interview: 1936 — Hayek’s Breakthrough Year

Hayek consistently asserted that the work of John Maynard Keynes was a retrograde throwback to the backward looking, pre-marginalist, objective cost, distributional thought of the classical British economists, a brand of thinking that had been smuggled into post-marginalist economics by Alfred Marshall.  For Hayek, the modern marginalist economics of Menger, Knight, Wieser, and Jevons looked at prices as guides to future marginalist decision making, especially alternative subjective cost considerations in the reorganization of alternative production plans.  The retrograde economics of Marshall, Mill, Ricardo, and Keynes looked at prices as objective measures of aggregate quantities of objectively defined goods from the past which could by used in an economist’s mathematical logarithm to map out the necessary determination of the next sequence of objectively defined and measurable aggregate quantities and prices.

Given that background, I don’t believe it is entirely a coincidence that Hayek’s break though 1936 articulation of his long-growing insight into the role of price signals into the coordination of production plans and consumer goods across time came just eight months after the publication of Keynes’ muddled account of backward determined objective “aggregates” which logrithmically determining the next round of objectively measurable aggregates, published in his General Theory. Here is Hayek explaining his own breakthrough year of 1936 to Armen Alchian in an interview from 1978:

ALCHIAN:  Two things you wrote that had a personal influence on me, after your Prices and Production, were [“Economics and Knowledge”] and “The Use of Knowledge in Society.” These I would regard as your two best articles, best in terms of their influence on me.

HAYEK: “Economics and Knowledge” — the ’37 one — which is reprinted in the volume [Individualism and Economic Order], is the one which marks the new look at things in my way.

ALCHIAN: It was new to you, too, then? Was it a change in your own thinking?

HAYEK: Yes, it was really the beginning of my looking at things in a new light. If you asked me, I would say that up till that moment I was developing conventional ideas.  With the [Nov. 10, 1936] lecture to the Economics Club in London, my presidential address, which is “Economics and Knowledge,” I started my own way of thinking.

Sometimes in private I say I have made one discovery and two inventions in the social sciences: the discovery is the approach of the utilization of dispersed knowledge, which is the short formula which I use for it; and the two inventions I have made are denationalization of money and my system of democracy.

ALCHIAN: The first will live. [laughter] How did you happen to get into that topic? When you had to give this lecture, something must have made you start thinking of that.

HAYEK: It was several ideas converging on that subject.  It was, as we just discussed, my essays on socialism, the use in my trade-cycle theory of the prices as guides to production, the current discussion of anticipation, particularly in the discussion with the Swedes on that subject, to some extent perhaps Knight’s Risk, Uncertainty and Profit, which contains certain suggestions in that direction–all that came together. And it was with a feeling of a sudden illumination, sudden enlightenment, that I — I wrote that lecture in a certain excitement. I was aware that I was putting down things which were fairly well known in a new form, and perhaps it was the most exciting moment in my career when I saw it in print.

ALCHIAN: Well, I’m delighted to hear you say that, because I had that copy typed up to mimeograph for my students in the first course I gave here. And Allan Wallace, whom I guess you must know, came through town one day, and I said, “Allan, I’ve got a great article!” He looked at it, started to laugh, and said, “I’ve seen it too; it’s just phenomenal!” I’m just delighted to hear you say that it was exciting, because it was to me, too.

But when did the idea hit you? When you started to write this paper, started to think about it, there must have been some moment at which you could just suddenly see you had something here. Was there such a moment at which you said, “Gee, I’ve got a good paper going here”?

HAYEK: It must have been in the few months preceding that, because I know I was very unhappy about having to give the presidential address to the Economics Club.  Then I hit on that subject, and I wrote it out for that purpose. How long it was exactly before the date [of the address] I couldn’t say now, but I do know that the idea of articulating things which had been vaguely in my mind in this form must have occurred to me when I was thinking of a subject for that lecture — the presidential address at the London Economics Club.

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