Detour on the Road to Serfdom

Does government intervention in the  economy lead inexorably to tyranny? So it would have us believe, the doughty  Austrian school.

This essay is not a frontal assault against the Austrian School. It attacks a theory that is popular among Austrians, but is by no means central to Austrian methodology. On the contrary. what I have called the Hayek Effect  plays a minor role in Austrian thinking, and its abandonment would do little damage to the structure of its ideas.

Although I direct my criticism against two of the Austrians’ main thinkers, I do not reject wholesale the theoretical contributions of either Ludwig von Mises or Friedrich Hayek. On the contrary, I find that von Mises’ critique of socialism was prescient and has been confirmed, among others, by the a posteriori observations of the foremost homegrown critic of East European communist rule, Janos Kornai.. Although I criticize Hayek’s noted wok The Road to Serfdom, I sympathize with the  aversion he expresses to excessive state domiation of society.

Von Mises theories of socialism and of interventionism

Von Mises distinguishes between socialism = economic planning, where the state takes over running firms, from interventionism, where property reains in private hands, but the state places restrictions of various types on the private capitalist’s decision-making. The difference between socialism and interventionism, according to  von Mises, is that interventionism leads inevitably to socialism. So once a country has embarked on the road of interventionism, the last astop is always socialism, which implies complete lack of civil liberties, democracy, etc. thus restrictions of economic freedom lead to restrictions on political freedom. 

See Ludwig von Mises and Interventionism

Von Mises lists a number of arguments against socialism which have stood the test of time and were prominently noticeable in the planned economies of eastern Europe between 1948 and 1988.  His objections are principally that in socialism no one would have an incentive to work because they would all get paid anyway, etc. I won't go into detail of his arguments, since I agree with them on the whole.

Von Mises then goes about proving that interventionism leads to socialism. His exhibit A is price controls. Cite von Mises, Wilensky on price controls in health insurance. Harold Wilensky: Rich Democracies: Political Economy, Public Policy and Performance, University of Californis Press, 2002, pages 600 et seq.

I accept von Mises’ theory of how price controls lead to comprehensive regulation. However von Mises provides no evidence that other sorts of interventionism likewise have the dreaded snowball effect. In any case he provides no examples, but instead concludes triumphantly that his conclusions for price controls are also valid for other controls.

It is by no means obvious why that should be so. I have cudgeled my brains to contrive some kind of model where this necessity takes place, but in vain, alas.

Consequently we must conclude that von Mises not only fails to prove his point, but actually seems to be arguing himself into a trap, which he then adroitly avoids by simply ceasing to discuss the issue at all.

Hayek took over von Mises’ thesis in The Road to Serfdom and provided a number of extremely feeble arguments to back up the price control argument presented by von Mises.  I go into detail on this subject in my essay Why Hayek Sucks.

But suffice it to say that no persuasive argument is presented to back up the Hayek effect. Indeed, Hayek proves that he has no viable theory of the relative between politics and economics.

I now proceed to empirical verification of the Hayek Effect.

I shall argue firstly synchronically, comparing political liberties in two small eurn countries that have dramatic difference in economic structure, but not very big ones in political freedom.

Then I proceed to a diachronic analysis of Sweden. My argument is simple:

See Close Call on the Road to Serfdom

Von Mises simply declares dogmatically that all government intervention is bad. He nowhere attempts to prove it, except with respect to a single sector of interventionism, namely price controls.