Friedrich von Hayek had abandoned his early socialism in favour of neoliberal free market ideas. But the fashionable theory at the time sat somewhere between the two. John Maynard Keynes had apparently devised a historic compromise between the markets and full scale socialism.

Keynes argued that the government should use its economic powers to manage the markets. This included government lending and spending to promote growth, and encouraging housewives to spend their savings. 

The Cambridge professor attained his prestige and influence because his prescriptions had survived academic scrutiny and practical application during the wars.

Burst out laughing

Hayek had an almost impossible task. He had to devise an economic counter-argument to Keynes, and to expose any logical inconsistency in his analysis and works. 

The “war of ideas” would have global economic consequences. And the Marxists, Fabians and Keynesians who dominated both Cambridge and the London School of Economics (LSE) were not going to make it easy.

Nicholas Kaldor, a disciple of Keynes at the LSE, took delight from in humiliating his intellectual counterpart.

He recalled one spat: “I said, ‘Professor Hayek, this is intermediate economics,’ and Hayek got redder and redder. And afterwards, in the tea room, Hayek came in and said, ‘You know what Kaldor said, what Nicky said? He said: “Professor Hayek, this is intermediate economics and you ought to know it.” I said ‘I protest. I never said that you ought to know it!’ Everyone burst out laughing.”

The paradox

One typical seminar given by Hayek at the LSE was described as “possibly the most aggressively vocal gathering in all economic history. It was extensively and imaginatively devoted to telling Hayek why he was wrong.” But Hayek was about to challenge the dominance of Keynes himself.  

His boss Professor Lionel Robbins translated and published “The Paradox” in Economica, the LSE house journal, and in August of that year he printed Hayek’s full frontal attack on Keynes’s latest work, A Treatise on Money.

“It is a hallmark of Hayek’s sublime confidence, tinged perhaps with the fearlessness that can accompany ignorance, that he was willing to take on Keynes in Keynes’s home territory,”, notes Nicholas Wapshott, the author of Keynes / Hayek: The Clash that Defined Modern Economics.

“Hayek’s harsh review of A Treastise on Money invoked howls of rage from Keynes. The subsequent debate…quickly descended into blunt and often brutal assaults that would long outlive both Keynes and Hayek.”

Keynes was not convinced, nor threatened, by his supposed arch-rival. He described Hayek’s work as “one of the most frightful muddles I have ever read…It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlham”.

Elsewhere, Keynes dismissed Hayek’s thinking as “the wildest farrago of nonsense yet”. After Hayek visited Keynes in Cambridge, the latter noted: “…But what rubbish his theory is – I felt today that even he was beginning to disbelieve it himself.”.

The decisive blow came on 4 February 1936 when Keynes published The General Theory of Employment, Interest and Money, which was almost universally accepted as showing he was right, and Hayek was wrong. According to his biographer Alan Ebenstein, “Hayek was virtually forgotten as a technical economist.”

A remarkable reversal

Then war was declared. Many of Hayek’s colleagues were in the trenches or working in government administration and soon he was elevated to editor of Economica in place of Robbins. The LSE was evacuated en masse to Cambridge. Keynes, in an act of extraordinary good will, ensured that Hayek was given comfortable rooms at King’s College where he served as master.

Hayek’s war could not have been in starker contrast to that of Antony Fisher. The economist enjoyed a remarkable reversal of fortune during the war. It had elevated him from a ridiculed and marginalised lecturer to one of the three most influential and celebrated economists of the age.

The Austrian was living and working in Britain at the outbreak of hostilities and was refused permission to serve with the armed forces or even as a propagandist with the Ministry of Information, despite his repeated appeals.

“Life in Cambridge during the war years was to me particularly genial,” Hayek would reflect. “Somehow the whole mood and intellectual atmosphere of the country had at once proved extraordinarily attractive to me, and the conditions of a war in which all my sympathies were with the English greatly speeded up the process of becoming thoroughly at home.”

One night in the spring of 1942, Hayek found himself sat with the 59-year-old Keynes next to the limestone balustrade on the roof of the Gothic chapel of King’s College, Cambridge.

Extremism and tyranny

The men had both volunteered for fire duty and were ordered to dispatch any incendiary bombs dropped by the Nazi Luftwaffe dropped on Britain’s historic towns in retaliation for the aAllied attack on medieval Lüubeck in Germany.

“On the whole when we met we stopped talking economics,” Hayek recalled. “So we became personally very good friends.”

The terror of watching Hitler’s “shock and awe” assault invoked in the two men very different conclusions. Keynes was determined to use governments to manage the market to prevent further extremism, while Hayek thought that any such interference would itself lead to tyranny.

“It was while he sat out there at night that he began to wonder about what would happen to his adopted country if and when peace came,” according to John Blundell, who we will meet again later in this story. “Hayek detected a growing sense of, ‘as in war, so in peace’ – namely that the government would own, plan and control everything.”

The unintended consequence was that as his colleagues were drafted to the war effort, Hayek was elevated through the academic hierarchy while also finding time to write a fiery polemic.

Hayek made the extraordinary claim that the socialism he onced celebrated had been the true cause of the rise of Nazism in Germany, and the deadly war that had destroyed Europe and slaughtered tens of millions of people.

Deeply pessimistic

“Few are ready to recognise that the rise of Fascism and Nazism was not a reaction against the socialist trends of the preceding period, but a necessary outcome of those tendencies,” he wrote in a small, red notebook.

The Road to Serfdom set out clearly the case for free market economics. It was a stark presentation of the idea that human societies had simply grown too complex to be managed, that any attempt by government to intervene would lead to cohesion and tyranny, and the organised distribution of goods would centralise power in too few hands.

At it’s heart, this theory was deeply pessimistic and assumed that people would, because of their selfish and greedy nature, abuse power. “Men are, in fact, not likely to give their best for long periods unless their own interests are directly involved,” he warned.

“At least for great numbers some external pressure is needed if they are to give their best. The problem of incentives in this sense is a very real one, both in the sphere of ordinary labour and those in marginal activities.”

He concluded: “Only where we ourselves are responsible for our own interests and free to sacrifice them, has our decision moral value.”

But while Hayek believed in capitalism, red in tooth and claw, he did not advocate markets free of any moral or practical limits. There are vital aspects to his prescriptions that appear to have been missed, or even deliberately erased, by his most staunch supporters today.

First and foremost, Hayek argued that capitalism must respect tradition, honesty and the rule of law. Civilisations not built on these moral limits would ultimately fail, he argued.

He warned against the power of corporate monopolies. “A system in which large privileged groups profit from the gains of monopoly may be politically much more dangerous,” he explained.

Perhaps most surprisingly, Hayek was, at this stage in his thinking, a keen supporter of state-imposed environmental regulations. These are the very same regulations being fought in his name in the acrimonious and sometimes dishonest war against climate science.

Hayek is absolutely clear: “Nor can certain harmful effects of deforestation, or of some methods of farming, or of the smoke and noise of factories, be confined to the owner of property in question or to those who are willing to submit to the damage for an agreed compensation. In such instances we must find some substitute for the regulation by the price mechanism.”

Hayek’s book was rejected three times before making it into print, on the grounds that it was “unfit for publication by a reputable house.” Hayek himself expected to sell just a few hundred copies. But then he found himself supported by men of extraordinary wealth and influence. Industrialists who were delighted to find an academic at last championing profits, and identifying them as wealth creators and good men.,

International sensation

Hayek was sailing to America for a small-scale speaking tour when The Road to Serfdom became an overnight international sensation.

“Imagine my surprise,” he wrote on arriving at a speaking engagement. “There was 3,000 people in the hall, plus a few score more in adjoining rooms with load speakers. There I was, with this battery of microphones and a veritable sea of expectant faces.”

The praise for The Road to Serfdom was far from universal. The book could not have been more insulting and personally upsetting to his socialist adversaries. Many had lost friends and family fighting in Spain against fascism during 1936 and in the bloody trenches of the Second World War. The book was widely derided in academic circles as emotional, political and not really about economics at all.

Keynes was also sailing to the United States when he first obtained a copy of The Road to Serfdom was published, en route to take part in the Bretton Woods negotiations to advise on the establishment of government institutions to manage the market.

“The voyage has given me the chance to read your book properly,” he told Hayek in a telegram.

“You will not expect me to accept quite all the economic data in it…I should say that what we want is not no planning, or even less planning, indeed I should say that we almost certainly want more.”

Deficient and authoritarian

Herman Finer, a US academic, best summed up the contemporary opposition to Hayek’s case, and in The Road to Reactionset out to prove that his “apparatus of learning is deficient, his reading incomplete, that his understanding of the economic process is bigoted, his account of history false, that his political science is almost non-existent, his terminology is misleading, his comprehension of British and American political procedure and mentality gravely defective, and that his attitude to average men and women is truculently authoritarian.”

But Hayek’s friends proved more influential. The first edition of 2,000 copies sold out in days and; newspapers and magazines around the world rushed out reviews.; Churchill was “fortified in his apprehensions” about socialism and his Conservative Party desperately sought one-and-a-half tonnes of scarce paper to print further copies in time for the general election.

The book was read by Winston Churchill, and by a young Margaret Thatcher while she was studying chemistry at Oxford University.

Readers’ Digest was decisive in propelling Hayek into the public mind, publishing extracts and also distributing 600,000 copies through its readers’ club. “Hayek became a celebrity, and the work, a symbol,” records Ebenstein.

The magazine was read by millions, including a Battle of Britain veteran determined to take on the tyranny of the state.

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. This series first appeared at Desmog.uk.