Hayek discusses his book, “The Fatal Conceit,” the development of money, and Margaret Thatcher.
F. A. Hayek is one of the world’s leading free‐market economists and social philosophers. Besides the important 1944 bestseller, The Road to Serfdom, he has written books on subjects ranging from economics (Prices and Production;Monetary Theory and the Trade Cycle) to political philosophy (The Constitution of Liberty;Law, Legislation and Liberty) to the philosophy of science (The Sensory Order;The Counter‐Revolution of Science). His latest book, to be published late this year, is The Fatal Conceit. Hayek, who will be 85 years old this fall, won the Nobel Prize in economics in 1974.
Prof. Hayek was recently interviewed at the University of Freiburg in Germany by James U. Blanchard III, chairman of the National Committee for Monetary Reform and a member of the Cato Institute’s Board of Directors.
Q: We’re looking forward to seeing your new book The Fatal Conceit. Could you tell us a little about the book?
Hayek: The book brought me to very fundamental philosophical problems which explain the thing which has puzzled many people: why the intellectuals have been the leaders in the movement to socialism. The fundamental problem is no longer whether the government can order human affairs, it’s whether the human brain itself can quite handle them. I have come to the conclusion that we have been able to form what I now call the extended society, an order far exceeding our vision and knowledge because of the evolution of another gift quite distinct from intelligence. That’s the gift of our morals, particularly the institutions of property and the family, which we have never invented, which have succeeded because the groups who practiced them—without understanding why—expanded more than others.
Q: The Austrian economist Carl Menger talked about the evolution of money as a sort of natural phenomenon. How did money come about, and what’s happened to money today?
Hayek: The great trouble is that money wasn’t allowed to develop. After two or three hundred years of the use of coins, governments stopped any further developments. We were not allowed to experiment on it, so money hasn’t been improved, it has rather become worse in the course of time. Menger, and before him Hume and Mandeville, named law, language, and money as the three paradigms of spontaneously occurring institutions. Now fortunately, law and language have been allowed to develop. Money was frozen in its most primitive form. What we have had since was mostly government abuses of money.
I have come to the position of asking, has monetary policy ever done any good? I don’t think it has. I think it has done only harm. That’s why I am now pleading for what I have called denationalization of money.Q: This controversial theory of competition of currencies is beginning to receive some attention. How do you think it would work? Would the major banks issue currencies, or would there be gold coins issued?
Hayek: It seems to me that my original plan is right, but I am afraid that I’ve come to the conclusion that politically, it is completely Utopian. Governments will never allow monetary competition, and even bankers do not understand the idea because they have all grown up in the system which is so completely dependent on central banks. So I think we need a roundabout way. After all, in the modern world, currency is no longer the most important money. Credit and credit cards are substitutes. While governments can stop people from issuing money, they can hardly stop them from opening accounts in something unless they introduce a complete system of exchange control. I do not expect that any bank will understand this idea. But I hope that one of the big dealers in raw materials will be prepared to open accounts which will be redeemable in so much of current moneys as are necessary to buy this list of raw materials. Through these accounts he can make his unit—call it the “solid”—the standard unit without it ever being used in circulation. People very soon will begin to keep their accounts in “solids”—the only thing which is trustworthy. Although it’s a thing where many people can compete, most of them will probably choose the same list of raw materials. If one major firm will start this, others will imitate it. So I think we can forget about existing money and existing banks, and gradually open a system of accounts which will displace the government money.
Q: Maybe the unit, one day, will be known as the “Hayek.” Continuing on the money issue, it seems to me that the fundamental flaw in Milton Friedman’s theory of monetary control is becoming more and more evident today. The authorities are now admitting that they don’t even know what the money supply is. So how could you have a theory based on a steady increase in the money supply?
Hayek: You know, about forty years ago, I once wrote a sentence something like this: Almost the worst thing which could happen would be if mankind ever forgot the quantity theory of money—except they should ever take it literally. While I still believe that it is true that the price level is determined from the quantity of money, we never know what the quantity of money in this sense is. I think the rule ought to be that whoever issues the money must adapt the quantity so that the price level will remain stable. But to believe that there is a measurable magnitude which you can keep constant, with beneficial effects, I regard as completely wrong.
I don’t like criticizing Milton Friedman not only because he is an old friend but because, outside of monetary theory, we are in complete agreement. Our general views on what is desired and what is not are almost identical until we get on to money. But if I told him what I said before, that I very much doubt whether monetary policy has ever done anything good, he would disagree. He personally is convinced that a good monetary policy is a foundation for everything.
Q: What do you think will be the outcome of the Third World debt crisis?
Hayek: I don’t know. If we are very lucky—I doubt that we should be so lucky—we may get through it without either a resumption of inflation or new controls being clapped on. But the only good thing I hope to see is that people are becoming somewhat aware that the present monetary system is not very satisfactory and that we will have to consider fundamental reform. I don’t think anybody is yet going far enough.
I sympathize with the people who would like to return to the gold standard. I wish it were possible. I am personally convinced it cannot be done for two reasons: The gold standard presupposes certain dogmatic beliefs which cannot be rationally justified, and our present generation is not prepared to readopt beliefs which were old traditions and have been discredited. But even more serious, I believe that any attempt to return to gold will lead to such fluctuations in the value of gold that it will break down. So although I must sympathize with the gold standard people, I don’t believe that is a possible way. I think, in the long run, only my much more radical proposal will be feasible.
Q: Do you see the future as being more and more inflation and currency depreciation, or do you think that we could have a depression?
Hayek: Many things in the last three years have moved very much better than I had hoped. Particularly in England, the fact that Mrs. Thatcher would be able to bring inflation down as well as she has done, and the same to some extent in America, is very encouraging. If you can bring down inflation to zero, and have it stay there, I think the position of the leading countries can be saved. I’m not sure that means the positions of their banks can be saved!
Q: I have been pleasantly surprised that Margaret Thatcher has accomplished as much as she has.
Hayek: And she sees why she hasn’t accomplished more. She has recently said, repeating my own criticism to her, that she has been much too slow.
Q: You have said, “When I was very young, only the very old believed in classical liberalism. Now that I am very old, we’re winning a flood of young people to our side.” I’ve also noticed that the libertarian or free‐market movement in the United States tends to be dominated by young people. How did it happen in your lifetime that “liberal” changed from meaning free‐market or classical liberal to the present‐day terminology where “liberal” implies economic intervention?
Hayek: Ask the people at Harvard who did it! I no longer dare call myself a liberal in America because it is so completely misunderstood, and the new meaning is invading Europe. Even here, one has to explain what one means by liberal. But, if I may use the American neologism, libertarianism is spreading among the young in a most encouraging fashion. It has been strongest in the States, it’s quite strong in Germany, it’s strong in England, and the most remarkable thing, it’s starting in France, which was the country with the least hope. There is a very definite group of young economists who are thinking on right lines. I don’t know if there is any organized libertarian movement in Italy, but there’s nothing organized in Italy anyway.
Q: Unlike even my younger days, there are dozens of new free‐market books coming out, almost on a monthly basis, and it’s almost a flood of intellectual ammunition against socialism and state intervention.
Hayek: It’s enormously increasing in the last three or four years. I oughtn’t to say this, but I can no longer read the literature about myself that has been lately appearing. It’s far too much.
Q: I would imagine, since you won the Nobel Prize in 1974, that you’ve been besieged by articles and interviewers.
Hayek: Not immediately. It has been something halfway in between, you know. It’s now nine years since I got it, and the first four or five years, yes, one becomes a sort of temporary celebrity, but that I don’t care for. But the great interest in my writings among intellectuals, which really counts in the long run, is a very recent phenomenon. It appears that in the last four years interest has been growing progressively.
Q: You taught with Lord John Maynard Keynes at the same university, did you not?
Hayek: I taught at his university while he was advising government. We at the London School of Economics were evacuated to Cambridge for the whole World War II period, and Keynes got me rooms in his college. But he was most of the time advising governments, so we met only occasionally on weekends. We were personally very good friends.
He had the illusion that a little inflation is good. Too much, no. He was one of the cleverest men I knew, but he was not really a very competent economist at all. He had strong intuitions, which sometimes were right, and the strong conviction that he could put over any theory that he invented to justify his particular recommendations. He was a very great man, but I don’t think he was a great economist.
Q: I think that maybe he was a great investor, though. I’ve heard that in the 1930s he made a huge amount of money in the stock market.
Hayek: Well, I can qualify that slightly, and quote him literally. He confessed to me that when he speculated in currency, he went flat broke. And when he turned to commodities—not the stock market—he made, I think, half a million pounds then. And the same amount for his college. He must have made two million pounds in pre‐War pounds.
Q: Who’s your favorite economist, besides F. A. Hayek?
Hayek: Well, among the not really young ones are Armen Alchian and George Stigler. Until recently, my dear friend Lionel Robbins, who has had a stroke and is now out of action.
Q: What about some of those who have passed away?
Hayek: Well, Mises, of course. And I have the greatest admiration for Carl Menger, who started the whole Austrian tradition—and of that generation there are a good many.
Q: When did you meet Ludwig von Mises?
Hayek: We were ten years in constant close collaboration. He was not my teacher at the University, but I worked under him in my first job. From 1921 through 1931, I worked with him day by day and attended his famous Mises seminar, and that had a very profound effect on my thinking. I think that in understanding the main dangers of developments in economics, he was probably the most far‐seeing man of the time. A man of great intuition, great theoretical and historical knowledge, but we must not forget that until the age of nearly sixty, academic work was a sideline for him. He was a very active man in practical work and could only devote himself to thinking in old age. He never made what to me has been the decisive step away from rationalism. He remained to his end a convinced rationalist and ethical utilitarian, and did not see what David Hume already said—that our high morals are not the conclusions of our reason. They are the result of another process, a kind of group selection and evolution which led to those communities who had adopted, unintentionally, the most appropriate rules of conduct prevailing. So part of our capacity to maintain moral society is a tradition of moral rules which we still do not fully understand. And there, rationalism becomes insufficient. I would even go so far as to say that pure rationalism leads directly to socialism.
Q: That leads me to another question. What do you think accounts for the fact that capitalism has had such a bad reputation among the intellectual elite? Is it a simple matter of envy, or is there a more fundamental reason?
Hayek: Yes, this is a very curious story. It was the enormous influence of Karl Marx’s teaching that capitalism has created the proletariat. It’s curious because the fact is true, but the capitalist hasn’t created the proletariat by expropriating anybody. On the contrary, he has created a proletariat by enabling people to live who otherwise could not have lived. He has created a proletariat by keeping people alive! In that sense, the proletariat is a creation of capitalism, and all these people just wouldn’t exist without capitalism.
Q: If capitalism wasn’t here to provide the labor, the jobs, and the capital, millions of people would not exist.
Hayek: Only capitalism could have created what I call the extended society, which is based on the utilization of infinitely more resources than any other system could have used.
Q: What can individuals do to help the spread of free‐market ideas?
Hayek: Help the people who can do it to persuade the intellectuals. There is an organized effort in that direction now underway and very rapidly spreading. I think it was a mistake in the past to try to appeal to the masses generally. The people who make opinion are the intellectuals. They have been making wrong opinion. We must convince them in order to get them to work in the right direction. There are now specialized institutions which are trying to apply free‐market principles to concrete problems in a form which is intelligible to the general public. And these things must be financially supported.