The origins of market fetishism - critique of Friedrich Hayek's economic theory

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The origins of market fetishism - critique of Friedrich Hayek's
economic theory
Monthly Review, June, 1989 by Kari Polanyi-Levitt, Marguerite Mendell

THE ORIGINS OF MARKET FETISHISM

Friedrich Hayek was thirty-three years old when he was projected from
relative obscurity in Vienna into the prestigious Tooke Chair of
Economic Science and Statistics at the London School of Economics. He
was invited to the L.S.E. by Lionel Robbins, a friend and admirer of
Ludwig von Mises and one of the few English economists acquainted with
the German language and the Vienna School of Economics of the 1920s.
John Hicks recalled that Hayek created quite a stir among the group of
young economists whom Robbins had gathered around him when he became
professor and head of department in 1929. This group, Hicks wrote,
shared "a common viewpoint, or even, one might say, a common faith.
Some of us, especially Hayek, have in later years maintained that
faith; others such as Kaldor, Abba Lerner, George Shackle and myself
have departed from it, to a greater or lesser extent.... The faith in
question was a belief in the free market or `price-mechanism'--that a
competitive system free of all interferences by government...would
easily find an `equilibrium.''' (Hicks, 1981: 2)

The appointment of Hayek was part of a deliberate effort by Lionel
Robbins to shore up the ideological stronghold of economic liberalism
at L.S.E. after a brief period during which the economics department
had been headed by Hugh Dalton (1926-27) and Allyn Young. (Other
appointments of conservative economists included Frederic Benham and
Arnold Plant.)

The influence of the Austrian School on the teaching of economics in
the English-speaking world was transmitted not through Hayek, but
rather through Robbins, whose 1932 Essay on the Nature and
Significance of Economics has served as the classic definition of its
subject matter as "the theory of allocation of scarce means among
alternative uses." (see Kirzner, 1986: 140-147) This (formal)
definition thereafter displaced Marshall's more substantive but less
elegant one. As Joan Robinson observed in her Richard T. Ely lecture,
"the date of publication was unlucky. By the time the book came out
there were three million workers unemployed in Britain and the
statistical measure of GNP in the USA had recently fallen to half its
former level." The book appeared, she commented with characteristic
acidity, "when means for any ends at all had rarely been less scarce."
(Robinson, 1972: 1)

 The Austrian School of Economics

Hayek's business-cycle theory, which owes an acknowledged debt to the
earlier work of Mises, is grounded in Austrian economics, i.e., in the
role played by time preference and "round-aboutness" in the production
process. A young Austrian economist has recently noted the similarity
between the Mises-Hayek theorty of the business cycle and that of
Hilferding in Finance Capital. In Hilferding's theory the (Marxian)
rising organic composition of capital plays a somewhat similar role to
(Austrian) increasing "round-aboutness" in generating imbalances
between the production of producer goods (Department I) and consumer
goods (Department II). (Rosner, 1988) The policy conclusions which
follow bear a fascinating similarity insofar as demand stimulation is
rejected by both. The Marxist view was that business cycles are a
pathology of capitalism. The sufferings of the unemployed cannot be
alleviated within the capitalist system. Economic policy in the
interests of the working class is thus impossible within the
capitalist system.

In spite of the deep hostilities between Social Democrats and
Conservatives in post-First World War Austria, their basic ideas on
the business cycle and on macroeconomic policy were not substantially
different. Both considered inflation as potentially dangerous, and
neither advocated demand expansion as an approach to the very high
level of unemployment. The explanation lies in part in the
intellectual tradition of the Austrian School of economics in the
years before 1914, when such leading socialist figures as Otto Bauer,
Karl Renner, Rudolf Hilferding, and Otto Neurath were active
participants in the Bohm-Bawerk Seminar, as was Joseph Schumpeter
(Marz, 1986) and Ludwig von Mises. The traumatic experience of the
inflations of 1919-22--and most particularly the hyperinflation of
October 1921 to May 1922--certainly contributed to a reluctance to
rely on monetary expansion and has influenced Austrian (and German)
social democratic policy to this day. We return to the consequences of
the post-First World War inflations later in this paper.

To understand Hayek's place as a fourth generation star of the
Austrian School of economics, it is important to appreciate that
neither its founder Carl Menger, nor Menger's two (rival)
successors--Eugen von Bohm-Bawerk (1851-1914) and Friedrich von Wieser
(1851-1926) were radical antisocialists. Bohm-Bawerk was a true
liberal and his Privatseminar in the decade before 1914 was enriched
by important controversy with Marxist thought.(*) The leading Marxist
participants already referred to were unquestionably influenced by the
methodology and approaches of that school in various ways which would
take us too far afield were we to treat them in this essay.
Austro-Marxist approaches to macroeconomic policies were conditioned
by the intellectual formation of those of its leading lights who were
trained in economics in the best years of the Austrian school before 1914.

Wieser has been described as the central figure of the Austrian
school: central in time, central in the ideas he propounded, and
central in his influence insofar as he was the holder of the central
chair during nearly two decisive decades. His socioeconomic credo was
summarized as follows: "Building on a strong Catholic and conservative
foundation he was an interventionist liberal ... with quite an
admixture of racist sentiment who still found it possible to admire
Marx. Above all, he was an admirer of the state as guided by the
supreme wisdom of his own bureaucratic class." (Streissler, 1986) The
anti-interventionist, antisocialist current in the Austrian School,
which so appealed to Lionel Robbins in the 1920s, was the singular
contribution of Ludwig von Mises (1881-1973), and was ultimately
carried into the Anglo-American world by his favorite protege, Hayek.
Here it must be noted that Mises' extreme anti-interventionism was not
shared by all the members of his seminar.

 In an excellent summary of the principal tenets of the Austrian
School, Fritz Machlup, a contemporary of Hayek and one-time member of
Mises' Privatseminar, pointed out that "consumer sovereignty" and
"political individualism" were additions by the Mises branch of
Austrian economics: "In the United States the label `Austrian
economics' has come to imply a commitment to the libertarian program.
This was not so in the case of the earlier generations of Austrian
economists some of whom were advocates of governmental intervention
that would be ruled out by Mises and his disciples. Mises' mission was
above all the attainment and maintenance of individual freedom."
(Machlup, 1981)

The Demise of Austrian Liberalism

Hayek was born in Vienna at the turn of the century (1899) as the
brief era of the liberal constitutional order established in the
1860s--which privileged the rising class of bankers, manufacturers,
and merchants and found its social support base among middle-class
urban Germans and German speaking Jews--was challenged by
anti-capitalist populist movements of the Right and the Left.

During the last quarter of the nineteenth century, the program which
the liberals had devised against the upper classes occasioned an
explosion of the lower. The liberals succeeded in releasing the
energies of the masses, but against themselves, rather than against
their ancient foes.... The Catholics, routed from the school and the
courthouse as the handmaiden of aristocratic oppression, returned as
the ideology of the peasant and the artisan, for whom liberalism meant
capitalism, and capitalism meant Jew. Laissez faire, dressed to free
the economy from the fetters of the past, called forth the Marxist
revolutionaries of the future. (Schorske: 117. Schorske's study of the
politics and culture of Fin-de Siecle Vienna is rapidly becoming a
classic, a superb interpretive essay on the ambiance of pre-1914 Vienna.)

 In 1987 Karl Lueger, anti-capitalist and anti-Semitic leader of the
Christian Social Party was elected Mayor of Vienna. Interventions of
Kaiser Franz Joseph and the hierarchy of the Catholic church failed to
prevent the installation of this popular but demagogic figure.
Leuger's appeal was founded on the sense of betrayal of the "little
man," the petty producers and small artisans, who felt menaced by
liberal capitalism. The target of Lueger's Christian Socials were the
"free thinking, highly educated and often Jewish capitalists and their
somewhat strong belief in `Manchester Liberalism,' materialism and
positivism." (Kitchen: 36)

Here it is important to understand the high-profile role played by
German-speaking (largely assimilated) Jews in the economic life of
Imperial Austria. This was true particularly of those areas which
subsequently became the Republic of Austria. Commercial and
professional opportunities abounded because of the almost complete
absence of a native bourgeoisie. This was not true of Bohemia where
German capitalists played the key role. As the center of the Hapsburg
Empire, Vienna attracted a large Jewish immigration. In 1860, the
number of Jews in Vienna numbered about 6,000. By 1918, numbers
approached 200,000--after Warsaw and Budapest, the largest urban
concentration of Jews in Europe. A very considerable number of the
rich bankers and industrialists of Vienna and the Alpine provinces
were Jews--possibly the majority; Jews were also prominent in the
liberal professions. In contrast to the situation in Germany, they
played a considerable part in the Imperial administration because they
had nothing to gain--and much to fear--from rising nationalism both
pan-German and Slav. They were loyal allies of the liberal Hapsburg
administration within the Empire. In the minds of the Austrian people,
the term "Jew" and "capitalist" tended to merge. (Borkenau: 92-117;
Craver: 22-3)

 Whereas the populism of the Christian Socials was anticapitalist and
anti-Semitic, the social democratic challenge to the liberal
capitalist order was squarely based on the class interests of the
workers, who had largely been excluded from its economic benefits and
had no political voice in parliament. The Austrian Social Democratic
Party was founded by Victor Adler in 1889 at the Hainfeld Congress,
which united moderate and radical groupings into one party. Its
political base was principally among the urban working class. Its
ideological foundation was based on Marx and Lassalle. The movement
believed in progress, industrialization, and the historical
inevitability of socialism.

In 1907 the working class won universal, equal, and direct suffrage in
the Imperial Austrian Parliament following a massive demonstration
organized by the Social Democratic Party in Vienna. Mises describes
the event in his memoirs (1978:89): "Vienna was completely paralyzed,
and 250,000 workers marched on the Ringstrasse past Parliament in
military fashion in rows of eight, under the leadership of Party
officials." Mises complained that the "Social Democrats had extorted
this right by force." They "attempted to intimidate and bring
Parliament to heel through terror" because, as he explained, "the
Austrian constitution had expressly forbidden public outdoor meetings
in front of Parliament." It is clear that Mises found this
manifestation of the will of the masses to achieve the right to vote
quite terrifying. In the first election with universal suffrage, the
Social Democrats won 83 of 516 seats. To add one more dimension to the
complexities of the politics of Imperial Austria, we must explain that
the Hapsburg administration perceived the cosmopolitan Socialists as
less dangerous to their continued rule than the strident nationalist
assertions of the Czechs and Slovenes. It was possible to meet their
demands for the vote and for social-reform measures, whereas the
nationalist aspirations of the non-German regions could not be
accommodated within the structure of the Hapsburg regime.

 In commenting on the demise of nineteenth-century Austrian "liberal
culture," in the years of Vienna's fin de siecle, Schorske
acknowledges the continuity of that tradition in the philosophy of the
social democrats: "of all the filial revoltes aspiring to replace the
[liberal] fathers, none bore the paternal features more pronouncedly
than the Social Democrats. Their rhetoric was rationalist, their
secularism militant, their faith in education virtually unlimited."
(Schorske: 119) The politics of post-First World War Austria were
taking shape in the contest between Catholic Conservatives and
Socialists:Black versus Red.

The Birth of the First Austrian Republic

To fully comprehend the virulent individualism and antisocialism of
Mises and Hayek, we have to consider the cataclysmic circumstances
surrounding the birth of the First Austrian Republic (1918) from the
ruins of Imperial Austria-Hungary. The knowledge of the impending end
of an era of security, stability, and the enjoyment of high culture
had permeated the atmosphere of Vienna in the decade preceding the
outbreak of the Great War; a sense of impending end of the world
(Weltuntergang), of "things falling apart." Ernst Fischer described it
as follows:

 As a rule, things tended to come to Austria later than elsewhere; not
so the premonition of impending catastrophe, the heightening of
sensibility, the loss of reality. Something was coming to an end--not
only the monarchy, not only the century, but a whole world "fawned
upon by decay," as Georg Trakl has it in one of his poems. Those who
were most sensitive to all this because so ambiguously poised between
civilization and anti-Semitism, between privilege and ignominious
rejection were the intellectual Jews, along with the old patrician
families, a stratum of cultivated bureaucrats and the elite of the
Social Democratic Workers Party. They were Vienna at its most
interested and interesting. (Fisher: 76)

Postwar Vienna, its numbers swollen by pension-hungry officials from
all over the former Austro-Hungarian Empire, was joined with three
neighboring and four Alpine provinces to create the "new" Austria, a
rump of six-million German-speaking leftovers after the secession of
the succession states of Czechoslovakia and Yugoslavia and large
territories ceded to Poland and Rumania. The oversized former
metropolis of a multinational empire of 50 million was regarded with
horror by the Alpine provinces as "red" and "Jew-ridden." The new
republic was generally believed to be non-viable (nicht lebensfahig).
Socialists had traditionally looked to union with Germany, an option
vetoed by the Allied powers; the more conservative-minded dreamed of a
Danubian federation of the former Imperial territories. Meanwhile the
country became increasingly dependent on external assistance from the
victorious Entente powers.

The long-awaited collapse of the Hapsburg order of things preceded the
establishment of the First Republic in November 1918. In October 1916
Fritz Adler, son of Victor Adler and passionate opponent of the war,
became an instant hero when he assassinated the Prime Minister of
Austria. He was lionized by the population of Vienna, profoundly
disillusioned with the war and angry at those who profited by it while
death stalked the battlefronts. The 1917 Russian October Revolution
put socialism on the agenda in Central Europe--and aroused the deepest
fears of the ruling classes. The Austrian Socialist Party had by then
abandoned its ambiguous position concerning the war and in January
1918 organized a number of general strikes. The Imperial authorities
were no longer able to supply the soldiers at the front and industrial
workers in the cities with food and clothing. The Socialists had
organized Austria's soldiers and industrial workers into soldiers' and
workers' councils which soon became the only functioning
administration in the land able to deal with increasingly severe
shortages of food and heating fuel. Revolution was on the agenda
throughout the year 1918. (Reventlow, 1969; Hautmann, 1971) Victor
Adler died on the eve of the proclamation of the First Austrian
Republic in November 1918, and Karl Renner was named the first
Chancellor of the provisional government. The sister republic of
Hungary was established in October 1918 with Count Karolyi as its
first president. The Hapsburg era was finished. In March 1919 Bela Kun
displaced the Karolyi regime. The short-lived Hungarian Soviet
Republic was defeated in August 1919 by a combination of forces
including military intervention by neighboring states. In Austria the
leadership of the powerful 350,000-member Social Democratic Party
successfully prevented ultra-left forces from pushing the situation
toward the establishment of a Hungarian-type revolutionary regime.

 The Socialists emerged from the elections of 1919 as the strongest
single party with 48 percent of the votes, and entered in a coalition
with the Christian Social conservatives, who controlled the four
Alpine provinces. Otto Bauer became foreign minister and first head of
the Socialization Commission. Joseph Schumpeter briefly served as
Minister of Finance from March to October 1919.

In the spring of 1919, Bauer introduced his socialization program
calling for the gradual public administration of large coal, iron, and
steel plants and the eventual control of all sectors of the economy.
(Rabinbach, 1983:24) This was not a program of expropriation, but
rather one of restricted gradual socialization. It had, at its
inception, the full support of Schumpeter, who warned of the need to
exclude from this program those industries which depended heavily on
the availability of foreign exchange.

As part of the reconstruction program, Schumpeter proposed a capital
levy, in his words, an "enormous incursion into the private rights of
the propertied classes.... We have to do it." This capital levy would
be directed exclusively towards the repayment of the war debt.
Additionally, he proposed the creation of an independent Central Bank,
stabilization of the currency, indirect taxation to equalize the
burden, and an industrial strategy to attract domestic and foreign
capital. (Marz: 323)

Schumpeter quarreled with Bauer, who disagreed with the need for
foreign loans, while his intransigence on the capital levy alienated
the conservative Christian Socials, who withdrew their support for the
program. Schumpeter resigned, and in 1924 he left Austria for Bonn,
and thence for Harvard in 1932. According to Marz, "for one side he
was too radical and for the other too pragmatic, too self-willed."
(Marz: 330) The socialization issue gave rise to a rich literature in
which a number of Austria's leading economists participated, including
Schumpeter, Lederer, and Neurath. Bauer (1919) advocated a form of
guild socialism--while Mises contributed a blistering attack on the
feasibility of any form of socialist economy. (Mises: 1920, 1922)

 The coalition broke down, and the socialization programs were
effectively suspended after Ignaz Seipel became Chancellor in May
1922. He stabilized the currency at one new schilling = 10,000 Kronen
with the assistance of a League of Nations program not dissimilar to
the conditionalities of I.M.F. adjustment programs of the 1980s.
Thousands of public servants were fired, remaining subsidies were
removed, new taxes imposed, and the proposal for capital taxation
suspended. A League of Nations supervisor was installed to oversee the
implementation of the stabilization program, which "corresponded to
the train of thought dominant in contemporary academic economics. An
economy weakened by the disease of inflation, this theory pronounced,
can be restored to health only by severe fiscal and monetary
discipline." (Marz: 499)

This was the context in which Mises expounded his views at the
University of Vienna which were, as Machlup recalls, unpopular with
the majority of people considered as the intelligentsia:

 Mises fought interventionism while almost everybody was in favour of
some government action against the "evil" consequences of
laissez-faire. Mises fought inflationism while a large majority of
people were convinced that only a courageous expansion of money,
credit and governmental budgets could secure prosperity, full
employment and economic growth. Mises fought socialism in all its
forms, while most intellectuals had written off capitalism as a
decaying system to be replaced either peacefully or by revolution, by
socialism or communism. Mises fought coercive egalitarianism while
every "high-minded" citizen thought that social justice required
redistribution of wealth and/or income. Mises fought
government-supported trade unionism, while progressive professors of
political science represented increasing power of labor unions as an
essential ingredient of democracy. Hayek became the most forceful
exponent and defender of the economic and political views of Mises."
(Machlup: 10-11)

In the setting of intellectual Vienna of the 1920s, Mises and Hayek
and their associates were the misfits--the remnants of old Vienna's
privileged urban elites whose security had been shattered, whose
savings had been decimated by wartime and postwar inflation, and whose
taxes were financing the pioneering housing programs of Vienna's
socialist municipal administration. In their parlors and favorite
coffee houses the patrician middle classes, now deprived of their
prewar privileges, fed their fears of "the dictatorship of the
proletariat." They were particularly terrified by the 1926 Linz
Program of the Social Democratic Party which resolved to defend
Austria's democratic constitution--by armed struggle if
necessary--against threats by the Christian Socials to crush the
working class and its organizations. They made common cause with the
rising forces of clerical reaction which eventually led to the
suspension of Parliament in 1933 and the violent destruction of the
working-class movement in February 1934, leaving the country
defenseless against Hitler's occupation in 1938.(*) The heirs of the
Liberal tradition of the 1860s joined forces with clerical fascism in
their paranoiac fear of the working classes.

 A special target of Hayek's polemics in the 1920s was the regime of
rent control and public housing, which effectively eliminated private
high-rental residential construction. (Hayek: 1929) Working-class
families were now privileged in access to low-rental, bright,
spacious, modern apartments with parks, kindergartens, and other
communal facilities. These programs, together with a sweeping
educational reform based on Alfred Adler's theories of psychology,
plus the large-scale participation of the working people of Vienna in
a remarkable variety of cultural, recreational, and educational
activities organized by the Socialists made "Red Vienna" a world-class
showpiece of avant-garde urban lifestyle.

The elite of the intellectuals of Vienna were socialist sympathizers.
In Vienna alone 350,000 people belonged to Social Democratic
organizations, while socialist trade unions comprised 700,000 workers.
"Never before or since," wrote Ernst Fischer, "has a Social Democratic
Party been so powerful, so intelligent, or so attractive as was the
Austrian party of the mid 1920s." (Fisher: 143) According to another
contemporary, the "piecemeal reforms were to be the first building
blocks of a future socialist society." (Zeisel: 123)

 "The ultimate justification of socialism derived from our expectation
that it would usher in a new man, a new morality.... The essence of
being a socialist is the holding of certain ethical positions about
justice and about duties to our fellow man." (Zeisel 123, 131) As we
shall see, it is precisely the fundamental conflict of values which
underlies the contending visions of democratic socialism and
individualistic libertarianism.

Mises' Privatseminar

Hayek came from a good patrician family. He served as an officer in
the Great War and obtained a doctorate in law and political science
from the University of Vienna in 1922. After a year spent in New York
(1923-24), he returned to Vienna and joined Mises' Privatseminar.

Although Vienna remained one of the best three places to study
economics during the 1920s and early 1930s (the others being Stockholm
and Cambridge, England), the center of research activity shifted away
from the university seminar to the Privatseminar and research
institute. Mises, who commanded respect as the most able of the third
generation of the great Vienna School of Economics, did not have a
chair at the University--nor did Schumpeter. He earned his living by
working in an administrative capacity as Secretary of the Vienna
Chamber of Commerce. His Privatseminar, which met twice a month in his
office, from its foundation in 1922 to 1934 when he departed for
Geneva, was nevertheless considered by Morgenstern as "far more
important in the 1930s than anything that went on in the University."
(Craver: 14) According to Hayek, this was already so in the 1920s.
Clearly Mises was the central figure in the Viennese economics
community. Many of the regular participants of the seminar
subsequently achieved international recognition, including Fritz
Machlup, Gottfried von Haberler, Oskar Morgenstern, Gerhard Tintner,
and Paul Rosenstein-Rodan. The seminar was not confined to economists
and included also sociologists, historians, mathematicians,
philosophers, and a number of men from the banking and business
community. An invaluable source of recollections of the Mises seminar
has been provided by one of its regular participants, Martha Steffie
Braun. (Browne: 1986)

Many of the participants also belonged to another "circle" founded by
Hayek and Furth in 1921 which they called the Geisteskreis, where a
wider and more philosophical range of topics was discussed: musical
instruments, literature, history, political philosophy, relativity
theory, and more. Hayek's circle excluded women, whose participation
was confined to serving tea and cookies. (Browne: 1) Throughout the
1920s there was a close relation between the Mises group in Vienna and
the U.S.-based Rockefeller Foundation, which enabled Austrian
economists of the Mises-Hayek circle to visit the United States and
brought foreign economists to Vienna. Among the economists who visited
Vienna were Howard Ellis, Albert G. Hart, Ragnar Nurkse, Alfred
Stonier, Hugh Gaitskell, and John van Sickle, an American whose
connections with the Rockefeller Foundation were particularly useful
to regular members of the group. (Craver: 15)

 In spite of his contempt for empirical research, Mises let himself be
persuaded by Hayek to set up an institute for business-cycle research
on the model of the U.S. institutes which Hayek had visited in 1924.
It was located on the premises of the Chamber of Commerce and
initially financed by contributions from the business community.

In January 1927 Hayek was installed as director of the newly formed
Institut fur Konjuktursforschung. It was a shoestring affair with a
staff of only two clerks, until the Rockefeller Foundation provided
major funding. Hayek brought in Oskar Morgenstern (who succeeded him
as director after his departure for London) and enabled another
economist friend, Gottfried Haberler, to obtain temporary employment.
(Craver: 19) After the departure of Hayek in 1931 and Mises in 1934,
Morgenstern emerged as the central figure in the Vienna economics
community. The work of the institute became more scientific,
mathematical, and econometric with the participation of trained
mathematicians such as Abraham Wald and Gerhart Tintner. Subsequently,
Morgenstern collaborated with the brilliant Hungarian mathematician,
John von Neumann, in the foundation of game theory.

Of all of Mises' younger friends and colleagues none was more faithful
than Hayek in his dedication to combatting socialism. It has been
correctly observed that Hayek's social and political philosophy was
determined, from its beginnings, by an attempt to refute socialism,
and that therein lies the matrix of his life-long efforts. (Cristi, 1986)

 It would not be fair to Mises and Hayek, however, to ignore the fact
that the origin of the Vienna debate on "Economic Calculation in a
Socialist Commonwealth" (1920) took place in a world in which there
had never yet existed, and there did not at that time exist, a
functioning socialist economy. While the debate concerning the
feasibility of a socialist economy waxed hot, the population of Vienna
was literally freezing and hungry. The "new" Austria, torn from its
traditional sources of supplies of food and raw materials, was in
chaos. The Czechs refused to ship coal. The hyperinflation was not
terminated until mid-1922. Unemployment stood at 300,000 in the early
1920s. Austria was surviving by virtue of allied food aid and
charitable activities of foreign nongovernmental organizations.
National output did not recover pre-1914 levels until 1928-29. The
economic situation in the new Soviet Socialist Republic was no
better--indeed worse.

The situation was somewhat different when the debate concerning a
centrally planned economy was taken up again in Britain in the 1930s
after the publication of Oskar Lange's and Frederick Taylor's famous
articles which showed that shadow prices could be used by planning
authorities, an approach already pioneered by Barone as early as 1909
which had not previously come to the attention of Mises. As Michael
Polanyi, a thinker who shared Hayek's fears of central planning,
pointed out: "If planning is impossible to the point of absurdity,
what are the so-called planned economies doing? And how can central
planning, if it is utterly incapable of achievement be a danger to
individual liberty as it is widely disowned to be?" (The Logic of
Liberty, quoted in Cristi) In defense of Mises, Hayek explained that
"when Mises wrote that socialism is impossible he obviously meant that
the proposed methods of socialism could not achieve what they were
supposed to do." (Hutchison: 209) There may indeed be some truth to
that position, but neither Mises nor Hayek were even remotely
interested in exploring the possibilities of moderating the excesses
of central planning by some more mixed forms of economic organization.

 The Road to Serfdom

At the peak of the great debates on post-Second World War
reconstruction in Britain, which laid the foundations of the welfare
state, Hayek published a tract which was pretty much ignored in
England but became a great popular success in the United States: The
Road to Serfdom (1944) was serialized in the Readers Digest. In a
tribute to Hayek written in 1962, Mises, who described himself as the
"father of the renaissance of classical nineteenth-century ideas of
freedom," revealed the nature of their shared liberal philosophy:

What made him [Hayek] known overnight to all people in the Western
orbit was a slim book published in 1944, The Road to Serfdom. Hayek
showed that all those features of the Nazi system that appeared as
reprehensible in the eyes of the British ... were precisely the
necessary outline of policies which the "left," the selfstyled
progressives, the planners, the socialists, and in the U.S., the New
Dealers--were aiming at. While fighting totalitarianism, the British
and their allies waxed enthusiastic over plans for transforming their
own countries into totalitarian outfits.

Since the publication of The Road to Serfdom, Hayek has pursued his
antisocialist vocation into the area of political philosophy. In an
interview published by the American Enterprise Institute, he
reaffirmed the values which underlie his oeuvre, the values of a
world, he tells us, which had disappeared by the late nineteenth
century, destroyed by "reformers" who appealed to people's "primitive
instincts" which had previously been successfully repressed by the
moral conventions of life. The lost moral beliefs which he mourned
were "the moral foundations of an exchange economy." The reformers
stand accused of appealing to "solidarity" and to "altruism," which
awakened these repressed instincts. (Hayek 1978: 11-18)

 Hayek returned to the theme in 1984: "It is no exaggeration to say
that the central aim of socialism is to discredit those traditional
morals that keep us alive." These traditional morals are those "at
which David Hume arrived two hundred and fifty years ago." Rationalist
intellectuals, Hayek tells us, do not understand that "man owes some
of his most important endowments which enabled him to keep billions of
his kind alive through the operation of an extended order transcending
perception, to an attitude which he acquired because group selection
favoured in the process of cultural evolution those groups whose
traditional rules of conduct enabled them through the market to adapt
their actions to effects of which they were not aware." (Nishiyama and
Luebe 1984: 321-22; emphasis added)

According to Hayek, the "conceit of intellectuals" and their
"reformist zeal" are destroying the viability of the economy. Their
programs to redistribute income will leave everybody worse off;
morally they will undo the tradition of restraint, returning man to
his innate instincts, the instincts of a savage.

In Hayek's world, economic coordination by Adam Smith's invisible hand
is elevated to an order "beyond rational comprehension" and requires a
code of morality ultimately based on the fear of hunger:

 We must resign ourselves to the fact that our morals do not lead us
where we wish to go, that in particular they do not produce beauty,
pleasure or generally guide us to what we want, but rather warn us not
to pursue some short ways to what we desire because to do so would
cause damage to the order on which we all count to achieve what is
possible. To put it crudely, our morals are materialistic, not
idealistic and must be so because their first function is to keep us
alive. (Ibid: 328, emphasis added)

"To demonstrate that rationalism may be wrong and that traditional
morals may in some respect provide a surer guide to human action is
the main contention of this lecture." (Ibid: 325)

Hayek's life-long pursuit of an antisocialist ideology has brought him
back to the "traditional moral values" of the eighteenth century,
before the French Revolution shook Europe to its foundations and
opened the road to political democracy for the masses. Hayek's
libertarianism is profoundly antidemocratic. It is beyond the scope of
this essay to offer an explanation of the reasons why he found fertile
soil in the United States, or to speculate on the implications of an
economic order with minimal government based on material self-interest
which accords to the irrational the principal coordinating role. Is
this not a societal model which invites the substitution of the moral
cement of religion for the civil authority of the state? Is it
altogether accidental that Hayek's work has been embraced by the
fundamentalist libertarian radical Right in the United States? Do
these movements not pose a threat to dissenting views? Could there be
more than one road to totalitarianism?

As for an orderly economy in a democratic society, it is interesting
to note that it has been the Socialist Party of the Second Austrian
Republic which has constructed a flourishing economy with the largest
nationalized state sector in Western Europe, an extensive system of
social security, a very high degree of trade unionization, an enviably
low rate of unemployment, stable prices and exchange rates, and the
virtual absence of strikes.

 But the longing for a socialist society reaches beyond a more just
economic order. It is the longing for a society that is not based on
self-interest and selfishness, that does not elevate the profit motive
to a religion, a society not driven by material values. That vision is
well expressed by a great economist who was no socialist, and was
ultimately Hayek's principal adversary in the contest of views
concerning macroeconomic policy in the five decades which have passed
since Hayek left Vienna for London.

When the accumulation of wealth is no longer of high social
importance, there will be great changes in the code of morals. I see
us free to return to the most sure and certain principles of religion
and traditional virtue, that avarice is a vice, that the extraction of
usury is a misdemeanour, and the love of money detestable. We shall
once more value ends above means and prefer the good to the useful.
(J.M. Keynes, 1931, quoted by Zeisel)

 The differences in values which underlie the work of Hayek and Keynes
are ultimately more important than the details of their economic
theories. This paper has attempted to throw some light on the world
which shaped Hayek in his formative years. In Ludwig von Mises' words:
"To appreciate duly Doctor Hayek's achievements, one must take into
account political, economic, and ideological conditions as they
prevailed in Europe and especially in Vienna at the time the First
World War came to an end." (Margit von Mises: 183). Hayek's Vienna,
which profoundly shaped his lifelong writings, was a shrinking
middle-class Vienna which clung desperately to its dwindling wealth
and place in society, whose moral foundations were eroded when it
sanctioned the destruction of democracy in fear of "socialist
dictatorship," leaving the First Republic defenseless against Hitler
in March 1938. The rest is history. (*)The "Private Seminar," well
known in Vienna, was private in the sense that it was organized by its
leader outside any academic institution. (*)On this, see Ilona
Duczynska, Workers in Arms: The Austrian Schutzbund and the Civil War
of 1934, published by Monthly Review Press.

Kari Polanyi-Levitt and Marguerite Mendell teach economics at,
respectively, McGill University and Concordia University, Montreal.
They are co-founders of the Karl Polanyi Institute of Political
Economy, Concordia University. The paper, under the title "Hayek in
Vienna," was originally prepared for a conference on Hayek which took
place at the Universite de Montreal on January 29, 1988. A
French-language version is published in Gilles Dostaler and Diane
Ethier, eds., Friedrich Hayek: Philosophie, Economie et Politique
(Montreal: Association Canadienne-Francaise pour l'Avancement des
Sciences, 1988).

Bibliography for: "The origins of market fetishism - critique of
Friedrich Hayek's economic theory"

Kari Polanyi-Levitt "The origins of market fetishism - critique of
Friedrich Hayek's economic theory". Monthly Review.
COPYRIGHT 1989 Monthly Review Foundation, Inc.

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