The two roads to serfdom: how neoliberals misrepresent Hayek

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Posted May 17 2018 by Dave Darby of Lowimpact.org
The Road to Serfdom by Friedrich von Hayek

I recently went to visit a friend in Germany by train, and as I packed my bag, I looked around for a book to throw in, to read on the way. The one I plumped for was the Road to Serfdom by Friedrich von Hayek, Mrs. Thatcher’s (and Ronald Reagan’s) guru.

I was surprised to find that I agreed with almost every word of it. My previous impression of Hayek, from second-hand sources, and never having read him, was that he was a free-market guru who opposed government intervention as an economic actor, and that Thatcher’s privatisation of public services was directly related to this. However, it’s clear that Hayek was just as concerned about the rising monopoly power of multinational corporations, and advocated government regulation to prevent it. Here’s where Thatcher and Reagan were extremely selective, choosing instead to deregulate – especially in the banking sector – to give the corporate sector a free rein.

He also saw a role for the state in preventing fraud and ensuring the rule of law, in providing a basic social safety net, and in environmental protection, saying:

“Nor can certain harmful effects of deforestation, of some methods of farming, or of the smoke and noise of factories, be confined to the owner of the property in question, or to those willing to submit to the damage for an agreed compensation.”

So he was much less of a libertarian than I’d thought. He was writing in 1944, and corporate power has grown inexorably since then, to the point that it’s difficult to see how national governments can effectively regulate multinational corporations that have no respect for national borders, and now that national governments and global institutions are riddled with bankers; or how environmental regulation can be effective in a world in which perpetual economic growth is the aim of every government. Any regulation will be window dressing, and pushing against a tide of growth and ‘development’ – a bit like a new airport, with thousands of incoming and outgoing flights every day, claiming to be sustainable because it serves organic food and recycles its waste.

Just to be clear here – Hayek expresses fears about abuse of power by corporate monopolies:

“a system of comprehensive monopolies recognised by all of the national governments, but subject to none, would inevitably become the worst of all conceivable rackets.”

Exactly. But still, the overwhelming majority of his concerns are about state power – especially centrally-planned socialist economies – rather than corporate power, and from where I’m sitting his concerns are equally applicable to both. In fact I’d go much further than Hayek in criticising the corporate sector. His main fear was that corporations will form monopolies that will skew markets in their favour and remove some of our freedoms. Agreed, but my additional fear, already realised, is that the corporate sector will also infiltrate the political system to create a de facto centrally-planned economy that benefits them, and removes even more of our freedoms.

Hayek’s main premise was that governments should exist to make the economic rules, not to be players in the game, and that centralised planning and state control of the economy always leads to totalitarianism. Even when planned economies are introduced by bright-eyed, idealistic socialists, the fact that economic power is centralised at all means that at some point, especially in times of economic downturn, that power can, and will, be seized by totalitarian Stalinists, Maoists, nazis or fascists.

He didn’t need a crystal ball in 1944 to see that this was true, and I agree with him. I can also see that his emphasis on preventing state power was understandable I guess, in a Europe dominated by totalitarian states. He couldn’t have foreseen the growth in corporate power that has come to eclipse state power, with the help of other neoliberal gurus who were less keen to put barriers in the way of monopoly power – Milton Friedman, for example, another guru of Thatcher. For Friedman, monopoly power was just a reward for efficiency.

George Orwell agreed with Hayek’s analysis of centralised state planning, saying that it “gives to a tyrannical minority such powers as the Spanish Inquisitors never dreamt of”, but stresses that “’free’ competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the state”. Notice how he puts ‘free’ in inverted commas – because in a corporate world, the economy is anything but free. A truly free economy has no place for multinational corporations that pump money into the political system, give politicians jobs and pressure them with an army of lobbyists. Maybe Hayek didn’t stress this enough, but certainly it seems to have been missed by his modern neoliberal followers.

Others have claimed that state economic planning can be benign, and doesn’t have to be controlled by ruthless, competitive individuals who have climbed to the top of the state system. However, where I agree with Hayek is that there is a danger – where centralised control exists, it can be conveniently usurped by totalitarian regimes. Now, we have a world in which centralised capitalism is more and more coming under the sway of a spectrum of more-or-less authoritarian regimes from Trump and Putin to Turkey and China. It’s a slippery slope to totalitarianism that many have now recognised.

However, economic power is now greater than political power, and therefore the solution won’t come via governments, who are now very much junior partners in corporate global governance. This trader tells it like it is (at 0.24), after the last in a series of financial crashes stretching back to Adam Smith.

And even if it were possible in contemporary capitalism for (national) states to wrest power from (global) corporations, then we’d be headed back in the direction that Hayek rightly warned us about – state control of important parts of the economy. The solution has to lie in a third way – building a new type of economy, the institutions of which are themselves democratic. Government assistance in this would be welcome, but probably unlikely in a world in which the media, the financial system, energy and food supply, housing, technology and transport are all dominated by the corporate sector.

I’ve talked with people on the left and right who say that the state or the corporate sector are the only institutions that can run large operations that that have national importance – like energy generation (wrong) and distribution (wrong), or trains (wrong), or finance (wrong, wrong, wrong, wrong and wrong). There is an alternative to the traditional state or corporate powers that are often championed or at least condoned by left and right, and it’s growing fast.

For example, see this article – here called the Solidarity Economy, although I’m not convinced of this label yet. Several people have said to me that it has an extremely left-wing feel; but if left and right nowadays means more or less control of the economy by the state, then it’s nothing of the sort. So why alienate half the population with a label? If any potential solution to our current crisis is going to succeed, it can’t be, or even be perceived as, left or right. Nothing is going to succeed with half the population against it from the start.

It’s a snowball that we can help to roll, by moving our money to locally-focused, usually smaller-scale, often co-operative or mutual organisations and businesses that keep money in local communities rather than hoovering it out to pay shareholders. See here for how you can do that.

Hayek was also an internationalist, and envisaged a European federation of independent states; but he warned against a centralised structure that can come to be dominated by bureaucratic, military or corporate power. When you think that the US began as a federation of independent states, it’s easy to see the danger of this happening. The problem, ultimately, is not a federation / union of European countries, it’s the existence of the enormous power of multinational corporations, that will dominate any and all supranational institutions in the absence of any authority to control them. Indeed, they infiltrated most global institutions and national governments with their money, their staff and their lobbyist a long time ago. This situation will only get worse in this system.

Without institutions to effectively regulate them, as Hayek would have wished, it’s down to people like you and me to move our custom away from multinational corporations, and to encourage our more apathetic friends, family members and/or work colleagues to do the same.

A market consisting of democratic institutions like co-ops, credit unions, community-supported schemes, mutual societies, commons and self-employment is still a free market – just one that doesn’t concentrate wealth, because any system that concentrates wealth also concentrates power, which prevents real democracy. Hayek would have approved, I think. He wanted to see ‘control of the means of production divided amongst many people acting independently’, but this is impossible in an economy dominated by huge, undemocratic corporations.

Personally, I think that there are some hard times coming. Ecology is being destroyed and humanity is growing rapidly, in terms of population and economy. War is big business, and twice as many countries have nuclear weapons as when the nuclear non-proliferation treaty was signed.

We can only get through those hard times – if we can get through them at all – together. However, I think that Hayek is right in his individualist approach – without freedom we can’t do anything. It’s a given – everyone must know, as an individual, that no-one can tell them what to do arbitrarily. And this (surely) is the case for economic institutions just as much as it is for political institutions; if we don’t have democracy in the former, we can’t ultimately have it in the latter. So here, left and right, the individual and (voluntary) collective approaches are both right – i.e. self-employment and co-operatives; and bigger decisions can be made by federating rather than centralising. Centralised power always gets seized by the very people who shouldn’t have it, one way or another.

I’ll give the last words to Hayek, because they’re beautiful and true (apart from the 1944-style casual sexism of course):

“We shall not rebuild civilisation on the large scale. It is no accident that on the whole there was more beauty and decency to be found in the life of the small peoples, and that among the large ones there was more happiness and content in proportion as they had avoided the deadly blight of centralisation. Least of all shall we preserve democracy or foster its growth if all the power and most of the important decisions rest with an organisation far too big for the common man to survey or comprehend. Nowhere has democracy ever worked well without a great measure of local self-government, providing a school of political training for the people at large as much as for their future leaders. It is only where responsibility can be learnt and practised in affairs with which most people are familiar, where it is the awareness of one’s neighbour rather than some theoretical knowledge of the needs of other people which guides action, that the ordinary man can take a real part in public affairs because they concern the world he knows.”