Hayek's Challenge An Intellectual Biography of F.A. Hayek
by Bruce Caldwell
University of Chicago Press, 2003
Cloth: 978-0-226-09191-4 | Paper: 978-0-226-09193-8 | Electronic: 978-0-226-09192-1
ABOUT THIS BOOKAUTHOR BIOGRAPHYREVIEWSTABLE OF CONTENTS

ABOUT THIS BOOK

Friedrich A. Hayek is regarded as one of the preeminent economic theorists of the twentieth century, as much for his work outside of economics as for his work within it. During a career spanning several decades, he made contributions in fields as diverse as psychology, political philosophy, the history of ideas, and the methodology of the social sciences. Bruce Caldwell—editor of The Collected Works of F. A. Hayek—understands Hayek's thought like few others, and with this book he offers us the first full intellectual biography of this pivotal social theorist.

Caldwell begins by providing the necessary background for understanding Hayek's thought, tracing the emergence, in fin-de-siècle Vienna, of the Austrian school of economics—a distinctive analysis forged in the midst of contending schools of thought. In the second part of the book, Caldwell follows the path by which Hayek, beginning from the standard Austrian assumptions, gradually developed his unique perspective on not only economics but a broad range of social phenomena. In the third part, Caldwell offers both an assessment of Hayek's arguments and, in an epilogue, an insightful estimation of how Hayek's insights can help us to clarify and reexamine changes in the field of economics during the twentieth century.

As Hayek's ideas matured, he became increasingly critical of developments within mainstream economics: his works grew increasingly contrarian and evolved in striking—and sometimes seemingly contradictory—ways. Caldwell is ideally suited to explain the complex evolution of Hayek's thought, and his analysis here is nothing short of brilliant, impressively situating Hayek in a broader intellectual context, unpacking the often difficult turns in his thinking, and showing how his economic ideas came to inform his ideas on the other social sciences.

Hayek's Challenge will be received as one of the most important works published on this thinker in recent decades.

AUTHOR BIOGRAPHY

Bruce Caldwell is the Joe Rosenthal Excellence Professor in the Department of Economics at the University of North Carolina, Greensboro, and author of Beyond Positivism: Economic Methodology in the Twentieth Century. He is past president of the History of Economics Society and the general editor of The Collected Works of F. A. Hayek, copublished by the University of Chicago Press.

REVIEWS

"Guides are needed, and Bruce Caldwell's Hayek's Challenge is a welcome introduction."
— The Economist

"Caldwell's approach to the task of deconstructing Hayek's intellectual influence is an original one. . . . It is the intellectual voyage that interests Caldwell. . . . He charts his lengthy struggle with multiple equilibria and attempts to reconcile what have often seemed inconsistencies in his thinking. And, he shows how Hayek's interests, in later life, shifted away from pure economics and towards political theory and philosophy. . . . His exegesis of Hayek's main works is outstandingly lucid and may bring his ideas to the attention of a new generation of students. . . . Hayek's Challenge can be recommended to both the specialist and general reader."
— Howard Davies, Times Higher Education Supplement

"Bruce Caldwell's intellectual biography of the great Austrian is a wonderful work."

— Richard D. North, Independent

Named "Outstanding Academic Title" by Choice
— Choice

"A carefully written, impeccably researched, and thoughtful book that is sure to become a standard in Hayek scholarship."
— Peter McNamara, Claremont Review of Books

"A finely nuanced addition to the literature of which [Caldwell] has such a fine command. The study represents a landmark in studies of Hayek and the development of Austrian economics for either of which it will long remain essential reading."
— D.E. Moggridge, EH.Net

"A significant contribution to philosophy and to economics. . . . Caldwell has wrestled with several complex themes in Hayek's philosophical writing and has provided us with an indispensable guide."
— Leonard P. Liggio, Journal of Markets and Morality

"A good place to start with if you want to understand or even emulate Hayek."
— Meghnad Desai, Business History

"Caldwell's pleasant and engaging book is an enduring contribution to Hayek scholarship.. It should be of interest outside the world of Hayek scholarship, too. Hayek has as good a claim as anyone to be the most important economist of the 20th century. . . . . Besides the excellent history of the early Austrian school, besides many particular insights and facts, the book has one great merit that more than suffices to make it a valuable contribution . . . its emphasis of the role of complex systems on Hayek's thought."
— Roger Koppl, Journal of Economic Behavior & Organization

TABLE OF CONTENTS

Acknowledgments

- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0001
[Friedrich A. Hayek, economic theorists, Austrian tradition, economic theory]
This introductory chapter begins by setting out the rationale for research on Hayek. It then outlines the challenges of interpreting Hayek's thought. Among these is the fact that his writings lie within the Austrian tradition; and that Hayek seems to have changed his mind about certain things over the years or, put in another light, that his work appears to contain contradictions. An overview of the three parts of the book is also presented. (pages 1 - 14)
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I. The Austrian School and Its Opponents—Historicists, Socialists, and Positivists

- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0002
[Austrian school, Carl Menger, Principles of Economics, textbooks]
This chapter focuses on Carl Menger's Principles of Economics (Grundsätze der Volkswirthschaftslehre), highlighting important themes of the book. Menger had studied law, receiving his degree in 1867. Over the next four years, he worked briefly as a journalist for the leading Viennese newspaper, the Wiener Zeitung, then entered the press section of the prime minister's office, where he was responsible for reporting on economic news. Over the same period, he wrote the Principles of Economics and submitted it as his Habilitation paper. Menger's Principles of Economics is the founding document of the Austrian school of economics, yet, as its name implies, it is basically a textbook. It may seem strange today that a textbook could serve to found a school of thought, but, in contrast with current scholarly practice, professors in the Austro-Hungarian and German Empires typically wrote textbooks rather than articles or monographs. (pages 17 - 38)
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- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0003
[Cameralism, Nationalökonomie, historical economics, Enlightenment, French Revolution, Napolenonic conquest]
This chapter begins with a review of the antecedents to the German historical school, the cameralist and Nationalökonomie traditions. Next it documents the effects of the Enlightenment, the French Revolution, and the Napoleonic conquests on German thought. That intellectual movement and those political events fostered a new nationalism among many Germans and, ultimately, produced among its scholars a rejection of cosmopolitanism and an insistence on the importance of a people's own, unique history. Such general sentiments found particular expression in the early decades of the nineteenth century in the German historical schools of law and, later, of economics. (pages 39 - 63)
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- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0004
[Carl Menger, Gustav Schmoller, Investigations, social phenomena]
This chapter discusses the Methodenstreit, the battle over methods between Carl Menger and Gustav Schmoller. It begins with an examination of the book that began the conflict, Menger's Investigations into the Method of the Social Sciences. Menger's major goal was to show that, despite Schmoller's assertions to the contrary, a theoretical approach to the investigation of social phenomena is, indeed, possible. It shows that, although certain aspects of his defense of theory involved principles that are widely accepted today, other parts raised questions that would occupy many subsequent generations of students of methodology. Looking further into the book, the chapter identifies issues that reemerge in the debates that Hayek would have with opponents a half century later. Once the study of the Investigations is complete, it describes and reflects on the polemical battle that followed. Although Joseph Schumpeter's assessment that the conflict was a “history of wasted energies” has much truth to it, the struggle had important consequences for the development of both the German historical and the Austrian schools, at the time as well as in subsequent decades. (pages 64 - 82)
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- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0005
[historical school, social scientists, economists, economics, Austrian school]
By the first decade of the twentieth century, the historical school faced challenges from within Germany and without. By the end of the First World War, it had lost almost all its influence. This chapter traces the reasons behind the decline of the historical school. It shows that Max Weber, one of the most famous social scientists of the twentieth century, played an important role in the story. Weber is known today principally as a sociologist. For most of his career, however, he identified himself, not only as an economist, but specifically as a member of the historical school of economics. His dissension from historicist doctrine would provide the foundation for many later Austrian arguments on methodology. (pages 83 - 99)
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- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0006
[Eugen Böhm-Bawerk, Austrian economists, Marxism, marginalism, Joseph Schumpeter, Otto Neurath, Ludwig von Mises, Austrian school of economics]
In 1903, Carl Menger stepped down from his chair at the University of Vienna, succeeded by Friedrich von Wieser. The next year, Eugen Böhm-Bawerk concluded his third stint as minister of finance, and retired to a supernumerary position at the university. Although his new post required no teaching, he would run a seminar on economics for the next decade that would gain considerable prominence. The second generation of Austrian economists had taken command, beginning what Hayek would later describe as “the period of the school's greatest fame.” Böhm-Bawerk's seminar became the focus of attention in the decade before the war. A chief reason was that it brought two apparently irreconcilable forces, the marginalists and the Marxists, together for debate. This chapter begins with a discussion Marxism v. marginalism. It then covers the multiple apostasies of Joseph Schumpeter; Otto Neurath; Ludwig von Mises and the German-language socialist calculation debate; Ludwig von Mises on the reconstruction of social science; and the Austrian school of economics. (pages 100 - 130)
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II. Hayek's Journey

- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0007
[Friedrich A. Hayek, Friedrich von Wieser, Ludwig von Mises]
This chapter describes Friedrich August von Hayek's family and early history; his student days; Friedrich von Wieser's influence on Hayek; and the relationship between Hayek and Ludwig von Mises. (pages 133 - 149)
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- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0008
[Friedrich A. Hayek, American economics, Monetary Theory and the Trade Cycle, economic theory, methodology]
This chapter begins with a description of Hayek's trip to American in 1923, where he worked briefly for economist Jeremiah Jen, then enrolled as a scholarship student at New York University. In his spare time, Hayek “gate-crashed” courses at Columbia, including Wesley Clair Mitchell's class on the history of economic doctrines and J. B. Clark's seminar. Hayek also did some traveling. The discussions then turn to Hayek's paper on American economics and the publication of his first book, Monetary Theory and the Trade Cycle. The chapter concludes with some observations and anticipations on Hayek's methodological thought. (pages 150 - 164)
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- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0009
[Friedrich A. Hayek, lectures, monetary theory, John Maynard Keynes]
This chapter details Hayek's series of lectures at the London School of Economics in 1931. The talks caused a huge stir. His opening lecture was on the history of monetary theory, and, in it, he summarized parts of the four chapters that he had been preparing for his volume in Weber's Grundriss der Sozialökonomik series. And, because so few in his audience were up on the Continental business cycle literature, his theory of the cycle was new to them. The chapter also describes Hayek's battle with John Maynard Keynes. (pages 165 - 181)
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- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0010
[Lionel Robbins, institutionalism, economics, welfare, ends, means]
This chapter considers Lionel Robbins's response to the American institutionalists and British critics of economics, from Ruskin and Carlyle, to defenders of historicism, to pundits writing for the weeklies. Working within a tradition that dated back to Senior and Cairnes, Robbins sought both to specify the proper scope of the field of economics and to make clear the nature of the generalizations on which it was based. Many classical and neoclassical economists had argued that economics was the study of the material causes of welfare. Drawing on the work of Philip Wicksteed and the Austrians, Robbins offers in its stead the definition that one may still find today in the opening chapters of introductory economic textbooks: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”. (pages 182 - 204)
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- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0011
[Friedrich A. Hayek, presidential address, London Economics Club, Economics and Knowledge]
On 10 November 1936, Hayek delivered his presidential address before the London Economics Club. The address was published the next February in Economica as “Economics and Knowledge”. Many years later, Hayek would claim that the paper played an important role in the development of his thought. “Economics and Knowledge” clearly looms large in Hayek's own retrospective reconstructions. Given the retrospective, and, perhaps, contemporaneous, importance that Hayek attributed to “Economics and Knowledge,” the paper warrants careful study. This chapter first reviews exactly what Hayek says in it, then examines the origins of some of his ideas. Next, it explores some reasons why, at least from the perspective of today, it was, indeed, a significant paper. (pages 205 - 231)
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- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0012
[Friedrich A. Hayek, science, capitalism, scientism]
This chapter focuses on Hayek's theories and his responses to his opponents. Among these were men of science, who insisted that only a science freed from capitalism would be able to show the way ahead. Hayek ultimately decided to explore the origins and expose the errors of these beliefs in his next project, a major study that would examine “the abuse and decline of reason in modern times.” This project—which Hayek called the Abuse of Reason project—was never completed. Instead, pieces of it were published separately. A part of the first section appeared as an article entitled “Individualism: True and False”. The second section was published as “Scientism and the Study of Society”, and parts of the historical account appeared as the essays “The Counter-Revolution of Science” and “Comte and Hegel”. The final section became The Road to Serfdom. “Scientism and the Study of Society” was published in Economica between 1942 and 1944, and is his first explicitly methodological work. In it, he offers a critique of the errors of what he called scientism as well as a positive program for how the social sciences should proceed. Given the interest in the development of Hayek's methodological thought, it is obviously a key document. It is also a piece that has given rise to multiple interpretations in the secondary literature. (pages 232 - 260)
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- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0013
[Friedrich A. Hayek, human mind, classification, interpretation, classical liberal order, The Sensory Order, The Constitution of Liberty, evolution, spontaneous order]
Between 1945 and 1960, Hayek worked on two major projects. In the first, he developed in much greater detail the underpinnings in physiological psychology of the scattered remarks found in “Scientism and the Study of Society” about the human mind, classification, and interpretation. The second provided a description of and rationale for a classical liberal order. It is hard to imagine that the two resulting books, The Sensory Order and The Constitution of Liberty were written by the same person. The first is a technical scientific text whose didactic prose is, for those uninitiated in the jargon of psychology, at times impenetrable. The latter is, by contrast, systematic and flowing, filled with notes referencing the writings of the great and the obscure, a work at once sophisticated yet fully accessible to the layman. Both volumes contained themes that were critical in Hayek's later work. They led him to the “twin ideas of evolution and spontaneous order”and to the perception that examples of orders could be found in a wide variety of physical and social phenomena. This chapter begins the task of piecing together how Hayek came to incorporate these ideas into his existing work. It starts with The Sensory Order, a book that, although it was based on an old paper, appears to have gotten Hayek thinking along new lines. Then it looks at a lecture that could be considered a prelude to The Constitution of Liberty, one initially intended as the first section of the Abuse of Reason project, “Individualism: True and False”. An examination of that paper helps with the examination of just what sort of methodological individualist Hayek really was. (pages 261 - 287)
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- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0014
[Friedrich A. Hayek, The Constitution of Liberty, rule-following, Committee on Social Thought, University of Chicago]
This chapter begins with a discussion of The Constitution of Liberty. It examines some of the main themes of the book, and demonstrates the presence in it of certain ideas: about rule-following behavior; about the complex orders that sometimes spontaneously result when rules are followed; and about the ways that rules and orders develop and change, or evolve, through time. Next, it investigates the origin of the ideas by examining the crucial decade of the 1950s, most of which Hayek spent on the Committee on Social Thought at the University of Chicago. It concludes by looking at his further elaboration of these core ideas in subsequent work. (pages 288 - 320)
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III. Hayek's Challenge

- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0015
[Friedrich A. Hayek, methodology, psychology, political philosophy, trade cycle, economics, equilibrium theory, monetary theory]
This chapter offers a chronological summary and assessment of Hayek's methodological legacy. In some instances, this involves comments on his contributions to such fields as economics, psychology, and political philosophy. In others, the ways various authors have tried to extend or build on Hayek's work are noted. Hayek's methodological position is reconstructed as consisting of the following four theses: Firstly, to offer a scientific explanation of the trade cycle, one must employ a theory. Secondly, the theory must be consistent with the existing theoretical foundation of economics, or “equilibrium theory.” Next, equilibrium theory carries the implication that all markets clear. A trade cycle is a situation in which some markets do not clear, so an additional factor must be introduced that would cause this to happen. Money qualifies as such a factor since it is demanded, not for its own sake, but to satisfy other demands. This implies that the theory of the cycle must be a monetary theory. Finally, much existing monetary theory draws on the quantity theory of money. But the quantity theory only relates changes in the money supply to changes in the aggregate price level, and is, therefore, incapable of explaining the changes in the structure of production that constitute the cycle. Changes in the structure of production are caused by changes in relative prices. As such, a monetary trade cycle theory must be capable of showing the origins and effects of cycle-producing relative price changes. (pages 323 - 369)
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- Bruce Caldwell
DOI: 10.7208/chicago/9780226091921.003.0016
[Friedrich A. Hayek, economics, positivism, scientific thought]
This epilogue uses the lessons learned about Hayek, about the puzzles he wrestled with and offered solutions to, about the ideas he developed and those he opposed, to argue for a number of theses. First, Hayek's major message was one of the limits that we face as analysts of social phenomena. Second, although there has been much progress of a variety of sorts, the history of economics in the twentieth century lends support to Hayek's views about the empirical limits of the discipline. Third, things are more complicated when it comes to developments in theory. Fourth, a dominant subtext of this concluding chapter is that the effects of positivist or scientific thought on the profession have been nearly entirely negative. (pages 370 - 406)
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Appendixes

Bibliography

Index