Economy

Big Economic Theory Underpinning Libertarian Economics Is Total Baloney

Friedrich Hayek argued that centralized economic planning would lead to totalitarianism, but that's totally wrong.

Since the 2014 midterm elections, Democrats have been trying to figure out what happened. There are probably dozens, if not hundreds, of reasons for the Democratic bloodbath. But one reason, in my opinion, is that Democrats never discuss, much less analyze, the fundamental theories of modern conservatism. As a result, erudite-sounding nonsense is passed off as wisdom, and sways an electorate grasping for answers. Republican calls for limited government find fertile ground with workers whose wages are stagnating.

One of the intellectual foundations of this idea of limiting government comes from an Austrian émigré economist named Friedrich A. Hayek, in his 1944 book The Road to Serfdom. Conservatives use that term as shorthand for the idea is that socialism and centralized economic planning don’t work and ultimately lead to totalitarianism, which ends up enslaving the people and impoverishing a nation. That idea taken alone isn’t necessarily wrong, but the theory actually takes a step back and says that any form of centralized economic planning, including government regulation of business, is the first step on the road to serfdom.

Hayek argued that government intervention almost always creates more problems than it fixes, and many current Republicans believe this as a matter of faith. Rand Paul mentions Hayek as one of the intellectual forefathers of his economic ideas and former vice-presidential candidate Paul Ryan discussed Hayek frequently on the campaign trail. Ryan is also notorious for giving copies of The Road to Serfdom to his staffers. 

At the time Hayek wrote the book in the early 1940s, governments around the world were engaged in central economic planning. Russia had been collectivizing and devising “five-year plans,” for nearly two decades, and a number of Eastern European countries were following Russia’s lead. Germany had created a massive war machine through central planning. Beyond that, many Western democracies, including the United States and Britain, had instituted various degrees of centralized economic planning to help deal with the economic collapse of the Great Depression and then with the emergency of the second world war.

Hayek didn’t like what he was seeing in the west because it was too close to what he’d seen firsthand in Eastern Europe. He wrote the book as a warning that even small efforts at government control of the economy could cause changes in society that would eventually lead to collectivism, dictatorship, and ultimately, widespread poverty and suffering. 

The book was a hit among conservatives in the United States, more so than in England. It neatly encapsulated their worst fears about government and the behavior of liberals. Hayek noted that starting in the 1930s there was “a complete change in the direction of the evolution of our ideas and social order.…We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past.”

This may have accurately reflected the existing political changes in the 1930s, but Hayek acts as if this was the end product of some nefarious liberal takeover of the economy. He largely ignored the events that caused this change, most notably the Great Depression.

Hayek said that collectivism was replacing individualism, and that was dangerous because the development of individualism “is closely associated with the growth of commerce. From the commercial cities of northern Italy the new view of life spread with commerce” throughout Europe, “taking firm root wherever there was no despotic political powers to stifle it.” But over the years many in society forgot this lesson, and as social problems arose many began to look to collective action. As this happened there was a “decline of the understanding of the way in which the free system worked, [and] our awareness of what depended on its existence also decreased.”

And so, step by step, society changed, resulting in “an entire abandonment of the individualist tradition which has created Western civilization.” Command economies also “replaced the… mechanism of the market by collective and ‘conscious’ direction of all social forces to deliberately chosen goals.”

Hayek then describes some of the problems with collectivism and central planning. “The common features of all collectivist systems may be described, in a phrase ever dear to socialists of all schools, as the deliberate organization of the labors of society for a definite social goal.”

It is not possible, according to Hayek, to simply control the economy. Government will eventually control every aspect of life. That is because ultimately a “conflict arises between individual freedom and collectivism.” Collectivism differs from “liberalism and individualism in wanting to organize the whole of society and all its resources for the unitary end and in refusing to recognize autonomous spheres in which the ends of the individuals are supreme.” 

This happens step by step. First economic plans are made, then education has to be controlled to ensure the population learns the necessary information to achieve the economic goal, then government has to engage in propaganda to ensure that the population agrees with the centralized goal, then a strong police state must be instituted to round up and silence the dissenters, then democracy must be abandoned to ensure that those hostile to the plan aren’t elected.

Hayek’s point is that once you start central planning you can’t stop. This is because people get in the way, they don’t cooperate, they object, and so this “people problem” also has to be controlled. Freedoms are slowly stripped away, and then all freedom is lost. The end result is that planning, according to Hayek, inevitably leads to dictatorships.

“Most planners who seriously consider the practical aspects of their task have little doubt that a directed economy must be run on more or less dictatorial lines.” And this slide toward dictatorship is the crux of conservatives’ worst fears:

“The authority directing all economic activity would control not merely the part of our lives which is concerned with inferior things; it would control the allocation of the limited means for all our ends. And whoever controls all economic activity controls the means for all our ends and must therefore decide which are to be satisfied and which are not. This is really the crux of the matter. 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.”

So, according to Hayek, once you allow a little control, you will always need more to make it work. Small planning inevitably leads to big planning, and protecting people from the vagaries of life eventually leads to people becoming dependent upon government. That is the idea that many of Hayek’s conservative followers fervently believe. And that is why they so fear any government involvement in the economy.

It’s an interesting theory, and given the state of the world in 1940, certainly one worth taking seriously. But how did Hayek do? As he noted at the beginning of the book, “we can in a measure learn from the past to avoid a repetition of the same process.” So what does the past, which was Hayek’s future, teach us about Hayek’s predictions?

The book was published during a worldwide trend toward central economic planning. Some of it was due to the rise of communism, some was the Western response to the Great Depression, and some was the rise of Fascists and their drive to world domination. So the book certainly fit the times. And, in the immediate aftermath of the war, many western European nations embraced cradle-to-grave welfare, nationalized industries, and created employment boards, and government managed industrial cartels. Many others fell behind the Iron Curtain, and had communism and totalitarianism imposed on them. It was a dark time, and Hayek’s ideas seemed prescient.

But by the early 1950s, economic conditions began to improve, particularly in Western Europe, and nations began to weaken government control of their economies. Some nationalized industries were sold off, many countries abandoned employment boards, others removed government control over industrial cartels. The Western world was not following Hayek’s model, and so he had to adapt. In a new introduction to the book in 1956, he admitted that no country had apparently taken his road to serfdom, and suggested that it wasn’t some kind of iron rule (though he’d been pretty adamant that it was).

"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. What it contains is a warning that unless we mend the principles of our policy, some very unpleasant consequences will follow which most of those who advocate there policies will not want."

He modified his argument to fit the new reality. Now he said that the first step on the road to serfdom was a “soft” socialism, in the form of government regulation of aspects of the economy, wealth-transferring welfare programs and high taxes to pay for it all. Hayek said that these programs would protect people from the consequences of their actions, which would erode individual initiative and make people increasingly dependent on a paternalistic government. (If this sounds familiar it’s because it could have come from the stump speech of virtually any recent or present-day Republican candidate for president.)

So how did this revised theory pan out? Well, again particularly in the West, as economic conditions began to improve in the late 1950s, and increasingly in the 1960s and into the 1970s, governments continued to  scale back on their government control of the economy. The wave of nationalization of industries crested in the late 1960s, labor boards eliminated in the UK, and a wave of deregulation began in the United States. The tide of “centralized planning” receded. A few countries, particularly the Scandinavian countries of Northern Europe, retained exceedingly generous welfare programs, and the necessary high taxes, and retained some aspects of centralized planning, but they never abandoned democracy.

The United States never nationalized industries, but did have the War Production Board during World War II, which helped manage and coordinate industry to supply material for the war effort. It was abandoned in 1945. The United States did have a number of government management boards for various industries, like airlines and trucking, but those were eliminated during a wave of deregulation in the late 1970s. Banking and financial regulations were also scaled back in the 1990s (with a minor effort to re-regulate after the crash of 2008). 

A number of countries in South America have lurched from incompetent socialist states to equally incompetent fascist and right-wing police states. And with recent examples of Venezuela and Bolivia, the lurching continues. But none have followed Hayek’s road from soft socialism to hard socialism to totalitarianism. Many Mideast countries have strange hybrid economies, with many large industries, particularly the petroleum industry, controlled by the government. Some provide government support for their citizens based on oil revenue, but they don’t have Western-style welfare systems. And they are largely autocratic, but none have embraced communism or even socialism.

Quite a few countries became communist at the end of the second world war, but that was a product of geography, not political or economic philosophy. Many nations in Eastern Europe fell behind the “Iron Curtain” and had communism and totalitarianism forced upon them. Essentially the same thing happened to North Korea and North Vietnam. And a few countries did become communist, particularly China, Cuba and Vietnam, but this was only after violent upheaval and civil war. So while these countries ended up as communist and totalitarian, they didn’t get there on Hayek’s "road."

How many countries in the last half-century have moved, as Hayek suggested, from soft socialism to totalitarianism? Precisely none.

Another aspect of Hayek’s theory was that once the communists or the collectivists take over, all is lost. They will institute totalitarianism and control the populace with an iron fist. And how has that worked in the intervening 60 years? Well, the vast majority of formerly communist countries have abandoned communism. And far from abandoning it in a bloody fight, with the commissars holding onto power with a bloody grip, as Hayek seems to imply, most of these countries sloughed it off with a shrug.

Russia did so in the late 1980s and early 1990s. The Berlin Wall came down in 1989 and most of the former Soviet Bloc countries behind the Iron Curtain abandoned communism. China allowed private ownership of property and businesses in 1978 in a move at market reform, and now it is one of the largest economies on earth. The government still exerts enormous economic control, and total political control, but it resembles nothing like what Hayek suggested. It is now more of a mercantilist country, like England in the 18th century. And most of the formerly communist countries of Asia, particularly Cambodia and Vietnam, have abandoned most of the economic aspects of communism, though they are far from free market capitalist economies, and certainly not democracies.

The last few remaining communist and totalitarian holdouts are North Korea, Cuba and Burma, though Cuba and Burma are slowly scaling back government control of the economy. Despite these efforts, the economies of both are complete basket cases, which is an insult to baskets. That leaves North Korea as the last communist dictatorship. But it had communism imposed on it at the end of WWII, so even it did not follow Hayek’s road.

In fact, around the world the road ran in the exact opposite direction as Hayek prophesied. Countries certainly did become socialist and communist, but it wasn’t the slow march Hayek predicted. A few countries elected socialist governments, but those never took over in the way Hayek predicted. And most of the countries with various forms of “soft” socialism—much of Europe—scaled many of these programs back. Certainly most European countries still have generous welfare programs and a high degree of government regulation of the economy, and many have government-controlled healthcare, but few still have widespread nationalized industries. And they are among the oldest democracies and the freest nations on earth.  

There is no other way to say this: Hayek was wrong. He swung, and he missed. Nice try, though. Yet despite this, conservatives still bring him to the plate. He’s Paul Ryan’s lead-off hitter. Despite the fact that Hayek was completely wrong, conservatives still claim that liberal economic policy will lead us down the road to serfdom. Republican politicians say it, libertarian activists hold panel discussions about it, and conservative commentators allude to it.

So what does it mean that Hayek was so wrong in his predictions of the future? I know it’s easy for us to look back and criticize those from the past who get their predictions wrong. But let me suggest that the issue isn’t really fairness. The inability to predict the future indicates a flaw in the underlying theory. That’s how it works in science. A scientific theory is only considered valid to the extent that it accurately predicts future behavior. Galileo’s theory of gravity, for example, was that gravity applies equally to all bodies regardless of their weight or density, and that a falling body will speed up over time. Subsequent experiments proved Galileo correct. Newton based his gravitational theories on Galileo’s work, and scientists ever since can reliably predict the effect of gravity. NASA landed men on the moon with little more than calculus, slide rules and Newtonian physics. They were able to do it because Galileo and Newton were right, and the underlying theories were sound.

Shouldn’t political theories be subject to the same criteria? Shouldn’t they be judged based on how well they predict future events? Perhaps the test shouldn’t be as rigorous as in the physical sciences, because we’re dealing with messy and imperfect human affairs, but there should be some correlation between a prediction and actual events.

In The Road to Serfdom Hayek said that embracing socialism—government ownership of the means of production, pervasive social welfare programs—was the first step on the road to serfdom. And what happened? Not a single country has gone that direction. In fact, in the past 50 years almost exactly the opposite has happened. So what does that say about Hayek’s theory? In a word: wrong. But, more importantly, what does that say about modern conservatives who quote a fool and call him a sage? And what does it say about the liberals who let them get away with it?

Michael Coblenz is an attorney in Lexington, Kentucky. He briefly ran for Congress in 2014. He occasionally blogs at http://thedisappointedoptimist.com/.