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The Constitution of Liberty The Constitution of Liberty owed its origins to a trip that surely was among the most enjoyable duties a scholar had ever to perform

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The Constitution of Liberty The Constitution of Liberty owed its origins to a trip that surely was among the most enjoyable duties a scholar had ever to perform. In editing Mill's correspondence with his wife, Hayek omitted most of the long letters he wrote her from a trip in Italy and Greece during winter and spring, 1854-55. Hayek conceived the idea of repeating Mill's journey by exactly a hundred years to the day and producing an annotated volume of Mill's letters. He secured foundation funding for the sojourn, and he and his wife spent a "delightful" seven months traveling by car through France, Italy, and Greece, from which they made a side trip to Egypt where he delivered lectures on "The Political Ideal of the Rule of Law," which comprise five chapters within The Constitution of Liberty. As a result of his Cairo lectures and "constant preoccupation with Mill's thinking," "the plan for The Constitution of Liberty suddenly stood clearly before my mind" upon returning to the United States. He worked on the volume for the next four years, taking a year to write each of its three parts, then revising the whole during latter 1958 and the first part of '59. He concluded the 1959 preface to the German edition of The Counter-Revolution of Science (which originally was to be the first part of The Abuse and Decline of Reason) that "the work of which this is a part will not be continued in the form originally conceived. I now hope to present the body of thought in another volume that is less historical but more systematic"–The Constitution of Liberty. He wrote the preface of The Constitution of Liberty on his sixtieth birthday, May 8, 1959. He stated his conception of freedom in the book's first chapter–"the state in which a man is not subject to coercion by the arbitrary will of another." His point was not that a complete absence of coercion is possible or characterizes liberty. His point was that law creates freedom by securing a rational framework within which individuals can live their lives. What he thought essential is that coercion not be arbitrary, that individuals should know what is permissible and what is not. The larger times within which he wrote influenced the work. The late 1950s were a period of intense rivalry between the United States and its allies and the Soviet Union. There was a real philosophical and political struggle as to which system would prevail in the world– that of the Soviet Union or of the United States. Many anticipated it would be the former. Within this context, The Constitution of Liberty should be considered a restatement and justification of liberal democratic capitalism. Hayek's hopes for The Constitution of Liberty were higher than for any of his other work. The volume was intended by him when he wrote it as his magnum opus. A number of the chapters were in some form published before they appeared in the final book, and they were circulated to friends, associates, and students for comments. He listed 26 individuals in the Acknowledgements and Notes who reviewed the manuscript in some form before publication, unprecedented for any of his other work (he mentioned in the acknowledgements, "I have never learned even to avail myself of the aid of a research assistant"). He hoped The Constitution of Liberty would be The Wealth of Nations of the twentieth century. The five chapters of The Constitution of Liberty that comprised Hayek's Cairo lectures primarily concern the rule of law. He emphasized the importance of law to liberty. Without law, there can be no liberty. Right law constitutes, creates, defines liberty–right law is liberty. He used as the epigraph of the chapter "The Origins of the Rule of Law" this passage from Locke: "The end of law is, not to abolish or restrain, but to preserve and enlarge freedom. For in all the states of created beings capable of laws, where there is no law there is no freedom. For liberty is to be free from restraint and violence from others; which cannot be where there is no law: and is not ... a liberty for every man to do what he lists [desires].... For who could be free when every other man's humour might domineer over him?... But a liberty to dispose, and order as he lists, his person, actions, possessions, and his whole property, within the allowance of those laws under which he is, and therein not to be the subject of the arbitrary will of another, but freely follow his own." In the first part of The Constitution of Liberty, "The Value of Freedom," he sought to paint a picture of the great productive possibilities of a political order characterized by the rule of law. This essentially was a continuation of economic arguments he made earlier in his career against socialism, but from a more positive perspective. He here stressed not the infeasibility of classical socialism, but the productivity of a political-economic order in which the rule of law, private property, contract, and freedom of exchange create the highest standard of living. The essentiality of the rule of law to material productivity is based upon people's requirement for a rational context in order to be maximally productive, "The importance which the certainty of law has for the smooth and efficient running of a free society can hardly be exaggerated. There is probably no single factor which has contributed more to the prosperity of the West than the relative certainty of the law which has prevailed here." The social rationality that laws create is, in Hayek's view, their ultimate justification. If the rules of society are uncertain as to what one's property, for example, is people will not be as productive as in a society where rules are more certain. Without laws and social morés, individuals cannot know what the consequences of their actions will be. Rules and law create societal order, and thereby the possibility of productive effort. The content of law is, of course, essential as well as its existence. Hayek thought that the appropriate role of law is to create private domains for individuals wherein, as Locke and Mill held, they may act as they wish. Liberty, Hayek maintained in "The Value of Freedom," "presupposes that the individual has some assured private sphere, that there is some set of circumstances in his environment with which others cannot interfere." He emphasized the importance of material progress, "The aspirations of the great mass of the world's poulation can today be satisfied only by rapid material progress. At this moment, when the greater part of mankind has only just awakened to the possibility of abolishing starvation, filth, and disease; when it has just been touched by the expanding wave of modern 2 technology after centuries or millenia of relative stability; even a small decline in our rate of advance might be fatal to us." He sought to overturn hundreds of years of egalitarian thinking. Perhaps the most readily apparent examples of this in The Constitution of Liberty were his discussions of underdeveloped nations and of the importance, indeed necessity, of inequality within societies. Concerning world inequality, he wrote, "there can be little doubt that the prospect of the poorer, 'undeveloped' countries reaching the present level of the West is very much better than it would have been, had the West not pulled so far ahead. If today some nations can in a few decades acquire a level of material comfort that took the West hundreds or thousands of years to achieve, is it not evident that their path has been made easier by the fact that the West was not forced to share its material achievements with the rest–that it was not held back but was able to move far in advance of the others?" Concerning inequality within a community, "it is one of the most characteristic facts of a progressive society that in it most things can be obtained only through further progress. This follows from the necessary character of the process: new knowledge and its benefits can spread only gradually, and the ambitions of the many will always be determined by what is as yet accessible only to the few. The rapid economic advance that we have come to expect seems in a large measure to be the result of inequality and to be impossible without it." In his inegalitarianism as well as tepid support for democracy, he was outside the mainstream of liberal political thought. While contrasting passages from the following authors can be found, their prevailing sentiment was nonetheless different than the one Hayek enunciated: Hobbes–"Nature has made men so equal in the faculties of the body and mind, as that though there be found one man sometimes manifestly stronger in body or of a quicker mind than another, yet when all is reckoned together the difference between man and man is not so considerable as that one man can thereupon claim to himself any benefit, to which another may not pretend, as well as he." Locke–"Let us suppose that the mind to be, as we say, white paper, void of all characters, without any ideas; how comes it to be furnished? To this I answer in one word, from experience: in that all our knowledge is founded, and from that it ultimately derives itself." Locke also quoted "the judicious Hooker" approvingly that "equality of men by nature" "'hath brought men to know that it is no less their duty to love others than themselves; for seeing those things which are equal must needs all have one measure, how should I look to have any part of my desire herein satisfied, unless myself be careful to satisfy the like desire, which is undoubtedly in other men, being of one and the same nature?... My desire, therefore, to be loved of my equals in nature ...'" Smith–"The difference of natural talents in different men is, in reality, much less than we are aware of. The difference between the most dissimilar characters, between a philosopher and a street porter, for example, seems to arise not so much from nature, as from habit, custom, and education." 3 Jefferson–"All men are created equal." Though Hayek was inegalitarian in his view of individuals' potentialities, he was not conservative in the sense of preserving the status quo or protecting preexisting relationships of power and privilege in a society. He sought, indeed, radically to upset the status quo to the extent it is incompatible with the emergence of a genuinely meritocratic, inegalitarian, competitive market society, "The freedom that will be used by only one man in a million may be more important to society and more beneficial to the majority than any freedom that we all use." Moreover and most significantly, "It has been the fashion in modern times to minimize the importance of congenital differences between men and to ascribe all the important differences to the influence of the environment. However important the latter may be, we must not overlook the fact that individuals are very different from the outset. As a statement of fact, it just is not true that 'all men are born equal.'" The significance of Hayek's inegalitarian outlook of humanity's intrinsic propensities is that it undercuts societal orders based upon a notion of the desirability of equality or uniformity of social outcome. If humanity are not physiologically very diverse, communities in which significant diversity of outcomes exists may, to this extent, be less than optimal. If individuals naturally are very diverse, though, optimal–or natural–societal orders will be ones in which human diversity manifests itself. He held in The Constitution of Liberty, "From the fact that people are very different it follows that, if we treat them equally, the result must be inequality in their actual position ... [F] reedom leads to material inequality." This perhaps is the heart of the Hayekian message regarding desirable human communities: There can be no material progress without inequality and diversity of outcomes. He put this forward, moreover, not as an ethical precept but an empirical fact. Individuals may not like the fact, but they cannot create materially productive human communities in any other way. There is a choice between equality and productivity. One may have one or the other, or neither, but one may not have both–or at least such was Hayek's view. He chose inequality and productivity in the material outcomes of a societal order over equality and poverty. Material inequality in a society should be based upon innate human diversity. This paradoxically is achieved through the equality of all before the law. It precisely is when people are treated the same that innate human diversity manifests itself. Hayek thought an optimal society is one where place and material possessions are determined by competence impartially determined through a competitive market typified by freedom of exchange and private property, not by government management of the details of economic activity. He was criticized in a respectful manner by a student of his at Chicago, Ronald Hamowy, who wrote in the New Individualist Review on "Professor Hayek's use of the term 'coercion' within the context of state activity. He states that 'the conception of freedom under the law that is the concern of this book rests on the contention that when we obey laws, in the sense of general abstract rules laid down irrespective of their application to us, we are not subject to another man's will and are therefore free.' The inference is, of course, that these abstract rules 4 are non-coercive, despite any qualification as to their content." Hamowy's criticism–that Hayek's macro-conception of liberty is non-contentual–has been made by others as well. Hayek responded that the "issue on which Mr. Hamowy dissents is the practical one of the manner in which the power of coercive action by government can be so limited as to be least harmful. Since government needs this power to prevent coercion, it might at first seem as if the test should be whether it is in the particular instance necessary for that purpose. But to make necessity for the prevention of worse coercion the criterion would inevitably make the decision dependent on somebody's discretion ... While we want to allow coercion by government only in situations where it is necessary to prevent coercion, we do not want to allow it in all instances where it could be pretended that it was necessary for that purpose. We need therefore another test to make the use of coercion independent of individual will. It is the distinguishing mark of the Western political tradition that for this purpose coerion has been confined to instances where it is required by general abstract rules, known beforehand and equally applicable to all. Combined with the requirement that such general rules authorizing coercion could be justified only by the general purpose of preventing worse coercion, this principle seems to be as effective a method of minimizing coercion as mankind has yet discovered." His position was, in other words, not only that law should have a certain, general form, but a coercion-mimimizing content. Hamowy also said that Hayek's "main thesis is that freedom may be defined as the absence of coercion." To this, Hayek responded, "it was not the main thesis of my book that 'freedom may be defined as the absence of coercion.' Rather, as the first sentence of the first chapter explains, its primary concern is 'the condition of men in which coercion of some by others is reduced as much as is possible in society.' I sympathize with disappointment about my admission that I know of no way of preventing coercion altogether and that all we can hope to achieve is to mimimize it. Coercion can only be reduced or made less harmful but not entirely eliminated." The essential rub is that "to prevent people from coercing others is to coerce them." Hayek's hopes for The Constitution of Liberty were higher than for any of his other work. He had this exchange with Buchanan: Q: I've heard you say that you were so surprised by the reaction to The Road to Serfdom. On the other hand, I've heard people say that you were greatly disappointed by the reaction to The Constitution of Liberty–that you expected much more of a reaction than you got. Is that right? A: Yes, that is true. Hayek hoped that, like The Road to Serfdom, The Constitution of Liberty would be a tremendous popular success. The work was officially published on February 9, 1960, but review and advance copies were available during late 1959. Hayek personally sent, or had sent by others, scores of copies to leading academics, corporate leaders, and government officials, as well as journals and magazines, in the United States particularly but throughout the world. 5 While some of this large pre-publication promotion was paid for by the University of Chicago Press and foundations, he also dipped into his own pocket. He sought a wide readership. In a personal letter to an editor at Time unsuccessfully encouraging a review, he observed that, while it appeared to be a scholarly work, The Constitution of Liberty was intended for the general reader. In a more or less form letter he sent to many with a copy of the book, he expressed that it was mostly intended for businessmen and leaders of public affairs and opinion. He personally sent copies to former President Hoover, Vice-President Nixon, Time publisher Henry Luce, Walter Lippmann, members of the President's Council of Economic Advisors, and others. Nixon apparently at least glanced at The Constitution of Liberty and was basically in sympathy with it. Hayek sent a copy of The Constitution of Liberty to Reader's Digest, hoping that it would condense it as it had The Road to Serfdom. In a letter with The Constitution of Liberty to De Witt Wallace of the Reader's Digest, he described it as the great positive statement of a free society's principles upon which he had been working since The Road to Serfdom. Reader's Digest replied, to Hayek's disappointment, that it would not be possible to condense the work. Some of the letters and copies of the book he sent were intended to solicit remarks that could be used for further promotion. Roscoe Pound wrote back to Hayek, for example, that "if you feel it is worthwhile to quote me I should not hesitate to say that the book is timely, sound, and well written." In much of Hayek's pre-publication correspondence with advance copies, he noted publication would be February 9th, hoping to engender the widest possible publicity for the book when it was released. He was disappointed by the public response. A review was not published in Life as well as not in Time, and the book was unfavorably reviewed by Sydney Hook in an interior article in the New York Times Book Review, which gave The Road to Serfdom a banner, front page reception sixteen years before. Hook said that "as a cautionary voice Mr. Hayek is always worth listening to. He is an intellectual tonic. But in our present time of troubles, his economic philosophy points the road to disaster." Hayek's great disappointment by the response to The Constitution of Liberty was not warranted and reveals both his extremely high conception of himself and unrealistic expectation of what was likely to be a popular work. Actually, for a book of its sort, it received considerable, as well as positive, attention. John Davenport wrote in Fortune that "this is a timely and timeless book"; the Chicago Sunday Tribune Magazine of Books said, "this should be the book of the year in the field of ideas"; Arthur Kemp wrote in the Journal of the American Medical Association that "it provides the most significant contribution in the twentieth century to a restatement of the principles of a free society on which the growth and even the survival of western civilization depends"; and Henry Hazlitt, who wrote the 1944 New York Times Book Review article on The Road to Serfdom, praised The Constitution of Liberty in his Newsweek column. In a review signaling rapprochement with Hayek, Lionel Robbins wrote in Economica, "I have written as I should talk if we were having a friendly discussion in the staff seminar here, as we have done so often in the past. The recognition of an order in society which has not been planned as a totality is clearly fundamental; and never has the pathbreaking significance of the great eighteenth century discoveries in this respect been better set forth than in Professor Hayek's 6 luminous exposition, itself the source of many new insights. Propositions that have been repeated more or less parrot-wise for a hundred and fifty years acquire a meaning and depth seldom before realized. It is a work which surely no one with even a bare minimum of magnimity and sense of what is fine can read without gratitude and admiration–gratitude for a splendid contribution to the great debate, admiration for the moral ardour and intellectual power which inspired it and made it possible." The rift between the two men healed. Hayek chose to direct his final thoughts in the volume against conservatism, in its postscript, "Why I Am not a Conservative." He noted that in the contemporary battle against increasing state power, supporters of classical liberalism at times had to make alliances with conservative forces, but he did not consider such tactical associations to reflect the intrinsic classical liberal or libertarian position, which ultimately is as opposed to conservatism as to socialism. Indeed, he saw more similarities between socialism and conservatism than between either and classical liberalism or libertarianism, "Conservatism, though a necessary element in any stable society, is not a social program; in its paternalistic, nationalist, and power-adoring tendencies it is often closer to socialism than true liberalism; and with its traditionalistic, antiintellectual, and often mystical propensities it will never, except in short periods of disillusionment, appeal to the young and all those others who believe that some changes are desirable if this world is to become a better place." Before socialism's rise, conservatism's opposition was liberalism. He especially opposed conservatism because of its approach to knowledge. Classical liberalism and libertarianism celebrate the acquisition of new knowledge. They recognize that human advance is always into the unknown, and that humanity can never move forward unless we recklessly pursue the truth wherever it leads. Such is not always the case with conservatism, which has a "propensity to reject well-substantiated new knowledge because it dislikes some of the consequences which seem to follow from it. By refusing to face the facts, the conservative only weakens his own position." If he had to choose between left and right, he chose left at the time he wrote The Constitution of Liberty in the same way he dedicated The Road to Serfdom "to the socialists of all parties": "The belief in integral freedom is based on an essentially forward-looking attitude and not on any nostalgic longing for the past or a romantic admiration for what has been. In a world where the chief need is once more to free the process of spontaneous growth from the obstacles and encumbrances that human folly has erected,... [the political philosopher's] hopes must rest on persuading and gaining the support of those who by disposition are 'progressives,' those who, though they may now be seeking change in the wrong direction, are at least willing to examine critically the existing and to change it wherever necessary." Classical liberalism and libertarianism are forward-looking, rational philosophies. They see potential worlds that are yet to be, not that have never been. Hayek concluded The Constitution of Liberty, "I doubt whether there can be such a thing as a conservative philosophy. Conservatism may often be a useful practical maxim, but it does not give us any guiding principles which can influence long-range developments." 7 15. The Road to Serfdom The Road to Serfdom is Hayek's classic–his work that has been, is, and will continue to be read by more people than any of his other works. Not only was it an international cause célebre following publication in 1944, but it continues to be found in many popular bookstores today. It is his book that has entered the canon of permanent classics in political philosophy alongside the Republic, Prince, Treatise of Civil Government, Communist Manifesto, On Liberty, and a handful of others. It may be read hundreds of years from now. While books of ideas need not be read by vast numbers in order to be influential, they must be read by a substantial body to attain the rank of highest significance. That Hayek considered some popular success to be relevant to a work's importance is attested by his hope, prior to its publication, that The Constitution of Liberty would be a popular success. He fundamentally believed in the power of ideas; the scope of a book's readers therefore is relevant to its influence. The Road to Serfdom–alone among his writings–had some contemporary effect in shaping public opinion–deeply, not immediately, and on a broad scale. It sounded as the cry of a voice in the wilderness, that socialism, if realized, would amount to political and moral, as well as economic, slavery. This now is the conventional wisdom. When Hayek enunciated this idea, he was derided for his position. The book's greatness stems, though, not only from its consequences but its intrinsic merit. The work may in largest part be considered the moral and political ramifications of the socialist calculation debate, considered not so much from the perspective of economic productivity, but the type of regime and people inevitable within a regime of classical socialism. The book was an attempt to reach beyond his fellow economists to a wider audience of social scientists and intellectuals. He did not know when he wrote it how far he would reach, but that he greatly exceeded his reasonable hopes is apparent. He did not think it likely that he would become prominent around the world as its author. He did not realistically foresee himself as more than a professor of economics–though he undoubtedly had much higher hopes. But hoping is not the same thing as what one reasonably expects. His goal for The Road to Serfdom was to reach an audience of educated men and women, and in influencing them affect public policy. He saw Britain potentially poised to plunge into full-scale nationalizing socialism after the war, which he thought would be a grievous error. "It is necessary now to state the unpalatable truth that it is Germany whose fate we are in some danger of repeating," he declared in the midst of World War II. To a later generation, as to much of his own, this statement sounds far-fetched. How could early 1940s Britain have in some way been conceived as in danger of becoming another Nazi Germany? His argument was that government ownership of the means of production in a society–largely supported by academic intellectuals during the 1930s, and later–would concentrate power in the state in a manner similar to Nazi Germany or the Soviet Union. Keynes is mentioned only twice in The Road to Serfdom–once merely in the title of an article and the other time in support of Hayek's contention of how far Britain had traveled on the German path during the preceding twenty years. Hayek's target was not what then was becoming referred to as the welfare state. His opponent was not Keynes. In The Road to Serfdom's 1976 preface he clarified that "during the interval of time terminology has changed and for this reason what I say in the book may be misunderstood. At the time I wrote socialism meant unambiguously the nationalisation of the means of production and the central economic planning which this made possible and necessary." Neither was Hayek's opponent in the book Beveridge and his famous 1942 Report on Social Insurance and Allied Services. Neither Beveridge nor the Beveridge Report is mentioned in The Road to Serfdom. When the The Road to Serfdom was published in Britain on March 10, 1944, it was an immediate success, attracting substantial public interest. It appeared at the right moment. Whether one agreed or disagreed with it, the book struck a chord. Should classical socialism be the direction in which Britain moved following the war? Sir William Harcourt, a British Liberal leader, famously said in 1884, "We are all socialists now." Hayek now said of this remark, "If it is no longer fashionable to emphasise that 'we are all socialists now,' this is so merely because the fact is too obvious. Scarcely anybody doubts that we must continue to move towards socialism, and most people are merely trying to deflect this movement in the interest of a particular class or group." Socialism was considered, particularly by academic intellectuals, as society's next step. The prevailing definition of socialism was, moreover, "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." The work was "mostly written in '41 and '42." He said of the title that "the idea came from Tocqueville, who speaks about the road to servitude; I would like to have chosen that, but it doesn't sound good. So I changed 'servitude' into 'serfdom,' for merely phonetic reasons." He especially worked stylistically on the introduction and first two or three chapters: "During the war I played with The Road to Serfdom because it was the first time I felt I had come to master English, in the sense that I got enjoyment in writing in English. The opening was the best thing I have ever written"; "I really tried there to see how well I could write English, and I took great trouble, reading it out again and again, getting the swing of the thing. It would have taken me years to do it for the whole book." He cited Karl Mannheim's Man and Society in an Age of Reconstruction (1940) several times in The Road to Serfdom, and it is worthwhile to turn to this work to obtain a better picture of the tenor of the times. Mannheim was a prominent socialist thinker who was compelled to move to England as a result of the Nazis' rise to power. Mannheim believed that "at the present stage of industrial society planning in some form or other [i]s inevitable"; "planning is the reconstruction of an historically developed society into a unity which is regulated more and more perfectly by mankind from certain central positions. The social process is no longer merely the product of conflict and competition. Without recognizing this trend, we cannot understand the age in which we live"; and "it is becoming more and more obvious that the enjoyment of income and interest and the right to dispose of capital are two very different things. It is possible that in 2 the future things will so develop that by appropriate taxation and compulsory charity this unrestricted use could be curtailed, and the disposition of capital could be guided from the center by credit control ... withdrawing certain functions of capital from the competence of capitalists." Prior to Friedman's reconceptualization of the monetary source of the Great Depression–from which Hayek always dissented–it was unclear that the depression was not the result of mistakes by capitalists, inherent contradictions in capitalism, and a need for systemic change. Hayek also cited the then-popular work of C. H. Waddington who looked forward to an economy which "will be centralised and totalitarian in the sense that all aspects of the economic development of large regions are consciously planned as an integrated whole." These genuinely were prominent views of the day. If the socialist sentiments of Hayek's intellectual opponents sound irrelevant today, this does not detract from their representativeness of a considerable faction within the contemporary ideological outlook. If, in the same way that some of Hayek's thoughts in The Road to Serfdom now sound off, it is remembered how equally far were sentiments of his peers from present discussion–though in the opposite direction– perhaps his remarks will seem less otiose. He misjudged the ranges of probable and practical of the politics of his time, and was excessively pessimistic as to the likelihood of internal socialist change within western nations and of his evaluation of the capacity of a "middle way" between state socialism and state-less capitalism to achieve economic productivity and personal freedom. He, indeed, endorsed a middle way, though considerably farther to the right than Keynes and Beveridge, and though Hayek did not recognize as or call it such. His achievement was to get the main point right that so many of his contemporaries got wrong: The practice of private ownership and private direction of many of the means of production in a society is essential to freedom, prosperity, and democracy. Moreover, that classical socialism achieved through democratic means would be totalitarian. The British background–intellectual and historical–within which he wrote should be emphasized. Britain was, unlike the United States, a class-riven, inegalitarian, and geographically compact society within which the notion of societal organization was more plausible than in the United States. Particularly following the experiences of World Wars I and II, when most of the British economy was harnessed to the war efforts in a way far surpassing that in the United States, the idea that such activity could be pursued during peacetime appeared eminently reasonable. From an intellectual perspective, socialism seemed plausible as well. The great British economic and political writers of the seventeenth through nineteenth centuries paved the way for socialism through their emphases on worldy life, material pleasures, and happiness. Socialism was materialism to be achieved through governmental means. Socialism was, however, explicitly a change from the past though an outgrowth from it. The idea of organizing all of a society's economic aspects could not be conceived until after the industrial revolution. The technology simply did not exist previously to exert such control. Preindustrial communication was inefficient. A society without even the telegraph and paved roads is difficult to organize economically. While pre-industrial absolutist rulers were tyrants or despots, they generally left their subjects' economic activities alone, subject to local, church, and trade guilds and controls, and were for the most part content merely to tax their subjects. 3 The Great Depression substantially increased support for socialism. When tens of millions were unemployed throughout the western world, it appeared capitalism was a failure, Marx's prediction of capitalism's demise was correct, and that collective, state control of the means of production was the only way to achieve a stable and productive economy. Herman Finer's vitriolic 1945 response to The Road to Serfdom, Road to Reaction, well expressed the conventional view of capitalism's failure from the perspective of consequences of these deficiencies for preservation of democratic government, "the sense of desperation produced by the downward tug of economic ruin subjected political systems throughout the world to tremendous strain. In Germany, still a democratic form of government, people flew for help to men who were making ready to supplant popular government by dictatorship. In France, the nation was split wide open socially. In the United States and Great Britain, where the democratic system had firmer foundations in history and character of the people, the gravest pressure, almost to the breaking point, was put on the constitutions, which barely survived." For Hayek, on the other hand, "only capitalism makes democracy possible," and "we have progressively abandoned that freedom in economic affairs without which personal and political freedom have never existed in the past." While Hayek gave as his ostensible reasons for writing The Road to Serfdom that he wanted to clarify that Nazism was not a reaction to socialism but an outgrowth from it, and that no one "better qualified" was available to write on themes in the work as a result of his colleagues' wartime government service, there was more to it than this. The book was his personal war effort, one he found "a duty which I must not evade." In part, because he was not able directly to participate in the war, he indirectly did so. The essential message of the work is the incompatibility of socialism and freedom. This message animates the work for it broadens discussion of socialism's failings from economic inefficiency to the elimination of freedom. His argument was not for the most part that socialism could not economically work–he and others had already made that argument–but that socialism is inimical to liberty and freedom. He stated in the conclusion that the book had an "essentially critical task"–the repudiation of classical socialism, government ownership and management of the means of economic production. As previously seen, Hayek began his critique of socialism by observing that it commenced as a reactionary movement opposed to the French Revolution's liberalism. Under the impetus of the European uprisings of 1848, however, continental socialism began to ally itself with democracy. Continental socialists correctly foresaw that democracy was the way of the future and that no effort seeking wholesale reconfiguration of society could hope to persuade the ruling classes voluntarily to forfeit their positions. It thus in part was that socialism began to be seen as the next step for society. It positioned itself alongside the most progressive forces in society, those calling for equal suffrage. The tie between socialism and democracy is, however, deeper than political expediency; moreover, British socialists always were democrats. There was a different socialist tradition on the continent than in Britain. In continental Europe, socialism generally was neither democratic nor Christian. Marx, the foremost European socialist, had little, if any, regard for democratic voting, and continental socialism generally was authoritarian and technocratic. 4 In Britain, it was a different story. Thomas More's Utopia (1516) put forward the idea of a genuinely communist society, and during the Puritan revolution in seventeenth century England there arose beside the main, more moderate movement a more radical group called "Diggers" or "True Levelers" who sought communal ownership of land. While the movement was short-lived, its protest against private property was not entirely forgotten. Robert Owen (1771-1858) typically is regarded as founder of British socialism and was first to use the term "socialism." He supported "progressive repeal and modification" of unjust laws and institutions, rejecting revolutionary change. Later in the nineteenth century, John Stuart Mill came to embrace a cautious socialism, favoring cooperation within the working place and competition between working places, and, following Jeremy Bentham, became the great proponent, and patron saint, of governmental reform in Great Britain. Thomas Hill Green, an Oxford don during the 1860s and '70s, exerted considerable influence over British intellectual circles until the early years of the twentieth century. A devout Christian, Green emphasized community. Unless mankind is conceived as part of a community– with reciprocal duties and rights–little understanding of either individual or society is possible. Other influences on the development of British socialism during the last decades of the nineteenth century included the ethical and aesthetic idealism of such poets as John Ruskin and William Morris. The most significant source of twentieth century British socialism was the Fabian Society, founded in 1883, whose most significant members included Sidney and Beatrice Webb and George Bernard Shaw. Sidney played the crucial role in founding LSE, and it was at LSE that so many of the twentieth century British socialists taught, including Attlee, Dalton, Wallas, Tawney, and Laski. The vision of British idealist socialism, as distinct from continental socialism, was to build a New Jerusalem in which human brotherhood would replace pecuniary competition. The goal was not exclusively external change of men's lots in life, but internal change. The times of the 1920s and '30s of course naturally greatly influenced the content and course of political and economic discussion. World War I destroyed the great liberal dream of the nineteenth century of a peaceful and harmonious world united by commerce and free trade. Moreover, the example of the Soviet Union beckoned socialist intellectuals and redirected British socialism from voluntary cooperation toward state initiative and control. Laissez faire liberalism of the nineteenth century was dead, or, at the very least, in a state of suspended animation. To the extent socialism preaches equality, both of human nature and in sharing the fruits of human cooperation, it is consistent it would find democracy–the practice of political equality– the most appropriate form of government. The program of classical socialism came to be government ownership and mangement of the means of economic production to be achieved through democratic means. Though, as Hayek affirmed, socialists' intentions were pure, their goals lofty, that they came to have an essentially egalitarian view of human nature, and they were democrats, they nevertheless favored coercive direct control by government over a great portion of a society's economy. By way of contrast, Hayek stressed in The Road to Serfdom, "It is not 5 the source but the limitation of power which prevents it from being arbitrary." Collectivism is not less so because it is ratified by a majority. Conflating democracy with necessarily good government and a good society is neither logical nor has stood the test of time. His position upon democracy was essential to his view that socialism is not justified, even though it may be democratically enacted. He thought democracy is intrinsically neutral, "We have no intention of making a fetish of democracy. It may well be true that our generation talks and thinks too much of democracy and too little of the values which it serves.... Democracy is essentially a means, a utilitarian device for safeguarding internal peace and individual freedom. As such it is by no means infallible or certain.... There is no justification for the belief that so long as power is conferred by democratic procedure, it cannot be arbitrary. Democratic control may prevent power from becoming arbitrary, but it does not do so by its mere existence." This view of democracy is not in harmony with ones that see in the the majority, right, whatever actions the majority may take and that praise the majority of itself. It should be remembered that at the time Hayek wrote, the extension of democracy around the globe was much less than it has become and its proponents perhaps were less guarded in their enthusiasm for it for this reason. In his presentation of democracy largely as desirable for instrumental reasons, Hayek followed in the Anglo-American tradition which sees democracy as, in Churchill's words, "the worst form of government, excepting all the other forms." "What is government itself," James Madison wrote, "but the greatest of all reflections on human nature? In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself." It is not so much that democracy is desirable in itself, Hayek argued; it is that he perceived no alternative to it for promoting relative personal freedom, allowing peaceful changes of government, furthering a competitive market, and educating a citizenry. If there is no intrinsic relationship between socialism's compatibility with freedom and its democratic enactment, what should be considered next is why socialism is inherently irreconcilable with liberty. Undoubtedly the primary reason is the degree of power entrusted to government in a clasically socialist regime. There can be no personal freedom in a society in which the individual is merely a piece in a planner's scheme. Hayek wrote in "Freedom and the Economic System," the article which became The Road to Serfdom, "Economic life is the administration of the means for all our different ends. Whoever takes charge of these means must determine which ends shall be served, which values are to be rated higher and which lower, in short what men should believe and strive for. And man himself becomes little more than a means for the realisation of the ideals which may guide the dictator." He used as an epigraph at the start of the chapter "Economic Control and Totalitarianism" in the book itself, "'The control of the production of wealth is the control of human life itself.'" He himself said, "Whoever controls all economic activity controls the means for all our ends, and must therefore decide which are to be satisfied and which 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." The most important feature of his argument against state planning in The Road to Serfdom is that it primarily is based upon human freedom, not economic productivity. His 6 argument was not merely that capitalism is justified because it is more economically productive than socialism, but that capitalism is justified because socialism is inimical to liberty. This latter argument, if true, has appeared to be more powerful than the economic one for if the issue of socialism is portrayed as one of freedom, then the debate over socialism has been lifted to the sphere of ultimate values and morality and away from technical efficiency. At the time Hayek wrote The Road to Serfdom, the collectivist economies of Nazi Germany and the Soviet Union often were considered more productive than those of a bankrupt capitalist system, so the argument against socialism from the perspective of freedom was of more relevance than it has become. As it seems socialism is inimical both to personal freedom and material productivity, the case against it in its classical variant of state management of the means of production appears conclusive. The issue of socialism's productive merits was, of course, one classical socialists emphasized. They genuinely believed that socialism would be more economically productive than capitalism. The current conventional wisdom is that socialists were utterly wrong in this appraisal and that the examples of the former Soviet Union and a host of other formerly communist nations demonstrate the vanity of central managment and planning of a society's productive resources. If the current conventional wisdom is correct, this would indicate that there is little case for classical socialism. If it is not as materially productive as capitalism, the original main argument for it from the perspective of its proponents has vanished. Hayek stated in the conclusion of The Road to Serfdom that its purpose was not "to sketch a detailed program of a desirable future order of society." A summary conception of the order he favored may nonetheless be gleaned from its pages. It is, first of all, an individualist one. He remarked on "the individualist tradition that has created Western civilization," and praised "respect for the individual man qua man." The essence of classical liberalism and libertarianism is an appraisal of humanity that places maximum focus upon each individual. Neither presupposes that individuals gain their maximum fulfillment in a collective whole that is somehow greater than the individuals who compose it. Bentham has still stated this aspect of true liberalism best in An Introduction to the Principles of Morals and Legislation (1789), "The community is a fictitious body, composed of the individual persons who are considered as constituting as it were its members. The interest of the community then is, what?–the sum of the interests of the several members who compose it." Both classical liberals and libertarians teach that individuals are most likely to be happy and to reach their greatest potential and highest personal productivity when they have the greatest personal liberty possible. Essential to a classically liberal or libertarian society is private property and a free market incorporating prices and the ability to exchange goods and services. Hayek observed that the "gradual transformation of a rigidly organised hierarchic system into one where men could at least attempt to shape their own life is closely associated with the growth of commerce." As a matter of historical record, relative respect for individual rights and democracy have developed first and flourished only in those societies that have practiced a competitive market to some considerable extent. Though he did not believe in the infallible efficacy of democracy, Hayek thought it is most likely to be maintained within a market order. Both democracy and economic 7 liberty emphasize the value of the individual. Where each individual is considered to have worth and to be deserving of some respect, democracy and economic liberty are able to find an atmosphere in which they can breathe. When, instead, the focus is the group rather than the individual, democracy and economic liberty are threatened. He saw individualism forming the core of western civilization. From the Hebrew conception of all men and women being equal children of God, to the Greek emphasis on humanism, to the Christian views of the immortality of each soul, concommitant worth of every person, and the love of Christ for all, to the Roman perspective of equality before the law–what has made the west different and better than other civilizations at its best is its emphasis on the importance of each human individual. Hayek traced the development of the western respect for the individual from its roots in antiquity, to the Renaissance, and through the Renaissance to modern times. "From the commercial cities of Northern Italy the new view of life spread with commerce to the west and north, taking firm root wherever there was no despotic political power to stifle it." Individualism became most firmly established in Britain and the Netherlands where it "for the first time had an opportunity to grow freely and to become the foundation of the social and political life of these countries." The most important institutional safeguard of individualism is the rule of law. He considered no attribute of a society's political order more important. Where not laws but men rule, no one is free, and great coercion is possible and even inevitable. He began the chapter "Planning and the Rule of Law," "Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law. Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand–rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one's individual affairs on the basis of this knowledge." This is the essence of Hayek's desired social order–not a lawless society but a lawful one. His concept of optimal social order was not based upon the notion that society without government is possible: "Probably nothing has done so much harm to the liberal cause as the wooden insistence on certain rough rules of thumb, above all the principle of laissez-faire." He considered government not so much intrinsically evil as in need of being directed and kept as minimal as possible. Classical liberalism and libertarianism are not the absence of government, as some of their proponents as well as opponents mistakenly hold. He was clear on this point. The liberty-maximizing regime does not entail "inaction of the state. The question whether the state should or should not 'act' or 'interfere' poses an altogether false alternative, and the term laissez-faire is a highly ambiguous and misleading description of the principles on which a liberal polity is based." Some form of organization is necessary within every society, "of course, every state must act and every action of the state interferes with something or other. But that is not the point"; "in no system that could be rationally defended would the state just do nothing." He was not at all opposed to new governmental and societal rules and norms to establish and strengthen a classically liberal or libertarian order, and his thought is often misinterpreted on this point. He could not have been more clear than he was in "Freedom and the Economic System," the article preceding The Road to Serfdom, that "we can 'plan' a system of general rules, 8 equally applicable to all people and intended to be permanent, which provides an institutional framework within which the decisions as to what to do and how to earn a living are left to the individuals. In other words, we can plan a system in which individual initiative is given the widest possible scope and the best opportunity to bring about effective coordination of individual effort.... This task of creating a framework of law has by no means been carried through consistently by the early liberals. After vindicating on utilitarian grounds the general principles of private property and freedom of contract, they have stopped short of applying the same criterion to the specific historic[al] forms of the law of property and of contract. Yet it should have been obvious that the question of the exact content and the specific limitations of property rights, and how and when the state will enforce the fulfillment of contracts, require as much consideration as the general principle." He held in The Road to Serfdom, "the liberal argument is in favour of making the best possible use of the forces of competition as a means of co-ordinating human efforts, not an argument for leaving things just as they are. It is based on the conviction that where effective competition can be created, it is a better way of guiding individual efforts than any other. It does not deny, but even emphasises, that, in order that competition should work beneficially, a carefully thought-out legal framework is required, and that neither the existing nor the past legal rules are free from grave defects." He added, "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." And, "there is nothing in the basic principles of liberalism to make it a stationary creed. The fundamental principle that in the ordering of our affairs we should make as much use as possible of the spontaneous forces of society, and resort as little as possible to coercion, is capable of an infinite variety of application. There is, in particular, all the difference between deliberately creating a system within which competition will work as beneficially as possible, and passively accepting institutions as they are." His argument was not that government should acquiesce in whatever rules exist within a society. His argument was that government should change these rules to create greater competition. He perhaps best stated his opinions along these lines in a 1945 national radio discussion on The Road to Serfdom sponsored by the University of Chicago, with two hostile panelists: "There are two alternative methods of ordering social affairs–competition and government direction. I am opposed to government direction, but I want to make competition work ... In the way in which you use 'planning' in this discussion, it is so vague as to be almost meaningless. You seem to call all government activity planning and assume that there are people who are against all government activity.... There are a good many people who oppose planning who do not mean by that opposition that they think that there ought not to be any government at all. They want to confine government to certain functions"; "this discussion here, as elsewhere, has been very confused. What I was trying to point out is that there are two basic and alternative methods of ordering our affairs. There is, on the one hand, the method of relying upon competition, which, if it is to be made effective, requires a good deal of government activity directed toward making it effective and toward supplementing it where it cannot be made effective"; "All I am arguing about is that, where you can create a competitive condition, you ought to rely upon competition. I have always said that I am in favor of a minimum income for 9 every person in the country. I am not an anarchist. I do not suggest that a competitive system can work without an effectively enforced and intelligently drawn up legal system." Hayek's fellow-participants on the radio panel were Charles Merriam, a distinguished University of Chicago political scientist, and Maynard Krueger, a former United States Socialist Party vice-presidential candidate. Merriam's biographer recounted of the discussion, "Listeners must have been puzzled at the speed with which hostilities began ... What they did not know is that the six-hour warm-up session the evening before had been considerably more heated than was normally the case and that Merriam and Hayek were scarcely on speaking terms as the program started." When challenged by his interlocutors, Hayek responded, "I am not shaken by what you are saying. You see, you are still talking about an old controversy–about whether the state ought to act or ought not to act at all. The whole effort of my book was to substitute a new distinction for the older silly and vague idea. I had realized that some kind of state action is extremely dangerous. Therefore, my whole effort was to distinguish between legitimate and illegitimate action. I have attempted to do that by saying that, so far as government plans for competition or steps in where competition cannot possibly do the job, there is no objection; but I believe that all other forms of government activity are highly dangerous." The libertarian order is not necessarily one where government is minimized but where competition is maximized. He wrote passionately of the modest yet encompassing aim of facilitating societies to allow individuals the "opportunity peacefully and in freedom to build up their own little worlds." Not a collective whole greater than the individuals who compose it but "the supreme ideal of the freedom and happiness of the individual," was his goal. The Road to Serfdom, Hayek's war "duty," was his most important work in shaping his future career, following in time Collectivist Economic Planning and "Economics and Knowledge." He said in The Road to Serfdom's 1976 preface that, after it, "though I tried hard to get back to economics proper, I could not free myself of the feeling that the problems on which I had so undesignedly embarked were more challenging and important" than those he had previously considered. Furthermore, "much that I said in my first sketch needed clarification and elaboration." He was on a new path. 10 12. Socialist Calculation Problems of socialist calculation long had been of interest to economists of the Austrian school. Eugen von Böhm-Bawerk, Mises' teacher, strongly reacted to the work and thought of Marx. According to economic historian Henry Spiegel, Böhm-Bawerk's main argument against socialism was that "the socialist criticism of capitalism was in fact a criticism of the human condition, that is, of the central problem of scarcity, with which socialism would have to cope just as did capitalism"–an argument explored in much greater depth by Mises and Hayek. The socialist calculation debate–inaugurated in 1920 by Mises through his seminal article "Economic Planning in the Socialist Commonwealth"–was long-lasting and important. Indeed, much of Hayek's work in The Road to Serfdom may be considered a continuation of the socialist planning debate in different terms, moving from economic to political, social, and governmental ramifications of comprehensive state planning. Mises' thesis was brilliant: How would it be possible for an economic system, socialism, to exist in which there are no prices? "There are many socialists who have never come to grips in any way with the problems of economics," he held, "and who have made no attempt at all to form for themselves any clear conception of the conditions which determine the character of human society. They have criticized freely enough the economic structure of 'free' society, but have consistently neglected to apply to the economics of the disputed socialist state the same caustic acumen ... Economics, as such, figures all too sparsely in the glamorous pictures painted by the Utopians. They invariably explain how, in the cloud-cuckoo lands of their fancy, roast pigeons will in some way fly into the mouths of the comrades, but they omit to show how this miracle is to take place." How would a socialist state practically be structured? It is not enough merely to point to deficiencies in capitalism. Critical to Mises' argument was the importance of prices, and the necessity to prices of private property and a competitive market. The essence of the socialist calculation debate was his attempt to point out that, in the absence of an exchange economy with a competitive market and private property, there is no such thing as price, and that such a condition renders efficient economic decision-making impossible, "Where there is no free market, there is no pricing mechanism; without a pricing mechanism, there is no economic calculation." Mises stated the main point beautifully, "The [socialist] director wants to build a house. Now, there are many methods that can be resorted to. Each of them offers certain advantages and disadvantages with regard to the utilization of the future building, and results in a different duration of the building's serviceableness; each of them requires [differing] expenditures of building materials and labor. Which method should the director choose? He cannot reduce to a common denominator the items of various materials and various kinds of labor to be expended. Therefore, he cannot compare them." A number of socialist thinkers acknowledged the force of Mises' argument. Oskar Lange wrote, "Socialists have certainly good reason to be grateful to Professor Mises, the great advocatus diaboli [devil's advocate] of their cause. It was his powerful challenge that forced the socialists to recognize the importance of an adequate system of economic accounting to guide the allocation of resources in socialist economy. Both as an expression of recognition for the great service rendered by him and as a memento of the prime importance of sound economic accounting, a statue of Professor Mises ought to occupy an honorable place in the great hall of the Ministry of Socialization of the Central Planning Board of the socialist state." The problem of value was to be solved, according to socialist economists, not through freely-fluctuating prices in a competitive market typified by private property, but through very careful accounting by socialist planners. There were two phases of the socialist calculation debate. In a 1977 interview, Hayek remarked, "Mises had conducted this fight with the socialists in the 1920s. When I came to England in the 1930s, I realized that it had gone almost completely unnoticed, so I edited a volume of the literature. The Mises controversy was in the 1920s and mine was in the 1930s." Collectivist Economic Planning (1935), subtitled Critical Studies on the Possibilities of Socialism, played a significant role in the transition of Hayek's work from technical economic theory to political and social philosophy. He recalled decades later of his movement to what his interviewer called "political-philosophical questions," "It really began with my doing that volume on collectivist economic planning, which was originally merely caused by the fact that I found that certain new insights which were known on the Continent had not reached the Englishspeaking world. Being forced to explain this development on the Continent in the introduction and conclusion to this volume I was curiously enough driven not only into political philosophy but into an analysis of the methodological misconceptions of economics [that] seemed to me to lead to these naive conceptions of, 'After all, what the market does we can do better intellectually.'" He remarked as well in this context that he left technical economics because he "bec[a]me much too interested in the semi-philosophical policy problems–the interaction between economics and political structure." His transition from economic theory to other issues was occasioned by his realization that premises he took for granted commanded far less than universal assent. Chief among these was that society is more economically productive when it is structured to allow each individual to use his own knowledge and abilities for his own purposes rather than requiring each individual to conform to a plan established by central authority. He first enunciated some of the themes that concerned him in the socialist calculation debate and for the rest of his career in his 1933 inaugural address at LSE, "The Trend of Economic Thinking": "The majority of men still remain under the erroneous impression that, since all social phenomena are the product of our own actions, all that depends upon them is their deliberate object"; "the coordination of individual efforts in society is not the product of deliberate planning"; and, far too optimistically, "the conviction that, since where there is no directing Will there must be chaos, deliberate planning will necessarily be an improvement on existing conditions, is more and more recognised to be the result of our insufficient understanding of the existing system." 2 He opposed in Collectivist Economic Planning the idea that it is possible to manage an advanced society from the top. He instead emphasized the idea of spontaneous order (though he did not yet use this term)–that the proper goal of government should be to enable individuals to make as much use as possible of their own knowledge and talents in ways that they themselves see fit. He believed there can be no progress without freedom. The attempt to mandate interpersonal agreement by requiring all members of a society to live in accordance with the dictates of one or some prevents the kind of human order from emerging within which material and technological advance occurs. He observed that the "distribution of available resources between different uses, which is the economic problem, is no less a problem of society [in a command economy] than for the individual." What is missing in a command economy is "any standard of value." He as well stressed, "Free choice of the consumer and planning from the center are incompatible aims." Another of Hayek's arguments in Collectivist Economic Planning was, how would uncertain investment decisions be made in a command economy? "Risky, and even purely speculative, undertakings will be no less important here [under socialism] than under capitalism.... Even if progress is inevitably connected with what is commonly called 'waste,' is it not worth having if on the whole gains exceed losses?" Later in his work, particularly The Constitution of Liberty, he emphasized that discovery, advance, and progress almost always are into the unknown, and that most new starts are failures. By what criteria would relatively uncertain investment decisions be made in a collectivist economy? Both Mises and Hayek considered the issue of incentives in their critiques of socialism, as well as the information-bestowing character of prices–though for neither was the question of incentive under socialism his primary theme, though for Mises it was a more important concern. Mises wrote, "the motive force disappears with the exclusion of the material interests of private individuals." According to Hayek, "the question [is] whether decisions and responsibility can be successfully left to individuals who are not owners or are not otherwise directly interested in the means of production under their charge." Hayek further held in Collectivist Economic Planning that "the constant shift of resources between firms which goes on under capitalism would be equally advantageous in a socialist society. In a capitalist society the transfers of capital from the less to the more efficient entrepreneur is brought about by the former making losses and the latter making profits. The question of who is to be entitled to risk resources and with how much he is to be trusted is here decided by the man who has succeeded in acquiring and maintaining them." He later called "market socialism"–attempts to merge collective ownership with a competitive market–"little more than a sham." Hayek passionately believed that socialism, as any form of collectivism, literally cannot deliver the goods. Society cannot be structured as to allow government control of the means of production if there is to be an adequate material standard of living, "Central direction of all economic activity presents a task which cannot be rationally solved under the complex conditions of modern life." He held in The Road to Serfdom, "central direction is incredibly 3 clumsy, primitive, and limited in scope," and "it is no exaggeration to say that if we 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." Socialism is a factual as well as moral question. It was not merely, for Hayek, that collectivist economic planning is ethically undesirable, it is that it is not empirically possible. Socialism does not conform with conditions that are an inherent part of human experience. 4 13. "Economics and Knowledge" The most important essay in Hayek's transition to issues that concerned him for the rest of his career was "Economics and Knowledge," originally given as his presidential address to the London Economic Club on November 10, 1936. He here put forward the conception of the division of knowledge which, if true, renders the possibility of classical socialism infeasible, "There is a problem of the division of knowledge which is quite analogous to, and at least as important as, the problem of the division of labor. But, while the latter has been one of the main subjects of investigation ever since the beginning of our science, the former has been as completely neglected, although it seems to me to be the really central problem of economics as a social science.... Economics has come closer than any other social science to an answer to that central question of all social sciences: How can the combination of fragments of knowledge existing in different minds bring about results which, if they were to be brought about deliberately, would require a knowledge on the part of the directing mind which no single person can possess? The spontaneous actions of individuals will, under conditions which we can define, bring about a distribution of resources which can be understood as if it were made according to a single plan, although nobody has planned it." Hayek's discussion in "Economics and Knowledge" grew out of economic equilibrium discussions–what constitutes equilibrium, how is equilibrium defined? He remarked in "Economics and Knowledge" of his conception of equilibrium that "separation of the concept of equilibrium from that of a stationary state seems to me to be no more than the necessary outcome of a process which has been going on for a fairly long time," and in the 1948 republished version of "Economics and Knowledge" referred the reader to chapter II of The Pure Theory of Capital for "further developments," where he held, "most of the shortcomings of the theory of capital in its present form are due to the fact that it has only been studied under the assumptions of a stationary state, where most of the interesting and important capital problems are absent." John Stuart Mill perhaps best and most famously expressed the concept of a stationary state in Principles of Political Economy in the chapter there of this title, "Of the Stationary State": "It must always have been seen, more or less distinctly, by political economists, that the increase of wealth is not boundless: that at the end of what they term the progressive state lies the stationary state." This would be a "stationary state of capital and wealth." Hayek's enunciation of equilibrium theory was different than Mill's conception in two ways: first, equilibirum does not occur in a static economy but dynamic one, and second, that equilibrium is a process that occurs over time not at a point in time. Hayek discussed his conception of equilibrium in "Economics and Knowledge," "A state of equilibrium can hardly mean anything but that, under certain conditions, the knowledge and intentions of the different members of society are supposed to come more and more into agreement or, to put the same thing in less general and less exact but more concrete terms, that 5 the expectations of the people and particularly of the entrepreneurs will become more and more correct." He emphasized foreknowledge, in a market "all knowledge is capacity to predict"; "the concept of equilibrium merely means that the foresight of the different members of the society is correct ... Correct foresight is the defining characteristic of a state of equilibrium." Israel Kirzner, currently dean of the Austrian movement in economics, remarks of this last passage, "In other words, the state of equilibrium is the state in which all actions are perfectly coordinated, each market participant dovetailing his decisions with those which he (with complete accuracy) anticipates other participants will make. The perfection of knowledge which defines the state of equilibrium ensures complete coordination of individual plans." He continues, "the movement from disequilibrium to equilibrium is at once a movement from imperfect knowledge to perfect knowledge and from uncoordination to coordination. The movement from disequilibrium to equilibrium is a process of communicating information." The price system is, in Hayek's view, what brings equilibrium about. Prices are an information- or knowledge-bestowing tool. Prices are the invisible hand. He said years later, "it was somehow in thinking through anew these problems [of socialist calculation] which had much occupied us in Vienna ten or fifteen years earlier that I had suddenly the one enlightening idea which made me see the whole character of economic theory in what to me was an entirely new light." He enunciated not merely the negative case against socialism that the division of knowledge makes socialism infeasible. He stated the positive case for the free market that fluctuating prices are the only way to compensate for knowledge's fragmentation and indeterminacy. The proper role of government is to facilitate effective interpersonal interaction through enabling a market order within which individuals may use fragmented knowledge through freely-fluctuation prices dependent upon a competitive market and private property. He wrote in his autobiographical notes of "Economics and Knowledge" that, together with related articles reprinted in Individualism and Economic Order, "this seems to me in retrospect the most original contribution I have made ..." Probably his most well-known article after "Economics and Knowledge" is "The Use of Knowledge in Society," originally published in 1945 in the American Economic Review and republished with "Economics and Knowledge" in Individualism and Economic Order. Friedman writes of this article that prices "transmit information.... The crucial importance of this function tended to be neglected until Friedrich Hayek published his great article on 'The Use of Knowledge in Society.'" Hayek here held, "The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete knowledge which all the separate individuals possess. The economic problem of society is a problem of the utilization of knowledge which is not given to anyone in its totality." The mistaken belief that all knowledge can be collected in one mind leads to classical socialism. 6 He wrote as well in "The Use of Knowledge in Society" that the question of economic planning is not whether there will be planning, but "who is to do the planning. It is about this question that all the dispute about 'economic planning' centers. It is a dispute about whether planning is to be done centrally or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy ... means central planning– direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. Which of these systems is likely to be more efficient depends mainly on the question under which of them we can expect that fuller use will be made of ... knowledge." Hayek's ultimate goal was efficiency, economic efficiency, the most concise manner of achieving a goal. Such an objective is compatible with a materialistic conception of the world in which the highest standard of living for all people is life's ultimate purpose. A competitive market is required by the "unavoidable imperfection of man's knowledge." Hayek's breakthrough in the theory of knowledge, epistemology, was that as knowledge is divided, optimal social order should reflect this circumstance and that prices–dependent upon a competitive market and private property–overcome the division of knoweldge. Hayek remarked in retrospect: "When I look back to the early 1930s, they appear to me much the most exciting period in the development of economic theory during this century. This is probably a highly subjective impression, determined both by my age at that time and the particular circumstances in which I was placed. Yet even when I try hard to look at the period as objectively as I can, the years between about 1931, when I went to London, and say 1936 or 1937, seem to me to mark a high point and the end of one period in the history of economic theory and the beginning of a new and very different one." He added in a retrospective, 1963 consideration of the new approach in economic theory that emerged during the early 1930s, "I am not at all sure that the change was all a gain and that we may not some day have to take up where we left off." He described his transition from technical economics to other areas of the social sciences, beginning with "Economics and Knowledge," "I felt in a way, that the thing which I am now prepared to do, I don't know if there's anybody else who can do this particular task ... This was a new opening ... How does economics really look when you recognize it as the prototype of a new kind of science of complex phenomena? That was so much more fascinating as an intellectual problem." He said of "Economics and Knowledge" that "up 'til that moment I was developing conventional ideas. With the '36 lecture I started my own way of thinking. It was several ideas converging on [one] subject. It was my essays on socialism, the use in my trade-cycle theory of prices as guides to production, the current discussion of anticipation ... All that came together. And it was with a feeling of sudden illumination, sudden excitement, that I wrote that lecture. I was aware that I was putting down things which were fairly well known in a new form, and perhaps it was the most exciting moment in my career when I saw it in print." 7 He characterized the message of "Economics and Knowledge" as "the conception that prices serve as guides to action and must be explained in determining what people ought to do– they're not determined by what people have done in the past." He said in "The Use of Knowledge in Society," "we must look at the price system as a mechanism for communicating information if we want to understand its real function–a function which, of course, it fulfills less perfectly as prices grow more rigid. The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. By a kind of symbol [a price], only the most essential information is passed on." He held in The Road to Serfdom, "precisely what the price system does under competition" is "it enables entrepreneurs, by watching the movement of comparatively few prices to adjust their activities to those of their fellows"; "far from being appropriate only to comparatively simple conditions, it is the very complexity of the division of labour under modern conditions which makes competition the only method by which co-ordination can be adequately brought about. The more complicated the whole, the more dependent we become on that division of knowledge between individuals whose separate efforts are co-ordinated by the impersonal mechanism for transmitting information known by us as the price system." By acting according to prices and profits, individuals are most likely to contribute to the common good. Much of the rest of Hayek's career was devoted to studying and describing a societal conception within which individuals may make most use of divided knowledge through a competitive market and freely-fluctuating prices. His focus in time became rules. Rules enable people to live effectively together. He remarked of "Economics and Knowledge" when receiving an honorary doctorate from Rikkyo University, Tokyo in 1964, "Its main conclusion was that the task of economic theory was to explain how an overall order of economic activity was achieved which utilized a large amount of knowledge which was not concentrated in any one mind but existed only as the separate knowledge of different individuals. But it was still a long way from this to an adequate insight into the relations between the abstract rules which the individual follows in his actions and the abstract overall order which is [thereby] formed ... It was only through a reexamination of the age-old concept of freedom under the law, the basic conception of traditional liberalism, and of the problems of the philosophy of the law which this raises, that I have reached a tolerably clear picture of the nature of the spontaneous order of which liberal economists have so long been talking." He said on another occasion, "'Economics and Knowledge' was really the beginning of my looking at things in a new light." 8 CHAPTER THIRTY-FIVE KEYNES When socialism as an organized political force first made its appearance in the late nineteenth and early twentieth centuries, many students of government were concerned that democracy would be unable to stand the strain of conflict between two diametrically opposed economic philosophies. On the one hand, there was the philosophy of socialism, ultimately aiming at nationalization of the means of production, exchange, and distribution within a society. On the other hand, both Liberal and Conservative parties held that, without private property, enterprise, and exchange, democracy would decay and disappear. Since democracy can only exist if there is general agreement on fundamentals, it was felt by many that disagreement over one such fundamental–the question of property and the relation of government to the economy–would undermine the vitality and very existence of democracy. Yet experience has proven otherwise. As is often the case in democratic politics, apparently irreconcilable positions are eventually reconciled by compromise in which each contending side has to make important concessions to the other. Capitalism has moved in the direction of socialism with respect to government provision of services and macro-management of the economy, because the democratic ideal of human dignity is incompatible with personal insecurity, substantial social inequality, economic want, and human suffering where the means are available to remedy such conditions. On the other side, socialists moved in the direction of classical political economy on the issue of private ownership of an economy's means of production, because public ownership of productive resources through nationalization proved inefficient and–more importantly–because the democratic values of power's diffusion and personal liberty are incompatible with total ownership and management of a nation's economy by the state. As social discourse developed during the twentieth century, there was increasing focus on economic as opposed to strictly political issues. In a way, this was progress. At one time, core political questions were the best form of government and who should vote. Now, these issues are largely resolved. Other than a genuinely small minority in democratic nations, almost no one today contests that all adult members in a society–men and women, of all races and religions–should have the right politically to participate in society's governance through voting. This consensus existed almost nowhere in the world at the beginning of the twentieth century, and even as recently as the 1970s, democracy was restricted mainly to the nations of Western Europe, the United States and Canada, and Japan. Moreover, as technology exponentially increased during the twentieth century, the idea of managing a nation's economy became feasible. In the preindustrial age, the capacity simply did not exist for national economic management. A society without even telegraph and paved roads is difficult comprehensively to organize. While pre-industrial rulers could be tyrants or despots, they generally left their subjects' economic activities alone–subject to local, church, and trade guilds and controls–and were for the most part content merely to tax their subjects. There are at least two aspects of the welfare state that has emerged in industrial democracies during the twentieth century: provision of social welfare, and national economic management. Both are vital. While the phrase the "welfare state" is perhaps most often associated with such government activities as social security, education, health care, and the like, it actually involves much more. From the start, the new view of government that evolved particularly in response to the Great Depression of the 1930s considered a key task of the state to be promoting maximum economic growth. Indeed, in industrial democracies today, economic macro-management as distinct from provision of government social welfare services may well be the greatest criterion for political success or failure. In developing the new view of government comprising both significantly expanded public services and national economic management, British economist John Maynard Keynes (1883-1946) played a considerable role. Keynes was an elitist. He was by no means a socialist. Once, when attacking Marxism, he rhetorically asked: "How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeois and intelligentsia who, with whatever faults, are the quality of life and surely carry the seeds of all human advancement?" On another occasion, he wrote to George Bernard Shaw: "I've made another shot at old K[arl] M[arx] last week, reading the Marx-Engels correspondence just published, without making much progress.... I can see they invented a certain method of carrying on and a vile manner of writing, both of which their successors have maintained with fidelity. But if you tell me that they discovered a clue to the economic riddle, still I am beaten–I can discover nothing but out-of-date controversialising." Keynes's position was not that government should control the economy in a socialist or communist sense of managing all businesses, owning all land, and employing all workers. His position was rather that government should manage the economic conditions within which private enterprise takes place. He nowhere expressed this idea more clearly than in his magnum opus, The General Theory of Employment, Interest, and Money, whose February, 1936 publication was an epochal event in the history of economic thought. Writing in the midst of the Great Depression, he held: I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use.... When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down. ... I agree ... that the result of filling in the gaps in the classical theory is not to dispose of the 'Manchester System,' but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production. He noted here as well that "the traditional advantages of individualism" include that it "is the best safeguard of personal liberty ..." Keynes first burst onto the scene with his 1919 The Economic Consequences of the Peace–a blistering attack on the economic aspects of the Versailles Peace Treaty and the makers of the treaty. He possessed unsurpassed influence in British academic economic thought. From 1911 to '45, he was editor of the Economic Journal, the leading periodical in British economics. He was secretary of the Royal Economic Society. Cambridge, from which he graduated and at which he taught, was the center of economic scholarship in England, though LSE attempted to challenge its place. Moreover, in addition to more strictly scholarly avenues of suasion, he was a very prominent member of society. He served on committees and commissions advising governments, and was chairman of the British Nation, a popular magazine of opinion and news. He wrote articles and opinion pieces for newspapers and magazines around the world. According to his magnificent biographer, Robert Skidelsky, he "was not just a man of establishments; but part of the elite of each establishment of which he was a member. There was scarcely a time in his life when he did not look down at the rest of England, and much of the world, from a great height." Keynes's next major work, following The Economic Consequences of the Peace, was A Tract on Monetary Reform (1923), which Friedman calls his "best book." A Tract on Monetary Reform was for the most part a collection of articles and lectures he wrote and gave during the previous three years. His great concern at this time was that domestic prices should be stabilized from either inflation or deflation, rather than that the primary goal of monetary policy should be fixed inter-currency exchange rates. Under the gold standard system of monetary thinking that characterized national and international monetary policy during this period, the crucial variable over which national monetary authorities were to exercise control was the exchange rate. The intention was to keep these rates fixed. National money supplies were to be adjusted to keep the price of currencies constant in relation to a certain amount of gold and each other. In the case of Great Britain and the United States, the goal of monetary policy was to keep the ratio of dollars to pounds fixed at $4.86 to £1, for example, the rate that prevailed before World War I. Keynes challenged the prevalent thinking. His conception was that national monetary authorities should focus on stable domestic prices rather than stable exchange rates. Stable domestic prices were not guaranteed under the gold standard system of monetary policy for, if the value of a nation's currency were threatening to decline on international exchanges, it was to reduce its internal supply of money–thus deflating its economy–and thereby right the balance. Conversely, if its currency value were threatening to increase internationally, a nation was to inflate its domestic economy, thereby reducing the value of its money at home and abroad. Keynes's objection to the gold standard was that it could be very upsetting to a nation's economy. He thought that as an economy becomes advanced, as he held Britain's was, it is characterized by "stickiness of social and business arrangements." While internal wages and prices might react harmoniously in theory with changes in money supply occasioned by maintaining fixed international exchange rates, in practice this is not so. It is hard to force prices and wages down following diminution of the money supply without economic contraction, unemployment, and recession or depression. Basic to Keynes's conception of the influence of monetary policy on prices was the relative stress he placed on the speed at which money changes hands (its velocity) compared to the amount of money in an economy (its supply) in establishing at least short run prices. He subscribed to the fundamental monetary equation MV = PQ, where M is the supply of money in an economy, V is the velocity at which it changes hands, P is the general price level, and Q is the amount of goods and services in an economy. Typically, more emphasis is placed on M (money) and P (prices) in this equation, than on V and Q, on the assumption that velocity and the amount of goods and services do not change as much, or vary in relative proportion to one another. Conventional anaysis is, in other words, more that changes in money supply (M) lead to changes in prices (P). Keynes believed, on the other hand, that, at least in the short run, prices do not necessarily vary with changes in the money supply. Instead, velocity of money may shift, and thus a change in the supply of money may not be equilibrated with a comparable shift in general price level. Especially during times of economic downturn–when producers are not expanding and consumers are not spending–a given increase in the money supply may have relatively little impact on aggregate prices. He granted that, in the long run, it is "probably true" that prices vary with the quantity of money. But, in his most famous words, he continued: "This long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again." His goal was stable domestic prices and thereby stable business conditions. Government should control money supply so as to level economic expansion and contraction, not to react to changes in currency exchange rates. Keynes believed a breakthrough in monetary management was achieved in A Tract on Monetary Reform. Key basics of the Keynesian Revolution in economics were present in embryo form: relative bifurcation of money supply from prices, stress on immediate financial circumstances in setting policy, a prominent role for government in managing–though not directing the details of–a nation's economy. Following publication of A Tract on Monetary Reform, Keynes waged an unsuccessful effort to prevent Britain from returning to the gold standard at prewar pairty (during World War I the gold standard was suspended). He considered a policy of returning to gold at prewar parity to be madness. During the period leading up to restoration, the pound possessed a value somewhere in the vicinity of 10 percent less than the dollar at prewar parity. To close the gap would require deflationary policies in Britain, further depressing an economy that already suffered from significant unemployment. Following the return to the gold standard at prewar parity, he wrote an attack on it, "The Economic Consequences of Mr. Churchill," who at the time was Chancellor of the Exchequer. In 1926, Keynes wrote The End of Laissez Faire (reproduced here in its entirety), where by "laissez faire" he meant the idea that government does not have a large role to play in managing the conditions of a nation's economy. The upshot of British economic policies during the '20s was that Britain experienced a decade of poor economic times even before the decade-long international depression that began in 1929. Thus, economic conditions appeared worse in Britain than they did in America at the beginning of the '30s. Consequently, more extreme, in the sense of socialist, measures were proposed and eventually implemented (particularly following World War II) in Britain than in America. The United States never embarked on the program of nationalization of key industries that Great Britain did. Between 1900 and 1920, unemployment in Great Britain averaged 3.4 percent a year. Between 1921 and 1940, on the other hand, unemployment averaged 13.7 percent–over 10 percentage points higher–for a generation. During the whole period between 1921 and '39, unemployment nudged beneath 10 percent only once, to 9.7 percent in 1927. Clearly something had gone awry. What? Keynes's answer was that the nation had become a stultified and rigid beast. It was no longer a growing and vibrant organism: "The forces of the nineteenth century have run their course and are exhausted." As the Great Depression became an even greater catastrophe than the weak '20s in Britain, monetary policy became ineffective. In a deflationary circumstance, monetary policy is a weak tool. When prices are decreasing–deflation–people experience the purchasing power of their money going up simply by holding onto it. Moreover, if banks are going out of business right and left, as occurred during the depression, there will be little incentive to deposit funds in banks. In a depression, there is little borrowing and because of deflation and financial uncertainty, interest rates will be only 1-2 percent. Interest rates cannot be pushed to less than this amount through government action, so monetary policy became relatively ineffective during the '30s. In monetary policy's place, Keynes recommended fiscal policy. Now, it was the responsibility of government to prime the pump, to get the economy moving again. Government should employ people, perform p...