Rosamaria Bitetti // 16.05.2016

“When I turned 15, my parents gave me a copy of “The Road to Serfdom”. Some of the ideas in Hayek’s book came as a shock to me, and I contacted the editor, who eventually gave me the address of Hayek’s summer residence in Tirol. I knocked and he opened his door. We started discussing, and we never stopped, until his last years.”

Kurt Leube, a historian of economic thought, emeritus at the Hoover institution, Stanford University, Director of the European Center of Austrian Economics Foundation and currently visiting professor at Luiss, Rome, shares his thoughts about his experience as Friedrich von Hayek’s research assistant.

Leube describes his Austrian mentor, who won the 1974 Nobel Prize in economics, as “an old school gentleman. Not shy, but reserved. He came from a family which could claim an academic tradition from more than five generations, but in 1917 he dropped out of the University of Vienna to join the army and went on to fight on the Italian front.

I wonder how disappointed he would be today to learn that neoliberalism – a term he helped revive after the two wars with both his ideas and his dissemination through the Mont Pelerin Society – has become a catch-all-phrase to describe whatever his opponents dislike, from public subsidies to mail surveillance. “Hayek founded the Mount Pelerin Society precisely because he knew his ideas were unpopular and counterintuitive. It is an undeniable fact that political and social philosophy, more than other academic fields, are subject to popular myths and recurrent fads. The almost cyclical misreading of F.A. von Hayek’s oeuvre is a case in point of what Erich Fromm explained as ‘one of the peculiar ironies of history [the fact] that there are no limits to the misunderstanding and distortion of theories, even in an age when there is unlimited access to the sources’.”

In Italy, Hayek was introduced and studied more by philosophers, political scientists and sociologists than by economists. This is partly due to the fact that he was a renaissance mind: he was a Nobel laureate economist, but he also wrote about cognitive science, political theory, law history of thought.

“I think this is true, and on one hand it is a monument to his greatness, but on the other also an indication of how dangerous it is to present economics as a purely technical discipline. Maximisation and equilibrium models might seem complex, but they still are an oversimplification of human life. The high degree of mathematisation in modern economics is often pursued at the expense of a deeper understanding of human actions. This explains why Hayek was never perfectly at ease in the economics faculty of the University of Chicago. While others were laying grounds for that great cultural movement that would become Chicago economics, Hayek focused on his interdisciplinary seminar of methodology. He invited not only economists, but all sorts of scientists: Enrico Fermi, Albert Einstein, Karl Popper, Roscoe Pound. Privately, he was closer to those Chicago economists who had a cultural interest, such as George Stigler. Hayek was interested in music, literature, theatre and the visual arts. He even had a small collection of paintings.”

Leube hints at a certain ostracism that surrounded Hayek for several years: “Right before the Nobel, I organized a conference in Vienna, and a major newspaper’s headline was ‘Hayek = unemployment’. A few months after the award, everybody in Austria was claiming ownership of Hayek. The Academy of Science, which had ignored him until then, invited Hayek to be its corresponding member. I still remember how entertained he was when he received those letters.”

117 years after his birth, Hayek still addresses contemporary problems.

“Just think about his theory of the economic cycles, and how it suddenly became interesting again after the 2008 crisis. According to Hayek, booms and busts are caused by artificial credit creation, setting in motion some productive processes (similar to the US building boom which eventually triggered the 2008 crises) that wind up not paying off in the end, given people’s real desire for future goods vs. present ones. Under conditions of an unhampered market economy, those desires would tend towards equilibrium via adjustments in interest rates. However, the self-regulating interest rates are obviously distorted by artificial credit creation. While the additional credit indeed has short-term stimulative effects (booms), in the long run a structure of production that does not match actual saved capital will collapse, leading to the damaging bursting of the bubbles.

In other words, Hayek’s central thesis, in sharp contrast to that of Lord Keynes, maintains that the monetary factors are the original ones and that any business cycle arises from real alterations in the structure of production.

Although the theoretical arguments indisputably were won by Hayek, in the years of the Great Depression Keynes’ politically appealing recommendations for vigorous and, erroneously assumed, painless state interventions or deficit spending soon dominated economic policy. And for this very reason – political appeal – they still are.”

So are we doomed? “Hayek thought that ideas studied in universities are the first part of a complex (intellectual) capital structure, which are then disseminated through second-hand intellectuals and then become common knowledge among politicians and voters. In the long term, the battle of ideas is the best strategy for improving the world.” After all, Keynes was wrong: in the long term, we are not all dead.

Rosamaria Bitetti is a research fellow at the Istituto Bruno Leoni.