Friedrich Hayek, the Austria-born economist, has always aroused strong feelings in both his admirers and his detractors. The Road to Serfdom (1944), his most famous book, was dismissed on publication by most of the British and American intelligentsia, a predictable response in view of Hayek’s taunt that intellectuals had played a leading part in the “totalitarian transformation of society.” Isaiah Berlin struggled with the book, referring to “the awful Dr. Hayek” in a letter to a friend. Socialists branded him a reactionary for his espousal of nineteenth-century liberalism; opponents of FDR’s New Deal embraced him as their savior. Although Hayek’s standing among professional economists had waned long before the outbreak of World War II, The Road to Serfdom found a receptive audience in the general public: he lived long enough to receive a Nobel Memorial Prize in Economic Sciences in 1974 and to count Margaret Thatcher among his most ardent acolytes.

While his great rival, John Maynard Keynes, has attracted several biographical studies, notably the brilliant three-volume treatment by Robert Skidelsky, Hayek’s life has remained comparatively obscure. The American philosopher W. W. Bartley embarked upon an edition of Hayek’s collected works, to be accompanied by a biography, but died before he could finish them. Bruce Caldwell, an economic historian, took over Bartley’s editorship, published the intellectual biography Hayek’s Challenge (2004), and has now cowritten with Hansjoerg Klausinger the first volume of what’s intended to be the “definitive” biography.

So far, the authors have achieved that ambition: they devote more than eight hundred pages to Hayek’s first fifty years, replete with trivial details such as the subject’s weight on his first birthday (twenty-two pounds) and a lengthy description of his “messy” family life. This is an unsparing portrait. Hayek emerges as a paradoxical figure: a passionate liberal whose family supported the Nazis and whose most enthusiastic supporters have been conservative, a loner with a broad circle of contacts, a world-famous economist who scorned the social sciences, a polemicist who on occasion retired from the fight, an antimonopolist whose ideas were used as propaganda for big business, and an ethicist whose own behavior in marriage was disappointing.

Friedrich August von Hayek (known as Fritz to his family) was born on May 8, 1899, in Vienna. The Hayeks were members of the respectable upper-middle class, educated and well connected but not particularly well off. His father, August, was a physician with a passion for botany, and his mother, Felicitas, was the daughter of Franz von Juraschek, a prominent university professor and civil servant. The Jurascheks were distantly related to the fabulously rich Wittgensteins—Fritz’s first car trip was taken with Ludwig Wittgenstein’s mother, Leopoldine, in an electric Morgan around Vienna’s Ringstrasse.

The young Hayek was an undistinguished pupil. He moved schools often and received poor grades in every subject save biology, failing in Latin, Greek, and math. Nevertheless, in his early years he exhibited an intellectual trait that stayed with him for his entire life: he was a voracious reader with a broad range of interests, something of an autodidact. The rigid pedagogy of late imperial Austria didn’t suit his talents.

Hayek’s childhood was on the whole conventional and apparently happy. He was an outdoorsy type—his recreations included tennis, skating, mountaineering, and skiing. Skating parties would sometimes include his cousin Helene (Lenerl) Bitterlich, who later became his second wife. Summer vacations were spent in the pretty Styrian resort town of Schladming, at the foot of the Dachstein Mountains. Hayek retained a lifelong passion for the Alps and returned whenever he could; the book jacket includes a photograph of him in wooded mountain terrain, pipe in mouth and dressed in lederhosen and walking boots.

Hayek’s later approach to economics was marked by his early studies of the natural world. As a child he often joined his father on field trips identifying and collecting plants, minerals, and insects. He also attended his father’s lectures at the Viennese botanical institute, and he described his paternal grandfather as “an enthusiastic Darwinian.” Hayek later claimed that his father’s “exploration of how plant, animal, geological and climatic circumstances combined to determine the flora of a region has probably had a lasting influence on my thinking.” In particular, he admired biologists’ “patient search for significant facts.” (By contrast, Charles Darwin claimed to have found inspiration for his evolutionary theory in the works of the economist Thomas Malthus.)

Hayek left school with the lowest acceptable examination grades and was drafted into the army soon after his seventeenth birthday. Active service in World War I as a junior artillery officer on the Italian front revealed a natural fearlessness. “I lack nerves,” he told Bartley in an interview. Hayek was lucky to have survived: on one occasion the spotter plane he was in was damaged by enemy fire and forced to crash-land; on another he engaged in knife-to-knife combat with an Italian soldier in the pitch dark, and he was never sure whether he killed his opponent. Military life left him with a permanently weak heart and reduced hearing (Karl Marx, he later joked, couldn’t hear out of his right ear, while he was deaf in his left), but as Caldwell and Klausinger observe, in his intellectual endeavors Hayek continued to seek out danger.


Returning to Vienna after the war, Hayek found a tumultuous state of affairs: imperial rule had given way to a republic, a diminished Austria was severed from the former Habsburg territories, “Red Vienna” was coming under socialist rule, and hyperinflation was in the offing. The Austrian middle class suffered a great loss of paper wealth; in the winter of 1919–1920 all but two rooms in the Hayek family home went unheated. This harsh experience induced in him a yearning for monetary stability, as evidenced by his consistent advocacy for the gold standard in the 1930s, when most economists had had enough of the barbarous relic, and later in life by his unflinching criticism of what he saw as the inflationary consequences of Keynesian economic policies.1

Hayek enrolled at the University of Vienna. Nominally a law student, he indulged his catholic intellectual tastes, taking courses in sociology, philosophy, psychology, history, and biology (he also sat in on lectures on anatomy and the central nervous system) before finally choosing to specialize in economics—a decision made, say the authors, because economics offered better career prospects than law.

Hayek’s early dabbling in botany made him particularly well suited to the approach of the Austrian school of economics, which he encountered at university. Founded in the mid-nineteenth century by Carl Menger, the Austrian school took an evolutionary approach to its subject.2 Hayek’s older contemporary Joseph Schumpeter applied evolutionary ideas to develop his theory of “creative destruction,” which he saw as the most important economic force. (Schumpeter’s entrepreneur, applying new methods and technologies, stands in place of natural variation.) Hayek came to view the economy as an ever-changing, self-organizing order that emerges from the spontaneous interactions of countless individuals. He later claimed that these ideas were inspired by Menger’s notion of “organic institutions” that evolve naturally rather than as a result of deliberate planning.

In Vienna Hayek was invited to join the private seminar of the economist Ludwig von Mises. He was profoundly influenced by Mises’s 1922 book, Die Gemeinwirtschaft (published in English under the title Socialism), which claimed that rational economic calculation was impossible under socialism. Central planners, Mises asserted, lacked the information and incentives to make rational decisions, while market prices reflected relative scarcities. Later, when Hayek taught at the London School of Economics in the 1930s, he lectured and wrote essays on this subject, which became known as the socialist calculation problem.

Another powerful influence on the young economist was his grandfather’s old friend Eugen von Böhm-Bawerk, who like Mises was a fierce critic of Marxism. Böhm-Bawerk, the leader of the second generation of Austrian economists, had died in 1914, leaving behind two volumes of his three-volume magnum opus, Capital and Interest. Interest existed, he wrote, because people have an inherent preference for present over future consumption. He described how the rate of interest influences investment decisions: when interest declines, it becomes more attractive to invest in projects with longer payback periods (what he called more “roundabout” methods of production). Hayek often insisted that conventional economics paid insufficient attention to time.

In October 1921, after completing his law degree, Hayek joined Mises at the Abrechnungsamt, the Austrian Clearing Office for War Debts. Inflation was running so hot that Hayek’s paycheck tripled over the first couple of months. He also started work on a doctoral thesis. When Hayek was invited by the American economist Jeremiah Jenks to come to New York to work as a research assistant, he jumped at the opportunity. It turned out to be a good career move but a disaster for his personal life. During his university years, Hayek and his cousin Lenerl had fallen in love, but Hayek, diffident and uncommunicative, failed to express his feelings, and by the time he returned from the United States in 1923 Lenerl was married to another man.

At New York University Hayek pursued his interests in monetary policy. Most leading economists of the day—including Irving Fisher of Yale and Keynes—had come to the view that monetary policy should be directed at stabilizing the price level (roughly equivalent to what is now called inflation targeting, in which a central bank tries to steer inflation close to a publicly announced rate). The Federal Reserve Bank, under the influence of the New York Fed governor Benjamin Strong, adopted this viewpoint. After the brief US recession of 1921, the prime aim of US monetary policy was to avoid another deflation.


Hayek had other ideas. He believed that in an economy in which productivity increases, prices have a natural tendency to fall, since less work is needed to manufacture a given commodity. Attempts to resist this tendency might introduce new economic disturbances. During the Roaring Twenties the United States experienced the strongest productivity growth in history, but prices didn’t decline. Monetary policy directed at stabilizing prices, Hayek wrote in 1928, “administers an excessive stimulus to the expansion of output as costs of production fall, and thus regularly makes a later fall in prices with a simultaneous contraction of output unavoidable.” Within a few years, America’s economy experienced such a deflationary collapse.

Two years after his return to Vienna, Hayek married Helena (Hella) Fritsch, a colleague at the Abrechnungsamt. Mises found him work running the newly established Austrian Institute for Business Cycle Research. This was a curious appointment, since Hayek had by this date developed a pronounced skepticism toward an overreliance on economic statistics. In December 1926 he wrote to his colleague Oskar Morgenstern (who later, with John von Neumann, established the field of game theory) that “these business barometers…are somewhat dubious and burden my conscience as a theorist.”

His biographers dismiss the myth that Hayek’s institute successfully predicted America’s Great Depression. This story originated in a comment by the British economist Lionel Robbins in his introduction to Hayek’s first book, Prices and Production (1931). In fact, the institute didn’t produce its own forecasts for the United States, and its predictions were generally optimistic. A report in December 1928, however, alluded to data that suggested “the onset of a period of depression.” Hayek later conceded that the prediction had, at best, been an indirect one. As the Depression lengthened, the institute got out of the forecasting game.

Robbins was instrumental in bringing Hayek to the London School of Economics, where he initially gave a course of lectures in early 1931 based on the forthcoming Prices and Production and was later appointed the Tooke Professor of Economic Science and Statistics. Hayek loved England and came to see himself as more English than the English. He read the works of Anthony Trollope, joined the Reform Club in Pall Mall (a grandiose watering hole for the liberal establishment), and became a British citizen in 1938.

At the LSE, Hayek’s star initially shone—one student, Ronald Coase, a future Nobel laureate, claimed his lectures “were undoubtedly the most successful set of lectures given at LSE during my time there”—and then dramatically waned. Hayek’s business-cycle theory suggested that the Fed’s pursuit of price stability in the 1920s had pushed investment out of line with genuine savings. He concluded that higher interest rates and more saving were needed to rectify what he called a state of “intertemporal disequilibrium.” The Depression must take its course, he argued, and an “incomplete investment project” must be allowed to fail without further harmful intervention by the monetary authorities.

Such an unforgiving and inflexible approach to Depression economics put Hayek in conflict with Keynes, who was advocating for lower interest rates and more consumption. Hayek was dismissed as a sadistic deflationist. He also continued to support the gold standard, which Keynes held responsible for the Depression. The dispute between Hayek and Keynes became heated. Hayek gave Keynes’s A Treatise on Money (1930) a poor review, and the Cambridge economist hit back with a review of Prices and Production, declaring it “one of the most frightful muddles I have ever read, with scarcely a sound proposition in it…. It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlam.” Over time Hayek’s supporters at the LSE defected to the Cambridge camp; even Robbins deserted him. As the German-born economist Ludwig Lachmann recalled, “When I came up to the LSE in the early 1930s, everybody was a Hayekian; at the end of the decade there were only two of us, Hayek and myself.”

When Keynes published his General Theory of Employment, Interest and Money in 1936, Hayek failed to respond. He later justified his silence on the grounds that since Keynes was always changing his mind, it wasn’t worth the effort to point out additional disagreements with him. Besides, Hayek had his own magnum opus to concentrate on. But when The Pure Theory of Capital was eventually published in 1941, it sank like a stone. Whereas Keynes’s General Theory provided the rationale for government policies that aimed to ameliorate the effects of the Depression, Hayek’s contribution was seen as excessively abstract: he elaborated, with three-dimensional diagrams, the Austrian theory of capital and its emphasis on the time structure of production. Reviewers, including Kenneth Boulding and Ralph Hawtrey, felt he had failed to provide a robust account of the trade cycle—Boulding said The Pure Theory of Capital was an example of one of Hayek’s incomplete investment projects. Hayek later confessed that “my inadequate knowledge of mathematics which I had never found helpful in my work” contributed to its failure.

Back in Vienna, members of his family had warmly welcomed the rise of the Nazis. Hayek’s mother was enthusiastic about Hitler, applauded the Anschluss in March 1938, and displayed overtly antisemitic sentiments. His brother Heinz, a professor of anatomy, joined the Nazi Party and provocatively signed off with “Heil Hitler!” in his letters to Fritz. But Hayek had no truck with antisemitism—he had many Jewish friends from his university days and among fellow Austrian economists, including Mises, and fretted repeatedly about Austria’s “intellectual decay” and “political corruption.” He helped several former colleagues find work abroad after they were banned from teaching in Austria.

Hayek’s ideological assault on fascism started in 1933 with a brief memo to LSE director William Beveridge entitled “Nazi-Socialism.” Controversially, Hayek maintained that fascism was a genuine socialist movement and that hostility to traditional liberalism united both fascists and communists. Antiliberalism in economic affairs, he wrote, “leads inevitably to a reign of universal compulsion, to intolerance and the suppression of intellectual freedom.” He developed these notions over the following years—notably in his 1938 paper “Freedom and the Economic System,” in which he extended his critique to central planning in general.

Hayek intended The Road to Serfdom, published in 1943, for a broader readership. The book contains both a lengthy attack on central planning and a defense of traditional liberal values, which Hayek thought the British were in danger of forgetting amid the war economy and the popularity of foreign political ideologies such as Marxism. He argues that under a liberal economic system, one of private property governed by the rule of law, market competition enables buyers and sellers to coordinate their activities. He describes the market’s operation as impersonal and fair, not because outcomes are equal but because no one receives any special privileges. “A world in which the wealthy are powerful is still a better world than one in which only the already powerful can acquire wealth,” Hayek wrote. This mode of organization isn’t just economically beneficial in his view; it is the only system under which individual freedom flourishes. On the other hand, Hayek saw central planning as inherently coercive, since planners would have to impose their preferences on individuals. Propaganda is required to create a common ethical code, and ultimately democratic procedures are undermined.

Caldwell has written elsewhere that The Road to Serfdom acts like a Rorschach test: readers’ reactions reveal more about themselves than about the book. “If market fundamentalism is a religion, its bible is The Road to Serfdom,” write Naomi Oreskes and Erik M. Conway in their recent book, The Big Myth: How American Business Taught Us to Loathe Government and Love the Free Market.3 Oreskes and Conway describe how The Road to Serfdom was taken up by representatives of big business who opposed the New Deal, which

was still a far cry from centralized planning, and many analysts…have credited Franklin D. Roosevelt with saving capitalism. To suggest that…Roosevelt’s reforms were a step toward unfreedom is like claiming that road signs, stop lights, and speed limits are steps toward the elimination of driving.

Yet nowhere in The Road to Serfdom does Hayek attack (or even mention) the New Deal. His only direct reference to Roosevelt is an approving quotation taken from a speech the president gave attacking the “collectivism” of corporate America and calling for the reintroduction of a “democratic competitive order.” Hayek never even uses the term “free market” in the book. The problem, as Oreskes and Conway admit, is that the nuanced version of The Road to Serfdom is not one that reached the American people. Instead, Reader’s Digest produced a twenty-page condensation that found a mass audience. This version, of which over a million copies were printed, included the assertion that “competition must be left to function unobstructed.” But these words aren’t found in the original text. General Motors paid for the distribution of an even cruder cartoon version.

In Liberalism’s Last Man: Hayek in the Age of Political Capitalism, Vikash Yadav, a professor of international relations at Hobart and William Smith Colleges, argues that Hayek has been mischaracterized as an extreme libertarian and market fundamentalist. Yadav points out that in The Road to Serfdom Hayek shows support for several progressive positions, including the state’s provision of a minimum income, the promotion of social mobility, the taxation and regulation of pollution, and antitrust laws to restrain monopolies. Hayek’s main proviso is that state intervention should always seek to preserve competition. Politically, he was against fascism and communism, but also against nationalism, imperialism, and the democratic excesses of populism. The nation-state, he argued, should be constrained at home by the rule of law and abroad by an international federalism. He supported free trade among nations (a position that Keynes rejected in the 1930s) and the free movement of people across borders. In short, Hayek was an internationalist whose guiding principle was toleration.

Yadav ends his book with a flourish:

Hayekian liberalism supports international economic unions, fundamental human rights, anti-imperialist struggles, the free flow of labor, and a moral framework for international relations; liberalism is not nationalist, imperialist, or realist. Liberalism is not conservative, even though it fights to conserve individual liberty and the free market, ideals that may align with the interests of conservatives in a liberal capitalist regime. Liberalism is progressive, principled, reasonable, and universal. To conclude with Hayek’s parting words: “The guiding principle that a policy of freedom for the individual is the only truly progressive policy remains as true today as it was in the nineteenth century.”

Keynes felt that Hayek hadn’t drawn a clear enough distinction between good and bad planning. As he wrote in a letter to Hayek, “You are trying to persuade us that so soon as one moves an inch in the planned direction you are necessarily launched on the slippery path which will lead you in due course over the precipice.” This was not Hayek’s intention, as Caldwell and Klausinger explain. In the introduction to The Road to Serfdom, Hayek stated that he was not arguing that “these developments are inevitable. If they were, there would be no point in writing this.” In his preface to the 1956 edition, he clarified his position: “The most important change which extensive government control produces is a psychological change, an alteration in the character of the people. This is a necessarily slow affair”—extending, perhaps, over a couple of generations.

Despite his misgivings, Keynes wrote an extremely warm letter of appreciation to his old adversary about the book. During the war, the LSE had decamped to Cambridge, and Keynes arranged for Hayek to have rooms in King’s College. Legend has it that the two of them spent nights together as air wardens atop the college buildings. The eventual friendship between these two great economists serves as a reminder that the defense of liberal democracy was their common cause.

Hayek was always attracted to intellectual gatherings. In April 1947 he brought together several dozen like-minded scholars at Mont Pèlerin, near Lake Geneva, among them economists from the University of Chicago, a handful of former Austrian comrades, Karl Popper and Robbins from the LSE, and the historian Cecily Veronica Wedgwood (the sole female participant). At the first meeting of the Mont Pelerin Society, Hayek read a paper called “‘Free’ Enterprise or Competitive Order,” in which he criticized laissez-faire and argued for government regulation of monopolies. This was too much for his old mentor, Mises, who jumped up, announced to the assembly, “You’re all a bunch of socialists,” and stomped out of the room.

This volume of Caldwell and Klausinger’s biography concludes with the painful collapse of Hayek’s marriage. At some time in the early 1930s he had told Hella of his undiminished love for Lenerl, but she refused to divorce him or even to discuss the matter. He secured a “bootleg divorce” in Arkansas in 1950 without informing Hella. (Lenerl’s husband, Hans Warhanek, died of a heart attack that June after she told him she wanted a divorce.) Hayek’s old friend Robbins was appalled by this behavior: “The man I knew is dead.” A few weeks later Hayek and Lenerl finally married.

Keynes’s biographer Robert Skidelsky maintains that Hayek “was a great thinker rather than a great economist.” This is unfair. While The Pure Theory of Capital was not a success, Hayek’s writings on monetary policy, and in particular his critique of inflation targeting, remain relevant today. In the aftermath of the global financial crisis of 2007–2008, central banks around the world set interest rates at zero (and in some places below zero) in order to keep inflation close to their targets. Yet among the unintended consequences of ultra-easy monetary policy was the appearance of multiple asset price bubbles, excessive risk-taking by investors seeking to make up for lost income, a worrying growth in public and corporate debt, and the widespread misallocation of capital, whether in pie-in-the-sky ventures in Silicon Valley or low-return “zombie” companies. Now that interest rates are rising, these financial fragilities have been exposed, and central bankers are the objects of much criticism. Any reconsideration of contemporary monetary policy should properly start with a study of Hayek’s work from the 1920s.4

Furthermore, Hayek’s economics and political thought cannot be separated. They are united by a common rejection of the application in the social sciences of techniques developed in the physical sciences. Hayek castigated the engineering mentality of scientists and policymakers that led them to embrace central planning. The fact that his approach to economics had more in common with biology than physics put him at loggerheads with mainstream economics.5 He deplored the use of assumptions—such as equilibrium, perfect competition, and rational expectations—that render economics tractable to mathematical modeling but are far removed from the real world. Such concerns are shared today by many progressive economists.

His peevishness about the importation of physics metaphors into economics grew over the years. In 1942 Hayek published an essay denouncing “scientism,” by which he meant the “slavish imitation of the method and language of Science” in social science. He delivered a final exhortation in his Nobel lecture in December 1974, entitled “The Pretence of Knowledge,” in which he claimed that the

failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences—an attempt which in our field may lead to outright error. It is an approach which has come to be described as the “scientistic” attitude—an attitude which, as I defined it some thirty years ago, “is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.”

Toward the end of his life Hayek wrote an essay, “Two Types of Mind” (1975), in which he identified a contrast between two approaches to scientific thinking—the master specialist, who knew every detail of his subject, and the puzzler, who kept returning to a set of claims, adding new insights. Hayek, in his own opinion and that of his biographers, belonged to the second type. What connected his seemingly disparate interests in economics and politics was an insatiable curiosity about what he called “phenomena of organized complexity.” When the Santa Fe Institute was established in 1984 to pursue the exciting new field of complex systems, its approach was interdisciplinary. Hayek, with his roving intellectual interests and view of society as an emergent “spontaneous order,” might be said to have got there first.