Free Markets – Part 1

F.A. Hayek’s Road to Serfdom.

What is the moral and practical basis for limiting government and protecting a large sphere within which individuals can make their own decisions regarding how they want to earn money and how they want to spend money?

That’s the subject of this essay series on free markets. The essays will start with an exploration of F.A. Hayek’s earlier work, The Road to Serfdom, which became a sensation in America and elsewhere when it was first published in 1944.

The introduction to the book, written by Bruce Caldwell, states:

John Maynard Keynes read [The Road to Serfdom] on the way to the Bretton Woods conference, and delighted Hayek when he wrote him that it was “a grand book” and that “morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement.” Keynes went on to say, though, that “You admit here and there that it is a question of knowing where to draw the line. You agree that the line has to be drawn somewhere, and that the logical extreme is not possible. But you give us no guidance whatever as to where to draw it.” Hayek evidently took these criticisms to heart, for in the coming years he would make two further important contributions to political philosophy that would refine and extend the arguments made in The Road to Serfdom. In The Constitution of Liberty [explored in the previous essay series] he laid out the philosophical foundations of liberal constitutionalism, wherein a private sphere of individual activity is defined, the state is granted a monopoly on coercion, and then is constitutionally limited by the rule of law in its use of those coercive powers. In the last third of the book Hayek outlined the specific sorts of government policies that were consistent with such a political setup.

The introduction of the 1994 edition of The Road to Serfdom was written by Nobel Prize-winning economist Milton Friedman, who writes:

This book has become a true classic: essential reading for everyone who is seriously interested in politics in the broadest and least partisan sense, a book whose central message is timeless, applicable to a wide variety of concrete situations. In some ways it is even more relevant to the United States today than it was when it created a sensation on its original publication in 1944. The problems of the war and postwar adjustment that Hayek used to illustrate his timeless central thesis, and the collectivist jargon of the time that he used to document his assertions about the intellectual climate, were familiar to the immediate postwar generation and established an immediate rapport between author and reader. The same collectivist fallacies are abroad and on the rise today, but the immediate issues are different and so is much of the jargon. Today we hear little of “central planning,” of “production for use,” of the need for “conscious direction” of society’s resources. Instead the talk is of the urban crisis — solvable it is said only by vastly expanded government programs; of the environmental crisis — produced it is said by rapacious businessmen who must be forced to discharge their social responsibility instead of ‘simply’ operating their enterprises to make the most profit and requiring also, it is said, vastly expanded government programs; of the consumer crisis—false values stimulated by the selfsame rapacious businessmen seeking profits instead of exercising social responsibility and of course also requiring expanded government programs to protect the consumer, not least from himself; of the welfare or poverty crisis—here the jargon is still ‘poverty in the midst of plenty,’ though what is now described as poverty would have been regarded as plenty when that slogan was first widely used … [L]iberal order (I use the term liberal, as Hayek does — in the original nineteenth-century sense of limited government and free markets, not in the corrupted sense it has acquired in the United States, in which it means almost the opposite) … It is tempting to believe that social evils arise from the activities of evil men and that if only good men (like ourselves, naturally) wielded power, all would be well. That view requires only emotion and self-praise — easy to come by and satisfying as well. To understand why it is that “good” men in positions of power will produce evil, while the ordinary man without power but able to engage in voluntary cooperation with his neighbors will produce good, requires analysis and thought, subordinating the emotions to the rational faculty. Surely that is one answer to the perennial mystery of why collectivism, with its demonstrated record of producing tyranny and misery, is so widely regarded as superior to individualism, with its demonstrated record of producing freedom and plenty. The argument for collectivism is simple if false; it is an immediate emotional argument. The argument for individualism is subtle and sophisticated; it is an indirect rational argument. And the emotional faculties are more highly developed in most men than the rational, paradoxically or especially even in those who regard themselves as intellectuals … The fall of the Berlin Wall, the collapse of communism behind the Iron Curtain, and the changing character of China have reduced the defenders of a Marxian-type collectivism to a small, hardy band concentrated in Western universities. Today, there is wide agreement that socialism is a failure, capitalism a success. Yet this apparent conversion of the intellectual community to what might be called a Hayekian view is deceptive. While the talk is about free markets and private property — and it is more respectable than it was a few decades ago to defend near-complete laissez-faire — the bulk of the intellectual community almost automatically favors any expansion of government power so long as it is advertised as a way to protect individuals from big bad corporations, relieve poverty, protect the environment, or promote “equality.” The present discussion of a national program of health care provides a striking example. The intellectuals may have learned the words but they do not yet have the tune … Hayek began working on The Road to Serfdom in September 1940, and the book was first published in England on March 10, 1944. Before it was submitted to the University of Chicago Press the book was turned down in the United States by three publishers — whether because they believed it would not sell or, in at least one case, because they considered it “unfit for publication by a reputable house.” Undeterred, Machlup showed the page proofs of the British edition to Aaron Director, a former member of the University of Chicago Economics Department who was to return to the university after the war as an economist in the Law School. Subsequently, Frank H. Knight, a distinguished economist at the university, received a set of proofs and presented them to the University of Chicago Press with Director’s suggestion that the Press might want to publish the book. John Scoon, then editor at the Press, later recalled. “About the time the contract for American rights was signed — the beginning of April — we began to hear about the book in England, which had been published there on March 10. The first printing in England was only 2,000 but it was sold out in about a month. It began to be quoted in Parliament and in newspapers, and a few newspapers over here began mentioning it now and then—but of course we were still uncertain as to how it would appeal to the United States. As a matter of fact, right up until publication date we couldn’t get a bookstore even in New York excited about the book.” The Chicago edition was published on September 18, 1944, in a first printing of 2,000 copies … The Reader’s Digest published a condensation in April 1945, and more than 600,000 copies of the condensed version were subsequently distributed by the Book of the Month Club. In the fifty years since its publication, the Press has sold over a quarter of a million copies … There is little doubt that Hayek’s writings, and especially this book, were an important intellectual source of the disintegration of faith in communism behind the Iron Curtain, as on our side of it.

Now to Hayek’s words, in which he begins by defining socialism:

[M]any who think themselves infinitely superior to the aberrations of naziism, and sincerely hate all its manifestations, work at the same time for ideals whose realization would lead straight to the abhorred tyranny … Before we can progress with our main problem, an obstacle has yet to be surmounted. A confusion largely responsible for the way in which we are drifting into things which nobody wants must be cleared up. This confusion concerns nothing less than the concept of socialism itself. It may mean, and is often used to describe, merely the ideals of social justice, greater equality, and security, which are the ultimate aims of socialism. But it means also the particular method by which most socialists hope to attain these ends and which many competent people regard as the only methods by which they can be fully and quickly attained. In this sense socialism means the abolition of private enterprise, of private ownership of the means of production, and the creation of a system of “planned economy” in which the entrepreneur working for profit is replaced by a central planning body. According to the modern planners, and for their purposes, it is not sufficient to design the most rational permanent framework within which the various activities would be conducted by different persons according to their individual plans. This liberal plan [here Hayek uses the word “liberal” in the sense of classical liberalism], according to them, is no plan — and it is, indeed, not a plan designed to satisfy particular views about who should have what. What our planners demand is a central direction of all economic activity according to a single plan, laying down how the resources of society should be “consciously directed” to serve particular ends in a definite way.

Then Hayek contrasts central planning to individuals’ plans:

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 the 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.” The socialists of all parties have appropriated the term “planning” for planning of the latter type, and it is now generally accepted in this sense. Economic liberalism is opposed … to competition’s being supplanted by inferior methods of coordinating individual efforts. And it regards competition as superior not only because it is in most circumstances the most efficient method known but even more because it is the only method by which our activities can be adjusted to each other without coercive or arbitrary intervention of authority. Indeed, one of the main arguments in favor of competition is that it dispenses with the need for “conscious social control” and that it gives the individuals a chance to decide whether the prospects of a particular occupation are sufficient to compensate for the disadvantages and risks connected with it. It is necessary in the first instance that the parties in the market should be free to sell and buy at any price at which they can find a partner to the transaction and that anybody should be free to produce, sell, and buy anything that may be produced or sold at all. And it is essential that the entry into the different trades should be open to all on equal terms and that the law should not tolerate any attempts by individuals or groups to restrict this entry by open or concealed force. Any attempt to control prices or quantities of particular commodities deprives competition of its power of bringing about an effective coordination of individual efforts, because price changes then cease to register all the relevant changes in circumstances and no longer provide a reliable guide for the individual’s actions.

Hayek makes clear that there are a few narrow, reasonable exceptions to private action:

To prohibit the use of certain poisonous substances or to require special precautions in their use, to limit working hours or to require certain sanitary arrangements, is fully compatible with the preservation of competition. The only question here is whether in the particular instance the advantages gained are greater than the social costs which they impose. Nor is the preservation of competition incompatible with an extensive system of social services — so long as the organization of these services is not designed in such a way as to make competition ineffective over wide fields … There are, finally, undoubted fields where no legal arrangements can create the main condition on which the usefulness of the system of competition and private property depends: namely, that the owner benefits from all the useful services rendered by his property and suffers for all the damages caused to others by its use. Where, for example, it is impracticable to make the enjoyment of certain services dependent on the payment of a price, competition will not produce the services; and the price system becomes similarly ineffective when the damage caused to others by certain uses of property cannot be effectively charged to the owner of that property. In all these instances there is a divergence between the items which enter into private calculation and those which affect social welfare; and, whenever this divergence becomes important, some method other than competition may have to be found to supply the services in question. Thus neither the provision of signposts on the roads nor, in most circumstances, that of the roads themselves can be paid for by every individual user. Nor can certain harmful effects of deforestation, of some methods of farming, or of the smoke and noise of factories be confined to the owner of the property in question or to those who are willing to submit to the damage for an agreed compensation. In such instances we must find some substitute for the regulation by the price mechanism. But the fact that we have to resort to the substitution of direct regulation by authority where the conditions for the proper working of competition cannot be created does not prove that we should suppress competition where it can be made to function.

The problem Hayek saw was that intellectuals were pushing political leaders to go far beyond these narrow exceptions:

The task of creating a suitable framework for the beneficial working of competition had, however, not yet been carried very far when states everywhere turned from it to that of supplanting competition by a different and irreconcilable principle. The question was no longer one of making competition work and of supplementing it but of displacing it altogether. What in effect unites the socialists of the Left and the Right is this common hostility to competition and their common desire to replace it by a directed economy … The idea of complete centralization of the direction of economic activity still appalls most people, not only because of the stupendous difficulty of the task, but even more because of the horror inspired by the idea of everything being directed from a single center. If we are, nevertheless, rapidly moving toward such a state, this is largely because most people still believe that it must be possible to find some middle way between “atomistic” competition and central direction. Nothing, indeed, seems at first more plausible, or is more likely to appeal to reasonable people, than the idea that our goal must be neither the extreme decentralization of free competition nor the complete centralization of a single plan but some judicious mixture of the two methods. Yet mere common sense proves a treacherous guide in this field. Although competition can bear some admixture of regulation, it cannot be combined with planning to any extent we like without ceasing to operate as an effective guide to production.

Hayek points out that neither central planners, not regulators, can ever act based on the much fuller range of information available to the much larger number of individuals they seek to control:

Far from being appropriate only to comparatively simple conditions, it is the very complexity of the division of labor under modern conditions which makes competition the only method by which such coordination can be adequately brought about. There would be no difficulty about efficient control or planning were conditions so simple that a single person or board could effectively survey all the relevant facts. It is only as the factors which have to be taken into account become so numerous that it is impossible to gain a synoptic view of them that decentralization becomes imperative. But, once decentralization is necessary, the problem of coordination arises— a coordination which leaves the separate agencies free to adjust their activities to the facts which only they can know and yet brings about a mutual adjustment of their respective plans. As decentralization has become necessary because nobody can consciously balance all the considerations bearing on the decisions of so many individuals, the coordination can clearly be effected not by “conscious control” but only by arrangements which convey to each agent the information he must possess in order effectively to adjust his decisions to those of others. And because all the details of the changes constantly affecting the conditions of demand and supply of the different commodities can never be fully known, or quickly enough be collected and disseminated, by any one center, what is required is some apparatus of registration which automatically records all the relevant effects of individual actions and whose indications are at the same time the resultant of, and the guide for, all the individual decisions. This is precisely what the price system does under competition, and which no other system even promises to accomplish. It enables entrepreneurs, by watching the movement of comparatively few prices, as an engineer watches the hands of a few dials, to adjust their activities to those of their fellows. The important point here is that the price system will fulfill this function only if competition prevails, that is, if the individual producer has to adapt himself to price changes and cannot control them. The more complicated the whole, the more dependent we become on that division of knowledge between individuals whose separate efforts are coordinated by the impersonal mechanism for transmitting the relevant information known by us as the price system. It is no exaggeration to say that if we had had to rely on conscious central planning for the growth of our industrial system, it would never have reached the degree of differentiation, complexity, and flexibility it has attained.

Hayek then explains how a central planner’s mentality is necessarily unduly myopic:

[I]t is worth inquiring why so large a proportion of the technical experts should be found in the front rank of the planners. The explanation of this phenomenon is closely connected with an important fact which the critics of the planners should always keep in mind: that there is little question that almost every one of the technical ideals of our experts could be realized within a comparatively short time if to achieve them were made the sole aim of humanity. There is an infinite number of good things, which we all agree are highly desirable as well as possible, but of which we cannot hope to achieve more than a few within our lifetime, or which we can hope to achieve only very imperfectly. It is the frustration of his ambitions in his own field which makes the specialist revolt against the existing order. We all find it difficult to bear to see things left undone which everybody must admit are both desirable and possible. That these things cannot all be done at the same time, that any one of them can be achieved only at the sacrifice of others, can be seen only by taking into account factors which fall outside any specialism, which can be appreciated only by a painful intellectual effort — the more painful as it forces us to see against a wider background the objects to which most of our labors are directed and to balance them against others which lie outside our immediate interest and for which, for that reason, we care less. The movement for planning owes its present strength largely to the fact that, while planning is in the main still an ambition, it unites almost all the single-minded idealists, all the men and women who have devoted their lives to a single task. The hopes they place in planning, however, are the result not of a comprehensive view of society but rather of a very limited view and often the result of a great exaggeration of the importance of the ends they place foremost … From the saintly and single-minded idealist to the fanatic is often but a step. Though it is the resentment of the frustrated specialist which gives the demand for planning its strongest impetus, there could hardly be a more unbearable— and more irrational—world than one in which the most eminent specialists in each field were allowed to proceed unchecked with the realization of their ideals.

In the next essay in this series, we’ll explore how Hayek explains what communism and fascism (and other forms of central planning) have in common.