

The deeply detailed report Machlup wrote to justify Hayek’s Nobel award includes a line-by-line identification of Hayek’s contributions with each specific publication. Reduced to thirty-three pages for the Swedish Journal of Economics, Machlup arranged with the committee to have the unabridged essay (some seventy-five pages) published in German by the Walter Eucken Institute.34 In a section of the essay on ‘Money, Credit, Capital and Cycles,’ Machlup (1974, 500) attributes an exceptional ‘prediction’ to Hayek. He wrote, ‘In a comment which Hayek published in the Monthly Reports of the Austrian Institute for Economic Research (as its Director) in February 1929, he boldly predicted that crisis

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and downturn in the United States might be imminent. With these warnings, which came true with a vengeance, Hayek had introduced one of the main theses of his monetary theory of the investment cycle.’ Unlike most if not all of the statements made in the essay about Hayek’s contributions, there is no entry in the bibliography for the February 29 Monthly Report of the Austrian Institute for Economic Research. Did Hayek make such a prediction? In fact, prediction is a word Machlup used six times in this essay. The word harks back to Hayek’s (1974, para 21) own notion of ‘pattern prediction’ which enters into his Nobel Prize lecture ‘The Pretense of Knowledge’: pattern predictions to which we are increasingly confined as we penetrate from the realm in which relatively simple laws prevail into the range of phenomena where organized complexity rules. As we advance we find more and more frequently that we can in fact ascertain only some but not all the particular circumstances which determine the outcome of a given process; and in consequence we are able to predict only some but not all the properties of the result we have to expect. Often all that we shall be able to predict will be some abstract characteristic of the pattern that will appear - relations between kinds of elements about which individually we know very little. Yet, as I am anxious to repeat, we will still achieve predictions which can be falsified and which therefore are of empirical significance.

In an Interview with Ebeling and Joseph Salerno (1980), Machlup returned to Hayek’s ‘pattern prediction’ versus ‘forecasting’: Forecasting really means that the forecaster believes that he knows all the things that are really likely to affect the outcome and that he can therefore dare to say the price level will rise by twelve per cent next year, and the gross national product, as measured in the ways we know, will not rise by more than one per cent or will fall by one per cent. I consider these forecasts absolutely foolish because these people who make the forecasts do not have the required knowledge. On this point I may refer to Hayek’s ‘Pretense of Knowledge’–that was the title of his Nobel Prize lecture.

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Did Hayek predict or forecast the crash of the stock market in 1929 or the Great Depression in 1930? Lionel Robbins claimed he did in his Foreword to the original edition of Hayek’s Production and Prices (1931). Hansjorg Klausinger (2010, 227) disputes Robbins’ claim that Hayek predicted a specific event: The phenomenon that had puzzled economists during the long American boom of the 1920s was that it had not as usual been accompanied by a rising but instead by a more or less stable price level. From this adherents to the monetary approach of the business cycle, that is at least those who equated stabilization of the price level with that of the cycle itself, had drawn comfort that a crisis could not be imminent. Conversely, their opponents questioned the validity of the monetary explanation as it appeared to have been disproved by a lack of association of the boom with rising prices. Doubting the monetary nature of the cycle, these latter economists as a rule were also not so sanguine with regard to the danger of a crisis because a breakdown could well ensue from non-monetary causes alone. In comparison, the position of Hayek was insofar unique as he shared the belief in the monetary origin of the cycle, but discarded the norm of a stable price level…. Thus, even stable prices as they had characterized the American economy during the 1920s might be interpreted as signaling an unsustainable boom, which must end in a crisis.

If we are looking for an assessment of current economic activities and a future outlook including a stock market crash or a depression in Hayek’s comment of February 1929, which Machlup identifies as the place where the prediction is made, we do not find it. Understanding that Machlup may have misstated the date of the monthly report, I examined all monthly reports (Monats Berichte) from November 1928 to December 1930. I find no prediction of a stock market crash or Depression in any of these monthlies. What I do find is a set of conditions that are reasonably close to the easy credit/investment explosion described by Hayek and Machlup as a harbinger of crisis, the first inkling appears in November 1928: The position of the Federal Reserve banks, however, is strong enough to be able to conduct credit expansion for quite some time, and a time of

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great economic crisis is likely to be still quite far away, even if this does not exclude periods of temporary smaller liquidation.

And again, in the issue of April 1929: Conditions at the New York Stock Exchange dominate [the situation]. It is therefore necessary to more closely examine the reasons this complicated situation came about. Firstly it must be pointed out that due to strictly external actualities, the bull market continued throughout the entire month of March and only fell sharply at the end of the month. People continuously deluded themselves about the future development of the stock market. It had been assumed that the Fed’s comprehensive measures and the warnings by leading banking professionals would be sufficient to slow down the upswing and to bring about a cessation of the pronounced ‘speculation fever.’ However it came about that to date all of these measures have failed as the upward movement, following the crash of March 27th, has resumed, albeit in a somewhat slower fashion. It is important to determine where the money [fueling] this stock exchange speculation comes from.

Generally, Hayek’s Monthly Report is full of the back-and-forth, goodbad, surge-dive daily forecasting nonsense that we read daily in the financial media of 2018. The Harvard Weekly Letter of July 20, 1929, predicted a recession by the end of the year, nevertheless, by October 26, the Harvard Economics Society noted, ‘Despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation. If further liquidation occurs, it will be limited by growing realization of the fact that business conditions are generally sound and that abundant credit is available for industrial or financial purposes.’35 There was no event prediction in Hayek or in the Harvard Weekly Letters. More important from my viewpoint is Machlup’s insistence of positioning the prediction statement front and centre in the original report commissioned by the Nobel Committee and in the Swedish Journal of Economics article (It appears as well in the Walther Eucken volume). Was it somehow important to the award committee? That might be suggested by the Lindbeck article.

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Indeed, Machlup aspired to a Nobel Prize himself. There is a slim file in the archives that includes a list of ‘Possible Nobelists Sharing the Prize with Me.’ Given that the short list identifies contributions that might make sense of a pairing, we also get insights into Machlup’s thoughts about his own significant contributions, including Haberler (International Economics), Lundberg (Multiplier) and Joan Robinson (Competition). Machlup kept lists of Nobel winners through 1982.36 He died in 1983.

9 Conclusion This chapter has tried to capture in one place many of the points of tangency between Machlup and Hayek using their published work, but drawing heavily on their correspondence at the Hoover Institution. My hope was to reveal more of the relationship between Machlup and Hayek, the filiation of their ideas and personal ambitions, than has appeared in previous studies. There have been very few studies of Machlup despite the involvement of this economist in the economic and policy debates of much of the twentieth century. As a critic, editor, teacher, mentor—as well as theorist—Machlup exerted a profound influence on his student Edith Penrose, whose work has since 2006 been examined for its background in Austrian economics and Austrian capital theory. Machlup is indeed the missing link between Penrose and the Austrians. Always examining the theory contributions of others in terms of his own fit with those theories, we find Machlup extending Hayek’s view of the production period; educating Hayek (and later Penrose) on the services of resources; articulating the credit expansion/investment inflation impetus for financial crisis; recommending reduced saving and limiting credit before a boom to limit the boom—and weighing in against government policies to limit the bust. Machlup was an indefatigable worker on behalf of his causes, whether a professorship for Mises, the US publication of Hayek’s The Road to Serfdom or Hayek’s Nobel Prize. Missing from this paper which focuses on filiation is the widely divergent work Machlup pursued during the

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same 40–50 years, including publications on patents, international monetary economics, innovation and knowledge; his convening of the Bellagio Group conferences on monetary reform from 1963 to 1977; some twenty-three conferences reaching beyond economics to public policy; and his mentorship of graduate students like Edith Penrose. How did he manage to devote so very much energy to so very many undertakings without sharing the details of all of them across his circles of friends? I found only one sentence in one letter to Hayek referring to an upcoming conference in Vienna. I knew from my own research that the conference date in the letter was that of a meeting of the Joint Conference of Officials and Academics (an extension of the Bellagio Group). No further detail on the group or its work appears in the Machlup/Hayek correspondence, nor did Machlup ever invite Hayek to become a member of the Bellagio Group of economists working on monetary reform. I provided my own rationale for the exclusion: all members of the group were citizens of G-10 countries with prior public policy experience (except the youngest). Nevertheless, I am convinced that this very deliberate man was inclined to share only when it suited his own reputation and ambitions or did not interfere with them.

Notes 1. Friedrich Hayek, interviewed by Axel Leijonhufvud date unspecified 1978 (Centre for Oral History Research, University of California, Los Angeles, http://oralhistory.library.ucla.edu/). 2. Letter from Machlup, April 28, 1934 sent to Hayek, Haberler, Halm, Marshak, Mises and Strigl, Fritz Machlup Papers, Hoover Institution, Box 86, folder 1, copyright Stanford University. 3. ‘The Conception of the Production Period and its Relation to the Cycle Theory,’ consolidated and edited response from Hayek, Haberler, Halm, Marshak, Mises and Strigl, Fritz Machlup Papers, Hoover Institution, Box 86, folder 1, copyright Stanford University. 4. Eight pages of line-by-line comments on Hayek’s Pure Theory of Capital. Quoted passage is an overarching comment, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University.

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5. See Foss et al. (2005) on the services of resources in Penrose and Foss and Ishikawa (2006) on the role of entrepreneurial judgement and action in appraising resource combinations and carrying out commercial ventures corresponding to specific combinations of resources. Connell (2007) linked Penrose’s theory to Machlup’s partial equilibrium adjustment model and traced the development of The Theory of the Growth of the Firm through the Machlup/Penrose correspondence. Kraaijenbrink et al. (2010) advance the connection between Austrian economics and a resource-based theory of the firm with Penrose as a founder. Foss and Ishikawa (2006, 9) are right to conclude, ‘This is the world of Austrian economics in general, and Austrian capital theory in particular.’ 6. Letter from Hayek, May 19, 1934, Fritz Machlup Papers, Hoover Institution, Box 43 folder 15, copyright Bruce J. Caldwell. 7. This quote is from p. 145 in Machlup’s original, reproduced as a PDF by the Mises Institute. 8. Letter from Machlup, April 17, 1940, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 9. Letter from Machlup, September 13, 1940, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 10. Letter from Hayek, October 13, 1940, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Bruce J. Caldwell. Permission to quote from the correspondence of F. A. Hayek was granted by the estate of F. A. Hayek. 11. Letter from Machlup, November 12, 1940, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 12. Letter from Machlup, September 17, 1941, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 13. Letter from Machlup, June 4, 1943, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 14. Letter from Machlup, October 21, 1943, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 15. Letter from Hayek, July 30, 1944, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Bruce J. Caldwell. Permission to quote from the correspondence of F. A. Hayek was granted by the estate of F. A. Hayek. 16. Letter from Machlup, August 24, 1944, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University.

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17. Letter from Hayek, August 8, 1942, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Bruce J. Caldwell. Permission to quote from the correspondence of F. A. Hayek was granted by the estate of F. A. Hayek. 18. Letter from Machlup, January 21, 1943, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 19. Letter from Hayek, June 13, 1943, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Bruce J. Caldwell. 20. Letter from Machlup, August 9, 1943, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 21. Letter from Machlup to Harry Gideonse, September 9, 1943, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 22. Letter from Harry Gideonse, September 15, 1943, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 23. Letter from Hayek, September 17, 1943, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 24. Letter from Machlup, September 17, 1943, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 25. Letter from Ordway Tead to Machlup, September 25, 1943, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 26. Letter from Machlup, October 21, 1943, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 27. Letter from Hayek, October 26, 1943, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Bruce J. Caldwell. 28. Letter from Machlup, November 22, 1943, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 29. Letter from Machlup, January 4, 1944, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 30. Letter from Machlup, April 15, 1944, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 31. Letter from Machlup, December 7, 1944, Fritz Machlup Papers, Hoover Institution, Box 43, folder 15, copyright Stanford University. 32. Letter from Machlup, November 19, 1974, Fritz Machlup Papers, Hoover Institution, Box 44, folder 2, copyright Stanford University. 33. Fritz Machlup Papers, Hoover Institution, Box 51, folder 9, copyright Stanford University.

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34. Fritz Machlup Papers, Hoover Institution, Box 107, folder 9, copyright Stanford University. 35. See Appendix: Harvard Weekly Letters—Harvard Economic Service, June 1928–October 1929. 36. Fritz Machlup Papers, Hoover Institution, Box 306, folder 9, copyright Stanford University.

References Connell, C. M. (2007). Discerning a Mentor’s Role: The Influence of Fritz Machlup on Edith Penrose and The Theory of the Growth of the Firm. Journal of Management History, 13(3), 228–239. Ebeling, R. (2000a). William E. Rappard: An International Man in an Age of Nationalism. The Freeman. Retrieved from http://www.fee.org/the_freeman/ detail/william-e-rappard-an-international-man-in-an-age-of-nationalism#ixzz2QSDMa3ze. Ebeling, R. (Ed.). (2000b). Selected Writings of Ludwig von Mises, Vol. 3: The Political Economy of International Reform and Reconstruction. Indianapolis, IN: Liberty Fund. Ebeling, R. (2008). The Life and Works of Ludwig von Mises. The Independent XIII, 1, 99–109. Ebeling, R., & Salerno, J. (1980). Interview with Fritz Machlup. Austrian Economics Newsletter, 3(1). Retrieved from https://mises.org/journals/aen/ aen3_1_1.asp. Ebenstein, A. (2001). Friedrich Hayek: A Biography. Chicago: University of Chicago Press. Fleck, C. (1996). Emigration of Social Scientists’ Schools from Austria. In M. G. Ash & A. Sollner (Eds.), Forced Migration and Scientific Change (pp. 198–223). Washington, DC: Cambridge University Press. Foss, N. (1998). Edith Penrose and the Penrosians—Or, Why There Is Still So Much to Learn from The Theory of the Growth of the Firm. Prepared for a Special Issue of Cahiers de l’ISMEA - Série Oeconomica. Foss, K., Foss, N. J., Klein, G. P., & Klein, S. K. (2005). Austrian Capital Theory and the Link Between Entrepreneurship and the Theory of the Firm (CKG Working Paper, 2005-5). Foss, N., & Ishikawa, I. (2006). Towards a Dynamic Resource-Based View: Insights from Austrian Capital and Entrepreneurship Theory (DRUID Working Paper No. 06–16). Danish Research Unit for Industrial Dynamics.

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Garrison, R. (2002). Business Cycles: Austrian Approach. In H. Vane & B. Snowdon (Eds.), An Encyclopedia of Macroeconomics. Aldershot: Edward Elgar. Harvard Weekly Letters. (1928–1929). Vols. 7–8. Cambridge, MA: Harvard Economics Society. Hayek, F. (1936). The Mythology of Capital. The Quarterly Journal of Economics, 30(2), 199–228. Hayek, F. (1945). Use of Knowledge in Society. American Economic Review, 35, 519–530. Hayek, F. (1967 [1935]). Prices and Production. New York: Augustus M Kelley. Reprint of second edition. Hayek, F. (1974). The Pretence of Knowledge. The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1974. Retrieved from https:// www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1974/ hayek-lecture.html. Hayek, F. (1978). Oral History Interviews. Centre for Oral History Research, University of California, Los Angeles. http://oralhistory.library.ucla.edu/. Hayek, F. (1979). Unemployment and Monetary Policy: Government as Generator of the ‘Business Cycle’. San Francisco: Cato Institute. Hayek, F. (2009 [1941]). The Pure Theory of Capital. Auburn, AL: Ludwig von Mises Institute. Hullsmann, J. G. (2007). Mises: The Last Knight of Liberalism. Auburn, AL: Ludwig von Mises Institute. Klausinger, H. (2010). Hayek on Practical Business Cycle Research: A Note. In H. Hagemann, T. Nishizawa, & Y. Ikeda (Eds.), Austrian Economics in Transition: From Carl Menger to Friedrich Hayek (pp. 218–234). Basingstoke: Palgrave Macmillan. Koppl, R. (1992). Invisible-Hand Explanations and Neoclassical Economics: Toward a Post Marginalist Economics. Journal of Institutional and Theoretical Economics, 148, 292–313. Kraaijenbrink, J., Spender, J.-C., Groen, A. (2010). The Resource-Based View: A Review and Assessment of Its Critiques. Journal of Management, 36(1), 349–372. Krohn, C.-D. (1996). Dismissal and Emigration of German-Speaking Economists After 1933. In M. G. Ash & A. Sollner (Eds.) Forced Migration and Scientific Change (pp. 175–197). Washington, DC: Cambridge University Press. Langlois, R. N., & Koppl, R. (1991). Fritz Machlup and Marginalism. Methodus, 3, 86–102.

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Lebow, R. N. (2012). German Jews and American Realism. Constellations, 18(4), 545–566. Lindbeck, A. (1985). The Prize in Economic Science in Memory of Alfred Nobel. Journal of Economic Literature, 23(1), 37–56. Machlup, F. (1934). Fuhrer durch die Krisenpolitik. Beiträge zur Konjun­ kturforschung vom österreichischen Institut für Konjunkturforschung 6. Vienna: Julius Springer. Machlup, F. (1935). Professor Knight and the ‘Period of Production’. Journal of Political Economy, 43(5), 577–624. Machlup, F. (1937). Can We Control the Boom? A Conference at the University of Minnesota, University of Minnesota Press. Machlup, F. (1940). The Stock Market, Credit and Capital Formation. London: William Hodge & Company. Machlup, F. (1946). Marginal Analysis and Empirical Research. American Economic Review, 36(4), 519–554. Machlup, F. (1948–1955). Papers. Hoover Institution Archives. Stanford, CA. Machlup, F. (1958). Equilibrium and Disequilibrium: Misplaced Concreteness and Disguised Politics. Economic Journal,(68), 1–24. Machlup, F. (1959). Statics and Dynamics: Kaleidoscopic Words. Southern Economic Journal, 26(2), 91–110. Machlup, F. (1974). Friedrich Von Hayek’s Contribution to Economics. The Swedish Journal of Economics, 76(4), 498–531. Machlup, F. (1982). My Work on International Monetary Problems: 1940– 1964. Banca Nazionale del Lavoro Quarterly Review, 140, 3–36. von Mises, L. (1981 [1936]). Socialism. Indianapolis, IN: Liberty Press. Penrose, E. T. (1995 [1959]). The Theory of the Growth of the Firm. Oxford: Blackwell. White, L. (2008). The Clash of Economic Ideas. Cambridge, UK: Cambridge University Press.

Part III The Chicago School of Economics

10 Friedman and Hayek’s Converging Ideas on Freedom and the State Birsen Filip

1 Introduction Since the Ancient Greeks, the concept of freedom has been one of the central issues in the disciplines of philosophy and politics.1 Over the years, this concept has undergone numerous theoretical formulations in philosophy, as well as in other social sciences, some of which were in direct opposition to one another. Indeed, theorists have been unable to reach a consensus as to its precise definition and its components. In the late twentieth and early twenty-first centuries, the concept that prevailed in the mainstream was largely defined according to the principles of the ‘free’ market economy. This chapter focuses on the concept of freedom as formulated by Friedrich August von Hayek (1899–1992) and Milton Friedman (1912–2006), which was largely derived from the neoclassical economic approach.2 Although there were significant differences in their respective views on economic methodology and monetary B. Filip (*)  University of Ottawa, Ottawa, Canada e-mail: [email protected] © The Author(s) 2018 R. Leeson (ed.), Hayek: A Collaborative Biography, Archival Insights into the Evolution of Economics, https://doi.org/10.1007/978-3-319-95219-2_10

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policy, Friedman agreed with many aspects of Hayek’s work in the areas of social and philosophical thought.3 The concept of freedom endorsed by Friedman in Capitalism and Freedom (1962) and Free to Choose (1980) shared similar elements with the version put forth by Hayek in The Road to Serfdom (1944) and The Constitution of Liberty (1960).4 These four books will be the primary focus of this chapter, because this is where they most persuasively marketed their ideas. Both include two of the same primary components: negative freedom and economic freedom. This chapter focuses on these two key components of their respective concepts of freedom, as negative freedom and economic freedom ended up shaping the opinions of many politicians, intellectuals, academics and, most importantly, the views of the mass majority.

2 Why Is Friedman’s Idea of Freedom Important? Friedman won the Nobel Prize in Economics in 1976 and is considered to be one of the most influential and respected economists of the second half of the twentieth century. From 1946 to 1976, he taught at the University of Chicago’s Economics Department, which is widely regarded as the ‘Mecca and Rome’ of the discipline of economics.5 Many economists view him as the ‘intellectual leader’ and ‘primary architect of the Chicago School’ because of his strong belief that economics is a ‘true science,’ his defence of laissez-faire capitalism and monetary policy, his vigorous opposition to State intervention and his ‘emphasis on freedom rather than equality’ (Van Overtveldt 2007, 8). It would be difficult to overstate the role that the Economics Department of the University of Chicago played in the evolution of mainstream economics in the twentieth century. This prestigious institution shaped the development of the economics profession, the academic world of economics and economic policy. Since 1969, many Nobel laureates in the field of economics were directly or indirectly associated with the economics department at the University of Chicago.

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Many of its former students have also been involved with ‘governmental organizations,’ as well as national and international institutions based in the USA and abroad (Van Overtveldt 2007, 323–324). In addition to his contributions to the development of modern economics at the University of Chicago, Friedman was well-known as a ‘political activist with a right-wing agenda’ and an ‘ideologue of the right,’ both in the USA and abroad (Van Overtveldt 2007, 91). According to author of Economics as Religion, Friedman’s ‘lifetime mission has been to persuade the American public of the correct ideas, and thus the correct form of government, a task to which he devoted great energy, in writing [1966–1984] Newsweek columns, appearing on television shows writing popular books and other efforts to publicize his views’ (Nelson 2014, 151). Friedman’s promotional activity made him a salesman for the ‘free’ market. His public television series, Free to Choose, was ‘regarded as being a major factor in shifting American public opinion towards appreciating the need to dismantle government largess.’ The series has since been shown in England, Japan, Australia, Canada and other countries (Pacific Institute 1984, 6). Friedman became an economic advisor to many presidents and premiers and cabinets, including the administrations of Richard Nixon (1969–1974), Gerald Ford (1974–1977) and Margaret Thatcher (1979–1990) (Pacific Institute 1984, 6, 13, 19). Furthermore, Ronald Reagan considered him to be his ‘most trusted’ advisor on economic and foreign policy matters despite the fact that Friedman did not hold an official post in his administration (Rayack 1987, 2, 7).6 Friedman was ‘one of the greatest thinkers in modern history’: ‘not since the time of Adam Smith has such a finely focused mind concentrated on the intellectual underpinnings of a free society.’ Reagan also declared Friedman to be a ‘champion of liberty’—‘inflexible and single-minded in his devotion to the cause of freedom.’ Friedman had played a ‘major role in disseminating the philosophy of freedom,’ both within the borders of the USA and elsewhere (Pacific Institute 1984, 13, 19–20). The extent of Friedman’s influence over the Reagan Administration was evident by the fact that many of Reagan’s speeches and policies emphasized

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the importance of individual freedom, reducing the role of the government and the federal bureaucracy, and cutting expenditures at a time when Friedman was arguing for the same measures in his newspaper columns (Rayack 1987, 172–183). This could be interpreted as an indication that many of the ideas that he put forth in Free to Choose and Capitalism and Freedom were actually implemented and achieved in practice. Friedman saw himself as a ‘freedom fighter’ and was regarded as a threat to people who (allegedly) feared freedom (Pacific Institute 1984, 13). He never wavered in his belief in the existence of a strong correlation between economic freedom and freedom in general (including civil liberties, freedom of speech, freedom of expression, freedom of the press and freedom of religion). His lifelong project was to facilitate the global adoption of ‘free’ market economics, which would have resulted in the spread of freedom as a secondary outcome. His economic views and emphasis on the importance of individual freedom (which he expressed in his public television series, books and articles, as well as the many speeches and interviews that he gave around the world) influenced world leaders and the vision of the general public. Hence, the need to understand and analyse the idea of freedom that Friedman sought to develop in his influential Capitalism and Freedom and Free to Choose.

3 Why Is Hayek’s Idea of Freedom Important? Hayek was born into a noble family and appeared to be unconcerned with the difficulties endured by the lower social and economic classes in their efforts to achieve freedom. His high ascribed status influenced Hayek’s world view, intellectual development, academic work and political ideas. Therefore, given his aristocratic background, it is not surprising that Hayek (2007, 117) argued in defence of inherited privileges and rejected attempts to ‘realize various ideals of substantive justice and equality,’ such as welfare and socialist states. Hayek is highly respected for his contributions to the development of the Austrian school of economics; however, he is also well-known

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for his work at the London School of Economics (LSE) alongside his colleague, Lionel Robbins (1898–1984). They were credited with creating the LSE ‘resistance’ that developed against John Maynard Keynes (1883–1946) in the 1930s (Hacohen 2000, 317). At the LSE, Hayek, who was renowned as an economist of the ‘first rank,’ earned a reputation for being Keynes’ ‘only intellectual opponent’ (Van Overtveldt 2007, 341). Hayek also worked at a number of other prestigious universities during the course of his career including the University of Chicago and the University of Freiburg. Hayek made a number of significant contributions to the Mont Pèlerin Society, an organization comprised of ‘opponents of socialism in the intellectual, political, and business worlds’ who promoted the ‘free’ market, individual freedom and limited State action (Boettke 2006, 51). From its early days, the objective of the Mont Pèlerin Society was to promote unrestricted ‘freedom’ and maximize the interests of the elite classes. Founded in 1947, the Mont Pèlerin Society was originally financed by a group of ‘aristocratic families’ and, given its stated purpose, has always received support from the elite classes, including the ‘top financial aristocracy of Europe.’ The Mont Pèlerin Society has always included many economists, intellectuals, business leaders and institutions among its members and associates, who ‘serve as a very powerful lobby on behalf of economic and political globalization promoting a formula that emphasizes the benefits of laissez faire freedom and individual rights’ (Peterson 1999, 122, 125). Hayek served as President of the Mont Pèlerin Society from its founding in 1947 until 1960 (Honorary President after 1960). Other founding members included Raymond Aron, Aaron Director, Friedman, Albert Hunold, Frank H. Knight, Ludwig von Mises, Karl Popper, Michael Polanyi and George Stigler (Hayek 1989, 132, 133; Mirowski and Plehwe, 2009, 13, 15).7 This group of thinkers, holding specializations in a variety of different disciplines including economics, philosophy, law, history and political science, collaborated on the development of liberalism, with each individual member playing a significant role in promoting, ‘strengthening’ and protecting ‘liberal ideas’ (Van Overtveldt 2007, 344).

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Yet, Hayek’s influence diminished during the Keynesian era.8 However, after the decline of Keynesian economics, Hayek gradually reacquired prominence, culminating in the 1974 Nobel Memorial Prize in Economics.9 As a result, he became one of the most influential academics in the political, social and economic arenas. Although Hayek never held an official post in the political arena, he was nevertheless a very influential figure and a source of inspiration for a number of prominent politicians including Thatcher and Reagan (Backhouse 2006, 34). Thatcher publicly endorsed the contents of The Constitution of Liberty as the basis of her Conservative Party’s platform (Feser 2006, 1; Miller 2010, 12–13). For example, shortly after becoming Party leader, Mrs. Thatcher encountered a middle way advocate at the Conservative Research Department, reached into her briefcase and took out a book. It was Friedrich von Hayek’s Constitution of Liberty. Interrupting our pragmatist, she held the book up for all of us to see. ‘This’ she said sternly, ‘is what we believe’ and banged Hayek down on the table. (Ranelagh 1991, ix)

Similarly, ‘Reagan claimed that his thinking on economics was directly influenced by Hayek’s writings’ (Feser 2006, 1). In 1984, he informed Eamonn Butler of the Adam Smith Institute that Hayek had played ‘an absolutely essential role in preparing the ground for the resurgent conservative movement in America.’10 The same year, Hayek became a member of Queen Elizabeth II’s Order of the Companion of Honour on the ‘recommendation’ of Prime Minister Thatcher for his ‘services to the study of economics’ (Ebenstein 2003, 305–306). Hayek was also viewed as an important figure for libertarian philosophers, primarily Robert Nozick, despite the fact that he was not a libertarian and ‘distanced himself from the sort of free market utopianism.’ Nozick cited Hayek’s Individualism and Economic Order (1948), along with Mises’s (1951 [1932]) Socialism: An Economic and Sociological Analysis as the works which ‘converted him away from socialism while he was in graduate school’ (Feser 2006, 2, 6, 11, n5). After the publication of The Road to Serfdom (1944), Hayek was regarded as a ‘philosopher of freedom’ (Backhouse 2006, 34). His economic views and emphasis on the importance of individual freedom influenced the development of liberal thought.

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4 Friedman and Hayek on Freedom Despite many converging ideas between their respective formulations of freedom, Hayek’s version was slightly more nuanced than Friedman’s. One key difference between their individual versions of freedom was that Hayek attributed a certain level of importance to the philosophical and historical background of the concept of freedom; whereas Friedman’s version ignored numerous features from earlier conceptions that prevailed since the times of the Ancient Greeks. Based on his study and analysis of the philosophical and historical background of the concept of freedom, Hayek concluded that his version of freedom was distinct from ‘metaphysical’ freedom (or ‘subjective freedom’), moral freedom and social freedom (the achievement of common and universal ends and goals). Although Hayek may have attributed more importance to understanding the philosophical and historical backgrounds of the different versions of freedom that had previously prevailed, his conception of freedom ended up being relatively similar to that of Friedman. Both versions of freedom included negative freedom and economic freedom as components; both maintained that a strong correlation exists between economic freedom and freedom in general; both had faith in the ability of economic freedom to achieve overall freedom; and both argued that economic freedom not only generates economic prosperity, efficiency and growth, but that it also guarantees a higher level of freedom in all areas. Any restrictions placed upon economic freedom, therefore, would adversely impact freedom in general.

4.1 Negative Concept of Freedom Hayek (1960, 19) defined freedom as the ‘absence of a particular obstacle [or] coercion by other men.’ Similarly, Friedman’s (1962, 15) concept of freedom entails the ‘absence of coercion of a man by his fellow men.’ They believed that freedom requires the absence of coercion by other men, which can refer to the State, individuals or other agents. This key component of their respective concepts of freedom was labelled

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negative freedom (or ‘freedom from’) by Sir Isaiah Berlin (1909–1997) in his Four Essays on Liberty (1969). Although Friedman and Hayek did not mention Berlin’s theoretical work nor did they specifically refer to the negative concept of freedom by name, this is precisely what they so strongly advocated and defended in their work. Negative freedom is often compared to positive freedom (‘freedom to’), which requires, among other things, rationality, self-determination and self-realization on the part of agents.11 The origins of the negative concept of liberty can be traced back to libertarian political philosophers such as Hobbes and Locke (England), and Constant and Tocqueville (France). Meanwhile, the origins of the positive concept of liberty are associated with Rousseau, Hegel and Marx (Berlin 1969, 123–124). In the twentieth century, however, both positive freedom and negative freedom became primarily associated with the writings of Berlin, who claimed that they were ‘two major conceptions of liberty in the history of ideas’ (Gray 1984, 325).

4.1.1 Berlin on Negative and Positive Freedom Berlin (1969, 121–122, 130) argued that negative freedom is related to answering the question, ‘What is the area within which the subject – a person or group of persons – is or should be left to do or be what he is able to do or be, without interference by other persons?’ Meanwhile, positive freedom is concerned with determining, ‘What, or, who is the source of control or interference that can determine someone to do, or to be, this rather than that?’ In other words, the main difference between positive freedom and negative freedom pertains to the fact that the former tries to answer ‘By whom am I ruled?’ whereas the latter attempts to determine ‘What am I free to do or to be?’ Negative liberty does not concern itself with identifying the ruler or master; instead, it focuses on what people are ‘free to do or be.’12 In contrast to negative liberty, Berlin (1969, 131, 134) argued that positive freedom is based on personal autonomy, ‘self-mastery,’ ‘self-direction,’ ‘self-realization’ and rational self-determination; as such, it is more likely to be identified with moral and ethical values.13

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Positive freedom also involves ‘bearing responsibility for my choices,’ and being ‘able to explain them by references to my own ideas and purposes.’ Berlin also admitted that the concept of positive freedom can be problematic for two key reasons. First, positive freedom has the potential to engender coercion and despotism. Unlike negative freedom, rulers are able to justify the necessity of intervention and coercion for the purpose of achieving and ensuring the conditions required to achieve positive freedom.14 In other words, based on positive freedom, the ruler is permitted to establish institutions and shape the actions of individuals in order to achieve the conditions of autonomy and self-realization. Berlin (1969, 131–133, 136–137, 153) warned that such types of intervention on the part of the ruler would restrict freedom, because he is imposing his will on individuals, which creates the potential for the emergence of despotism, paternalism and authoritarianism. He was further concerned that interference on the part of rulers would allow them to ‘oppress’ and ‘torture’ individuals in the name of achieving the conditions of positive freedom so as to realize the common good of society. Individuals could not experience anything worse than having the coercive power of the ruler treat them as though they were mere tools for the achievement of the common good, which means they would be unable to utilize their individual wills in order to determine their own goals and ends. Even if the ruler genuinely sought to achieve the conditions of autonomy and self-realization for the ruled, Berlin (1969, 137, 140, 150–151) emphasized that ‘every dictator, inquisitor, and bully who seeks some moral, or even aesthetic, justification for his conduct’ claims to impose his ‘creative will’ in order to improve the lives of others. In other words, ‘every dictator, inquisitor, and bully’ feels that he ‘must do for men (or with them) what they cannot do for themselves…because they are in no condition to know what is best for them.’ Thus, Berlin concluded that interference aimed at achieving the conditions of positive freedom on the part of rulers degrades man and denies him the essence of what it is to be human. The second problematic aspect of positive freedom identified by Berlin was its potential to eliminate diversity. He was concerned that imposing rational self-determination on everyone meant that the whole

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society would need to accept a single pattern (rationality) in order to make their choices of action. Since all individuals are not rational, the ruler would need to oppress and coerce some citizens into obeying his rational decisions. As a result, the diversity of individual desires, wishes, values and goals would be reduced, as those deemed irrational would ultimately be eliminated. Berlin defended negative freedom because, unlike the positive concept of freedom, it is based on the absence of coercion and interference, which prevents rulers from oppressing their citizens. Based on negative freedom, people are free so long as they are left alone to pursue their particular goals and ends as they see fit, without having anyone dictate or coerce them as to how they should live their lives or attain their objectives. Berlin (1969, 122) emphasized that coercion involves the ‘deliberate interference of other human beings within the area in which I could otherwise act.’ However, his definition does not include instances of individuals being unable to achieve their particular goals and ends on account of a lack of capacity, which is more related to poverty or poor health than coercion. That means Berlin did not feel that wealth and income should play a significant role in ‘our assessment of the magnitude of freedom’ (Gray 1984, 334). In other words, freedom is independent of an individual’s lack of capacity or opportunities attributable to poor health or low levels of wealth and income. Berlin (1969, 123, 125, 129–130, 167) warned against confusing a lack of freedom with social norms, economic conditions or other established values like political equality, peace, fairness, welfare, justice and happiness. Defenders of positive freedom frequently make the mistake of regarding the achievement of happiness, justice or economic equality as being equivalent to freedom. Negative freedom—compared to positive freedom—provides ‘the wider the area of non-interference,’ which translates into a greater degree of freedom.

4.1.2 Friedman and Hayek on Negative and Positive Freedom Although Friedman and Hayek did not specifically refer to Berlin’s work on freedom, they both defended and promoted the negative concept of freedom and rejected positive freedom, as defined by Berlin.

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Like Berlin, both Friedman and Hayek argue that it is not who governs that matters most in the achievement of freedom, but what the government is permitted to do. Friedman and Hayek also consistently argued that people are free so long as they are left alone to make their own decisions and choices in the pursuit of their goals, independent of interference from the wills of another man, the State or any other external authority. They also argued that any form of coercive power, be it a tyrant, monarch, dictator or oligarchy, represented an enemy of freedom because each of them would inevitably implement obstacles to its achievement. Paralleling Berlin’s ideas, they both regarded interference and coercion as key factors that inhibit freedom, because they conflict with individual free choice and prevent people from determining and achieving their particular goals and decisions. Friedman and Hayek agreed that the wider the areas of non-interference, the more choices that people have available to them, translating into a greater degree of freedom. Hayek explained that any form of interference by an external authority in the private sphere of an individual represents a key factor in their lack of freedom, as it prevents them from using their own intelligence, conscience and knowledge; this is true even in the event that the interference is in the form of non-violent coercion. Like Berlin, Hayek (1960, 21) maintained that an individual is coerced each time he makes a decision or choice in his private sphere without relying upon ‘his own intelligence or knowledge’ or without adhering to ‘his own aims and beliefs,’ but instead follows the will and the ends of the external authority. Hayek’s rationale was that every time an individual is forced to choose actions that help achieve the ends of the external authority, these individuals are being coerced into accepting the will of the coercer, thereby eliminating individual will from their choice of action. Hayek was concerned that the process of achieving positive freedom, whether it be via violent or non-violent coercion, would lead to individuals losing their freedom; he also worried that these individuals would not even realize that their freedom had been taken away. Hayek cited the generic example of a State attempting to manipulate its citizens through propaganda techniques in order ‘to convince them that the goals of the central authority are identical with their own’ (Hoy 1984, 41). For instance, the State authority may choose to impose laws

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requiring the redistribution of wealth and income in order to achieve the conditions of positive freedom, which would facilitate the attainment of the common good and improve the welfare of the society as a whole. People obey the laws of the ruler, and because they feel as though they have freely accepted and consciously imposed these restrictions upon themselves, they might not realize that they have been oppressed or enslaved by them. By following this course of action, the ruler will likely feel as though he has made his subjects feel free, because he has chosen to do what was best for them or, to put it another way, prevented them from doing what is wrong. Hayek argued that even though individuals may feel as though they have made their own choices under such a scenario of State intervention, it is important to note that their final decisions were those that the State encouraged them to make in order to achieve the conditions of positive freedom. The acceptance of such interference on the part of the State authority, even if it is done under the auspices of achieving positive freedom and the common good, represents a real threat to freedom, because the mind of an individual is being manipulated and made into a tool to be utilized by the government. Like Berlin, Friedman and Hayek argued that defenders of non-violent State intervention designed to achieve positive freedom often confused the absence of freedom with a lack of economic resources, equality, opportunities, fairness, welfare, justice, etc. While Hayek did accept the notion that a lack of economic prosperity could be a sign of incapacity, he did not regard it as an obstacle to freedom. Rather, he argued that even if a human being is not able to fully utilize freedom on account of inadequate social, economic or health conditions, the value of freedom remains the same for all members of society, from the poorest and least educated segment of the population all the way up to the richest and most educated citizens. Similarly, Friedman believed that poverty or a lack of economic resources had nothing to do with a lack of freedom. Therefore, contrary to the defenders of the positive concept of freedom, Friedman and Hayek regarded any State laws requiring the redistribution of wealth and income for the purpose of achieving fairness, welfare and justice, as real threats to the achievement of individual freedom.

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Another reason for Hayek’s rejection of State interference and coercion for the purpose of achieving positive freedom and the common good pertains to diversity: State interference would eliminate diversity by preventing the free development of an individual’s intellect, skills and capacity. Friedman (1962, 3–4) also thought that State interference would engender the homogenization of society by imposing ‘uniform standards,’ which represents a threat to the diversity of individuals’ actions. Like Hayek, Friedman regarded the elimination (or minimization) of State intervention as a key element in the achievement of freedom. Both believed that individuals should be capable of making choices or decisions within their private spheres, based on their own faculties, and without being subjected to coercion by the arbitrary will of another man or agent.

4.2 Friedman and Hayek on Economic Freedom Friedman claimed that ‘an essential part of economic freedom is freedom to choose how to use our income: how much to spend on ourselves and on what items; how much to save and in what form; how much to give away and to whom.’ He further included the ‘freedom to enter any occupation, engage in any business enterprise, buy from and sell to anyone else’ based on ‘our own values’ without any form of coercion or central planning. Therefore, economic freedom mandates that we use ‘the resources we possess in accordance with our own valuesfreedom to enter any occupation, engage in any business enterprise, buy from and sell to anyone else.’ Compliance with ‘free’ market economic principles was the best and most efficient way to organize ‘the activity of millions of people,’ where each individual pursues his ‘own interest in such a way as to make everybody better off.’ However, different branches of social and political life needed to adhere to this approach of organizing economic interactions if freedom was going to emerge. The economic approach, especially the theory of the invisible hand, could be applied to every action, relationship and interaction among individuals (Friedman and Friedman 1980, 13, 65–66).

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According to Hayek (2007, 127), economic freedom refers to the freedom to engage in economic activity within a ‘free’ marketplace, where ‘if one person refuses to satisfy our wishes, we can turn to another.’ Like Friedman, he argued that ‘economic freedom’ was ‘the prerequisite of any other form of freedom’ (Hayek 1994, 110). Both were convinced that the ‘free’ market economy could coordinate the activities of millions of people through voluntary exchanges in the marketplace without the need to deliberately plan, predict, calculate or change the values, rules, customs, ends and goals of individuals. This is because the ‘free’ market creates an environment where individuals are able to establish and alter their objectives and goals without the need for external planning on the part of an authority.

4.2.1 Economic Freedom and Voluntary Exchange Friedman and Hayek claimed that economic freedom necessitates that society is organized on the basis of a system of voluntary exchange, where transactions occur only if each of the actors involved accrues some kind of benefit. The pursuit of individual interests would maximize the interests of society as a whole in a more efficient manner than the alternative of each individual citizen attempting to support societal goals and ends directly. According to Friedman (1962, 24), the broader the number of ‘activities’ that are realized based on the voluntary cooperation principle of the marketplace within the social and political realms, ‘the fewer are the issues on which explicitly political decisions are required.’ People could engage in cooperation based on ‘voluntary interaction’ in ‘any discipline’ (‘physics, chemistry, meteorology, philosophy, humanities, economics,’ language, music, etc.) as though they are operating within a marketplace.15 The trading of ‘ideas,’ ‘information’ and ‘gossip’ takes place in similar manner as the exchange of ‘goods and commodities’ in a market, free from all forms of coercion. Furthermore, ‘a society’s values, its culture, its social conventions – all these develop in the same way, through voluntary exchange, spontaneous cooperation’ (Friedman and Friedman 1980, 25–27).

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Hayek shared Friedman’s opinions about voluntary cooperation. Hayek believed that progress in different areas of human life, including the legal system, language and moral values, was the product of unplanned, undesigned and uncalculated human actions. Deliberately planned and calculated projects would impose patterns, values, rules and laws, which would disturb the self-regulating and self-organizing aspects of society. Such projects have the potential to disrupt the voluntary cooperation that exists between individuals within ‘free’ market capitalism. Friedman and Hayek argued that voluntary cooperation and collaboration between buyers and sellers in the marketplace did not require the existence of any personal, moral or ethical relationships between them. Any relationship established in a ‘free’ market is individualistic, formal, instrumental and impersonal. Buyers have no interest in knowing where, how and under what circumstances sellers obtained their goods and brought them to market and, similarly, sellers are not concerned with where and how buyers made the money spent on their products. Such issues are wholly irrelevant to the economic freedom that characterizes the ‘free’ market, where the pursuit of individual interests by each person is far more important. Friedman explained that individuals achieve their personal goals and ends by choosing the option that effectively maximizes their self-interests subject to their resource constraints. The objective of obtaining an individual benefit lies behind every effort made by people to take risks, work hard, save, cooperate and improve their lives. The benefit in question can come in the form of monetary gain, a special reward, ‘the esteem or approval of fellow scholars,’ or personal pleasure and satisfaction (Friedman and Friedman 1980, 23–24, 26). Friedman and Hayek promoted the self-interest maximization, instrumentalism and individualism assumptions of neoclassical economics as more than mere tools to be used for economic modelling, the analysis of economic indicators or the development of government and business policies.16 In doing so, they made it abundantly clear that instrumentalism and individualism could be applied to every action, relationship and interaction among individuals. Friedman argued that each individual is an atomistic decision maker—they behave according

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to their own interests and personal advantages when interacting with others. The individualism assumption states that each individual behaves like an economic agent (individual producer, labourer, consumer or investor) that aims to achieve his or her specific ends, goals and wants in all aspects of their lives. If each individual member of society pursues their own interests, then society as a whole will attain economic prosperity and freedom. Hayek (1994, 17, 66) defended the individualism associated with liberalism against the supporters of collectivist systems, claiming that the ‘individual’ has to be ‘the ultimate judge of his ends.’17 However, he also made it clear that individualism did not entail being egotistical or selfish, even though individuals’ selfish or altruistic goals and ends motivated them to exchange or barter the fruits of their labour in the marketplace.18 He did not believe that individuals always acted as economic agents seeking to maximize their self-interests in every situation. Rather, he argued that individualism is basically ‘the respect for the individual man…, the recognition of his own views and tastes as supreme in his own sphere.’ Hayek also stressed the importance of individuals taking responsibility for their behaviour and accepting the consequences of their own actions. Nonetheless, Hayek was still aware that individuals were dependent upon society and social relationships for the achievement of their specific interests, goals and ends. The fact that Friedman and Hayek regarded human beings as individualistic self-interest maximizers is significant, because it means that their respective ideas of freedom did not value universal or common goals, wills and ends. The idea that individuals are self-interest maximizing entities has been promoted and defended by mainstream economists and academics, the elite business class and influential politicians around the world.

4.2.2 Economic Freedom and Private Property During the Cold War, the benefits associated with private property ownership were often highlighted in order to demonstrate the superiority of capitalism over socialist regimes, where State ownership and

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central planning were prevalent. Friedman and Hayek maintained that socialist and communist systems were inefficient in coordinating individual economic activities, on account of the abolition of private property rights. Friedman and Hayek argued that private property ownership, which necessitates a mutual recognition of property rights, is the foundation for voluntary exchange and freedom. According to Hayek (2007, 136; 2011, 207), the right to private property represents ‘the most important guaranty of freedom, not only for those who own property, but scarcely less for those who do not.’ He also believed that the ‘recognition of private or several property is thus an essential condition for the prevention of coercion.’ Similarly, Friedman maintained that the ‘freedom to own property’ is a necessary component of economic freedom. This is because the recognition of property rights permits individuals to choose how to use their income and bargain voluntarily in order to determine the exchange value of commodities, which allows both buyers and sellers to ‘peacefully’ realize their individual choices and goals at the conclusion of their transaction. Private property rights also allow individuals to decide ‘how much to save and in what form; how much to give away and to whom’ (Friedman and Friedman 1980, 13, 65, 67). That means the right to private property ownership makes it possible to achieve ‘free’ economic activity within the marketplace.

5 The Role of the State Friedman and Hayek criticized the increasing role of the State in the USA after the Great Depression of the 1930s, the emergence of a social democratic Welfare State in England and the centrally planned economies of the Cold War.19 Friedman argued that the US approach of remedying the Great Depression via active State intervention in the form of programmes like social security, ‘unemployment insurance,’ ‘public assistance’ and ‘minimum wages’ was akin to what may have been done in Otto von Bismarck’s Germany. During World War II, the role of the State was gradually expanded into many different aspects of economic

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life in the USA, including the ‘fixing of prices and wages by edict, rationing of consumer goods, prohibition of production of some civilian goods, allocation of raw materials and finished products, control of imports and exports.’ After the War concluded, the State role continued to expand into the provision of welfare programmes like Medicare, Medicaid, food stamps and ‘numerous other programs’ (Friedman and Friedman 1980, 93–96). Friedman’s concept of freedom and the development of his economic theories seem to have been influenced by his opposition to this shift in the role of the State that transpired since the Great Depression. Like Friedman, Hayek defended ‘free’ market capitalism against socialist forces and movements in The Constitution of Liberty and The Road to Serfdom, where he argued that an expanded State role would eventually lead to some form of centrally planned regime such as fascism, Nazism or communism. These socialist forces were based on the promise of collectivism, a great increase in material wealth, and the equal distribution of wealth. Hayek (1994, 6, 11–12) argued that the catastrophic outcomes caused by fascism, Nazism and communism, all of which entailed the death of liberalism and the ‘prevalence of socialist views,’ could be avoided or ‘prevented,’ so long as society and the people that comprised it were able to recognize these movements and forces ‘in time’ and understand where they ‘may lead.’ Hayek (1960, 244; 1994, 2, 6, 16) warned that the fascist forces that ruined freedom in Germany were not unique attributes of German society; they could exist anywhere. These concerns were primarily aimed at England and the USA following the Great Depression period of the 1930s. The governments of the USA and England were expanding the ‘powers of administrative agencies over the private life and property of citizens.’ Such extensions of various forms of State power into the private spheres of citizens as indications that those two nations were heading towards socialism. He was extremely alarmed by the presence of such socialist forces in two prominent western democracies, not only on account of the fact that they could disturb the ‘spontaneous order,’ but also because they were precisely the same ‘forces’ that led to the ‘rise of fascism and Nazism’ and communism, which represented regressions in western civilization. If the USA and England continued on this trajectory, they could eventually experience the emergence of serfdom.

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Hayek (1967, 226) did not believe that these situations in the USA and England constituted an ‘immediate’ danger, because they were very different compared to what transpired in Germany. Nonetheless, he advocated for diligence in identifying the warning signs of these dangers well before advancing on the long road to repeating the errors of Germany. Even though many of the supporters of socialist forces in the USA and England valued the ‘liberal ideal of freedom,’ they needed to understand that the achievement of their social, political and economic programmes would produce ‘unforeseen but inevitable consequences,’ as those programmes would engender a ‘state of affairs in which, if the policy is to be pursued, totalitarian forces will get the upper hand’ and would destroy freedom. A key rationale for Hayek’s (1994, 12) warnings about the presence of socialist forces in the USA and England was that totalitarianism did not occur over a short period of time. It was ‘at least twenty-five years before the spectre of totalitarianism became a real threat, we had progressively been moving away from the basic ideas on which European civilisation has been built,’ including the principles of economic and individual freedom. In The Road to Serfdom, Hayek identified the warning signs evident in Germany, Italy and Russia in order to understand the developments that produced totalitarianism. The various forms of collective, rational and conscious control that existed in these three countries advanced the destruction of western civilization and liberalism. Although Germany, Italy and Russia had different forms of collectivism, they all aimed to organize society, particularly its wealth and resources, in a manner that would allow for the achievement of teleological goals and ends without recognizing the particular goals and ends of individuals. Hayek opposed any form of State intervention designed to achieve material, intellectual and physical happiness and perfection. Any State interference that attempts to intervene in the private spheres of individuals would produce greater harm than benefit in terms of achieving freedom. Any State that aims to improve the institutional framework by imposing specific moral values in order to achieve the good life or common good for its citizens represents a danger for the free development of the soul and capacities of individuals; this approach would actually reduce spontaneous actions by individuals and generally weaken the progress made by civilized societies. Instead, in order to have freedom, it

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was necessary to limit State actions in the private spheres of individuals and within society in general. This would allow citizens to freely choose the actions that will shape their lives and develop their own faculties, skills, intellects and characters. Friedman and Hayek defended the negative role of the State. They both believed that programmes and policies aimed at achieving an equality of outcome engendered increasing bureaucracy, the concentration of power in political hands, corruption, inefficiency, unproductivity, wastefulness and a loss of freedom. Friedman (1962, 2) argued that the State is neither a ‘master’ nor a ‘god to be blindly worshipped and served.’ A free person would not accept concepts like universal or common ends, or the will of the State or Nation, because such an individual is very concerned about his own interests and freedom and would do all in their power to prevent the State from destroying that freedom. Therefore, in order to prevent the government from violating freedom, Friedman and Hayek proposed a very limited role for State action. Friedman (1962, 3) concluded that the limitation of State ‘power’ was not only necessary to secure freedom, but also to allow for ‘advances of civilisation’ and progress in many areas including the arts, ‘science,’ ‘literature,’ ‘agriculture’ and ‘industry.’ Similarly, Hayek (1960, 23–24) argued that the advancement of civilization and its institutions requires limiting the role of the State, because such advances are outcomes of spontaneous, unplanned, accidental and unpredictable events and developments that occurred throughout human history.

5.1 Totalitarian Regimes Friedman and Hayek formulated concepts of freedom that were derived from ‘free’ market capitalism. However, while Hayek’s work on the subject of freedom often examined many different types of totalitarian regimes, including fascism and socialism, the Cold War led Friedman to limit his discussions to socialist regimes.20 On the matter of totalitarian regimes (centrally planned economies or the ‘command economy’), Friedman and Hayek argued that the State uses its coercive power to impose various restrictions, which involve forcing individuals to obey

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its dictates in different phases of social and economic life instead of pursuing their individual goals and ends. Centrally planned systems impose uniform patterns and standards for the purpose of regulating the choices and activities of people in order to achieve common goals. Friedman (1981a, 5, 7) explained that the ‘central authority’ in the Soviet Union and China determined what individuals were supposed to produce, buy and sell without obtaining any input from the people as to their actual needs, desires or goals. As a result, these centrally planned systems lowered living standards, represented an obstacle to both economic efficiency and economic freedom, and could not avoid influencing ‘freedom in general.’ Like Friedman, Hayek (1994, 78) argued that a centrally planned economy (or ‘command economy’) requires teleological evaluations of ends and goals in order to achieve collectivism. As a result, central planning eliminates the ability of an individual to behave in accordance with their will, which is effectively replaced by the will of a superior power coordinating the activities of all individuals under its sphere of influence. Centrally planned systems establish teleological goals and ends that would control, regulate or plan different aspects of social, political and economic life within a society. The achievement of such goals and ends would involve constant planning and deliberative regulation by the State, which would require the possession of perfect information (or knowledge) and incredible coercive powers. In this case, the State would be able to organize the economy, its politics and the activities of society as a whole ‘according to a single’ and conscious ‘plan’ through the limitation and/or suppression of individual freedom. This sort of deliberate regulation and planning of social, political and economic life would eventually lead to ‘dictatorship because dictatorship is the most effective instrument of coercion and the enforcement of ideals, as such, essential if central planning on a large scale is to be possible.’

5.2 Welfare States Even though Friedman and Hayek were adamantly opposed to totalitarian regimes, they did not regard them as the only legitimate threats

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to freedom. They were also highly critical of the paternalism of Welfare States and argued against extending the role of the State within the social and economic arenas for the purpose of ensuring distributive justice. They denounced the authority of the Welfare State as an enemy of freedom. Friedman argued that any programme or policy aimed at achieving the ‘equality of outcome’ is ‘antithetical to liberty.’ This includes the collection of taxes in the name of security and equality because, despite the fact that these funds are used to provide citizens with social programmes like public assistance, education, health care, unemployment insurance, housing subsidies and infrastructure, individual freedom is reduced when people are forced to involuntarily hand over their money in order to finance programmes for the benefit of others. He also highlighted the fact that those people who initially refuse to pay their taxes because they do not agree with State’s conception of fairness will eventually be coerced into accepting the situation. Furthermore, Friedman argued that Welfare States inevitably lead some people to behave irresponsibly, become dependent on government assistance, lose their freedom or experience some combination of the three. In fact, he argued that individuals should not be concerned about what the State can provide for them; instead, they should be worried about achieving their individual goals and ends, and protecting their freedom from the State’s political power (Friedman and Friedman 1980, 135, 140). Hayek rejected Welfare States that aim to provide equality of opportunity, which would require that all individuals start their lives at similar levels in terms of material and social status. Poverty or a lack of economic resources had nothing to do with a lack of freedom. The unequal distribution of wealth and income resulting from the ‘free’ marketplace did not constitute an obstacle to the achievement of freedom. Therefore, he did not regard economic inequality within a society as an outcome of ‘injustice,’ but rather as the product of ‘misfortune’ (Plant 1994, 165). He often argued that distributive justice is meaningless and unjust in the context of ‘free’ market capitalism, as it requires the State to treat its citizens unequally (Hoy 1984, 49). The achievement of distributive justice meant that ‘people who differ greatly in strength, intelligence, skill, knowledge and perseverance’ had to be treated accordingly

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by the State. Thus, Hayek (1976, 82, 97) claimed that the defenders of distributive justice were arguing that the State should provide benefits to some people (i.e. the disadvantaged and deficient), while preventing others from reaching a particular state of affairs. While disadvantaged and deficient people might be dealt with based on uniform rules and laws that ensure equality and justice, others may need to be treated unequally by the arbitrary powers of the State. Distributive justice had nothing to do with ‘an innocent expression of good will towards the less fortunate, but that it has become a dishonest insinuation that one ought to agree to a demand of some special interest which can give no real reason for it.’ Hayek (1960, 289) was also highly critical of the paternalism associated with the ‘social democratic welfare state’ and argued against extending the role of the State within the social and economic arenas for the purpose of ensuring distributive justice and greater equality. Defenders of distributive justice supported various types of social and economic programmes and services because they viewed them as an ‘efficient method of providing for the specially needy’: ‘[f ]ree choice of occupation and free decision by each of what he wants to produce or what services he wants to render are irreconcilable with distributive justice.’ Distributive justice is not only irreconcilable with ‘freedom of action but also with freedom of opinion,’ because it ‘requires that all men are made to serve a unitary hierarchy of values’: ‘[d]istributive justice…demands not only personal unfreedom but the enforcement of an indisputable hierarchy of values, in other words, a strictly totalitarian regime.’ Distributive justice has ‘meaning only within an organization whose members act under command in the service of a common system of ends, but can have no meaning whatever in a…spontaneous order which can have no such common system of ends.’ It is not the State’s business to ensure equality and justice based on the distribution of wealth and income. Hayek (1967, 170, 258) argued that justice had nothing to do with ‘the protection of vested interests and the creation of new privileges,’ meaning that differences in people’s incomes, levels of success, efforts and choices cannot be interpreted as just or unjust. Hayek argued that attempts to equalize people’s abilities via State interference would inevitably fail because individuals were different and

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unequal by ‘nature’ and through ‘nurture’ (Miller 2010, 78). Individuals inherit different capacities and talents by nature and receive different types of education and treatment from their families and environment and by nurture; when taken together, these factors engender differences in their capacities, skills, incomes, wealth, goals and objectives. Hayek (1960, 85) claimed that liberty had nothing to do with achieving equality in people’s skills, capacities, incomes and wealth, stating that ‘not only has liberty nothing to do with any other sort of equality, but it is even bound to produce inequality in many respects.’ Therefore, he regarded the inequality of income and wealth as important aspects of free societies and freedom in general.21 In addition to the existence of misfortune and inequality, Hayek explained that the failure to achieve one’s particular goals and ends, as well as the frustrations associated with being unable to do so, are typical elements of a free society. Numerous factors could account for such a failure including conflict of interest, a lack of knowledge and changes within a society and its environment. Those factors play a significant role in the subsequent decisions on the part of individuals to alter their particular goals and ends in a free society. Individuals may need to use their knowledge of particular situations and conditions to alter their actions by making many minuscule and immediate decisions aimed at achieving their particular goals and ends. However, Hayek was also clear that the State should never alter an established course of action being pursued in the name of distributive justice or greater equality for the purpose of accommodating the frustrations and failures of those individuals that were unable to achieve their particular goals and ends. Free individuals are fully capable of evaluating their own failures within their dispersed knowledge and, as a result, are able to abandon ‘false means’ in favour of adopting new ones so as to achieve their particular goals and ends.22 Hayek (1967, 233) argued that individuals should use their dispersed knowledge, skills and capacities; an individual’s ‘material reward should not be determined by the opinion of his fellows of his moral merits but by the value which they attach to the particular services he renders them.’ One of the ‘great merits of a free society that material reward is not dependent on whether the majority of our fellows like or esteem us personally.’

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In his arguments against distributive justice, Hayek (1976, 108) concluded that since the State or any person cannot possess accurate information about the particular aims, dispersed knowledge, skills and capacities of individuals, it is impossible for a central authority (i.e. social ‘engineer’ or planner) to coordinate the activities of millions of individuals for the purpose of achieving the common goals and ends of the State.23 Rather, individuals possess different goals and ends, as well as distinct conceptions of welfare and justice that cannot be reduced to a single definition of common good by the State authority. The multiple ends of millions of people cannot be organized according to the achievement of distributive justice based on the adoption of a single ‘common ethical code’ by the central conscious planning authority. Hayek (1960, 78) recognized that concern and moral obligation for the ‘welfare of our family’ associates and friends is an ‘essential part of freedom’ that cannot disappear in an open society. However, he rejected the idea of instilling individuals with a sense of moral and ethical obligation for their respective communities through coercion on the part of commanders. Hayek (1976, 89) emphasized the point that ‘moral obligations towards some can never become enforced duties in a system of freedom under the law.’ Achieving the common good (i.e. distributive justice) should not require the imposition of duties by way of the State authority. Achieving social justice through State authority, as is done in Welfare States and under socialist systems, forces a large number of individuals to help strangers without being able to witness the direct consequences of their actions. Hayek (1960, 78–79) rejected ‘general altruism’ and argued that ‘nobody can effectively care for other people as such; responsibilities we can assume must always be particular.’ Contrary to the supporters of socialist systems or Welfare States, Friedman and Hayek maintained that market order provides individuals with multiple opportunities to achieve their particular goals and ends by generating different circumstances and spontaneous forces within society. Their analyses of the relationship between justice, income and wealth distribution led them to reject any form of State interference aimed at ensuring distributive justice.

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5.3 Friedman and Hayek on the Positive Role of the State Although Friedman and Hayek were highly critical of State interference within society, they did not argue that the State served no purpose whatsoever in societal affairs. For instance, they favoured some degree of State involvement in facilitating a favourable environment in which the ‘free’ market economy could properly operate. They also acknowledged that the State needs to play an important role in guaranteeing security against enemies, particularly in the case of war. Friedman (1962, 28) thought the government could facilitate voluntary exchange by establishing a legal framework that would promote competitive markets and protect property rights and individual freedom from the coercive powers of other people. The State could also play a role in combatting ‘monopoly’ and ‘neighbourhood effects’ (or externalities) by implementing measures like taxes and quotas (Friedman and Friedman 1980, 29–30). Friedman (1962, 2, 34) also believed the government should intervene in issues of national defence and in the event of a war (‘military and police forces’). The government has a responsibility to defend the freedom of its citizens against an invasion or other forms of violence perpetrated by foreign forces. However, strict limits need to be placed on the coercive powers of the State so that the ability of its citizens to achieve freedom is not obstructed, even in extreme cases where the security and sovereignty of the nation are imperilled by foreign or internal threats. In the absence of such forms of State ‘protection we are not really free to choose’ (Friedman and Friedman 1980, 29). Hayek (1976, 87) supported an ‘assured or guaranteed minimum income’ in cases of people in ‘extreme misfortune’ who are ‘unable to earn in the market an adequate maintenance.’ A guaranteed minimum income does not ‘lead to a restriction of freedom, or conflict with the Rule of Law’; rather, it provides people with their basic needs and an opportunity to be part of the marketplace, which would be in ‘the interest of all.’ Hayek argued that there is ‘no reason why in a free society government should not assure to all protection against severe

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deprivation in the form of an assured minimum income, or a floor below which nobody needs to descend.’ He further argued that the ‘assurance of a certain minimum income for everyone, or a sort of floor below which nobody need fall even when he is unable to provide for himself, appears not only to be a wholly legitimate protection against a risk common to all, but a necessary part of the Great Society in which the individual no longer has specific claims on the members of the particular small group into which he was born.’ Hayek (1979, 41, 55) concluded that it is ‘unquestionable that in an advanced society government ought to use its power of raising funds by taxation to provide a number of services which for various reasons cannot be provided, or cannot be provided adequately, by the market.’ Hayek also thought that the State should play a significant role in the construction and maintenance of public infrastructure like roads, the provision of national defence in cases of invasion or violence by foreign forces, and the implementation of policies to secure the conditions of freedom within society. The coercive powers exercised under such circumstances (i.e. violence or injustice from foreign enemies or members of society against their fellow citizens) need to be limited and should never represent a threat to the achievement of freedom. Additionally, he supported State intervention in the case of natural disasters, as the market system would not be able to supply the economy at such times. Hayek (2011, 500–506) also advocated the public financing of education, because some people may not have the ability to pay for this essential service. However, he simultaneously rejected the indoctrination of a common or single set of values through the education system, as this would constitute a threat to diversity. Although Friedman and Hayek agreed that the State needs to play an instrumental role in society under certain circumstances, Hayek’s views on the role of the State were more ambiguous than those of Friedman. Much like the British empiricists and contrary to Friedman, Hayek (1960, 60, 259) never argued in favour of a ‘complete laissez-faire’ approach; instead, he tended to distance himself from extreme laissez-faire supporters, primarily the libertarians, and called for the ‘proper functions of the state and for the limits of state action.’ While Hayek

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was opposed to the concept of a modern Welfare State, he did permit the government to play a role in establishing a minimum safety net for certain necessities, provided that this was done ‘without detriment to individual freedom.’ Ultimately, despite the fact that Hayek attributed a more active role for the State in the social arena than Friedman, he was just as opposed to the idea that the State could be more efficient than individuals in improving societal welfare. Nevertheless, even in spite of these differences, Friedman and Hayek did not attribute a great deal of importance to the role of the State and its institutions in the protection and promotion of the conditions of positive freedom.

5.3.1 Double Standards on the Role of the State Friedman and Hayek consistently defended a limited State role in securing freedom and the private spheres of individuals. Interestingly, however, they contradicted many of their oft-repeated views and values by defending what become known as the ‘free market miracle’ in Chile after the democratically elected government of Salvador Allende was overthrown in a military coup by General Augusto Pinochet in 1973.24 Hayek did not condemn the human rights abuses or coercive practices carried out during the Pinochet dictatorship. Friedman visited Chile in 1975, just two years after the coup d’état; ‘during his visit Friedman had a forty-five minute meeting with Pinochet in which he recommended a dramatic decrease in the rate of the increase of the money supply to get inflation under control. Friedman later sent Pinochet a letter in which he outlined this and other policies’ (Caldwell and Montes 2014a, 16; 2014b, 2015, 274).25 Pinochet responded to this letter and confirmed that he did indeed follow Friedman’s advice: The valuable approaches and appraisals drawn from an analysis of the text of your letter coincide for the most part with the national Recovery Plan proposed by the Secretary of the Treasury, Mr. Jorge Cauas. The Plan is being fully applied at the present time - a plan for which we have high expectations of advancing the Chilean economy. (Friedman and Friedman 1998, 594)

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In an interview with El Mercurio, Friedman (23 March 1975) addressed the costs associated with transitioning to a ‘free’ market economy under Pinochet’s dictatorship: Undoubtedly there are costs. But unfortunately there is no other alternative. Anyway, I believe that the current situation is better than 18 months ago [the end of Allende’s government]. Possibly it could have improved more, but when the patient is ill, there is no easy solution. The oxygen, in this case, would worsen up the patient instead of curing him. The policy of a palliative instead of amputating the sick parts entails the danger of a final cost more critical that the one avoided. The alternative that Chile faces, in my view, is a high unemployment rate for a short or long period. When one is ill, you can only choose between a major or minor evil.

Hayek was officially invited to Chile to ‘give a lecture and receive an honorary degree’ on 12 May 1977 from ‘Juan Naylor, the Rector of Universidad Técnica Federico Santa María.’ He was also invited to personally meet with Pinochet during this visit, as well as other government officials and ‘elite members of the Chilean society who were gracious hosts and were active supporters of the military regime’ (Caldwell and Montes 2014a, 18, 52; 2014b, 2015, 276, 305). Hayek described all of them as ‘educated, reasonable, and insightful men’ (cited by Robin 2013, 2015). Hayek (26 July 1978) told readers of The Times: I have not been able to find a single person even in much maligned Chile who did not agree that personal freedom was much greater under Pinochet than it had been under Allende.26

During a subsequent visit to Chile in 1981, Hayek stated: As long-term institutions, I am totally against dictatorship. But a dictatorship may be necessary system for a transitional period. At times it is necessary for a country to have, for a time, some form or other of dictatorial power. As you will understand, it is possible for a dictator to govern in a liberal way.27

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Hayek sent his Constitution of Liberty to the Portuguese dictator (1932– 1968), António de Oliveira Salazar, in the hope that it might assist the dictator ‘in his endeavour to design a constitution which is proof against the abuses of democracy’ (Ebenstein 2003, 300; Fisher 2009, 327; Robin 2013, 2015; Farrant et al. 2012, 521). Hayek argued that there had been more personal liberty…under Salazar’s early government in Portugal than under the ‘democracies’ of Eastern Europe, Africa, and much of South America. (Cited by Caldwell and Montes 2014a, 27; 2014b, 2015, 283)

Friedman and Hayek consistently opposed State interference aimed at achieving the conditions of positive freedom in their respective discourses, because they regarded such actions as forms of coercion. Hayek also supported certain brutal and coercive regimes, provided that they defended the ‘free’ market.

6 The Rule of Law Despite the fact that Friedman and Hayek rejected State interference aimed at achieving the conditions for the positive concept of freedom, they emphasized the importance of the rule of law in establishing a frontier between the private sphere of the individual and the public authority. Friedman believed that State interference was justified provided that it prevented ‘any member of a civilized community’ from bringing ‘harm to others’ or limiting their freedom, and that it was done in accordance with the rule of law (Friedman and Friedman 1980, 2). It may be necessary to limit the freedom of some individuals via the system of law when their free actions are in ‘conflict’ with those of others (Friedman 1962, 26). In such circumstances, the government needs to act and establish order and the rule of law so as to ‘preserve’ everyone’s freedom and protect citizens from the coercive powers of other people (Friedman and Friedman 1980, 26, 29–30). Like Friedman, Hayek also attached great significance to the system of law, because he did not believe freedom referred to natural

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freedom or entailed following one’s desires, emotions, impulses and compulsions.28 He was aware that natural freedom would drive men towards social chaos—he proposed restrictions that would limit people’s actions and prohibit certain activities through a legal framework in order to prevent social chaos and coercion, while simultaneously retaining some degree of liberty. That is to say, he was advocating for the rule of law.29 Hayek used the expression ‘rule of law’ to describe a legal system based on predictable, known and universal rules that protect the private spheres of individuals from coercive powers. The ‘rule of law depicts what the law should be in a free society,’ as it embodies the ‘norms that govern behaviour’ (Caldwell 2004, 293). Hayek claimed that rules and laws represented the ‘framework’ of social life. Individuals are responsible for their actions and can achieve their particular goals and ends by acting in accordance with these rules and laws based on their own values, convictions and beliefs, uninhibited by interference on the part of external forces. Hayek maintained that while acting in accordance with rules and laws may place certain restraints and limits upon individuals, they are not coercive because rules and laws are ‘neutral as regards the ends of human action’ (Miller 2010, 104). Such restraints and limits would ensure that individuals do not harm the rights of their fellow citizens. Hayek viewed restraint as a condition of freedom, as opposed to an obstacle to the achievement of freedom. Individuals progressively learn to exercise self-restraint over their actions by respecting the rule of law, which is not equivalent to following the commands or orders of others. Hayek argued that the State itself should be the only entity to possess a monopoly of coercion in order to enforce rules of just conduct, thereby avoiding social chaos and preventing the coercion of one individual by another within a free society.30 He was aware that his defence of a monopoly of coercion by the State would engender various interpretations. For this reason, he stressed that while the State should be granted minimal coercive powers so that it can secure freedom, the State should simultaneously be expected to respect the rule of law. In other words, even though the State can intervene to establish a legal order within society for the purpose of securing well-defined property

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rights, individual rights (such as freedom of speech and association) and freedom, it is necessary to place limits on its power by means of a legal system, so that the State is prevented from transforming itself into a dictatorship. Therefore, Hayek maintained that the actions of the State need to be limited by predetermined, foreseeable and known rules; as long as the State respects the rule of law, its actions are legitimate. However, if the State did expand its role to the point that the rule of law was no longer respected, then the existence of a State monopoly of coercion would be in conflict with freedom. According to Hayek, this is basically the situation that emerged through the establishment of central economic planning within collectivist systems. Hayek (1994, 91) argued that the rule of law ceases to be a ‘safeguard’ and the ‘legal embodiment of freedom’ under the central economic planning of collectivist systems, because the State’s coercive powers are no longer ‘limited by pre-established rules.’ The rule of law requires the State to limit its political and economic actions by having fixed rules in place, which is not the case under the central economic planning that characterizes collectivist systems. Fixed rules prevent arbitrariness, because they are not products of arbitrary power, nor do they favour the interests of one particular individual or group of people over those of others.31 Therefore, as long as State interference is compatible with the rule of law, he thought, interference cannot be rejected (Hayek 1960, 221). Hayek argued that an open society could only exist under the premise that rules are abstract, general, negative and universal, as opposed to the notion that rules aim to achieve particular results and duties.32 The rule of law exists for the sole purpose of protecting the private spheres and freedoms of individuals. It does not concern itself with imposing positive duties or a particular kind of actions on anyone (i.e. implementing social policies to achieve an equal distribution of wealth and income). Known rules and laws pertaining to the role of the State and the actions of all members of society ensure that all individuals understand the range of actions permitted within their society. As a result, individuals would be able to predict the permissible actions of the State, in addition to those of their fellow citizens, allowing them to achieve social coordination and cooperation.

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Despite their emphasis on limiting State intervention, Friedman and Hayek agreed that the State needs to establish the rule of law in order to prevent the coercion of individuals by others and to secure individual rights and freedoms. Hayek (1960, 21, 144) argued that the main role of the State should be to prevent coercion by protecting the ‘private spheres of the individuals,’ including private property, and defending individual rights and freedom by maintaining the rule of law. The State itself should be the only entity to possess a monopoly of coercion, but that this power should be used to the minimal extent possible and its implementation needs to be based on predictable, ‘known rules’ and laws. However, aside from those few exceptions, Hayek maintained that ‘we should accept only the prevention of more severe coercion as the justification for the use of coercion by government.’

7 Conclusion Both Friedman and Hayek formulated conceptions of freedom that primarily revolve around the concepts of economic freedom and negative freedom. They often used the notion of economic freedom to defend their views pertaining to the superiority of ‘free’ market capitalism and the benefits of voluntary exchange. In so doing, they promoted neoclassical economic principles, individualism, utilitarianism and instrumentalism as more than mere assumptions used for economic modelling, conducting empirical analysis and implementing government and business policy. They regarded these principles as values that needed to be adhered to not only in the marketplace, but also within political and social life. This campaign led to the extensive use and application of the logic of voluntary exchange and rationalism to virtually every facet of life. Treating different aspects of social and political life as though they were business transactions encourages people to base their choices of action on selfish interest maximization principles. It would appear as though politics, enterprises, governments, interest groups, associations, universities, institutions, technology, the arts, scientific research and modern systems of justice and administration have all chosen to implement the assumption of neoclassical economics

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within their fields, causing them to become increasingly rationalized, just as Max Weber (1864–1920) had predicted in the early twentieth century. This situation represents a threat to the ability of individuals to lead free and autonomous lives, because it does not allow for them to establish their own goals and ends based on their own thoughts, reasoning, convictions, free will and conscience; instead, they determine their goals and ends according to a form of empirical heteronomy whereby an individual possesses a heteronomous will as opposed to an autonomous will. That means people allow their goals and ends to be determined by the fundamental assumptions of ‘free’ market capitalism rather than basing them on their own set of laws or principles. However, applying the fundamental principles of neoclassical economics and the agendas of the ‘free’ market into different areas of social, political and economic life in such a manner has resulted in the creation of an ‘iron cage,’ in which freedom is threatened by the inescapability of an efficient, rational and impersonal social order. Friedman and Hayek argued that people are free so long as they are left alone to make their own voluntary decisions and choices, independent of intervention or coercion on the part of the State or other individuals. For this reason, both associated distributive justice with coercion. The existence of property rights within a society does not necessarily mean that the actual distribution will be a fair and just, because the prevailing allotment of private property is typically the outcome of current and historical exploitation. In fact, the unjust distribution of wealth and property is often what leads many theorists and academics to defend State intervention aimed at achieving distributive justice. They opposed the growing role of government in the social, economic and political arenas for the purpose of achieving distributive justice, as they believed such interference represented a genuine threat to freedom. Advocates of positive freedom viewed distributive justice as an important concept in creating the conditions required for positive freedom. Friedman and Hayek neglected positive freedom in their respective conceptions of freedom, and associated State intervention aimed at achieving the conditions of positive freedom with coercion.33 They failed to understand that positive freedom as self-realization does not necessarily mean that a person has to be coerced in order to be free.

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Furthermore, they did not want to acknowledge the possibility that individuals with limited capacity, or those lacking adequate education and training on account of their economic and social conditions, may not be capable of achieving self-realization. When individuals lack the conditions of positive freedom, State interference designed to provide adequate services and programmes to achieve these conditions would not necessarily be in conflict with freedom. Friedman and Hayek were not particularly concerned with the difficulties endured by the lower social and economic classes in their efforts to achieve freedom. This would suggest that they did not really care whether or not the masses attained freedom, which would explain why they were so strongly opposed to distributive justice and any form of State intervention designed to achieve the conditions of freedom. Their theories and principles largely promoted freedom for the aristocrats and elites of the twentieth and twenty-first centuries, as these individuals benefitted most from deregulation and a minimal role for the State within society. Neither Hayek nor Friedman made reference to ethical and moral values in their respective definitions of freedom, despite the fact that these values were very important for many of the theorists that formulated ideas of freedom in the past. When considering the significant contributions that Friedman and Hayek made to the development of neoclassical economics, it is hardly surprising that they accepted economics as a ‘value neutral’ discipline that does not take account of moral and ethical principles. This is largely because they regarded moral and ethical principles as biased and unscientific. As a result, neither allowed for these principles to have any role in their economic, political and social theories, nor did they incorporate them into their respective versions of freedom. Friedman’s disregard for ethical and moral values in his conception of freedom is primarily due to his unwavering belief in the notion that economics is a natural science, which means there is no place for such considerations. Meanwhile, Hayek’s views on this subject are much more ambiguous, in that he does not regard economics as a true natural science, but as non-predictive science. In other words, he argued that economics is a social science that was influenced by people’s actions which,

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in turn, are shaped by their individual beliefs and values.34 Nonetheless, he treats the application of ethical and moral values as an issue of individual choice, as opposed to a matter of society and the State. What Friedman and Hayek failed to understand is that human beings do not possess ethical and moral values by nature. Therefore, a system like ‘free’ market capitalism that rewards and promotes egoism and the maximization of individual interests would lead society into a State of unfreedom for the rest. Furthermore, a State that supports the development of virtuous citizens that are willing to achieve the common good in order to counteract the negative outcomes of the ‘free’ market is not incompatible with the achievement of freedom. In fact, interference on the part of the State for the purpose of achieving self-realization and the common good of society could be regarded as a feature ‘of liberty itself ’ (Gray 1984, 335). The combination of economic freedom and the lack of moral and ethical principles within the discipline of economics has actually created significant problems within the economic, social and political arenas. Friedman and Hayek ignored the severity of many of the problems created by modern exchange economies; they also failed to comprehend how modern exchange economies prevented individuals from achieving positive freedom. The respective ideas of freedom formulated by Friedman and Hayek only attained the level of abstract freedom, which is basically the minimal form of freedom pertaining to the private spheres of action of individuals. Abstract freedom is primarily associated with the right to not be enslaved, the right to own property, the right to exchange property and the right to enter into contracts with others; however, it attributes no importance to the right to self-realization. It is not entirely surprising that their respective formulations of freedom only managed to reach the minimal form of freedom, as both of them only valued freedom for its instrumental value and primarily used this important concept to promote the ‘free’ market economy over Welfare States and centrally planned economies. Friedman and Hayek were able to use a philosophical concept like freedom in order to influence the opinions of people without providing them with a genuine form of freedom. Friedman and Hayek’s promotion of ‘free’ market capitalism and economic freedom led ‘the wider world’ to believe that being ‘free to

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choose’ within the social, political and economic arenas was associated with behaving in one’s own self-interest. Given that the pursuit of individual interests does not necessarily align with the common or universal interests of society, their advocacy of applying the ‘free’ market economic approach to different branches of social and political life has produced many catastrophic outcomes, including the exploitation of natural resources and human beings, the degradation and pollution of the environment, economic crises and war. In fact, it is apparent that the period that witnessed the most significant application of the ideas of ‘free’ market capitalism in the concept of freedom represents a regression in the development of self-understanding and self-realization. Friedman and Hayek’s ideas pertaining to freedom should, therefore, be discarded from political, economic, social and philosophical discourse and debates, because this minimal form of freedom promotes freedom for modern elites while delivering unfreedom for the rest.

Notes 1. Freedom and liberty are used interchangeably; no distinction is made between these two terms in this chapter. 2. Friedman and Hayek were not the only advocates of applying the free market economic approach to different branches of social and political life; since the 1970s, a number of prominent economists have done extensive work on this subject. For example, Gary S. Becker (1930–2014), another important twentieth-century neoclassical economist who studied at the University of Chicago and was influenced by Friedman’s application of economic freedom to social life, argued that the neoclassical economic approach is applicable to all human behaviour. According to Becker, the neoclassical economic approach can be applied to many areas of human life that are typically not associated with ‘traditional economic analysis’ in order to make a decision; these include daily activities, education, the use of time, family, h ­ obbies, crime, marriage, fertility, politics, laws (common and ‘constitutional law,’ as well as ‘civil, criminal, and administrative procedure’), health care, illness pollution, etc. (Van Overtveldt 2007, 12, 108–109). For example, Becker maintained that families should be regarded as

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households, and as such, marriage is assumed to happen only if it is mutually beneficial to both parties, and procreation takes place only if children are going to provide a higher level of utility. 3. Friedman highly valued the application of the methodologies of the natural sciences to the discipline of economics. However, Hayek persistently argued that the particular or subjective knowledge of individuals cannot be treated as objective scientific knowledge to be used as a tool in the scientific methods of social engineers and planners for the purpose of achieving teleological ends and goals. He also stated that the models, techniques and methods of the natural sciences cannot explain, predict or plan the complex situations and actions of individuals. More precisely, Hayek held the belief that all individuals are unique; thus, their future choices and actions cannot be accurately predicted by the models, techniques and methods of natural science, because it is not possible to gather all of the information and knowledge pertaining to the particular facts and situations that affect their choices. Although Hayek opposed the power of reason and the rationalist-objectivist approach, he supported Popper’s application of the methodology of natural science to the social sciences via ‘piecemeal engineering,’ which refers to the ‘application of scientific method…non-dogmatic method of trial and error’ to the social sciences. 4. Hayek (1989, 19–20) was aware that ‘economists,’ ‘civil servants’ and ‘academic philosophers and social scientists’ would never take the opinions he expressed in The Road to Serfdom seriously, despite the fact that it was an immediate success, gained a ‘wide audience in Britain’ and ‘created a sensation in the United States,’ as it was a book written for a popular audience. As a result, he devoted most of his efforts at the University of Chicago to writing The Constitution of Liberty in an attempt to gain the respect of the academic community. Many of the ideas that Hayek expressed in those two influential books were shaped by a number of prominent economists and thinkers, including Adam Smith, David Hume, John Stuart Mill, Adam Ferguson, Wilhelm von Humboldt, Karl Popper, Carl Menger and Ernst Mach. 5. The department of economics at the University of Chicago was originally a very ‘conservative’ institution and closely associated with the ‘orthodox version of classical economics,’ which had a strong belief in ‘free’ and competitive markets and laissez-faire policies (or scepticism about State intervention) (Van Overtveldt 2007, 3).

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6. That is not to say that the president ‘slavishly followed’ Friedman’s views in all matters, as there were some situations where Reagan explicitly rejected his opinions. For example, despite Friedman’s staunch defence of free trade, Reagan implemented a ‘vigorous protectionist program’ (i.e. subsidies, quotas and tariffs) for specific industries. Reagan also changed his views and contradicted Friedman when he defended ‘Social Security’ in the ‘1984 presidential campaign.’ To be clear, however, Reagan only rejected Friedman’s views concerning ‘Social Security’ for a short period of time in order to secure the election (Rayack 1987, 2, 7, 185–187). 7. After the success of The Road to Serfdom in Europe and the USA, Hayek (1989, 132–133) conceived the notion of gathering internationally renowned defenders of liberal traditions for the purpose of advancing the development of liberal thought; this resulted in a ten-day conference involving 39 people at Mont Pèlerin, which culminated in the founding of the Mont Pèlerin Society. 8. When Keynes died Hayek (1989, 143) was convinced that he would become the ‘best-known economist living … But ten days later it was probably no longer true. At that very moment, Keynes became the great figure, and I was gradually forgotten as an economist.’ For a long time, Hayek was viewed as an ideologue and his ideas were not taken seriously by most economists. 9. With the victory of Thatcher’s conservative government in the 1979 election, ‘British Keynesian academics’ were ‘locked out of policy formation’ (Tribe 2009, 69). 10. Hayek Papers Box 24.72. 11. The distinction that Berlin made between positive and negative freedom has been recently examined in, for example, Elster (1990), Gray (1984), Pettit (1996) and Taylor (1985). 12. Berlin (1969, 129–130) believed that the notion of freedom was not ‘logically’ connected to any particular political regime. 13. Berlin (1969, 134) describes the ‘positive conception of freedom as self-mastery,’ which divides personality into two parts: ‘the transcendent, dominant controller’; and, the ‘empirical bundle of desires and passions to be disciplined and brought to heel.’ 14. Berlin (1969, 122) stated that, ‘coercion implies the deliberate interference of other human beings within the area in which I could otherwise act.’

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15. Friedman believes that scientific discoveries and knowledge advance in much the ‘same way as an economic order develops.’ Additionally, he attributes the development of social and cultural practices and values to voluntary exchange, similar to that which exists in the marketplace (Friedman and Friedman 1980, 25). 16. Friedman accepted human beings as rational economic agents that possess accurate knowledge of the external world when making self-interest maximizing choices. Hayek, on the other hand, rejected the view that individuals, as economic agents, possessed perfect information or knowledge as to the complete set of choices available to them when faced with a decision. He also opposed the use of econometrics and, as a result, considered any form of State planning based on a forecast or model to be useless, failed and ‘irrational’ (Hacohen 2000, 365). Instead, he believed that human beings make their decisions according to their own beliefs and convictions, which can be shaped by unexpected, unpredictable and accidental events (Hayek 1960, 11). Friedman, however, disagreed with Hayek on this matter, as he firmly believed that economic forecasts were useful tools in the discipline of economics. 17. According to Hayek (1994, 17), the origins of individualism could be traced back to ‘Christianity and the philosophy of classical antiquity.’ 18. Hayek was opposed to mainstream economic views of individual ism. More precisely, he rejected the idea that ‘Agents are assumed to be rational, in the sense that they exhibit consistency in choice over well-ordered preference functions, and they are assumed to have full information. Tastes and preferences can be virtually of any form, but, whatever they are, they are assumed to be unchanging…agents are motivated only by their own narrowly defined self-interest, with the result that their utility functions are independent of those of other agents’ (Caldwell 2004, 281). 19. Friedman claimed that the remedies for the catastrophic consequences of the Great Depression of the 1930s, including the New Deal, could have been influenced by Otto von Bismarck’s Germany. He associated Bismarck’s Germany with paternalism, claiming that, in the 1880s, Bismarck’s paternalistic empire introduced social programmes designed to help the poorest segment of the population (Friedman and Friedman 1980, 93, 98). Parallel to Friedman’s view, Hayek argued that, prior to and during the rise of Nazism, German ideas were inherited from

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the Prussian tradition and based on the authority of a powerful State, socialism and economic nationalism regulating all aspects of life based on deliberative calculations. 20. Although Friedman rejected the notion that the Cold War influenced his conception of freedom, it is not surprising that his ideas on freedom clearly reflect the political, social and economic issues, agendas and conflicts of that period. 21. Hayek defended the inequality of income and wealth within a society on the basis that they engendered the creation of new products, values and lifestyles that would eventually be accessible to everyone including the poor. 22. Nonetheless, despite his rejection of deliberate and conscious calculations on the part of the State to achieve common goals and ends, Hayek assumed that individuals did, in fact, make deliberate and conscious calculations in order to achieve their particular goals and ends. 23. The achievement of common goals and ends represents the satisfaction of the ‘sum of all the private interests.’ 24. Chile’s ‘free’ market miracle was based on the establishment of a cooperative relationship between the economics department of the University of Chicago and the Catholic University of Chile. The establishment of cooperative agreements or projects between Latin American universities and the University of Chicago in the second half of twentieth century is well documented. Such cooperative arrangements were ‘financed primarily by the Ford and Rockefeller Foundations’ (Van Overtveldt 2007, 351). 25. ‘Friedman’s trip was criticized by the New York Times columnist Anthony Lewis in September of that year. Soon thereafter, student protests began at the University of Chicago. Though the protests included such things as picketing the apartment house where he and Rose lived’ (Caldwell and Montes 2014a, 16; 2014b, 2015, 274). 26. https://www.margaretthatcher.org/document/117136. 27. https://puntodevistaeconomico.wordpress.com/2016/12/21/extractsfrom-an-interview-with-friedrich-von-hayek-el-mercurio-chile-1981/. 28. Hayek outlined the differences between ‘public law’ and ‘private law’; he divided ‘private law into criminal law and civil law.’ According to Hayek, private law regulates the behaviour of individuals because it secures private property and individual rights, whereas ‘civil law’ secures

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freedom and establishes ‘order’ within society. Meanwhile, he regarded public law as ‘rules of organization’ for the government. He divided public law into: ‘constitutional law,’ which restricts State power and ‘allocates authority within government’; ‘financial legislation,’ which focuses on the financial expenditures of the State; and ‘administrative law,’ which regulates the use of ‘public resources’ by governmental agencies (Hoy 1984, 70, 77). Hayek (1991, 363) argued that public law is ‘deliberately created for particular purposes,’ while ‘private law is the result of an evolutionary process and has never been invented or designed as a whole by anybody.’ In the case of public laws, however, legislators involved in developing the legal system aspired to ‘discover what would be regarded as just.’ Hayek (1976, 41) also pointed out that while legislators were very conscious of the fact that this development was the outcome of their intellectual work, that does not mean they are ‘given unlimited power to invent whatever rules they thought fit’ on account of their intellectual capacity. Furthermore, he emphasized the fact that legislators involved in developing the system of law are not inspired by the achievement of their own particular goals and ends. That means legislators cannot create rules that express their own will, as their role is limited by what would be accepted as universally right by the members of society. 29. Hayek believed that achieving one’s goals and ends necessitates obeying certain rules and laws, which are supposed to preserve and expand freedom. However, he made it clear that laws are not merely outcomes of dictates by kings and other leaders, nor are they products of deliberate invention or design. Hayek regarded laws imposed from ‘the top-down’ for the purpose of achieving desirable outcomes as ‘coercive,’ even in cases where ‘there is no coercer’ (Skoble 2006, 178). Rather, laws are products of spontaneous forces and a ‘gradual process of trial and error’ (Hayek 1960, 157, 160). He argued that when laws and rules are outcomes of spontaneous forces, they can be evaluated and altered based on the emergence of new circumstances; however, when they are the result of ‘human design’ or imposed by a coercive power, they cannot be easily altered when new conditions arise. Hayek also stressed that laws cannot aim to achieve a ‘specific end’ or a ‘concrete result.’ 30. According to Hayek (1967, 167), rules of just conduct are negative rules; they ‘delimit the range of permissible actions but do not determine the particular actions a man must take at a particular moment.’

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31. Hayek (1976, 86) explained that ‘the rules’ to achieve distributive justice under socialist and Welfare States are ‘rules for the conduct of superior towards their subordinates.’ 32. The role that Hayek attributed to laws in his conception of freedom is similar to the ideas of Locke and Smith. All three believed that laws are supposed to ‘preserve and enlarge freedom.’ According to Hayek, laws are not the product of arbitrary power and they do not favour the interests of a particular individual or group of people. Furthermore, he stated that laws have three important features: they are ‘perfectly general [perfectly abstract], non-discriminatory and predictable.’ He also argued that laws do not dictate how individuals should live their lives or achieve their freedom; rather, they provide a framework for the attainment of maximum freedom (Barry 1994, 266–267). 33. In ‘What’s Wrong With Negative Freedom?’ Charles Taylor (1985, 211) regarded this view as a ‘caricaturally extreme form, [that] refuses to recognize the freedoms guaranteed in other societies as genuine.’ He further explained that academics who associated positive freedom with totalitarian regimes believed that ‘coercion can be justified in the name of freedom.’ In other words, ‘men can…be forced to be free.’ 34. Since beliefs and values are subjective in nature, it was impossible for Hayek to forecast the consequences of economic actions and decisions.

References Backhouse, R. E. (2006). Hayek on Money and the Business Cycle. In E. Feser (Ed.), The Cambridge Companion to Hayek (pp. 34–50). Cambridge: Cambridge University Press. Barry, N. P. (1994). The Road to Freedom: Hayek’s Social and Economic Philosophy. In J. Birner and R. Van Zijp (Eds.), Hayek, Co-ordination and Evolution: His Legacy in Philosophy, Politics, Economics and the History of Ideas (pp. 141–163). London: Routledge. Becker, G. S. (1976). The Economic Approach to Human Behavior. Chicago: The University of Chicago Press. Berlin, I. (1969). Four Essays on Liberty. London: Oxford University Press. Boettke, P. J. (2006). Hayek and Market Socialism. In E. Feser (Ed.), The Cambridge Companion to Hayek (pp. 51–66). Cambridge: Cambridge University Press.

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Caldwell, B. (2004). Hayek’s Challenge: An Intellectual Biography of F. A. Hayek. Chicago: University of Chicago Press. Caldwell, B., & Montes, L. (2014a, August). Friedrich Hayek and His Visits to Chile (CHOPE Working Paper No. 2014-12). Caldwell, B., & Montes, L. (2014b, September 26). Friedrich Hayek and His Visits to Chile. Review of Austrian Economics. First Online. Caldwell, B., & Montes, L. (2015). Friedrich Hayek and His Visits to Chile. Review of Austrian Economics, 28(3), 261–309. Ebenstein, A. O. (2003). Friedrich Hayek: A Biography. Chicago: University of Chicago Press. Elster, J. (1990). The Market and the Forum: Three Varieties of Political Theory. In J. Elster & A. Hylland (Eds.), Foundation of Social Choice Theory (pp. 102–132). Cambridge: Cambridge University Press. Farrant, A., McPhail, E., & Berger, S. (2012). Preventing the “Abuses” of Democracy: Hayek, the “Military Usurper” and Transitional Dictatorship in Chile? American Journal of Economics and Sociology, 71(3), 513–538. Feser, E. (2006). The Cambridge Companion to Hayek. Cambridge: Cambridge University Press. Fisher, K. (2009). The Influence of Neoliberals Before During and After Pinochet. In P. Mirowski & D. Plehwe (Eds.), The Road from Mont Pèlerin: The Making of the Neoliberal Thought Collective. Cambridge, MA: Harvard University Press. Friedman, M. F. (1962). Capitalism and Freedom. Chicago: University of Chicago Press. Friedman, M. F. (1981a). Market Mechanism and Central Economic Planning. Washington, DC: The American Enterprise Institute. Friedman, M. F. (1981b). The Invisible Hands of Economics and Politics. Singapore: Institute of Southeast Asian Studies. Friedman, M. F., & Friedman, R. D. (1980). Free to Choose: A Personal Statement. New York: Harcourt Brace Jovanovich. Friedman, M. F., & Friedman, R. D. (1998). Two Lucky People: Memoirs. Chicago: University of Chicago Press. Gray, J. (1984). On Negative and Positive Liberty. In Z. Pelczynski & J. Gray (Eds.), Conception of Liberty in Political Philosophy (pp. 321–348). London: The Athlone Press. Hacohen, M. H. (2000). Karl Popper: The Formative Years, 1902–1945. Cambridge: Cambridge University Press. Hayek, F. A. (1948). Individualism and Economic Order. Chicago: University of Chicago Press.

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Hayek, F. A. (1960). The Constitution of Liberty. Chicago: University of Chicago Press. Hayek, F. A. (1967). Studies in Philosophy, Politics and Economics. London: Routledge and K. Paul. Hayek, F. A. (1976). Law, Legislation and Liberty, Volume 2: The Mirage of Social Justice. Chicago: University of Chicago Press. Hayek, F. A. (1979). Law, Legislation and Liberty, Volume 3: The Political Order of a Free People. London: Routledge & Kegan Paul. Hayek, F. A. (1989). Hayek on Hayek. Chicago: The University of Chicago Press. Hayek, F. A. (1991). Economic Freedom. Cambridge: Blackwell. Hayek, F. A. (1994). The Road to Serfdom. Chicago: The University of Chicago Press. Hayek, F. A. (2007). The Road to Serfdom Texts and Documents the Definitive Edition (B. Caldwell, Ed.). Chicago: University of Chicago Press. Hayek, F. A. (2011). The Constitution of Liberty: The Definitive Edition. Chicago: University of Chicago Press. Hoy, C. M. (1984). A Philosophy of Individual Freedom: The Political Thought of F. A. Hayek. Westport: Greenwood Press. Miller, E. (2010). Hayek’s The Constitution of Liberty: An Account of Its Argument. London: Institute of Economic Affairs. Mirowski, P., & Plehwe, P. (2009). The Road from Mont Pèlerin: The Marketing of The Neoliberal Thought Collective. Cambridge, MA: Harvard University Press. Mises, L. (1951 [1932]). Socialism: An Economic and Sociological Analysis (J. Kahane, Trans.). New Haven: Yale University Press. Nelson, R. H. (2014). Economics as Religion: From Samuelson to Chicago and Beyond. University Park: Pennsylvania State University Press. Pacific Institute for Public Policy Research. (1984). Politics and Tyranny: Lessons in Pursuit of Freedom by Milton Friedman. San Francisco, CA: Pacific Institute for Public Policy Research. Peterson, D. J. (1999). Revoking the Moral Order: The Ideology of Positivism and the Vienna Circle. New York: Lexington Books. Pettit, P. (1996). Freedom as Antipower. Ethics, 106(3), 576–604. Plant, R. (1994). Hayek on Social Justice: A Critique. In J. Birner & R. Van Zijp (Eds.), Hayek, Co-ordination and Evolution: His Legacy in Philosophy, Politics, Economics and the History of Ideas (pp. 164–177). London: Routledge.

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Ranelagh, J. (1991). Thatcher’s People. London: HarperCollins. Rayack, E. (1987). Not So Free to Choose: The Political Economy of Milton Friedman and Ronald Reagan. New York: Praeger Publishers. Robin, C. (2013). Nietzsche’s Marginal Children: On Friedrich Hayek: How Did the Conservative Ideas of Friedrich Hayek and the Austrian School Become Our Economic Reality? By Turning the Market into the Realm of Great Politics and Morals. The Nation, 27 May. http://www.thenation.com/ article/174219/nietzsches-marginal-children-friedrich-hayek#ixzz2ZTvhL6s7. Robin, C. (2015). Wealth and the Intellectuals: Nietzsche, Hayek, and the Austrian School of Economics. In R. Leeson (Ed.), Hayek: A Collaborative Biography: Part V Hayek’s Great Society of Free Men. Basingstoke, UK: Palgrave Macmillan. Skoble, A. J. (2006). Hayek the Philosopher of Law. In E. Feser (Ed.), The Cambridge Companion to Hayek (pp. 171–181). Cambridge: Cambridge University Press. Taylor, C. (1985). What’s Wrong with Negative Liberty. In Philosophical Papers (pp. 211–229). Cambridge: Cambridge University Press. https://doi. org/10.1017/CBO9781139173490.009. Tribe, K. (2009). Liberalism and Neoliberalism in Britain. In P. Mirowski & D. Plehwe (Eds.), The Road from Mont Pelerin: The Marketing of The Neoliberal Thought Collective (pp. 68–97). Cambridge: Harvard University Press. Van Overtveldt, J. (2007). The Chicago School: How the University of Chicago Assembled the Thinkers who Revolutionized Economics and Business. Chicago: Agate.

11 Chicago Economics in the Making, 1926–1940: A Further Look at United States Interwar Pluralism Luca Fiorito and Sebastiano Nerozzi

1 Introduction American economics during the interwar years has been defined as inherently pluralistic. Pluralism, Mary Morgan and Malcolm Rutherford (1998, 4) explain, ‘meant variety, and that variety was evident in beliefs, in ideology, in methods, and in policy advice.’ Contrary to the traditional ‘institutionalism versus neoclassicism’ narrative, starting from the late 1990s a flow of historiography has documented how the boundaries between the two ‘schools’—a rather inappropriate term in this connection—were loose and how economists of the time felt at

University of Palermo. Although this chapter is a joint effort by the authors, Sections 1, 2, and 6 can be attributed to Luca Fiorito, and Sections 3, 4, 5, 7 and 8 to Sebastiano Nerozzi, who is also responsible for the editing of the archival material.

L. Fiorito (*)  University of Palermo, Palermo, Italy S. Nerozzi  Docente Università Cattolica del Sacro Cuore, Milan, Italy © The Author(s) 2018 R. Leeson (ed.), Hayek: A Collaborative Biography, Archival Insights into the Evolution of Economics, https://doi.org/10.1007/978-3-319-95219-2_11

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liberty to borrow from each one.1 In the words of Warren J. Samuels (2000, 141), ‘heterogeneity, amorphousness, and perhaps, especially, individuation of practice, ruled the day.’ Pluralism was reflected not just in the coexistence of several (competing and cooperating) approaches within the discipline, but also in an irreducible heterogeneity within each of them. Marginalism found expression in several different variants—Marshallian, Clarkian, Austrian, etc.—while institutionalism, by its own very nature of an ‘open paradigm,’ could by no means be portrayed as internally coherent and consistent. Variety was so pervasive and methodological eclecticism so common that, in many respects, institutionalism and neoclassicism formed ‘two parts of the same fascinating explanatory puzzle’ (Rutherford 1997, 192). Within the general pluralistic framework, the University of Chicago offers a quite interesting case. Chicago was in fact pivotal in the formation and early history of the institutionalist movement prior to 1918, and, under the leading influence of John M. Clark, its department of economics retained a distinct institutionalist character until the mid1920s. Clark’s departure to Columbia in 1926 and the subsequent hiring or promotion to professorship of people like Frank Knight, Jacob Viner and Henry Simons set the stage for the establishment of the so-called first Chicago School of Political Economy. Although its members were certainly less critical towards the functioning of competitive markets and far more neoclassical than Clark and the bulk of institutionalists, the first Chicago school was by no means a monolith. Knight and Viner had different theoretical (as well as personal) styles; institutionalist and ‘unorthodox’ influences lasted well into the 1930s; and even if Simons’ pro-market views were undoubtedly influential, it would have been hard to recognize a distinguishing ideological mark among Chicago Ph.D.’s of those years. As Melvin Reder (1982, 5) has pointed out, throughout the late 1920s and 1930s the Chicago department remained very much a ‘mixed bag’ and its students ‘were not readily identifiable by their view of economic analysis or of economic policy.’ The nature of this chapter is mostly documentary, i.e. its aim is to unfold a rich body of archival material which can shed new light on the nature and evolution of interwar Chicago economics.

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Specifically, this chapter is based on a scrutiny of the Ph.D. qualifying exams on Economic Theory at Chicago from 1926 to 1940. In the recollections of a direct witness such as Reder (1982, 8): ‘These examinations have always been difficult, and the failure rate substantial. As the admissions policy of the Department has traditionally been lenient (i.e., give students of uncertain promise a chance), these examinations have functioned as a screening device for admission to candidacy for the PhD The exam-takers, therefore, have always included a substantial number of uncertain and apprehensive students as well as embryonic winners of the Clark medal.’ These documents provide a significant source of information concerning the making of an economist at Chicago since they reveal not just how economics was taught and tested at that university in the interwar years, but also what was then meant by ‘economic theory’ and how this conception evolved over time. The relevant material was found among the Albert G. Hart Papers at the Rare Book and Manuscript Library of Columbia University.2 Hart had been a graduate student at Chicago from 1931 to 1936, where he completed his dissertation under Knight.3 Hart’s material was complemented by further archival research at the University of Chicago which allowed us to collect other documentary evidences on the evolution of the teaching of economics since mid-1920s. This chapter is organized as follows: the first section discusses institutionalism at Chicago and the role of Clark; the second section documents the changes following Clark’s departure, when the teaching of economics was reshaped, under the leadership of Jacob Viner and Frank Knight, around the ‘core’ course of Economics 301; the third section focuses on mathematical economics and Schultz’s efforts to complement the Marshallian twist impressed by Viner and Knight; the fourth and fifth sections discuss how such a neoclassical turn in the teaching of economics did not prevent a deep institutional, epistemic and historical attentiveness to survive at Chicago during the 1930s; the sixth section deals with monetary and business cycle theory; and the seventh section presents some conclusions.

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2 Institutionalism at Chicago: John Maurice Clark As Rutherford (2010, 2011) has ably documented, in the period up to 1918 the department of economics at Chicago hosted, both as faculty and graduate students, a whole array of individuals directly associated with the foundation of institutionalism: Thorstein B. Veblen, Robert F. Hoxie, Wesley C. Mitchell, Walton H. Hamilton, Harold Moulton and John M. Clark.4 To this list, Rutherford correctly adds other figures—such as Leon C. Marshall, Paul Douglas, James A. Field, Harry A. Millis and Chester Wright—who had a weaker but still significant connection to the movement in its early days. These men, with their teaching, research and the close network they established, left a clear mark in the department of economics. As Rutherford (2010, 26) tells us, ‘Chicago […] has a strong claim to be seen as the birthplace of what became known as “institutional economics.”’ By the early 1920s, many of the institutionalists who had spent significant periods of time at Chicago were not anymore part of the university. Veblen left in 1906, Mitchell in 1899, Hamilton in 1915, Moulton in 1922, while Hoxie had tragically died in 1916. Quite significantly, however, in spite of such a decline in the institutionalist presence, the intellectual influence of the movement continued to persist though most of the decade, shaping the teaching of economics. This was due mainly to the leading position assumed by Clark within the department. Just to give an idea, in 1925 and 1926—the last two years of his permanence at Chicago—Clark taught graduate courses on Early Development of Economic Thought (Econ. 302), Modern Tendencies in Economics (Econ. 303), along with other courses that clearly reflected his own institutionalist research agenda, such as those on Problems of Overhead Costs (Econ. 304) and Problems in Social Economics (Econ. 305). In addition to these courses, which represented the bulk of the ‘Economic Theory’ training, Clark was also responsible for the graduate seminars on Research in Economic Theory (Econ. 401, 402, 403).5 Traditional economic theory was by no means absent from the theoretical requirements, but its position was, so to speak, ‘subordinate’ to a more institutionalist oriented line of attack. In 1922/1923, Viner,

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who at the time was also in charge of the teaching of International Economic Policies (Econ. 353) and all Government Finance courses (Econ. 360; Econ. 361), began to give a course on Neo-Classical Economics (Econ. 301) which was destined to become the core theoretical course at Chicago. Significantly, the course was presented, in the Course Program, as ‘a study of the general body of economic thought which centers about the theory of value and distribution and is regarded as “orthodox theory,”’ and it was explicitly intended as ‘preparatory to a more critical examination of this body of doctrine.’ The ‘critical examination’ was left to Clark’s course on Modern Tendencies in Economics that offered a ‘critical study of controversial questions in the general body of orthodox theory, and of some modern departures from orthodox theory.’ In a similar vein, Clark’s course on Social Economics was described as an attempt to reach ‘beyond the self-imposed limitations of static theory, or “price” theory; and reviewing the economic system from the point of view of its functions in a dynamic world.’ The topics covered included: ‘human nature, its desires, needs, and principles of choice; the institutional basis of economic life; the validity of price as an index of welfare; other indexes; demand and supply under dynamic conditions; price and efficiency under dynamic conditions; distribution under dynamic conditions.’ Such a prevalent institutionalist character of the Chicago department is well revealed by the first two qualifying exams in Economic Theory collected by Hart—which are entirely reproduced in the Appendix.6 From 1918 to 1933, the rules governing the final examination for the doctoral degree in economics at Chicago remained substantially stable. Four subjects had to be taken; of these, two were required of all candidates (general economic theory and the field of the thesis), while two others were to be selected from a list of ten. The first refers to the 1926 Spring Quarter and is markedly institutionalist in style: (Spring Quarter 1926) Answer six. 1. Give a list of outstanding dissenters from classical economics who were contemporaries of the classical writers, indicating chief points of dissent.

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2. Answer one of the following: a. Compare the conception of economic law embodied in W. H. Hamilton’s wage theory with some typical previous conception; b. Compare the ideas of the nature of ‘economic principles’ held by the more absolute adherents of the classical school, a typical modern ‘orthodox’ writer, and an ‘institutional economist’; c. Is it the purpose of Economics to formulate laws? If so, define ‘economic law’ and illustrate. If not, why not, and what is its purpose? 3. Discuss the merits of the criticisms of marginal productivity theories of distribution which are based on the charge that these theories make invalid assumptions of perfect competition, perfect divisibility and mobility of the factors and perfect calculations on the part of the entrepreneur. 4. How does Taussig’s theory of distribution differ, in its general outlines, from that of J. B. Clark. 5. ‘Physical productivity cannot give rise to interest as a percentage rate on capital value without an intervention of the capitalization or discounting of future incomes. Hence capitalization or time-discount is the true basis of interest, not productivity.’ Discuss. 6. Describe and estimate the contribution of one of the following: Karl Marx, T. B. Veblen, Carleton Parker. 7. Has modern psychology made the theory of marginal utility  obsolete? 8. What difference does it make to economic theory whether institutions are evolving social organisms or not? (Note possibility that some kinds of statements or principles may be more seriously affected than others.)

The second exam, which refers to the Summer Quarter 1926, appears to be more equilibrated in content: (Summer Quarter 1926) Answer eight questions, including not less than two from Group I, three from Group II, and two from group III. Group I 1. What are the chief or characteristic contributions of: Say, Petty, Aquinas, St. Simon, Rodbertus, Rae, Böhm-Bawerk, J. B. Clark. 2. ‘Mercantilism was essentially the application on a national scale of attitudes and policies characteristic of the earlier medieval local

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economy.’ Who held this view or something like it? What specific features of mercantilism and of the medieval economy might furnish a basis for the statement? Is it true? 3. If there was a British Classical School, who composed it and what were its unifying characteristics, real or supposed? 4. Outline the main steps in the development of those ideas in international trade which ultimately crystallized into the ‘Theory of International Trade;’ starting just before the more developed form of Mercantilism. Group II 5. Price is said to be governed by cost of production to the ‘marginal producer.’ If the latter be defined as the one who makes no profit (whose cost equals the price) the expression becomes tautological. Can the marginal producer be otherwise defined, or content put into the statement? 6. (a) Would interest exist if everyone were so rational as never to prefer a present utility to one of equal or greater degree (assuming equal certainty) in the future? (b) What is time discount and what is its relation to interest? 7. What is the relation between the laws of diminishing returns and the law of proportion of factors? Give some valid statements of these laws. 8. What economist is known for having emphasized the proposition that differences in wages are to a large extent such as to equalize the real attractiveness of different occupations? What fact is the theory of non-competing groups used to explain and what is that theory? Group III 9. State and discuss critically the central idea of Tawney’s ‘Acquisitive Society.’ 10. State and discuss Veblen’s criticism of the theory of marginal utility or some other of his major positions. 11. State and discuss critically Carleton Parker’s psychological theory and its economic significance.

Until 1926, therefore, institutionalism was still a decisive part of the training of a young economist at Chicago. In the two tests above, many of the questions—if not the majority—have a distinct institutionalist flavour, deal with institutionalist authors or show a critical attitude towards received orthodoxy, both classical and neoclassical.

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These tests also reveal that monetary theory—‘Financial Organi­ zation’ as it was then called at Chicago—was not included in the mandatory ‘economic theory’ exam. At that time, Lloyd W. Mints, who had just completed his Ph.D. at Chicago, was already the responsible for much of the teaching in the field. For instance, in the 1926–1927 academic years, he had been assigned both the two-semester course Introduction to the Graduate Study of Money and Banking (Econ. 330; Econ. 331) as well as the advanced seminar on Problems in Money and Banking (Econ. 332). Another interesting aspect of the tests concerns the absolute relevance given to the history of economic thought as an integral part of economic theory—this, however, will remain a distinguishing characteristic of the qualifying tests up to the late 1930s and will be discussed below. A closer look at the questions, then, confirms the paramount influence of the young Clark in shaping the kind of economics then taught at Chicago. For instance, Clark (1918a, b), author of the seminal twopart essay on ‘Economics and Modern Psychology,’ can be directly indicated as the responsible for question seven of the first test, for that on Veblen’s criticism of marginal utility theory and for the two on Carleton Parker’s instinct theory.7 The Clarkian mark is also evident in the questions relating to the criticism of marginal productivity theory—a central theme in his course on Problems of Overhead Costs. Viner, on the other hand, appears to be the author of the questions strictly pertaining to neoclassical theory, such as those on time-preference and the origins of interest, or those focusing on the history of international trade theory. Interestingly, one of the queries centred on the theoretical differences between the distribution theory of the elder Clark and that of Frank W. Taussig, Viner’s own mentor at Harvard. As a final notation, we would like to point out that it would be erroneous to think about a harsh dualism between the ‘orthodox’ Viner and the ‘institutionalist’ Clark. The two men were personal friends and Clark showed a deep respect for Viner’s scholarship. This is also confirmed by a letter that in 1924 John Maurice sent to his father John Bates. At that time, Viner was one of the candidates for the position at Columbia that eventually went to John Maurice. In one salient passage, the young Clark wrote:

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As to his [Viner’s] ability, I have been thinking of him for some time as a man who would occupy one of the most commanding positions in the economic world, and would not have to wait many years to reach it. He is a thoroughly good theorist – not always true nowadays of even the more brilliant students in special fields. If he goes to Columbia, I shall have special cause to mourn, because I have been sounding him for years with a view to take some theory work here, and he has only just seen his way to plan to give a course in the Classical Economists, about whom he has a vastly more detailed knowledge than I shall probably ever attain. He has a knack of very rapid reading, and reads an astonishing amount. His theory is of a classical turn, and would furnish a very valuable complement to my own revisionist tendencies, giving our graduate students something they badly need. No matter how strongly I believe in giving them a thorough understanding of what deductive-static theory really means, I simply can’t do it in the amount of time there is left after sketching the historical development of economic thought and going into the modern critical-revisionist movement.8

3 Forging the Core: Viner and Knight on Price and Distribution Theory Many changes took place after Clark left Chicago for Columbia in 1926. Field retired in 1927, while in 1928 Marshall, then the chair of the department, moved to Johns Hopkins to become professor of law. In 1926, Henry Schultz joined Chicago, and the following year, it was the turn of Frank H. Knight and his student Henry C. Simons, both from the University of Iowa. Viner had obtained full professorship in 1925 and Mints in 1929. These events, which led to the establishment of what is usually referred to as the ‘first Chicago School,’ had important consequences in the courses’ structure and organization. The major changes—this is what mostly interests us here—concerned the field of Economic Theory. In 1927, in addition to Neo-Classical Economics, Viner took over the two courses left vacant by Clark, History of Economic Thought and Modern Tendencies in Economics. Two years later, the course on Neo-Classical Economics changed its name into Price and Distribution

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Theory (Econ. 301). Its content was still presented as a study of ‘orthodox theory,’ but no mention of a future ‘critical examination of this body of doctrine’ was now included in the course description. Viner and Knight shared the responsibility of Price and Distribution Theory from 1929 until Viner’s departure for Princeton in 1946—at which point Milton Freidman assumed the teaching of the course.9 Price and Distribution Theory played a major role in nurturing what was later renown as the ‘Chicago price theory tradition’; Econ. 301, as some interpreters pointed out (Irving and Medema 2013, 1–2), can be regarded as ‘the hallmark of this inculcation, the core graduate course in price theory that long differentiated the Chicago approach.’ The course was a classic exposition of market economics, grounded in Marshallian partial equilibrium analysis, and its application to real-world phenomena. Its distinct theoretical character—which will be discussed in more detail below—is well epitomized by then more analytical queries of the 1932 Summer Quarter qualifying test: (Summer Quarter 1932) 1. Comment on the following passages: (a) When the production of any commodity obeys the law of  diminishing returns, the elasticity of the derived demand for labor—assuming this to be the sole factor of production—would, of course, be greater than that of the demand for the commodity; and conversely with commodities obeying the law of increasing returns. [Pigou, Arthur C. 1928. A Study in Public Finance. London: Macmillan, 209.] (b) Since elasticity measures variations in quantity (demanded or  offered) divided by variations in price, the elasticity of the demand for anything will be seven times as large for seven similar demanders as it is for one. [Pigou, Arthur C. 1928. A Study in Public Finance. London: Macmillan, 207.] 2. Explain the significance of any point on (a) a positively sloping demand curve; (b) a negatively sloping demand curve; (c) a short-run marginal cost curve for an individual concern; (d) a negatively sloping supply-curve for an industry; (e) a positively sloping supply-curve for an industry; (f ) a negatively-sloping supply curve for labor; (g) a particular expense curve.

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3 . Explain: (a) atomistic competition; (b) fixed costs; (c) sunk costs; (d) joint costs; (e) technological coefficients of production; (f ) constant elasticity; (g) ‘an increase in demand;’ (h) marginal productivity. 4. Explain the adjustments which would take place in the prices of commodities and the prices of the factors if a sudden influx of immigrants were to increase substantially the number of unskilled laborers in the country. Distinguish between short-run and long-run adjustments. 5. The same commodity is being sold by only two producers who are competing against each other. Will there be an equilibrium price? How will the price which results compare with (a) the price that would have prevailed if the commodity were produced by a single monopolist; and (b) the price that would have prevailed if there were many competing producers. Discuss.

After being the object of many distinguished recollections, Viner teaching of Econ. 301 has been recently disclosed to the general public by Douglas Irwin and Steve Medema who edited the detailed notes taken in 1930 by Marshall D. Ketchum and put at disposal of other students between the shelves of the Chicago University Library. By this ‘nearly verbatim transcription’ of Viner’s lectures, we are guided through the topics and the views he presented on the different authors and streams of thought and on the most debated theoretical or policy issues. The content of Knight’s teaching of Econ. 301 has been unveiled by the publication of lecture notes taken by F. Taylor Ostrander and edited by Warren J. Samuels (2005). These documents provide quite a careful account of Knight’s course from which some useful comparisons can be drawn. Aside from their personal relationships and from their different methodological perspectives, Knight and Viner shared a common view on the way economics should be taught.10 Marshallian ‘price theory’ was at the core of both their Econ. 301 courses, though they put different emphasis on the different topics and often held different opinions on single issues or authors. At a first glance, it can be said, Knight’s emphasis was more on the theory of distribution, while Viner certainly devoted more time to partial equilibrium analysis of price formation under different conditions of supply and demand.11

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Both Viner and Knight gave important contribution to the analysis of long-run costs of production. In his famous ‘Cost curves and supply curves,’ Viner (1931) derived the long-run average and marginal cost curve from the envelopment of the short-run cost curves, both for the firm and the industry as a whole. Knight (1921, 1935) defended the notion of perfect competition and argued for a net separation between static and dynamic analysis. In general terms, Knight conceived the Marshallian treatment of external economies and increasing returns as pertaining to dynamic analysis, and it was therefore logically fallacious to use it, as Marshall and Viner had done, within a static theoretical framework. Whatever the opinions of the two leading Chicago economists, this theoretical and methodological issue was often called on the Ph.D. Candidates, as a few examples may suffice to show: Winter Quarter 1927 9. State your theory of the relationship between money costs of production and long-run prices, giving consideration to the law of diminishing returns, the ‘particular expenses curve,’ economics of large-scale production, quasi-rent, and other factors. Autumn Quarter 1928 5. Explain the relationship between fixed cost and price: (a) in short run; (b) in long run; (c) under monopoly conditions. Summer Quarter 1931 2. Write a brief essay on Cost of Production, touching on the concepts of labor-cost, pain-cost, entrepreneur’s money-cost, and alternative or opportunity cost, the relations between them and the conditions under which each wholly or in part ‘determines’ price. Under what circumstances and why will the money-cost curve be respectively one of constant, increasing and decreasing costs? Under what conditions, if at all, is competitive equilibrium possible with decreasing cost?

After 1927, roughly 40% of the questions were related either to a discussion of Marshallian partial equilibrium analysis or to its application to specific market problems. The questions on neoclassic theory of distribution covered another 15%. Both Viner and Knight’s devoted

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a prolonged attention to a careful critical assessment of the different theories of capital and interest provided by the Austrian, on the one hand, and the neoclassical school on the other. In this respect, Viner and Knight converged in rejecting the distinction between primary and secondary factors as well as the Austrian notion of ‘period of production’; they followed John Bates Clark on the simultaneous nature of consumption and production and on Fisher’s theory of interest rate as deriving both by the marginal productivity of labour and on subjective time-preferences of individuals. The qualifying closely reflected the thorough discussion of the above concepts as undertaken in Econ. 301: Autumn Quarter 1927 10. State the essential issue between ‘productivity’ and ‘time-preference’ schools of interest theory and indicate your own view of the merits of the controversy. Autumn Quarter 1928 2. Describe the characteristics of the supply curve of capital, with special reference to the doctrines of at least three of the following: Cassel, Taussig, Marshall, Fisher, Wolfe. Outline a method for the statistical verification of any one of these theories. Summer Quarter 1929 3. Answer either (a) or (b). (a) Suppose that Robinson Crusoe could build with thirty days’ labor an implement which would increase his general efficiency five per-cent, that it would last five years and require five days labor per year to keep it in condition (during which time, of course, both Crusoe and the tool would be ‘unproductive’). Find the rate of interest on the investment, showing reasoning. Expand the conditions so as to show the meaning in a Crusoe economy of a supply curve and demand curve for capital and an equilibrium interest rate; show the relation of ‘productivity’ and ‘time-preference’ to these curves. (b) Write a brief essay on Profit as a distributive share, touching on its definition – in contrast to other shares, its relation to economic dynamics, uncertainty, supply and demand of entrepreneurship, and the conditions fixing the amount of profit in an individual enterprise and in industry at large.

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Fall Quarter 1930 2. ‘It is the capital value of an agent of production and not the rate of interest which is affected by a change in the value productivity of the agent.’ Is this true? Why or why not? If true, does it support the conclusion that productivity is not a factor determining the rate of interest?

Another often requested topic in income distribution was the theory of rent, as presented by classical political economist and by the neoclassical ones. Following John Bates Clark (and Fisher) in his symmetrical treatment of all factors of production, Knight thought that the single principle of rent explained all factors of production. Viner, instead, regarded the issue as dependent upon the specific assumptions concerning the supply of land as well as of the other factors of production (Irving and Medema 2013, 138–144). Ph.D. candidates were frequently asked to compare the different theories of rent since the time of classical political economy: Autumn Quarter 1927 7. Contrast J. B. Clark’s view of Rent with the ‘classical’ theory. Spring Quarter 1930 8. Discuss the legitimacy of the conventional classification of the factors of production into land, labor, capital, and business organization: (a) As the chief or only classification; (b) As one classification among others. Spring Quarter 1936 1. With reference to distribution theory, (a) examine critically the separation of ‘land’ from ‘capital’ as factors of production; (b) discuss the distinction between fixed and circulating capital.

Quite unexpectedly, very few questions among the qualifying tests are related to one of Knight’s most notable contribution to economic theory, i.e. his celebrated distinction between risk and uncertainty and its ability to provide the rationale for the presence of business’ profit.12 We know that to the theory of profit was devoted some attention not only by Knight but also by Viner who taught his student that ‘Only two economists have dealt with it in a penetrating manner. One of these is Schumpeter, and the other is Knight’ (Irving and Medema 2013, 145).

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Wage theory fell under the domain of general theory. In this connection, it is to be recalled that labour economics acquired importance at Chicago during the 1910s thanks to the work of Robert Hoxie, a figure deeply influenced by the work of Veblen. During the 1920s, much of this training was entrusted to Harry A. Millis and Paul Douglas (Kaufman 2010, 129–130). Arrived in Chicago in the fall of 1916, Millis became one of the most authoritative experts in industrial relations of the country and, during the New Deal, he was appointed as member and then chairman of the National Labor Relation Board. While Millis formation was mainly institutional in character, Douglas was grounded on the same Marshallian theoretical track as Viner and taught the undergraduate Intermediate Economic theory (Econ. 201)—the course that introduced the young Paul Samuelson to Marshallian analysis (Samuelson 1972, 5). At the graduate level, since his arrival at Chicago in 1920, Douglas gave regularly a course on the Theory of Wages (Econ. 306) that combined partial equilibrium analysis with institutionalist concerns, such as those on collective bargaining and minimum-wage legislation. His advance skills in theory and statistics, highlighted by the co-development of the Cobb–Douglas function, allowed him to be regarded as ‘the greatest labor economist in the first 50 years of the century’ (Cain 1979, quoted in Kaufman 2010, 130). Econ. 306 was originally part of the Labor and Personnel Administration field together with Millis’ Trade Unions, Collective Bargaining and Industrial Arbitration (Econ. 340; Econ. 341), but in 1933 became to be listed as an Economic Theory course. Several questions relating to the labour market and its characteristics are to be found in the qualifying as pertaining to the General Economic Theory section: Summer Quarter 1927 9. Discuss the causes of variations in wages between different occupations or, discuss the causes of lower wages for women than for men in the same occupation. Autumn Quarter 1928 8. (a) Discuss the argument that there is conflict between the marginal productivity theory of wages and the contention that wages can

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be raised by collective bargaining. (b) Explain the meaning of the following terms: bargaining power; marginal productivity of labor; supply of labor. Fall Quarter 1930 8. Compare or contrast the effects on the incomes of the different social classes in the United States of (a) Immigration of unskilled labor; (b) Immigration of skilled labor; (c) Exportation of capital. Autumn Quarter 1932 7. State the marginal productivity theory of wages, given the assumption underlying it, and discuss the relation of this theory to the proposition that wages can be raised by collective bargaining. Summer Quarter 1936 7. As a result of persecution, a heavy migration of unskilled labor takes place from country A to country B. Trace the probable effects of this migration on the distribution of income in country B. 8. ‘Laborers will protest much more against a decrease in money wages in the face of constant prices of the things that they buy than they will against continuation of the same money wages in the face of rising prices. Consequently, the supply curve for labor should be drawn in terms of money and not of purchasing power.’ Comment.

Since the heydays of institutionalism labour economics had played a central role in the training of young economists. Yet, as the above questions show, after 1927 partial equilibrium analysis gets established as the main perspective through which a young economist in Chicago was expected to examine the complex dynamics of the labour market.

4 Integrating the Core: Mathematical Economics The Marshallian thrust of the economics imparted by Viner and Knight in Econ. 301 did not preclude Chicago students the possibility to learn other streams of neoclassical thought and to acquire

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more sophisticated analytical tools.13 Pluralism, in this connection, was ensured by Schultz’s presence in the department. On his arrival at Chicago in 1927, Schultz—who together with Theodor Yntema was also in charge of Statistical theory (Econ. 311)—began to teach the newly established Mathematical and Statistical Economics (Econ. 411).14 In 1929, the course, which was then listed in the Statistics and Accounting section, was split into Statistical Economics (Econ. 411) and Mathematical Economics (412). In 1931, Mathematical Economics was included among the Economic Theory courses and presented as a study of economics ‘from the point of view of assumptions, range of problems, methods and tools, and validity and utility of results under present conditions.’ Specific consideration was given to the problem of ‘circular reasoning’ in price theory, to the ‘advantages and limitations of the mathematical approach’ and to the possibility of developing a ‘statistical complement’ to pure theory, while explicit reference was made to the works of Walras, Pareto and Moore. In 1933, Schultz also began to give a seminar on ‘The Theory and Measurement of Demand’ (Econ. 405), dealing with both the ‘pure theory of demand’ and the ‘various methods of deriving demand functions from family budget data and from time series of consumption and prices.’ Schultz’s growing influence in the department was reflected in the increasing presence of qualifying queries requiring higher analytical skills. For instance, in 1933 the student was required to derive the combined demand for beef and corn of two economic agent curves under the following conditions: (Spring Quarter 1933) 4. Answer (a) or (b), but not both. (a) The final degree of utility curves of A and B for corn (X) and beef (Y) are as follows, the small letters x and y representing the quantities of X and Y consumed by the person indicated by the subscript. Person A B

Commodity X (corn) fa(xa) = − 3/2xa + 19/2 fb(xb) = − 3/8xb + 5

Y (beef) ϕa(ya) = − 1/2ya + 6 ϕb(yb) = − yb + 7

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The total market supply of corn is x = xa + xb = 14 and the total market supply of beef is y = ya + yb = 8 Without performing any numerical computation, explain how to  deduce the combined demand curves of A and B for corn in terms of beef and beef in terms of corn. (b) Is there an equilibrium price and output when a commodity is produced by two competing monopolists? Discuss this problem, touching on the solutions of Cournot, Edgeworth, Amoroso, and Wicksell.

After Schultz’s death in 1938, Oscar Lange was appointed in order to take much of the most advanced economic and statistical training at Chicago. He began in 1938 teaching Correlation and Curve-Fitting (Econ. 311), Statistical Economics (Econ. 411) and Mathematical Economics (Econ. 402)—while the following year he introduced two advanced seminars on Imperfect Competition (Econ. 307) and Business Cycle Theory (Econ. 332). Mathematical expertise, however necessary, had to be accompanied by an equal level of methodological consciousness. In addition to the kind of exercises reproduced above, the qualifying regularly contained several ‘open’ questions asking for a critical scrutiny of the conditions for both general and partial equilibrium analysis, or for a discussion of the limits and strengths of the two approaches: Spring Quarter 1930 2. State the conditions necessary for general stable equilibrium in a closed competitive economy, and defend each item included in your list. Spring Quarter 1935 2. Discuss the advantages of Marshall’s method of taking one relation at a time (plane curves) in contrast with the use of the concept of general equilibrium, and of intermediate procedures. Summer Quarter 1938 1. Write critically on the things to be taken as ‘given’ (the ‘data’) in stationary-economic analysis. List such magnitudes; discuss the facts as to the constancy of each in real life; and in so far as any one actually

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changes, consider whether this is due to economic causality and is explicable in terms of supply-and-demand reasoning, and whether it tends toward a position of equilibrium (a stationary value) in the future. Discuss the usefulness or necessity of this type of economic method.

Chicago students were asked to show a similar epistemic awareness as to the use of statistics applied to economic problems: Spring Quarter 1930 7. List three of the most notable applications of statistical methods to problems of economic theory (not including the business cycle) and indicate in each case what contribution to economic theory resulted, whether in choice of problem for study, basic method of analysis, preconceptions, conclusions, or in any other respect except the mere use of statistical data. Spring Quarter 1935 7. Discuss the assumptions underlying and the degree of suc cess obtained by recent attempts to make economic theory more quantitative.

The paternity of these questions is quite difficult to attribute. It may be Schultz’s, who had included a discussion of methodology in the course description for Mathematical Economics, or it may well be Knight’s, probably the most outspoken critic of the ‘quantitative approach’ to economic theory of his time.15 Anyhow, it is crystal clear that, despite the Marshallian turn of the post-1927 era, pluralism and open methodological discussion were crucial to the making of a Chicago economist during the 1930s.

5 History as a Central Part of the Core One of the main characteristics of the qualifying examinations that remained constant throughout the years is the fact that roughly onethird of the queries were regularly devoted to the history of economic

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thought. This should be by no means surprising. The course on History of Economic Thought (Econ. 302)—which, as Samuelson (1972) and Patinkin (1973) recall, represented one of the distinguishing marks of the department—was thought alternatively by Knight and Viner.16 The course was described as follows: The course combines a brief survey of the whole field of economic thought with a more intensive study of the ‘classical school’ of British economists. In the survey part of the course the emphasis is placed on the relation between economic thought and the cultural and economic life of the different peoples and periods. Some of the great contrasts in the character of economic life and in the attitude toward it which mark antiquity, the middle ages, and the successive periods of modern times receive special consideration. The gradual separation of a body of doctrine and pure science of economics or price theory, is made the background of the discussion of the classical school. A considerable fraction of the work of the course is given to a few of the most important classical writers whose doctrines are studied in relation to the problems and discussion of today.

Two elements are highlighted from this brief presentation. History of economic thought was studied at Chicago in the perspective of present-day problems. The relevance of each author was ultimately discussed in relation to the main issues of theory and policy of the day. Putting Knight’s and Viner’s views in a nutshell, we could say that while an economist is always situated in his own time, his doctrines are situated in our own and should be evaluated in the light of the present knowledge we have of economic theory. Yet, rather than collapsing the old theories into the new ones, both Viner’s and Knight’s aimed to assess the validity of any theory on the basis of its internal consistence and practical relevance. A second point that can be stated is that price theory, depicted above as the very essence of Chicago economics, emerges also as the main focus of the course in history of economic thought. Attending history of economic thought meant being exposed to the narration of how price theory emerged as the ‘pure science of economics’ and how it evolved over time, from the classical to the marginalist and neoclassical school, before being embodied in the teaching of Chicago economics.

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The analysis of the qualifying closely reflects the way history of economic thought was taught and conceived: its teaching was meant to help students acquiring a deeper knowledge of the foundations of modern (neoclassical) economics. The past was deemed important insofar as it was related to the present and able to offer a critical foundation for assessing contemporary theoretical and policy problems. A few examples may suffice: Spring Quarter 1928 1. Discuss the scope and method of the English classical school in the light of modern criticism thereof. Autumn Quarter 1928 1. Discuss the position of Adam Smith, Ricardo and J. S. Mill with respect to the relationship between rent and price, and state your own position. Autumn Quarter 1928 7. (a) What were the contributions of the Physiocrats to economic thought? (b) Who were the Physiocrats and what was their relationship to the problems current in their days? Autumn Quarter 1929 (a) Give a critical discussion of the doctrine of marginal productivity, with some notice of its history (suggestions: Menger, Wieser, J. B. Clark, Wicksteed, Walras, Pareto). Spring Quarter 1930 6. (a) What are the laissez-faire views of the classical school? (b) How would you explain their prevalence at that time? (c) What, if anything, was wrong with them? Fall Quarter 1930 6. Discuss carefully the relations between real cost and money cost, the merits of the case and the doctrines of leading writers from Adam Smith to the Austrian. Summer Quarter 1931 3. Give a careful statement of the classical theory or theories of wages with some indication of the development or variations (Smith to Cairnes, incl.) also indicating briefly the contrast between this and modern wage theory.

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Spring Quarter 1933 2. Trace the development of the demand concept from Adam Smith to the present, touching on the contributions of J. S. Mill, Cournot, Fleeming Jenkin, Walras, Böhm-Bawerk, and the statistical economists. Spring Quarter 1936 3. Sketch in general outlines the history of the capital concept and the theory of interest from Adam Smith to yourself.

Historical contextualization was carefully undertaken. History of economics was presented as a succession of specific ‘epochs of economic thought’—each characterized by a school of thought and its leading exponents. Moreover, the course was meant to make the students aware on how history of economic thought was affected, in its internal developments, by the complex relationships with culture, religion, policy, economic power and so on. The qualifying shows how students were asked to manage the possible causality links between history of facts and history of ideas. A few examples: Autumn Quarter 1927 1. Assuming that the development of economic thought may be  divided into four principal epochs, namely Classical antiquity, the Middle Ages, the Sixteenth to Eighteenth Centuries, and the later Eighteenth and Nineteenth centuries—give a brief general characterization of the ideas and literature of each epoch, particularly with reference to the conception of economic policy, its character, the agency by which it is to be carried out, and something of the underlying reasons for the changes from each epoch to the next. Summer Quarter 1929 4. Answer either (a) or (b). (a) Compare and contrast the place of labor cost or general pain cost in the systems of Smith, Ricardo, J. S. Mill, Marx, Jevons, Austrian School, and Cairnes. (b) Discuss the issue as to how far the changes in the character of economic thought from the classical-antiquity to the Middle ages, the latter to Mercantilism, and this to the Classical school, were due to changes in ‘conditions’ and how far to independent changes in men’s ideas and attitudes. Similarly for the current growth of ‘realistic’ schools (institutional and statistical).

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Summer Quarter 1931 1. Discuss the nature and historical causality of the following sequence: (a) (Medieval) Control of economic life in accord with ethical-religious principles by the church with the aid of the ‘secular arm.’ (b) (Post-Renaissance) Control by national state in accord with political policy. (c) (Nineteenth Century) ‘Laissez-faire:’ relatively little control over individual acting according to self-interest. (d) (Twentieth Century) Pronounced tendency to increased control. Spring Quarter 1931 1. State in a brief paragraph for each of the most distinctive features of the following schools or types of economic thought: (a) Greek; (b) Medieval; (c) Mercantilist or Nationalist; (d) British Classical School; (e) 19th Century Historical Schools; (f ) Socialism; (g) Institutional Economics; (h) Mathematical Economics; and (i) Statistical Economics. Autumn Quarter 1933 6. Briefly characterize and evaluate comparatively what you consider the significant ‘approaches’ or methodologies in economic science. (The following are to be taken as suggestive catchwords: classical, inductive, institutional, deductive, price-theory, sociological, socialistic, control.) Where possible, cite examples of the different tendencies in the history of economic thought from the Greeks to the present.

Notably, historical contextualization was carefully undertaken by Viner—his attentiveness for historical details is proverbial.17 Knight’s attitude in this respect is a little more puzzling. In this connection, let us draw again from Patinkin’s (1973, 797–798) direct recollections: There is one aspect of Knight’s treatment of the history of economic thought that continues to puzzle me: despite Knight’s broad historical interests—and his 1926 translation of Max Weber’s General Economic History—Knight made practically no attempt to relate the development of economic thought to the contemporaneous historical developments. At one point in his ‘History of Economic Thought’ course—after distinguishing several ‘epochs of economic thought’—he went on to say that we ‘have to examine the historical contexts of the economic writings of these periods’ (Classnotes, Econ. 302, 1945). But Knight himself did

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little further along these lines—except for some passing remarks in his discussion of Ricardo’s work. Instead, Knight’s approach to the history of thought was that of providing a purely logical criticism of the nature of the assumption made by the various schools of thought, and the validity of the conclusions that they drew from them; he was concerned almost solely with the logical consistency of the theories he was examining.18

Patinkin’s reminiscences notwithstanding, the qualifying also allows us to state that students were expected to be aware of the ‘social’—or even national—construction of economic theory, as a few examples may show: Summer Quarter 1928 4. Discuss the medieval doctrine of the just-price and the prohibition of usury in their general historical and cultural setting. Summer Quarter 1929 8. Give a general characterization of German, French, and American economic thought in the nineteenth century, in contrast to England. Spring Quarter 1936 8. What general features distinguish the economic thought of  American writers, from the foundation of the nation to the present, from the doctrines of the British classical school? Illustrate in the case of America by naming important writers and works. Summer Quarter 1936 6. Compare and contrast the social ideals and objectives to be brought about or contributes to by economic writing and discussion, of (a) the medieval school men (the ‘Canonists’); and (b) the ‘mercantilists’ as schools of economic thought. Summer Quarter 1937. Compare and/or contrast the ethical presupposition or axioms (the ultimate axioms of social policy) underlying (a) the canonistic economics of the late Middle Ages; (b) mercantilism; (c) the laissez-faire economics of the nineteenth century; and (d) ‘The New Deal.’

The intermingling of history and theory was not specific to Knight and Viner, or to Chicago alone. In 1938, the year of his arrival at Chicago, Oscar Lange started to teach a course on Ancient and Medieval

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Economic Thought Relating to Economic Life (Econ. 308).19 The relevance of the history of economic thought in graduate curricula was widely spread in American Universities: in a 1953 survey for the American Economic Association, Howard R. Bowen (1953) reported that history of economic thought—albeit a ‘declining’ field—was still a required or elected course by Ph.D. students at three quarters of the reporting institutions and that 12% of respondent graduate students considered it of great value—third field after Economic Theory (39%) and Statistics (26%).

6 The Persistence of Pluralism The qualifying exams in economic theory did not concentrate exclusively on theory—strictly convened. As we have seen, questions relating to history and methodology were not infrequent and for the Chicago student often constituted the required complement of analytical exercises. Other queries bypassing the technical core of economics focused on the very foundations of social policy. Several qualifying questions were related to the theoretical arguments about the possibility of a genuine socialism, as well on the efficacy of free trade and the desirability of minimal government involvement in the economy: Spring Quarter 1931 2. Give a brief discussion of the social advantages and defects of  entrepreneur price competition as a method of allocating productive resources among various possible uses. Spring Quarter 1933 3. Give some reasonable objectives for a centrally planned economy in a democratic state; state the grounds of your selection of objectives; indicate and discuss possible lines of procedure for realizing them through price control. Autumn Quarter 1934 2. State in general terms the main assumptions involved in stating that free competition would bring about an ideal allocation of productive services.

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Summer Quarter 1938 4. Give a brief but careful discussion of the question whether you would expect ‘cycles’ in a collectivistic economy. In so far as they would ‘tend’ to occur, what policies or measures for prevention or for mitigating their ill effects would be available to the collectivistic government which are not available to the government of the United States as constituted at present, without fundamental changes in the laws of property and enterprise.

In this connection, there seem to be no doubts as to Knight’s paternity of many of the above questions. In 1928, Knight started to give a course on Critique and Evaluation (Econ. 304), which after two years changed name into Economic Theory and Social Policy (Econ. 304). The course, listed in the Theory field, was described in the university catalogue as ‘a critical examination of the economic system based on property and competition in which are considered: its strength and weakness as a mechanism for the reconciliation and mutual promotion of individual interests; the type of interest and of personality it tends to develop; the meaning and bearing of social interests, in contrast and possible conflict with those called individual.’ Knight taught that course from 1930 to at least 1942, although the course was not offered with continuity. In 1940, Knight— together with the philosopher Charner M. Perry—also started a graduate seminar in Economic Theory and Social Control (Econ. 405) devoted to an ‘investigation of the theoretical assumptions as to the nature and ends of organized economic action, and as to the relation between these and the organization form, in “free” and “planned” economic systems.’ Another recurrent topic was the possibility of drawing welfare conclusions from the set of assumptions of traditional economics theory: Spring Quarter 1930 4. (a) Discuss the adequacy of competitive price as a measure of the welfare significance of market phenomena. (b) What means are available, or have been suggested, for modifying pecuniary measures of welfare, and what are their possibilities? Summer Quarter 1930 7. Discuss the problem of finding a satisfactory working concept of economic welfare.

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This is a theme that Knight (1944) will fully develop in 1944 when he will attack any attempt to base normative prescriptions on the Marshallian notion of ‘consumer’s surplus.’ Significantly, as it clearly emerges from our archival evidence, queries related to institutionalism (broadly conceived) were frequently included in the core theoretical qualifying tests, instead of being relegated to a special field examination. What follows are some illustrative examples: Spring Quarter 1927 6. What is meant by ‘institutional economics’? What are its outstanding doctrines, and its positive achievements? Summer Quarter 1927 6. Discuss the program, the technique of investigation, and the  achievements of the institutionalists in the light of previous revolts against the orthodox economics. Summer Quarter 1928 3. Appraise the institutionalist criticism of the Classical and NeoClassical economics and discuss the possibility of an institutionalistic approach to economic problems as a substitute for the older economics. Spring Quarter 1929 8. List the more important criticisms of the classical type of economic theory Veblen, Hamilton and Mitchell, and appraise them, as to merit and novelty in the history of doctrine. Autumn Quarter 1932 8. Briefly state your conception of the nature of institutional economics, its relation to the price-type theory type of economics, and its value to the student. Comment on the work of Adam Smith, J. S. Mill and Alfred Marshall with regard to the adequacy of the consideration given by them to institutional factors, and discuss the desirability of replacing the standpoint of Marshall by that of any institutionalist or group of institutionalists. Autumn Quarter 1935 8. Indicate briefly the position of the institutional school of economists in America. With what earlier movements in the history of doctrine could it be compared, giving illustrative names in both cases.

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Spring Quarter 1936 7. Compare the interpretations of economic history of any two: Marx, Sombart, Veblen, Max Weber. Summer Quarter 1937 2. Sketch the relation between the economic doctrines of Marx  and Veblen, relating both positions to the problem of an ‘institutional economics’ and to the writings generally representative of this position.

As the above bears witness to, questions related to institutionalism-related themes lasted until the late 1930s—a time in which the movement had already lost much of its influence in American economics. Ironically enough, it was Knight who helped to keep alive the movement’s tradition at Chicago long after Clark’s departure to Columbia (see also Asso and Fiorito 2013): Knight was probably the most authoritative critic of institutionalism during the 1920s (Asso and Fiorito 2008), and his attacks were often phrased in harsh terms. Still, he considered a thorough knowledge of both the methodological and epistemic bases of institutionalism as an essential portion of the training of a Chicago economist. In this connection, Knight began in 1929 to give a course on Economic History and Economic Theory (Econ. 323), devoted to the critical scrutiny of the ‘recurrent conflict between two conceptions of economics, the historical or institutional and the deductive system of the classical and mathematical schools.’ Two years later, the course was transformed into a Seminar in Historical and Institutional Economics (Econ. 404), which in 1932 eventually changed its name into Economics from an Institutional Standpoint (Econ. 305)—a course that Knight taught until 1942, although it was not offered with continuity. From Samuels (2005), we learn that while the bulk of the course dealt with institutionalist writers as they were properly understood— such as Thorstein Veblen, Wesley C. Mitchell, Walton H. Hamilton and others—its reading list encompassed both US and European sources. What is also interesting is that Knight conceived institutionalism as including German Historismus and the analysis of religious beliefs,

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as determinants of the prevalent socio-economic philosophy of life, provided by Werner Sombart, Max Weber and Richard Tawney.20 Far less apparent than Knight’s is the influence of his student Henry C. Simons on the composition of the qualifying. After his arrival at Chicago, Simons took over the course on Government Finance (Econ. 360) and Problems in Government Finance (Econ. 361)—both courses were previously taught by Viner.21 He continued to teach these courses though the 1930s, although in 1937 the course changed name into Economics of fiscal policy. Maybe the following questions could be somewhat related to his teaching. Spring Quarter 1936 5. Criticize from the standpoint (a) of recovery measures and (b) as measures of social reconstruction, either the general programs of the N.R.A. or that of the A.A.A. Summer Quarter 1938 4. Give a brief but careful discussion of the question whether you would expect ‘cycles’ in a collectivistic economy. In so far as they would ‘tend’ to occur, what policies or measures for prevention or for mitigating their ill effects would be available to the collectivistic government which are not available to the government of the United States as constituted at present, without fundamental changes in the laws of property and enterprise.

Even after the publication of his famous and influential manifesto ‘A positive program for laissez faire’ in 1934, it is not easy to trace questions directly connected to Simons’ laissez-faire views. Perhaps the queries related to his courses were relegated in a field examination and not in the general theory tests. While the requirements for Ph.D. candidates geared around a deep and critical knowledge of present and past economic theories, any doctrinal or militant approach to economic ideas and policies was left to student’s personal evaluation not to be submitted to any kind of formal scrutiny. This could explain why, as far as the Ph.D. examinations are concerned, the role of Simons in the shaping of ‘Chicago Economics’ appears to be less marked than commonly recognized.

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7 Widening the Core: Money, Banking and Business Cycle 1933 represented a turning point in the way economic training was tested at Chicago: the qualifying in general economic theory was divided into two examinations: one in price theory and one in monetary economics.22 The Fall 1933 qualifying test shows how monetary problems were closely related and almost coincident with business cycle theory or, in more modern terms, macroeconomics: B. Criticize the view that industry fails to distribute sufficient purchasing power to buy its product, resulting in economic unbalance. 1. State the classical doctrine of international gold flows and price levels and discuss some recent criticism of this doctrine. 2. ‘The primary cause of business depression is the rigidities of the price structure.’ ‘Through their alternating contraction and expansion of the circulating medium the banks are responsible for the wide swings in industrial activity.’ 3. Discuss the theoretical shortcomings involved in a policy on the part of our federal government of progressively bidding up the price of gold in foreign markets. 4. If business recovery came without the assistance of governmental inflation it would be accompanied by an expansion of the circulating medium as a result of the lending operations of the commercial banks. What significant similarities and differences are there between such expansion and (a) government borrowing from the banks in order to finance public works, (b) outright ‘greenbackism’? 5. It has been argued that insomuch as the demand for capital goods is a derived demand it follows that any voluntary saving will necessarily result in some degree of unemployment. That is to say, the savings will reduce the demand for consumers’ goods, thus reducing the demand for capital goods, and consequently not all the savings will be borrowed; hence unemployment. But the commercial banks, through their power to create circulating medium, make it possible for entrepreneurs to obtain the funds with which to create capital goods without the reduction in consumer demand which comes with saving. Hence the banks furnish a means of escape from the dilemma. Discuss.

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At Chicago, the main graduate courses in money and banking were taught by Lloyd W. Mints.23 By the 1925–1926 academic year, Mints had been giving the graduate-level money and banking series to teach—a position he held until the mid-1940s. From 1925 to 1935, Mints taught the two-semester course on Money and Banking.24 The course was described as: a two-major course having two objectives. The student is expected to make a wide acquaintance with the literature of the field; and to become familiar with those theories and principles in the fields of money and banking which are essential to an intelligent understanding of the problems arising in these fields. The relation of a medium of exchange to the processes by which changes in the price level are brought about are critically examined. Consideration is also given to the principles which should govern the operations of individual commercial banks and of the banking system, and to the relations of these operations to changes in the price level and business conditions.

A reading list preserved in Milton Friedman’s archival papers shows that most of Mints’ 1932 course focused on the quantity theory of money as presented by a selection of chapters of the most important research works in the field published during the former two decades by Alfred Marshall, Irving Fisher, Arthur C. Pigou, Ralph Hawtrey and John M. Keynes. The different approaches to business cycle theory were presented following Hansen’s book on Business Cycle Theory (1927) and the Treatise on Money (1930). A deep discussion of the Treatise on Money was supported by the reading of the Keynes–Robertson and Keynes– Hayek exchanges together with some of the most important reviews to the book. Since the onset of the Great Depression, monetary economics had massively grown in importance not only within Chicago teaching, but also in the research agenda of the more representative economists of the Chicago Department of Economics. In June 1931, Keynes was invited to the Harris Foundation Conference in Chicago, significantly devoted to the topic ‘Unemployment as a world problem.’ Here, Keynes’ interpretation of the Great Depression, based on the Treatise on Money, was presented and discussed with some of the leading figures

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of the Department.25 The following year, the Harris Conference, jointly organized by Jacob Viner and John H. Williams from Harvard, set out a famous manifesto for expansionary monetary and fiscal policy in order to reverse the powerful deflationary tendencies then at work. In 1933, a group of seven Chicago economists signed a plan urging the establishment of a 100% reserve banking system, in order to prevent the lending activities of commercial banks from affecting and destabilizing the money supply of the country. These initiatives together with the teaching, the research works and the public speeches of Jacob Viner, Lloyd Mints, Paul Douglas, Charles O. Hardy, Aaron Director and Henry Simons have been frequently held responsible for setting out a specific, consistent and enduring stream of thought, often labelled ‘Chicago Monetary Tradition.’ The distinguishing characters of this tradition were highlighted for the first time by Milton Friedman (1956), in the attempt to clarify the principles underpinning his own restatement of the quantity theory of money as a powerful alternative to Keynesian macroeconomics. Since then, the nature, the content and the continuity of this tradition have been the object of quite an intricate debate among economists and historians of economic thought (Leeson 2003; Nerozzi 2009; Ahiakpor 2010; Laidler and Sandilands 2010). As monetary theory grew in importance in connection with the massive experiments in economic and social policy undertaken under the New Deal, the teaching of money and banking widened: in 1934 Melchior Palyi a German visiting professor, who taught International Finance since 1927 (Econ. 334), was also entrusted with the course of Business Cycle Theory (Econ. 333) and European Banking (334).26 Shortly after the publication of the General Theory, the qualifying reflected the new theoretical issues arisen by Keynes’ new theoretical effort. Many questions were related to such topics as involuntary unemployment, monetary illusion, fiscal deficits and liquidity preference: Spring 1936 4. Under which conditions can there be a considerable amount of fairly permanent involuntary employment in an economic society? Under what conditions, if any, and by what procedure, if at all, would

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it be possible to raise the wages of all the labor in an economic society? Under what conditions, if any, and by what procedure, if at all, would it be possible to raise the wages of all the labor in an economic society above the theoretically competitive level (the level determined by ‘marginal productivity’) without bringing about unemployment? Summer 1936 8. ‘Laborers will protest much more against a decrease in money wages in the face of constant prices of the things that they buy than they will against continuation of the same money wages in the face of rising prices. Consequently, the supply curve for labor should be drawn in terms of money and not of purchasing power.’ Comment. Summer 1938 Argue in detail the effect on the rate of interest, (a) in the short run, (b) in the long run, to be expected from a general change in the desire to hold cash. State carefully the assumptions you make at every stage of the argument. Autumn 1938 4. Explain J. M. Clark acceleration of derived demand. Does it  hold always or are there certain qualifications necessary? If so, what are they? What bearing has it upon the statistical verification of the under-consumption theories of the business cycle? Autumn 1939 It is Keynes’s contention that an increased liquidity preference will raise the rate of interest and thus reduce investment, employment and income, and that a contraction of consumption will come only after the reduction of income. State an alternative position as to the manner in which an increased liquidity preference would tend to reduce investment and employment. Consider both positions critically and state your conclusions.

While the above questions offer a further testimony of the quick reception of Keynes’s master piece in the USA, the terminology employed betrays the tendency to translate Keynes’s approach in the language that was common usage in the American monetary debate. The General Theory was widely intended as a contribution to business cycle analysis and to public policy, rather than the foundation of a new discipline

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or theoretical approach. As such, it was integrated with some of the landmarks in dynamic monetary analysis offered by J.M. Clark, Dennis Robertson and Ragnar Frisch. Moreover, Keynes contribution was generally held to be of little help or even damaging to a serious understanding of the working of the monetary system and of its ability to affect general business conditions. While the Treatise on Money was widely appreciated in Chicago (and contributed to shape its teaching), the General Theory was not. Aside from Viner’s mainly positive review (Viner 1936), the other leading figures of the Chicago Department of Economics welcomed Keynes’ General Theory with bitter criticisms (Knight 1937 a, b; Simons 1936, etc.). This critical stance towards Keynesian policies enacted under the New Deal, especially after the 1937–1938 recession, was reflected in some of the questions of the qualifying: Summer 1938 2. Discuss and evaluate ‘pump priming’ as a business cycle policy. In particular, answer the following questions: (a) Should a policy of ‘pump priming’ in recession be complemented by a policy of deflation in prosperity? (b) What bearing does it have on the principle that governmental budgets should be balanced without borrowing or printing money? (c) In what way (or ways) could it be brought in accord with the requirement of a balanced budget? Do you know of countries which have adopted ways of doing this? (d) If ‘pump priming’ involves an indefinite increase of the public debt, must this lead to a catastrophe? Autumn quarter 1939 In regard to the probable effect on employment of a once-for-all reduction of money wage rates it is Keynes’s contention, (a) that product prices will decline correspondingly; with the result that there will be no improvement in cost-price relationships, and (b) that such influence in the direction of increased employment as there may be will come from a decline in the rate of interest as a consequence of the wage reduction. A more orthodox position would be to the effect that, (a) there would be little or no tendency for product prices to decline immediately after a wage reduction, and that very shortly income would so increase, as

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a consequence of increased employment, as to avoid the necessity of any, or at least any commensurate, decline in product prices, and (b) a wage reduction would not affect the rate of interest, but would raise the marginal productivity of capital. Comment. State the case for the thesis that an appropriate monetary policy would control or at any rate greatly reduce, fluctuations in employment. How likely is it that monetary measures alone would be adequate to achieve this end? Autumn quarter 1940 3. How do you account for the failure of the ‘reflationary’ program of the last seven years to restore full employment? 4. ‘The boom is a period in which we exploit to the full all the available new developments which the progress of science and technology, together with the growth of population, have up to that point made economically possible. Once all factories have installed the new machines, once a city has been equipped with the municipal utilities which technology has so far made available, once the construction of houses, apartments, office buildings, hotels, school buildings and the like have caught up with the growth of the population, there remains little that can profitably be done except to maintain the capital plant already constructed. When this point is reached, the boom dies a natural death.’ (Hansen, TNEC, 3501). Indicate why you think this is or is not (a) a wholly, (b) a substantially, correct explanation.

8 Conclusions As far as the existence of a peculiar ‘Chicago School of political economy’ can be retraced in the interwar period, its origins have to be looked for in the establishment of a discernible oral tradition within the teaching and the public speeches of Chicago economists. This tradition has been so far looked for through the published or unpublished lecture notes of courses given at Chicago, from the recollection of former Chicago students, together with the writings of the most authoritative economists of the Department. When read in the context of the above mention sources, the archival materials presented in this chapter may help understand which kind of knowledge and theoretical skills a

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Chicago economist was expected to be equipped with. Specifically, a wide set of qualifying text, retraced in Albert G. Hart Papers preserved at Columbia, shows how the standards required to access Ph.D. training were set at Chicago during the 1920s and how they evolved over time, revealing which topics and fields of research were offered to graduate students and how they were presented, discussed and tested. A set of concluding remarks can briefly summarize the main evidences and tendencies emerging in the light of our previous analysis. First of all, the qualifying tests (supplemented by the courses’ programmes) show the existence of two important turning points in the shaping of Chicago economic training. The first one is in 1927, when John M. Clark, the undisputed leader of the Chicago Department of Economics during the heyday of institutionalism, moved to Columbia, leaving open ground to the restructuring of the courses according to a different and more analytical approach already represented in the Department by Viner and, in a narrower field, by Paul Douglas. The arrival at Chicago of figures such as Knight, Schultz and Simons definitely shifted the balance towards neoclassical theory. The qualifying test patently testify this massive shift: questions broadly reflecting the institutionalist approach to economics declined from their 32% of the total qualifying test in 1926 to less than 15% in 1927 and to roughly 5% in the following three years; at the same time, neoclassical price and distribution theory picked to almost 50% of the question on average. Thus, in the late 1920s, Marshallian partial equilibrium analysis took over the throne and was firmly established as the ruling approach that any student at Chicago should be able to master if she/he wanted to aspire to the higher degrees in economics. A second turning point occurred in 1933 when the qualifying test in Economic Theory was divided into two major fields: price and distribution theory on the one side; and money and business cycle on the other. This innovation reveals the importance acquired by monetary theory in economic training at a time that is commonly associated with the nurturing of what was later named as the ‘Chicago monetary tradition.’ Though the tests related to the monetary field preserved in Hart’s Papers are seriously incomplete (indeed, they provide no hint for 1934 and 1935), the queries we did found contain many references to

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the quantity theory of money, its relations with prices and aggregate demand, together with a critical discussion of the most important concepts laid down by Keynes and other, more orthodox, monetary economists. While this material cannot either prove or disprove the existence, the nature and the originality of a monetary tradition specific to Chicago, yet it provides a further testimony of the importance and the breadth that monetary economics gained in this university during the 1930s. The above-mentioned turning points certainly help figuring out the way and the time of the changes that allowed the Chicago Department of economics to be listed among the most advanced and most prestigious of the country. Yet the documentary evidences that we could draw from the qualifying tests launch a warning against the temptation of depicting a unidirectional and monotonic evolution from institutionalism to neoclassical theory. If Marshallian partial equilibrium analysis was firmly established at the core of Chicago training in economics since the late 1920s, the way it was taught and complemented by other approaches testifies a persistent methodological pluralism and the respectful examination of many different approaches, such as the Austrian school, mathematical economics and institutionalism. First of all, the questions on institutionalism did not cease to be posed to the student. Indeed, institutionalism (or ‘institutionalism-related’ topics) continued to be taught by many Chicago economists such as Harry Millis, Paul Douglas and, above all, Frank Knight. Secondly, the way price and distribution theory (as well as labour economics) were taught maintained that the different assumptions and hypothesis underpinning the analysis were always to be taken in careful consideration by the student. Thus, deep methodological awareness was among the fundamental ability that a Chicago trained economist was expected to have. As a third point, history of economic thought was always the object of careful scrutiny in the qualifying tests, both with an eye to precise historical contextualization and to the analytical comparison with modern neoclassical theory. In the end, we could state that the qualifying tests reveal how far Chicago economics cannot be considered, at least in the interwar

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period, neither a set of theoretical postulates, concerning an alleged true economic doctrine, nor an ideological commitment to the defence of market economy; rather, Chicago economics manifested itself as an open, pluralistic but highly demanding method to discuss any kind of economic idea with reference both to its declared or hidden assumptions and to its remote historical roots.

Notes 1. The classic references are Rutherford (1998), Morgan and Rutherford (1998), Yonay (1998), and Rutherford (2011). 2. The Hart Papers at Columbia University contains a run of economic theory qualifying exams from the University of Chicago covering the period 1926–1940. Ph.D. qualifying exams took place 4 times a year— one for each quarter—and after 1933 the economic theory qualifying was split in two distinct parts, one on Economic Theory (ET) and the other on Monetary and Cycle Theory (MCT). The relevant archival material is composed by the following exams: 1926 (Spring Quarter, Summer Quarter); 1927 (Spring Quarter, Summer Quarter, Autumn Quarter, Winter Quarter); 1928 (Spring Quarter, Summer Quarter, Autumn Quarter); 1929 (Spring Quarter, Summer Quarter, Autumn Quarter); 1930 (Spring Quarter, Summer Quarter, Autumn Quarter); 1931 (Summer Quarter, Spring Quarter); 1932 (Spring Quarter, Summer Quarter, Autumn Quarter); 1933 (Autumn Quarter ET, Autumn Quarter MCT); 1934 (Autumn Quarter ET); 1935 (Spring Quarter ET; Autumn Quarter ET); 1936 (Spring Quarter ET, Summer Quarter ET); 1937 (Summer Quarter ET); 1938 (Summer Quarter ET, Autumn Quarter MCT); 1939 (Spring Quarter, MCT; Autumn Quarter MCT); and 1940 (Spring Quarter ET; Spring Quarter MCT). 3. Interestingly, Hart was himself a product of Chicago interwar pluralism. According to Reder’s (1982, 5–6) recollections: ‘Among graduate students or young instructors of my student years at Chicago (1939–1941), some (e.g., Yale Brozen, D. Gale Johnson, H. Gregg Lewis) were Chicago-style economists; others (such as G. L. Bach, Arthur Bloomfield, A. G. Hart, C. E. Lindblom, Jacob Mosak, David Rockefeller) would not usually be thought of as examples of the Chicago genre.’

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4. Interestingly, Hamilton (1919)—the one who introduced the term ‘institutionalism’ into the literature of economics in 1919—visited Chicago from Amherst in the summer of 1917 and gave a graduate course on ‘Current Tendencies in Economic Thought.’ 5. Since his arrival at Chicago Clark gave also regularly a field course on Public Policy and the Railroad (Econ. 363). Clark had in fact originally been hired by James Laurence Laughlin as a railway economist (Rutherford 2010, 26). 6. In 1926, the list included: (1) Statistics and Accounting; (2) Economic History; (3) The Pecuniary and Financial System; (4) Labor as an Agent in Production and as a Claimant of the Product in Industry; (5) Social Direction and Control of Economic Activity; (6) Government Finance; (7) Market Functions and Structures; (8) The Economics of LargeScale Industry and of Monopoly; (9) Population and the Standard of Living; and (10) A Field proposed by the candidate and approved by the department. This list was slightly modified over the years. 7. Interestingly, Clark considered his own approach to economic psychology to be complementary to that of Parker. As he put it in a letter to a French colleague: ‘Professor Parker and myself, working independently, have treated two complementary aspects of human nature: he the innate qualities, I the modifying elements of the environment.’ John Maurice Clark to Maurice Roche-Agussol, September 14, 1918. In Asso and Fiorito (2004a, 469). 8. John Maurice Clark to John Bates Clark. Chicago, January 11, 1924. Joseph Dorfman Papers, Rare Book and Manuscript Library, Columbia University. In Asso and Fiorito (2004b). 9. Similarly, Viner and Knight taught alternately both History of Economic Thought and Modern Tendencies in Economics. 10. According to Reder (1982, 7): ‘Hostile to Douglas and Henry Schultz, his [Knight’s] relations with Viner were probably “correct,” but there is little evidence of cordiality. What relations they had must at times have been strained by Knight’s refusal to cover the fact of disagreement with a fig leaf of politeness. Cause and effect aside, Knight and Viner were not able to co-ordinate their views on research or departmental appointments; so far as I am aware they never tried to do so.’ 11. According to Patinkin (1973, 788): ‘Many factors lie behind this long road to understanding and appreciation. First of all, Knight gave little emphasis in his teaching to those things to which the beginning graduate student is normally attracted—namely the technical aspects of the

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discipline, and the newer the better. In part this was due to the fact that Knight was just not interested in these aspects—and in part because he took this knowledge for granted and wanted to get at the more fundamental issues that lay behind the assumptions and implications of the analysis. And this was not simply a reflection of the period and of the generation—for my classnotes of Jacob Viner’s contemporaneous version of the Economics 301 course show that Viner (in addition to being concerned with the broader issues of analysis and scholarship) gave considerably more emphasis to the technical aspects of the analysis than did Knight. Thus, for example—as might be expected from his famous article on ‘Cost Curves and Supply Curves’ (1931)—Viner provided a fairly detailed presentation of the properties of these curves under the assumptions of imperfect as well as perfect competition, though (as I shall note later) Knight too discussed the theory of imperfect competition.’ 12. We were able to detect only this single question from the 1939 Summer Quarter qualifying: ‘5. (a) Write briefly on the nature of the “risk” which confront the business entrepreneur and presumably affect his behavior. (b) Write briefly on the meaning of “profit” as a category in distribution, how it is determined in a competitive free enterprise economy, and under what conditions the total profit in the economy would be expected to be respectively positive, zero, or negative.’ 13. In 1931, Herbert J. Davenport visited the University of Chicago (where he had graduated in 1902) to give a monothematic course on The Marshall Economics (Econ. 305). Davenport was highly critical of Marshall. See especially his posthumously published The Economics of Alfred Marshall (1935). 14. Yntema, who had joined the faculty of the University of Chicago in 1923, made his first appearance as a graduate programme teacher in 1927. 15. As Reder (1982, 4) put it in his recollections: ‘Whatever the cause, Schultz’ attempts to disseminate mathematical economics and econometrics at Chicago had to overcome Knight’s formidable opposition. Whether this opposition was responsible for the adverse opinion of Schultz held by some Chicago students (of the middle and late 1930s) is hard to say: Knight was not one to hide his views, and his opinions carried weight. Two of the students not favorably impressed by Schultz were Friedman and Stigler; they might have influenced others. However, there were other good students (for example, Martin Bronfenbrenner and Jacob Mosak) who always spoke highly of Schultz as did Lange himself.’

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6. In 1930 and 1931, Knight and Viner co-taught the course. 1 17. On Viner as an historian of economics see Groenewegen (1994) and Winch (1983). 18. The broad consensus between Viner and Knight did not prevent these two exceptionally able teachers from offering different if not opposing interpretations on specific topics and authors. According to Patinkin (1973, 797): ‘In [Knight’s] teaching of the “History of Economic Thought” (Econ. 302), […] his detailed critique of the Ricardian system (Knight 1935) was the vehicle by which Knight made clear the main features of his own analytical framework. For this reason this history was live and current for us as students. Here too, however, I must admit that part of this liveliness stemmed from our realizing that the evaluation of Ricardo was also the subject of a running debate between Knight and Viner, where in contrast with the analytical genius whom Viner depicted, Knight depicted a Ricardo who represented a retrogression from the achievements of Smith: primarily I think, because of what Knight regarded as Ricardo’s greater emphasis on—and formalization of—the labor theory of value. Indeed, Smith—according to Knight—did not believe in the labor theory of value (Classnotes, Econ. 302, 1945).’ Even in the topics they treated there was probably some difference between Viner and Knight. Again, we are informed by Patinkin that: ‘Knight devoted most of his “History of Thought” course to the classical school, and in this connection had us read the relevant texts from Smith, Ricardo, Senior, and Mill. He then set us the task of presenting what we had learned about this school in a term paper (which had become a standard feature of the course) on “The Classical Cost-of-Production Theory of Price.” The remainder of the course was devoted to the Austrian “subjective-value revolution,” with a few passing remarks added with reference to the institutionalists. As already indicated, there was much overlapping between this course and Knight’s theory course proper— though the emphasis of the latter was on the Marshallian synthesis of the classical and Austrian approaches.’ 19. The course was described as: ‘The economic thought of Greek Philosophy; the Romans; economic doctrines in Roman Law. Early Christianity; the Apostolic Age and the Early Fathers; Augustine; the Thomist system. Christianity and social revolt; the medieval heretics; the Reformation; Anabaptism and the Peasant War. Protestantism and capitalism. The economic doctrines of the Catholic church.’

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20. In a 1937 letter to his friend and institutionalist ‘rival’ Clarence Ayres, Knight himself offers a rather telling (and provocative) description of the aim and contents of the course. The letter reveals the little value that Knight attached to the constructive side of the institutionalist doctrine, particularly as an instrument to understand real economic events: ‘You probably know that I attempt to give a course on “Economics from an Institutional Standpoint.” I am taking the liberty of inflicting on you my latest outline and reading list. I would very much appreciate critical comments, and especially suggestions of good short reading. … It is unnecessary to say that I don’t place any very high estimate on the constructive value of institutionalist writings as known to me – including those of C. E. Ayres! What I would like to do would be to take the ‘challenge’ seriously and make some real contribution toward an understanding of institutional development. In this connection, I am convinced that legal philosophy and legal history form the main item which needs emphasis, with religion probably in second place.’ (Knight to Clarence E. Ayres, 16 February 1937; quoted in Samuels 1977, 305). 21. Econ. 360 was described as: ‘A survey course examining both the internal financial problems of government and those arising from the relations between different governments and between government and its citizens. A critical analysis will be made of the major principles and practices relating to the financial aspects of the spending, taxing, borrowing, and internal-management activities of government.’ 22. Still in 1933, the rules governing the final examinations for the doctoral degree in economics at Chicago underwent some changes. The candidate was now required to specialize in only three fields: general economic theory (which for the first time expressly included ‘monetary and cycle theory’), the field of the thesis and one subject chosen from (1) Statistics; (2) Accounting; (3) Economic History; (4) Financial System and Financial Administration; (5) Government finance; (6) Labor and Personnel Administration; (7) Trusts and Public Utilities; (8) International Economic Relations; and (9) some other field proposed by the candidate. These rules remained unaltered until the mid-1940s. 23. Lloyd W. Mints arrived at Chicago in 1922. In 1922, he was hired as Instructor of Political Economy and in 1924 became Assistant Professor of Political Economy. On Mints’ life and career see Peterson and Phillips (1991).

11  Chicago Economics in the Making, 1926–1940 …     415

24. In 1935–1936, the course was divided into two distinct courses: Money (Econ. 330) and Banking (Econ. 331) Mints taught also the graduate as well the advanced course on Problems in Money and Banking (Econ. 332). Like many of the ‘Chicago School,’ Mints was somewhat uncomfortable with this designation, though he identified the birth of the Chicago School as 1933, when he and several colleagues published a tract on Banking and Currency Reform (Simons et al. 1933). 25. Aside from Viner, then visiting professor in Geneva, ‘all the Chicago economists were listed as members of the 1931 roundtable group, including Garfield Cox, Aaron Director, Harry Gideonse, Frank Knight, Harry Millis, Samuel Nerlove, Henry Schultz, Chester Wright, Quincy Wright and Theodore Yntema’ (Davis 1971, Appendix B). Simons and Mints also took part in the conference and Mints asked Keynes several questions related to different methods of monetary expansion. 26. In 1927, Palyi first came to the USA as a visiting professor at the University of Chicago. 1928 saw Palyi as an economist at the Deutsche Bank. Until 1931, Palyi was also a Professor of Finance at the Graduate School of Commerce in Berlin. For the next three years, he held two posts important in the financial reconstruction of the German economy: he was the principal economic advisor to the Reichsbank and the Managing Director of the Institute for Currency Research, Berlin. By 1933, Palyi had immigrated to the United States. He became a visiting professor and research economist at the University of Chicago and the University of Wisconsin.

References Ahiakpor, J. C. W. (2010). On the Similarities Between the 1932 Harvard Memorandum and the Chicago Antidepression Recommendations. History of Political Economy, 42(3), 547–571. Asso, P. F., & Fiorito, L. (2004a). Human Nature and Economic Institutions: Instinct Psychology, Behaviorism, and the Development of American Institutionalism. Journal of the History of Economic Thought, 26(4), 445–477. Asso, P. F., & Fiorito, L. (2004b). Curiosities from the Columbia University Archives. Storia del Pensiero Economico, 2(2), 149–163.

416     L. Fiorito and S. Nerozzi

Asso, P. F., & Fiorito, L. (2008). Was Frank Knight an Institutionalist? Review of Political Economy, 20(1), 59–77. Asso, P. F., & Fiorito, L. (2013). Studying Institutional Economics at Chicago in the 1930s: The Case of Arthur Bloomfield. Research in the History of Economic Thought and Methodology, 31B, 57–77. Bowen, H. R. (1953). Graduate Education in Economics. American Economic Review, 43(4), 1–223. Cain, G. (1979). Paul H. Douglas. In D. L. Sills (Ed.), International Encyclopedia of the Social Sciences (Vol. 18, Biographical Supplement, pp. 153–156). New York: Free Press. Clark, J. M. (1918a). Economics and Modern Psychology: I. Journal of Political Economy 26(1), 1–30. Clark, J. M. (1918b). Economics and Modern Psychology: II. Journal of Political Economy, 26(2), 136–166. Davenport, H. J. (1935). The Economics of Alfred Marshall. Ithaca, NY: Cornell University Press. Davis, J. R. (1971). The New Economics and the Old Economics. Ames: Iowa State University Press. Friedman, M. (1956). The Quantity Theory of Money: A Restatement. In M. Friedman (Ed.), Studies in the Quantity Theory of Money (pp. 3–21). Chicago: University of Chicago Press. Groenewegen, P. (1994). Jacob Viner and the History of Economic Thought. Contributions to Political Economy, 13(1), 69–86. Hamilton, W. H. (1919). The Institutional Approach to Economic Theory. American Economic Review, 9(1), 309–318. Hansen, A. H. (1927). Business Cycle Theory, Its Development and Present Status. Boston: Ginn. Irving, D. A., & Medema, S. G. (Eds.). (2013). Jacob Viner Lectures in Economics 301. New Brunswick, NJ and London: Transaction Publishers. Kaufman, B. E. (2010). Chicago and the Development of Twentieth Century Labor Economics. In R. B. Emmett (Ed.), The Elgar Companion to the Chicago School of Economics (pp. 128–151). Cheltenham, UK: Edward Elgar. Keynes, J. M. (1930). A Treatise on Money (2 vols.). London: Macmillan. Knight, F. H. (1921). Cost of Production and Price Over Long and Short Periods. Journal of Political Economy, 29(4), 304–335. Knight, F. H. (1935). Statics and Dynamics: Some Queries Regarding the Mechanical Analogy in Economics. The Ethics of Competition and Other Essays (pp. 161–185). New York: Harper & Bros.

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Knight, F. H. (1937). Unemployment: And Mr. Keynes’s Revolution in Economic Theory. Canadian Journal of Economics and Political Science, 3(1), 100–123. Knight, F. H. (1944). Realism and Relevance in the Theory of Demand. Journal of Political Economy, 52(4), 289–318. Laidler, D., & Sandilands, R. (2010). Harvard, the Chicago Tradition and the Quantity Theory. A Reply to James Ahiakpor. History of Political Economy, 34(3), 515–532. Leeson, R. (Ed.). (2003). Keynes, Chicago and Friedman (2 vols.). London: Pickering and Chatto. Morgan, M. S., & Rutherford, M. (Eds.). (1998). From Interwar Pluralism to Postwar Neoclassicism. Durham, NC: Duke University Press. Nerozzi, S. (2009). Jacob Viner and the Chicago Monetary Tradition. History of Political Economy, 41(3), 575–604. Patinkin, D. (1973). Frank Knight as Teacher. American Economic Review, 63(5), 787–810. Peterson, R. D., & Phillips, R. J. (1991). In Memoriam: Lloyd W. Mints, 1888–1989: Pioneer Monetary Economist. American Economist, 35(1), 89–91. Reder, M. W. (1982). Chicago Economics: Permanence and Change. Journal of Economic Literature, 20(1), 1–38. Rutherford, M. (1997). American Institutionalism and the History of Economics. Journal of the History of Economic Thought, 19(2, Fall), 178–195. Rutherford, M. (Ed.). (1998). The Economic Mind in America: Essays in the History of American Economics. New York: Routledge. Rutherford, M. (2010). Chicago Economics and Institutionalism. In R. B. Emmett (Ed.), Elgar Companion to the Chicago School of Economics (pp. 25–39). Cheltenham: Edward Elgar. Rutherford, M. (2011). The Institutional Movement in American Economics, 1918–1947. Cambridge, MA: Cambridge University Press. Samuels, W. J. (1977). The Knight-Ayres Correspondence: The Grounds of Knowledge and Social Action. Journal of Economic Issues, 11(3), 485–525. Samuels, W. J. (2000). Introduction to the Problem of the History of the Interwar Period. Research in the History of Economic Thought and Methodology, 18A, 139–147. Samuels, W. J. (2005). Notes and Other Materials from Frank H. Knight’s Course, Economics from an Institutional Standpoint, 1933–1934. Research in the History of Economic Thought and Methodology, 23B, 141–192.

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Samuelson, P. A. (1972). Jacob Viner, 1892–1970. Journal of Political Economy, 80(1), 5–11. Simons, H. C. (1936, July). Keynes’ Comments on Money. The Christian Century, 2, 1016–1017. Simons, H. C. et al. (1933). Banking and Currency Reform. Unpublished Memorandum. Papers of Henry Simons, Box  11, File 1, Special Collections, Joseph Regenstein Library, University of Chicago. Viner, J. (1931). Cost Curves and Supply Curves. Zeitschrift für Nationalökonomie, 3(1), 23–46. Reprinted with the Supplementary Note in The Long View and the Short (pp. 50–84). Glencoe, IL: The Free Press, 1958. Viner, J. (1936). Mr. Keynes on the Causes of Unemployment: The General Theory of Employment Interest and Money by John Maynard Keynes. Quarterly Journal of Economics, 51(1), 147–167. Yonay, Y. P. (1998). The Struggle Over the Soul of Economics: Institutionalist and Neoclassical Economists in America Between the Wars. Princeton, NJ: Princeton University Press. Winch, D. (1983). Viner as Intellectual Historian. Research in the History of Economic Thought and Methodology, 1, 1–17.

Index

A

Acton, John 22, 137 Adam Smith Institute 109, 332 Ahnenpaß (ancestor passport) 91 Alchian, Armen 102, 134, 140, 162–163, 196 American Economic Association (AEA) 121n, 137, 169–170, 172, 249, 397 American Enterprise Institute 133, 167 Anti-Semitism vii, 26, 93, 95, 107, 187n Apollonio, Dorie 74 Archibald, James 180 Arrow, Kenneth 110, 172 Association of Private Enterprise Education (APEE) 75–76, 80 Atlee, Clement 181 Austrian Institute for Economic Research 99, 101, 130, 133, 198–199, 314–315

Business Cycle Research 131, 141–142, 144, 149, 225– 226, 234 Austrian School academic hierarchy 48 aristocracy and 101–108, 227 Boettke and 72–73 business cycle theory xi, 5, 36, 52, 144, 196, 200, 231, 244, 290, 390–391, 408 Chicago School and 35–43, 233– 234, 245–246, 249–250 CHOPE and 82 on democracy 24, 30 on dictatorship 23 eternal merit of freedom 173–185 FEE and 50, 80 Friedman and 171, 244–248 Galbraith and 168–169 GMU and 20–21 government and 237–238

© The Editor(s) (if applicable) and The Author(s) 2018 R. Leeson (ed.), Hayek: A Collaborative Biography, Archival Insights into the Evolution of Economics, https://doi.org/10.1007/978-3-319-95219-2

419

420     Index

Great Depression and 146–147, 243 Hitler and 5 investment cycle theory 144 Keynes and 201 Kaldor and 163–166 Lachmann and 240 Machlup and 289–290, 295 Knight and 135–136, 139–147, 170, 234, 243 Mises and 99, 115 MPS and 47 producer sovereignty and 13 Robbins and 231–232 Schmidt and 149 stagflation and 83 trade-cycle theory 145 “Truth,” 13, 16–18, 32, 115, 219, 223 Ayres, Clarence E. 414n B

Bader, Lawson 81 Ball, Whitney 81 Ballantrae, Baron 33 Balogh, Thomas 254–255, 307 Bank of England 242, 253 Bark, Denis 112 Bartley, William Warren III 85n, 134, 219, 245, 254 Beck, Glenn xv, 31 Beck, Morris 72 Becker, Gary S. 363n Bellagio Group 314, 319 Bennett, William 38, 81 Berger, Adolph O. x, 45, 133–134, 142, 144, 148, 194, 204, 234–235

Berger, Arnold 105, 217, 225–226 Berlin, Isaiah 47, 334–338, 365n Berlin Wall 30, 217 Bero, Lisa 74 Beveridge Report 162 Beveridge, William xii, 32, 100, 107–108, 163, 165, 193, 230–231, 235–236, 253 Big Bang deregulation 147 Blaug, Mark 170, 216 Block, Walter xv, 36, 42–43, 166, 244 Blundell, John 12, 51, 83, 93 Boehner, John 76, 84n Boettke, Peter APEE and 76–77 Caldwell and 31, 56n “Coordination Problem” blog 166 on economic historians 43 FEE and 28, 50, 115 Fink and 73 Friedman and 41 Hayek and 71–72, 79–80 Hoover Institution and xiv I Chose Liberty 72 Kochs and 7, 20–21, 72, 75–76 Mises and 15 MPS and 8 teaching economics 50–52, 76–78, 246 tobacco industry and 56n Branch Banking and Trust Company (BB&T) 31, 50, 227 Brandt, Karl 247–248 Bronfenbrenner, Martin 412n Brulle, Robert 81 Bunche, Ralph 175 Burns, Arthur 83, 172, 215–216 Bush, George H. W. 41, 46, 183

Index     421

Business cycle Austrian Institute for Business Cycle Research ix–x, xii, 225–226, 234 Austrian model xiv, 136, 144, 147, 170, 231, 243–244 business cycle theory xi, 5, 36, 52, 144, 196, 290, 390–391, 408 comparison of Hayek’s and Myrdal’s explanations of 47, 284–286 conceptualization of 275–276 forecasting 141–142 Hayek’s analysis of 96–97, 129– 134, 165, 276–280, 312 Hitler and vii Kaldor and 162 Knight and 135 Mises on viii–ix, 36, 199–200 money, banking and 402–407 money policy and 295, 316 monopoly and 305 Myrdal’s analysis of 280–284, 312 overview 273–275 recession and 197 Butler, Eamon 109, 332 C

Caldwell, Bruce xv, 8, 11, 15, 22–23, 25, 28, 31–34, 43, 50, 56n, 70–71, 79–83, 134, 180, 184, 205–206, 216, 227 Campbell, F. S. 30 Campbell, Glenn 245 Cannan, Edwin 27, 100, 109, 120n Capital theory 9, 21, 138–139

Carter, Jimmy 143, 178 Cato Institute 49 Center for Innovation and Economic Prosperity 78 Center for the History of Political Economy (CHOPE) 80–82 Center for Public Choice 79 Chamberlin, Edward 135, 150n Chicago Plan for Banking Reform 144, 234 Chicago School of Economics Austrian School and 35–43, 47, 219, 233–234, 245–246, 249–250 “free” market 45 Friedman and 52, 163, 182, 328–329 Harberger and 106 Hayek and 11, 14, 32, 45, 229, 251–252, 331 non-recruitment to 201–205 uncovering of fraud of Nobel Prize 69 Journal of Political Economy 128 Kaldor and 164, 183 Knight and 135–147, 225 Liberalism and 179 LSE and 217, 306 Mont Pèlerin Society and 169 Neoclassical economics 48 Robbins and 225 Chilcote, Samuel 75 Chitester, Robert 12, 104–105, 201, 223 Churchill, Winston 180–181 Citizens for a Sound Economy (CSE) 74 Clark, John Bates 385–386, 393, 400

422     Index

Clark, John M. 52, 374–381, 405–406, 408 Classical Liberalism 25, 27, 112, 249 Nazi-Classical Liberal Pact viii, 29, 166, 173, 247 Climate Change Counter Movement (CCCM) 81 Competitive Enterprise Institute 81 Conservative Party (England) 180, 248, 332 Cowen, Tyler 73 Cubitt, Charlotte 12, 34, 39, 77, 93–94, 108, 114–115, 131, 174–175, 205, 240, 247, 250 Cullity, John 44, 72–74 Curtis, Kathy 73 D

Dalton, Hugh 166, 224 Daughters of the American Revolution 70 De La Beckwith, Byron 26 Democratic Party (U.S.) 147 Denison, Stanley 181 Deregulation 147–148, 361 Dictatorship Austrian School and 107, 223 Berlin on 335 communism and 181, 255 democracy and 181–182 economy and 179 Finer on 184 freedom and 337 Hamowy on 221 Hayek and 3, 9, 26, 110, 358 Hitler 5, 26 Keynes on 234

Pinochet 23–25, 183, 354–355 Portugal 174–175, 356 religion and 137 totalitarianism 347 Director, Aaron 38, 135, 144, 225, 241–242, 311–312, 331, 404 Disraeli, Benjamin 148 Divine Right of Kings 112 Doherty, Brian 72–73, 77, 81–82 Douglas, Paul 138, 144, 147, 242, 376, 387, 404, 408–409, 411n Dow Jones Industrial Average 133 E

Eastman, Max 247–248 Ebeling, Richard 36, 40, 49–50, 79–80, 106–107, 226–227, 240, 244, 309, 315 Ebenstein, Alan 8, 10, 13, 34, 37, 165, 175, 202, 204–205, 209n, 216, 221, 225, 226, 313, 332, 356 Eisenhower, Dwight 215 Emmett, Ross 78, 138, 142–143, 146, 202–203 Ericsson, Neil 253 F

Fascism Austrian School and 223 Boettke on 7, 71 economic fascism xv, 42 Fascist party 31, 71 Friedman and 36, 244 Hayek and 110, 344 inflation and 234

Index     423

liberalism and 173, 179–180, 247 Mises and viii, x, 5, 22–23, 25–26, 28–29, 31, 218, 238 Rockwell and 26–27 Simons on 252 Spann and 44, 94, 231 totalitarianism 346 Wieser and 95 Fascism versus Capitalism (Rockwell) 17–18 Federal Reserve Bank 83, 97, 117n, 133, 137, 172, 194–195, 316 Feldstein, Martin 74 Ferguson, Adam 364n Feulner, Ed 83 Finer, Henry 70–71, 184–185, 255 Fink, Richard 36, 73–76, 244 Ford Foundation 367n Ford, Gerald 329 Foundation for Economic Education (FEE) x–xi, 28, 35, 50, 80, 115 Franklin, Benjamin 24 Franklin, Cecil 180 Freedom economic 339–343 Friedman on 328–330, 333 Hayek on 330–333 negative and positive concept of 333–339 Freedom Caucus 76 Friedman, Milton AEA and 121n Austrian School and 171, 243–248 authoritarianism and 182–183 Boettke and 41 Block and 43 Chicago School and 35–43, 52, 235, 403–404

fascism and 36, 244 on freedom 327–330, 339–343, 359–363 Galbraith and 168–169 on Great Depression 171, 343, 366n Hayek and 15, 33, 46–48, 132, 201–204 Kaldor and 163–164 Knight and 135–138, 141, 146–148 Lindbeck on 314 on military conscription 248 Mints and 403 Mises and 36, 40–42, 244–248 MPS and 36–38, 47, 202, 247, 309 prediction of stagflation 171–172 Robbins and 241–242, 253 on role of the State 343–346, 352–356 Rothbard and xii, 36, 244–245 on rule of law 356 Say “No” to Intolerance 246 Stigler and 245–246, 249, 252, 254 on totalitarianism 346–347 Two Lucky People 246 on welfare state 347–351 Frisch, Ragnar 308, 406 G

Gaitskell, Hugh 258n Game theory 106, 152n Gideonse, Harry 135, 151n, 247–248, 311, 415n Gladstone, William Ewart 148 Goldman Sachs 76

424     Index

Graduate Institute of International Studies 248, 309 Great Depression Austrian theory 146–147, 243 class 114 deflation 143, 248 democracies 5 Friedman on 171, 343, 366n Hayek's “prediction” of fraudulence of claim 18, 44–47, 69, 138, 141–142, 172, 206–207, 226 Friedman on 204 Hayek on 194–196, 198 Klausinger on 316 LSE membership 250 Mises on 18, 199–201 Nobel Prize 3, 12, 15–16, 45 origin of 194–196 Robbins on 130, 132 interwar business cycles 134, 273, 276 Keynes on 403 Knight on 179 labour liquidation 143 Myrdal on 284 Robbins on 224–225, 231–232 Roosevelt and 73 State’s role and 343–344 Great Inflation 172 Greenpeace 81 H

Haberler, Gottfried 13, 74, 93, 95, 97, 108, 131, 144, 206–207, 209n, 237, 286, 290, 294–295, 306, 318

Habsburgs vii, 4, 30, 173, 247, 254–255 Hamowy, Ronald 110, 220–221 Harberger, Arnold 106, 136 Hardin, John 78 Harris Foundation 143, 403–303 Harris, Ralph 33 Harris, Seymour 57n Hawtrey, Ralph 286n, 403 Hayek, Friedrich “von” Constitution of Liberty xi, xv, 14, 24, 46, 110, 139, 175, 183, 219–222, 239, 328, 332, 344, 356, 364n Contra Keynes and Cambridge 134 Fatal Conceit 10 Individualism and Economic Order 39, 332 Inside the Hayek Equation 250 Intellectuals and Socialism 138 Law, Legislation, and Liberty 174, 176 Mises and 4–5, 9, 21, 95, 198– 200, 228, 235, 238 on Nobel Prize 18, 69, 199–201 Monetary Theory and the Trade Cycle, ix, 134, 143, 161, 231, 276 Nobel Prize for Economic Science 3–13 indirect test of claim 70 overview of claim 69–70 Pretence of Knowledge 21, 111, 217, 315 Price and Production 231 The Road to Serfdom 11, 14–15, 24, 30–31, 39, 47, 70–71, 82, 93, 111–113, 138, 168,

Index     425

178, 180–181, 184, 202, 205, 237, 248, 252–253, 255, 328, 332, 344–345 American Edition 310–312, 318 Hayek Institute 133–134, 141, 162, 194–195, 227, 256n Heartland Institute 50, 79, 227 Hegel, G. W. F. 33, 334 Hendry, David 253 Heritage Foundation 101 Higgs, Robert 79 History of Economics Society (HES) 23, 43 Hitler, Adolf vii–viii, 5–7, 23, 26, 44, 71, 93–94, 137, 144, 149, 165, 179, 184, 187n, 217, 219, 231, 238, 247 Hobbes, Thomas 334 Hoff, Trygve 176 Hülsmann, Guido 18, 22–23, 30, 80, 99, 108, 115, 142, 199, 232, 238, 248, 309 Humboldt, Wilhelm von 364n Hume, David 148, 180, 364n Hutchison, Terence 166, 197, 205–206, 235, 238 I

Independent Institute 79 Independent Review 79 Institute for Humane Studies 31, 36, 81, 244 Institute for Political Economy 202 Institute of Economic Affairs (IEA) 12, 17, 83, 115 Intellectuals 127–134

Intermediate Economic theory 387 Internal Revenue Service 76 Irwin, Douglas 383 J

John W. Pope Center for Higher Education Policy 80 Johns Hopkins University 306, 314, 381 Johnson, Harry 146–147, 201, 203 Johnson, Lyndon 203 Jones, Homer 241–242 Jörberg, Gustav 12, 173 K

Kahn, Richard 170–171, 257n Kaldor, Nicholas 109, 161–165, 183, 228, 231–232, 236, 253–255, 307 Ketchum, Marshall D. 383 Keynes, John Maynard Caldwell on 70, 124 Chicago School 251, 403–406, 409, 415n Committee of Economics 224 death 365n Ebeling and 49 Galbraith and 167, 169 General Theory x, 163, 170, 216, 227, 228–240, 234, 251, 404–406 Hayek and ix–x, 39, 83, 96, 129, 140, 219, 229–230, 237 homosexuality 219 Ibsen and 230 inflation and 83

426     Index

influence 32, 151n, 166, 175, 204, 332 Johnson and 201, 203–204 Kahn and 170 Kaldor and 162–163, 165 Keynesian Revolution 215–216 Klein and 175 Knight and 135, 251–252 LSE and 331 Marshall and 245 Mints and 415n Myrdal and 283 Robbins and xii, 128, 131, 236, 240 Samuelson and 227 Treatise 229 Wicksell on 257n on Wittgenstein 100 King, Martin Luther 175 Kirzner, Israel 13–14, 17, 32, 36, 107, 244 Klausinger, Hansjorg xv, 16, 134, 194, 200, 217, 316 Klein, Daniel B. 21 Klein, Lawrence 32, 175 Klein, Naomi 183 Knight, Frank Austrian School and 135–136, 139–147, 170, 234, 243 Chicago School and 45, 52, 135–147, 202, 225, 253, 374, 391, 408 Director and 242 “Economic Theory and Nationalism,” 179–180 Friedman and 135–138, 141, 146–148 Hart and 375 on history of thought 395–397

Hayek and 115–116, 164, 202– 203, 220, 226, 233–234, 239, 291–292, 295 institutionalism and 409 Journal of Political Economy 94, 128, 225, 249 Keynes and 135, 251–252 Machlup and 312 Mises and 22, 135 MPS and 47, 135, 137–138, 146, 331 on persistence of pluralism 398–401 on price and distribution theory 381–388 Robbins and 135–136, 141–144, 241, 243 Samuelson and 251 Stigler and 251–252 Viner and 381–388, 392, 395 Knowledge in society theory 148. See also Berger, Adolf O.; Schmidt, Carl Theodore Knox, Malcolm 33 Koch brothers xiii, 7, 20–21, 36, 44, 72–79, 81–82, 244 Kresge, Stephen 33, 131, 134, 216 Kuehnelt-Leddihn, Erik “Ritter von,” 30, 128, 173 L

Labour force/market 143–144, 233, 282, 298, 342, 385, 387– 388, 409 Labour Party (England) 10, 167, 181, 258n Labour unions 11, 111

Index     427

Lachmann, Ludwig 34, 36, 205, 240, 244 Laski, Harold xii, 32, 71, 107, 176, 182, 230, 255 Lebow, R. N. 305–306 Leube, Kurt xiv, 5, 38–41, 51, 131, 245–246 Lewis, Anthony 367n Lewis, Arthur 175 Lewis, H. Gregg 410n Liberal Party (England) 180, 248 Lindbeck, Assar 224, 312, 314, 317 Locke, John 334, 369n London School of Economics (LSE) Chicago School and 217 Director and 242 Finer and 71, 184 Hayek and 4, 10–11, 45, 95, 100–101, 108, 110, 132, 225, 231, 237, 239, 250, 255, 331 Kaldor and 161–162 Keynes and 227, 230 Lachmann and 34, 205, 240 Leube and 245 Lewis and 175 North and 14 London Economic Club and 145 Phillips and 203 Plant and 180 Popper and 206 Robbins and 241–242 Thomas and 165–166 Lopokova, Lydia 100 Ludwig von Mises Institute 14, 17–18, 30, 42, 50, 104, 108, 218. See also Mises, Ludwig von Lutuli, Albert 175

M

Mach, Ernst 364n Machiavelli, Niccolò 221 Machlup, Fritz 13, 39–40, 45, 47, 102, 108–109, 128–134, 144, 223, 253 “Can We Control the Boom,” 303 Essays on Hayek 40 Fuhrer durch die Kriesenpolitik 304–305 Hayek and 297–300, 318–319 Nobel Prize 312–318 introduction to 289–297 Mises and 306–309 Road to Serfdom and 310–312 “The Stock Market, Credit, and Capital Formation,” 303 Mandela, Nelson 175 Marden, Roy 75 Martin, Kingsley 180 Marx, Karl 78, 334, 378, 394, 400 Marxism 45, 137, 176, 206 McCloskey, D. 168, 182 McLeod, Neil 7, 98 Medema, Steve 382–383, 386, 393 Menger, Carl 228, 231, 364n Military Service Act of 1916 248 Mill, John Stuart 364n, 393–394, 399, 413n Millis, Harry A. 376, 387, 409, 415n Mints, Lloyd 143–144, 153n, 225, 380– 381, 403–404, 414n, 415n Mirowski, Philip 23, 32, 331 Mises, Ludwig von Austrian School and 99, 115 Boettke and 7, 80 business cycle theory 36 consumer sovereignty 76

428     Index

deflation and 143 Ebeling and 79, 106–107 Economic Policy: Thoughts for Today and Tomorrow 44 enemies 217–218 fascism and 22–31, 71, 173, 179, 231 FEE and 80, 115 “free” market “knowledge,” 7 Friedman and 36, 40–42, 244–248 Hayek and 4–5, 9, 21, 95, 198–200, 228, 235, 238 on Nobel Prize 18, 69, 199–201 Human Action xi, xiv, 39, 42, 248 influence 22, 36, 97–99, 108–109, 111–113 Kaldor and 163 Knight and 22, 135 LSE and 91, 94–95 Liberalism in the Classical Tradition 19, 218 Machlup and 289–290, 293, 303, 306–310 Morgenstern and 106 MPS and 22, 239, 331 on prices 294 problems of refugee scholars 305–309 producer sovereignty 13–15 Robbins and 166 Rockwell and 17–18, 42, 104 Rothbard and 8, 102–103, 218–219 Simons and 234 Socialism: An Economic and Sociological Analysis 13, 129, 238, 332 suppression 193

See also Austrian Institute for Economic Research; Ludwig von Mises Institute Mises, Margit 169 Mitchell, Wesley Clair 96, 99, 376, 399–400 Mobilization Universe 76 Monetary and Cycle Theory (MCT) 410n Monopoly 13, 32–33, 108, 120n, 135, 179–180, 234, 251, 305, 352, 357–359, 383– 384, 390 Mont Pèlerin Society (MPS) Alchian and 102 Boettke and 8, 72 Burns and 83 Chicago School and 135 dynamics of group 110 “free” market and 219 Friedman and 36–38, 47, 202 Hayek and 11–13, 33, 69, 78, 130–131, 167, 176 Knight and 135, 137–138, 146 Mises and 22 Nixon and 172 Reagan and 169 Robbins and 45, 232 tobacco industry and 31, 75 Viner and 222 Montes, Leonidas 25, 33, 43, 56n, 80, 82 Morgenstern, Oskar 101, 106–107, 130, 142, 152n, 164, 217, 289, 306 Morris Foundation 12 Morris, Walter 11–12 Mosak, Jacob 410n, 412n Mussolini, Benito xv, 26, 42, 149, 179

Index     429 N

P

National Bureau of Economic Research (NBER) 99, 149, 309 Nazism Austrian School and 44 Block and 42–43 Friedman and 36, 244 Hayek and 91–94, 344, 366n intellectual coordination 166 Koestler and 4 Mises and 18, 25, 29 Nazi-Classical Liberal Pact viii, 29, 173, 247 pre-Nazi Germany 179 Rothbard on 9 See also Dictatorship; Fascism; Hitler, Adolf Negative and positive freedom Berlin on 334–338 Friedman and Hayek on 336–339 Neoclassical theory 48, 52, 166, 245, 249, 290–291, 327, 341, 359–361, 363n, 374–375, 379–380, 385–386, 388, 392–393, 408–409 New Deal 70, 366n, 387, 396, 404, 406 Nik-Khah, Edward 23, 32 Nixon, Richard 44, 83, 111, 172, 329 “No business cycle theory,” 141 North, Gary 10, 14, 36, 50, 244 Nozick, Robert 332 Nymeyer, Frederick 199, 219

Palyi, Melchior 404, 415n Paradox-of-savings thesis 96, 161, 283 Patinkin, Don 146–147, 171, 392, 395–396, 411n, 413n Penrose, Edith 293, 297–298, 300, 305, 307, 318–319, 320n Philip Morris 75, 79 Phillips, A. W. H. 203, 208n Phillips, J. R. 414n Phillips Machine 39, 57n Pigou, Arthur C. 140, 227, 230, 237, 273, 382, 403 Pinochet, Augusto 23–24, 46, 99, 174, 182–183, 354–355 Polanyi, Michael 331 Plant, Arnold xiii, 10, 100, 145, 180, 232 Political parties xv, 32, 56n, 179–180 Conservative Party (England) 180, 248, 332 Democratic Party (U.S.) 147 Labour Party (England) 10, 167, 181, 258n Liberal Party (England) 180, 248 religion and 116, 137 Republican Party (U.S.) 79, 180, 198 Pope Foundation 80–81 Popper, Karl 33, 85n, 205–207, 239, 241, 309, 331, 364n Producer sovereignty 13–16 Property xv, 7, 43, 240, 296, 314, 360, 362, 367n, 398, 400 Austrian School and 16–31 economic freedom and 342–343 State and 344, 352, 357, 359 Public Order Act (1936) 238

O

One-party system 25, 182. See also Dictatorship

430     Index Q

Queen Elizabeth II 37–38, 332 R

Racism 7, 43, 110 Rand, Ayn 7, 48–49, 97, 252 Read, Leonard xi, 35, 50, 115 Reader’s Digest 70, 93, 248, 312 Reagan, Ronald 32, 38, 169, 198, 209n, 329, 332, 365n Recruitment London School of Economics 91–101 through “specious” visions 101–116 Reder, Melvin 136, 138, 253, 256n, 374–375, 411n, 412n Rees-Mogg, William 11 Reform Club 47, 131, 181, 248 Republican Party (U.S.) 79, 180, 198 Religion 21–22, 29–30, 48, 104– 106, 114, 116, 135, 137– 139, 217–218, 223, 234, 330, 394, 414n Rippon, Geoffrey 180 Rizzo, Mario 36, 82, 244 Road to Reaction (Finer) 70–71, 185, 255 Robbins, Lionel Austrian School and 231–232 Beveridge and 100, 236 Chicago School and 225 Essay on the Nature and Significance of Economic Theory 143 Hayek and 227–233, 236, 240–243, 248–249, 252 Foreword to Prices and Production 204

Foreword to The Road to Serfdom 16, 45–46 “prediction” of Great Depression 225–226, 316 on free trade 100 on Great Depression 224–225, 231–232 Hayek and 10, 16, 38, 44–47, 96, 162, 166, 168, 171, 199, 223–224 Keynes and xii, 128, 131, 236, 240 Knight and 135–136, 141–144 Lerner and 164 LSE and 241–242 Machlup and 253, 308 Mises and 108, 128–134, 166 MPS and 45, 232 Robertson, Dennis 100, 142, 236, 273–274, 286, 287n, 403, 406 Banking Policy and the Price Level 142 Robinson, Joan 150n, 170–171, 318 Roche, George III 37–38, 40, 169 Roche, Lisa Jackson 40, 48 Rockefeller Foundation viii, 163– 164, 199, 306, 309, 367n Rockwell, Llewellyn 17–19, 26–31, 42, 104 Roman Catholic Church 22, 29, 105, 136–137, 183, 316, 413n Roosevelt, Franklin D. 73, 144, 176 Röpke, Wilhelm 247–248, 307, 309 Rosten, Leo 10, 24–25, 137, 164, 181–182, 193 Rothbard, Murray Austrian School and 17, 23, 102 Austrian Truth and 13–14

Index     431

Beckwith and 26 Boettke and xiv, 246 “free market knowledge” and 7–8 Friedman and xii, 36, 244 “Hayek and His Lamentable Contemporaries,” 215–216 Mises and 40, 50, 108 “The Mises We Never Knew,” 218 “A New Strategy for Liberty,” xiv, 41–42 Review of Austrian Economics 43 Rousseau, Jean Jacques 334 Rule of Law 38, 70, 82, 184, 352, 356–359 S

Salazar, António de Oliveira xv, 110, 175, 221, 356 Salerno, Joseph 73, 82, 315 Samuels, Warren J. 374, 383, 400 Samuelson, Paul 49, 93, 135, 171, 203, 217, 227, 251, 387, 392 Savarese, James 79 Schmidt, Carl Theodore ix, 45, 141, 148–149, 204, 225–226, 235 Schultz, Henry 52, 143–144, 375, 381, 389–391, 408, 411n, 412n Schultz, Theodore 208n Scitovsky, Tibor 110, 162, 163 Seldon, Arthur 50, 80, 115 Shackle, G. L. S. x, 109, 171, 224, 227–229, 233–234 Shaw, George Bernard 260n Shaw, Jane 79–80 Shearmur, Jeremy 137, 180

Shehadi, Nadim 110, 129, 162–163, 166 Shenoy, Sudha 36, 51, 82–83, 102, 105, 244 Simon, John 248 Simon, William E. 111 Simons, Henry C. 52, 144, 202, 234, 251, 312, 374, 381, 301, 404, 408 Skidelsky, Robert 110, 229–230, 238, 251 Smith, Adam 148, 329, 332, 364n, 369n, 393–394, 399, 413n Smith, Walter 143 Society for the History of Economics (SHOE) 72, 79 Solow, Robert 203 Soule, George 70 Spann, Othmar 44, 94–95, 129, 231 Sraffa, Piero 142, 170, 229 Stagflation 83, 171–172 Stalin, Joseph 25, 50, 111, 137, 227 Stigler, George x–xi, xiv, 35, 38, 46, 135–136, 147, 172, 202–203, 205, 209n, 225, 239, 241–243, 245–247, 249, 252, 254, 309, 314, 331, 412n Stowers, Ryan 76 Swedish Central Bank xii, 146 Swedish School 286 T

Tanaka, Seigen 23, 81 Tead, Ordway 311 Thatcher, Margaret 11, 32, 329, 332, 365n Thomas, Brinley 165–166

432     Index

Tinbergen, Jan 175 Tobacco industry Boettke and 31 cash for comments economists network 79, 82 Fink and 73, 75 Hayek and 31 Kochs and 74–75, 79 lobbying 73–76, 83 Tobacco Institute 56n, 75 Tobacco, Obesity and Fossil Fuel (TOFF) industries 20, 76 Tobin, James 203 Toffler, Alvin 49 Tollison, Robert 79 Toqueville, Alexis de 15, 22, 137, 180, 334

241–242, 249, 308, 374– 376, 380–388, 392, 395– 396, 401, 404, 406, 408, 411n, 412n, 413n, 415n Von Monakow, Contantin 33–34 W

Wallis, W. Allen xi, 202, 225, 241–242, 247–248 Walter Eucken Institute 314 Wedgwood, Veronica xi, 239, 259n Wenar, Leif 33 Whaples, Richard 79 Wicksell, Knut 257n, 273–286, 294, 296, 390 Wittgenstein, Ludwig 92, 100 Wood, John 181

V

Veblen, Thorstein B. 376, 378–380, 387, 399–400 Viner, Jacob ix, 45, 52, 100, 129, 138, 142–144, 146–147, 217, 222, 225–226,

Y

Yeager, Leland 33 Young, Allyn Abbott 100

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