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ECONOMIST
The exiles fight back
Hayek, Popper and
Schumpeter formulated a response to tyranny
Their lives and reputations
diverged, but their ideas were rooted in the traumas of their shared
birthplace
AS THE second world war raged, Western intellectuals wondered if
civilisation could recover. George Orwell, the most brilliant of the
pessimists, wrote “Animal Farm” and began work on “1984”, which saw the
future as “a boot stamping on a human face—forever”. Among the optimists
were three Viennese exiles who launched a fightback against
totalitarianism. Instead of centralisation, they advocated diffuse
power, competition and spontaneity. In Massachusetts Joseph Schumpeter
wrote “Capitalism, Socialism and Democracy”, published in 1942. In New
Zealand Karl Popper wrote “The Open Society and its Enemies” (1945).
Friedrich Hayek wrote “The Road to Serfdom” (1944) in Britain.
Vienna, their original home, had been devastated. In 1900 it was the
capital of the Habsburg monarchy, a polyglot, fairly liberal empire. In
short order it faced two world wars, the empire’s collapse, political
extremism, annexation by the Nazis and Allied occupation. Graham Greene
visited in 1948 and described the former jewel of the Danube as a
“smashed, dreary city”.
War and violence “destroyed the world in which I had grown up,” said
Popper. Schumpeter viewed Austria as just a “little wreck of a state”.
“All that is dead now,” said Hayek, of Vienna’s heyday.
Yet the city shaped them. Between 1890 and the 1930s it was one of the
brainiest places in the world. Sigmund Freud pioneered psychoanalysis.
The Vienna Circle of philosophers debated logic. The Austrian school of
economics grappled with markets; Ludwig von Mises made breakthroughs on
the role of speculation and the price mechanism. Von Mises mentored
Hayek, who was a cousin of the philosopher Ludwig Wittgenstein, who went
to school with Adolf Hitler, who stood at the Heldenplatz in 1938 to
welcome “the entry of my homeland into the German Reich”.
The three wartime thinkers had different backgrounds. Schumpeter was a
flamboyant adventurer born into a provincial Catholic family. Popper’s
family was intellectual and had Jewish roots; Hayek was the son of a
doctor. But they had common experiences. All three attended the
University of Vienna. Each had been tempted, and then repelled, by
socialism; Schumpeter was finance minister in a socialist government. He
also lost his fortune in a bank collapse in 1924. He then left for
Germany, and, after his wife died, emigrated to America in 1932. Hayek
left Vienna for the London School of Economics in 1931. Popper fled
Austria just in time, in 1937.
Each was troubled by the Anglo-Saxon countries’ complacency that
totalitarianism could never happen to them. Yet warning signs abounded.
The Depression in the 1930s had made government intervention seem
desirable to most economists. Now the Soviet Union was a wartime ally,
and criticism of its terror-based regime was frowned upon. Perhaps most
worryingly, in Britain and America war had brought centralised authority
and a single collective purpose: victory. Who could be sure that this
command-and-control machine would be switched off?
Hayek and Popper were friends but not close to Schumpeter. The men did
not co-operate. Nonetheless a division of labour emerged. Popper sought
to blow up the intellectual foundations of totalitarianism and explain
how to think freely. Hayek set out to demonstrate that, to be safe,
economic and political power must be diffuse. Schumpeter provided a new
metaphor for describing the energy of a market economy: creative
destruction.
The hotel years
Start with Popper. He decided to write “The Open Society” after Hitler
invaded Austria and described it as “my war effort”. It begins with an
attack on “historicism,” or grand theories dressed up as laws of
history, which make sweeping prophecies about the world and sideline
individual volition. Plato, with his belief in a hierarchical Athens
ruled by an elite, gets clobbered first. Hegel’s metaphysics and his
insistence that the state has its own spirit are dismissed as
“mystifying cant”. Popper gives a sympathetic hearing to Marx’s critique
of capitalism, but views his predictions as little better than a tribal
religion.
In 1934 Popper had written about the scientific method, in which
hypotheses are advanced and scientists seek to falsify them. Any
hypothesis left standing is a kind of knowledge. This conditional,
modest concept of truth recurs in “The Open Society”. “We must break
with the habit of deference to great men,” Popper argues. A healthy
society means a competition for ideas, not central direction, and
critical thinking that considers the facts, not who is presenting them.
Contrary to Marx’s claim, democratic politics was not a pointless
charade. But Popper thought that change was only possible through
experimentation and piecemeal policy, not utopian dreams and large-scale
schemes executed by an omniscient elite.
Hayek shared Popper’s view of human knowledge as contingent and
dispersed. In “The Road to Serfdom” he makes a narrow point ruthlessly:
that collectivism, or the longing for a society with an overarching
common purpose, is inherently misguided and dangerous to liberty. The
complexity of the industrial economy means it is “impossible for any man
to survey more than a limited field”. Hayek built on von Mises’s work on
the price mechanism, arguing that without it socialism had no way to
allocate resources and reconcile millions of individual preferences.
Because it is unable to satisfy the vast variety of people’s wants, a
centrally planned economy is innately coercive. By concentrating
economic power, it concentrates political power. Instead, Hayek argues,
a competitive economy and polity is “the only system designed to
minimise by decentralisation the power exercised by man over man”.
Democracy was a “device for safeguarding” freedom.
Schumpeter is a puzzle. (In his history of neoliberalism, Daniel Stedman
Jones picks von Mises as his third Viennese thinker instead.) His
previous book, a tome on the history of business cycles, flopped in the
1930s. It is fashionable now to describe his follow-up, “Capitalism,
Socialism and Democracy”, as one of the greatest works of the 20th
century. But it can be turgid and long-winded; parts are dedicated to
prophecies of the kind Popper thought nuts. Schumpeter’s contention that
socialism would eventually replace capitalism—because capitalism
anaesthetised its own acolytes—is sometimes thought to be
tongue-in-cheek. Yet, like a gold nugget amid sludge, the book contains
a dazzling idea about how capitalism actually works, rooted in the
perspective of the businessman, not bureaucrats or economists.
Until John Maynard Keynes published his “General Theory” in 1936,
economists did not really concern themselves with the economic cycle.
Schumpeter emphasised a different sort of cycle: a longer one of
innovation. Entrepreneurs, motivated by the prospect of monopoly
profits, invent and commercialise products that trounce their
antecedents. Then they are trounced in turn. This “perennial gale” of
birth and death, not planners’ schemes, is how technological advances
are made. Capitalism, while unequal, is dynamic. Firms and their owners
enjoy only limited windows of competitive advantage. “Each class
resembles a hotel,” Schumpeter wrote earlier; “always full, but always
of different people”. Perhaps he was recalling his own wild ride in
Vienna’s banking industry.
Taken together, in the 1940s Hayek, Popper and Schumpeter offered a
muscular attack on collectivism, totalitarianism and historicism, and a
restatement of the virtues of liberal democracy and markets. Capitalism
is not an engine for warmongering exploitation (as Marxists believed),
nor a static oligarchy, nor a high road to crisis. Accompanied by the
rule of law and democracy, it is the best way for individuals to retain
their liberty.
Serfdom revisited
The reception of their work varied. Popper struggled to get his book
published (it was long and paper was still rationed). By 1947
Schumpeter’s was hailed as a masterpiece; his battered reputation
soared. Hayek’s work had little impact until it featured in Reader’s
Digest in America, turning him into an overnight sensation there. And,
over time, the three men’s paths diverged. Popper, who moved to Britain
in 1946, returned to focus on science and knowledge. Schumpeter died in
1950. Hayek moved to Michigan, becoming a luminary of the Chicago School
of free-market economists and a shrill critic of all government.
But their combined stature grew. By the 1970s Keynesianism and
nationalisation had failed, leading a new generation of economists and
politicians, including Ronald Reagan and Margaret Thatcher, to emphasise
markets and individuals. The collapse of the Soviet Union in the 1990s
vindicated Popper’s searing attack on the stupidity of grand historical
schemes. And Silicon Valley’s continual reinventions, from the mainframe
and PC to the internet and mobile phones, vindicated Schumpeter’s faith
in entrepreneurs.
The three Austrians are vulnerable to common criticisms. The
concentration of their intellectual firepower on left-wing ideologies
(rather than Nazism) can seem lopsided. Schumpeter had been complacent
about the rise of Nazism; but for Popper and Hayek, the devastation
unleashed by fascism was self-evident. Both argued that Marxism and
fascism had common roots: the belief in a collective destiny; the
conviction that the economy should be marshalled to a common goal and
that a self-selected elite should give the orders.
Another criticism is that they put too little emphasis on taming the
savagery of the market, particularly given the misery of unemployment in
the 1930s. In fact Popper was deeply concerned about workers’
conditions; in “The Open Society” he lists approvingly the labour
regulations put in place since Marx wrote about children toiling in
factories. He thought pragmatic policies could gradually improve the lot
of all. In the 1940s Hayek was more moderate than he later became,
writing that “some minimum of food, shelter and clothing, sufficient to
preserve health and the capacity to work, can be assured to everyone”.
The economic cycle was “one of the gravest problems” of the time.
Schumpeter showed fewer signs of compassion yet was profoundly
ambivalent about the social impact of creative destruction.
Today the Austrians are as relevant as ever. Autocracy is hardening in
China. Democracy is in retreat in Turkey, the Philippines and elsewhere.
Populists stalk the Americas and Europe: in Vienna a party with fascist
roots is in the ruling coalition. All three would have been perturbed by
the decay of the public sphere in the West. Instead of a contest of
ideas, there is the tribal outrage of social media, leftwing zealotry on
America’s campuses and fearmongering and misinformation on the right.
Together the trio shine a light on the tension between liberty and
economic progress, now exacerbated by technology. In the 1940s Hayek and
Popper were able to argue that individual freedom and efficiency were
bedfellows. A free, decentralised society allocated resources better
than planners, who could only guess at the knowledge dispersed among
millions of individuals. Today, by contrast, the most efficient system
may be a centralised one. Big data could allow tech firms and
governments to “see” the entire economy and co-ordinate it far more
efficiently than Soviet bureaucrats ever could.
Schumpeter thought monopolies were temporary castles that were blown
away by new competitors. Today’s digital elites seem entrenched. Popper
and Hayek might be fighting for a decentralisation of the internet, so
that individuals owned their own data and identities. Unless power is
dispersed, they would have pointed out, it is always dangerous. |