The Real Economy

Hayek, totally misunderstood?

Hector McNeill¹
SEEL

Many economists are less concerned with solving practical policy problems but rather enter the fray by writing books with catchy titles and filling the books with assertions that support the perversity theses of along the lines that, “the road to hell is paved with good intentions”.

Friedrich Hayek (1899–1992) risks becoming branded in this mould by a broad misinterpretation of his now famous "Road to Serfdom" by enthusiasts in the Thatcher government concerning what he had to say about matters of welfare because the current government is, in fact, doing exactly what Hayek warned against.

There is good reason, however, to believe that this book was not fully understood and that its pre-eminence is more related to the fact that it seemed to provide ammunition for a specific ideological view on the role of government macroeconomic policy.

In the short perceptive book, "The Rhetoric of Reaction", the economist Albert Hirschman (1915–2012), makes revealing observations in the chapter entitled "The Jeopardy Thesis" where he sets out what Hayek wrote concerning matters of welfare. The following indented content is verbatim from this chapter in that book. I have added emphasis to certain parts of note.

Albert Hirschman
(1915-2012)

The Great Depression in the 1930s had led in Britain to strong and, in part also because of Keynes's influence, newly persuasive demands for a more activist role of the state in the economy. At this point Hayek and with the authority of someone who, given his Austrian background, knew only too well the precarious nature of freedom, issued his eloquent warning that governmental interference with the "market" would be destructive of liberty. There is one chapter in the book (chapter 9) that under the heading "Security and Freedom" deals specifically with matters of social policy. Today's neoconservatives would be shocked on rereading it, for Hayek goes surprisingly far in endorsing what was later to be called the Welfare State.

He comes out in favour of:

"the certainty of a given minimum of sustenance for all," that is, for "some minimum of food, shelter, and clothing sufficient to preserve health and the capacity to work," as well as for state-assisted insurance against sickness, accident, and natural disaster."

He criticizes, to be sure, a certain type of "planning for security that has such an insidious effect on liberty" and also warns that: "policies which are now followed everywhere, which hand out the privilege of security now to this group and now to that, are ... rapidly creating conditions in which the striving for security tends to become stronger than the love of freedom."

But at the time, Hayek's critique of social welfare policies was remarkably restrained in an otherwise militant work. Perhaps he could not help but share, or did not wish to offend, the overwhelming feeling of solidarity and community that was so characteristic of wartime England and that was reflected in the virtually unanimous endorsement by public opinion of the Beveridge Report, that Magna Carta of the Welfare State published in 1942, only one year before the “Road to Serfdom”

Since the introduction of financial regulatory relaxations following the UK Budget of 1981, we have witnessed government setting about undermining major components of the Welfare State facilitated by the macroeconomic policies which have resulted in a relatively rapid decline in performance since that year. Almost the immediate impact was the plumetting decline in the balance of payments, rising investment in jobs offshore as opposed to onshore (within the UK), and, as a result, real incomes falling to such an extent as to make support for welfare from government revenues increasingly difficult. This, of course is not the "fault" of the welfare provisions but rather the overall drop in performance of the economy and the loss of manufacturing, in particular, as a result of inept macroeconomic "management". The increasing emphasis on financialization, and the inevitable 2008 financial crisis followed by the imposition of quantitative easing has presented the constituents of this country with a case study of Hayek's,

"policies which are now followed everywhere, which hand out the privilege of security now to this group and now to that, are ... rapidly creating conditions in which the striving for security tends to become stronger than the love of freedom."

The Cambridge Dictionary defines the state of affairs characterized by, ".. government by a small group of people who have unlimited power over the people in their country or state and use it unfairly" as tyranny.

Governments operating on purely ideological principles end up prejudicing increasing numbers of the constituency not only in terms of declining real incomes and welfare but also in diminishing the freedoms of the people by constraining options for people to improve their conditions. This cascade towards "serfdom" arises from arbitrary government decisions based on the power and interests of a small faction. As the Welfare State spirals towards a provision managing increasing levels of pauperism, generated by inept macroeconomic policies, social agitation is bound to herald yet more extreme policies in the name of "security", for some, and a drift towards tyranny.