Friedrich Hayek: prophet of the free market

The following is an excerpt from Chapter Three of David McKnight, 'Beyond Right and Left: New Politics and the Culture War', (Allen & Unwin, Sydney, 2005).

The full chapter outlines the ideas of Hayek and discusses their influence on advanced industrial countries.

Any understanding of neo-liberalism must grapple with the complex ideas of the Friedrich Hayek, because they are foundational to the revival of neo-liberal ideas which have swept the world. It is Hayek's vast intellectual output and theoretical system which gave the revival its resilience and depth. His vision and ideas helped give the sustaining confidence needed by the small radical liberal movement in its years before triumph. What follows in this chapter is a description and discussion of Hayek's key ideas.

Hayek was born in Vienna in 1899 and took degrees in law and politics. But economic theory dominated his early work and in the 1930s, while he taught at the London School of Economics, he clashed with John Maynard Keynes, at that stage making little impact. The disagreement was over the correct analysis of the Great Depression and prescriptions for avoiding such calamities in future. In 1950 he moved to the University of Chicago, the intellectual centre for the development of neo-liberal economic and social theories and where a colleague was Milton Friedman.

Hayek was not just an economist but an evangelist who was prepared to swim against the tide. To most people World War Two had demonstrated the enormous advantages of the state in co-ordinating workers and industrialists in a single victorious focus. By 1944 planning for post-war reconstruction assumed large state sponsored projects of education, health, national development. At precisely this most unlikely of times Hayek wrote his best known polemic in favour of liberty and against the state and all its works. The Road to Serfdom compared state socialism, economic planning, Nazism, communism, social liberalism and concluded that they were all very similar under the skin because they shared an opposition to the free market order. It was dedicated 'To the socialists of all parties'.

A remarkable quality of The Road to Serfdom is its absolutism. Not only is central control and planning an absolute evil but there is a rapid and slippery slope between government planning of any form and total central control. He was also blithely unaware of (or dismissive of) the realities faced by many ordinary people.

In a competitive society it is no slight to a person, no offence to his dignity, to be told by any particular firm that it has no need for his services, or that it cannot offer him a better job. It is true that in a period of prolonged mass unemployment the effect on many may be similar. But there are other and better methods to prevent that scourge than central direction.1

At first glance Hayek's book was a polemic against socialism and fitted the rapidly growing anti-communism that dominated the Cold War. But as his dedication made clear, Hayek was highly critical of anti-Communists who believed in a strong state. He was far from an ivory-tower dwelling academic. As an intellectual engaged in combat, he not only helped found the Mont Pelerin Society in 1947, but also the Institute for Economic Affairs in Britain in 1957 which helped fashion what the world came to know as Thatcherism.

As the years went by it became clearer that he represented a strand within the Right which was quite different from simple anti-communism and mainstream conservatism (which had merged with social liberalism). His aim was to revive a minority strand within liberalism which he believed had been largely taken over by a rationalistic, Continental liberalism which aimed to guarantee a liberal society more through governments than markets.2 Hayek's liberalism, which drew on Adam Smith and philosopher David Hume, was grounded in a view which argued that liberal institutions (such as the market) evolved slowly and spontaneously and were justified by their success, not by government. In Hayek's version of liberalism there was little room for government modification of market forces in the name of social cohesion. In his speech accepting the Nobel prize for economics in 1974, Hayek congratulated the selection committee for their willingness to award the prize to someone 'whose views are as unfashionable as mine are'.3

Hayek believed fashions changed through the central role of ideas and intellectuals and this had long been part of his crusade. In 1960, which many thought was the high noon of triumphant and prosperous capitalism, Hayek worried that 'the propertied class, now almost exclusively a business group, lacks intellectual leadership and even a coherent and defensible philosophy of life'.4

Hayek's self-appointed task was to provide this intellectual leadership and a coherent and defensible philosophy of life. He did this by conceiving an intellectual system covering economics, law, politics, social evolution and morality. This system was developed from first principles, in this case Hayek's particular concept of liberty. This gives his ideas the attractive element of coherence but like so many ideological thinkers, including many Marxists, a foundation of simple first principles also opened the way to fundamentalism. Hayek, however, had a number of genuine insights which it would be unwise to ignore. In any case, those repelled by the market fundamentalism of his followers need to understand the intellectual challenge he threw down to his fellow liberals, to conservatives and to socialists.


1 F.A. Hayek, The Road to Serfdom, Routledge and Kegan Paul London, 1962, p. 79.

2 . See Hayek, The Constitution of Liberty, chapter 4.

3 Tomlinson, p. 13. Hayek shared the prize with social democratic economist, Gunnar Myrdal.

4 F.A. Hayek, The Constitution of Liberty, Routledge & Kegan Paul, London, 1960 (1976), p. 128.