"Hayek's Challenge represents a career's worth of thinking and writing on F. A. Hayek's contributions to the social sciences. Because of the breadth and depth of Hayek's work, evaluating it or even summarizing it is a reach for anyone; yet, because of his own specialization in methodology and his willingness to delve into fields well outside his own, Caldwell is uniquely qualified to undertake the challenge. His book has to be judged a dramatic success. Hayek's Challenge should easily gain a reputation as one of the most and possibly the most significant contributions to the literature on F. A. Hayek."—Roger Garrison, author of Time and Money: The Macroeconomics of Capital Structure
"A highly original work. Caldwell's scholarship is impeccable, and in fact extraordinary. Written lucidly and eminently readable, Hayek's Challenge is likely to become one of the leading works in the field. It will be consulted again and again for the wealth of incidental information that it contains."—Israel M. Kirzner
The introduction to
Hayek is a puzzle. Certainly he started out as one for me, now some twenty-odd years ago.
It was the spring of 1982, and I was finishing up a postdoctoral year at New York University (NYU). An assistant professor, I had received my doctorate in economics a few years earlier with a specialization in the history of economic thought. My thesis had carried the earnest and pedantic title "The Methodology of Economics from a Philosophy of Science Perspective," and part of the reason I was at NYU was to try to transform it into a book that people might actually want to read. But I was also there to study Austrian economics or, more precisely, to learn more about the distinctive methodological views of the Austrians. These differed radically from, and, indeed, directly criticized, the positivistic pronouncements of mainstream economists. In particular, I wanted to know more about the rather strange-sounding apriorist methodology that had been advocated by Ludwig von Mises. I knew next to nothing about Hayek.
NYU was very much the place to go if you wanted to learn about the Austrian movement. There was (and still is) a formal program dedicated to the study of Austrian economics there, with courses, a weekly seminar, and funding for faculty positions, postdocs, and graduate students. The faculty members present that year included Israel Kirzner, Mario Rizzo, Jerry O'Driscoll, and (in the spring) Ludwig Lachmann. Larry White was a visiting professor, Richard Langlois held another postdoc, and among the dozen or so students were Don Boudreaux, Mark Brady, Sandy Ikeda, Roger Koppl, Kurt Schuler, and George Selgin. It was a great gathering of minds and personalities and, for me, a very rich experience.
That spring, Jerry O'Driscoll handed me a book by Terence Hutchison and said, "So what do you think of his argument about Hayek's U-turn?" Hutchison had claimed that Hayek underwent a "methodological U-turn" in the mid-1930s. More precisely, he had argued that the publication in 1937 of an article by Hayek titled "Economics and Knowledge" marked Hayek's turning away from Mises's apriorist approach and toward the falsificationist methodology propounded by the philosopher Karl Popper (Hutchison 1981, chap. 7; see also Hayek  1948a).
The claim certainly seemed strange to me. I had studied Popper's thought carefully for my dissertation and now knew more about Mises's ideas, and, frankly, it is hard to conceive of two viewpoints more at odds with one another. How could anyone change so much as to switch from one to the other? Yet it was also evident that Hayek was close friends with both men. Hutchison was a leading historian of thought who had lived through the period in question, and he provided detailed textual evidence to support his argument. So Hutchison's interpretation presented a puzzle, and it was in trying to solve that puzzle that I began to do research specifically on Hayek. I have been at it ever since, even though people who care about me have warned me against putting so many of my eggs in one basket. I hope that, in this introduction, I am able to convey some of the reasons why I ended up doing so.
For the first eight or nine years of his academic life, the economist F. A. Hayek wrote in German. Afterward, he wrote principally in English, at least until he moved to Germany in 1962. Perhaps because of the novelty and challenge of trying to communicate ideas in a new language, he chose his titles with considerable care. Sometimes he made allusions to other works. Thus "The Trend of Economic Thinking," his 1933 inaugural lecture at the London School of Economics, alluded to The Trend of Economics, a volume edited by Rexford Tugwell that had appeared in America a decade before (see Hayek  1991c; Tugwell  1930). He got the idea for the title of his most famous book, The Road to Serfdom ( 1976b), from a phrase used by Alexis de Tocqueville, "the road to servitude" (see Hayek 1983b, 76). And I offer as a conjecture that the title of his Finlay lecture, "Individualism: True and False" ( 1948c), was a reference to passages about individualism in Oscar Wilde's "The Soul of Man under Socialism."
On other occasions, titles had multiple meanings. The paper that gave rise to Hutchison's claim about Hayek's "methodological U-turn," "Economics and Knowledge," was one of these. Its subject was the assumptions that are made in economic theories about agents' knowledge, but it was also about what economists themselves could know. It would seem that Hayek's Nobel address, "The Pretence of Knowledge" ( 1978e), can be similarly interpreted. My own title, Hayek's Challenge, follows Hayek's lead; it refers to the multiple challenges that surround his work.
Hayek himself, of course, faced challenges. Economists are used to the pose of being bearers of bad news. (I say pose because demand for our services, like that for those of undertakers and therapists, is highest when times are bad.) For Hayek, however, it was less of a pose than for most. It is not enough to say that some of his views were unpopular. For most of his life his economic and political positions were completely out of sync with those of the rest of the intelligentsia. He attacked socialism when it was considered "the middle way," when seemingly all people of good conscience had socialist sympathies. He disavowed the Keynesian revolution—even before it had properly taken place. In the latter half of the twentieth century, when some form of welfare state existed within virtually all the Western democracies, he criticized the concept of social justice that provided its philosophical foundations. Although a small group of libertarians and conservatives always read him with enthusiasm, for much of the century Hayek was a subject of ridicule, contempt, or, even worse for a man of ideas, indifference. Because of his political views, Hayek faced many challenges in trying to find an audience for his ideas among the thinkers of his day.
Hayek also presents challenges to those who try to interpret his thought. (Since I am one of these, I may as well share the secret title of my book: Caldwell's Challenge.) There are multiple problems here.
First, there is the simple fact that Hayek's writings lie within the Austrian tradition. Now, to be sure, in the 1930s that tradition was part of the then-developing mainstream in economics. In the postwar era, however, economics changed. One way to characterize the changes is to say that the discipline moved from interwar pluralism to postwar neoclassicism (Morgan and Rutherford 1998). Another is to point out that the mainstream experienced a number of "revolutions": the Keynesian revolution, the econometrics revolution, the general equilibrium or formalistic revolution, and so on. However one might choose to characterize the changes, it is clear that the Austrians did not participate in them. More strongly, people like Hayek and Mises actively opposed them. It may, therefore, be difficult for modern-day economists (who I hope make up at least a portion of my audience) to make much sense of the Austrians. Part of my task is to provide the necessary background to make the Austrians' viewpoint comprehensible to those unfamiliar with their tradition.
The volume of Hayek's work provides another daunting challenge for interpreters. Hayek lived from 1899 to 1992, and his writings span seven decades. Worse, he was incredibly prolific. Even worse, he did not restrict himself to economics, making contributions in fields as diverse as psychology, political philosophy, the history of ideas, and social-science methodology. I joke, of course, when I use the word worse, for part of Hayek's fascination is that he contributed, at times significantly, to so many fields. Studying Hayek forces you to read outside your field, and that can be a liberating experience. But, in this age of specialist training, it is also difficult not to feel inadequate when reading him, and his sheer reach makes any attempt at assessment of his ideas dicey, to say the least.
An even more serious challenge for those who would interpret him arises from the fact 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. We will see, for example, that, in the course of one decade, Hayek seems simultaneously to have held the views that what he called equilibrium theory is necessary if one is to do economic science at all and that it is also a highly misleading model for understanding the workings of a market system. Within the covers of the same book he will both argue that policies that aim at income redistribution violate the rule of law and endorse the provision of a "safety net" that is itself an instrument of redistribution. He will trumpet both methodological individualism and group selection, positions often viewed as mutually exclusive. Now, if one disagrees with Hayek on ideological or other grounds, these apparent contradictions are not, of course, a problem. They are a solution, for they provide grounds for dismissing him. But, for someone who wants, as I do, to make sense of Hayek, to provide a plausible reading of the development of his ideas, they pose real difficulties.
There is a huge secondary literature on Hayek, and it produces challenges as well. Part of the problem derives from the fact that Hayek was, and is, a controversial figure. Many who write about him have strong opinions about whether he was right or wrong, and this affects their readings. Furthermore, the enormous scope of his corpus makes for multiple interpretations, as writers draw on different parts of his work. Finally, some people use Hayek's writings as input into their own substantive theories, and, in such cases, the temptation is great to interpret Hayek himself as participating in the same project. As a result, very different interpretations of what Hayek was up to exist—probably more so than for most writers. As I said, I hope to provide a plausible reading of the development of Hayek's thought. But part of my job will also be to confront my own readings with others that exist in the secondary literature.
Another set of challenges has to do with what Hayek has said about himself. Hayek occasionally introduced autobiographical elements into talks and papers, and he even gave a few interviews, but the degree of autobiographical revelation changed dramatically when he was awarded the Nobel Prize in economics in 1974. A few years later, under the auspices of an Oral History Project at the University of California, Los Angeles, Hayek agreed to sit for an extensive set of interviews. The sessions stretched over a number of weeks in late 1978, with nine different people asking him questions. The topics covered ranged far and wide, and there appears to have been little attempt to coordinate what was asked, so sometimes he repeated himself. Hayek discussed his personal life, his academic history, his ideas, his times, his interactions with and impressions of the many great and near-great figures whose paths he crossed. The resulting 493-page transcript (Hayek 1983b) is a wonderful source of information on all aspects of his life and work.
So why is this a problem? As Malachi Hacohen has amply demonstrated in his superb new biography of Karl Popper (see Hacohen 2000), sometimes autobiographical accounts are inaccurate. Popper wrote an autobiographical sketch for the volume on his work in the Library of Living Philosophers series, a slightly revised version of which later appeared in book form as Unended Quest (1976). Popper spent a long time working on the manuscript, producing a number of drafts before he was finally done. Despite this, Hacohen discovered factual errors in Popper's careful reconstruction, some of them serious. Although he was at first inclined to think that Popper had intentionally fudged the record, he later came to the conclusion that the mistakes were not intentional. Popper just remembered things wrong. In this, Hacohen concluded, he was doubtless anything but abnormal: "Autobiographical anachronism is common, and Popper's memory failure may not even be as surprising as I still occasionally find it" (Hacohen 2000, 14).
Hayek had prepared for the oral-history interviews, of course. Still, he was over seventy years old when he gave them, and he was responding extemporaneously about events some of which had taken place forty or more years earlier. It also appears that Hayek had answers for certain questions almost programmed, using exactly the same wording again and again. This is not to suggest that he made things up. But, after a while, what a person recalls may be the story that he told last time, rather than what actually happened. The interviews provide many insights, but they must be handled with care. This is particularly true when the subject matter is sensitive or controversial and when independent verification of his claims is absent.
The final challenge for the Hayek interpreter is the question, Why? Hayek's research path was anything but straightforward. This was a man who, after all, started out as an economist but whose most famous (or, for some, notorious) book, The Road to Serfdom, was in part a political tract. Furthermore, right after he published The Road to Serfdom, he started work on a book on theoretical psychology. He would later say that the resulting volume, The Sensory Order ( 1967h), was extremely important for understanding his later work. But he never said how or why, and, for that matter, subsequent references to The Sensory Order were not particularly prominent. Later in his career, he would turn to political theory, and, ultimately, he would offer an evolutionary theory of the development of human social norms. These sorts of violent twists and turns in research interest cry out for explanation. Is it possible to make sense of Hayek's journey? That is certainly one of the biggest challenges that we face.
The challenges, I can say, have been well worth it. (I speak for myself; I am writing this introduction after having finished writing the book.) Even after all these years, I have at times felt exhausted from, but have never grown tired of, wrestling with Hayek. His mind, of course, fascinates. Anyone with his breadth of interests, with his ability to write on so many different subjects, cannot fail to attract an intellectual historian. Since I was a boy, I have always loved puzzles, so I have enjoyed the puzzling parts, too, the work of trying to piece together, to make sense of, his odyssey. I may as well admit that the controversial nature of his writings also appeals to my contrarian instincts; I have come to enjoy the challenge of presenting his ideas to audiences in which I know there are people who are prepared to dismiss them. In trying to be a good historian, I have been forced in explicating Hayek to confront my own commitments and biases, simply because I have been challenged so often to defend my readings. You can judge for yourself the extent of my self-delusion on this score.
Finally, Hayek's story is, well, just a plain good story. The people he knew and those he corresponded with, worked alongside of, and argued against include many of the most influential economists of the twentieth century. His is, in many ways, the story of the development of modern economics. But, because Hayek so frequently disagreed with those around him, his was a contrapuntal variation, parallel but contrasting, and the more intriguing for it. It is a great tale, one that I will relish recounting, and I suspect that my enthusiasm will shine through my analysis.
The plan of the book is straightforward. Part 1 is intended to provide background on the Austrian school. Given that the Austrian approach often differs from that of the mainstream within economics, few are likely to question the need for some sort of background. It may be appropriate, however, for me to offer some justification for the length of this part, for long it is.
Here we will meet Carl Menger, whose 1871 Principles of Economics became a founding document of the school (see Menger  1976). Because the book is a foundational document, we will explore in detail a variety of its themes. But, to understand the Austrian approach, it is not enough simply to review its proponents ideas. One must also recognize the fundamental fact that the Austrian school was a movement formed in opposition; indeed, its very name was given to it by its detractors and intended as a slur of sorts. We will, therefore, need to spend some time on the Austrians' first rival, the German historical school, and on the battles, methodological, political, and academic, that ensued as the two schools vied with one another for power, prestige, and, not least of all, academic positions. The Germans quickly subdued their Austrian competitors, although, in a way, the Austrian movement became more united for it: as the Viking motto goes, things that do not kill you outright tend to make you stronger. The rivalry between the two schools of thought, known as the Methodenstreit, or "battle over methods," was a defining element in the first twenty years or so of the Austrian school's existence. But it also obscured the many similarities between the two schools, similarities that are the more striking if one compares either school to what passes today for the mainstream of economics. Unraveling all of this is one of the chief goals of the first part of the book.
The battle over methods is, however, only part of the story. If the Methodenstreit provided the initial impetus for the growth and development of Austrian thought, new conflicts were to sustain it. The twin forces of socialism and positivism increasingly became, for the economists of Vienna in the first two decades of the twentieth century, the new opposition. Incredibly, all the forces and personalities came together in a seminar presided over by Eugen von Böhm-Bawerk at the University of Vienna in the years just before the war. Little did the Austrian economists realize the strength of their new antagonists or that the arguments that they were formulating were but a dress rehearsal for disputes that would echo through the coming century. Every one of the arrayed forces, from the positivists to the historicists, from the subjective value theorists to the socialists, would claim for his ideas the mantle of science. Hayek fought in the First World War, then went to university during the cold, hungry, and at times violent days that followed. He would encounter each of the contending sets of ideas during his student days, and the ghosts of Menger and Gustav Schmoller, as well as the larger-than-life influence of seminar participants like Ludwig von Mises and Otto Neurath, would leave their marks. But it would take nearly a lifetime of scholarly work before his particular vision of what it meant to do scientific economics would finally emerge.
In part 2 of the book I tell Hayek's story. If Hayek is sometimes a puzzle for later interpreters, he was also himself a puzzler. Schooled in a university tradition that permitted bright students to explore areas on their own, he was confident enough to plunge into new fields of study when he thought that they might help him discover solutions to his problems. The first puzzle that Hayek encountered had to do with the role of money in an economy. The existence of money obviously conferred substantial benefits—at the most basic level, it facilitates trade, thereby encouraging specialization and growth. Money is a puzzle because its manifold benefits come at a cost: money itself can destabilize an economy, as the hyperinflation that wracked the already-decimated economies of Germany and Austria following World War I amply demonstrated. Hayek's first puzzle was to provide a theory of how a monetary economy works, one that would also explain why at times it fails to work.
By the 1930s, Hayek was working on a second, related puzzle: a theoretical description of how a capital-using monetary economy, one with freely adjusting prices, might operate through time. Hayek was not, of course, the only one to tackle this question, and the answer offered by one of his rivals, a British economist named John Maynard Keynes, would be taken by many economists as definitive during the middle decades of the twentieth century. Keynes was not only a theorist, he was also a man of affairs, and he saw himself as saving capitalism. Others of his rivals among the economists, market socialists like Oskar Lange, thought the rescue mission chimerical and recommended more drastic remedies.
Whatever the many differences that separated Keynes from Lange might be, both of them saw a machine that had broken down when they looked at the economy. This provided another puzzle for Hayek, for, when he looked at the economy, he saw an organism that sometimes failed to work, to be sure, but at other times was able to coordinate the activities of millions of independent human beings. Why did almost everyone else of his day see the world so differently? Hayek began to wonder whether the theoretical tools that economists employed were to blame. He came to the conclusion that even the most advanced theories of the time failed to capture the central features of a market economy, in particular the way it was able to coordinate dispersed knowledge and allow that knowledge to be used by others. Hayek eventually came up with an alternative description that highlighted that fact.
It convinced no one, or virtually no one, at least not at first. And Hayek recognized immediately that changes in economic reasoning alone were not enough. If he was to convince his opponents, he would need to develop a more complete theory of society, to show how a host of social institutions might work together to allow free individuals to put their knowledge to use. This recognition led Hayek into all sorts of new areas of study and to new puzzles. Why did some institutions work better than others? Where did they come from? Could they be altered? At what cost?
Every step along the way, then, Hayek encountered puzzles and opponents who offered alternative solutions to them. But there was one constant: every one of his opponents claimed to be doing "real" science. This provided a final puzzle, one with which Hayek would deal all his life. What was science, after all? What distinguished it from pseudoscience? (This question also engaged one of Hayek's closest friends, the philosopher Karl Popper.) It was clear enough that, for much of the twentieth century, science was regnant. But Hayek felt that many of his opponents, all claiming the mantle of science, were but pretenders to the throne. He constantly encountered people who thought of themselves as objective scientists, people who held ideological views different from his and who immediately felt comfortable attributing their differences to the fact that, whereas they were scientists, he was an ideologue. Hayek developed criticisms of what he called scientism and also tried to explain how his opponents had come to hold their erroneous beliefs. In the process, like Carl Menger before him, he turned to the study of methodology to make his case. And, just as, earlier, he had found that the tools of equilibrium theory did not illuminate the workings of a market economy, he found that the methods of study endorsed by his scientistic antagonists obscured the workings of the complex, spontaneously ordered phenomena that social scientists seek to explain. He therefore proposed alternative methods.
In my intellectual biography of Hayek, then, I trace the development of Hayek's ideas, focusing on the development of his ideas regarding methodology as a unifying theme. Although certain methodological pronouncements were present in Hayek's early work, like most economists (this was also true of Menger) his first love was not methodology. Therefore, when, in his early work, Hayek wrote about methodology, he simply echoed some standard Austrian doctrines, doing so principally to make a case to a German audience for an Austrian approach to business cycle theory. It was only later, as he engaged in numerous debates over how well his and alternative theories captured what he saw as essential features of a market economy, that Hayek began to explore methodological issues more thoroughly. The end result was a distinctive vision of what was possible in the social sciences and of how social phenomena might best be studied.
Hayek's methodological views are of interest in their own right, but they also increasingly came to inform much of his substantive work. Accounts that leave out this part of his thought miss much of the rationale for why he took the specific positions he did. In tracing out the evolution of his ideas, I will try to show the relations between his methodological writings and his contributions to such areas as economics, political philosophy, and psychology. I will not try to provide a systematic and detailed exposition of all his theories. There already exist a number of excellent generalist accounts that provide overviews as well as others that deal with specific aspects of his thought. On the other hand, my book does not presuppose a knowledge of Hayek's work; indeed, it is intended to be accessible to readers who are neither economists nor historians. I also hope that those who wish to undertake a more systematic study of Hayek's thought will, after reading my book, both understand his broader vision and know where in his massive oeuvre to look for specific ideas.
I call the middle part of the book "Hayek's Journey." The title is meant not so much to draw attention to the physical journeys that he took, from Vienna to London to Chicago and beyond—although they too are part of the tale to come—as to emphasize Hayek's intellectual voyage. Where Hayek began was with the Austrian presuppositions, but, after decades of study, where he ended up was in a place that was unique. I hope to offer a plausible account of the many twists and turns that the road to that unique place took. There are, of course, different stories that could be told. More to the point, different stories have been told, and, although some of them complement my account, others clearly compete with it. I will address some of these alternative interpretations, but, to keep to the main thread, I will do so in appendixes to the volume.
History is always like this, of course. It is always a negotiation between the present and our reconstructions of the past, between the evidence and our interpretations of the evidence, a struggle between contending plausible stories offered by different narrators whose own histories, perspectives, and agendas color their accounts. I have puzzled over Hayek's journey for a long time, and I believe the story that I am about to tell you, but I also know that the strength of my convictions matters very little. What perhaps matters most is that, in putting forward my account, I provide a clear target for those who will carry the interpretive task further. That is something that I have tried to do.
I should perhaps say a few words about where my book fits into the now enormous secondary literature on Hayek and on the Austrian school. When I started work on this project over ten years ago, not much had been written on the early history of the Austrian school. This has now been to a considerable extent remedied. Caldwell (1990) contains conference papers on Menger, English translations of some early work are provided in Kirzner (1994a), and Endres (1997) offers a book-length explication of some of the theoretical contributions of Menger, Böhm-Bawerk, and Wieser. The methodological positions of the founding fathers are analyzed in Cubeddu (1993) and Oakley (1997). There has also been a revival of interest in the thought of the German historical school, as documented in Peukert (2001).
Even in the light of the recent additions to the literature, I still feel that, in part 1, I am able to add considerably to our understanding of Hayek's predecessors and their effects on his thought. In particular, I have tried to emphasize the complex interplay of theory and methodology and to highlight the contending ideological, political, and academic rivalries that existed between the Austrians and their historicist, and, later, their positivist and socialist, opponents. This background would help shape Hayek's perceptions of, and responses to, his own opponents, from the American institutionalists to the assorted groups and personalities that he would encounter in England and beyond. An understanding of it will allow us to make better sense, I think, of the unique blending of perspectives and viewpoints that would emerge in his own thought, a blending that resulted in a thoroughly modernist critique of the scientistic pretensions of his age and yet simultaneously pointed toward some surprising (some might even label them postmodern) new directions.
Part 3 of my book contains two chapters. In the first, I review Hayek's journey, in the process trying my hand at assessing his legacy. Although I feel confident about the story I tell about Hayek's journey, I must confess that I feel less certain about my attempt at assessment. Writing that assessment was, for me, the scariest part of the book, for it required me to enter into regions well outside my own areas of expertise. (Indeed, part of the assessment involves pointing the reader toward newly developing literatures in diverse fields that may be read as part of Hayek's continuing legacy.) I have given dozens of talks about Hayek over the years. During the discussion periods that followed the talks, I discovered that people take very different things away from their readings of Hayek. Hayek wrote so much and in so many different areas that that is, perhaps, inevitable. I therefore recognize that my own assessment will equally inevitably be idiosyncratic, reflecting my own readings and interests. Still, I feel that this is something that I owe to the reader.
In the second chapter, one styled as an epilogue, I examine a final challenge that Hayek's work provides, a challenge to the discipline of economics. Hayek had a particular vision of the subject matter studied by economists and was critical of the methods that economists employed in their investigations. If Hayek was right, then some of the directions taken by the discipline in the twentieth century have been wrong. In this final chapter, I try to take those criticisms seriously and use them to reflect, as a historian of economic thought, on the development of economics in the century that has just passed.