Monday, July 18, 2011

Book Review (#21 of 2011) - Hayek Road to Serfdom

The Road to Serfdom: Text and Documents--The Definitive Edition (The Collected Works of F. A. Hayek, Volume 2) edited by Bruce Caldwell.
(Note, there were some issues with pasting this post from Google Docs, where I originally wrote it. I have re-formatted the below twice to make it easier to read, but on the last edit somehow it got reset. I don't feel like re-formatting it again (namely adding links to external sources).

This new edition of the book features much additional material. The first 20% of the book tells the story of its publishing, explains the context Hayek wrote this book in, and explains the articles Hayek used in compiling the book. It includes the forewords Hayek wrote for the 1956 and 1976 editions, as well as Milton Friedman’s foreward to the 1994 edition and other supplementary documents. Hayek’s notes have been updated to make more sense to a modern reader-- all of which I found essential.

This new edition of the book features much additional material. The first 20% of the book tells the story of its publishing, explains the context Hayek wrote this book in, and explains the articles Hayek used in compiling the book. It includes the forewords Hayek wrote for the 1956 and 1976 editions, as well as Milton Friedman’s foreward to the 1994 edition and other supplementary documents. Hayek’s notes have been updated to make more sense to a modern reader-- all of which I found essential.

Originally published in March 1944, Hayek is responding to some intellectual trends he finds disturbing, primarily the trend of the West moving away from classical liberalism. But he gives caution to those who mischaracterize his words:
“It has frequently been alleged that I have contended that any movement in the direction of socialism is bound to lead to totalitarianism. Even though this danger exists, this is not what the book says.”

Hayek traces the roots of classical liberalism to Christianity, Greek, and Roman thought:
“(T)he essential features of that individualism which, from elements provided by Christianity and the philosophy of classical antiquity, was first fully developed during the Renaissance and has since grown and spread into what we know as Western civilization—are the respect for the individual man qua man, that is, the recognition of his own views and tastes as supreme in his own sphere...”

Hayek spells out the proper role of government under classical liberal tenets:
1. Protection of private property and enforcement of contracts.
2. Provision and enforcement of “the rules of the game.”
3. Provision of pure public goods and correction of negative externalities.
4. Proper regulation of natural monopolies (as opposed to ownership of them).
5. A mild redistribution of income and provision of a social safety net, including catastrophic insurance.

“(T)here can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody. Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance— where, in short, we deal with genuinely insurable risks—the case for the state’s helping to organize a comprehensive system of social insurance is very strong... Wherever communal action can mitigate disasters against which the individual can neither attempt to guard himself nor make provision for the consequences, such communal action should undoubtedly be taken” (emphases mine).

It’s important to note that in points #3, 4, 5 Hayek differs sharply from the Austrian economists he is usually lumped together with as Bryan Caplan explains:
“Mises and Rothbard clearly rejected many of the key elements of modern neoclassical economics (including #3-5), while Hayek did not.”

Hayek also did not see collective government action in the face of a Depression and high unemployment as opposed to classical liberalism (emphases mine):
Many economists hope, indeed, that the ultimate remedy (to business cycle fluctuations) may be found in the field of monetary policy, which would involve nothing incompatible even with nineteenth-century liberalism. Others, it is true, believe that real success can be expected only from the skillful timing of public works undertaken on a very large scale...But this is neither the only nor, in my opinion, the most promising way of meeting the gravest threat to economic security. In any case, the very necessary efforts to secure protection against these fluctuations do not lead to the kind of planning which constitutes such a threat to our freedom.

Many people mistakenly think that the “laissez-faire” classical economists to which Hayek gives deference were “anarcho-capitalists” opposed to government intervention anywhere. Quite the contrary, Adam Smith, Frederic Bastiat, Jean-Baptiste Say, J.S. Mill, Hayek, and Milton Friedman all unanimously agree on #1-#5 above with only a difference in the details. They also clearly acknowledged that monetary and fiscal policy could be effective during an economic downturn.

But all agreed that these government actions could be used as excuses for other encroachments and proposed a high bar that must be met by the government first.

Hayek understood that the British public were enjoying full-employment under a centrally-planned war economy, and many were advocating that this continue after the war since the Great Depression was such a strong memory. Indeed, Socialists were elected into office immediately after the war and seized much of the “commanding heights” of the economy for the State, in the belief that they were preserving individual freedom by saving the populace from economic hardship, as Keynes had believed possible (without the “commanding heights” bit) in his General Theory:
“(T)he modern classical theory has itself called attention to various conditions in which the free play of economic forces may need to be curbed or guided. But there will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good” (Keynes, emphasis mine).

Hayek spends much of the book arguing why this is a fallacy. Economic freedom-- the ability to choose between alternatives, to lose your job, to fail at a business, etc. is intertwined with individual freedom:

“Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends. And whoever has sole control of the means must also determine which ends are to be served, which values are to be rated higher and which lower—in short, what men should believe and strive for.”

The Socialists desired to create a Utopia where there would be “full employment,” no poverty, and no perceived unfairness in outcomes. Hayek gives a lucid explanation of why this is incompatible with maintaining individual liberties:
“The choice open to us is not between a system in which everybody will get what he deserves according to some absolute and universal standard of right, and one where the individual shares are determined partly by accident or good or ill chance, but between a system where it is the will of a few persons that decides who is to get what, and one where it depends at least partly on the ability and enterprise of the people concerned and partly on unforeseeable circumstances...”

While a Socialist or Communist regime may eliminate differences in wealth, it doesn’t solve the problem of real poverty and it takes away the most valuable object-- freedom:

“The fact that the opportunities open to the poor in a competitive society are much more restricted than those open to the rich does not make it less true that in such a society the poor are much more free than a person commanding much greater material comfort in a different type of every real sense a badly paid unskilled worker in this country has more freedom to shape his life than many a small entrepreneur in Germany or a much better paid engineer or manager in (Soviet) Russia...It may sound noble to say, “Damn economics, let us build up a decent world”—but it is, in fact, merely irresponsible. With our world as it is, with everyone convinced that the material conditions here or there must be improved, our only chance of building a decent world is that we can continue to improve the general level of wealth.”

Hayek understands the problem that the Soviet propogandists dealt with and we see in North Korea today: Under Socialism, not only do you have to replace freedom and incentives with coercion in order to get labor to produce, but the government has to convince people that its system is “fair,” and eliminate freedom of information to make the people believe they are in the best situation. Because:
“Once government has embarked upon planning for the sake of justice, it cannot refuse responsibility for anybody’s fate or position. In a planned society we shall all know that we are better or worse off than others, not because of circumstances which nobody controls, and which it is impossible to foresee with certainty, but because some authority wills it...Everything which might cause doubt about the wisdom of the government or create discontent will be kept from the people.”
This is why books are burned and banned in every Socialist country. Intellectual freedom is incompatible with a state that has to be believed by the people as making the absolute best decisions.

There were perhaps very few outright Marxists in Hayek’s day, but Hayek spends a good bit of the book explaining that Communism and National Socialism are branches from the same root, and credibly does so from his first-hand Austro-German experience. I appreciated this from the perspective of having celebrated V-E Day modernly in the former Soviet Union with (educated) people there not really able to elucidate what the differences were between Hitler and Stalin.

The weak point of the book deals with how the State or central planner assumes responsibility for defining morality in that society. Defining morality is a problem in any society without an objective standard of Truth.

I piece together Hayek’s thoughts on how a country moves down the road to serfdom:

First, democracy can be frustratingly slow-- as it is designed to be. People hate “gridlock,” and start to clamor for ways to streamline the legislative process. The more tasks the government assumes, the harder it is to find pareto-efficient outcomes. In some cases, technocrats and experts are installed to have control over processes.
Second, monopolies develop and begin to lobby the government for protection. The more protection allowed, the stronger they become. This increases the level of frustration by keeping certain prices high and increasing structural unemployment.
Third, people hate hardships and insecurity. People being laid off by their long-time employer, or losing money in a failed business venture have sad testimonies. Rather than understanding that this is what happens in a world are free to pursue their own economic opportunities, people begin to clamor for a better way, for “economic justice” and “security.” While Hayek agrees with some redistribution for the poor (see above) he points out that some hardship is simply necessary in a free society.
Next, the government begins to intervene in response to the above with “good intentions.” Maybe it’s a tariff to protect an industry, or a price ceiling to “keep things affordable,” or takes over a monopoly, but there are resulting unintended consequences that may exacerbate the problems above or create new ones. People clamor for more relief. Rinse and repeat until eventually the government is trying to direct all economic outcomes.

Hayek does offer some observations that are cause for optimism in 1944-- namely that international socialism is highly unlikely because socialism ultimately collapses in nationalism. Workers in England would object to some world government that redirects capital to, say, Poland:
“That socialism so long as it remains theoretical is internationalist, while as soon as it is put into practice...becomes violently nationalist, is one of the reasons why “liberal socialism” purely theoretical, while the practice of socialism is everywhere totalitarian.”

But Hayek was in favor of something like the League of Nations that could be used to foster the liberal order and help maintain certain international rules-- like trade agreements:
“Federalism is, of course, nothing but the application to international affairs of democracy...a community of nations of free men must be our goal.”

The last few chapters deal with the details of German history, how National Socialism was the natural outcome of the followed philosophies of German philosophers, who Hayek notes were much heralded in the West, particularly in the world of education.

In Hayek’s 1956 foreward, he says that the Socialism and Planning he wrote about in 1944 “in this sense probably came to an end around 1948.” Socialism proved to be inefficient and the loss of individual freedom caused the British public to be alarmed. By 1976, the “Welfare State” with its emphasis on redistribution and soft paternalism had replaced outright central planning on the Left at the same time that many centrally planned economies would begin to free their markets and pursue greater wealth. Even the post-Keynesian attempts by the government to pull levers to achieve “full employment” were widely being abandoned.

Friedman’s 1994 foreward, a re-write of one he wrote in the 1970s, was very lucid. I think Episode I of Friedman’s Free to Choose is much more Hayek than Adam Smith. Highlights:

“What is now described as poverty would have been regarded as plenty when that slogan was first widely used.”
“The free market is the only mechanism that has ever been discovered for achieving participatory democracy.”
“(T)hose of us who were persuaded by Hayek’s analysis saw few signs in 1945 of anything but a steady growth of the state at the expense of the individual, a steady replacement of private initiative and planning by state initiative and planning. Yet in practice that movement did not go much farther—not in Britain or in France or in the United States.”

In all, I give this book 4.5 stars out of 5. It would have meant much more to a European in 1944 than an American today, and parts of the book are very context-relevant. I think Hayek would be concerned that it was being trumpeted by Conservatives, which Hayek was not, to advocate means and ends of which he did not approve in his book.

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