NBC Radio’s “Words at War”–The Road to Serfdom – 15 May 1945

Socialism

Mises Daily: Monday, November 19, 2012 by Ludwig von Mises

… In the market economy, everyone serves his fellow citizens by serving himself. This is what the liberal authors of the 18th century had in mind when they spoke of the harmony of the rightly understood interests of all groups and of all individuals of the population.

And it was this doctrine of the harmony of interests which the socialists opposed. They spoke of an “irreconcilable conflict of interests” between various groups.

What does this mean? When Karl Marx — in the first chapter of the Communist Manifesto, that small pamphlet which inaugurated his socialist movement — claimed that there was an irreconcilable conflict between classes, he could not illustrate his thesis by any examples other than those drawn from the conditions of precapitalistic society.

In precapitalistic ages, society was divided into hereditary status groups, which in India are called “castes.” In a status society a man was not, for example, born a Frenchman; he was born as a member of the French aristocracy or of the French bourgeoisie or of the French peasantry.

In the greater part of the Middle Ages, he was simply a serf. And serfdom, in France, did not disappear completely until after the American Revolution. In other parts of Europe it disappeared even later.

But the worst form in which serfdom existed — and continued to exist even after the abolition of slavery — was in the British colonies abroad. The individual inherited his status from his parents, and he retained it throughout his life. He transferred it to his children. Every group had privileges and disadvantages.

The highest groups had only privileges, the lowest groups only disadvantages. And there was no way a man could rid himself of the legal disadvantages placed upon him by his status other than by fighting a political struggle against the other classes.

Under such conditions, you could say that there was an “irreconcilable conflict of interests between the slave owners and the slaves,” because what the slaves wanted was to be rid of their slavery, of their quality of being slaves.

This meant a loss, however, for the owners. Therefore, there is no question that there had to be this irreconcilable conflict of interests between the members of the various classes.

One must not forget that in those ages — in which the status societies were predominant in Europe, as well as in the colonies which the Europeans later founded in America — people did not consider themselves to be connected in any special way with the other classes of their own nation; they felt much more at one with the members of their own class in other countries.

A French aristocrat did not look upon lower class Frenchmen as his fellow citizens; they were the “rabble,” which he did not like. He regarded only the aristocrats of other countries — those of Italy, England, and Germany, for instance, as his equals.

The most visible effect of this state of affairs was the fact that the aristocrats all over Europe used the same language. And this language was French, a language which was not understood, outside France, by other groups of the population.

The middle classes — the bourgeoisie — had their own language, while the lower classes — the peasantry — used local dialects which very often were not understood by other groups of the population. The same was true with regard to the way people dressed.

When you travelled in 1750 from one country to another, you found that the upper classes, the aristocrats, were usually dressed in the same way all over Europe, and you found that the lower classes dressed differently.

When you met someone in the street, you could see immediately — from the way he dressed — to which class, to which status he belonged…

The Austrian School of economics is a school of economic thought which bases its study of economic phenomena on the interpretation and analysis of the purposeful actions of individuals. It derives its name from its origin in late-19th and early-20th century Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others.

Currently, adherents of the Austrian School can come from any part of the world, but they are often referred to as “Austrian economists” or “Austrians” and their work as “Austrian economics”.

The main tenets of the Austrian School are generally considered to be:

  • The theory that economic events are best explained by a deductive study of human action.
  • The theory that the use of economic models and statistical methods to model economic behavior are a flawed, unreliable, and insufficient means of analyzing economic behavior and evaluating economic theories.
  • The theory that testability in economics and consistently accurate mathematical modeling of an economic market are impossible because mathematical modeling of any real market affects the decision-makers in that market and “testing” relies on real human actors who cannot be placed in a lab setting without altering their would-be actions.
  • The theory that the way in which money is produced has real and not only nominal economic effects.
  • The theory that the cost of any activity should be measured by reference to the next best alternative.
  • The theory that, in a free market, interest rates and profits are determined by three factors: monetary gains or losses from a change in the consumption of a good or service, additional output that can be produced by additional inputs, and the time preference of the associated individual agents.
  • The theory that markets clear if prices are allowed to adjust freely.
  • The theory that inflation properly defined relates to an increase in the supply of money (including credit) which causes prices to rise.
  • The theory that capital goods and labor are highly heterogeneous (diverse), that money allows different goods to be analyzed in terms of their cost effectively, that economic calculation requires a common basis for comparison for all forms of capital and labor, that this process is the signaling function of prices, and that it is also a rationing function which prevents over-use of inherently limited resources.
  • The theory that the capital structure of economies consists of heterogeneous goods that have multi-specific uses which must be aligned to be effectively allocated, that the economic “boom-bust cycle” is caused by an artificial and unsustainable expansion of credit by the banks, and that this expansion causes businesses to make bad investment decisions which, in turn, necessarily cause major economic dislocation.

The Austrian School differs significantly from many other schools of economic thought in that the Austrian analysis of the observed economy begins from a prior understanding of the motivations and processes of human action.

To understand purposeful economic behavior and its consequences, the Austrian School follows an approach termed methodological individualism, or, as Ludwig von Mises termed it, “praxeology.” Mises was the first Austrian economist to present a theory of praxeology as such. Subsequently, Murray Rothbard presented a different version of praxeology in his work Man, Economy, and State.

Many theories developed by “first wave” Austrian economists have been absorbed into most mainstream schools of economics. These include Carl Menger’s theories on marginal utility, Friedrich von Wieser’s theories on opportunity cost, and Eugen von Böhm-Bawerk’s theories on time preference, as well as Menger and Böhm-Bawerk’s criticisms of Marxian economics.

The former U.S. Federal Reserve Chairman, Alan Greenspan, speaking of the originators of the School, said in 2000, “the Austrian School have reached far into the future from when most of them practiced and have had a profound and, in my judgment, probably an irreversible effect on how most mainstream economists think in this country.”

Nobel Laureate James M. Buchanan has stated that he would not object to being identified as an Austrian economist. Republican U.S. congressman Ron Paul is a firm believer in Austrian School economics and has authored six books on the subject.

Paul’s former economic adviser, Peter Schiff, is an adherent of the Austrian School.Jim Rogers, investor and financial commentator, also considers himself of the Austrian School of economics.Chinese economist Zhang Weiying, who is known in China for his advocacy of free market reforms, supports some Austrian theories such as the Austrian theory of the business cycle.

Currently, universities with a significant Austrian presence are George Mason University, Loyola University New Orleans, and Auburn University in the United States and Universidad Francisco Marroquín in Guatemala. Austrian economic ideas are also promoted by bodies such as the Mises Institute and the Foundation for Economic Education.

Neoliberalism refers to economic liberalizations, free trade and open markets, privatization, deregulation, and enhancing the role of the private sector in modern society. Today the term is mostly used as a general condemnation of economic liberalization policies and its advocates.

The term was introduced in the late thirties by European liberal intellectuals to promote a new form of liberalism after interest in classical liberalism had declined in Europe.

In the decades that followed, neoliberal theory tended to be at variance with the more laissez-faire doctrine of classical liberalism and promoted instead a market economy under the guidance and rules of a strong state, a model which came to be known as the social market economy.

In the sixties, usage of the term “neoliberal” heavily declined. When the term was reintroduced in the following decades, the meaning had shifted. The term neoliberal is now normally associated with laissez-faire economic policies, and is used mainly by those who are critical of market reform.

The term “neoliberalism” was originally coined in 1938 by the German scholar Alexander Rüstow at the Colloque Walter Lippmann.The colloquium defined the concept of neoliberalism as “the priority of the price mechanism, the free enterprise, the system of competition and a strong and impartial state.”

To be “neoliberal” meant that – in the name of liberalism – a modern economic policy is required. Neoliberalism was not a monolithic theory. At the outset it drew on different academic approaches such as the Freiburg school, the Austrian School, the Chicago school of economics, and Lippmann´s realism.

In the 1930s the mood was decidedly anti-liberal. To join forces a group of 25 liberals organised the Walter Lippman Colloquium, an international meeting that took place in Paris in August 1938. Among them were Louis Rougier, Walter Lippmann, Friedrich Hayek, Ludwig von Mises, Wilhelm Röpke and Alexander Rüstow.

Following the core message of Lippmann’s book The Good Society participants like Rüstow, Lippmann and Rougier agreed that the old liberalism of laissez faire had failed and that a new liberalism needed to take its place.

While for them it was a farewell to classical liberalism, which they thought to have failed, other participants like Mises and Hayek were not convinced to condemn the old liberalism of laissez faire. But all participants were united in their call for a new liberal project. Following Rüstow’s original recommendation they called this project neoliberalism.

The neoliberalism that came out of the Colloque Walter Lippmann was generally in line with Rüstow’s theories of turning away from conceptions of unrestricted liberty towards a market economy under the guidance and the rules of a strong state.

It was an attempt to formulate an anti-capitalist, anti-communist Third Way. Neoliberalism was originally established as something quite different from the free market radicalism with which it is usually associated today.

At the Colloque Walter Lippmann, the differences between ‘true neoliberals’ around Rüstow and Lippmann on the one hand and old school liberals around Mises and Hayek on the other were already quite visible. There occurred fundamental differences.

While ‘true neoliberals’ demanded state intervention to correct undesirable market structures, Mises had always insisted that the only legitimate role for the state was to abolish barriers to market entry. Similar differences of opinion also existed in other questions such as social policy and the scope for interventionism. After a few years the insurmountable differences between old liberals and the neoliberals become unbearable.

Rüstow was bitter that Mises still adhered to a version of liberalism that Rüstow thought had failed spectacularly. In a letter Rüstow wrote that Hayek and his master Mises deserved to be put in spirits and placed in a museum as one of the last surviving specimen of the extinct species of liberals which caused the current catastrophe (the Great Depression).

Ludwig von Mises became equally critical of the german neoliberals. He complained that Ordoliberalism really meant ‘ordo-interventionism’.

The Mont Pelerin Society was founded in 1947 by Friedrich Hayek to bring together the widely scattered neoliberal thinkers and political figures. “Hayek and others believed that classical liberalism had failed because of crippling conceptual flaws and that the only way to diagnose and rectify them was to withdraw into an intensive discussion group of similarly minded intellectuals.” 

With central planning in the ascendancy world-wide and with few avenues to influence policymakers, the society served to bring together isolated advocates of liberalism as a “rallying point” – as Milton Friedman phrased it. Meeting annually, it would soon be a “kind of international ‘who’s who’ of the classical liberal and neo-liberal intellectuals.”

While the first conference in 1947 was almost half American, the Europeans concentration dominated by 1951. Europe would remain the “epicenter” of the community with Europeans dominating the leadership.

The first form of neoliberalism, classical neoliberalism, stems from classical liberalism and was chiefly created in inter-War Austria by economists, including Friedrich Hayek and Ludwig von Mises. They were concerned about the erosion of liberty by both socialist and fascist governments in Europe at that time and tried to restate the case for liberty which became the basis for neoliberalism.

Hayek’s 1970s book, The Constitution of Liberty sums up this argument. In the introduction he states: If old truths are to retain their hold on men’s minds, they must be restated in the language and concepts of successive generations.

Hayek’s belief in liberty stemmed from an argument about information.He believed that no individual (or group, including the government) could ever understand everything about an economy or a society in order to rationally design the best system of governance. He argued this only got worse as scientific progress increased and the scope of human knowledge grew, leaving individuals increasingly more and more ignorant in their lifetimes.

As a result, he believed it was impossible for any person or government to design the perfect systems under which people could be governed. The only solution to this, he believed, was to allow all possible systems to be tried in the real world and to allow the best systems to beat the worse systems through competition.

In a liberal society, he believed, the few who used liberty to try out new things would come up with successful adaptations of existing systems or new ways of doing things. These discoveries, once shared and become mainstream, would benefit the whole of society, even those who did not directly partake of liberty.

Due to the ignorance of the individual, Hayek argued that an individual could not understand which of the various political, economic and social rules they had followed had made them successful.

In his mind, this made the superstitions and traditions of a society in which an individual operated vitally important,since in probability they had, in some way, aided the success of the individual. This would be especially true in a successful society, where these superstitions and traditions would, in all probability be successful ones that had evolved over time to exploit new circumstances.

However, this did not excuse any superstition or tradition being followed if it had outlived it usefulness: respect of tradition and superstition for the sake of tradition and superstition were not acceptable values to him. Therefore classical neoliberalism combined a respect for the old, drawn from conservatism, with the progressive striving towards the future, of liberalism.

In emphasising evolution and competition of ideas, Hayek highlighted the divide between practical liberalism that evolved in a haphazard way in England, championed by such people as David Hume and Adam Smith, versus the more theoretical approach of the French, in such people as Descartes and Rousseau.

Hayek christened these the pragmatic and rationalist schools, the former evolving institutions with an eye towards liberty and the later creating a brave new world by sweeping all the old and therefore useless ideas away.

Hayeks’s ideas on information and the necessity of evolving evolutions placed neoliberalism firmly on the pragmatic side against both rationalist socialists (such as communists, fascism and social liberals) and rationalist capitalists (such as economic libertarians, laissez-faire capitalists) alike.

The rule of law

At the centre of neoliberalism was the rule of law. Hayek believed that liberty was maximised when coercion was minimised. Hayek did not believe that a complete lack of coercion was possible, or even desirable, for a liberal society, and he argued that a set of traditions was absolutely necessary which allowed individuals to judge whether they would or would not be coerced. This body of tradition he notes as law and the use of this tradition and the Rule of Law.

In designing a liberal system of law, Hayek believed that two things were vitally important: the protection and delineation of the personal sphereand the prevention of fraud and deception, which could be maintained only by threat of coercion from the state. In delineating a personal sphere, individuals could know under what circumstances they would or would not be coerced under, and could make plans for the use of their resources in achieving their aims.

In designing such a system, Hayek believed that it could maintain a protected sphere by protecting against abuses by the ruling power, be it a monarch (e.g. Bill of Rights 1689), the will of the majority in a democracy (e.g. the US Constitution) or the administration (e.g. the Rechtsstaat).

He believed that the most important features of such protections were equality before the law, and generality of the law. Equality meant that all should be equal before the law and therefore subject to it, even those decisions of a legislature or government administration.

Generality meant that the law should be general and abstract, focusing not on ends or means, as a command would, but on general rules which, by their lack of specificity, could not be said to grant privileges, discriminate or compel any specific individual to an end.

General laws could also be used to transmit knowledge and encourage spontaneous order in human societies (much like the use of Adam Smith’s invisible hand in economics).  He also stressed the importance of individuals being responsible for their actions in order to encourage others to respect the law.

Neoliberal economics

Friedman’s chief argument about neoliberalism can be described as a consequentialist libertarian one: that the reason for adopting minimal government interference in the economy is for its beneficial consequences, and not any ideological reason. At the heart of economic neoliberalism are various theories that prove the economic neoliberal ideology.

Neoliberal economics in the 1920s took the ideas of the great liberal economists, such as Adam Smith, and updated them for the modern world. Friedrich Hayek‘s ideas on information flow, present in classical neoliberalism, were codified in economic form under the Austrian School as the economic calculation problem.

This problem of information flow implied that a decentralised system, in which information travelled freely and was freely determined at each localised point (Hayek called this catallaxy), would be much better than a central authority trying to do the same, even if it was completely efficient and was motivated to act in the public good.In this view, the free market is a perfect example of such a system in which the market determined prices act as the information signals flowing through the economy.

Actors in the economy could make decent decisions for their own businesses factoring in all the complex factors that led to market prices without having to understand or be completely aware of all of those complex factors.

In accepting the ideas of the Austrian School regarding information flow, economic neoliberals were forced to accept that free markets were artificial, and therefore would not arise spontaneously, but would have to be enforced, usually through the state and the rule of law. In this way, economic neoliberalism enshrines the role of the state and becomes distinct from libertarian thought.

However, in accepting the ideas of self-regulating markets, neoliberals drastically restrict the role of the government to managing those forms of market failure that the neoliberal economics allowed: property rights and information asymmetry.

This restricted the government to maintaining property rights by providing law and order through the police, maintaining an independent judiciary and maintaining the national defence, and basic regulation to guard against fraud. This made neoliberal economics distinct from Keynesian economics of the preceding decades.

These ideas were then developed further. Milton Friedman introduced the idea of adaptive expectations during the stagflation of the 1970s, which described why government interference (in the form of printing money) resulted in increasing inflation, as shop owners started to predict the rate of increase in the money supply, rendering the government action useless.

This developed into the idea of rational expectations, which showed that all government interference useless and disruptive because the free market would predict and undermine the government’s proposed action. At the same time, the efficient market hypothesis assumed that, because of catallaxy, the market could not be informationally wrong.

Or, to paraphrase the famous quote of Warren Buffett, “the market is there to inform you, not serve you”. Combined with rational expectations, this showed that markets would be self-regulating, and that regulation was unnecessary and disruptive.

Additionally, many theories were developed which showed that the free market would produce the socially optimum equilibrium with regard to production of goods and services, such as the fundamental theorems of welfare economics and general equilibrium theory, which helped prove further that government intervention could only result in making society worse off (see Pareto efficient).

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