Hayek and the seeds of neoliberalism: "This is the thing we need at the moment - to fight Keynes!"

| 2nd August 2018
Hayek is the intellectual inspiration for neoliberal think tanks and their war against Socialism, government regulation and, today, the European Union. But are these tankers really faithful to his ideas? BRENDAN MONTAGUE investigates

When you learn about the life of Hayek and read his works you soon discover that everything is not as this influential cabal would have us believe.

As our story unfolds we will see that climate denial is the invention of a network of think tanks first established to promote free market ideology.

The neoliberal intelligentsia running these organisations will have, almost without exception, read and been hugely influenced by a book called The Road to Serfdom by the Austrian economist Friedrich von Hayek.

The book was originally rejected by London’s publishing houses and widely ridiculed by academics. Hayek himself recognised that it destroyed his credibility as a serious economist.

Influential cabal

And yet Serfdom became the Bible of both the American president Ronald Reagan and his British counterpart Margaret Thatcher. It provides the free market Kool-Aid which feeds Trump and the right wing Brexiteers. 

This angry polemic became the blueprint for their counter-revolution against progressive politics, the dismantling of any welfare state, the wholesale abandonment of progressive taxation and the bloody war against trade unions. This assault was meant to make us all free, all prosperous.

Hayek provided the belief system that would persuade an influential transatlantic network of politically motivated men to wage a sometimes dirty and criminal assault against the state and its regulators, and against climate scientists and their research.

But when you learn about the life of Hayek and read his works you soon discover that everything is not as this influential cabal would have us believe.

Vested interests

Even the ideas of their founding father have been distorted and twisted to suit the vested interests of those extremely wealthy, oil-enriched men who have quietly funded and led the neoliberal movement and exploited its followers in their war against climate change regulations.

Friedrich von Hayek was born in Vienna on 8 May 1899. His father, a part-time botany university lecturer, introduced Hayek to the relatively new and shocking ideas of Darwin, and the evolution of the species through natural selection and the “survival of the fittest”.

Historians have pondered whether Hayek's early introduction to the theory of natural selection informed his economic thinking.

He would later develop an idea that corporations selling the products we buy, and indeed whole civilisations, were locked into a struggle for survival just as individual animals and their wider species struggled against each other in nature.

Human nature was, in Hayek’s later analysis, selfish, cruel, self-interested. Just as it is for the shark, or the rat. Only the money system of capitalism and the free market would allow this competition to flourish and create wealth.

This was Adam Smith’s ‘invisible hand’. Classical liberal economics reloaded. And it was this flirtation with “social Darwinism” that led a few to accuse Hayek and some of his followers of fascism.

But this distrust of the human and infatuation with the mystical free market had not always been central to Hayek’s ideas.

Childhood Ambitions

Hayek had from his childhood harboured ambitions to become a world leading academic. However, at the age of 14 this seemed to be an impossible dream. He had, according to biographer Lanny Ebenstein, "failed Latin, Greek and mathematics, and was near the bottom of his class most of the time".

And it wasn't long before Hayek found himself close to the maelstrom of world events. And the student was to become a confirmed Socialist.

The Russian socialist revolution took place when Hayek was 17 years old. A further Marx-inspired revolution followed in Budapest two years later and when its communist government collapsed many of its leaders fled to Vienna and filled its cafés and bars with passionate debates about the planned economy.

Hayek was fascinated by socialist literature and was disciplined at school for reading a radical pamphlet during a divinity lesson.

It was while the young man was optimistic for his own future, and convinced of the creative power of humanity, that he flirted with Marxism.

But events would conspire against him, breaking that confidence, and he began his journey to the politics of anxiety and fear.

The young student had assumed his future was relatively secure. His mother was from a “conservative, land owning family” and her “considerable inheritance” allowed the family to enjoy a life of privilege.

In the wake of the Great War, Austria was under the grip of hyperinflation and massive war debts and Hayek “saw his parents' savings melt away”, records biographer Nicholas Wapshott.

Their descent into poverty meant Hayek after leaving school could no longer afford to study in Germany. In October 1921 he took a government post as a legal assistant administering the country's debt.

In a further irony of history it was working for the state that saved Hayek from penury, and while working for the state he was converted to a new ideology that despised the state and its provision of welfare for the poor.

Intellectual mentor

By happenstance, he was assigned to the supervision of Ludwig von Mises, the grandfather of free market economics, who quickly became his intellectual mentor. Mises “sowed doubts in Hayek's mind about the virtues of socialism,” according to Wapshott.

Hayek himself recalled: “The Vienna socialists, Marxists, were more doctrinaire than most other places, it only repelled me.” Hayek abandoned Socialism, and in the same moment was tutored by the intellectual father in its very antithesis, neoliberalism.

A decade later and Hayek would find himself presenting a lecture at the London School of Economics on the Strand in London where he would come to the attention of its head of economics, Lionel Robbins.

Robbins was labouring under a serious problem. He was in conflict with John Maynard Keynes who dominated the economic thinking of the time. Keynes was listented to - and Robbins ignored - during meetings of the prime minister Ramsey MacDonald's committee for economists.

Keynes was considered to be the most brilliant and influential economist of the age.

He had allowed the British government to fund its war effort without the almost inevitable crisis of hyperinflation usually brought about by massive government spending. He had become the sage of government and also the darling of a new, progressive and socially liberated age.

The world was still coming to terms with the Wall Street crash, which followed an orgy of speculation and heralded the Great Depression.

Politicians and populations both turned to economists for advice on how to escape this desperate situation, and almost everybody accepted that the markets when left unchecked caused irreparable damage.

Paradox of Thrift

Bertrand Russell, the philosopher, wrote: “Keynes's intellect was the sharpest and clearest I have ever known…when I argued with him I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool.”

Keynes presented the “paradox of thrift” which explained that if everyone started saving during a depression less would be spent in the shops, economic growth would suffer and the country as a whole would be worse off.

Austerity was a false economy. He advocated a planned economy with the state using taxation during the boom and spending during recession to manage the business cycles which had plagued capitalism since the industrial revolution.

Keynes took to the airwaves, his biographer records, “urging the housewives of London in a radio broadcast to spend, spend, spend”.

Robbins was vehemently opposed to the dominant Keynesian paradigm and needed new ideas, new research, in order to add academic weight to his dislikes.

Hayek had published a series of articles extolling the virtues of the free market.

The Institute for Business Cycle Research, an association of industrialists in Vienna, sponsored a lecture tour to London. Robbins was in attendance - and was immediately convinced he had found exactly the man he had been looking for.

Robbins invited Hayek to speak at the London School of Economics, having read his latest publication, The Paradox of Saving, which directly contradicted Keynes. “This is the thing we need at the moment - to fight Keynes,” Robbins exclaimed.

Universal Admiration

Hayek's lectures at the London School of Economics from January 1931 were considered a resounding success. Robbins persuaded Sir William Beveridge - his boss and the man who proposed that the state must intervene to wipe out poverty - to hire the Austrian free market economist.

The prestigious job came with a starting salary of £1,000 a year allowing Hayek to move to Hampstead Garden Suburbs with his family, buy his first car and join the exclusive Reform Club in Pall Mall. The Austrian had achieved his boyhood ambition and become a serious academic.

But how would he fare in the extraordinarily difficult task of challenging one of the finest economists of the ages, and overturning the almost universal admiration for Keynes and his proscriptions of state management of the markets through taxation?

This Author

Brendan Montague is editor of The Ecologist, founder of Request Initiative and co-author of Impact of Market Forces on Addictive Substances and Behaviours: The web of influence of addictive industries (Oxford University Press)He tweets at @EcoMontague.

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