4/30/15

The Road to Serfdom is a very important economic book written in the early 1940s by Friedrich Hayek.

Hayek, an Austrian living in Britain at the time (WWII), was the leading economist of the Austrian school (another was Joseph Schumpeter, originator of the economic concept of “creative destruction”). The Austrian school was the economic strain opposed to Keynesianism, the paramount AND erroneous economic theory of their—and, unfortunately, our—era, developed by and named after the leading economist of the time, John Maynard Keynes.

If the world listened more to the Austrian School we would all be better off. Keynes was wrong on two counts:

  1. He may have been right for the 1930s . . . maybe. But his theory definitely does not work in a “Global Village” economy where stimulating the economy in one country creates employment in another.
  2. However, even for the 1930s world, Keynes made the fatal mistake of ignoring psychology. You see economy is 90% psychology. As an example, the pillar of economic theory known as the Paradox of Thrift phenomenon—you save because you are uncertain about the security of your job, but your saving creates a reduction in aggregate demand that causes you to lose your job—is all about psychology. It explains for instance the poor GDP figures just released for the 1Q of 2015 where growth in consumer spending was very slow due to the numerous uncertainties surrounding us. In Keynes’ case, his biggest error was to assume that government and government bureaucrats are capable of turning off the spigot of stimulating demand (needed, according to Keynes, when the private economy is in recession in order to generate government demand, which offsets the reduction in private demand) when the private economy is recovering and, indeed, reduce government spending to create surpluses so that the debts can be paid off. Not on your life. Once you give these bureaucrats money, power, and a role, they will never turn it off. In truth, they will want to expand it and enlarge it, thus incurring more and more debt until we are all bankrupt (see Greece).

That is NORMAL behavior of people. Unfortunately for Keynes and his followers, to this day the world is made of PEOPLE, not rational economic models

Hayek, on the other hand, believed that psychology and the way people behave are paramount in the way the economy performs, knowing that people’s behaviors are not always rational and that they do not always have perfect knowledge of everything. Of course, another big believer in behaviorist economic theory was the founder of the Chicago school of economics (and a great believer in Hayek too), Milton Friedman.

In his book, Hayek claims that fascism (of course, a huge issue in the early 1940s) is a branch of communism and not an anti-reaction to the cycles in capitalism. Keynes and his followers maintained that fascism was the reaction to the depression of the 1930s and, thus, they suggested that stimulating the economy to avoid depressions is paramount. Hayek, on the other hand, pointed out that both fascism and communism are based on central planning for the economy, thus, by definition, strangling the human entrepreneurial spirit and making people serfs. Hence, the name of the book.

To be clear, some (small) element of government stimulation in recessionary times is good, but ONLY if it is done in a way to INCREASE the freedom of people by lowering taxes—not by central planning. But that is by-the-by.

The point of this blog is that, even under democratic governing systems, after decades of growing government intervention in everything in our lives (in the name of Keynesian theory), we are all subject, in one degree or another, to the “road to serfdom” phenomenon. We are all way too dependent on government because it has foisted itself on us in so many ways for so long that we are simply becoming conditioned to relying on the government and expecting it to resolve many issues. Even worse, we actually become conditioned and accept the nonsense belief that government knows best.

Baltimore (and Maryland as a whole) has been—and still is to a large extent—a democratic bastion for 40-50 years, all the while run under the “government knows all and best” model. Listening to the reactions of many business people in Baltimore, I am shocked to see how far along the road to serfdom they’ve travelled. These are business people whose businesses were gutted and not ONE of them is willing to criticize the “government”—in this case the local police and mayor—for allowing it to happen.

If there is one thing that EVERYONE agrees on, it is that an absolute requirement for government is to keep the peace, security, and the rule of law. Without it, no private economy or enterprise can exist. What happened in Baltimore is a total collapse of public safety. For police to stand, and watch, and allow such damage to businesses to occur by arson, looting, etc. (whether or not they were instructed to allow that to happen), is a total failure of the most basic requirement of modern democratic and free-market society.

For these business owners to accept what happened in resignation and refuse to criticize their government is precisely the type of reaction you’d get from serfs.

If we allow this trajectory to continue we will all be serfs sooner than we think.