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.