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Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics. Daniel Stedman Jones - Princeton University Press. Princeton, NJ. 2012. Chapter 2: Friedrich Hayek and The
Road to Serfdom Karl Popper had assaulted the historicist philosophies that had done so much harm to a humanitarian individualism, and Mises had critiqued the bureaucratic mentality at the heart of state institutions and political organizations. Hayek drove home a polemical attack on the drift of Western policy toward collectivism. Friedrich August von Hayek was born into a moderately wealthy aristocratic and intellectual family in Vienna in 1899. His father was a biologist, botanist, and policymaker who worked on social welfare issues for the Austro-Hungarian government before World War I. Friedrich Hayek grew up in imperial Vienna before volunteering to join the army at the outbreak of the war in 1914. Hayek survived without serious injury and was decorated for his bravery. After the war, Hayek decided to pursue studies in law and political science at the University of Vienna and received doctorates in both disciplines, in 1921 and 1923, respectively (he also permanently dropped the “von” from his name in 1919). After completing his studies, Hayek spent a year working as a research assistant to Professor Jeremiah Jenks at NYU between 1923 and 1924.74 Hayek returned to Vienna before an invitation from Lionel Robbins brought him to the London School of Economics (LSE) as a visiting lecturer in 1929. 57 At the LSE, Hayek soon entered into debates with Keynes about the role of monetary policy and the viability of planning in the economy. He became Tooke Professor of Economic Science and Statistics in 1931, at age thirty two, and joined an established group of free market advocates led first by Edwin Cannan, the editor of a distinguished edition of Adam Smith’s The Wealth of Nations, and afterward by Cannan’s protégé, Robbins.75 This group was later joined by Popper and Ronald Coase, another future member of the Mont Pelerin Society who, like Hayek, also won the Nobel Prize in Economics (in 1991), and who moved to the United States in 1951 before settling at the University of Chicago in 1964, where he joined Friedman and George Stigler in the Economics Department. Hayek fell in love with Britain and developed a lasting admiration for its history, traditions, and institutions, believing it to be in many ways the home of liberty. He developed strong bonds with Robbins at the LSE and Keynes at Cambridge and became a British citizen, remaining close to the country for the rest of his life through his only son, Lawrence, who settled there after his father left for Chicago in 1951.76 Of the three works, Hayek’s Road to Serfdom had the most lasting political impact. Written in haste while the LSE was exiled to Cambridge during the Blitz, according to Popper, to whom Hayek sent a copy of the draft, The Road to Serfdom was “frankly a political book.” But Popper thought it “without question one of the most important political books I have ever seen.”77 The Road to Serfdom was published in Britain in March 1944, at the end of a fevered period of eighteen months during which the Beveridge Report on Social Insurance and Allied Services (1942), the government’s white paper on employment (1944), and Beveridge’s own report on full employment (1944) all appeared and were debated widely. In The Road to Serfdom, Hayek took aim at this drift among Western policymakers toward central planning. Hayek’s view of the dangers of “collectivist” central planning, which he equated with socialism, arose from an analysis of the development of human thought and freedom close to Popper’s in The Open Society: We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past…. We are rapidly abandoning not the views merely of Cobden and Bright, of Adam Smith and Hume, or even of Locke and Milton, but one of the salient characteristics of Western Civilisation as it has grown from the foundations laid by Christianity and the Greeks and Romans. Not merely nineteenth and eighteenth-century, but the basic individu- alism inherited by us from Erasmus and Montaigne, from Cicero and Tacitus, Pericles and Thucydides, is progressively relinquished.78 -58- Hayek explicitly linked this idea of Western civilization with the JudeoChristian tradition. This linkage brings him close to traditional conservatives like Edmund Burke, with whom Hayek identified:79 But the essential features of that individualism which, elements pro- vided by Christianity and the philosophy of classical antiquity, was at first fully developed during the renaissance and has since grown and spread into what we know as Western Civilisation—are the respect for the individual man qua man, that is, the recognition of his own views and tastes as supreme in his own sphere, however narrowly that may be circumscribed, and the belief that it is desirable that men should de- velop their own individual gifts and bents. 80 Hayek’s view of human nature mixed the traditional conservative acceptance of man’s fall from grace coupled with a Burkean belief in his cumulatively held wisdom and the modern political philosophical belief in rational self-interest as man’s strongest motivating force. Hayek’s view of human nature made him suspicious of what he worried was Popper’s susceptibility to certain forms of interventionism. For example, Popper thought that “we do use means (law courts, police) in order to keep crime under control, and child labour; and we may be able to end wars by similar means. All this is no doubt legitimate; and so is the attempt to control poverty and one-sided exploitation, and to try to eliminate it.”81 This partiality, Hayek felt, went against the grain of a society based on the freedom of the individual to pursue her economic self-interest. But even with the best intentions guaranteed, according to Hayek, the realization of a political philosophy based on government planning and state intervention in the economy would be impossible because of the natural limits to human knowledge. -59- Hayek wrote to Popper when he was trying to help him publish The Open Society about the concept of “piecemeal engineering.” He questioned why his friend supported such an approach to social and economic problems and explained his own aversion to such an idea: I can now also better explain my strong dislike for your term “partial engineering”. If the aspect of the “engineering type of mind” which I there discuss as the reason for the strong inclination of most engineers for a centrally planned society is correct, your term is almost “a contra- diction in terms”. It is briefly that it is of the nature of an engineering job that all the knowledge if concentrated in a single head, while it is the specific character of all truly social problems that the task is to utilise knowledge which cannot be so concentrated.82 Hayek therefore compared Popper’s concept to his own arguments about the impossibility of central planning. Hayek’s view of the impossibility of planning stemmed directly from a limited view of human capacities—it was impossible for people to hold all the information necessary to make rational decisions on behalf of everyone. Such interventionism would also confound a society characterized by liberty and spontaneous order. In response, Popper clarified what he meant by the term and attempted to narrow any disagreement with Hayek about what he saw as their common approach to social and economic progress: I am very greatly impressed by your criticism of my term “piecemeal engineering”. I happen to dislike the “engineering type of mind” too, and I see now intuitively more clearly your objections. If I could, I would change my terminology. Your remark that in the engineering case “all knowledge is concentrated in a single head” (or, at any rate, in a very few heads) “while it is the specific character of all truly social problems that the task is to utilise knowledge which cannot be so con- centrated” is one of the most illuminating and striking formulations I have ever heard on these problems. This really is a fundamental differ- ence. In a way, it fits in with one idea which I mention in the critical part of my article, viz., that the concentration of power and the possessions of social knowledge exclude each other to a certain extent. Your point -60- is immensely interesting, but I never meant this “engineering attitude of mind” when I spoke of piecemeal engineering; what I meant was the careful and conscious trial- and -error attitude of mind; the attitude of looking, on the one side, for institutional reforms, on the other hand, for the unavoidable blunders which are, in the social case, precisely due to the fact that we shall only find out from those on whose toes we have stepped that we have done so. (And if we have concentrated power, we shall not find out.)83 This approach, for Popper, was crucial to his project of uniting the “humanitarian camp” around the methodology of critical rationalism. In their letters, Hayek and Popper constantly debated the theme of language and terminology. Much of the discussion is obscured, however, by the concept of freedom. The word is used by Popper, for example, to establish what he thinks Hayek and he are in agreement about: I too feel that our tendencies are fundamentally the same: for individu- alism (I am using the term in my sense), for freedom as the necessary condition of everything else, and against pseudo-science, dogmatism, dilettant [sic] radicalism. I think I fully appreciate your remark that we are fighting the same battle on different fronts, and I was glad about your hint that my approach (and terminology) might possibly gain “a certain audience” with whom reasoning is notoriously difficult.84 The reader of these letters today is struck, however, by the weight that such elastic terms as “individualism” and “freedom” are meant to carry. It is not at all clear that Hayek and Popper mean the same thing when they use these terms. As if to acknowledge this very point, Hayek wrote back to Popper when discussing the prospective title of The Open Society, that “it is now unfortunately almost imperative to avoid the word freedom in the title, so much nonsense has it had to cover in recent years.”85 If Hayek was concerned with the drift of Western policymakers toward collectivism in general, it may be that Popper was more worried about any reproduction of the conditions for totalitarianism. In a discussion of the French social theorist Auguste Comte, he described to Hayek what he saw as the real problem: -61- Where the scientistic enthusiasts fail, I believe, is not the idea that mankind may, to some extent, control its fate, or lift itself out (as many individual men have done, especially if we take the metaphor spiritu- ally) by its bootstraps. It is, rather, the holistic exaggeration of this idea which is so mistaken, and so repulsive in its hysterical wish for power. I feel certain that we agree on this point.86 Thus, for Popper, it is the potential for totalitarian tendencies in the utopian projects of many of those on the left that make them unacceptable and dangerous. The belief that man can better himself was an admirable and important aim, but it had to be tempered with modesty about the tools at our disposal to achieve such a goal. Despite these nuances in Hayek’s and Popper’s views, it is clear they were extremely close to each other during this period in the 1940s, especially when their views are contrasted with the view of Hayek’s great friend and academic adversary, John Maynard Keynes, who was working to plan the peace with the Americans, including developing the Bretton Woods monetary system with Harry Dexter White. Keynes famously wrote to Hayek after reading The Road to Serfdom that he believed intellectually talented and morally unimpeachable experts could create the “good society.”87 Keynes argued that Hayek’s view of humanity was likely to prove wrong, especially in the United States, which he took to be the highest testing ground for ideas as well as being, after World War II, the leader of the developed world. Instead of ditching ideas of efficacious government, Keynes said, in a famous line, what we need is the restoration of right moral thinking—a return to proper moral values in our social philosophy. If only you could turn your crusade in that direction you would not look or feel so much like Don Quixote. I accuse you of perhaps confusing a little bit the moral and material issues. Dangerous acts can be done safely in a community which thinks and feels rightly which would be the way to hell if they were executed by those who think and feel wrongly.88 Keynes’s views were typical of liberalism’s twentieth-century metamorphosis into a creed that espoused intervention and technical expertise by enlightened officials imbued with public service. -62- Similar ideas animated the New Dealers. But they also represented everything that Hayek and his friends were fighting against. Quite to the contrary, Hayek thought that people of good intentions, in trying to create a society that functioned according to high ideals, might “in fact unwittingly produce the very opposite of what we have been striving for.”89 Such a pessimistic view placed Hayek close to the heart of all those American businessmen, politicians, and others who had never been reconciled to Roosevelt’s policies. The neoliberal movement grew out of such tensions in the postwar period in the United States. In place of activist government and central planning, Hayek sought a carefully circumscribed role for the state. Hayek’s vision was intimately bound up with the rule of law within which markets would operate effectively and individual liberty would be preserved. The rule of law would guarantee a basic negative freedom, which was the state’s legitimate function outside of defence and the protection of its citizens. It also implied a fundamental acceptance of substantive inequality—an essential feature of neoliberal ideas throughout all three phases of its history. An understanding of inequality as unavoidable, even desirable, gets at the crux of the conflict between neoliberal ideals and those of New Deal liberals or social democrats—there was an acceptance of the rectitude of different outcomes for different individuals for neoliberal theorists. Any notion of greater equality of outcome that could be produced by redistributing income or resources was a utopian idea that, lacking a precise rational meaning, was open to manipulation by a despot or a government. By contrast, in a free market system, the individual was paramount. Different individuals had different capacities, which would be valued differently in the marketplace. Such inequality of outcome was fine because, according to Hayek, at least everyone had equal access to the market. Inequality did not matter because social mobility was possible, and for anyone who lost out, their own initiative would give them the opportunity to succeed through repeated attempts. If they were unable or unwilling to make such attempts, then it was not the role of government to treat individuals unequally by compensating for someone’s lack of success: A necessary, and only apparently paradoxical, result of this is that for- mal equality before the law is in conflict, and in fact incompatible, with any activity of the government deliberately aiming at a substantive ide- al of
distributive justice; it must lead to the destruction of the Rule of Law. To produce
the same result for different people, it is necessary to treat them
differently.90 -63- Here the idea that redistribution and greater equality were not simply disincentives to initiative but actually morally debilitating emerges as a crucial dimension of neoliberal thought. (Later on, academics such as political scientist Charles Murray in his book on American social policy, Losing Ground [1984], and even liberal Democratic politicians such as Daniel Patrick Moynihan in his controversial report on the African American family [1965], would tap into such beliefs through their emphasis on the age-old distinction between the deserving and the undeserving poor.91 A belief in inequality was at the root of arguments among neoliberal welfare reformers from the 1960s on about egalitarian welfare policies and the culture of dependency they supposedly produced. Some deserved their chance to advance and others did not— the division usually fell between those who worked and those who did not, such as the notorious “welfare moms.” This type of debate occurred on both sides of the Atlantic and culminated in welfare reform under Bill Clinton in 1996 and in various attempts at reform under Margaret Thatcher, John Major, and Tony Blair in the 1990s.) According to Hayek, then, collective endeavors had to be kept to a minimum so that there would be no danger of subjugating the individual and her various desires and values. For in a planned system, there would inevitably be the problem of a scale of values and of who was to decide among them. Instead of government or the ruling group making such decisions on our behalf, under a free market capitalist system “common action is thus limited to the fields where people agree on common ends. Very frequently these common ends will not be the ultimate ends to the individuals but means which different persons can use for different purposes.”92 For Hayek, it was “not the source of power but the limitation of power which prevents it from being arbitrary.”93 Thus mere overall democratic control, as with Mises, would not prevent the abuse of coercive power. For Hayek, the danger was the appeal of socialism. Socialism was the antithesis of freedom, according to Hayek, but it had mistakenly become equated with liberty as well as equality because of its appeal to an optimistic vision of social, technological, and economic progress. Hayek argued that such a utopian view of the aims of socialism was a disastrous misreading: -64- Where freedom was concerned, the founders of socialism made no bones about their intentions. Freedom of thought they regarded as the root-evil of nineteenth century society, and the first of modern plan- ners, Saint-Simon, even predicted that those who did not obey his pro- posed planning boards would be “treated as cattle.”94 Hayek suggested that socialists had appropriated the term freedom for themselves when what they really meant was wealth (and its expropriation): But [it] would only heighten the tragedy if it should prove that what was promised to us as the Road to freedom was in fact the High Road to Servitude. Unquestionably, the promise of more freedom was re- sponsible for luring more and more liberals along the socialist road, for blinding them to the conflict which exists between the basic principles of socialism and liberalism, and for often enabling socialists to usurp the very name of the old party of freedom. Socialism was embraced by the greater part of the intelligentsia as the apparent heir of the liberal tradition: therefore it is not surprising that to them the idea of social- ism’s leading to the opposite of liberty should appear inconceivable.95 For Hayek, then, a reunification of socialism and liberalism of the sort Popper sought was fundamentally impossible because for socialists, the individual was not important. The larger ends of a socialist society were to be realized at the expense of the individual’s needs or wants, whereas for liberals, the individual was sacrosanct. The two philosophies were in irreducible conflict. According to Hayek, socialism was a breed of collectivism. The problem of collectivism, like Mises’ bureaucratism and Popper’s Platonic or Hegelian historicism, also brought with it a moral problem: the problem of the “end of truth.” All individual desires and acts must be subsumed under the overarching social purpose as defined by the collectivist state: It is entirely in keeping with the whole spirit of totalitarianism that it condemns any human activity done for its own sake and without ulterior purpose. Science for science’s sake, art for art’s sake, are equally abhorrent to the Nazis, our socialist intellectuals, and the commu- nists. Every activity must derive its justification from a conscious social purpose.96 -65- Reality ceases to be empirically based and becomes something to be handed down and shaped by the powerful according to their plans for society—their monopoly on truth. Intellectual freedom should not be undermined and eroded simply because, Hayek scathingly suggested, most people do not have the capacity for “independent thought.”97 However, Hayek, at this stage of his career, was also attempting to construct an alternative to crude nineteenth-century laissez-faire economics. This preoccupation with moving beyond both laissez-faire arguments and the new forms of interventionism espoused by the British Edwardian New Liberalism or the liberalism of Roosevelt and the New Deal was central to the research of the early neoliberals—the German neoliberals Walter Eucken and Franz Bohm (as well as Wilhelm Röpke and Alexander Rustow, who was one of the first to coin the term neoliberal, this group was also known as the ordoliberals and is discussed in the next chapter), Henry Simons and Frank Knight at Chicago (also discussed in the next chapter), and Hayek, Popper, and Robbins in London at the LSE during the 1930s and 1940s.98 According to Hayek, opposition to socialist and collectivist planning should not be confused with a “dogmatic laissez-faire attitude.”99 The state was essential to guarantee the conditions of free competition. But, like Mises, Hayek was a strong advocate of the spontaneity of markets. The price mechanism organized free individuals into a functional system governed by supply and demand. It got rid of the need for coercion implied by planning: This [spontaneous and complex diversity] is precisely what the price system does under competition, and which no other system even promises to accomplish. It enables entrepreneurs, by watching the movement of comparatively few prices, as an engineer watches the hands of a few dials, to adjust their activities to those of their fellows. The important point here is that the price system will fulfil this func- tion only if competition prevails, that is, if the individual producer has to adapt himself to price changes and cannot control them.100 Nevertheless, Hayek, like Popper, believed that the benefits of competition could be complemented by certain regulations and restrictions, such as health and safety, or perhaps even those directed at certain social outcomes. -66- But where should the line be drawn? Which social outcomes were reasonable to justify state intervention and which were not? This was Keynes’s main criticism of Hayek when he read The Road to Serfdom: You admit here and there that it is a question of where to draw the line. You agree that the line has to be drawn somewhere, and that the logical extreme is not possible. But you give no guidance whatever as to where to draw it. In a sense this is shirking the practical issue. It is true that you and I would probably draw it in different places. I should guess that according to my ideas you greatly underestimate the practicability of the middle course. But as soon as you admit that the extreme is not pos- sible, and that a line has to be drawn, you are, on your own argument, done for, since you are trying to persuade us that so soon as one moves in the planned direction you are necessarily launched on the slippery path which will lead you in due course over the precipice.101 This devastating critique is not entirely fair to Hayek, who did give guidance as to the limits of laissez-faire economics.102 For example, he saw a legitimate role for government in the regulation of the monetary system, the prevention of private monopolies, and the supervision of natural monopolies— something that would distinguish him from members of the second Chicago school such as Aaron Director or Milton Friedman, who, after 1950, reversed the emphasis of early neoliberals on antimonopoly.103 For Hayek, writing in The Road to Serfdom, The only question here is whether in the particular instance the advan- tages gained are greater than the social costs which they impose. Nor is the preservation of competition incompatible with an extensive system of social services—so long as the organisation of these services is not designed in such a way as to make competition ineffective over wide fields.104 However, the standard of where to draw the line between when to intervene and when not to was a subjective one on the part of the government seeking to intervene, and necessarily so, because each government, or indeed each individual, would draw it in a different place. This unpredictability was -67- the fundamental problem Keynes had noticed. In Hayek’s statement it is possible to imagine the justification of the New Deal or Nye Bevan’s National Health Service. So, while Hayek wanted to critique the idea of the middle way associated with Roosevelt, Keynes, and the mixed economy, he ended up sounding as though he might support it. Again, this is indicative of the fact that the primary target in the work of early neoliberalism, and especially that of the Austrians, such as Hayek, was totalitarianism. Totalitarianism of the sort witnessed in Soviet Russia was similar to that of Nazi Germany. The key point about totalitarian systems was that it aimed toward a total negation of the individual, his wants, desires, and needs. “The various kinds of collectivism, communism, fascism, etc. differ between themselves in the nature of the goal,” according to Hayek, but they all want to “organise the whole of society and all its resources for this unitary end, and in refusing to recognise autonomous spheres in which the ends of the individuals are supreme.”105 There was no compromise with totalitarianism. Accommodations with certain aspects of the welfare state, on the other hand, especially with people’s memories of the Great Depression still so fresh, were possible. Keynes’s criticisms ran deep. Many years later, Hayek gave an insight into his anger at the public misrepresentation, as he saw it, of the arguments of The Road to Serfdom in his correspondence with the American Keynesian economist Paul Samuelson. He blamed Samuelson for the propagation of the idea that he, Hayek, thought the road to serfdom was inevitable in his famous economic textbook: “I seem to have discovered the source of the false allegation about my book The Road to Serfdom which I constantly encounter, most resent and can only regard as a malicious distortion which has largely succeeded in discrediting my argument.”106 He went on, I believe you will have to admit, if you look at the book again, that your assertion is wholly unfounded and has probably become the main cause of the prejudice which has prevented people from taking my ar- gument seriously. I am afraid that I cannot take this matter lightly. By creating this myth you have done so much harm to the development of opinion that I must insist on a public retraction and apology in a form commensurate with the extent of circulation of your book.107 -68- Hayek was outraged at what he saw as the distortion of his message, an important part of which was the ability of free individuals in society to alter their course. The existence of elections meant that a society could choose to claw back government power as well as to give it away.108 Another crucial element of Hayek’s analysis centered on the potential for complacency among democratic publics. An example is the idea that the planning and regulation of the economy didn’t matter because only the economic sphere would be affected. For Hayek, this was a myth. It was precisely the increased control over economic affairs through government interference that revealed the thin end of a wedge. In his belief that no liberty was possible without the economic freedom of the individual in the marketplace, Hayek again came close to Mises. The increased involvement of an interventionist government in the economy eroded, as Hayek saw it, the fundamental foundations of freedom as understood within the paradigm of Western civilization. This is a point that left the neoliberals vulnerable. Winston Churchill’s ill-judged speech during the 1945 election campaign, in the run-up to a vote that Churchill lost in a landslide, suggested that the Labour Party might need “some kind of a Gestapo” to enact socialism in Britain, a view that fell flat with an electorate that just did not believe the most exaggerated claims about democratic parties of the left.109 (Attlee’s mildness did not help Churchill, either). For Hayek and Mises, the economy could not be separated from other arenas of social and political life. Economic freedom created the conditions for all other freedoms. As Hayek put it, The authority directing all economic activity would not merely control the part of our lives which is concerned with inferior things; it would control the allocation of the limited means for all our ends. And who- ever controls all economic activity controls the means for all our ends and must therefore decide which are to be satisfied and which not. This really is the crux of the matter. Economic control is not merely control of a sector of human life which can be separated from the rest. It is the control of the means for all our ends.110 -69- This was a fundamental point. Economic freedom could not be separated from political or civic freedom. There could be no freedom without economic liberty. This idea, alongside Mises’ description of a laissez-faire society constructed on the “democratic” power of the consumer, would form the basis for Milton Friedman’s claims in Capitalism and Freedom (1962) that human freedom rested in the market, a development discussed in the next chapter. There is also an interesting convergence here worthy of note. Both the New Deal liberals and the British social democrats pitched their egalitarian ideas on the grounds that political freedom was inadequate without some economic security—a basic assumption that has a long history on the left. Economic freedom, as constructed by neoliberals, was a hollow concept because it was beyond so many people’s reach. As Keith Tribe has argued, in Hayek’s discussion of the pernicious influence of the German statist tradition (which stemmed back to Bismarck and the Prussian Rechtsstaat), he refused to credit political reformers’ attempts to address the stark realities of life during the Industrial Revolution.111 The center of gravity for liberals, in the latter part of the nineteenth century, moved from a concern about the potential for harm in government regulation and intervention to a conviction that necessary social reform entailed improving the lot of the mass of people affected by industrial capitalism’s savage inequalities. Without economic freedom, political or civil rights meant substantively little. The neoliberals also believed that political and civil freedom were not enough. But for them the linkage was defined by the freedom of the individual in the marketplace to buy and sell as she pleased. Here we have another fundamental difference between the value placed on the market as the deliverer of freedom and the idea that the market presents an obstacle to freedom whose harshest effects must be blunted so that freedom might flourish—between negative and positive liberty, as Isaiah Berlin famously presented the division.112 Hayek saw the conflict between the free market and the state as a choice, upon which rested the future of the freedoms that Western democracies cherish: The choice open to us is not between a system in which everybody will get what he deserves according to some absolute and universal stan- dard of right, and one where the individual shares are determined part- ly by accident or good or ill chance, but between a system where it is the will of a few persons that decides who is to get what, and one where it depends at
least partly on the ability and enterprise of the people concerned and
partly on unforeseeable circumstances.113 -70- Thus, Hayek believed that negative liberty was all that could be guaranteed by government through the rule of law and the supervision of the competitive order. But it was a negative liberty supported by meritocracy. An attempt to engineer positive liberty, on the other hand, brought with it the danger of enslavement. The desire of policymakers and publics alike for a measure of economic security in the wake of war and depression was understandable. But Hayek thought that the dangers of unintended consequences in the expansion of government power necessary to guarantee positive liberty outweighed the protections that the universalist welfare state might provide for those in need. According to him, there were two types of security: These two types of security are, first, security against severe physical privation, the certainty of a given minimum of sustenance for all; and, second, the security of a given standard of life, or of the relative posi- tion which one person or group enjoys compared with others; or, as we may put it briefly, the security of a minimum income and the security of the particular income a person is thought to deserve.114 Keynesian approaches to economic management as laid out in The General Theory of Employment, Interest and Money (1936) privileged certain groups over others, according to Hayek.115 For example, inflation and its effects benefited consumers at the expense of saving and investment. Economic security could only be purchased at the price of equalitarian, in the Popperian sense, freedom, the liberty of all before the law and the freedom of access of everyone to the market. If we want to conserve freedom, according to Hayek, “we must regain the conviction on which the rule of liberty in the Anglo-Saxon countries has been based and which Benjamin Franklin expressed in a phrase applicable to us in our lives as individuals no less than as nations: ‘those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.’”116 The moral results of “collectivism” were thus more important than its “moral basis” or the motivations behind it:117 -71- We must now return briefly to the crucial point—that individual free- dom cannot be reconciled with the supremacy of one single purpose to which the whole society must be entirely and permanently subor- dinated. The only exception to the rule that a free society must not be subjected to a single purpose is war and other temporary disasters when subordination of almost everything to the immediate and press- ing need is the price at which we preserve our freedom in the long run. This explains also why so many of the fashionable phrases about doing for the purposes of peace what we have learned to do for the purposes of war are so misleading: it is sensible temporarily to sacrifice freedom in order to make it more secure in the future; but the same cannot be said for a system proposed as a permanent arrangement.118 Hope lay with the United States and the UK, where traditions of human liberty had, according to Hayek, been best preserved.119 At same the time, Hayek was very worried about the damage that was being done to the traditions of individualism and freedom, even in those two countries: The virtues these people possessed—in a higher degree than most other people, excepting only a few of the smaller nations, like the Swiss and the Dutch—were independence and self-reliance, individual initiative and local responsibility, the successful reliance on voluntary activity, non- interference with one’s neighbour and tolerance of the different and queer, respect for custom and tradition, and a healthy suspicion of power and authority. Almost all the traditions and institutions in which democratic moral genius has found its most characteristic expression, and which in turn have moulded the national character and the whole moral climate of England and America, are those which the progress of collectivism and its inherently centralistic tendencies are progressively destroying.120 Hayek believed these things needed to be first fought for in the realm of ideas. It is perhaps important to remember here Hayek’s status as an exile from Austria (a culture dominated by German statism) and his happy relationship with Britain, where he became a citizen. His assertion of Britain and the United States as the homes of liberty was surely reinforced by this experience. Hayek was -72- acutely aware of the socialist success, through the Fabian Society especially, in influencing the development of social democratic policies, which were taken up by the Conservative and Liberal Parties as well as the Labour Party. Hayek’s admiration for the political successes of socialists is almost as keenly felt as his admiration of British and American political culture. He believed that a similar movement had to be created for the defense of free markets and individual liberty. This led him to think about creating an organization that would bring together like-minded scholars from across Europe and the United States. The Mont Pelerin Society and The Intellectuals and Socialism The Road to Serfdom was a huge success and a bestseller in both Britain and the United States as soon as it came out. No other book of Hayek’s would receive such popular acclaim. Its popularity with a mass audience was ensured by the publication of a condensed version of the book in the Reader’s Digest that appeared in the United States in April 1945. A promotional book tour across the United States followed publication. Hayek was hailed as a celebrity when he arrived in New York.121 The book attracted American admirers, such as Leonard Read, the founder of the Irvington, New York-based free market think tank, the Foundation for Economic Education (FEE, discussed in chapter 4), who were drawn to Hayek’s criticisms of liberals and collectivist conservatives. This helped Hayek pursue his plans to establish a transatlantic group to defend “the free society.”122 The historian Max Hartwell, himself a member of the Mont Pelerin Society, has suggested that Hayek’s plans for the society grew out of a belief that Western civilization was under threat from the historical trends in favor of collectivism outlined in The Road to Serfdom. His and others’ similar ideas needed to be backed up with action in the form of a group that would share their thoughts and observations in the face of the domination of the academy by supporters of planning, socialism, and government intervention. They were further motivated by a fear of the renewed onset of totalitarianism evident in Stalinist Russia’s advance into Eastern and Central Europe. Soviet Communism had not been attacked directly in The Road to Serfdom because Russia was still allied to Britain and the United States in the effort to defeat -73- Hitler. Now the communist threat behind the iron curtain, as Churchill described it in 1946, was at the forefront of the concerns of the scholars and activists surrounding Hayek. With communism on the advance militarily, the fears of communist influence on the Western democracies was real. Such a neoliberal network would facilitate opportunities and contacts that might help to change the intellectual and political climate in the West to one that would be more congenial to free markets and individual liberty. It would also provide a forum to counter the intellectual appeal of socialism. According to Hartwell, five major groups, four in Europe and one in America, formed the basis of the Mont Pelerin Society’s early membership. The first group comprised those based in England, at the LSE and in Manchester. In addition to Hayek, this group included Lionel Robbins, Edwin Cannan, Arnold Plant, William H. Hutt, Ronald Coase, Karl Popper, John Jewkes, T. S. Ashton, Cecily Wedgwood, and Michael Polanyi. These intellectuals were predominantly economists, but also historians, philosophers, and journalists. The second group consisted of Austrian exiles from Nazi rule in the United States, including Gottfried Haberler (who had been at Harvard since the mid-1930s), Fritz Machlup (who went first to the University of Buffalo, then to Johns Hopkins in Baltimore, and then to Princeton, where he remained until his death in 1983), and Ludwig von Mises (who had by this time moved to New York and was based at NYU). A third group, centered on Paris, had emerged out of the Colloque Walter Lippmann of 1938. This group included French liberal sociologists, economists, and philosophers, among them Louis Rougier, Raymond Aron, Jacques Rueff, M. Bourgeois, and E. Mantoux. The Colloque Walter Lippmann had anticipated the aims of the Mont Pelerin Society, primarily the urgent need to defend the classical liberal principles of individual freedom. The membership of the fourth group came mainly from those who had remained in Hitler’s Germany, from the Freiburg school and Munich, a group of scholars that become known as ordoliberals, who had pushed the idea of the social market in the 1920s and 1930s (see chapter 3). These included the future German chancellor Ludwig Erhard, A. Weber, Walter Eucken, Wilhelm Röpke, and Franz Böhm. The last group consisted of Americans mainly from the University of Chicago, such as Frank Knight, Milton Friedman, George Stigler, Aaron Director, and Henry Simons (also discussed in chapter 3).123 -74- Hayek wanted to keep the membership of the organization broad to ensure wide engagement and debate in its meetings, though as we have seen, not as broad as Popper would have liked. Certain nuances of view emerged during the discussions that surrounded the first meeting, which took place in Mont Pelerin, Switzerland, in 1947. Uniting the membership was a vaguely defined belief in the need to fight to protect freedom—a formulation that allowed for much disagreement. As we have seen, Popper thought that “what we need is peace and mutual confidence within the camp of humanitarianism, and the great majority of socialists is in this camp.” Others disagreed. Mises, for example, wrote to Hayek in late 1946 from New York about his plans for the society’s first meeting, worried that too many socialist sympathizers might be invited: The cause of this lamentable failure [to safeguard freedom from to- talitarianism] was that the founders of these movements [of liberal and social democratic reform] could not emancipate themselves from the sway of the very ideas of the foes of liberty. They did not realise that freedom is inextricably linked with the market econo- my. They endorsed by and large the critical part of the socialist pro- grams. They were committed to a middle-of-the-road solution, to interventionism.124 For Mises, these views were dangerous. As such, they were ideas the society should be fighting not courting. The potential watering down of free market advocacy, continued Mises, was the most important point: The weak point in Professor Hayek’s plan is that it relies upon the co- operation of many men who are known for their endorsement of in terventionism. It is necessary to clarify this point before the meeting starts. As I understand the plan, it is not the task of this meeting to discuss anew whether or not a government decree or a union dictate has the power to raise the standard of living of the masses. If somebody wants to discuss these problems, there is no need for him to make a pilgrimage to Mont Pelerin. He can find in his neighborhood ample opportunity to do so. -75- The point of the meeting and the society, for Mises, should be to pursue an agenda that took the inimical nature of government action for granted and decided what should be done about it. Hayek was often less dogmatic than his friend. As we have seen in The Road to Serfdom, he was ready to allow some forms of government intervention to ensure social services or a minimum level of sustenance, for example. Equally, it is apparent from his correspondence with Leonard Read of the FEE in Irvington that he did not believe market forces ought to trump the imperatives of postwar reconstruction. As Hayek commented to Read about the American journalist Henry Hazlitt (author of the bestselling introduction to free market economics, Economics in One Lesson, published in 1946), whose study of the postwar economic situation had queried the lack of conditions attached to American loans to Europe and suggested that they be halted until conditions had been met, It is possible to agree with practically every word in his conclusions and yet doubt the advisability of giving the impressions [sic] that at this moment the complete cessation of American lending would be anything less than a major calamity. I agree particularly that it is of the first importance that the effects of these loans should not produce seri- ous inflation in America, and that it is of the greatest importance that the Americans should give the example of sound policy. And the most important point is of course that the loans will help only if they induce the government to use the time gained to put their own economies in order. But while that is probably true it seems to me extremely danger- ous to state this publicly by saying that “as a contribution to revival the conditions are much more important than the loan itself.”125 Hayek’s objection to the public discussion of the conditions for American lending (what became Marshall Plan aid) because debtor nations would find such intrusions into their affairs politically intolerable. Hayek was thus a robust defender of the independence of the historically great European powers—when he saw fit. In this kind of debate, Hayek was much more pragmatic than some of his supporters and colleagues. He was also often a staunch advocate of European and British interests in arguments and discussions with his American colleagues and supporters. -76- The American contingent was vital when it came to finance.126 In the beginning the assistance was fairly modest and consisted in paying for the American-based members’ attendance at meetings. For example, Leonard Read suggested that Mises could attend the Mont Pelerin meeting as a representative of his Foundation for Economic Education. Read also helped to organize a dinner in New York at the Canadian Club in the Waldorf Astoria in May 1946 for “intimate discussion” between Mises, Hayek, Read, and Hazlitt.127 The FEE had offered to help Hayek, to which he replied with a letter requesting a long “list” of American books, to be sent “individually” so as to avoid problems with import licenses.128 H. C. Cornuelle, the executive vice president of the FEE, replied to Hayek: The books you requested have been ordered and we shall send them to you, separately, as soon as possible. We are pleased to do this and hope they will be useful to you. Do not hesitate to ask us for any assistance of this kind. With best wishes, Sincerely yours, H. C. Cornuelle129 Such help became more bountiful during subsequent years as major funds such as the William Volker Fund (WVF) and the Earhart Foundation provided substantial support for scholars and resources for free market activism (see chapter 4). Quite often, such as with the Free Market Study funded by the WVF at the University of Chicago and supervised by Hayek, the influence of funders was much more significant. The WVF’s efforts to control the substantive work of the project were only partially successfully resisted by Hayek. Van Horn and Mirowski write that Harold Luhnow and the officers of the WVF were not “mere pecuniary accessories to the rise of the Chicago School: they were hands-on players, determined and persistent in making every dollar count, supervising doctrine as well as organisation.”130 Central to Hayek’s thought, then, was intellectual organization. As we have seen, he was convinced of the importance of the battle of ideas. In 1949, after the success of The Road to Serfdom and the establishment of the Mont Pelerin Society, Hayek published an important article that laid out a rationale for a transatlantic network of defenders of individual liberty and the free market to -77- combat the influence of the left. In all democratic countries, Hayek believed, and in the United States even more than elsewhere, a strong belief prevails that the influence of the intellectuals on politics is negligible. This is no doubt true of the power of intellectuals to make their peculiar opinions of the moment influence decisions, of the extent to which they can sway the popular vote on questions on which they differ from the current views of the masses. Yet over somewhat longer pe- riods they have probably never exercised so great an influence as they do today in those countries. This power they wield by shaping public opinion.131 Hayek was deeply impressed by the influence of the British Fabian Society in developing social policy in the UK through its books, the LSE, and the infiltration of government and social institutions with an educated elite of public servants. A movement that took seriously the successes of the Fabians would be somewhat different from the plans of some for a “Liberal International,” as he wrote to Popper: Our effort therefore differs from any political task in that it must be essentially a long-run effort, concerned not so much with what would be immediately practicable, but with the beliefs which must regain as- cendance if the dangers are to be averted which at the moment threaten individual freedom.132 This was his primary motivation for founding the Mont Pelerin Society. He thought that winning the intellectual struggle would lead, in the long term but not before, to political success as well. Hayek argued that the way in which ideas filtered into the political and public mainstream was through the influence of intellectuals, whom he called “second-hand dealers in ideas.”133 By intellectuals, he meant a diverse group of individuals whose actual expertise in any specific area was usually limited at best but whose authority to comment and pontificate on all sorts of matters was rarely questioned by wider society: -78- The class does not consist of only journalists, teachers, ministers, lec- turers, publicists, radio commentators, writers of fiction, cartoonists, and artists all of whom may be masters of the technique of conveying ideas but are usually amateurs so far as the substance of what they con- vey is concerned. The class also includes many professional men and technicians, such as scientists and doctors, who through their habitual intercourse with the printed word become carriers of new ideas out- side their own fields and who, because of their expert knowledge of their own subjects, are listened to with respect on most others. There is little that the ordinary man of today learns about events or ideas except through the medium of this class.134 Hayek thought that this intellectual class held views with a blatantly liberal (in the progressive American sense of the term), socialist, or progressive bias. The predisposition toward interventionist ideas among intellectuals reinforced their public status as long as such ideas were more broadly popular, and vice versa. The effect of this culture of conformity was a kind of mutually reinforcing circle that was deeply damaging to intellectual diversity and the public scrutiny necessary for effective debate: It is specially significant for our problem that every scholar can prob- ably name several instances from his field of men who have undeserv edly achieved a popular reputation as great scientists solely because they hold what the intellectuals regard as “progressive” political views; but I have yet to come across a single instance where such a scientific pseudo-reputation has been bestowed for political reasons on a scholar of more conservative leanings.135 According to Hayek, experts were too often judged by their political sympathies instead of by the excellence or otherwise of their academic work. Their results, and the consequent reputation they enjoyed within their specialist field, mattered less than whether they were adherents of “fashionable general ideas.”136 The intellectuals helped propagate these general ideas through their public and political actions. The results of technical knowledge became divorced from public debate because they were interpreted for the public and -79- filtered by intellectuals with a socialist or collectivist bias. Public debate became characterized by the vague repetition of notions given weight through being repeated by intellectuals: It is no exaggeration to say that, once the more active part of the in- tellectuals has been converted to a set of beliefs, the process by which these become generally accepted is almost automatic and irresistible. These intellectuals are the organs which modern society has developed for spreading knowledge and ideas, and it is their convictions and opin- ions which operate as the sieve through which all new conceptions must pass before they can reach the masses.137 Defenders of individual liberty and the market, according to Hayek, had a duty to counter this trend by generating their own long-term influence in the climate of ideas. In this way, the legislation, policy, and politics of the future would change for the better to reflect the principles of their view of the free society. Hayek’s essay had a profound influence on those around him at the time. But it was a strange manifesto in that it emphasized utopian dreams, exactly the sort of folly for which Hayek supposedly attacked the socialists. It was also affected by Hayek’s limitations as a writer in English, his second language. Some, like Leonard Read, who secured its publication in the University of Chicago Law Review in 1949, thought its meaning hampered by Hayek’s awkward prose style: [The Intellectuals and Socialism’s] limitation, as I see it, is in the writing. In too many places your meaning is obscured, by reason of the language arrangement in setting forth the ideas. This piece is far too important to be limited to those who, having done considerable thinking in this area, can deduce your brilliant meanings.138 In the drift toward socialism among the intellectuals, Hayek sensed a laziness that imperiled the bases of freedom. A message such as this carried enough force that the prose style really didn’t matter. Instead, the fervor it carried, and which was felt at the time by other neoliberal readers and supporters, made it -80- such an important strategic statement. It is worth quoting Hayek’s conclusion in full as it served as the call to arms for the transatlantic neoliberal movement that grew up after 1945: Does this mean that freedom is valued only when it is lost, that the world must everywhere go through a dark phase of socialist totalitari- anism before the forces of freedom can gather strength anew? It may be so, but I hope it need not be. Yet, so long as the people who over longer periods determine public opinion continue to be attracted by the ideals of socialism, the trend will continue. If we are to avoid such a develop- ment, we must be able to offer a new liberal program which appeals to the imagination. We must make the building of a free society once more an intellectual adventure, a deed of courage. What we lack is a liberal Utopia, a program which seems neither a mere defense of things as they are nor a diluted kind of socialism, but a truly liberal radical- ism which does not spare the susceptibilities of the mighty (including the trade unions), which is not too severely practical, and which does not confine itself to what appears today as politically possible. We need intellectual leaders who are willing to work for an ideal, however small may be the prospects of its early realisation. They must be men who are willing to stick to principles and to fight for their full realisation, how- ever remote. The practical compromises they must leave to the politi- cians. Free trade and freedom of opportunity are ideals which still may arouse the imaginations of large numbers, but a mere “reasonable free- dom of trade” or a mere “relaxation of controls” is neither intellectually respectable nor likely to inspire any enthusiasm. The main lesson which the true liberal must learn from the success of the socialists is that it was their courage to be Utopian which gained them the support of the intellectuals and therefore an influence on pub- lic opinion which is daily making possible what only recently seemed utterly remote. Those who have concerned themselves exclusively with what seemed practicable in the existing state of opinion have constant- ly found that even this had rapidly become politically impossible as the result of changes in a public opinion which they have done nothing to guide. Unless we can make the philosophic foundations of a free soci- ety once more a living intellectual issue, and its implementation a task -81- which challenges the ingenuity and imagination of our liveliest minds [sic]. But if we can regain that belief in the power of ideas which was the mark of liberalism at its best, the battle is not lost. The intellectual revival of liberalism is already underway in many parts of the world. Will it be in time?139 It was not too late, as events in subsequent decades proved. But it took a generation for Hayek’s strategy of ideological purity to bear fruit. Hayek’s emphasis on utopia was not pursued in the political strategies of the neoliberal intellectuals and think tanks that spread the revival of free market ideology in the postwar period. If anything, the market as neoliberalism matured was presented as clear common sense, whose basic logic was inescapable. Of course, this presentation was fantasy. Some markets succeeded and others failed. The ideological case for the superiority of the market in all areas of economic and social life all of the time amounted to a political faith as utopian as any other. The difficult questions, then as now, were when markets work best and when they fail to succeed at all. The most striking thing about Hayek’s statement is how much of his pure ideological vision did come to pass in Britain and the United States after 1980. The free market became the organizing principle for microeconomic reform, especially through the privatization of state assets, nationalized industries, public utilities, and public services. Trade unions were vanquished and the power of labor was diluted. Exchange controls were abolished. The financial markets were progressively deregulated. Market mechanisms became the models for the operation of health care. Of course, the institutions of the welfare state, the progressive income tax, and universal public education remained, although even in these areas, public funding and support had been downgraded by the end of the twentieth century. It is hard to think of another “utopia” to have been as fully realized. The purity that Hayek advocated was meant as an optimistic and ideological and intellectual tactic rather than a blueprint. The results have been extraordinary. Hayek’s cogent presentation of the case for an alternative ideological infrastructure to transform the “climate of opinion,” as opposed to the emphasis on utopianism, was followed by neoliberal supporters and activists. Hayek’s article had a powerful galvanizing effect on many of the creators and leaders of the transatlantic network of neoliberals—liberals “in the old sense of -82- the word”—that Hayek and his ideas helped bring to generate in the postwar period.140 It remained for flesh to be put onto the bones of the skeleton conceived by the early activists of the Mont Pelerin Society. The members of the society were intellectuals and academics, and tended to revert to their universities between meetings and return to their work. What the movement needed was a group of individuals who would popularize and promote neoliberal ideas beyond their scattered and isolated academic homes. The ideas contained in The Road to Serfdom had already gained the attention of many members of the business elite, such as Jasper Crane of DuPont Chemicals, who were central to the anti–New Deal coalition. This network is the subject of chapter 4. But by the end of the 1940s, the foundations of a program and an intellectual and political strategy were in place. Popper, Mises, and Hayek had assailed the characteristic features of New Deal liberalism and British social democracy as they saw them. Popper was the least comfortable with a crude free market program, and this was reflected in his less prominent role in the growth and maturation of neoliberal politics after 1945. But he had provided a cogent attack on Plato, Hegel, and Marx that gave intellectual armory to neoliberalism. Hayek had emerged as the intellectual and organizational leader of a new movement. His unwillingness to compromise philosophically about the superiority of markets in “The Intellectuals and Socialism” was followed by Milton Friedman and other Chicago economists. It was also followed by many of the fervent ideological entrepreneurs who ran the neoliberal think tanks and promoted free market ideas. Mises was least noticed at the time, but it was perhaps his unalloyed vision of markets that emerged victorious in the long run. His view of bureaucracies influenced the Chicago economists, the Virginia public choice theorists, and, most important of all, the businessmen who funded transatlantic neoliberal politics. Businessmen liked Mises because he argued that corporations were the drivers of social and economic progress. Without the support of such rich individuals and foundations the movement could never have got off the ground. His conception of consumption as a fundamentally democratic act and the marketplace as a forum for expression was far-sighted. It became a core component of the arguments made on behalf of markets by supporters of the Thatcher and Reagan governments in the 1980s. Popper and Hayek had articulated the beginnings of an alternative that they based on individual liberty and limited but strong government to main- -83- tain the competitive order and free market capitalism. Mises was less keen on government of any sort. But at this stage and in these works, these writers had not yet constructed a detailed and coherent alternative political or economic agenda. They were still too affected by what had happened in continental Europe from which they had all escaped. They were not able to foresee the wealth and general prosperity of the postwar period. The second Chicago school, and Milton Friedman and George Stigler in particular, were primarily responsible for the generation of a set of workable alternative policies. Instead, Popper, Mises, and Hayek had sounded a siren call, a warning about the tragic possibilities of the direction in which Western politics, economy, and society seemed to be moving. But the critique they had generated gave substance to the movement that Hayek in particular would lead. The detailed character of transatlantic neoliberalism and the network that was responsible for its successful diffusion are the subject of the next two chapters. But its beginnings, in the ideas of Popper, Mises, and Hayek, marked the first steps that would launch transatlantic neoliberalism from the academy into policy and politics. -84- |