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"Understanding the Economic Basics & Modern Capitalism:
Market Mechanisms and Administered Alternatives"
by Dan Blatt - Publisher of FUTURECASTS online magazine.

Smith: Wealth of Nations.   Ricardo: Principles.
Marx: Capital (Das Kapital).   Keynes: General Theory.
Schumpeter: Capitalism, Socialism and Democracy.

Economics is the miracle science. Even imperfect capitalist markets routinely raise billions out of poverty.

Table of Contents & Chapter Introductions

The Road to Serfdom
Friedrich A. Hayek

FUTURECASTS online magazine
Vol. 5, No. 6, 6/1/03.


  This classic attack on the fuzzy minded dogma of socialism is now ripe for objective evaluation. The verdict is that this book played a vital role in undermining the intellectual validity of socialist dogma and slowing its disastrous spread, but ultimately missed the reasons for - and thus played no role in - the ultimate demise of socialism as an intellectually legitimate option for economic organization.

 In defense of 19th century liberalism:


Individual liberty is viewed as one of the greatest achievements of Western civilization.
   Hayek wrote this book in 1944 as a defense of 19th century liberal ideals, which were far different from the liberal ideals of the 20th century. The ideal of individual liberty - the belief that each individual should be free to pursue his own destiny within his own narrow sphere - is viewed and defended as one of the greatest achievements of Western civilization. This great accomplishment, Hayek warned, is incompatible with socialism. Individual liberty must be destroyed wherever socialism exists.
  He believed that the Anglo Saxon democracies, by pursuing the chimera of economic security and equality that socialism promised, were treading the same path to serfdom as had Germany and Italy after WW-I.

 Fascism and communism both promise "social welfare," "social justice," and "fairness" to justify authoritarian means and extensive arbitrary and discretionary governmental powers.
   In place of individual liberty, socialism offers security. It promises protection from personal economic necessities and restraints, and an equality of economic well being.
  From his perspective, as a native of Central Europe who had experienced the rise of fascism and communism throughout Europe, Hayek concluded that fascism and communism were not opposites, but very similar creeds based on autocratic socialism. Their goals of "social welfare," "the good of the community," "social justice," and "fairness," are open ended and provide no real guidance as to what is and is not desirable or required of the system. Their ideological goals justify authoritarian means, and the practical requirements of complex central planning require extensive arbitrary and discretionary powers.
  Ultimately, with all freedoms compromised, socialism offers only "the security of the barracks."

 Justification for horrific means:
   Collectivism justifies any means to achieve its great ends. Any expediency is justified, no matter how it may affect individuals or small groups, for the benefit of the whole. The "greater goal" justifies even horrific means.

 Collectivist principles justify the rise of totally unprincipled apparatchiks.
   Once collectivist goals are accepted, the way is open for demagogues and ruthless men to gather the "strength" needed to impose the needed measures. To rise in such a system, only totally callous apparatchiks are desired. They must be "unreservably committed to the person of the leader; but next to this the most important thing is that they should be completely unprincipled and literally capable of everything."

  Ideologues on both the left and right typically become so committed to their noble goals that they easily justify any means to accomplish them. Even today, both leftist and rightist ideologues express frustration with the democratic checks and balances that inhibit government action - frequently enmesh ideological agendas in legislative gridlock - and protect our freedoms.

 Socialism destroys language - and thought:
    Ultimately, even the language is perverted. All the most treasured virtues, such as "freedom," "justice," "law," "right," "equality," etc., are redefined for collectivist purposes, so that even thought can be controlled.
  Hayek quotes Benjamin Franklin: "Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety."

 Socialism destroys the "rule of law:"
  Thus, under socialism, the "rule of law" must be replaced so that the central planners can have the arbitrary and discretionary powers that they must have to have any chance to make socialism work. Discretionary powers, he points out, will inevitably be used for discretionary purposes.

 Socialism destroys the right to hold property:

"It is only because the control of the means of production is divided among many people acting independently that nobody has complete power over us."

   Socialism must eliminate the private property rights that diffuse power and allow people a larger measure of freedom.

  "[T]he system of private property is the most important guarantee of freedom, not only for those who own property, but scarcely less for those who do not. It is only because the control of the means of production is divided among many people acting independently that nobody has complete power over us. If all the means of production were vested in a single hand, whether it be nominally that of 'society' as a whole or that of a dictator, whoever exercises this control has complete power over us."

 Socialism destroys opportunity:
   Socialism must eliminate the opportunity for private wealth that capitalism offers the ordinary citizen.

  "[A] world in which the wealthy are powerful is still a better world than one in which only the powerful are wealthy."

 Socialism destroys choice:
   Socialism must eliminate free choice of occupation, production and consumption.
  If the planners are to control production, we must be content to consume what they think we should consume, when and where they think proper.

Socialism destroys democracy:
   Democratic government will fail as a check on the abuse of power as the central planners acquire the degree of arbitrary and discretionary powers that they need.

 Ultimately, socialism dissolves into factions squabbling over which group will reap the lions share of the benefits, a competition in which those who resort to compulsion have obvious advantages.
  Even partial socialism is a threat to democratic liberties.
  When the state controls more than half the economy (as it did in Germany in the late 1920s), just about all economic entities become dependent on government.
  Socialism will breed vicious factionalism as everyone chooses up sides to influence the authorities who have control over their lives.
  Socialism promises only greater equality, not exact equality, leaving open the question of who gets what. Ultimately, socialism dissolves into factions squabbling over which group will reap the lions share of the benefits, a competition in which those who resort to compulsion have obvious advantages.

  Factionalism is an inevitable result of all expansions of government economic powers. It is not mere coincidence that the modern growth of government involvement in economic matters has been accompanied by the growth of "vested interests" and their massive monetary contributions to the political parties.

Rejection of the "laissez faire" propaganda myth:
   The mythological laissez faire alternative is readily rejected by Hayek.
"Planning for competition" (planning to facilitate competitive commerce) has always been a necessary government function, requiring such things as an appropriate legal framework, infrastructure, and social regulation applied generally to all commerce to achieve such societal objectives as environmental and safety goals.

 All administrative substitutes for market prices are arbitrary and capricious.
   It is "planning against competition" that threatens us all. Even as early as 1944, Hayek is aware that technological progress and complexity make automatic market mechanisms and decentralized decision making more imperative, and central planning more hopeless. The rational allocation of rewards - and efficient decisions about supply and demand - are both impossible without the pricing mechanism.
  All administrative substitutes for market prices are arbitrary and capricious. Protection and subsidies for favored economic entities he labels "restrictionism," and points out that this always causes greater volatility and diminished performance for the rest of the economy.

 Socialists love big business:

   Socialists love monopolies and oligopolies, Hayek notes. Large, dominant economic entities support the clearest arguments and provide the easiest opportunities for socialist nationalization.

  John K. Galbraith, in "A Journey Through Economic Time," provides an example of socialist love for large economic entities and oligopolistic industry.

Advantages of federal political systems:

   The American model of a federal union, with local government empowered as much as possible, is the political system favored by Hayek. International organizations should be limited to facilitating international commerce and competition by establishing rules of conduct against restrictionist practices.

  A federal system with strong national governments is, in fact, the way Europe chooses to proceed, although restrictionist practices are still an important part of the European scene.

  Hayek made two fundamental errors in this analysis, both of which are much easier to see from the perspective of the 1990s than they were during the 1940s when he wrote.

 Democracy and liberty:
  First, the popular commitment to democracy and liberty in the Anglo Saxon nations was not understood by Hayek.

 In Anglo Saxon nations, the people will abandon socialism rather than surrender political freedom and individual liberty.
   Democratic traditions had been sorely tested by the Great Depression and the economic troubles that preceded it during the 1920s. Democracy had failed in many places after WW I, but had survived in the Anglo Saxon nations.
  Hayek failed to acknowledge the comparative weakness of democratic institutions in Germany, Italy and Russia. As events proved, if socialism were tried and failed in an Anglo Saxon nation, the people would abandon socialism rather than surrender their democratic powers and individual liberties.

 Ineptness is inherent in government management:
   Second, the inherent ineptness of government management was not understood by Hayek.
  Socialism was doomed to failure even where the central planners were given absolute power and were permitted to act in an arbitrary and capricious manner.

 Withdrawal of individual liberty must stifle economic advance and ultimately cause the widespread failure of autocratic socialist systems.
  Hayek understood the connection between individual liberty and the explosion of energy and inventiveness that drove the Western economic advance in the 19th century. Individual liberty set the individual free to pursue his own economic destiny. Economic advance was propelled by the advances of numerous enterprising individuals. However, he failed to suspect - or even just to hope - that withdrawal of individual liberty must stifle economic advance and ultimately cause the widespread failure of autocratic socialist systems.
  Lacking guidance from market prices - meaningful sales charts - objective accounting systems - and the profit and loss statement - and encumbered by political and bureaucratic imperatives and due process decision making procedures - even the best managers must fail.
  Indeed, central planning must inevitably fail even where it is given autocratic power to remove the constraints of due process decision making requirements and democratic checks and balances. Corruption grows unchecked where power is autocratic, and creates far greater obstacles to progress than the procedural obstacles of due process and democratic politics.

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Copyright 1999 Dan Blatt