The Road to Serfdom: Chapter 5

“This is the fundamental fact on which the whole philosophy of individualism is based. It does not assume, as is often asserted, that man is egoistic or selfish or ought to be. It merely starts from the indisputable fact that the limits of our powers of imagination make it impossible to include in our scale of values more than a sector of the needs of the whole society, and that, since, strictly speaking, scales of value can exist only in individual minds, nothing but partial scales of values exist – scales which are inevitably different and often inconsistent with each other. It is this recognition of the individual as the ultimate judge of his ends, the belief that as far as possible his own views ought to govern his actions, that forms the essence of the individualist position.” –pg 102

Planning and Democracy

The main problem with social planning is that it is often difficult to define what is meant by the common good and using the state to achieve a set of ordered preferences assumes that the desired ends of millions of people can be measured as a single aggregated goal. In reality the welfare of a population depends on an infinite variety of ends that cannot be expressed as a single goal but as a multitude of ends each ranked differently by the attention and interest that each individual pays to any particular social problem. For the state to direct its action towards a common goal it must either have agreement between the ordered preferences of individuals or it must be willing to ignore the conflict that exists between the preferences of individuals that are not identically ordered and force the ordered preferences of those that control the state onto those that disagree with the preferences of the state.

Since it is impossible for any individual to be aware of the urgency of more than a limited number of needs it will always be true that the individual will only be concerned with a small fraction of the needs of all those within society that could benefit from state action. The subjective view of the total need within society ensures that each individual will rank their preferences for the common good differently and therefore it becomes very unlikely that these subjective preferences will find common agreement under all but the most pressing threats facing the welfare of society. If each of the possible subjective ends that benefit the whole of society are competing for a scarce amount of resources then it will not be likely that a majority will be able to form the consensus required to set the ordered preferences of the state.

The inability for individuals in disagreement to form a cohesive plan for the state suggests that the only way for the government to form a consensus is to increase its scope until each individual has some of their preferences implemented through centralized planning. This creates a natural oligopoly between the ends that can gain the most national support and force the ends of the minority to be subjugated by the will of the majority. The oligopoly of majority opinion can then implement the forced support it requires from the minority whereby each group within the oligopoly can gain more than its fair share of support even if the individual groups within the oligopoly have ends which are in direct opposition to each other. Whereas these groups would have to face the trade-offs between their competing ends under a voluntary system, they are now able to subsidize their disagreed upon ends by forcing the cost onto the minority who now loses out on the ability to seek out their own ends in their entirety.

When an oligopoly (or monopoly) on planning cannot be formed then the democratic body is limited in its ability to take planned action as those in the governing body attempt to convince each other of their views instead of implementing a coherent plan. While the people agree that a plan must be implemented they are unable to agree on any particular plan and an increase in the dissatisfaction with democratic institutions will lead to an increase in the support for the various roles of the state to be delegated to a body of experts. This relinquishing of power from democratic control only deals with the symptoms of frustration and not with the true cause at the root of the conflict. To agree to planning without agreement to the particular plan leads to the need for there to a small group of people who have the ability to dictate the direction of the plan.

As the preferred plans of these groups come towards more agreement, the pressure to form an ever increasing concentration of power ceases. The final outcome will rest not only on the degree of agreement between these groups but on the economic costs placed on society by the monopolistic nature of these groups. If there is a significant decrease in the scarce resources that these groups share between their ends then there will be significant pressure placed on the tenuous agreement that these bodies have reached. As Hayek points out, the example of Germany is easily understood since Hitler did not destroy democracy but was able to take advantage of a failed democracy facing extreme economic hardship. Although many Germans detested Hitler, he was seen as the only man strong enough to get things done.

Liberty and Democracy

The success of the modern democracies is based off their allowance for much of the decision making process to be left in the hands of private individuals. The ability to form collective action when preferences align, and leave collective action when deliberation fails, allows for a wider satisfaction of the subjective preferences of individuals. This not only increases the liberty of each individual but increases the chance that the issues for which the democratic body is responsible for will be agreed upon. As we see in modern democracies, the planning that occurs is often in the form of assisting those whose economic limitations prevent them from attaining their individual plans.

If we believe Hayek’s argument then we can see that democracy can only function within the capitalist system where individuals have free disposal over private property. Hayek goes so far as to say that “when it becomes dominated by a collectivist creed, democracy will inevitable destroy itself.” Strong words considering that many of the modern democracies have experienced and survived the challenges that Hayek says would stress the democratic process. What could be the possible causes that led Hayek’s theory to fail to predict the resiliency of the modern democracies? The answer is that the belief in liberty takes pressure off of the democratic process, as stated above, and the increase in the wealth over which the decision making process is made allows for a greater number of demands to be satisfied.

As I stated in an earlier post, one of the possible reasons is that of the reliance of the democratic process on government stimulus. We can now see how deficit financing is able to postpone the process that Hayek discusses in this chapter and allows those in society to value both socialist and democratic views. The disagreement that leads to the implementation of centralized bodies with dictatorial control may not be very evident when deficit financing is able to satisfy all the ends that each group within society demands. The costs of conflict are then subsidized by future taxpayers who bear the cost simply because they are not represented by the democratic process that present voters participate in.

When a democratic body is not able to agree on what programs need to be sacrificed to balance the budget it incentivizes politicians to garner a majority of votes by providing services to the largest number of voting groups through deficit financing. If a democratic body is unable to balance its budget in the present it is unlikely that it will be able to balance its budget in the future and will only be willing to balance its budget when there is an immediate threat to its bond markets. As we can see in many modern democracies like Greece, when the demand for a county’s bonds dries up the conflict that the deficit was obscuring becomes immediately apparent.

At this point it becomes impossible for a democratic body to regain control on its own since many of its citizens have left the democratic process entirely as they engage in violent acts against the governing body. We have seen many recent attempts to quell this unacceptable outcome through third party bailouts, dissolution of the state, and violent suppression of the protestors. We are at a point in history where we might see many natural experiments for Hayek’s theory, as democratic bodies attempt to agree on the impossible task of determining who will take the cuts required to balance the budget. The pressure this will place on the democratic process will test the solvency of the majority of modern democracies over the next several years.


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