The Life of an Unrepentant Old Whig

A defining characteristic of the twentieth century was the shift of economics from the peripheries of academic life to the center of political discourse. This development was personified by the most famous twentieth-century economist, John Maynard Keynes. Events like the Great Depression contributed to Keynes’s rise to fame, but so too did the force of economic ideas as governments sought to cope with problems like mass unemployment and rampant inflation, often against a background of political radicalization.

Part of Keynes’s appeal was his promise that governments could manage capitalist economies through a combination of macroeconomic policies and timely interventions. Underneath Keynes’s program, however, was another set of concerns. Keynes always regarded himself as a liberal and in the business of defending liberal civilization from socialists, nationalists, and fascists. A similar conviction drove the man whose ideas came to symbolize opposition to Keynes and the Keynesian revolution in economics.

Several biographies have been written of Friedrich August von Hayek (1899-1991). Until now, none have come close to matching Robert Skidelsky’s threevolume biography of Keynes. The publication of Hayek: A Life, 1899-1950 (2022) co-authored by two distinguished historians of economic thought, Bruce Caldwell and Hansjoerg Klausinger, rectifies that situation. As Skidelsky himself writes,“ This is the definitive Hayek for our times.”

While Caldwell and Klausinger admire Hayek, their biography—the first of a projected two-volume work—is no hagiography. The Hayek who emerges from this text is somewhat of a charming loner who maintained distance between himself and all but a small number of individuals. According to his daughter Christine, Hayek was rather clueless as a father and husband. He also made mistakes in his professional and personal life, often because he misread situations and people. Yet we also encounter a man whose deep curiosity about the world was matched by considerable courage and intellectual integrity.

The fullness of Caldwell and Klausinger’s picture of Hayek’s life and ideas owes much to their comprehensive study of primary sources. It is hard to overstate how impressive this is. The sources include extensive interviews with Hayek himself and his son and daughter, as well as many hitherto unexamined archival sources, personal, family, and professional correspondence, journals, diaries, note-cards, reading lists, and unpublished papers. This material has been carefully cross-referenced to get as close to the truth about the man as possible. This process, Caldwell and Klausinger state, may “seem like pedantry, but such care is particularly important when one’s subject is someone like Friedrich Hayek who was, is, and will remain a controversial figure.”

Viennese Traumas

Controversy invariably goes together with complexity. In Hayek’s case, it owes something to Hayek’s social origins in upper-middle-class fin-de-siècle Vienna, then the capital of the multi-ethnic Habsburg Empire. His father, August von Hayek, and mother, Felicitas von Juraschek, came from the lower nobility and shared academic backgrounds. Agnostic in religious matters, Hayek’s parents had grown up in the wake of the “liberal empire”: a period in the 1860s and 1870s during which the Habsburg realms underwent reforms led by German-speaking liberal politicians.

Liberalization had well and truly come to an end by the 1890s. By then, the empire seethed with economic, political, social, ethnic, and religious tensions. Its dominant German minority felt increasingly under siege from Hungarians, Czechs, and Poles. In Vienna, it was the growing prominence of Jews in political, economic, and academic life that bothered many ethnic Germans.

The rise of racial expressions of anti-Semitism touched many Viennese German families. This included, it turns out, Hayek’s father, mother, and at least one of his three siblings. His father, a doctor and amateur botanist, joined a German medical organization that was “committed to ‘a defending of non-Jewish doctors against the Jews’.” One of his brothers, Heinz, joined the SA (the Nazi party’s paramilitary organization) in 1933 and became a Nazi party member in 1938. A “tacit anti-Semitism,” Hayek retrospectively observed, was present in the family household. Hayek himself, Caldwell and Klausinger demonstrate, consistently rejected these associations. After a flirtation with socialism upon returning from the war in 1918, Hayek maintained his classical liberal views and embraced neither anti-Semitic nor ethno-nationalist positions. That led to growing tensions with his mother and his brother throughout the 1930s in light of their support for hard-right nationalists and then the Nazi regime after the Anschluss in March 1938.

By this time, Hayek was living in Britain and one of the stars at the London School of Economics, to which he had been recruited by Keynes’s then-leading economic critic, Lionel Robbins. But Austria remained a constant reference point for Hayek. It was where he had found many of the core ideas that would guide him, the places where he felt at peace, and the woman who would be the love of his life.

The Puzzler

This, however, is to get ahead of ourselves. Divided into six parts, Caldwell and Klausinger’s biography takes readers through Hayek’s family history, childhood, and schooling (he was a bright but lazy student), his war service, his studies at the University of Vienna in the 1920s and subsequent formation as an economist, his eventual move to England, his intellectual battles with Keynes throughout the 1930s, and the experience of World War II. It ends with his postwar move to America following a messy divorce—a sad affair in which Hayek does not appear in a favorable light.

As Caldwell and Klausinger traverse the decades, they take us through the period’s political and economic upheavals and Hayek’s reactions to what was happening in the West. Intellectually speaking, they suggest that Hayek was a “puzzler,” “someone who would keep coming back and rethinking a set of claims, adding new insights along the way.”

The key driver for this, they argue, was that Hayek kept confronting the “same old arguments” about politics and economics. No matter how deep and wide the evidence illustrating, say, the follies of extensive government economic intervention, Hayek discovered that the reality was—and is—that there will always be people who want to believe that, say, industrial policy will somehow work if the conditions are right or if they are put in charge. The fate of market liberals, it seems, is to illustrate such schemes’ fallacies, and to endure the opprobrium which goes along with that.

Keynes as Nemesis

Hayek found himself in this role more or less from the moment he was invited to lecture at the LSE. “I feel like a Cassandra,” he told Robbins in 1931. While much of his work was focused on price and capital theory, Hayek had been brought to England to combat Keynes’s growing influence among economists.

Hayek remained committed to the importance of developing sound economic theory as a way of countering cranks as well as those who stood to do much harm in the name of expediency.

In curious ways, Caldwell and Klausinger point out, Keynes and Hayek were quite similar. Both were from roughly the same social class, academically gifted, products of their respective intellectual milieux (Cambridge and Vienna), religious agnostics, and inclined to look back to late nineteenth-century Britain as a liberal golden age. They even shared intellectual interests outside economics, such as the history of ideas. Such things, plus a degree of tolerance less evident in contemporary academic life, explain the good relations between the two men, despite their often different ways of thinking.

Therein lies one of the most important themes that emerge from Caldwell and Klausinger’s study of Hayek’s life. Beyond the technicalities of their sparring which took off with Hayek’s forceful critique of Keynes’ Treatise on Money (1930), the deeper disputes between the two men gravitated around two matters.

One was about economics itself. Keynes and Hayek may have been arguing about topics as specialized as the natural rate of interest, but what was really at stake was Keynes’ emerging ambition to rethink economics so that the theoretical “action,” so to speak, moved away from a focus on prices and the constant readjustment of factors of production and distribution in response to the working of free prices, and towards a method of thinking in aggregates: a general theory whereby attention was primarily directed towards a constant anticipation of a deficiency in overall demand that government economic policy must be ready to rectify to preserve full employment. The second dispute concerned twentieth-century liberalism. For all their admiration of nineteenth-century liberal England, neither Hayek nor Keynes saw any possibility of going back to that time. Liberalism, both believed, needed to be rethought in light of twentieth-century challenges.

The two topics were, as Caldwell and Klausinger demonstrate, interrelated, and gradually converged on government’s role in the economy. Complicating this discussion was Keynes’s tendency to flip-flop on many policy issues. This made Keynes a moving target for Hayek. Another problem was that Hayek remained committed to the importance of developing sound economic theory, not least as a way of countering cranks as well as those who stood to do much harm in the name of expediency. By contrast, Keynes focused more on immediate policy challenges. Both outlooks have a role in economic thought, but it is clear from Caldwell and Klausinger’s account that, in certain respects, Hayek and Keynes ended up talking past each other.

Serfdom Arises

The great mystery of the Keynes-Hayek clash is why Hayek never wrote a review of Keynes’ General Theory. This is all the more puzzling given that, by 1936, Hayek and Robbins were losing their war with Keynes. The ongoing flight of economists and economic students to Keynes and his revolution in economics increasingly left market liberals marooned.

Hayek’s explanations in later life for this lacuna were somewhat lame. They ranged from weariness of endless disputation to his fear that Keynes would simply change his mind again. Caldwell and Klausinger speculate that Hayek hesitated because A.C. Pigou—the heir of the great Cambridge economist Alfred Marshall and foremost representative of the classic economics attacked by Keynes’s General Theory—penned such a devastating and “uncharacteristically unrestrained” review of the book in Economica that Hayek “didn’t want to give the impression of piling on.” Not everyone will find that convincing. But whatever the truth, Hayek’s choice not to review the book, Caldwell and Klausinger state, “was, to say the least, a miscalculation.”

The kind of economics that Hayek pursued, which relied on prose arguments, was considered passé by most economists for whom mathematical modeling became an article of faith.

At the time, Hayek was immersed in writing a highly technical tome, The Pure Theory of Capital (1941), in which he sought to develop a more thorough explanation of the capital structure of an economy. Hayek may have been reluctant to be distracted from it by getting into another boxing match with Keynes. But Caldwell and Klausinger show that Hayek himself was simultaneously moving away from technical economics. Like other prominent classical liberals of the 1930s—Wilhelm Röpke, Walter Eucken, Jacques Rueff, etc.—Hayek was drawn to exploring the deeper roots of liberal civilization’s twentieth-century crack-up. Such a postmortem, Hayek believed, was a prerequisite for reviving a liberalism fitted up for the twentieth century.

Herein lies the roots of Hayek’s most famous book, The Road to Serfdom (1944). The text emerged from Hayek’s much broader inquiry into the rise of collectivist ideas and the attraction of government planning. It was supposed to take the form of a two-volume work entitled “The Abuse and Decline of Reason.” This project was never completed. Nonetheless, it yielded considerable fruit. This ranged from Hayek’s devastating critique of scientism to his largely negative assessment of John Stuart Mill. It also included Hayek’s seminal American Economic Review article “The Use of Knowledge in Society” (1945).

But The Road to Serfdom was the most famous product of this project, and Caldwell and Klausinger take us into the finer details of its composition, publication, and aftereffects. While conceived and presented as a popular political book, The Road to Serfdom was also a work of political economy insofar as it brought together economics with history and philosophy to explain how economic planning can deliver a nation into servitude. To that extent, the book underscored Hayek’s dissent from the direction of postwar economic inquiry which was already being spurred down the path of mathematics and models by Keynesians and others with a serious case of science-envy.

Journey to America

The Road to Serfdom’s popularity in America far exceeded its reception in Britain. “Practically,” Hayek later wrote, “all my contacts that led to later visits and finally made my move to Chicago possible were made” during a 1945 trip to America to promote The Road to Serfdom. But the book turned out to be advantageous for Hayek in two other ways. First, it helped created the impetus for Hayek to secure American funding for the first meeting of what came to be called the Mont Pèlerin Society: an international group of classical liberal thinkers that would establish one basis for a long-term pushback against Keynesianism and economic planning.

America, however, turned out to have another significance for Hayek. Here we come to what Caldwell and Klausinger denote as the greatest crisis of Hayek’s life. The full story has never been told before.

In the early 1920s, Caldwell and Klausinger relate, Hayek had fallen in love with a distant cousin, Helene (“Lenerl”) Bitterlich. By virtue of several factors involving insufficiently stated intentions, natural diffidence on Hayek’s part, and mutual misunderstandings, she ended up marrying someone else. Hayek then married Helena (“Hella”) von Fritsch and had two children. Yet he never got over his great love. In the early 1930s, he and Lenerl decided that, one day, they would be together. Hella was understandably nonplussed by this and refused to accede to Hayek’s request for a divorce. Then the war intervened. Fritz was in London. Lenerl remained in Vienna.

After the war, Hayek actively pursued a divorce from his wife. Hella, however, had no intention of playing along. The details of subsequent events make for painful reading. When Hayek left the family home on December 28, 1949, Hella turned to their daughter and “said, simply, ‘He’s not coming back’.” The end result was a deeply acrimonious parting, Hayek’s resignation from the LSE, complicated financial negotiations, and legal proceedings in fast-divorce Arkansas. Lionel Robbins was so appalled at Hayek’s treatment of his wife that he terminated their friendship. Eventually, Hayek secured an appointment at the University of Chicago (though, revealingly, at the Committee on Social Thought rather than the economics department) and moved to America with Lenerl.

Hayek thus ended the first half of his life married to the woman he loved, but alienated from old friends, living in a country in which he would never feel at ease, financially stretched, increasingly forgotten as an economist, and at odds with the direction economics was taking as a discipline. The kind of economics that Hayek pursued, which relied on prose arguments, was considered passé by most economists for whom mathematical modeling became an article of faith that Keynes himself would never have embraced. In the long-term, it would produce a situation whereby it was more important for career purposes for economists to produce elegant econometric and formulae-heavy models that turned out to be utterly wrong in their forecasts than written arguments concerning the logic of economic relationships that, while less mathematically-laden, had far better predictive power.

The slate for Hayek, Caldwell and Klausinger conclude, had thus been wiped clean, albeit painfully. It did not bode well for a prominent future for Hayek. The story of how that turned out not to be the case will be told in the next volume. If it is as well-written and thoroughly researched as the first, we stand to learn even more about one of the twentieth century’s most significant economic minds and classical liberal thinkers.