Hayek Was a Neoclassical – Yes, NEOCLASSICAL! — Economist

In a long and productive scholarly career, F. A. Hayek worked for the most part in relative obscurity. That obscurity was interrupted by three, maybe four, short periods when his fame extended beyond his fellow economists to a wider public. The first was in the early 1930s when, arriving in London in the depths of the Great Depression, he became, while still a young man, the second most famous economist — surpassed only by Keynes himself — in Britain. Next, at the end of World War II, in middle age, he achieved international celebrity when his book The Road to Serfdom became a surprise best-seller. Then, in his old age, to the surprise of almost everyone, Hayek was awarded the 1974 Nobel Prize in economics. Finally, when he was almost 90, Hayek enjoyed a final moment of glory after the Soviet empire imploded in the late 1980s, providing ultimate vindication for his argument, advanced almost six decades earlier, but widely dismissed and mocked by many economists who should have known better, that comprehensive central planning was ultimately an unworkable system for running a modern economy. Now, once again, some 20 years after his death, Hayek seems to be enjoying another of his periodic bursts of fame — this time because the presumptive Republican nominee for Vice-President of the United States, Paul Ryan, likes to cite Hayek as one of his intellectual inspirations, offering Hayek as an alternative source for his ideological position to Ayn Rand, whom Ryan had to throw overboard because of her militant atheism, Hayek’s discreet agnosticism apparently not (yet?) making him untouchable.

Hayek’s renewed celebrity earned him the dubious honor of being written about in the New York Times Magazine by Adam Davidson, a financial journalist for Planet Money, and a columnist for the New York Times Magazine. Davidson does not get off to a good start, calling Hayek “an awkwardly shy (and largely ignored) economist and philosopher who died in 1992.” Hayek did die in 1992, and he was an economist and a philosopher, but to say that Hayek was “largely ignored” is a curious way to describe a Nobel Prize winner, even if one makes due allowance for the surprise with which the award of the Nobel Prize to Hayek was met. That was bad enough, but to call Hayek “awkwardly shy” is sheer fiction, and not just fiction, but an absurd fiction. I have never seen Hayek described by anyone as shy. And in my intermittent acquaintance with Hayek, over almost 20 years from the time I met and took classes from Hayek as an undergraduate student when he visited UCLA in the 1968-69 academic year, I never observed an awkward moment. Hayek to be sure evidenced a certain reserve, but it was the courtly, aristocratic reserve of the Viennese haute bourgeoisie, the “von,” which Hayek dropped from his surname upon becoming a British subject in the 1930s, marking the elitist background from which Hayek sprang. Among his family connections were his cousins Ludwig Wittgenstein, the philosopher and Paul Wittgenstein, the concert pianist, who, after losing his right arm in World War I, commissioned Maurice Ravel to compose his Concerto for the Left Hand. The Wittgensteins’ father, Karl, was perhaps the wealthiest industrialist in Austria. After a preposterous start like that, nothing that Davidson says about Hayek can carry any credibility.

But in his third paragraph, Davidson goes completely off the rails:

For the past century, nearly every economic theory in the world has emerged from a broad tradition known as neoclassical economics. (Even communism can be seen as a neoclassical critique.) Neoclassicists can be left-wing or right-wing, but they share a set of crucial core beliefs, namely that it is useful to look for government policies that can improve the economy. Hayek and the rest of his ilk — known as the Austrian School — reject this. To an Austrian, the economy is incomprehensibly complex and constantly changing; and technocrats and politicians who claim to have figured out how to use government are deluded or self-interested or worse. According to Hayek, government intervention in the free market, like targeted tax cuts, can only make things worse.

Here Davidson doesn’t just get Hayek wrong, he gets everything wrong. Where to start? “For the past century, nearly every economic theory in the world has emerged from a broad tradition known as neoclassical economics.” Fair enough, though the dominance of neoclassical economics probably goes back to at least 1880, and certainly no later than the publication of Alfred Marshall’s Principles of Economics in 1890, 120 years ago. But what can Davidson possibly mean by the bizarre parenthetical side comment “even communism can be seen as a neoclassical critique?” Does he mean that communism is a version of neoclassical economics? Or perhaps he means that Communism is a critique of neoclassical economics. Either alternative would be truly amazing if, by Communism, he means the economic doctrines of Karl Marx, doctrines Marx had developed well before the principal founders of neoclassical economics, William Stanley Jevons, Carl Menger and Leon Walras, published their versions of the marginal utility theory of value in the early 1870s. Perhaps Davidson means something else by Communism, but for the life of me, I can’t imagine what it might be. Then, paying no attention to the theoretical content of neoclassical theory, Davidson identifies the set of crucial core beliefs of neoclassical economics as follows: “it is useful to look for government policies that can improve the economy.” The mind boggles. This is not just cluelessness; it’s cluelessness masquerading as profundity.

Then we are told that Hayek and his fellow “Austrians” reject the notion that it is useful to look for government policies that can improve the economy. But this has nothing to do with neoclassical economics. Davidson seems to have relied on George Mason University economist, Peter Boettke, for some of his ideas, but I find it hard to imagine that Davidson is quoting Boettke accurately when he writes:

In actuality, Ryan is like a lot of politicians who merely cherry-pick Hayek to promote neoclassical policies, says Peter Boettke, an economist at George Mason University and editor of The Review of Austrian Economics.

Does Davidson know what a neoclassical policy is? Does Boettke? Does anyone? I don’t think so, because neoclassical economics, as such, has no policy agenda. But whatever a neoclassical policy might be, Davidson assures us that Hayek is totally against it.

Now, although the term “neoclassical policy” is a pure nonsense term, I can guess how Davidson, after talking to a bunch of Austrians — I hope not Boetkke or Bruce Caldwell, who is also quoted in Davidson’s piece — picked up on the propensity of modern self-styled Austrians — generally followers of the fanatical Murray Rothbard, as distinguished from the authentic Austrians of Hayek’s generation — to deploy “neoclassical” as a term of abuse, providing sufficient justification for these modern Austrians to dismiss any economic doctrine or policy they don’t like by strategically applying the epithet “neoclassical” to it.

So let me assert flatly that F. A. Hayek was a neoclassical economist through and through. He was also an authentic Austrian economist, schooled in both branches of Austrian theory by way of his association with his primary teacher at the University of Vienna, Friedrich von Weiser Wieser, one of the two principal successors of Carl Menger, the founder of the Austrian School, and through his subsequent collaboration with Ludwig von Mises, a leading student of Eugen von Bohm-Bawerk, the other principal successor of Menger.

In an introductory essay (“The Place of Menger’s Grundsatze in the History of Economic Thought”) to a volume, Carl Menger and the Austrian Theory of Value, edited by J. R. Hicks, commemorating the centenary of Menger’s classic work Grundsatze der Volkwirtschaftslehre (Principles of Economics) propounding the marginal-utility theory of value, Hayek explained that Menger’s theory had been incorporated into the larger body of economic theory that grew from the foundational contributions of Jevons, Menger, and Walras. While Menger’s work had become less influential in the second half century following publication of Menger’s Grundsatze than it had been in the first half-century after its publication, Hayek attributed that fact to a shift, under the influence of Keynes, in the interests of economists from micro- to macro-economics. Keynes’s work was not neoclassical economics, and it has been an ongoing project ever since Keynes published the General Theory to determine whether, and to what extent, Keynes’s theory could be reconciled with neoclassical economic theory. Here is how Hayek summed up his essay.

It seems to me that signs can already be discerned of a revival of interest in the kind of theory that reached its first high point a generation ago – at the end of the period during which Menger’s influence had mainly been felt. His ideas had by then, of course, ceased to be the property of a distinct Austrian School but had become merged in a common body of theory which was taught in most parts of the world. But though there is no longer a distinct Austrian School, I believe there is still a distinct Austrian tradition form which we may hope for many further contributions to the future development of economic theory. The fertility of its approach is by no means exhausted and there are still a number of tasks to which it can profitably be applied.

So we are all (or almost all) neoclassical economists, and none more so than Hayek, who was steeped in the neoclassical tradition. But no tradition is static. When a tradition stops changing, when it stops evolving, it becomes a relic, not a tradition. And with change come differences of opinion and disagreements, even bitter disagreements, between practitioners operating within a single broad tradition. Many Austrians now view themselves as completely distinct and separate from the broader neoclassical tradition from which their own doctrines evolved, but that was never Hayek’s view. And for all the severe criticisms and complaints he voiced about the direction of economics since the 1930s, he never viewed himself as being cut off, or alienated, from the mainstream of neoclassical economic theory. That Hayek could be both a critic and a practitioner of neoclassical economics is obviously too complicated a proposition for Mr. Davidson, and many others for that matter, to comprehend, but to Hayek it seemed entirely natural and unremarkable.