The origins of market fetishism - critique of Friedrich Hayek's economic theory

THE ORIGINS OF MARKET FETISHISM

Friedrich Hayek was thirty-three years old when he was projected from relative obscurity in Vienna into the prestigious Tooke Chair of Economic Science and Statistics at the London School of Economics. He was invited to the L.S.E. by Lionel Robbins, a friend and admirer of Ludwig von Mises and one of the few English economists acquainted with the German language and the Vienna School of Economics of the 1920s. John Hicks recalled that Hayek created quite a stir among the group of young economists whom Robbins had gathered around him when he became professor and head of department in 1929. This group, Hicks wrote, shared "a common viewpoint, or even, one might say, a common faith. Some of us, especially Hayek, have in later years maintained that faith; others such as Kaldor, Abba Lerner, George Shackle and myself have departed from it, to a greater or lesser extent.... The faith in question was a belief in the free market or `price-mechanism'--that a competitive system free of all interferences by government...would easily find an `equilibrium.''' (Hicks, 1981: 2)

The appointment of Hayek was part of a deliberate effort by Lionel Robbins to shore up the ideological stronghold of economic liberalism at L.S.E. after a brief period during which the economics department had been headed by Hugh Dalton (1926-27) and Allyn Young. (Other appointments of conservative economists included Frederic Benham and Arnold Plant.)

The influence of the Austrian School on the teaching of economics in the English-speaking world was transmitted not through Hayek, but rather through Robbins, whose 1932 Essay on the Nature and Significance of Economics has served as the classic definition of its subject matter as "the theory of allocation of scarce means among alternative uses." (see Kirzner, 1986: 140-147) This (formal) definition thereafter displaced Marshall's more substantive but less elegant one. As Joan Robinson observed in her Richard T. Ely lecture, "the date of publication was unlucky. By the time the book came out there were three million workers unemployed in Britain and the statistical measure of GNP in the USA had recently fallen to half its former level." The book appeared, she commented with characteristic acidity, "when means for any ends at all had rarely been less scarce." (Robinson, 1972: 1)

In 1931 the Labour Party of Ramsay Macdonald had joined the Conservatives in a National Government engaged in slashing public expenditures and cutting the wages of Britain's working class in defense of the pound sterling and the interests of the City. The prevailing view of the community of academic economists was that the massive unemployment was due to excessively high real wages.

At this time, the group of yound Cambridge economists associated with J.M. Keynes were developing highly unorthodox theories which challenged these wisdoms, and they were, no doubt, regarded by the rentier interest of the City as threatening to financial stability and the edifice of the Empire. Hayek was brought to London as a counterattraction to Keynes. (Robinson: 2) His theories were by no means easy to understand but were undoubtedly comforting insofar as his antisocialism was matched only by his aversion to monetary expansion as an instrument of policy. We recall that the Board of Governors of the L.S.E. was largely controlled by the City.

Hayek's trade-cycle theory, which he taught in undergraduate classes throughout his years at the L.S.E., rejected "underconsumption" or "deficiency of demand" as an explanatory mechanism. Injections of credit during recessions would, according to his theory, only make matters worse by creating an "artificial" boom, followed by a worse "slump." The theory was one of intertemporal discoordination insofar as changes in the availability of credit and interest rates affect the relative prices of future goods against present ones and thus affect the resource allocation between more and less "roundabout" production: Hayek explained that injections of credit were likely to exacerbate the discoordination and delay the adjustment between the production of producer goods and consumer goods. (Garrison & Kirzner, 1987)

Joan Robinson has given us a graphic account of Hayek's visit to Cambridge in 1931, where he covered a blackboard with his famous triangles. It appeared that he was arguing that the slump was caused by excessive consumption, which reduces the stock of capital goods. What looks like an oversupply of capital and a lack of demand for consumer goods is in reality too high a demand for consumer goods and an insufficient supply of capital. (Rosner, 1988) R.F. Kahn, who was at that time working on his explanation of how the multiplier equates savings with investment, asked Hayek the following question: "Is it your view that if I went out tomorrow and bought a new overcoat that would increase unemployment?" "Yes," said Hayek, "but," pointing to his triangles on the board, "it would take a very long mathematical argument to explain why."

The Austrian School of Economics

Hayek's business-cycle theory, which owes an acknowledged debt to the earlier work of Mises, is grounded in Austrian economics, i.e., in the role played by time preference and "round-aboutness" in the production process. A young Austrian economist has recently noted the similarity between the Mises-Hayek theorty of the business cycle and that of Hilferding in Finance Capital. In Hilferding's theory the (Marxian) rising organic composition of capital plays a somewhat similar role to (Austrian) increasing "round-aboutness" in generating imbalances between the production of producer goods (Department I) and consumer goods (Department II). (Rosner, 1988) The policy conclusions which follow bear a fascinating similarity insofar as demand stimulation is rejected by both. The Marxist view was that business cycles are a pathology of capitalism. The sufferings of the unemployed cannot be alleviated within the capitalist system. Economic policy in the interests of the working class is thus impossible within the capitalist system.

In spite of the deep hostilities between Social Democrats and Conservatives in post-First World War Austria, their basic ideas on the business cycle and on macroeconomic policy were not substantially different. Both considered inflation as potentially dangerous, and neither advocated demand expansion as an approach to the very high level of unemployment. The explanation lies in part in the intellectual tradition of the Austrian School of economics in the years before 1914, when such leading socialist figures as Otto Bauer, Karl Renner, Rudolf Hilferding, and Otto Neurath were active participants in the Bohm-Bawerk Seminar, as was Joseph Schumpeter (Marz, 1986) and Ludwig von Mises. The traumatic experience of the inflations of 1919-22--and most particularly the hyperinflation of October 1921 to May 1922--certainly contributed to a reluctance to rely on monetary expansion and has influenced Austrian (and German) social democratic policy to this day. We return to the consequences of the post-First World War inflations later in this paper.

To understand Hayek's place as a fourth generation star of the Austrian School of economics, it is important to appreciate that neither its founder Carl Menger, nor Menger's two (rival) successors--Eugen von Bohm-Bawerk (1851-1914) and Friedrich von Wieser (1851-1926) were radical antisocialists. Bohm-Bawerk was a true liberal and his Privatseminar in the decade before 1914 was enriched by important controversy with Marxist thought.(*) The leading Marxist participants already referred to were unquestionably influenced by the methodology and approaches of that school in various ways which would take us too far afield were we to treat them in this essay. Austro-Marxist approaches to macroeconomic policies were conditioned by the intellectual formation of those of its leading lights who were trained in economics in the best years of the Austrian school before 1914.

Wieser has been described as the central figure of the Austrian school: central in time, central in the ideas he propounded, and central in his influence insofar as he was the holder of the central chair during nearly two decisive decades. His socioeconomic credo was summarized as follows: "Building on a strong Catholic and conservative foundation he was an interventionist liberal ... with quite an admixture of racist sentiment who still found it possible to admire Marx. Above all, he was an admirer of the state as guided by the supreme wisdom of his own bureaucratic class." (Streissler, 1986) The anti-interventionist, antisocialist current in the Austrian School, which so appealed to Lionel Robbins in the 1920s, was the singular contribution of Ludwig von Mises (1881-1973), and was ultimately carried into the Anglo-American world by his favorite protege, Hayek. Here it must be noted that Mises' extreme anti-interventionism was not shared by all the members of his seminar.

In an excellent summary of the principal tenets of the Austrian School, Fritz Machlup, a contemporary of Hayek and one-time member of Mises' Privatseminar, pointed out that "consumer sovereignty" and "political individualism" were additions by the Mises branch of Austrian economics: "In the United States the label `Austrian economics' has come to imply a commitment to the libertarian program. This was not so in the case of the earlier generations of Austrian economists some of whom were advocates of governmental intervention that would be ruled out by Mises and his disciples. Mises' mission was above all the attainment and maintenance of individual freedom." (Machlup, 1981)

The Demise of Austrian Liberalism

Hayek was born in Vienna at the turn of the century (1899) as the brief era of the liberal constitutional order established in the 1860s--which privileged the rising class of bankers, manufacturers, and merchants and found its social support base among middle-class urban Germans and German speaking Jews--was challenged by anti-capitalist populist movements of the Right and the Left.

During the last quarter of the nineteenth century, the program which the liberals had devised against the upper classes occasioned an explosion of the lower. The liberals succeeded in releasing the energies of the masses, but against themselves, rather than against their ancient foes.... The Catholics, routed from the school and the courthouse as the handmaiden of aristocratic oppression, returned as the ideology of the peasant and the artisan, for whom liberalism meant capitalism, and capitalism meant Jew. Laissez faire, dressed to free the economy from the fetters of the past, called forth the Marxist revolutionaries of the future. (Schorske: 117. Schorske's study of the politics and culture of Fin-de Siecle Vienna is rapidly becoming a classic, a superb interpretive essay on the ambiance of pre-1914 Vienna.)

In 1987 Karl Lueger, anti-capitalist and anti-Semitic leader of the Christian Social Party was elected Mayor of Vienna. Interventions of Kaiser Franz Joseph and the hierarchy of the Catholic church failed to prevent the installation of this popular but demagogic figure. Leuger's appeal was founded on the sense of betrayal of the "little man," the petty producers and small artisans, who felt menaced by liberal capitalism. The target of Lueger's Christian Socials were the "free thinking, highly educated and often Jewish capitalists and their somewhat strong belief in `Manchester Liberalism,' materialism and positivism." (Kitchen: 36)

Here it is important to understand the high-profile role played by German-speaking (largely assimilated) Jews in the economic life of Imperial Austria. This was true particularly of those areas which subsequently became the Republic of Austria. Commercial and professional opportunities abounded because of the almost complete absence of a native bourgeoisie. This was not true of Bohemia where German capitalists played the key role. As the center of the Hapsburg Empire, Vienna attracted a large Jewish immigration. In 1860, the number of Jews in Vienna numbered about 6,000. By 1918, numbers approached 200,000--after Warsaw and Budapest, the largest urban concentration of Jews in Europe. A very considerable number of the rich bankers and industrialists of Vienna and the Alpine provinces were Jews--possibly the majority; Jews were also prominent in the liberal professions. In contrast to the situation in Germany, they played a considerable part in the Imperial administration because they had nothing to gain--and much to fear--from rising nationalism both pan-German and Slav. They were loyal allies of the liberal Hapsburg administration within the Empire. In the minds of the Austrian people, the term "Jew" and "capitalist" tended to merge. (Borkenau: 92-117; Craver: 22-3)

Whereas the populism of the Christian Socials was anticapitalist and anti-Semitic, the social democratic challenge to the liberal capitalist order was squarely based on the class interests of the workers, who had largely been excluded from its economic benefits and had no political voice in parliament. The Austrian Social Democratic Party was founded by Victor Adler in 1889 at the Hainfeld Congress, which united moderate and radical groupings into one party. Its political base was principally among the urban working class. Its ideological foundation was based on Marx and Lassalle. The movement believed in progress, industrialization, and the historical inevitability of socialism.

In 1907 the working class won universal, equal, and direct suffrage in the Imperial Austrian Parliament following a massive demonstration organized by the Social Democratic Party in Vienna. Mises describes the event in his memoirs (1978:89): "Vienna was completely paralyzed, and 250,000 workers marched on the Ringstrasse past Parliament in military fashion in rows of eight, under the leadership of Party officials." Mises complained that the "Social Democrats had extorted this right by force." They "attempted to intimidate and bring Parliament to heel through terror" because, as he explained, "the Austrian constitution had expressly forbidden public outdoor meetings in front of Parliament." It is clear that Mises found this manifestation of the will of the masses to achieve the right to vote quite terrifying. In the first election with universal suffrage, the Social Democrats won 83 of 516 seats. To add one more dimension to the complexities of the politics of Imperial Austria, we must explain that the Hapsburg administration perceived the cosmopolitan Socialists as less dangerous to their continued rule than the strident nationalist assertions of the Czechs and Slovenes. It was possible to meet their demands for the vote and for social-reform measures, whereas the nationalist aspirations of the non-German regions could not be accommodated within the structure of the Hapsburg regime.

In commenting on the demise of nineteenth-century Austrian "liberal culture," in the years of Vienna's fin de siecle, Schorske acknowledges the continuity of that tradition in the philosophy of the social democrats: "of all the filial revoltes aspiring to replace the [liberal] fathers, none bore the paternal features more pronouncedly than the Social Democrats. Their rhetoric was rationalist, their secularism militant, their faith in education virtually unlimited." (Schorske: 119) The politics of post-First World War Austria were taking shape in the contest between Catholic Conservatives and Socialists:Black versus Red.

The Birth of the First Austrian Republic

To fully comprehend the virulent individualism and antisocialism of Mises and Hayek, we have to consider the cataclysmic circumstances surrounding the birth of the First Austrian Republic (1918) from the ruins of Imperial Austria-Hungary. The knowledge of the impending end of an era of security, stability, and the enjoyment of high culture had permeated the atmosphere of Vienna in the decade preceding the outbreak of the Great War; a sense of impending end of the world (Weltuntergang), of "things falling apart." Ernst Fischer described it as follows:

As a rule, things tended to come to Austria later than elsewhere; not so the premonition of impending catastrophe, the heightening of sensibility, the loss of reality. Something was coming to an end--not only the monarchy, not only the century, but a whole world "fawned upon by decay," as Georg Trakl has it in one of his poems. Those who were most sensitive to all this because so ambiguously poised between civilization and anti-Semitism, between privilege and ignominious rejection were the intellectual Jews, along with the old patrician families, a stratum of cultivated bureaucrats and the elite of the Social Democratic Workers Party. They were Vienna at its most interested and interesting. (Fisher: 76)

Postwar Vienna, its numbers swollen by pension-hungry officials from all over the former Austro-Hungarian Empire, was joined with three neighboring and four Alpine provinces to create the "new" Austria, a rump of six-million German-speaking leftovers after the secession of the succession states of Czechoslovakia and Yugoslavia and large territories ceded to Poland and Rumania. The oversized former metropolis of a multinational empire of 50 million was regarded with horror by the Alpine provinces as "red" and "Jew-ridden." The new republic was generally believed to be non-viable (nicht lebensfahig). Socialists had traditionally looked to union with Germany, an option vetoed by the Allied powers; the more conservative-minded dreamed of a Danubian federation of the former Imperial territories. Meanwhile the country became increasingly dependent on external assistance from the victorious Entente powers.

The long-awaited collapse of the Hapsburg order of things preceded the establishment of the First Republic in November 1918. In October 1916 Fritz Adler, son of Victor Adler and passionate opponent of the war, became an instant hero when he assassinated the Prime Minister of Austria. He was lionized by the population of Vienna, profoundly disillusioned with the war and angry at those who profited by it while death stalked the battlefronts. The 1917 Russian October Revolution put socialism on the agenda in Central Europe--and aroused the deepest fears of the ruling classes. The Austrian Socialist Party had by then abandoned its ambiguous position concerning the war and in January 1918 organized a number of general strikes. The Imperial authorities were no longer able to supply the soldiers at the front and industrial workers in the cities with food and clothing. The Socialists had organized Austria's soldiers and industrial workers into soldiers' and workers' councils which soon became the only functioning administration in the land able to deal with increasingly severe shortages of food and heating fuel. Revolution was on the agenda throughout the year 1918. (Reventlow, 1969; Hautmann, 1971) Victor Adler died on the eve of the proclamation of the First Austrian Republic in November 1918, and Karl Renner was named the first Chancellor of the provisional government. The sister republic of Hungary was established in October 1918 with Count Karolyi as its first president. The Hapsburg era was finished. In March 1919 Bela Kun displaced the Karolyi regime. The short-lived Hungarian Soviet Republic was defeated in August 1919 by a combination of forces including military intervention by neighboring states. In Austria the leadership of the powerful 350,000-member Social Democratic Party successfully prevented ultra-left forces from pushing the situation toward the establishment of a Hungarian-type revolutionary regime.

The Socialists emerged from the elections of 1919 as the strongest single party with 48 percent of the votes, and entered in a coalition with the Christian Social conservatives, who controlled the four Alpine provinces. Otto Bauer became foreign minister and first head of the Socialization Commission. Joseph Schumpeter briefly served as Minister of Finance from March to October 1919.

In the spring of 1919, Bauer introduced his socialization program calling for the gradual public administration of large coal, iron, and steel plants and the eventual control of all sectors of the economy. (Rabinbach, 1983:24) This was not a program of expropriation, but rather one of restricted gradual socialization. It had, at its inception, the full support of Schumpeter, who warned of the need to exclude from this program those industries which depended heavily on the availability of foreign exchange.

As part of the reconstruction program, Schumpeter proposed a capital levy, in his words, an "enormous incursion into the private rights of the propertied classes.... We have to do it." This capital levy would be directed exclusively towards the repayment of the war debt. Additionally, he proposed the creation of an independent Central Bank, stabilization of the currency, indirect taxation to equalize the burden, and an industrial strategy to attract domestic and foreign capital. (Marz: 323)

Schumpeter quarreled with Bauer, who disagreed with the need for foreign loans, while his intransigence on the capital levy alienated the conservative Christian Socials, who withdrew their support for the program. Schumpeter resigned, and in 1924 he left Austria for Bonn, and thence for Harvard in 1932. According to Marz, "for one side he was too radical and for the other too pragmatic, too self-willed." (Marz: 330) The socialization issue gave rise to a rich literature in which a number of Austria's leading economists participated, including Schumpeter, Lederer, and Neurath. Bauer (1919) advocated a form of guild socialism--while Mises contributed a blistering attack on the feasibility of any form of socialist economy. (Mises: 1920, 1922)

The coalition broke down, and the socialization programs were effectively suspended after Ignaz Seipel became Chancellor in May 1922. He stabilized the currency at one new schilling = 10,000 Kronen with the assistance of a League of Nations program not dissimilar to the conditionalities of I.M.F. adjustment programs of the 1980s. Thousands of public servants were fired, remaining subsidies were removed, new taxes imposed, and the proposal for capital taxation suspended. A League of Nations supervisor was installed to oversee the implementation of the stabilization program, which "corresponded to the train of thought dominant in contemporary academic economics. An economy weakened by the disease of inflation, this theory pronounced, can be restored to health only by severe fiscal and monetary discipline." (Marz: 499)

This was the context in which Mises expounded his views at the University of Vienna which were, as Machlup recalls, unpopular with the majority of people considered as the intelligentsia:

Mises fought interventionism while almost everybody was in favour of some government action against the "evil" consequences of laissez-faire. Mises fought inflationism while a large majority of people were convinced that only a courageous expansion of money, credit and governmental budgets could secure prosperity, full employment and economic growth. Mises fought socialism in all its forms, while most intellectuals had written off capitalism as a decaying system to be replaced either peacefully or by revolution, by socialism or communism. Mises fought coercive egalitarianism while every "high-minded" citizen thought that social justice required redistribution of wealth and/or income. Mises fought government-supported trade unionism, while progressive professors of political science represented increasing power of labor unions as an essential ingredient of democracy. Hayek became the most forceful exponent and defender of the economic and political views of Mises." (Machlup: 10-11)

In the setting of intellectual Vienna of the 1920s, Mises and Hayek and their associates were the misfits--the remnants of old Vienna's privileged urban elites whose security had been shattered, whose savings had been decimated by wartime and postwar inflation, and whose taxes were financing the pioneering housing programs of Vienna's socialist municipal administration. In their parlors and favorite coffee houses the patrician middle classes, now deprived of their prewar privileges, fed their fears of "the dictatorship of the proletariat." They were particularly terrified by the 1926 Linz Program of the Social Democratic Party which resolved to defend Austria's democratic constitution--by armed struggle if necessary--against threats by the Christian Socials to crush the working class and its organizations. They made common cause with the rising forces of clerical reaction which eventually led to the suspension of Parliament in 1933 and the violent destruction of the working-class movement in February 1934, leaving the country defenseless against Hitler's occupation in 1938.(*) The heirs of the Liberal tradition of the 1860s joined forces with clerical fascism in their paranoiac fear of the working classes.

A special target of Hayek's polemics in the 1920s was the regime of rent control and public housing, which effectively eliminated private high-rental residential construction. (Hayek: 1929) Working-class families were now privileged in access to low-rental, bright, spacious, modern apartments with parks, kindergartens, and other communal facilities. These programs, together with a sweeping educational reform based on Alfred Adler's theories of psychology, plus the large-scale participation of the working people of Vienna in a remarkable variety of cultural, recreational, and educational activities organized by the Socialists made "Red Vienna" a world-class showpiece of avant-garde urban lifestyle.

The elite of the intellectuals of Vienna were socialist sympathizers. In Vienna alone 350,000 people belonged to Social Democratic organizations, while socialist trade unions comprised 700,000 workers. "Never before or since," wrote Ernst Fischer, "has a Social Democratic Party been so powerful, so intelligent, or so attractive as was the Austrian party of the mid 1920s." (Fisher: 143) According to another contemporary, the "piecemeal reforms were to be the first building blocks of a future socialist society." (Zeisel: 123)

"The ultimate justification of socialism derived from our expectation that it would usher in a new man, a new morality.... The essence of being a socialist is the holding of certain ethical positions about justice and about duties to our fellow man." (Zeisel 123, 131) As we shall see, it is precisely the fundamental conflict of values which underlies the contending visions of democratic socialism and individualistic libertarianism.

Mises' Privatseminar

Hayek came from a good patrician family. He served as an officer in the Great War and obtained a doctorate in law and political science from the University of Vienna in 1922. After a year spent in New York (1923-24), he returned to Vienna and joined Mises' Privatseminar.

Although Vienna remained one of the best three places to study economics during the 1920s and early 1930s (the others being Stockholm and Cambridge, England), the center of research activity shifted away from the university seminar to the Privatseminar and research institute. Mises, who commanded respect as the most able of the third generation of the great Vienna School of Economics, did not have a chair at the University--nor did Schumpeter. He earned his living by working in an administrative capacity as Secretary of the Vienna Chamber of Commerce. His Privatseminar, which met twice a month in his office, from its foundation in 1922 to 1934 when he departed for Geneva, was nevertheless considered by Morgenstern as "far more important in the 1930s than anything that went on in the University." (Craver: 14) According to Hayek, this was already so in the 1920s. Clearly Mises was the central figure in the Viennese economics community. Many of the regular participants of the seminar subsequently achieved international recognition, including Fritz Machlup, Gottfried von Haberler, Oskar Morgenstern, Gerhard Tintner, and Paul Rosenstein-Rodan. The seminar was not confined to economists and included also sociologists, historians, mathematicians, philosophers, and a number of men from the banking and business community. An invaluable source of recollections of the Mises seminar has been provided by one of its regular participants, Martha Steffie Braun. (Browne: 1986)

Many of the participants also belonged to another "circle" founded by Hayek and Furth in 1921 which they called the Geisteskreis, where a wider and more philosophical range of topics was discussed: musical instruments, literature, history, political philosophy, relativity theory, and more. Hayek's circle excluded women, whose participation was confined to serving tea and cookies. (Browne: 1) Throughout the 1920s there was a close relation between the Mises group in Vienna and the U.S.-based Rockefeller Foundation, which enabled Austrian economists of the Mises-Hayek circle to visit the United States and brought foreign economists to Vienna. Among the economists who visited Vienna were Howard Ellis, Albert G. Hart, Ragnar Nurkse, Alfred Stonier, Hugh Gaitskell, and John van Sickle, an American whose connections with the Rockefeller Foundation were particularly useful to regular members of the group. (Craver: 15)

In spite of his contempt for empirical research, Mises let himself be persuaded by Hayek to set up an institute for business-cycle research on the model of the U.S. institutes which Hayek had visited in 1924. It was located on the premises of the Chamber of Commerce and initially financed by contributions from the business community.

In January 1927 Hayek was installed as director of the newly formed Institut fur Konjuktursforschung. It was a shoestring affair with a staff of only two clerks, until the Rockefeller Foundation provided major funding. Hayek brought in Oskar Morgenstern (who succeeded him as director after his departure for London) and enabled another economist friend, Gottfried Haberler, to obtain temporary employment. (Craver: 19) After the departure of Hayek in 1931 and Mises in 1934, Morgenstern emerged as the central figure in the Vienna economics community. The work of the institute became more scientific, mathematical, and econometric with the participation of trained mathematicians such as Abraham Wald and Gerhart Tintner. Subsequently, Morgenstern collaborated with the brilliant Hungarian mathematician, John von Neumann, in the foundation of game theory.

Of all of Mises' younger friends and colleagues none was more faithful than Hayek in his dedication to combatting socialism. It has been correctly observed that Hayek's social and political philosophy was determined, from its beginnings, by an attempt to refute socialism, and that therein lies the matrix of his life-long efforts. (Cristi, 1986)

It would not be fair to Mises and Hayek, however, to ignore the fact that the origin of the Vienna debate on "Economic Calculation in a Socialist Commonwealth" (1920) took place in a world in which there had never yet existed, and there did not at that time exist, a functioning socialist economy. While the debate concerning the feasibility of a socialist economy waxed hot, the population of Vienna was literally freezing and hungry. The "new" Austria, torn from its traditional sources of supplies of food and raw materials, was in chaos. The Czechs refused to ship coal. The hyperinflation was not terminated until mid-1922. Unemployment stood at 300,000 in the early 1920s. Austria was surviving by virtue of allied food aid and charitable activities of foreign nongovernmental organizations. National output did not recover pre-1914 levels until 1928-29. The economic situation in the new Soviet Socialist Republic was no better--indeed worse.

The situation was somewhat different when the debate concerning a centrally planned economy was taken up again in Britain in the 1930s after the publication of Oskar Lange's and Frederick Taylor's famous articles which showed that shadow prices could be used by planning authorities, an approach already pioneered by Barone as early as 1909 which had not previously come to the attention of Mises. As Michael Polanyi, a thinker who shared Hayek's fears of central planning, pointed out: "If planning is impossible to the point of absurdity, what are the so-called planned economies doing? And how can central planning, if it is utterly incapable of achievement be a danger to individual liberty as it is widely disowned to be?" (The Logic of Liberty, quoted in Cristi) In defense of Mises, Hayek explained that "when Mises wrote that socialism is impossible he obviously meant that the proposed methods of socialism could not achieve what they were supposed to do." (Hutchison: 209) There may indeed be some truth to that position, but neither Mises nor Hayek were even remotely interested in exploring the possibilities of moderating the excesses of central planning by some more mixed forms of economic organization.

The Road to Serfdom

At the peak of the great debates on post-Second World War reconstruction in Britain, which laid the foundations of the welfare state, Hayek published a tract which was pretty much ignored in England but became a great popular success in the United States: The Road to Serfdom (1944) was serialized in the Readers Digest. In a tribute to Hayek written in 1962, Mises, who described himself as the "father of the renaissance of classical nineteenth-century ideas of freedom," revealed the nature of their shared liberal philosophy:

What made him [Hayek] known overnight to all people in the Western orbit was a slim book published in 1944, The Road to Serfdom. Hayek showed that all those features of the Nazi system that appeared as reprehensible in the eyes of the British ... were precisely the necessary outline of policies which the "left," the selfstyled progressives, the planners, the socialists, and in the U.S., the New Dealers--were aiming at. While fighting totalitarianism, the British and their allies waxed enthusiastic over plans for transforming their own countries into totalitarian outfits.

Since the publication of The Road to Serfdom, Hayek has pursued his antisocialist vocation into the area of political philosophy. In an interview published by the American Enterprise Institute, he reaffirmed the values which underlie his oeuvre, the values of a world, he tells us, which had disappeared by the late nineteenth century, destroyed by "reformers" who appealed to people's "primitive instincts" which had previously been successfully repressed by the moral conventions of life. The lost moral beliefs which he mourned were "the moral foundations of an exchange economy." The reformers stand accused of appealing to "solidarity" and to "altruism," which awakened these repressed instincts. (Hayek 1978: 11-18)

Hayek returned to the theme in 1984: "It is no exaggeration to say that the central aim of socialism is to discredit those traditional morals that keep us alive." These traditional morals are those "at which David Hume arrived two hundred and fifty years ago." Rationalist intellectuals, Hayek tells us, do not understand that "man owes some of his most important endowments which enabled him to keep billions of his kind alive through the operation of an extended order transcending perception, to an attitude which he acquired because group selection favoured in the process of cultural evolution those groups whose traditional rules of conduct enabled them through the market to adapt their actions to effects of which they were not aware." (Nishiyama and Luebe 1984: 321-22; emphasis added)

According to Hayek, the "conceit of intellectuals" and their "reformist zeal" are destroying the viability of the economy. Their programs to redistribute income will leave everybody worse off; morally they will undo the tradition of restraint, returning man to his innate instincts, the instincts of a savage.

In Hayek's world, economic coordination by Adam Smith's invisible hand is elevated to an order "beyond rational comprehension" and requires a code of morality ultimately based on the fear of hunger:

We must resign ourselves to the fact that our morals do not lead us where we wish to go, that in particular they do not produce beauty, pleasure or generally guide us to what we want, but rather warn us not to pursue some short ways to what we desire because to do so would cause damage to the order on which we all count to achieve what is possible. To put it crudely, our morals are materialistic, not idealistic and must be so because their first function is to keep us alive. (Ibid: 328, emphasis added)

"To demonstrate that rationalism may be wrong and that traditional morals may in some respect provide a surer guide to human action is the main contention of this lecture." (Ibid: 325)

Hayek's life-long pursuit of an antisocialist ideology has brought him back to the "traditional moral values" of the eighteenth century, before the French Revolution shook Europe to its foundations and opened the road to political democracy for the masses. Hayek's libertarianism is profoundly antidemocratic. It is beyond the scope of this essay to offer an explanation of the reasons why he found fertile soil in the United States, or to speculate on the implications of an economic order with minimal government based on material self-interest which accords to the irrational the principal coordinating role. Is this not a societal model which invites the substitution of the moral cement of religion for the civil authority of the state? Is it altogether accidental that Hayek's work has been embraced by the fundamentalist libertarian radical Right in the United States? Do these movements not pose a threat to dissenting views? Could there be more than one road to totalitarianism?

As for an orderly economy in a democratic society, it is interesting to note that it has been the Socialist Party of the Second Austrian Republic which has constructed a flourishing economy with the largest nationalized state sector in Western Europe, an extensive system of social security, a very high degree of trade unionization, an enviably low rate of unemployment, stable prices and exchange rates, and the virtual absence of strikes.

But the longing for a socialist society reaches beyond a more just economic order. It is the longing for a society that is not based on self-interest and selfishness, that does not elevate the profit motive to a religion, a society not driven by material values. That vision is well expressed by a great economist who was no socialist, and was ultimately Hayek's principal adversary in the contest of views concerning macroeconomic policy in the five decades which have passed since Hayek left Vienna for London.

When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. I see us free to return to the most sure and certain principles of religion and traditional virtue, that avarice is a vice, that the extraction of usury is a misdemeanour, and the love of money detestable. We shall once more value ends above means and prefer the good to the useful. (J.M. Keynes, 1931, quoted by Zeisel)

The differences in values which underlie the work of Hayek and Keynes are ultimately more important than the details of their economic theories. This paper has attempted to throw some light on the world which shaped Hayek in his formative years. In Ludwig von Mises' words: "To appreciate duly Doctor Hayek's achievements, one must take into account political, economic, and ideological conditions as they prevailed in Europe and especially in Vienna at the time the First World War came to an end." (Margit von Mises: 183). Hayek's Vienna, which profoundly shaped his lifelong writings, was a shrinking middle-class Vienna which clung desperately to its dwindling wealth and place in society, whose moral foundations were eroded when it sanctioned the destruction of democracy in fear of "socialist dictatorship," leaving the First Republic defenseless against Hitler in March 1938. The rest is history. (*)The "Private Seminar," well known in Vienna, was private in the sense that it was organized by its leader outside any academic institution. (*)On this, see Ilona Duczynska, Workers in Arms: The Austrian Schutzbund and the Civil War of 1934, published by Monthly Review Press.

Kari Polanyi-Levitt and Marguerite Mendell teach economics at, respectively, McGill University and Concordia University, Montreal. They are co-founders of the Karl Polanyi Institute of Political Economy, Concordia University. The paper, under the title "Hayek in Vienna," was originally prepared for a conference on Hayek which took place at the Universite de Montreal on January 29, 1988. A French-language version is published in Gilles Dostaler and Diane Ethier, eds., Friedrich Hayek: Philosophie, Economie et Politique (Montreal: Association Canadienne-Francaise pour l'Avancement des Sciences, 1988).

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