Books: The Road to Serfdom

A couple months ago, two regulars on WorldMagBlog were arguing about whether fascism belonged to the political left or right. I pointed out that when I took an intro to economics/sociology/political science course in college, we were taught to distinguish between political systems (such as democracy and totalitarianism) and economic systems (such as capitalism and communism). I wasn’t sure about fascism, but I thought it was an economic system.

The one who was arguing that fascism was similar to socialism recommended Friedrich Hayek’s The Road to Serfdom. The other man said he was familiar with it, and that it was a dated document (it was written in 1944). I was unfamiliar with the book (despite having taken courses in economics in grad school), and decided to get it through interlibrary loan. Despite being a short book, it was slow reading, but I finished it last night.

First, I have to say that I think Hayek does an excellent job of demonstrating why central planning of an economy does not work, and that efforts to make it work lead to infringing on political freedom more and more. Of course, that wasn’t news to me – I learned that back in my intro to economics class almost thirty years ago. And I think this is why the one man said it is a dated document – no one (that I know of) is arguing for a centrally planned economy today.

Back in Hayek’s day it was another matter. It’s hard for me to imagine, but in the first half of the twentieth century, many people thought that was a reasonable goal. There was so much that people had learned to do on such a much larger scale than they used to be able to. Mass production was changing not only the way things were made but the way people lived, as consumer goods became so much more widely available at lower prices, and jobs making those goods brought people from rural areas into the cities.

Scientific discoveries were also changing things, from medicine to people’s understanding of the origins of life. And doing things in a scientific manner was seen as best way to do everything. If science could improve our lives through new technologies and understanding the physical world, why not also the way people work and interact in society? Today we read about eugenics and central planning of society and economics and think primarily of the horrors of Nazi Germany under Hitler. But during the time Hitler was coming to power, such ideas were seen positively even in the countries that ended up fighting against him.

That was Hayek’s worry, that the same ideas that had taken hold earlier in Germany and led to Hitler’s Third Reich were also being widely accepted in countries such as England and the United States. His field was primarily economics, not politics, but he felt he had to do something to counteract the growing popularity of socialism. So he wrote this book, and it became one of the most influential books of its time.

As I’ve studied economics but not the history of economics, I can’t say just how much he influenced economic and political thought. But I did read (sampling reviews of his book and thinking) that it was Hayek who first pointed out the importance of prices as a source of information. This was a basic concept in economic classes I took, but it was a very valuable insight when Hayek first expressed it.

In a market economy, producers set prices and consumers decide whether or not to buy a given product at a given price. If so many people buy it that supplies run out, producers know they can probably raise the price and people will still buy it. If it sells slowly or not at all, they have to try lowering the price. They respond to what consumers show they are willing to spend their money on, and in this way the goods available will more or less match what people want to buy and at the price people are willing to pay.

In a centrally planned economy, a (relatively) few people try to make all those decisions for the entire society, about how much of what will be produced, and what it will cost. In a small village it might work, but not in a large modern society. They are always over- or underestimating how much needs to be made, resulting in shortages and surpluses. (Think of stories of people in Soviet Russia waiting in line for hours to buy basic consumer goods – if they can get them at all.)

Shortages and surpluses occur in our economy also, but producers can react quickly. They get rid of surpluses by slashing the prices, and the prospect of profit draws new producers into the market to supply goods where there is a shortage. It’s always tough for people who lose their jobs because their company was one that judged the market badly and had to lay people off or even go out of business. But there’s no way to prevent that from happening without taking away people’s choice of where to work, and companies’ choice of what to make and sell.

In the view of the man who recommended this book to me, that’s a sufficient argument to show that socialism is bad. The problem is that the definition of socialism has changed over time, not everyone is using the same definition. I’m not saying that socialism is good, by the way, but you have to agree on its definition to discuss the matter. Among conservatives on WorldMagBlog, at least, any government involvement in the economy constitutes socialism. I think there are some good arguments to keep the government out of the economy for the most part, but I question how much Hayek’s arguments apply to issues such as the stimulus bill, bank bailouts, and the current debate over healthcare.

Some of Hayek’s arguments do apply. At any given time, there is a finite set of resources (raw materials, factory capacity, people with certain skill sets and schedules, money, etc.), and the question is how to allocate them. Every decision to allocate a resource in one place takes it away from somewhere else. If everyone had the same set of priorities, it would be easy enough. But there are as many different sets of priorities as there are people.

Even people with similar values will differ in the details of what to spend money on. Brand name or store brand? Pay extra for seats near the front or settle for cheaper seats in the balcony? Do we buy American or imports? Do we avoid dealing with a company that has practices we dislike, even if their products are very good?

Lots of people agree that the amount some athletes and movie stars are paid is ridiculous, especially when you consider how little is paid to people who do a lot more good for society. But if you start trying to pay people based on their worth to society, who gets to decide? Personally I don’t think racecar drivers contribute much to society. And I think way too much is spent on products to make people look younger and prettier. But I’m sure there are people who would think some of my choices foolish.

Even if you got a majority of people to agree on a set of priorities (a doubtful proposition to begin with), you would have to use the force of law to impose their choices on everyone else. And in practice, it ends up being some bureaucrats who work out the details to put all that into practice. In time, it’s pretty easy for the bureaucrats to take on, not only working out the details, but determining the priorities also.

That said, there are still legitimate areas for government involvement. Most people agree that infrastructure needs to be built and maintained by the government – roads, the power grid, water and sewer systems, and so forth. They can contract out much of the work to private companies, but there needs to be one interconnected system. And because money is involved in those projects, that means the government is involved in the economy to that extent.

Much of the current debate over healthcare has to do with the fact that it is such a big segment of our economy. I keep hearing the number “one sixth,” though I don’t know who came up with that number or how. The more that the government is involved in the economy, the less that production and consumption are determined by prices and the more they are skewed by bureaucrats deciding what, who, and how much.

Even Hayek doesn’t advocate pure laissez faire capitalism. He sees a role for government in assuring everyone that certain basic needs are met. But beyond that basic level, he fears that once the level of government involvement starts increasing, it becomes an unstoppable tide that will lead to totalitarianism. One reason some consider his book a dated document today is that most if not all countries do have quite a bit of government involvement in the economy, but this has not led to totalitarian governments.

There’s a great deal more than I can cover in one post. So I will try to get into some more specific aspects of his arguments tomorrow.


10 Responses to Books: The Road to Serfdom

  1. modestypress says:

    Please forgive me for saying this, and I won’t mention it to another soul, but I think you are one of the most intelligent and sensible people I have enountered on worldmagblog.

    Also, on slightly related topics, you might consider reading A Beautiful Mind a book about the brilliant but mad mathematician, economist, game theorist John Nash.

  2. Margaret Packard says:

    I’m with Modestypress. Of course I could be biased as Pauline’s sister, but really I get so frustrated with non-Christians who just defend one extreme view and don’t seem open to other views, and even more frustrated with Christians who do the same thing (because I think they should know better). I do find this blog refreshing on so very many topics. I wonder if more people knew about this blog, if it would have a large number of readers, or do people not appreciate a balanced look at the issues?

  3. LetUsHavePeace says:

    “no one (that I know of) is arguing for a centrally planned economy today”. Have you taken a look at the Federal Register? The world of serfs was not “centrally planned” but it was permanently regulated by decisions about status rights. That is very much the world we live in. As Hayek wrote, “We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past. Although we had been warned…that socialism means slavery, we have steadily moved in the direction of socialism. And now that we have seen a new form of slavery arise before our eyes, we have so completely forgotten the warning that it scarcely occurs to us that the two things may be connected.”

    • Pauline says:

      No, I haven’t actually looked at the Federal Register. I do know that it is enormous.
      I think there is a lot that needs to be changed, in terms of the laws that govern our nation. But I can’t agree that our lives today are regulated to control our status. My husband and I have both changed careers, moved several times, and had a variety of roles in different communities. Our choices were limited primarily by finances and willingness to take chances. But not by any regulation.
      I do think that the federal government should greatly simplify the tax code, and stop trying to use it to encourage or discourage certain behaviors. I think subsidies of most kinds should be eliminated. (I think there could be a good argument, for instance, for subsidizing the education of people willing to be doctors or teachers in low-income areas.)
      But that’s quite different from central planning, and from Hayek’s arguments against it. There are other arguments against government involvement in the economy, but I don’t think Hayek makes those, at least not clearly.

  4. LetUsHavePeace says:

    Have you and your husband had government licenses? How much of your income in these different careers came either directly or indirectly from the government? These are not meant to be hostile questions; but they are intended to open your eyes to the obvious. Including activities that exist only because of government regulation – tax preparation, environmental impact statements, compulsory school teaching, about 55% of all income in the United States is earned by people in government and related activities. It is an indication of the enormous productivity of our technology that the society can support this burden; but that does not make it any less “planned” in the sense that Hayek meant the word. He was describing how much of people’s ordinary life had become subject to regulation from which there was literally no escape. You make too much of the question of whether or not planning is “centralized”. The fact that the planning is divided up among city, county, state and federal governments does not make it any less “centralized” in Hayek’s meaning; putting a difference name on the authority that has an absolute right to tell people what to does not make the regulation any less socialist or enslaving. I doubt you will agree with this, but you should understand what Hayek meant. He was describing how Britain – the birthplace of individual liberty – had become a place where some government official had the right to tell people how to do almost everything. There is only one argument against government involvement in the economy: it does not work.

    • Pauline says:

      I have taught in a private school, been a church secretary and a bank teller, and worked in the IT department for three different manufacturing company. Oh, and I worked part-time for Toys ‘R Us, K-Mart, delivered Domino’s Pizza, and was a receptionist for an oral surgeon. The only time I got a “government license” was when the controller at the company I worked for asked me to become a notary public so that he always had someone handy to notarize things. Since the company paid for my license, I didn’t charge them for my services. I occasionally did have co-workers use me, and I probably earned a grand total of at least $4 before I moved out of the area.

      My husband was a research scientist for Johnson&Johnson, then a pastor, and has since worked for The Salvation Army, and worked in three different warehouses. At J&J he had to do a lot in terms of paperwork required by the FDA, but that was a big expense for the company and hardly a source of income. At the Salvation Army there was a grant that paid for his salary as a youth worker, but I don’t know the source of the grant. Since then he has worked at three different warehouses, currently for Wal-Mart.

      I returned Hayek’s book to the library yesterday, so I can’t look up what he wrote, but my understanding of his objection to centralized planning was in part because the decision-makers were so far removed from the activities they directed. In that regard, I consider control by local government far less of a problem. People are far less likely to vote for a tax increase that affects them so directly, so local government has to be much more responsible in how it spends money. I lived in one town that two years in a row rejected the budget for the school district, because they considered it excessive.

  5. LetUsHavePeace says:

    This may explain what Hayek meant about centralized planning. It is from Kevin Carlson’s blog:

    At the hospital where I work, I’ve seen entire floors remodeled at enormous expense, just to make them less functional than before. I’ve seen a perfectly functional telephone system on my ward replaced at a cost of thousands of dollars, and a totally acceptable photocopier replaced at a cost of thousands more, just because they had the money in their capital budget and couldn’t think of anything else to spend it on. I’ve seen the hospital add a DaVinci “surgical robot” and invest in extremely expensive specialty treatments for high-end niche markets, while patients shit the bed waiting for bedpans and go five days without a bath or linen change. Most recently, the hospital announced an $8 million expansion of ER; the money spend on that alone would probably be enough to increase the staffing ratio to one orderly for each six patients, what it used to be fifteen years of downsizing ago, and fund it at that level for ten years. But spending that money on labor for patient care would lower “productivity,” according to their pointy-haired MBA metrics–despite the fact that the money they’re ostensibly saving from staffing cuts now is more than offset by the resulting increases in med errors, falls, and hospital-acquired infections.

    The objects of capital spending remind me of Friedrich Hayek’s predictions for a centrally planned economy:

    “There is no reason to expect that production would stop, or that the authorities would find difficulty in using all the available resources somehow, or even that output would be permanently lower than it had been before planning started . . . . [We should expect] the excessive development of some lines of production at the expense of others and the use of methods which are inappropriate under the circumstances. We should expect to find overdevelopment of some industries at a cost which was not justified by the importance of their increased output and see unchecked the ambition of the engineer to apply the latest development elsewhere, without considering whether they were economically suited in the situation. In many cases the use of the latest methods of production, which could not have been applied without central planning, would then be a symptom of a misuse of resources rather than a proof of success.”

    What Mr. Carlson is pointing out is that, in a system where economic liberty does not exist, where neither the hospitals nor the patients can directly control what they spend, assessments of “efficiency” become entirely political.

    • Pauline says:

      The problems mentioned about how money was spent wastefully at the hospital, simply because it was in the budget, are not at all unique to publicly funded organizations. It happens with large private companies as well. My husband used to complain, back when he worked for J&J, about how they would have to find ways to spend money in the budget by the end of the year, or it would be reduced the following year. I have heard from salespeople at companies where I have worked that they take advantage of that tendencies at potential customers.

      When I studied business administration in grad school, I remember one prof (in Finance, I think) talk about how a common problem in very large companies is that managers start acting to get money and power for themselves and their departments, rather than acting for the good of the company as a whole. Even the basis of the CEO’s compensation often does not provide incentive for him to root out and correct such problems.

  6. LetUsHavePeace says:

    Thanks for your replies. The reason this is a topic of such concern to me is that the outright poverty and constrained choices that so many people have – even in this “rich” country – have their origins in what Hayek is describing. Johnson & Johnson’s bureaucracy was – and is – to a great extent, a function of its own entanglements with a set of rules that has no basis other than arbitrary authority – what Hayek called serfdom. It is impossible at this point for any of us to remove ourselves from the web of arbitrary rules, but there is – for me – some comfort in understanding why, in an age of abundance, people’s lives remain so hard. Self-interest is unavoidable; what government authority – as opposed to consensual agreement – produces is a system of hypocrisy that is morally corrupting. In the name of “fairness” and “doing good” extortion is made permanent. Thank God for the consolations of faith; without it there would be no hope at all. All the best.

    • Pauline says:

      I agree that there is a great deal of reason for concern. And that the government is dragging down the economy and making it harder for people to prosper. There is a great deal I would want to change in terms of the tax code and various regulatory agencies.

      What I don’t see is that Hayek’s reasoning applies to our situation. When you talk about “the outright poverty and constrained choices that so many people have – even in this “rich” country” – what is constraining their choices? If it is connected to their poverty, which can in part be blamed on the government’s actions, then it’s not what Hayek is talking about. He specifically says that the sense in which “freedom” is limited by lack of money is not the same meaning of freedom he is trying to defend.

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