A Lieutenant in London

In the spring of 1931, the political prospects for Europe were bleak. The Roaring Twenties had turned out to be a short interlude of relative liberty and international economic cooperation. Now the pendulum had swung back to interventionism and state idolatry. The only signs of hope were those few individuals and groups that had liberated themselves from the political prejudices of the time. The most promising group was the one led by Lionel Robbins at the London School of Economics.

Lionel Robbins

Robbins's career had been on a fast track. After a two-year stay at Oxford, he had become the chair of LSE's economics department in 1929 following the unexpected death of Allyn Young. Robbins gathered around himself a group of brilliant students who would become stars of twentieth century economic science: Ronald Coase, William Hutt, John Hicks, Nicholas Kaldor, Abba Lerner, Tibor de Scitovsky, George Shackle, Ludwig Lachmann, Paul Sweezy, and Ursula Webb (who married Hicks).⁴⁸ They were exposed to Mises's ideas like no other group outside Vienna.

Mises's influence on Robbins was mainly based on his writings, but it had been nurtured through personal contacts since the early 1920s. By 1931, Mises was thoroughly familiar with the school's staff and faculty, and could give detailed instructions to foreign visitors about how to meet people at LSE. In a January 1931 letter to Walter Sulzbach, for example, he recommended that Sulzbach get in touch with Gregory and Robbins, “the best economists and freest minds in contemporary England.” They had to be looked up in their offices and, if not there, called on at home. Meyendorff and Schwartz would certainly be willing to receive him if he gave their secretaries his calling card, mentioning that he was a friend of Mises's. He recommended the same procedure to solicit the assistance of Mr. Headicar, the librarian.⁴⁹

In those days, Robbins's admiration for Mises was boundless. He eagerly proselytized among his countrymen and had already converted his friend Arnold Plant to the cause of Austrian economics. He also sought to increase the Misesian profile of the economics department through regular guest lectures by Mises and his closest students. His long-term plan was to build up an effective counterweight against the pernicious influence of John Maynard Keynes, whose advocacy of inflation and government intervention had swept the universities of Cambridge and Oxford, as well as the Bank of England.

Robbins also sought to stem the tides within his own school. This concerned not only political orientation, but also fundamental questions pertaining to the nature and method of economics. For years, LSE's management had sought to make the school a center of economic research in the image of mathematics and biology. The few remaining old-style economists did not believe the young Robbins was strong enough to fend off the positivist crusaders.

But then an unexpected opportunity arose when Hayek visited the department in late January and early February 1931 to present his theory of business cycles, which was based on an elaboration of Böhm-Bawerk's theory of capital. It was Hayek's first personal encounter with Robbins, who had known him only through his writings.⁵⁰ Robbins had liked in particular Hayek's critique of the doctrines of the American economists William Trufant Foster and Waddill Catchings, two highly influential champions of the notion that excessive savings might prevent economic growth.⁵¹ Similar views were prominent also in the United Kingdom and in particular in Cambridge, where—as we now know—Keynes went so far as to make plans for the euthanasia of the coupon-clipping classes.⁵² Thus Robbins invited the talented young Austrian to join the cause in Britain.

Hayek delivered four lectures to an audience composed of professors and students. They met with mixed success. The senior faculty, most of whom did not know much about Austrian economics, found Hayek's tall figure far more impressive than his arguments. But the younger audience members were stunned. Robbins had prepared his students to receive a revelation from the epicenter of theoretical research. And under the impact of such passionate guidance, they indeed felt that Hayek's lectures were a great success. One of them, later to become a Nobel laureate, wrote about them in retrospect:

They were undoubtably the most successful set of public lectures given at LSE during my time there.... The audience, notwithstanding the difficulties of understanding Hayek, was enthralled. What was said seemed to us of great importance and made us see things of which we had previously been unaware. After hearing these lectures, we knew why there was a depression. Most students of economics at LSE and many members of the staff became Hayekians or, at any rate, incorporated elements of Hayek's approach in their own thinking.⁵³

Robbins himself later characterized the Hayek lectures as “a sensation” that was “at once difficult and exciting.”⁵⁴ He immediately prepared their publication and began lobbying to get Hayek a position at LSE. Hayek, probably at the behest of Robbins, wrote a review of Keynes's Treatise on Money and sent the manuscript to Robbins, who was the editor of LSE's journal Economica. The Cambridge economist's book had just appeared, in December 1930, and Hayek's review of it was brilliant and devastating. Robbins now persuaded LSE director William Beveridge to make him an offer. Hayek became the Tooke Professor of Political Economy. His lectures were published under the title Prices and Production and his review of Keynes's book appeared in Economica.

The last knight of liberalism had found a worthy lieutenant in London.

In the fall of the same year, Hayek and Robbins co-taught Hayek's first LSE seminar. The entire economics teaching staff was in attendance when he explained and defended the Austrian theory of capital. In a letter to Mises, Hayek reported on the atmosphere of the discussions:

Some of the junior (rank-wise, not age-wise!) colleagues—in particular Hicks, Benham, or Toysonby —are excellent, too. There is much opportunity for me to learn, and I am hindered in doing so only because Robbins presented me as an eminent authority, so that people always want to hear my opinion on all matters. I am aware, for the first time, that I owe to you virtually everything that gives me an advantage as compared to my colleagues here and to most economists even outside my narrow field of research (here my indebtedness to you goes without saying). In Vienna one is less aware of [this intellectual debt to you] because it is the unquestioned common basis of our circle. If I do not deceive too many expectations of the people here at LSE, it is not to my credit but to yours. However, [my] advantage [over the others] will disappear with your books being translated and becoming generally known.⁵⁵

Mises was certainly happy with this development. Commenting on the work of Hutt, one of Robbins's students, who had just published a revisionist account of the impact of capitalism on the condition of the nineteenth-century English working classes (an account that was devastating for the established view that the free market had worsened the plight of the working poor) he wrote in December 1931:

In England one can observe a decided turning away from the atheoretical direction. The movement that today is centered in the London School of Economics and in the person of Robbins will have the greatest scientific and political impact.⁵⁶

Robbins and Hayek in turn encouraged their Viennese Meister to visit London more frequently. Mises had a standing invitation to stay at Robbins's home. Hayek argued: “Here you have at least as many honest admirers as anywhere else, and it would be good if you could reinforce the influence that you exercise anyway through frequent personal visits.”⁵⁷ The absolute high point of Mises's impact was reached with the publication of Robbins's Nature and Significance of Economic Science. Sending a copy to Mises, the author called it a “modest attempt to popularize for English readers the methodological implications of modern Economic Science,” and he apologized “for my crudities of exposition.”⁵⁸

But the love affair between LSE and Misesian economics did not last. The new Austrian doctrines had initially benefited from their exoticness and novelty, but their policy implications prevented certain long-term conversions. A case in point was William Beveridge, who during the late 1920s had been infected by Robbins's enthusiasm for the logical rigor of Mises's writings, which had made him more tolerant toward classical-liberal policy prescriptions.⁵⁹ But by the time Hayek delivered his inaugural lecture in early 1933, Sir William had become “again a socialist of the purest sort.” Hayek surmised that this was “an emotional reaction to Gemeinwirtschaft, which he had just read and not understood.”⁶⁰

Hayek himself was instrumental in turning the LSE group away from Mises and toward the emerging verbal-Walrasian movement that had begun in Germany a decade earlier under the leadership of Wieser, Cassel, and Schumpeter. Given Hayek's background, this was hardly surprising. His economic thought had been nurtured in the classes of Friedrich von Wieser, and he had never made a secret of this intellectual heritage. Mises knew this perfectly well.⁶¹

Hayek not only stressed the common features of the Austrian and the Lausanne Schools, but also believed the latter to be far more technically advanced and therefore better suited to deal with the more demanding problems of economic analysis, in particular with the problem of value imputation. He would have presented these views from his very first LSE seminar on capital theory, where he must have found the ready support of the young John Hicks, who at that time had already embarked on his project of bringing Walras and Pareto to LSE.⁶² Their combined influence came to be felt most notably in the second edition of Robbins's Nature and Significance of Economic Science,which appeared in 1935. While the first edition almost completely neglected the Lausanne School, the new edition was replete with references to mathematical economists.

Hayek acquainted Robbins's group with the views of the fourth-generation Austrian economists. He championed the notion that general equilibrium theory was the state of the art and that all verbal economists, including Mises, worked within the very same framework. They were convinced that all further elaborations had to depart from here. Morgenstern and Hayek most vividly felt the need for reform, but neither of them grasped that the alternative was already at hand. It had escaped their notice that the logical structure of Mises's arguments against socialism and interventionism was squarely outside the Walrasian paradigm.

Hayek's two books on money appeared in English before any of Mises's works.⁶³ And he was the first Austrian economist ever to have a direct personal impact on the Anglo-Saxon world— the last best hope for Austrian economists after Germany and Austria turned socialist in the 1930s. It was Hayek therefore who was responsible for the impression of most English and American economists about modern Austrian economics during those critical years before the publication of Keynes's General Theory. It seems he made his case less successfully than his great rival from Cambridge.

Hayek later regretted that he had not refuted Keynes's General Theory in 1936 as he had done earlier with his Treatise on Money, and he seems to have believed that his failure to do so was crucial to the success of the Keynesian Revolution. But this was certainly an exaggeration of the influence he had with his British colleagues at the time. Hayek failed to do in 1930s Britain what Mises had done in 1920s Germany: reverse the orientation of the profession by the sheer power of his arguments. Hayek had his chance, but in the perception of the British mainstream his writings were at best controversial. Sraffa's review of Prices and Production had at least the same negative impact on Hayek's influence as Hayek's review of the Treatise on Money had had on Keynes's.

To a certain extent this resulted from the inconsistencies and contradictions Hayek had inherited from his real mentor. Hayek was and would remain throughout his life a disciple of Wieser's. This was so despite the fact that of the entire fourth generation of Austrian economists, he was the one closest to Mises in both methodological and political views.⁶⁴ The main reason, however, was that Hayek, still in his early thirties, was simply overburdened by the amount of work involved in trying to live up to Robbins's expectations. He never managed to publish more than essays or excerpts of much larger (but unfinished) manuscripts, a fact he constantly lamented. He never had the time to think through the fundamental problems of economic theory in its relationship to all other elements of Austrian economics. His presentations of monetary theory, capital theory, and business-cycle theory were mainly syntheses of already existing doctrines. Where he could not rely on the work of others as a supporting framework he lost himself in the analysis of details and never produced a coherent picture of his subject.⁶⁵

When Keynes's General Theory appeared, in the same year as the English translation of Mises's Socialism, the initial curiosity about Austrian economics had faded. The stage was set for the return of the local champion. Hayek had made no progress in promoting Austrian economists among the group of brilliant students who after World War II would shape economic teaching and research throughout the world. After ten years at LSE, he had used up the authority he inherited from Mises and lost former allies to the burgeoning Keynesian revolution.

This might seem in retrospect like a lost opportunity. Hayek was in a pivotal position to prepare for the rise of Austrian economics in England and the United States. And he certainly could have done more to promote Austrian economics in London had the circumstances been different. But the circumstances were what they were: Hayek had come to LSE at a time when the chair of the economics department was politically weak, and when the efforts of the school's management to turn economics into applied mathematics had attracted a number of highly gifted students eager to explore this new direction. Moreover, Austrian economics was not yet what it was about to become. The school was still in the phase before Mises's quantum leap. The encompassing system of economic thought that would first be expressed in Nationalökonomie (1940) and then in Human Action (1949) was then only visible in its broadest outlines.

Finally, there is the simple fact that Hayek was not a Misesian. In the early 1930s, Hayek was a pillar of the very same general-equilibrium movement that he decried a few years later. It would be meaningless to regret, in hindsight, that Hayek did not do what he had never set out to do, what he could not have succeeded in doing had he tried. He could not explain and defend a doctrine in the 1930s that was not fully developed until the 1940s.