Did Hayek Deserve the Nobel Prize?

This work claims to be an intellectual biography of Hayek, who, according to the author, “was the greatest philosopher of liberty during the twentieth century” and whose “contributions to political theory and philosophical economics are immense”. Paradoxically, this is a well-researched candid biography, which draws on primary sources, and most notably on oral archives, but provides enough evidence to refute the claims of the author and to question the award of the Nobel Prize in Economics to Hayek (jointly with Gunnar Myrdal) in 1974. This award is said to have surprised Hayek because he received it and surprised Myrdal because he had to share it with Hayek. The award was “for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena”. The book also serves to expose his covert racism and to explode the myth that he migrated from Vienna to the London School of Economics as a refugee from persecution. In point of fact, Hayek was a Roman Catholic who suffered no disabilities like his fellow Austrian Jews and left Austria long before the Nazi takeover. His migration to the London School of Economics was sponsored by Lionel Robbins. The financial incentive was the prime motive as Hayek found that the Dozenten system of payment to teachers from the fees paid by attending students did not give him a living wage. In fact, “every move he made was for financial reasons”, beginning from Vienna to Freiburg by way of London, Arkansas, and Chicago. A perfectly legitimate reason according to the dictates of rational self-interest and free markets, except that the principle of payment by consumers (students) was not acceptable to Hayek as to any other economist proponent of the market mechanism. Economists of all stripes are unanimous in preferring tenured contracts to the vagaries of payments by pupils as their source of income.

What in fact is the intellectual contribution of Hayek to analytic or empirical economics? The truth is that there is no killer theorem, concept, or paradigm associated with Hayek. During the early 1930s Hayek figured prominently in the debates when economists were in search of the causes of the Great Depression. But even then his contributions were suspect. Keynes called his Prices and Production as “one of the most frightful muddles I have ever read, with scarcely a sound proposition in it...an extraordinary example of how, starting with a mistake a remorseless magician can end up in Bedlam.” Milton Friedman wrote: “I am an enormous admirer of Hayek but not for his economics. I think Prices and Production was a very flawed book...his capital theory is unreadable. On the other hand, The Road to Serfdom is one of the great books of our time...he found his right vocation with The Road to Serfdom.” But Friedman omitted to point out that The Road to Serfdom is essentially an ideological tract for the times that lacks the originality and rigour of political theorists like John Rawls and Robert Nozick. Of his Pure Theory of Capital, an astute critic like G L S Shackle (Hayek’s doctoral pupil at the LSE) wrote: “It is inconceivable that any statistical or practical use can be made of the Austrian theory of capital”. John Hicks gave the clinching assessment of ‘The Hayek Story’ (1967): “Hayek’s economic writings...are almost unknown to the modern student” indicating, as Ebenstein says, the “black hole in which Hayek’s economic writings fell”. The decline and fall of Hayek the economist, and his relative position in the peer group, is well captured in the following table of the Most Cited Economists in the Index of Economic Journals in which Hayek does not figure at all in 1940-44.

Hayek did generate at least one testable hypothesis, not discussed by Ebenstein, viz, the Ricardo-Hayek Effect: “profits will be higher on the method with the higher rate of turnover...because the profits on the less capitalistic method will begin to accrue earlier than those on the more capitalistic method” (Hayek, ‘The Ricardo Effect’, Economica, May 1942). Even this did not evoke any empirical interest. Surprisingly, Hayek was never attracted to empirical economics despite his early spell as Director of the Austrian Institute for Business Cycle Research. His solitary excursion into inductive economics was a social survey of Gibraltar after second world war, which resulted in a government report. But he declined to do a similar survey for Cyprus when asked by the British government.

Be that as it may, Hayek retained his modesty and intellectual integrity. He admitted, “I never expected to receive the Nobel Prize...the Swedish Committee seems to have been very anxious to keep a certain balance between differing views (emphasis provided) and therefore selected a rather peculiar pair of which I was one.” This was patently unfair to Myrdal’s highly original work in monetary and business cycle theory and his use of economic tools like cumulative causation to address social issues like racism in his classic An American Dilemma.

Ebenstein also grossly exaggerates Hayek’s contribution to societal philosophy when he contends that more than anyone else he “put forward the ideas of spontaneous order, division of knowledge and the crucial role of prices to overcome this division”. The idea of spontaneous order was first expounded by the pillars of the Scottish Enlightenment, Adam Smith, David Hume and Adam Fergusson. Hayek himself acknowledged his intellectual debt to the seminal work of Ludwig Von Mises, particularly his opus ‘Human Action’ and his ‘Socialism’. Hayek’s contributions to the sub-genre of philosophical economics were thus essentially derivative. The only economist with an entry in the authoritative Cambridge Dictionary of Philosophy is Keynes for his Theory of Probability.

What was Hayek like as a teacher and how did he relate to colleagues and pupils? He had profound respect even for colleagues who were not his friends and were ideologically poles apart. He abhorred Harold Laski but stoutly defended him against the various charges periodically levelled at him. Similarly, although he disagreed with R H Tawney (“my socialist prototype”) he had high regard for him as a “very wise man.” He would strongly recommend Erich Roll’s History of Economic Thought despite its Marxist bias and selected Roll as the external examiner for Said Ahmad Meenai’s (an Indian student, later vice-president, Islamic Development Bank) doctoral dissertation on Lauderdale and Keynesian economics. But he had a strong anti-Keynes bias, not referred to in the book, and “particularly objected to the multiplier” coupled with a somewhat overzealous pursuit of every conceivable forerunner of Keynes. His prodigious memory and scholarship held the attention of his always full classroom, but he conspicuously lacked the pedagogic skills of Lionel Robbins, Phelps Brown, Beales, Laski, Tawney or Graham Wallas, “who surpassed anyone I have ever known” (Robbins). Hayek never acquired the English fluency of the Germanic diaspora at the LSE – Popper, Moser, Radomysler – and had a peculiar penchant for three-dimensional diagrams, to eke out his turgid English with a thick German accent.

Whatever his merits as a teacher, Hayek was never a collegial person: “and by choice did not make friends readily” and was “rather stand-offish” as recalled by Anne Bohm, a longtime LSE staff member. He was in the Senior Common Room but not of it and lacked the typical British don’s flair for conviviality and the arts of littleness. He was intimate only with Popper and with Robbins at least till his divorce from his first wife. No wonder Hayek never had the loyal student following of Robbins, Meade, Sayers, and others who always had a deep human interest in their students, whether writing timely references or walking down with them on the Strand or from Holborn Station to Houghton Street. One can scarcely visualise Hayek holding an informal seminar in a LSE neighbourhood pub like the economic historian F J Fisher. There is no better lubricant for thought than draft beer. Altogether, Hayek was an aloof figure, who, alas, was not free from visceral prejudices, as this book reveals, albeit in a very discreet end-note where Hayek is exposed in his own words for the first time, as a covert racist, anti-Asian and anti-Semitic. After the customary disclaimer of all bigots, he responded to an interview question as follows:

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...It was a type...described as Levantine, typical of people of the eastern Mediterranean...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.