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GLIFOS-social media video Search Terms: Loading ... About this video Known as an economist to the world, Dr. Hayek talks with Jack High about the past and present in the realm of economics. Discussing the role of various economists had on his thinking, including such notable people as Ludwig von Mises, Frank Knight, Frank Fetter and Gottfried Haberler, the synthesis of Hayek’s ideas becomes clearer. Describing his competition with John Maynard Keynes, Hayek tells of why his ideas lost out to the more popular and mathematical words of Keynes. Hayek gives his interpretation of the Austrian theory of the trade cycle, capital theory, in the process explaining in detail the role of expectations. The socialist calculation debates, and the more modern variant of general equilibrium analysis, are compared to contemporary policy. Finally, Hayek describes his transition from economics to social philosophy, highlighting his problems with John Stuart Mill. Credits Interview with Friedrich A. Hayek by Jack High

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Jack High Transcript HIGH: Professor Hayek, I believe you came from a family of natural scientists. How did you get interested in the social sciences? HAYEK: Well, it's quite to-- Although, I had a maternal grandfather who was a constitutional lawyer and later a statistician, but there's no influence from that side. The background was purely biological, which has now been passed on to my children. I don't know quite how it happened. I think the decisive influence which interested me and which led me to be interested in politics was really World War I, particularly the experience of serving in a multinational army, like the Austro-Hungarian army. When I saw, more or less, the great empire be dissolved over the nationalist problem. I served in a battle in which eleven different languages were spoken in a single battle. It's bound to draw your attention to the problems of political organization. It was during the war service in Italy that I more or less decided to do economics. But I really got hooked when I found [Karl] Mengers's Grundsetzesuch a fascinating book--so satisfying. Even then, you see, I came back to study law in order to be able to do economics, but I was about equally interested in economics and psychology. I finally had to choose between the things I was interested in. Economics at least had a formal legitimation by a degree, while in psychology you had nothing. And [since] there was no opportunity of a job, I decided for economics. HIGH: I seem to recall you telling a story in Claremont. You presided over the retreat of some troops. You were a lieutenant and ran into quite an interesting-- HAYEK: Well, it wasn't very interesting. On the retreat from the Piave [River], we were first pursued by the Italians. Since I was telephone officer of my regiment (which meant that I knew all the very few German-speaking men, who were the only reliable men in these conditions), I was asked to take a little detachment for the artillery regiment, first as a rear guard against the Italians following us and then as an advance guard as we were passing the Yugoslav part, where there were irregular Yugoslav cadres who were trying to stop us and get our guns. On that occasion, after having fought for a year without ever having to do a thing like that, I had to attack a firing machine gun. In the night, by the time I had got to the machine gun, they had gone. But it was an unpleasant experience. HIGH: Your name, of course, is closely associated with [Ludwig von] Mises's. What do you feel were the most important influences he had on you? HAYEK: That's, of course, a big order to answer. Because while I owe him a great deal-- I owe perhaps most to him that while he was very persuasive, I was never quite convinced by his arguments. Frequently, I find in my own explanations that he was right in the conclusions without his arguments completely satisfying me. In my interests, I've been very much guided by him: both the interest in money and industrial fluctuations and the interest in socialism comes very directly from his influence. If I had come to him as a young student, I would probably have just swallowed his views completely. As it was, I came to him already with a degree. I had finished my elementary course; so I pushed him in a slightly more critical fashion. Being for ten years 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. As I say, in most instances I found he was simply right; but in some instances, particularly the philosophical background--I think I should put it that way--Mises remained to the end a utilitarian rationalist. I came to the conclusion that both utilitarianism as a philosophy and the idea of it--that we were guided mostly by rational calculations--just would not be true. That [has] led me to my latest development, on the insight that we largely had learned certain practices which were efficient without really understanding why we did it; so that it was wrong to interpret the economic system on the basis of rational action. It was probably much truer that we had learned certain rules of conduct which were traditional in our society. As for why we did, there was a problem of selective evolution rather than rational construction. HIGH: How about the work of Frank Knight, especially his work on uncertainty? How big an influence did that have on you? HAYEK: Comparatively little, because I came across it too late. I found it extremely satisfactory when I became acquainted with it, but that was after I'd gone to London; so [it was] at a comparatively late stage. At that stage, Lionel 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. But, as I say, at a stage where my ideas were fairly definitely formed I liked it very much, and I think the stress on the risk problem had some influence on me, but only a contributing influence, as it fitted in with my thinking rather than starting something new. HIGH: So that book was not a part of the intellectual material of Vienna of the 1920s. HAYEK: No, in spite of the fact that Knight visited us once in Vienna. We made his personal acquaintance, and I suppose some of my friends read his book at the time. I didn't. HIGH: How about the work of [Frank] Fetter? Did that have much of an influence on you? HAYEK: I knew it; in fact, I knew the old man himself. I visited him at Princeton [University] when I was here in '23 or '24. Influence is putting it too strong. I was very interested in it, but being brought up on [Eugen von] Böhm-Bawerk I found it a very nice restatement--exaggerating, in my opinion, the purely psychological part of it. I think Böhm-Bawerk had kept much more balance between the time-preference and the productivity aspect. Fetter stressed entirely the time-preference aspect, although Mises liked it very much. I think Mises would have--I didn't hear him say so--but probably would have argued that Fetter was an improvement on Böhm-Bawerk. I've never been persuaded that was so. HIGH: So in the debate between Fetter and [Irving] Fisher, then, I guess you would come down more on the side of Fisher. HAYEK: Yes, I think so. HIGH: Looking back, it seems like there was a remarkable number of economists who later became prominent, who were in Vienna in the 1920s. What do you attribute that to? HAYEK: Well, the number wasn't so very large. It was a group of almost contemporaries, consisting essentially of [Gottfried] Haberler; [Fritz] Machlup; [Oskar] Morganstern; [Paul] Rosenstein-Rodan, who at that time was much more influential than he has since been, and who wrote a very important article on marginal utility; and myself. I think that is the group. HIGH: Haberler? Was he? HAYEK: I mentioned Haberler first, I thought. HIGH: Oh, did you? HAYEK: Yes. Haberler would come to my mind first, anyhow. We were all about the same generation, all of us still members of the same seminar. We were only two years apart, and we were all members of the Mises's seminar, which I think was really much more important because it kept us together after we'd finished-- You see, Mises's seminar was not really a university affair; this was a discussion club in his office. We called it the Mises Seminar, and it went on for something like twenty years. I left after fifteen years, in '31, when I went to London, but all the rest, and Mises himself, still continued until about 1936 or so. It's really the members of this seminar who, I think, probably were largely encouraged to pursue economics by this discussion group of Mises's, which in a way was much more important than the university. At the university there was no inspiring teacher after [Friedrich von] Wieser had retired. Hans Meyer, his successor, was a severely neurotic-- He was a very intelligent and knowledgeable man, but the kind of person who will never fulfill their promise because they haven't discipline enough to force themselves to complete a piece of work of any length, and that was his tragedy because it all led to certain emotional strains on the man. He was also a difficult person to get on with, and Mises was, contrary to his reputation, an extremely tolerant person. He would have anyone in his seminar who was intellectually interested. Meyer would insist that you swore by the master, and anybody who disagreed was unwelcome. HIGH: I see. Very little or maybe even none of Hans Meyer's work has been translated into English. Did he make any important contributions? HAYEK: I'm never quite sure. When I recently expressed doubts about it, a man who is a very good judge, [Ludwig] Lachmann, thought it was unjust, and perhaps I have forgotten. I haven't referred to him again since that time, and he really did not make a very great impression on me. But I should not be surprised that if I returned to him, I would find more in him than I remember. HIGH: I see. John Hicks wrote about you, and I want to quote this. This is a quote: "When the definitive history of economic analysis during the 1930s comes to be written, a leading character in the drama--it was quite a drama--will be Professor Hayek. There was a time when the new theories of Hayek were the rivals of the new theories of Keynes." End of quote. Why do you think your theories lost out to the theories of [John Maynard] Keynes? HAYEK: Well, there are two sides to it. One is, while Keynes was disputed as long as he was alive--very much so--after his death he was raised to sainthood. Partly because Keynes himself was very willing to change his opinions, his pupils developed an orthodoxy: you were either allowed to belong to the orthodoxy or not. At about the same time, 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. Recently, and Hicks is probably the most outstanding symptom, there has been a revival of interest in my sort of problems, but I had a period of twenty years in which I bitterly regretted having once mentioned to my wife after Keynes's death, that now Keynes was dead I was probably 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. Part of the justification, you know, was that I did only incidental work in economics after that. And most of what I did was kind of to a present-- Well, I guess there is one more aspect. I never sympathized with either macroeconomics or econometrics. They became the great fashion during the period as a curious pattern, thanks to Keynes's influence. In the case of macroeconomics, it's clear. But Keynes himself did not think very highly of econometrics, rather to the contrary. Yet somehow his stress on aggregates, on aggregate income, aggregate demand, encouraged work in both macroeconomics and econometrics. So, very much against his own wishes he became the spiritual father of this development towards the mathematical econometric economics. Now, I had always expressed my doubts about the thing, and that didn't make me very popular among the reigning generation of economists. I was just thought to be old-fashioned, with no sympathy for modern ideas, that sort of thing. HIGH: I see. What is your evaluation of Hicks's book Value and Capital? HAYEK: Oh, really, absolutely first-class work in his time. So far as there is a theory of value proper, which does not extend beyond this and which doesn't really analyze it in terms of directing production, I think it's the final formulation of the theory of value. I don't think [Paul] Samuelson's improvements are really improvements beyond it. I think the Hicksian analysis in terms of rates of substitution, in that narrow field, is a definite achievement. HIGH: Do you think that what is now called the Keynesian revolution should have been called the Hicksian revolution? Was he influential in getting Keynes's ideas accepted? HAYEK: I certainly don't think of Hicks as a revolutionary. I think he tried to give it a more acceptable form. But I have reason to say that it probably should be called a Kaldorian revolution, not for anything which is connected with Kaldor's name, but what spread it was really Lord [William] Beveridge's book on full employment, and that was written by Mr. Nicholas Kaldor and not by Lord Beveridge, because Lord Beveridge never understood any economics. HIGH: Have the economic events since you wrote on trade cycle theory tended to strengthen or weaken your ideas on the Austrian theory of the trade cycle? HAYEK: 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 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. HIGH: The Austrian theory of the cycle depends very heavily on business expectations being wrong. Now, what basis do you feel an economist has for asserting that expectations regarding the future will generally be wrong? HAYEK: Well, I think the general fact that booms have always appeared with a great increase of investment, a large part of which proved to be erroneous, mistaken. That, of course, fits in with the idea that a supply of capital was made apparent which wasn't actually existing. The whole combination of a stimulus to invest on a large scale followed by a period of acute scarcity of capital fits into this idea that there has been a misdirection due to monetary influences, and that general schema, I still believe, is correct. But this is capable of a great many modifications, particularly in connection with where the additional money goes. You see, that's another point where I thought too much in what was true under prewar conditions, when all credit expansion, or nearly all, went into private investment, into a combination of industrial capital. Since then, so much of the credit expansion has gone to where government directed it that the misdirection may no longer be overinvestment in industrial capital, but may take any number of forms. You must really study it separately for each particular phase and situation. The typical trade cycle no longer exists, I believe. But you get very similar phenomena with all kinds of modifications. HIGH: You've already talked a little bit about your involvement with the socialist calculation debate. What effects do you feel the debate had on the theory of socialism? HAYEK: Well, of course, it had some immediate effects. When Mises started it, there was still the idea very prevalent that there was no need for calculation in terms of value at all. Then came the idea that you could substitute values by mathematical calculation; then there came the idea of the possibility of socialist competition. All these were gradually repressed. But as I now see, the reason why Mises did not fully succeed is his very use of the term calculation. People just didn't see why calculation should be necessary. I mean, when I now look at the discussion at that time, and Mises asserts that calculation is impossible, I can [understand] the reply: Why should we calculate? We have the technical data. We know what we want. So why calculation at all? If Mises, instead of saying simply that without a market, calculation is impossible, had claimed that without a market, people would not know what to produce, how much to produce, and in what manner to produce, people might have understood him. But he never put it like this. He assumed everyone would understand him, but apparently people didn't. HIGH: To what extent do you think the debate has slowed down the spread of national economic planning in the Western world? HAYEK: Well, it's reviving again. It had died down very much, but when two years ago in this country this planning bill of Senator [Hubert] Humphrey's and the agitation of [Wassily] Leontief and these people came forward, I was amazed that people were again swallowing what I thought had been definitely refuted. Of course, Leontief still believes firmly in it. But, I don't think he ever understood any economics, but that's a different matter. HIGH: To what extent do you think that general-equilibrium analysis has contributed to the belief that national economic planning is possible? HAYEK: It certainly has. To what extent is very difficult to say. Of the direct significance of equilibrium analysis to the explanation of the events we observe, I never had any doubt. I thought it was a very useful concept to explain a type of order towards which the process of economics tends without ever reaching it. I'm now trying to formulate some concept of economics as a stream instead of an equilibrating force, as we ought, quite literally, to think in terms of the factors that determine the movement of the flow of water in a very irregular bed. That would give us a much better conception of what it does. But ultimately, of course, it goes back to the assumption of what the economists pleonastically call "given data," this ridiculous concept that, if you assume the fiction that you know all the facts, the conclusion you derive from this assumption can apply directly to the world. My whole thinking on this started with my old friend Freddy Bennan joking about economists speaking about given data just to reassure themselves that what was given was really given. That led me, in part, to ask to whom were the data really given. To us, it was of course [given] to nobody. The economist assumes [the data] are given to him, but that's a fiction. In fact, there's no one who knows all the data or the whole process, and that's what led me, in the thirties, to the idea that the whole problem was the utilization of information dispersed among thousands of people and not possessed by anyone. Once you see it that way, it's clear that the concept of equilibrium helps you in no way to plan, because you could plan only if you knew all the facts known to all people; but since you can't possibly know them, the whole thing is vain and a misconception partly inspired by this concept that there are definite data which are known to anyone. HIGH: Do you feel that mathematics has an important role to play in economic theory? HAYEK: Yes, but algebraic mathematics and not quantitative mathematics. Algebra and mathematics are a beautiful way of describing certain patterns, quite irrespective of magnitudes. There's one great mathematician who once said, "The essence of mathematics is the making of patterns," but the mathematical economists usually understand so little mathematics that they believe strong mathematics must be quantitative and numerical. The moment you turn to accept this belief I think the thing becomes very misleading--misleading, at least, so far as it concerns general theory. I don't deny that statistics are very useful in informing about the current state of affairs, but I don't think statistical information has anything to contribute to the theoretical explanation of the process. HIGH: What is your assessment of game theory? HAYEK: Well, I don't want to be unkind to my old friend, the late Oskar Morganstern, 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. HIGH: You have written an extraordinarily difficult book on capital theory--in my opinion it's difficult. What message did you want to convey in that book? HAYEK: Well, to put it briefly, I think it's that while Böhm-Bawerk was fundamentally right, his exposition in terms of an average period of production was so oversimplified as to mislead in the application. And that if we want to think the Böhm-Bawerk idea through, we have to introduce much more complex assumptions. Once you do this, the things become so damned complicated it's almost impossible to follow it. HIGH: Did you have any idea the work was going to be that complicated when you undertook it? HAYEK: No, no. I certainly didn't. It very gradually dawned upon me that the whole thing seemed to change its aspect once you could not put it in the simple form that you could substitute a simple average period of production for the range of investment periods, which involved in a way--No, it's not the right way of putting it--The average period of production is the first model showing a principle, but it is almost inapplicable to the real situation. Well, of course, the capital that exists has never been built up consistently on the basis of a given set of expectations, but by constantly reusing accumulated real capital assets for new purposes that were not foreseen. So the dynamic process looks very different. I think the most useful conclusions drawn from what I did are really in Lachmann's book on capital, whatever the title is. Like so many things, I am afraid, which I have attempted in economics, [this capital-theory work] shows more a barrier to how far we can get in efficient explanation than [sets forth] precise explanations. I mean, all these things I've stressed--the complexity of the phenomena in general, the unknown character of the data, and so on--really much more point out limits to our possible knowledge than our contributions that make specific predictions possible. This is, incidentally, another reason why my views have become unpopular: a conception of scientific method became prevalent during this period which valued all scientific fields on the basis of the specific predictions to which they would lead. Now, somebody pointed out that the specific predictions which [economics] could make were very limited, and that at most you could achieve what I sometimes called patterned predictions, or predictions of the principle. This seemed to the people who were used to the simplicity of physics or chemistry very disappointing and almost not science. The aim of science, in that view, was specific prediction, preferably mathematically testable, and somebody pointed out that when you applied this principle to complex phenomena, you couldn't achieve this. This seemed to people almost to deny that science was possible. Of course, my real aim was that the possible aims of science must be much more limited once we've passed from the science of simple phenomena to the science of complex phenomena. And there people bitterly resented that I would call physics a science of simple phenomena, which is partly a misunderstanding, because the theory of physics ends in terms of very simple equations. But that the active phenomena to which you have to apply it may be extremely complex is a different matter. The models of physical theory are very simple, indeed. So far as the field of probability, that's another part. But it is this intermediate field, which we have in the social sciences, where the elements which have to be taken into account are neither few enough that you can know them all, nor a sufficiently large number that you can substitute probabilities for the new information. The intermediate phenomena field is a difficult one. That's a field with which we have to deal both in biology and the social sciences. And they're complex. They become, I believe, an absolute barrier to the specificity of predictions that we can arrive at. Until people learn themselves that they can't achieve these ends, they will insist on trying. They will think that somebody who does not believe [this specificity can be achieved] is just old-fashioned and doesn't understand modern science. HIGH: I have heard you say before that in the 1920s, 1930s, you didn't regard Austrian economics as essentially any different from British economics. Looking back, do you still think that's true? HAYEK: If you stress essentially, yes, I think it is still true. So long as British economics at least aimed at being microeconomics (and that was true at that time), there was no such fundamental difference, though there must have been inherent in it a greater propensity to shift over to macroeconomics than there was in the Austrian tradition. I think historically it is true that most of the people in the Marshallian school readily switched over to macroeconomics, but the Austrians did not. It would be interesting, especially, to investigate the reasons why this happened. But my general feeling was that before Keynes helped macroeconomics to this complete temporary victory, the two traditions were closely approaching. Perhaps this was due to my making the acquaintance with English tradition very much in the form of Lionel Robbins's exposition, which was half-Austrian already. If I had moved not to the London School of Economics but to Cambridge, I might not have felt like this. HIGH: What do you feel saved the Austrian economists from adopting the perfect-competition/perfect-knowledge approach to micro problems? HAYEK: Well, I don't know, that is really deeply embedded in the whole tradition. I think already Menger's resistance against mathematical economics was based on the same awareness that you deal with the phenomena where your specific information is limited, but none of them have ever really spelled it out--not even Mises--adequately. It is still one of my endeavors to show why this tendency towards macroeconomics-- I just can't explain at the moment. I'm quite clear why, from the Austrian point of view, you could never be happy with a macroeconomic approach. It's almost a different view of the world from which you start. I find it much more puzzling that so many people seem to be able to live in both worlds at the same time. HIGH: There are quite a number of young economists today who are studying your work and the work of Mises. How do you look on the new Austrian movement? Do you regard it as significant? How do you regard its future prospects? HAYEK: Oh, yes, it's certainly significant. I am quite hopeful in the long run, just because of this movement, which consists not only of those who call themselves, in this country, the Austrian economists. There is a similar reaction among the young people in England and in Germany, and quite recently even in France, where it came latest. So I think the intellectual movement is wholly in the right direction. But it will take another twenty years before they will have any influence on policy, and it's quite possible in the meantime that the politicians will destroy the world so thoroughly that there's no chance of the thing taking over. But 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. Now, speaking a moment about the more general political aspect of it all, I'd like to say that when I was a young man, only the very old men still believed in the free-market system. When I was in my middle ages, I almost found that myself, and nobody else, believed in it. And now I have the pleasure of having lived long enough to see that the young people again believe in it. That is a very important change. Whether it comes in time to save the world, I don't know. HIGH: Looking back, your articles "The Use of Knowledge in Society" and "Economics and Knowledge" seem like a bridge between your economics work and your later social philosophy. Now, in the late 1930s, did you make a conscious decision to move in the direction of social philosophy rather than technical economics? HAYEK: No, it came from my interest in the history of the ideas that had first led economics in the wrong direction. That's what I did in the "counterrevolution of science" series of articles, which again sprung from my occupation with planning similar things, and it was these which led me to see connections between what happened in economics and what happened in the approach to the other social sciences. So I acquired gradually a philosophy, in the first instance, because I needed it for interpreting economic phenomena that were applicable to other phenomena. It's an approach to social science very much opposed to the scientistic approach of sociology, but I find it appropriate to the specialized disciplines of the social sciences--which means essentially economics and linguistics, which are very similar in their problems. [It explains] the genesis of all kinds of social structures, but throughout opposed to sociology. As I put it in my recent lectures, I'm very doubtful whether there is really a justification for a single theoretical science of sociology, any more than there's any justification for a single theoretical science of "naturology." Science has to deal with particular phenomena. It may develop a philosophy which explains how certain complexes of phenomena are ordered, but there are certainly many ordering principles operating in forming society, and each is of its own kind. For sociologists to claim otherwise--well, sociology, in a way, puts it differently--is due to the same current to which macroeconomics is due in economics. It's, of course, a--well, I've never used the term before--"macrosociology" instead of a "microsociology." Microsociology would consist of sciences like economics and linguistics and the theory of law and even the theory of morals; while macrosociology is as much a mistake as macroeconomics is. HIGH: What were the most important considerations in your leaving the field of economics and concentrating on social philosophy? HAYEK: Well, it was never a deliberate decision. I was, by accident, led into writing that book The Road to Serfdom. I found that it raised many problems to which I had no satisfactory answer and couldn't find a satisfactory answer anywhere. And when, to retreat a moment from the controversial subjects, I decided to write up my ideas on psychology, I became aware of the existence of this general background of a different methodological approach to complex phenomena. Once I had elaborated this aspect of the methodology of science, I just saw that it had even more urgent application at the moment to things like theory of politics than to the theory of economics. But there was one more-- There's always so many different things converging which drive one to a particular outcome. I did see that our present political order made it almost inevitable that governments were driven into senseless policies. Already the analysis of the The Road to Serfdomshowed me that, in a sense, [Joseph] Schumpeter was right--that while socialism could never do what it promised, it was inevitable that it should come, because the existing political institutions drove us into it. It didn't really explain it, but once you realize that a government which has power to discriminate in order to satisfy particular interests, if it's democratically organized, is forced to do this without limit-- Because it's not really government but the opinion in a democracy that builds up a democracy by satisfying a sufficient number of special interests to offer majority support. This gave me a key to the reason why, even if people understood economics correctly, in the present system of government it would be led into a very stupid economics policy. This, which I put it earlier, led me to what I call my two inventions in the economics field. On the one hand, my proposal for a system of really limited democracy; and on the other--also a field where present government cannot pursue a sensible policy--the denationalization of money, taking the control of money out of the hands of government. Now, once you are aware that, although I am very little concerned with influencing current politics, the current institutional setup makes a good economics policy impossible, of course you're driven to ask what can you do about this institutional setup. HIGH: Is it possible to arrange governments so that they are not eventually driven to make these-- HAYEK: Well, that is the attempt of my Law, Legislation and Liberty--to sketch a possible constitutional arrangement which I think would do so. There is the question of what you mean by possible. Whether it's possible to persuade people to accept such a constitution, I don't know. But there, of course, my principle comes in that I never ask what is politically possible, but always aim at so influencing opinion as to make politically possible what today is not politically possible. HIGH: You spoke earlier of ideas that had led economists astray. What do you feel are the most important of these ideas? HAYEK: Well, that's too long a story to explain briefly. Most of what I have done on the intellectual history is my study of positivism. The origin of the idea of central direction, the idea about the utilization of dispersed knowledge, all really converge on this same point. And I think it was inevitable, in a way, that I was led from economics in the narrower sense to the question of social organization and appropriate governments which would avoid being driven, even against their better insight, into stupid policies. Apart from the general effect of democracy, of course the present position with the inflation is a very clear one. You have a situation in which everybody knows that a little inflation will reduce unemployment, but that in the long run will increase it. But that the politicians are bound to be led by short-run considerations because they want to immediately be reelected, I think to me proves irrefutably that so long as government has discretionary powers over money, it will be driven into more and more inflation. In fact, it has always been so, except as long as government voluntarily submitted to the discipline of the gold standard. I can't really defend the gold standard, because I think it rests--its effectiveness rested--in part on a superstition, and the idea that gold money as such is good is just wrong. The gold standard was good because it prevented a certain arbitrariness of government in its policy; but merely preventing even worse is not good enough, particularly if it depends on people holding certain beliefs which are no longer held. So, in my opinion, an effective restoration of the gold standard is not a thing we can hope for. HIGH: I would like to ask you a couple of questions on the background of economics--history of economic thought. How do you evaluate the influence of John Stuart Mill? HAYEK: Well, you ask me at the wrong moment. I'm just drafting an article which is going to be called "Mill's Muddle and the Muddle of the Middle." I'm afraid John Stuart Mill--you know, I have devoted a great deal of time studying his intellectual development--really has done a very great deal of harm, and the origin of it is still impossible for me to explain. That in any man the mere fact that he was taught something as a small boy should make him incapable of seeing that it is wrong, I still find very difficult to understand. That applies especially to the labor theory of value. In the 1820s and 1830s the labor theory of value was very badly shaken. In fact, there was a famous meeting of the Political Economy Club, in which I believe [Robert] Torrens asked the question, "What is now left of the theories of Mr. [David] Ricardo? Concluding that the theory of value had been finally exploded by Samuel Bailey. Now, I don't know whether John Stuart Mill was among the members of the Political Economy Club, but I know that his own little discussion circle devoted several meetings to discussion of Bailey's book on value, which is one of the books that clearly refuted Ricardo. And Mill was very familiar with the French discussion at the time when utility analysis was very definitely in the air. It had not become a definite formulation, but Leon [Walras] and even [A. A.] Cournot-- And there was even an Englishman, Don Lloyd, who had developed almost a complete marginal utility theory, and I assume Mill must have known this. Any man after this who can assert of the theory of value that in the theory of value there's nothing to improve, that it is certain to be for all times definite, is completely incomprehensible to me. This had very serious consequences [for Mill], because it was this belief that the theory of value was definite that led him to this curious statement that the theory of production is determined by nature; where distribution is concerned, it's open to our modification according to our will. I'm not quoting literally now; I can't remember the form of words he used. Now that, of course, is entirely due to the fact that he had not understood the real function of value as telling people what they ought to do. By assuming that value is determined by what has been done in the past rather than seeing that to maintain the whole structure values are the things people are to follow in deciding what to do, Mill was led into this statement that distribution is a matter of arbitrary decision, and that forced him into a third great mistake in inventing the conception of social justice. Now, that means the three most important things in his book are not only completely wrong but are extremely harmful. That's not denying that he was a very ingenious man, and there are many little points in his book which are of great interest. [George] Stigler, in an article you probably remember, has pointed out his positive contribution, but I think the net effect of John Stuart Mill on economics has been devastating, and [Stanley] Jevons knew this. Jevons regarded Mill as a thoroughly pernicious influence. And while I would never use quite as strong language, I think Jevons was fundamentally right. HIGH: Then, in your view [Alfred] Marshall was wrong in his rehabilitations. HAYEK: Oh, yes, yes. In assessing the difference between the Austrians and the Cambridge school, it was Marshall, with his harking back to Mill and his famous two blades of a sisal--it's not demand only, it's not supply only, it's a sisal that determines values--that preserved this tradition. And it's out of this tradition that the whole of English socialism has sprung. If you look at--whether it's [George Bernard] Shaw or Bertrand Russell--the whole leaders of opinion in England at the beginning of this century, they were brought up on John Stuart Mill. HIGH: I want to switch the topic a little bit now, because we're just about out of time. I would like to ask you, what were your feelings, how did you react, when you found out you had won the Nobel Prize? HAYEK: Complete surprise. I mean, I expected nothing less, and I didn't even approve. I didn't think the Nobel Prize ought to be given late in life to people that had done something important in the distant past. That was certainly not the intention of [Alfred] Nobel himself, and I don't think it ought to be in economics. I think it ought to be given for some specific achievement in the fairly recent past; but this conferring it as a general sign of distinction on people who had given-- But even so, I assumed they would treat me as too old, as already out of the running. HIGH: Looking back over your career, how do you feel about your work, and what things do you think you might change, if you had to do it again? HAYEK: I don't know. I never thought about this. In spite of my age, I'm still thinking much more about the future than about the past. It's so difficult to know what the consequences of particular actions have actually been, and since all evolution is largely the product of accidents, I'll be very hard-put to say what particular decisions of my own have had particular consequences. I know certain events which were extremely lucky, that I had luck in many connections, but how far my own decisions were right or wrong-- It is my general view of life that we are playing a game of luck, and on the whole I have been lucky in this game. HIGH: Well, I think we're out of time. I would like to say that those of us who have had access to your work to learn from are very lucky and also very appreciative on it. HAYEK: Thank you very much. Table of Contents Interest in social sciences Experience in the army Influence of Ludwig von Mises Influence of Frank Knight Influence of Frank Fetter Economists in Vienna in the 1920s Mises's seminar Hans Meyer Keynes versus Hayek Value and Capital, John Hicks Austrian theory of the trade cycle Role of expectations in the Austrian theory of the trade cycle Socialist calculation debate General-equilibrium analysis Mathematics in economics Game theory Capital theory Austrian versus British economics Future of Austrian economics Hayek's transition from economics to social philosophy Social philosophy Common misperceptions in economics John Stuart Mill Winning the Nobel Prize Views on personal previous works Final words

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