Recently graduated with a Masters in Economics and decided it was time to start blogging. I decided that I wanted do something more than just a blog-post-a-day current events type blog and so I chose the name Econ Essays to represent the fact that I will be updating infrequently but hopefully the content I do post will be more in depth and thought provoking. Mostly this blog will be a place for me to write essays on whatever books I am currently reading. During my undergrad I was heavily influenced in my economic and political views by the Nobel Prize winning economist Friedrich A. Hayek. I plan on starting this blog by working my way through Hayek's political works such as Road to Serfdom, Fatal Conceit and then will try and work through some of his economic works such as Prices and Production and The Pure Theory of Capital. If I ever complete that rather daunting task then I'll just write about whatever catches my interest. So if you are interested in taking a look at politics and economics from a view outside of the mainstream then please stick around enjoy the ride.
Posted in The Road to Serfdom on July 25, 2011
“The Rule of Law thus implies limits to the scope of legislation: it restricts it to the kind of general rules known as formal law and excludes legislation either directly aimed at particular people or at enabling anybody to use the coercive power of the state for the purpose of such discrimination. It means, not that everything is regulated by law, but, on the contrary, that the coercive power of the state can be used only in cases defined in advance by the law and in such a way that it can be foreseen how it will be used. A particular enactment can thus infringe on the Rule of Law.” – pg120
Planning and the Rule of Law
This chapter is rather short as it only deals with a single topic, the rule of law. The rule of law is the idea that the government has set up before hand the rules that individuals must follow when seeking the particular ends they wish to commit their efforts to. This leads to the rules being applied to all individuals equally and no individual or group of people getting special exemptions in the event of undesirable economic outcomes.
Collective economic planning requires that the government ignore any rule of law that has been set up as it must arbitrarily decide between the end use of resources regardless of whether or not they conflict with previously established customs. If the state is created specifically to deal with the unpredictable economic hardships faced by individuals then it is practically guaranteed that the state will come into conflict with the rule of law as it chooses particular priorities over others.
The benefit for laying down formal rules before hand is that we do not know exactly how they will be used. This leaves the door open for people to come up with innovative uses of resources in ways in which the central authority could not predict with its limited view of the economy and its limited entrepreneurial ability. It seems paradoxical that a system whose ends are less predictable would be the more superior system but Hayek resolves this paradox by putting forth two arguments.
The first argument that Hayek lays down revolves around the socialist calculation problem that he was so famous for. Since the government is limited in the amount of information it can collect and analyze, only individuals will have the necessary information of the particular economic circumstance that they are facing. Therefore, only individuals should have the freedom, as set up by the general rules, to act in light of unforeseen economic conditions. If the individuals are to be able to use their knowledge effectively in making plans, they must be able to predict the actions of the state which might affect these plans. But if the state plans in response to unpredictable economic circumstances faced then the actions of the state are unpredictable which makes it more difficult for individuals to produce plans that allow them to overcome the economic hardships that they face.
The second argument is that if the state is unable to properly calculate the net costs of the legislation then it is very likely that the unforeseen costs will place a burden on the opportunities available to individuals to discover their own solutions to the problems they face. If the state is able to calculate the costs and benefits more accurately than those affected by the legislation then the affected parties will still bear the cost of having their preferred solutions stymied by the enforcement of the state solutions onto those individuals. The legislator will be put into a position where he must determine whose interests are more important to society since this can be the only justification in choosing one group’s preferences over another group’s.
If the legislator attempts to rise above his particular prejudice and rule in a manner that is fair, it is most likely the he will appeal to what is commonly perceived as fair in his society. The problem with this is that what the legislator perceives to be the general consensus arises mostly among those whose interests are directly affected by the particular ruling. The general consensus will likely be most vocally argued for by the concentrated minority at the expense of the unconcerned distributed majority. If this is the case then the legislator has simply replaced his uninformed prejudice with the desired ends of the special interest groups.
Ethics and the Rule of Law
While Hayek does very little in this chapter to discuss what determines the rule of law we can see that the rule of law must be based primarily off of a system of ethics. I think it will be beneficial for our understanding of what Hayek is trying to get at to lay down some initial definitions and construct a useful system of ethics. Hayek provides essentially no argument in this chapter as to why we should choose certain laws over others to which all individuals should be submitted to equally. Just because there is uniformity among individuals to the submission of society’s laws does not necessarily mean those laws are not arbitrary or unjust.
What does it mean to determine a system of ethics? Solving one of the eternal problems of philosophy in one blog post would be impossible but a simplistic sketch will suffice for now and assist us in understanding what Hayek was discussing. I will argue that a rationally determined system of ethics is one which facilitates the voluntary relations between people and where actions between individuals are to be coercive they are to be allowed only on the basis on the net facilitation of voluntary relations and not simply for irrational or arbitrary reasons.
Voluntary relations are those where all individuals involved are able to act towards their preferred goals and which include both mutually beneficial transactions and individual pursuits free from the interference of others. When the goals of individuals come into conflict the only way to resolve the conflict is either through negotiation and agreement to new goals or through coercively drawing a concession from one of the parties. As we can see from these definitions, a system of ethics is produced to reduce conflict within society thereby freeing up resources that would otherwise be spent on attempting to resolve these conflicts.
At this point we could easily fall into one of the greatest traps faced by philosophers and that is to determine what is ethical. The reason that this trap is so easily sprung is that people want to determine how they should act as an individual without taking into account how their individual moral beliefs will unfold as they are developed into a system of ethics held by a majority within society. It becomes very tempting to come up with an ethical system that simply justifies the goals that you wish to pursue without taking into account the conflicts that your preferred goals create with others. The problem with these systems of ethics is that they do nothing to resolve the conflicts that we initially set out to eliminate and in fact make us feel more justified in our actions which make us less likely to compromise with others, leading to more conflict within society. Therefore the first goal of ethics should be to determine which systems can be applied universally between all individuals.
In addition to the reduced costs that accrue to universal systems of ethics we must also have an understanding of those systems that have been established for the sole purpose of taking advantage of the compliance of others to a system of ethics. Throughout history irrational ethical systems have been maintained purely on the majority’s belief in the value of the ethical exceptions that benefit particular individuals. The belief in the monarchy, the dictator, gods, elders and the will of the majority have all been used to justify exceptions to the ethical systems that individuals within those societies were expected to follow.
When I argue for a rational system of ethics I mean that we should look for an empirical basis for our ethical systems. The problem with this is that empirical analysis cannot objectively determine what our subjective system of ethics should be, the famous is-ought problem first discussed by Hume. While we cannot determine empirically what ought to be we can determine empirically what ought not to be. We can do this because the goal of an empirical system of ethics is not just to determine what ought to be but how to universalize the system of ethics between all individuals. Keeping this in mind we can distil empiricism down to a simple statement; things are not true simply because people say they are true. A completely trivial and banal statement on the surface but a statement which can hold a lot of power against those who which to create exceptions to universal systems of ethics simply by creating words that denote the exception based on nothing other than the fact that the word exists.
These irrational exceptions are created because it is seen as the only way to achieve the goals of those that are exempt. This could be beneficial if the goals are noble, but by solving one problem we have created another. Without a rational system of ethics how do we determine objectively what goals are beneficial for society and if the only way to determine this is based off the subjective preferences of an elite group of individuals then we are just back to where we started. Whatever power structure has been allowed an exemption from the ethical system will be fought over by those that wish to promote their agenda, thereby creating more conflict within society and all the costs that come with it.
Having laid out the problem I have to admit that I can provide no solution. My belief that an objective system of ethics will reduce conflict and produce a more prosperous society rests on little more than faith at this point. However, I do believe that once we frame the question in a manner that allows us to consciously determine the costs and benefits of particular exemptions we can begin to move towards eliminating the most egregious examples of individual profit.
Posted in The Road to Serfdom on June 23, 2011
“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.
Posted in The Road to Serfdom on June 16, 2011
“The illusion of the specialist that in a planned society he would secure more attention to the objectives for which he cares most is a more general phenomenon than the term “specialist” at first suggests. In our predilections and interests we are all in some measure specialists. And we all think that our personal order of values is not merely personal but that in a free discussion among rational people we would convince the others that ours is the right one. All know that their aim can be fully achieved only by planning – and they all want planning for that reason. But, of course, the adoption of the social planning for which they clamor can only bring out the concealed conflict between their aims.” –pg 98
The “Inevitability” of Planning
Hayek begins this chapter with a critique of two slightly outdated arguments the socialists of his day used to justify their belief in the inevitability of planning. Both arguments may have been common back in Hayek’s time but they show their age mostly because both arguments revolve around the advancement of technology. In today’s age of advanced technology and constant innovation it is easy for us to forget how little effect technological change had on the everyday lives of the contemporary readers of Hayek’s arguments. It is highly unlikely that anyone educated in modern economics would be caught using either of these arguments but within Hayek’s critique the reader is introduced to the coordinating role that competition and the price system plays and therefore it would be useful to take a look at Hayek’s response.
The first argument, and the less believable of the two, is that the large players within an industry that can afford to invest in new technology are able to develop economies of scale that are not available to their less technologically advanced counterparts. This allows the technologically advanced companies to produce goods at a cheaper price and put their competitors out of business thereby achieving a monopoly within an industry. At this point the business will begin to raise their prices and take whatever monopolistic rents they can and it will be required by the state to take control of the industrial monopoly in the name of protecting consumers. If this argument is true then the inevitability of technological progress is the inevitability of state planning of industries and cannot be blamed on those who implement the planned economy but must be blamed on the private monopolies that arise in a competitive economy.
While we know now that technological progress usually breeds competition, there are similar processes at work within our society as those that brought about the type of planning that Hayek was discussing. Hayek’s response to the argument of his day was that these monopolies did not gain their monopolistic status through technological advance but through direct and indirect support from the state, either through direct monetary subsidy or through the indirect subsidy gained by the state placing regulatory burdens onto the monopolist’s competitors. The principle at work here is that if the supporters of planning do not have the knowledge of the monopolistic effects of the state then the government can intervene in a problem that it has itself created. If costs placed on consumers by special interest groups can be blamed on a third party then the special interest groups can increase the ability of the state to further their agenda in response to the negative effects that were created by their agenda in the first place.
The second argument of the socialists is that technological advances within a society create a complexity within that society that no individual is able to fully comprehend. Without the ability to obtain a coherent picture of the complete economic process it becomes indispensable that individuals have a central agency responsible for coordinating social life to prevent society from dissolving into chaos. Therefore, it will be required that the state takes the role of economic planner and coordinates the needs that the various industries require in satisfying the needs of consumers.
In response Hayek lays out the most important role played by competition and the price system; as a method for collecting disparate information within the economic system and coordinating the desires of the competing interests of consumers and producers. Contrary to the argument of the socialists, the more complex a society becomes the greater the need for the economic system to be decentralized because no central authority is going to be able analyze the vast amount of data within the system, most of which they do not have access to. Society is serviced best when the role of collecting the demands of consumers and satisfying those demands is left to the group of people that is best able to accomplish this goal. The only way to objectively discover this group of people is through the free competition that naturally takes place within the market system. Not only does this process produce the best methods of production, the ability of consumers to withdraw their support for marginal producers ensures that the monopolistic tendencies of producers are kept in check.
The Limits of Expertise
Hayek ends the chapter with a discussion of the great appeal that planning has for the experts within society. When a group of individuals have reached the pinnacle of their field not only are they capable of seeing the next required innovation but they are also able to have a full appreciation of the limits set on them by the scarcity of their resources. The next break through can seem like it is just over the horizon if only more people would support their efforts. It can be very tempting to use the coercion of the state to force others to take on the risk required to invest in untested methods under the justification that those forced would support the investment if they were able to fully appreciate the benefits of the desired innovation.
What experts often fail to grasp is that their drive to excel in their preferred field has led them to neglect their knowledge of other fields. While the depth of an expert’s knowledge in their particular field exceeds that of the average person, the breadth of their knowledge is not necessarily greater than that of the average person. This leads the expert to overestimate the benefits that innovations in their field will have and, more importantly, underestimate the opportunity cost of forcibly redistributing wealth from other areas of study. While those that support government led research find themselves naturally drawn to collude against the consumer, they often have little understanding of how their forced distribution prevents consumers from benefitting from any innovations they may discover.
It is unfortunate that the belief in the necessity of centrally planned research draws the most intellectually capable members of society within the paradigm of supporting the state because it leaves the average citizen with the impression that innovation would not exist if it were not for state support for research. Those that are the most intelligent and articulate within society are then put into the service of the state and will thereafter be incentivized to defend the programs of the state. This process then selectively biases discourse within society by creating a special interest group out of the intellectual class that would otherwise be able to point out the negative consequences of state coercion. In addition it removes those intellectuals from the pursuit of finding innovative and voluntary solutions to the problems of society which could lead to eventual removal of all coercive solutions.
Posted in The Road to Serfdom on June 10, 2011
“The dispute between the modern planners and their opponents is, therefore, not a dispute on whether we ought to choose intelligently between the various possible organizations of society; it is not a dispute on whether we ought to employ foresight and systematic thinking in planning our common affairs. It is a dispute about what is the best way of so doing. The question is whether for this purpose it is better that the holder of coercive power should confine himself in general to creating conditions under which knowledge and initiative of individuals are given the best scope so that they can plan most successfully; or whether a rational utilization of our resources requires central direction and organization of all our activities according to some consciously constructed blueprint.” –pg 85
Individualism and Collectivism
In this chapter Hayek carefully lays out the scope of the debate and begins to discuss the general outline of how a socialist society can end up on the road to serfdom. As seen above, it is important to define what is meant by the term planning. The debate revolves around the fact that central planning is coercive planning and the more coercive the central planner the less room there is for individual planning. To maximize the amount of freedom within individual planning, Hayek argues that it is the role of the government to construct the conditions necessary to facilitate the planning of individuals. This not only includes a central legal authority but also allows for the production of public goods that cannot be properly calculated for by the system of private property and prices.
The problems begin to arise for the socialists because the means of achieving their ends are the same means that are required for any preferred distribution of wealth. The danger with striving towards the socialist ends, regardless of the means, is that the success of the project cannot be determined until after the costs of the project have already accrued. Therefore, those who wish to redistribute wealth along lines socialists would consider unjust only need to create methods wherein the redistribution is diverted to unjust ends while making the claim that the program will meet the desired ends of the socialists. As long as the ends satisfy the socialists to some degree, support can be gained from the socialist movement for any redistribution of wealth, even those that would be considered unjust. Once the wealth has been redistributed to unjust ends it is often too late to rectify this distribution and without competition between methods there is no objective way to calculate the costs of possible alternative programs.
It is the belief that the costs of coercive central planning outweigh the benefits that leads Hayek to support a system of laissez-faire. The threat of special interest groups hijacking the socialist process imposes an initial cost on the socialist project regardless of whether or not the socialists are capable of weeding out those people that are attempting to gain support for an unjust redistribution of wealth. The research required in making this determination and the need to educate those in a position of possibly supporting an unjust program imposes large costs, in terms of time spent, on the socialists. Since the socialists do not receive any monetary compensation when they succeed at making this determination and the special interest groups receive monetary compensation when the socialists fail, there is a huge disparity in the incentives faced by those individuals who are attempting to make this process a success or failure.
The expected value the socialists receive from the methods of coercive central planning can simply be calculated as the net gain to social justice minus the costs imposed on them by special interest groups and weighted by the percentage chance of the socialist’s success in preventing their programs from being hijacked by special interest groups. The support of a system of laissez-faire can rest entirely on the outcome of this calculation wherein a negative value means the system of laissez-faire leads to greater social justice even if we assume there is no private charity supporting programs of social justice.
The First Step on the Road to Serfdom
We can further understand the costs imposed by special interest groups once we understand that the costs imposed onto socialists are often imposed by other socialist groups. What Hayek refers to as socialists of the Left and Right are often united in their support of the coercive means of organizing society but, ironically, have opposing ends whose costs they seek to impose onto each other. These two groups are united behind their anti-competitive mentality but seek the implementation of completely different socialist programs. While the Left socialists support the centrally planned redistribution of wealth towards the poor, the Right socialists support the centrally planned redistribution of wealth to the business and working class individuals within society. The Left supports centrally planned education and health care services, while the Right support a centrally planned monetary supply and the limited liability of corporations.
This union against competition is the first step towards the road to serfdom and can lead to the organization of a society’s industries along syndicalist or “corporative” structures which attempt to eliminate competition but leave the planning in the hands of the independent monopolies of each industry. The rents acquired by these monopolies are then split between the organized labour and business groups that support each of these industrial monopolies. These monopolies impose costs onto consumers by appealing to the socialist values of the average citizen while the failure of the citizenry to properly calculate these costs leads to an ever increasing financial burden upon the productive class of consumers and tax payers that pay for the costs of these programs. When these monopolies become too overbearing the only way to move back to a state of competition is for the citizens to vote in a government that is willing to return full control of the monopolized industries to the state. This position leaves society at a precarious point where they can move towards a freer state of competition or a state of complete central control depending on the motives of those in power.
The problem with this chapter, and the classical liberals take on laissez-faire in general, is that Hayek can spend the opening paragraphs criticizing socialists for using monopolistic solutions to social problems and then later openly call for the institutionalization of a monopolized legal service simply on the basis that he is incapable of creating voluntary solutions to the problem of public legal goods. When a voluntary solution cannot be found to the problem of public goods implementing a monopolistic solution still carries the problems of monopolies even if there is no alternative solution. The very outcomes Hayek so clearly lays out in the beginning of the chapter are then completely incomprehensible to him in the latter half of the chapter when he complains about the monopolization of legal services slowly eroding the legal framework of his preferred economic structure.
Who was it that said that focusing on the ends without analyzing the means will lead you to form groups with those that support your preferred means but with the intention of undermining your ends? It was Hayek from the first half of the chapter! Maybe someone should introduce him to the Hayek of the second half of the chapter. It is disheartening to see a writer that is usually so clear and precise in his thinking get so muddled up and contradictory within the space of five pages.
But we should not completely fault Hayek, monopolized legal services has been a core exception to laissez-faire philosophy for a long time and is not something that has been adequately solved by anyone. The problem to having an exception to a laissez-faire philosophy is that it opens up the door to anyone and everyone who might have an exception. Those in the laissez-faire camp even have one of the weakest excuses; they simply cannot think of any voluntary solutions to the problem of providing legal services as if they have searched the entirety of the solution space. Socialists on the other hand use the power of the state to enrich the lives of the poor, why shouldn’t their exceptions take precedent?
Until those that support free markets solve the problem of free market legal services they will never be able to live in a free market society because their lack of principles only gives others the freedom to circumvent principles when it suits their needs. The discussion of free market legal services is far beyond the scope of this book but I think it is important to point out the unprincipled nature of the laissez-faire argument as we go forward with discussing the ideas of The Road to Serfdom.
Posted in The Road to Serfdom on May 30, 2011
“That socialism has displaced liberalism as the doctrine held by the great majority of progressives does not simply mean that people had forgotten the warnings of the great liberal thinkers of the past about the consequences of collectivism. It has happened because they were persuaded of the very opposite of what these men had predicted.” –pg 76
The Great Utopia
In this chapter Hayek begins by laying out the first step required in moving the masses from supporting the general theories of laissez-faire to the more modern views of democratic socialism. The lynchpin of this shift was to be a subtle but important shift in the meaning of the word freedom. A subversion of the meaning of a people’s central principle could lead them to support philosophies that were drastically opposed to those philosophies that they initially supported. In this case the word freedom was gradually changed from meaning freedom from political coercion to meaning freedom from scarcity. It is easy to see how this would appeal to supporters of free markets when one takes into consideration the lack of freedom of choice experienced by those on the lower rungs of the socio-economic ladder. True liberty would mean that an individual’s choices would not be limited by economic factors.
We can see that in this context freedom is synonymous with wealth and the consequence of the union of these two concepts is that no one can truly be free while wealthier individuals have greater opportunities of freedom. This complete reversal of values, from the principles of individual achievement to the equal redistribution of wealth, was not completely appreciated at the time. The move towards democratic socialism was seen as an advancement upon the laissez-faire philosophy which made it difficult for many intellectuals to view this shift critically. Socialism was embraced as the heir of the liberal tradition and it therefore would have been impossible for the intellectuals of the day to realise that socialism would produce an outcome opposite to that which had previously been produced under the liberal doctrine.
For those that believe our current economic malaise is the result of decades of socialist economic policies an acknowledgement must be made of the failure of the old liberal doctrines to defend against this shift in values. If we want to move beyond the current state of democratic socialism it will do us no good to promote simple-minded principles of 19th century laissez-faire as some modern libertarian groups do. We must acknowledge that an individual cannot properly express their political freedoms if they cannot also acquire economic freedoms. It cannot be denied that the rich lose less relative to what the poor gain from the coercive redistribution of wealth and simply pointing out the coercion of redistribution will not convince socialists to once again accept the principles of liberty.
To move the current debate forward I believe that it will become important to point out where legitimate arguments for the necessity of coercive distribution of wealth are being used to justify unjust distributions of wealth. While the coercive redistribution of wealth from rich to poor may be necessary, there is nothing within the modern socialist theories that can justify the monopolistic operation of government poverty programs. The true level of poverty cannot be calculated in a system that draws monopolist rents from society at the same time that it attempts to eliminate poverty. We do not know where those monopolist rents would have gone and it is possible that some of the poverty may in fact be due to the removal of these rents from the economic system. Since socialists are interested in eliminating poverty and not simply padding the coffers of government officials, a move towards a competitive system of government regulated poverty programs can easily be seen as an important compromise between socialists and supporters of free market competition.
A Book of its Time
The second half of this chapter dives headlong into Hayek’s theories of the inevitable slide of democratic socialism into fascism. It is difficult to see how much I am going to discuss this part of the book because I simply believe that Hayek got it wrong. Having a broader understanding of the total threat faced by the allies during WWII and also during the cold war we can see many totalitarian elements rise within the democratic nations of the time; internment camps, coercive central planning and distribution, and a permanent military industrial complex are just some examples. The seeds of Hayek’s vision were all in place and yet it did not come to pass. As we read The Road to Serfdom with the advantage of hindsight we can see that as bad as things got the democratic nations never supported leaders that engaged in extreme violence against their own populace. Instead of simply dismissing this part of Hayek’s thesis I believe it will beneficial to look into the causes of his error.
The first thing that needs to be pointed out is that, depending on the definition of fascism used, Hayek was not entirely incorrect. While we do not live in the brutal fascist society of Germany during the World Wars, we do face a certain amount of soft economic fascism. The populace of modern democracies would be outraged if their government engaged in open violence against them but it is often forgotten that laws benefitting special interest groups at the expense of the general populace are still backed by the threat of unjustified violence. This system of soft fascism remains in place because people have been led to believe that the laws are necessary or they simply do not understand the consequences of all the redistribution and regulation that the government engages in. When reading The Road to Serfdom we must always remember that our current state of economic fascism at its worst is nothing more than the reduction of the wealth of the middle and upper classes and is no way similar to the regular threats of violence those in Germany and Russia faced for disobeying orders that often had nothing to do with the amount of the wealth the individual possessed.
The other point that needs to be taken into consideration is that there have been two main forces holding back the ability of the state to consume the productive capital of the economy. Namely the massive number of technological advances that occurred throughout the 20th century and the reliance on deficit financing to ensure that the government was never in a position to fail at maintaining its spending commitments. If we are living in a time of technological and economic stagnation and the only way to prop up the socialist democratic system is through deficit financing, we have to admit that we cannot be entirely sure how much conflict will be created once the status quo cannot be sustained. When there are a limited number of resources to pay for an unsustainable number of social programs it will inevitably create conflict between the groups that wield political power and the voters that fund those groups. If voters refuse to pay for these programs and the unions of the socialized economy respond by going on strike, it may become necessary for the government to engage in violent actions against certain portions of its populace. We may not see the fascism because the forces that would lead the government to require a fascistic response are being held at bay through deficit financing.
It is this view that I will take whenever discussing Hayek’s more archaic views. I address the issue here because going forward I will not spend much time defending or criticizing the similarities between modern democratic socialist states and the most heinous aspects of Hitler’s Germany and Stalin’s Russia, I think it is pretty evident that we will never slide back to that extreme. However, I will discuss Hayek’s views in relation to the aspects within modern democracies that can cause a perfectly functioning democracy to slide into the soft economic fascism that we see many modern states threatened with today.
Posted in The Road to Serfdom on May 24, 2011
“We are ready to accept almost any explanation of the present crisis of our civilization except one: that the present state of the world may be the result of genuine error on our own part and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected.” -pg 66
The Abandoned Road
In this first chapter we see the core thesis of Hayek’s work, how good intentions can lead to negative results. Although this is little more than assertion at this point we can already see the historical framing of the work. Hayek is fearful that the principles of freedom that were responsible for much of the prosperity of the 19th century will be tossed aside in the face of the successful planning that took place during World War II.
It is hard to argue with the success of WWII as an operation whose goal it was to defend freedom within Europe and around the world. A project where societies comprised of millions had to be rapidly planned and coordinated to address one massive obstacle, whose outcome would have serious ramifications for every person around the globe. It was apparent to Hayek that the ability of the government to manage this operation would drastically alter the beliefs of a society which not long before had believed in the principle of individualistic organization. To Hayek this shift in values towards central planning would inevitably lead to the fascist outcomes that he saw arise in Germany and Russia.
Fundamental Principles of Liberalism
For Hayek there were no hard and fast rules laid down by the principles of classical liberalism. He believed that the fundamental principle of classical liberalism was that in ordering our affairs we should make as much use as possible of the spontaneous forces of society, and resort as little as possible to the use of coercion. It was his belief that deliberate action should be taken to create a system where competition would work as beneficially as possible and that liberalism was not an argument for the passive acceptance of institutions.
Hayek did not agree with classical liberals who ideologically supported a strict doctrine of laissez-faire but, considering that everyone could lay forth their particular preferred exception, Hayek understood that strict rules would be necessary and unavoidable. Without these rules it was trivial for special interest groups to show the immediate effects that their programs conferred on some, while the harm they caused was more indirect and difficult to see. Those that would pay the costs were dispersed within society and not entirely aware of the costs they paid.
If the principles of classical liberalism that created such great prosperity were not understood, it would only be a matter of time before the combined efforts of special interest groups would be able to penetrate the stiff laissez-faire doctrine and collapse the popular support for the philosophy. In Hayek’s mind the advancement required to fully understand the benefits of spontaneous order were not yet acquired to a degree suitable to scientifically fend off the propaganda of those who opposed classical liberalism. The special interest groups could create critiques faster than the scholars of political economy could discover the general laws that revealed the dispersed costs to the general public.
The defence against the ever increasing costs of special interests could only ever mean the protection of the general prosperity of a society. A prosperity that no individual could directly point to nor could they have a complete understanding of what their total share was. The inability to determine this share meant that individuals within society would be unable to rationally calculate their preferences and likely would support policies that they themselves would be forced to pay an unfair share for. While the classical liberal philosophy was slower and more gradual than government intervention, the classical liberal philosophy at least had an objective methodology for determining if it was meeting the individual preferences of those that paid for and benefitted from the voluntary programs within the economy.
Patterns of Sustainable Trade and Specialization
What Hayek is laying out in this first chapter is what has been the core of the economic debate since the time of Adam Smith. The agreed goal of all those who attempt to understand the workings of the economy is that people should be able to specialize in work that permits them to trade with others and acquire the goods that they demand. The patterns, or the specific ways in which individuals coordinate with each other to meet their demands, should be sustainable over time so as to prevent the stress that results when people are unemployed and cannot acquire the goods that they seek.
Those that promote theories of laissez-faire appeal to the market process because it is an objective method for determining which patterns are viable and sustainable. The price system, and more importantly the system profit and loss, allows individuals to coordinate their preferred forms of specialization and trade within the economy. It is a method of objectively testing and comparing between the subjective preferences of entrepreneurs and consumers. Wherever we see successful patterns of specialization or trade there is always the opportunity open to others to test for new patterns and create more profitable forms of trade. Likewise when there are dynamic shifts within the economy and certain patterns become unprofitable they are discontinued before much waste accrues to the economic system.
Although this process is open and objective it is a process that takes considerable time to coordinate and can be knocked from its course whenever a set of rules or institutions arise that give unfair advantage to some individuals over others. Failures of the market process may be overcome with time but in the interim it is hard to look at those affected simply as autonomous pieces within an economic theory and not as people that are suffering with no hope in sight. The interventionist may agree with the principles of the market method but see a need for fast action that can only be brought about by coercing people to support others within the economic system. If the method of waiting for voluntarily support to reach those who have suffered the fate of being in an unsustainable pattern takes too long, society might be justified in setting up coercive institutions that have the ability to circumvent the market method.
It is the conflict between these two world views that Hayek will end up discussing in The Road to Serfdom. It is Hayek’s belief that the interventionist method, while providing immediate relief, sets up long run forces within society that will continue to undermine the market process even after the immediate economic threat has passed. It is hard to determine what the true long run cost of intervention will be to society and therefore makes it impossible for those affected to calculate the best path to resolving the economic crisis. In addition, if people are unable to critically assess the merits of the program it becomes that much easier for special interest groups to make proposals that cost more than they really should.
Although this problem can occur within any coercive institution, it is specifically within the democratic paradigm that Hayek investigates. This suggests that the modern reader can gain much benefit from a reading of The Road to Serfdom, not only to draw parallels with historical cases but to help the supporter of democracy to see how democratic institutions have within them the seeds of what would typically be considered undemocratic outcomes.
Posted in The Road to Serfdom on May 4, 2011
To kick off this blog I have decided to start with Hayek’s most widely read book The Road to Serfdom. Although I have spent the last 4 years reading Hayek, I read this book rather recently. Last summer, near the end of my undergrad, I tore through this tome rather quickly. Its strange, considering that this is his most popular book, that I would leave this one till the very end after reading pretty much all of his other major political works. I think I avoided this book because it was my impression that this book was more a book of its time, written in a world that did not have the successful examples of socialism that we in the modern world have easy access to. Canada, Sweden and many other European countries have seemed to managed the transition to democratic socialism without instantly collapsing into fascism. I viewed it as a message to the world of WWII where many people did agree with some of the means of fascism while not explicitly agreeing with the ends of the fascists.
To my surprise there was a lot to gained from reading this book. The first half of the book is a look into the fascistic tendencies of democracy and while I believe our modern societies would never let a Hitler into power again, a softer form of fascism is very much present within our institutions. The only refinement is that instead of a system of murderous control existing simply for the sake of power, we now have a kinder system of coercive laws that get abused for the cause of wealth distribution to special interest groups. Much of what I read felt like I was reading about our current system of governance.
Over the next couple of weeks I plan on rereading the book in a modern light. Not only will I attempt to relate what Hayek argued to our current democracies but I will also see if there is any additional structure that can be added to his argument in light of what we have learnt in the past 60 years.