No Third Way: Hayek and the Recovery of Freedom
by Samuel Gregg and Wolfgang Kasper
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May 8th, 1999, marked the centenary of the birth of one of the great men of the twentieth century. It is no exaggeration to say that the ideas and work of Professor Friedrich August von Hayek have been fundamental to what the English writer, Paul Johnson, calls the beginning of the recovery of freedom that has occurred in the last quarter of this century.

Born into an academic and titled family in Vienna, the cosmopolitan capital of the Habsburg Empire, it was clear from the beginning that Hayek had great intellectual gifts. After fighting as an officer in the Austro-Hungarian Army on the Italian front during World War I, Hayek studied at the University of Vienna in the 1920s, earning doctoral degrees in both law and political science, and becoming one of the central thinkers who developed the Austrian School of Economics. Appointed to a chair in economics at the London School of Economics, Hayek moved to England in 1931, and soon became somewhat of a celebrity. He spent much of his time debating and questioning the propositions then being advanced by the British neo-classical economists, and another economic giant, John Maynard Keynes.

At the time, most economists worked with assumptions of Ôperfect knowledgeÕ, representative consumers and producers in order to give their models mathematical elegance. These assumptions are in reality absurdities, which served to make economics incomprehensible to practical men ø but also mysterious! More recently, the neo-classical assumptions, which Hayek criticised, have been recognised more widely. This is the cause of the disciplineÕs growing irrelevance to policy making and business management. It is little wonder that business schools around the world are now dropping standard economics, and adopting Hayekian institutional economics paradigms.

This is reflected in the current trend to less regulation. We know ø without a shadow of a doubt ø that central planning is not only a recipe for economic disaster, but a destroyer of liberty and responsibility on a societal-wide scale. But it is easy to forget that for most of this century, more planning and more regulation were seen as Ôthe futureÕ. Following the experiences of the First World War and the Great Depression, the ideas of the neo-classical economists and Keynes rapidly became orthodoxy within economic and political circles. In such an environment, to be in favour of free markets was to risk being labelled not only foolish, but hard-hearted.

Friedrich Hayek, however, was among the first to challenge the neo-classical consensus. In his path-breaking work on business cycles and capital in the 1920s and 1930s, Hayek refuted the idea that government deficits and inflation can create sustainable jobs, well before Keynes wrote his General Theory. It took the economics profession some 50 years, and many policy accidents, to accept that Keynesianism is based on a fallacy. Yet in over-regulated, ageing Japan, they are still launching one Keynesian demand stimulation package after another ø every time reaping stagnation, unemployment and growing public debt. Hayek, however, did not limit his endeavours at persuasion to the corridors of academia. At various times, he also sought to reach wider audiences. Perhaps his most notable attempt to do so was his famous 1944 book, The Road to Serfdom, which predicted that governmentÕs seemingly remorseless spread throughout the economy would lead to economic stagnation, a steady diminution of personal freedom and responsibility, and the growth of morally enfeebled societies. The book itself was outstandingly successful, and Hayek spent much of 1944 to 1946 giving public lectures on these themes in Britain, the United States, and even occupied Germany. The Road to Serfdom was, however, unable to stem the collectivist tide then sweeping the West, a wave epitomised by the British General Election of 1945, which resulted in the Attlee Labour GovernmentÕs election to power, and the beginning of the nationalisation of key segments of the British economy.

Hayek was dismissed as a relic of a reactionary age, but he lived to see his predictions vindicated, with the gradual collapse of post-war Keynesian arrangements throughout the world. Awarded the Nobel Prize for Economics in 1974, HayekÕs ideas were the catalyst to the classical liberal/neo-conservative revival that inspired the Reagan Administration and Thatcher Government to reshape the WestÕs political landscape. HayekÕs creation of the Mont Pelerin Society in 1947 was central to this modern-day Reformation. Apart from providing like-minded scholars with a forum to discuss their ideas, the Society facilitated the development of Ôthink-tanksÕ, such as the Centre for Independent Studies, which continue to assert the cause of freedom in the realm of ideas. For as Hayek pointed out in his important 1949 essay, ÔThe Intellectuals and SocialismÕ, those who win the battle of ideas today will win the political wars of the future

In many ways, Hayek was uniquely equipped to be one of the leaders in the fight against collectivism. Hayek was, after all, a true Renaissance man, with an integrated grasp of epistemology, psychology, jurisprudence, sociology, history, politics, philosophy, and economics. Indeed, if he had chosen to do so, there is little question that Hayek could have become a distinguished psychologist. Though Hayek would have claimed to be an amateur in this field, he published in 1952 a book on the nature of sensory perception, The Sensory Order, which ranked at the time with the works of psychologists of the highest standing. Hayek was therefore ideally positioned to restore the free, responsible, curious, creative, enterprising human being to his central place in economics and the social sciences.

HayekÕs key economic propositions are rather simple: that human knowledge is far from perfect; that this is at the root of scarcity; and that the finding and testing of useful skills and knowledge is central to economic prosperity. No human being, Hayek stresses, can know everything. In this regard, HayekÕs greatness as an economist rests on the fact that he restored real human beings to the discipline, and has raised real questions about economists basing their propositions on the theoretical assumptions of perfect knowledge and the fiction that people are anodyne, reactive, automatons who simply maximise and minimise. Hence, the basic supposition of economic planning ø that government can know everything required to make correct decisions ø is revealed as yet another example of human hubris. The beauty of the market is that it assumes limited knowledge. The market, according to Hayek, is an open-ended discovery procedure which allows people to find out every day whether a new process works, if a new product will be profitable, and where to find the skills, resources and buyers for new products.

The theme of the limits of human knowledge figures heavily in HayekÕs non-economic writings. It is often forgotten that Hayek spent the second half of his academic life writing and publishing in the fields of moral, legal, and political philosophy. Thus it happens that what is perhaps HayekÕs greatest work, The Constitution of Liberty, falls into this category, though, of course, there is much in it that could not have been written except by a political philosopher who was also an economist. Here Hayek drew upon a variety of sources, including medieval writers such as Aquinas, as well as eighteenth century British giants such as Edmund Burke and Adam Smith. The two political thinkers, however, that he most admired were two nineteenth century figures, Lord Acton and Count Alexis de Tocqueville. In their writings, Hayek claimed, was to be found the most cogent affirmation of the ideal of liberty yet written, as well as profound warnings about the constructivist rationalism underlying the collectivist impulses that have plagued our century, and ultimately led to the abyss of Auschwitz, the Gulag, and the Killing Fields.

To summarise anyoneÕs contributions to moral and political philosophy is a difficult task. There are, however, four key propositions that characterise HayekÕs thought about such questions:

¥ The institutions that coordinate society arise largely from human experience, but not human design; hence attempts to design society are fatal to its goodness.

¥ In a free society, law is essentially found and not made. Law is normally derived not from the mere will of the rulers, be they kings or RousseauÕs ÔGeneral WillÕ, but from the interactions and the learning of all citizens.

¥ The Rule of Law not only is the first and foremost principle of the free society, but is also dependent upon the two previous propositions.

¥ The Rule of Law requires all people to be treated equally (i.e., with procedural justice), but does not require them to be made equal, and indeed is undermined by attempts to engineer equal outcomes (i.e., ÔsocialÕ justice).= Each of these propositions are underpinned by two themes, one of which was always central to HayekÕs thought, while the other was a conclusion at which he arrived towards the end of his life. The first theme is that human reason has its limits and that humans have cognitive limitations. None of us can possibly know everything. Having emphasised this point when joining Ludwig von Mises in refuting the ideas of socialists such as Oscar Lange during the famous economic calculation debates of the 1930s, Hayek used this insight to underline a fatal flaw in any attempt to build utopia in this world. Not only do the limits of human reason and cognition make efforts at creating heaven-on-earth impossible, but their impossibility makes such projects downright dangerous to human life and freedom.

The second theme underlying HayekÕs thought which challenges most contemporary moral philosophy is captured in a statement that Hayek made during a lecture in 1983 on the WestÕs moral heritage. Here Hayek stated: ÔI have been led, by a very painful process to reject what in my youth I regarded as the latest insight, and what even my great master, Ludwig von Mises, made the basis of his philosophy: [that is] the utilitarian explanation of ethicsÕ. Again, one may surmise that Hayek was confronting a form of human hubris by disputing that people were able to use their intelligence to ÔcreateÕ morality. Hayek went on to point out that people did not sit down and consciously decide to design and create institutions which underpin private property or the family, or the moral laws associated with these institutions. They had evolved throughout human history and their success owed much to the fact that they had not fallen victim to social engineers.

Hayek recognised, of course, that such propositions were likely to offend humanityÕs pride in its unique and very real capacity for reason and civilisation. The recognition of a human knowledge problem was not attractive to power-brokers, bureaucrats and academics. Therefore, the great fashions in economics and the other social sciences for most of this century were collectivist. Yet Hayek was simply underlining something that has been eternally true from the dawn of time: that humans are not gods. We are human, and if we accept the limits that are implicit to our humanity, we will be in a far better position to pursue knowledge, freedom, justice, and truth wherever it may be found. For once we become conscious that RenŽ Descartes was wrong in holding that reason is somehow detached from the human order, and therefore capable of endlessly manipulating humanity to whatever ends are chosen, then we will recognise what Hayek ø following in the footsteps of Aquinas and Burke ø recognised: that human reason is part of, but not above, the natural and developing human order.

The fight for freedom that Hayek carried on for all of his life is not over, and probably never will be. It will always be confronted by a variety of opponents, be they outright collectivists or, as is more common today, those who play the worn but nonetheless seductive tune of Ôthe Third WayÕ. HayekÕs message for the next century is that there is no third way when it comes to choosing between freedom or coercion, prosperity or stagnation. Those who try to tell us that they know the solutions for most human problems are no more than the Pied Pipers of yesterday who pretend to have knowledge that no single person can have and who would lure Australia back to the debilitating protectionism, regulation, and economic nationalism of the sixties and seventies, as well as the high tax-rates that slowly suffocate the entrepreneurial creativity that is at the heart of wealth-creation, and without which we would all starve. As our nationÕs politicians debate these matters, they would do well to reflect upon Friedrich HayekÕs warnings about the fragility of economic and political freedom. The recovery of freedom has only just begun: may their decisions not obstruct its revival.

About the Author
Dr. Samuel Gregg is Resident Scholar at the Centre for Independent Studies. Professor Wolfgang Kasper is a member of the Mont Pelerin Society and, until recently, taught at the School of Economics and Management, University College, University of New South Wales. This article is based on remarks made by Dr. Gregg and Professor Kasper at the Centre for Independent Studies on May 10, 1999 during a celebration to mark the centenary of Friedrich HayekÕs birth.

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