January 18, 2005

No Compromise on Freedom

4 out of 5 stars

Originally reviewed for India Nest

Neo-liberalism, the dominant thought in the international realm today, owes to no other theorist its intellectual foundation than Friedrich von Hayek. Together with the ‘monetarists’ under Milton Friedman, these two individuals identified the tools with which to demolish that brainchild of democratic socialism- social democracy, which had been the prevalent mode of organising civil society after the Second World War. We need to remember that during the time of this book, Hayek was striving to turn the current of the societal stream. His ideas were very much against the prevalent consensus, and returned only in the late 1970s with the advent of Thatcherism and Reaganomics.

Hayek’s core focus in The Road to Serfdom is identifying the relation between socialism and totalitarianism. He argues that the ‘road’ to totalitarianism gets clearer, as socialist influence in policy making gets deeper. Although he elaborated his famous thesis on the price mechanism in his The Use of Knowledge in Society (1945), he does make the fundamental argument in this book. He identifies that the fluctuation of the prices in the market as mere responses by individuals to what they think is the correct value of a particular commodity. He argues that such a cumulative effect of local knowledge is bound to be the nearest to perfect accuracy, because it is within the vicinity of both the consumer’s perceptions towards price, as well as the producer’s view of it. Therefore, he launches a vehement attack on centrally controlled price mechanisms, as practised in many socialist economies like the USSR during that time, because according to him, that distorted the actual value of the commodity up for sale, and was indirectly harming both the producers of that commodity as well as the consumers of another commodity. For example, by keeping the price of Commodity A too high, it is lowering the disposable income of the consumers of A, which consequently can quell demand, ultimately harming producers of A as well. Moreover, depressed incomes mean less demand for Commodities B and C, thus harming the producers of the same at the same time. Hayek contests the claim that a government agency can have such arbitrary powers at its disposal, for he directly links this with the loss of freedom for the market. Since for Hayek, the market represents the cumulative liberties of the individuals under its jurisdiction, he goes on to claim that such government restriction on the price mechanism is detrimental to liberty in general.

The more elaborated work by Hayek propounding his views on liberty in more detail was his The Constitution of Liberty. Margaret Thatcher in particular drew great inspiration from it. In The Road to Serfdom, however, Hayek’s target audience is not the academic, but the cadres of the numerous socialist, pseudo-Marxist parties that dominated the political scene in the 1940s. He constantly lauds the intentions of many idealist socialists, but persuasively contends that socialist thought, in whatever form, would ultimately lead to a compromise of liberty and set the society on ‘the road to serfdom’. In that sense, Nazism and Communism mean the same thing to Hayek- both forms of totalitarianism being a derivative of socialism.

Hayek mentions regrettably that liberalism in its 19th century form has come under vicious and often unjustified criticism from both the left as well as the right. He points out that the Victorian age of laissez faire brought unprecedented prosperity to western Europe. All that the early 20th century’s pseudo liberals/socialists managed to achieve was economic stagnation, protective tariffs on the erstwhile lucrative trading network, hostilities and ultimately, war and devastation of civil society. He calls out for a recognition for the achievements of the Victorian Englishman (he categorically hails the British version of liberalism as the superior one to its continental counterpart), and remodelling the contemporary public policy more in accordance with its liberal roots.

The ultimate blame for this debacle must lie on the socialist fetish for ‘planning’. Hayek argues that planning only works well in the short run, such as rationing during wartime. Without the pressures of conflict, it is bound to lead to a loss of liberty on one hand, ultimately resulting in totalitarianism, and poor economic performance on the other. His analysis points out that when the central governmental agency is engrossed in planning, invariably it has to play up a certain sectional interest and downplay others to adhere to the ‘collective goal’. Hayek maintains through out his book that no public agency can have such powers to determine individual lives. Inevitably, the colossal scale of planning would naturally entail less discussion and decision making by parliament, and more delegating of jobs to non-elected entities. Thus, the seeds of totalitarian government are sown. As the public institutions become more and more dependent on such delegated bodies, vested interests creep into the whole planning mechanism. Monopolies arise because of state led economic growth, and not due to free market competition. A much more effective alternative to planning is leaving the task to the cumulative effect of the spontaneous actions of the individuals in a market. The only planning Hayek concedes the state must do is ‘to plan not to plan’. Albeit jesting on that particular point, Hayek does mention the need for state action in areas where the private sector cannot deliver profitably. In essence he draws upon the concept of ‘publick goods’ and ‘publick works’ originally used by Adam Smith in his Wealth of Nations.

Nothing can compromise liberty for Hayek. This is not ideological fixation, but his ardent belief that it is through liberty that the potential of every individual can be optimally utilised. Like Adam Smith, Hayek believes that the cumulative individual good is indeed the public good. All the talk about re-organising society on the basis of a plan is sure to lead us down the ‘road’, and eventually prepare us for slavery under a Hitler or Stalin.

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  1. The idea that planning led to Hitler is nuts. The regime prior to Nazism (Weimer Germany) was no more planned than any other developed Capitalist country of the time. Stories such as the Right losing confidence in bourgeois democracy (note 1923 inflation ruining the petit bourgeoisie), the racism/patriotism of European imperialism reaching its logical conclusion or the degeneration of the USSR into tyranny pitting Socialist against Communist (e.g. Stalin claimed that Socialists were Socialists in name but Fascists in action) and justifying a counter stroke from the Right are much more credible ideas (to name but a few).

    Hitler's regime was not qualitatively less liberal (in an economic sense) than the other Capitalist regimes of the time. True there were strong restrictions on foreign trade and capital exports/imports but within the Reich, free trade ruled. Even during the Second World War the SS sold slave labour to the highest bidder. E.g. slave labor accounted for as many as half the workers at the Ford's Cologne plant. See link

    Before the Second World War, it could be argued that Nazi Germany was more liberal than Baldwin's U.K, as trade unions were banned.

    Planning has no necessary link to tyranny. The link only comes if that planning is undemocratic and unresponsive to people's needs. Under a Socialist regime the major investment decisions (the sort of thing currently decided by the executive boards of transnational corporations) would be made democratically. A democratic (in contrast to a Capitalist regime) would involve those impacted by any economic decision to have a say in that decision.

    03 Feb 2005, 12:48

  2. As Hayek would see it, planning inevitably leads to arbitrary government. This is because planning is like a rolling snowball, the very grassroot level of planning to be successful necessiates planning at the upper levels, and so on. To stick to the plan, many other plans are formed. Its a dangerous circle. A time comes when the representative chamber becomes overloaded with such planning bureucracy, and that is when power is delegated to arbitrary bodies who carry out the task without stopping for a moment to think whether they are infringing on our rights.

    04 Feb 2005, 10:59

  3. Valid point. Before I reply I'd like to compliment you on having some sensible text on your blog. Too many blogs are self-indulgent and not worth reading.

    Where people have roughly the same money at their disposal and where transactions do not have spill-over effects on people who are not involved in the transaction, there's a lot to be said for markets. They devolve decision making downwards to those impacted by the decision and a fair weighting is given to each person – a minority who are greatly impacted by a decision can "outvote" a rather indifferent majority, as the individuals comprising the majority won't be willing to back their mild preferences with much money.

    But if Bill Gates has a mild preference for something he can spend thousands of dollars on it, totally outweighing the wishes of, for example, thousands of Africans who have to live on a dollar a day. And how on earth do you get the market to stop people pumping "greenhouse gases" into the atmosphere?

    05 Feb 2005, 12:02

  4. Thank you for your kind words. I use the blog as a personal database for all my previously published work.

    Hayek developed the idea of 'price mechanism', or in more general terms, the transfusion of information within markets. Markets can furnish information much more accurately than a planning body can (which always plays off interests for preserving the 'plan'). Therefore, markets are effective the most where transactions have a direct bearing on others, contrary to what you argued.

    Let me use your examples. If Bill Gates has a fortune, then it is his hard work that he deserves it in the first place. If he spends a lot of money on something, that that has direct spin off benefits for the poor people in developing world, who are employed in the companies producing these products. Even if the company is based in the developed world, it is likely that one of its workers uses a product imported from a developing country. So you see the way markets transmit information and prosperity. In other words, this is the 'trickle down effect'.

    As far as environment is concerned, more and more people are now aware of the detrimental effects of the corporations. Therefore, if the companies have to adopt a unique selling point (USP) in the highly competitive world market, then an ethical stance is a very strong marketing brand. Body Shop can be cited as an example in this regard. Therefore, the markets have successfully filtered this information as well. Same could be said about customer relations, and the reason why more and more companies are paying heed to this.

    05 Feb 2005, 12:34

  5. Equity
    Last week there were elections for the Students' Union president. Every student had exactly one vote. Under a market system the more money you have the more influence you have. It's like giving some people millions of votes while others only have one each. As for "trickle down", a thousand Africans each spending one dollar will lead to more stimulus within the African economy than one American spending a thousand dollars.

    Social Costs
    The price of a bar of soap from the body shop includes a payment for the shop workers, the shop's owners, distribution costs, manufacturing costs etc. But it does not include the costs dumped onto the environment. Air pollution for example. In Hayek's terms information has been lost. To get around this problem, some economists have come up with notions of giving someone property rights over the environment and making anybody who damages it pay compensation. But that's just not practical.

    06 Feb 2005, 20:57

  6. You are misplacing the essence of the market system. It is not about who has the most money, it is about maximising the options for an individual what to do with his/her money. This is why elections are most compatible with market societies, because elections always come in the way of the socialist 'plan'.

    You also exaggerate Hayek's emphasis. Like Adam Smith, Hayek mentions the need for 'publick works and publick goods' in his 'The Road to Serfdom'. What Hayek would say that the environment is best looked after under a market system, because the transfusion of information is the best under this arrangement. This is because, as I explained in my last post, polluting companies will fall over each other to be the least polluting, to win the socially responsible USP from its customers.

    07 Feb 2005, 11:57

  7. Hello it's me agian!

    As Capitalism isn't synonymous with markets, I'll give up on my point about Capitalism being undemocratic because it allows the rich to have more influence over the economy than the poor.

    But I will press on with the social costs issue….

    You wrote "companies will fall over each other to be the least polluting, to win the socially responsible USP from its customers.". What's to stop people "free riding"?

    An example. Company A makes the same product as company B, but uses a cheaper more polluting process, enabling it to sell its product at a lower price than B. Most of the people impacted by the pollution produced by either company don't buy either product. In Hayek's terms the information about the damage done by the pollution is lost.

    This "socially responsible USP" notion relies on a consumer estimating the loss of utility borne by another person and acting as if it were his/her own loss. That's directly against the core dogma that people's main interest is self-interest. And that utility is subjective.

    08 Feb 2005, 11:29

  8. It's always nice to hear from you George. I have a debate with a Chinese reader of my blog about another post elsewhere too. It's good to see the interest this is generating.

    I think you are not giving the due credit to Hayek's price mechanism theory. Taking your example of pollution, the point is that consumers of the products of A and B are becoming more and more aware of the environmental degradation A's products cost, both as a result of negative advertising by company B and also because of the 'publick' education system, which Hayek favours. There will be a considerable proportion of this 'aware' group which will weigh up the social costs vis-a-vis the monetary cost of their decision to switch to company B, and decide that the former is their choice.

    What Hayek would conclude from this is that, although not perfect, this is the closest one gets to the ideal situation. Under a imposed plan which the companies have to follow, they are harming others just to keep the plan intact. For instance, if strict environmental regulations are put in place, the price of the product will go up and the consumers will suffer as a result. Also, the company might shift base from a certain developing country due to regulations, rendering thousands of people unemployed there. Under a market system, at least the companies are forced to make the changes to survive in a competitive environment and the incentive is clearly far stronger there.

    08 Feb 2005, 12:28

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