A critique of The Road to Serfdom
April 2006
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Contents:
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Meaning
of “planning” in Hayek ……..
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p.
1
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Hayek’s
import-export theory of socialism ……
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p.
6
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Meaning of “Planning” in Hayek.
Hayek
considers only two cases: complete free market and central planning. No
intermediate cases. But he then proceeds to posit certain types of situation
which are common both to central planning and to mixed economies like present-day
European ones.
P.86:
“When we have to choose between (A) higher wage for nurses or doctors and (B) more
extensive services for the sick, (C) more milk for children and (D) better
wages for agricultural workers, or between (E) employment for the unemployed or
(F) better wages for those already employed, nothing short of a complete system
of values in which every want of every person or group hasa definite place is
necessary to provide an answer.” [letters (A) through (F) inserted by CS]
Four
of those six magnitudes are today regularly decided by governments, namely A,
B, E & F, without having to apply any exhaustive catalogue of values. I
don’t know exactly how the Belgian or Austrian governments do it, but it doesn’t
seem to give them much trouble. Perhaps an exact catalogue would be necessary
if we had to choose between B and D, for example. But not between A & B.
Hayek´s phrase "a complete system of
values in which every want of every person or group hasa definite place” is
evidently an element which – in Hayek’s view -- would play in a socialist
system the same vital role that money and the price system play in a market
economy. In effect, the market system of prices assigns to each good and
service a monetary value, which determines whether it will be produced or not, and
if so in what amounts.
Thus Hayek measures any planned economy
against a very demanding standard -- price and amount of every single
merchandise and service must be determined down to the last penny, no less.
What warrants such an exacting criterion? Not much, it turns out. It is true
that in a market economy all prices are determined to the last penny. But
Hayek’s assumption that it is the overall equilibrium of the market which
imposes the exact price is gratuitous. Otherwise how could we explain so many
prices ending in 99 cents? Obviously it is a mere psychological trick played on
the consumer by sly shopkeepers, not the iron laws of supply and demand, that
dictate the inevitable 99s at the end of every price. So all this precision is
mere theater. Supply and demand impose a certain maximum and minimum between
which the seller is free to maneuver, that is all.
In practice a government is free to
manipulate supply and demand within certain limits. The specter of totally
planned economies has receded.
So
Hayek is a very poor tool for analysis of mixed economies. For him a mixed
economy is not an object of analysis in itself, but just a way-station on the
road to central planning, a mere transitional phase.
In
his amateurish attempt to prove that planning is inimical to the rule of law,
Hayek writes, “…planning necessarily involves deliberate discrimination between
particular needs of different people…” [change the cite to something
more apposite] So what about the extensive state planning of economic development
in South Korea?
Here is a summary of a paper on Korean development planning:
This
paper presents Korea's
experience through planning, policymaking and budgeting over the past two
decades. First, the characteristics of
the planning organizations, including the Economic Planning Board, the Office
of Planning and Management under each ministry, and Ad Hoc Committees, and
their evolution over time are first dealt with. Second, the process of plan
formulation was discussed by specifying the respective roles of each planning
organization, and of foreign and domestic exports. Third, the Korean system of
annual planning, which serves as a device for effective implementation of a
medium-term plan, and its evolution over time are examined. Fourth, the
government budgetary process and the role of budgeting in plan implementation
are discussed. Fifth, the formulation and implementation of the short-term
economic management policy, which may or may not be tied in with the
implementation of a medium-term plan, is discussed.
For Hayek, all this frantic activity wasn’t
planning at all, because it didn’t involve telling specific people what to do. But
it certainly wasn’t just a general guide on how to act in certain formally
specified future situations, which is Hayek’s prescription for seemly governmental
behavior.
In any case Hayek’s argument doesn’t hold
water, even referring to Soviet central planning, because the objects were not
individuals, but sectors, regions, combines & firms. Not a single individual
to be seen.
We soon see why. Hayek regularly uses the
term “individual” to designate the economic actor. The trouble is that for him,
Exxon and General Motors are “individuals". Nowhere in his book does he
mention the obvious fact that the private sector is largely composed, not of
individuals, but of organizations ranging in size from the middling to the
huge. In a scandalous conceptual hat trick he blandly identifies these
organizations with, and confers on them, all the attributes of individual human
beings.
Friedman aids and abets him, repeating ad
nauseam the terms “individual” and “individualism” while evidently
referring to such ”individuals” as Dow Chemical, Toshiba and Daimler Chrysler.
This attitude stands in sharp contrast to
that of A.V. Dicey, who wrote in 1905:
“…
One trade after another has passed from the management of private persons into
the hands of corporate bodies created by the State. This revolution may be
traced in every volume of the [English] statute-book which has appeared during
the last seventy years [1835-1905] or more … This legislation was favoured and
promoted by Liberals, but the revolution of which it is the sign has nevertheless
tended to diminish, in appearance at least, the importance of individual
action, and has given room, and supplied arguments for State intervention in
matters of business with which in England the State used to have little or no concern...
The modern development then of corporate trade has in more ways than one
fostered the growth of collectivist ideas. It has lessened the importance of
the individual trader. .. [it promotes the] principle that all property, and
especially property in land, belongs in a sense to the nation... It constantly
suggests … that every large business may become a monopoly, … [that] may wisely
be brought under the management of the State. The characteristics of modern
commerce … make for socialism.”
At the beginning of this passage the modern
reader is prompted to anticipate yet another denunciation of government displacing
private business, but then in a flash it become clear that Dicey’s target is
completely different: for Dicey, business corporations are not “individuals” and
champions of private property at all, but absolutely the opposite, bureaucratic
creatures of the state that undermine the ideals and attitudes of private
property. The “individual” is for Dicey an actual single human being, against
whom are ranged both the state and the corporation!
The contrast between Dicey in 1905 and
Hayek 40 years later is dramatic. By Hayek’s time the commonly held concept of a business firm had ceased to be based on the
idea of a single human owner-manager and had been replaced by the concept of the firm as an impersonal
organization. However, presumably for ideological reasons, Hayek chose to
conceal this dramatic change. He wished to anchor the idea of private property
in the traditional and intuitively appealing concept of personal possession by
individual humans. I conjecture that this was intended to prevent a continuation
of the phenomenon that Dicey had decried: a drift toward an abstract notion of
collective property that would be liable to dissolve into nothingness and
oppose but a weak ideological and legal defense against expropriation by the
state.
I presume that it was likewise to preserve
the illusion of a traditional, seamless personal property that Hayek studiously
ignored the seminal work by James Burnham The Managerial Revolution
(1938), [insert Gardiner & Means] which
announced the conquest of power by employee managers that by then had taken
place in the large corporations and in many of the small ones. Since Burnham we know that managers have
wills and interests of their own that are seldom fully congruent with those of the
firms’ owners. For their part, organizations themselves have an internal logic
that partly escapes both owners’ and managers’ control.
Even if we ignore the matter of the
manager’s and the organization’s specific contribution to decision-making and
execution, the owner “him”self seldom exists as such any more. “He” is replaced
by boards of directors, shareholders’ meetings, etc. A shareholders’ meeting is
not the same thing as a sole proprietor. All kinds of factors enter into the
decisions of groups which are absent from those of a single person. (elaborate
– group dynamics, etc.)
Consequently to call a megacorporation an
“individual” is sheer fantasy on several different levels at once. Nonetheless
to do so is methodologically acceptable, insofar as a business corporation is
vested with the same legal rights and obligations as a private citizen. The
socio-economic difference is great, but only at a positive, not a normative
level.
In any case, we are now enabled to
reinterpret Hayek’s statements about individuals, replacing the term
“individual” with the term “firm”. But even under this proviso, South Korea was
innocent of planning between 1963 and 1983. Import quotas and export objectives
are not orders to specific firms. They are filled by the firms that find it
most convenient and profitable to perform the activities required for the
attainment of those goals. In fulfillment of the five-year energy plan, the
Ministry of Public Works asks for bids to build a hydroelectric plant. The
firms that best qualify are then chosen to do the work. The plan doesn’t
specify which firms will get the job. On the contrary, every modern government
has elaborate rules on how to contract out work to private firms, which are
every bit as abstract and impersonal as the rules Hayek espouses. Therefore the condition on which the alleged arbitrariness of planning is
predicated, namely discrimination among specific firms, is not fulfilled.
Consequently one of Hayek’s principal objections to planning is shown to be
fatuous.
Hayek’s words “… the main condition on
which the usefulness of the system of private property depends: namely, that
the owner benefits from all the useful services rendered by his property and
suffers for all the damages caused to others by its use.” (p.44) assume that
the “owner” is the decision-maker. But when the decision-maker is not an owner
but a manager, who does not “benefit from all the useful services
rendered by his property and suffer for all the damages caused to others by its
use”... agent problem.
Equally fatuous is Hayek’s argument that planning
leads to arbitrary behavior of government: “… as planning becomes more and more
extensive [notice the “creeping socialism” assumption] it becomes regularly
necessary to qualify legal provisions increasingly by reference to what is
“fair” or “reasonable”; this means that it becomes necessary to leave the
decision of the concrete case more and more to the discretion of the judge or
authority in questions.” From this he concludes a “…decline of the Rule of Law
… in terms of progressive introduction of these vague formulas into legislation
and jurisdiction .... arbitrariness ... uncertainty ... consequent disrespect
for, the law". For proof he resorts to the decline of the Weimar Republic.
But the authoritarian decay of the Weimar
Republic was hardly
impelled by a process of ever greater discretion on the part of the
authorities. Rather, the political crisis of Germany [bla bla bla]
Furthermore, to denounce judicial
discretion while defending the Anglo-Saxon legal and economic system is a
self-contradiction, since traditionally English law is not based on fixed
codified rules, but on shifting interpretations that judges make of the decisions
entered by other judges. The dodgy
nature of such a system is amply clarified in the following passage, which
denounces the legal revolution instigated by judges whereby product liability
law in the US
became ever stricter after 1960:
The courts proceeded
in the usual way, fashioning one exception and then another, then yet another.
Evidence of subsequent remedial measures was first admitted to impeach
witnesses, then to prove that the defendant controlled the premises in
question, then to show that conditions had changed since the time of the
accident or that changes in design were feasible. The exceptions nibbled away
at the rule until some courts were emboldened to sweep the tattered remains
aside entirely. An lllinois appellatecourt simply declared that the rule should not apply in strict
liability cases because the focus was on the product itself, not on the
defendant's conduct. The Califomia Supreme Court then picked up the idea in a
landmark ruling in 1974. New York
and other states followed quickly.
IncredibIy, the logic
offered in these rulings was exactIy what had been used earlier to exc/ude evidence
of the plaintiff's contributory negligence before the accident. The product was
on trial, the courts argued, not the people. So the pIaintiff's personal
conduct before the accident was irrelevant.
But somehow the defendant's conduct aflerward was perfectly relevant …
Curiously, this process described by Huber
parallels precisely the evolution of the English legal system in the 19th
century which Dicey so criticized, and which was impelled by the Liberals
through parliamentary legislation. The area allotted to free contracting became
smaller and smaller, while the state (in the American case the courts,
independently and without any legislative warrant) dictated more and more
mandatory conditions that were binding on the parties although the contract
failed to specify them. There appears to be a blind automaticity in the
progress of government intervention, which chooses as its agent now one branch
of government, now another, to strive toward the same goal of restricting
individual freedom to contract.
Hayek’s import-export theory
of socialism
“For over two hundred years English ideas
had been spreading eastward. The rule of freedom which had been achieved in England seemed
destined to spread throughout the world. By about 1870 the reign of these ideas
had probably reached its easternmost expansion. From then onward it began to retreat,
and a different set of ideas … began to advance from the East. England …
became an importer of ideas. For the next sixty years Germany became
the centre from which the ideas destined to govern the world in the twentieth
century spread east and west.” (p. 25) The upshot of all this is that Hayek
presents socialism as a German import to Britain and elsewhere. Now there is
no doubt that, as Hayek explains, German ideas exerted great influence in the
19th and 20th centuries -- sometimes for good and
sometimes to the great detriment of humanity -- and that those ideas often entered
into conflict with traditional British liberal ideas. Nonetheless it goes too
far to claim that the idea of socialism was merely a German import into Britain
and that it had no domestic roots.
A.V. Dicey goes into this matter in considerable
detail in his Law and Public Opinion. He presents and illustrates five
factors that in his opinion led to the spread of socialist/collectivist ideas
in Britain
starting about 1865. At no point does he mention German influence or any
foreign influence at all, thus flatly contradicting Hayek. There follow some
excerpts from his lecture on the subject.
My
purpose in this lecture is to explain a revolution of social or political
belief which forms a remarkable phenomenon in the annals of opinion. This
explanation in reality is nothing else than an attempted analysis of the
conditions or causes which have favoured the growth of collectivism [defined
much more broadly than by Hayek] …
A
current explanation lies ready to hand. Under the Parliamentary Reform Acts
1867-1884 the constitution of England
has been transformed into a democracy, and this revolution, it is argued,
completely explains the increasing influence of socialism. The many must always
be the poor, and the poor are by nature socialists. Where you have democracy
there you will find socialism.
This
reasoning, as already pointed out is essentially fallacious. Democracy cannot
be identified with any one kind of legislative opinion. The government of England is far less democratic than is the
government of the United
States, but the legislation of Congress is
less socialistic than the legislation of the Imperial Parliament. Nor in England are
laws tending towards socialism due to the political downfall of the wealthy
classes. Under a democratic constitution they retain much substantial
power-they determine in many ways the policy of the country. The rich have but
feebly resisted, even if they have not furthered, collectivist legislation. The
advance of democracy cannot afford the main explanation of the predominance of
legislative collectivism.
The
true explanation is to be found, not in the changed form of the constitution,
but in conditions of which the advance of democracy is indeed one, but whereof
the most important had been in operation before the Reform Act of 1867 came
into force.
These
conditions, which constantly cooperated, may be conveniently brought under the
following heads:
·
Tory
Philanthropy and the Factory Movement
·
the
Changed Attitude after 1848 of the Working Classes
·
the
Modification of Economic Beliefs
·
the
Characteristics of Modern Commerce
·
the
Introduction of Household Suffrage.”
Now I shall comment these factors:
1.
Tory
philanthropy denotes a humanitarian movement in favor of protecting children
from overwork and brutal conditions in the factories that were spreading
throughout the land. It was similar in spirit and social compositing to the
contemporary anti-slavery movement. (more detail)
2.
The
changed attitude of the working classes was a trend away from revolutionary
politics and into reformist trade-unionism that marked the 1848-1870 period.
The trade-unionist ideology favored social legislation, etc. leading to greater state involvement with and regulation
of business.
3.
The
modification of economic beliefs is rather sketchy. Dicey cites a few novels
that display sympathy toward trade unionists.
4.
Characteristics
of modern commerce. Cited above in connection with the definition of
“individual”. Dicey mentions no
technological factor impelling the larger and more bureaucratic organization of
capitalist firms with the exception of the railroads, which explain only one
sector of the economy, although a crucial one. See Marx.
5.
Introduction
of household suffrage is the factor previously rejected as sole explanation but
now accepted as a partial one.
Especially
noteworthy in point 4 is Dicey’s identification of the prime movers of these
changes: “This legislation was favoured and promoted by Liberals, … [who] …
supplied arguments for State intervention in matters of business with which in England
the State used to have little or no concern...” The “Liberals” to whom Dicey
referred were the champions of private enterprise, industrialization, free
trade, etc. In other words, the very class with which Hayek identifies himself,
the business class, was primarily responsible for the growth of collectivism.
The socialistic inclinations of the working class played second fiddle to those
of the business class in the trend toward state intervention in the economy. Indeed,
the trend toward big government started long before the first Labour M.P.s trod
the halls of Parliament.
Now whom should we believe: Hayek, an Austrian
economist ignorant of English political history – although he had lived in
Britain since 1931 – who presents his theory in conclusory fashion, failing to
mention a single historical fact that would tend to back his version, or Dicey,
a celebrated legal scholar intimately familiar with the doings of Parliament in
the 19th century, who explains his grounds in considerable detail?
It is obvious that Dicey is right and Hayek wrong.
In other words Hayek committed the very
mistake that Dicey had cleared up four decades earlier – attributing the spread
of socialist ideas exclusively or principally to the working class. Furthermore
Hayek compounded the error by also claiming that socialism was lock, stock and
barrel a foreign import to Britain.
Thus we see that Hayek plays a vital role
in the care and feeding of capitalist ideology in the late 20th and
the 21st centuries by providing two of the stock items of
present-day free-market propaganda -- firstly his humbug about “individual”
property and secondly in obscuring the historical truth regarding the origin of
“big government”, the great bugaboo of the free-market crowd. It is more
convenient to dismiss big government (“BG”) as the insidious work of left-wing
zealots than to acknowledge that it is a response to internal needs of the
capitalist system in the course of its development.
Unlike
Hayek, his great contemporary Karl Polanyi read Dicey’s work and cited it in
his book on the Industrial Revolution The Great Transformation,
written and published about the same time as TRTS. It is, indeed, thanks to
this work of Polanyi’s that the author became aware of Dicey in the first place.
