The Puzzle of Hayek.

• Author: O'Driscoll, Jr., Gerlad P.
• Position: Critical Essay

The Commanding Heights, the award-winning PBS series, chronicles the ideological battles of the twentieth century. At the beginning of that century, there was a liberal world order. Classical liberal ideas still prevailed in the West. With the advent of the Great War, the liberal world order crumbled, and liberal ideas were eclipsed. Communism, fascism, and Nazism flourished. The upshot was a second global conflagration, followed by the Cold War. By the end of the century, all the "isms" had been eclipsed in turn, and liberal ideas flourished once again.

In many ways, the tale told by The Commanding Heights parallels the life and career of Friedrich A. Hayek. Born in 1899, Hayek grew up in a liberal world, adopted liberal ideas, and became one of the foremost classical liberals of his day. He was an advocate of free markets and free trade, the economic program of liberalism. His ideas would come to be scorned, however, as liberalism went into eclipse. Before he died, though, he saw many of his ideas vindicated. In 1974, he was awarded the Nobel Prize in economics.

In the first volume of his trilogy Law, Legislation, and Liberty (1973), Hayek provided a succinct statement of liberalism's credo. It is a message for our times: "That freedom can be preserved only if it is treated as a supreme principle which must not be sacrificed for particular advantages was fully understood by the leading liberal thinkers of the nineteenth century, one of whom even described liberalism as 'the system of principles.' Such is the chief burden of their warnings concerning 'What is seen and what is not seen in political economy' and about the 'pragmatism that contrary to the intentions of its representatives inexorably leads to socialism'" (57).

In Hayek's Challenge: An Intellectual Biography of F. A. Hayek (2004), Bruce Caldwell synthesizes his life's work on Hayek, methodology, and the history of economic thought generally. Caldwell is an accomplished historian of thought, and he has written a comprehensive reassessment of Hayek and, indeed, of the Austrian school of economics more broadly.

Hayek's Challenge is a demanding a book. No primer, it would be suitable for use in a graduate-level seminar on Hayek and twentieth-century economic thought. In order to set the stage for presenting Hayek's contributions, Caldwell begins with a 130-page history he calls "The Austrian School and Its Opponents--Historicists, Socialists, and Positivists." In it, he examines Hayek's intellectual precursors and the debates that formed the background to economic thought in the early twentieth century. This introductory material constitutes nearly 25 percent of the length of the book, so readers skip it at their peril. After setting the historical scene, Caldwell systematically presents Hayek's ideas on economics, politics, and philosophy. Here I begin, as Caldwell does, with Hayek's precursors.

The Austrians

It all begins with Carl Menger in 1871. As Caldwell observes, "Menger's Principle of Economics is the founding document of the Austrian School of Economics, yet, as its name implies, it is basically a textbook" (p. 19). But what a textbook! In it, Menger developed what became "fundamental Austrian tenets: the connection between time and error; the causal-genetic or compositive methodological approach; and the notion of unintended consequences" (p. 47). We meet all these ideas again in Hayek.

Caldwell identifies four reviews of Menger's Principles. In one of them, Gustav Schmoller, the leader of the Younger German Historical School, rejected Menger's efforts to present a theoretical account of economic phenomena based on a subjective theory of value. Schmoller insisted that a historical-statistical approach was the "sole legitimate way to study economic phenomena" (37). (Caldwell's appendix A consists of an English translation of the review.)

Schmoller's review led to a rebuttal by Menger in the form of another book in 1883, which in turn launched the war over method, the Methodenstreit. Methodology deals with the principles, rules, and procedures for determining the truthfulness of propositions in a discipline. At the most general level, the war raged over the role of deductive theory and empirical investigation in economics. To simplify, Menger defended theory, and Schmoller defended statistical and historical investigations (pp. 64-78).

The debate has haunted the Austrian school throughout its own history. Generally, the historical school (and successors, such as the American institutionalist school) sought to derive empirical laws of economics from history. The Austrians denied that any historical laws exist. We get knee-deep in these issues in Hayek's work.

In Caldwell's assessment, with which I agree, the Methodenstreit created "a separate Austrian school of economics" (p. 80). Two of Menger's students, Eugen von B6hm-Bawerk and Friedrich von Wieser, were most responsible "for spreading the fame of the Austrian School worldwide, especially in the English-speaking world" (p. 80). Bohm-Bawerk gained fame for his work on capital theory and for his devastating attacks on Karl Marx (pp. 81-82).

Caldwell deals with many other important figures, of whom Max Weber is only one of the most notable, in his presentations of economics in the last quarter of the nineteenth century and in the early twentieth century. Most noteworthy, however, is Ludwig von Mises.

Mises remains a highly controversial figure whose work elicits strong opinions both pro and con. Caldwell is notable for the fair and even-handed manner in which he presents Mises's ideas. Mises is best known for his presentation of economics as the science of human action. He argued that "all human action is rational" (pp. 122-23) and contended that economic theory is true a priori (pp. 124-26). Caldwell charitably observes that "Although Mises was always careful to explain in detail what he meant, his idiosyncratic use of terms made it much easier for him to be misread, especially by those who disagreed with him or who sought to discredit his ideas" (p. 123, n. 18). Caldwell presents just enough of Mises to render intelligible the debates over apriorism and methodology more broadly that so heavily occupied Hayek.

Hayek's Achievement

Caldwell began his project with an incident in which I was involved. While he was visiting New York University in the spring of 1982, I handed him a copy of Terence Hutchison's new book and asked if he agreed that Hayek had done a...