http://www.reason.com/news/show/33304.htmlF. A. Hayek must have sensed something in the wind at about the time I interviewed him in Los Angeles in May 1977. In the 1930s and 40s, Hayek had been the second most famous economist on the planet, best known as John Maynard Keynes's intellectual sparring partner. On the fundamental questions of economic policy, the debate pitting Professor Hayek of the London School of Economics against Professor Keynes of Cambridge University sparked a memorable confrontation between classical economics and the new-fangled "macroeconomics" of Lord Keynes's 1936 General Theory.
The Keynesians swept academic arguments in a virtual shut-out. With Keynes's death in 1945, in fact, Hayek (and the classical trade cycle theory) quickly faded from public view. Economic policy entered a golden age of "demand management" in which the business cycle was rendered obsolete, and Hayek moved out of economic theory altogether. In 1950 he went to the University of Chicago, where he chaired the Committee on Social Thought, finishing his career at the University of Freiberg (1962-68) and the University of Salzburg (1968-77). He embarked upon major contributions in such new fields as psychology (The Sensory Order, 1952), political theory (The Constitution of Liberty, 1960), and law (Law, Legislation & Liberty, Volumes l-lll, 1973-79).
He was wise to steer clear of economics. For his quibble with Keynes was not the only humiliation he had suffered in rarified theoretical discourse. The famous Socialist Calculation Controversy was prompted by the Austrian critique of central planning. From the 1920s until the '40s, Hayek and his countryman Ludwig von Mises argued that socialism was bound to fail as an economic system because only free markets--powered by individuals wheeling and dealing in their own interest--could generate the information necessary to intelligently coordinate social behavior. In other words, freedom is a necessary input into a prosperous economy. But even as Hayek's elegant essay extolling market prices as the signals of a rational economy was hailed as a seminal contribution upon its publication in the American Economic Review in 1945, shrewd socialist theorists proved to the satisfaction of their peers that central planning could be streamlined so as to solve, with really big computers, the very information problem that F. A. Hagek had so courteously exposed.
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