Hayek Opposes Centralized Economic Planning Summary

  • Last updated on November 10, 2022

Austrian economist F. A. Hayek published The Road to Serfdom, which argued that government programs to plan and control economic life would undermine democracy and civil liberty.

Summary of Event

F. A. Hayek began his professional career developing a relatively original theory of the business cycle, substantially influenced by his mentor, Ludwig von Mises. Many economists found Hayek’s work confusing and obscure. As the Great Depression Great Depression developed following 1929, Hayek’s theory led him to oppose government efforts to stimulate aggregate demand and relieve unemployment. Road to Serfdom, The (Hayek) Centralized planning, economic Economic systems;capitalism Capitalism Economic policy;and F. A. Hayek[Hayek] [kw]Hayek Opposes Centralized Economic Planning (Mar., 1944) [kw]Centralized Economic Planning, Hayek Opposes (Mar., 1944) [kw]Economic Planning, Hayek Opposes Centralized (Mar., 1944) Road to Serfdom, The (Hayek) Centralized planning, economic Economic systems;capitalism Capitalism Economic policy;and F. A. Hayek[Hayek] [g]Europe;Mar., 1944: Hayek Opposes Centralized Economic Planning[01110] [g]United Kingdom;Mar., 1944: Hayek Opposes Centralized Economic Planning[01110] [c]Economics;Mar., 1944: Hayek Opposes Centralized Economic Planning[01110] [c]Publishing and journalism;Mar., 1944: Hayek Opposes Centralized Economic Planning[01110] Hayek, F. A. Finer, Herman Jewkes, John Keynes, John Maynard

The Great Depression generated numerous proposals and policies for government intervention in economic life. Hayek, who moved from Vienna to the London School of Economics in 1931, became involved during the 1930’s in the spirited debate over proposals for socialism and governmental economic planning. From his participation in this debate emerged his most creative work, for which he ultimately received the Nobel Prize in Economic Sciences Nobel Prize in Economic Sciences;F. A. Hayek[Hayek] in 1974. Hayek argued that prices in a free-market economy function as a vast network measuring and acting on bits of information that exist only in the minds of millions of individuals. No central planner could possibly possess enough of this information to achieve efficiency. In addition, proposals that government officials mimic the decision rules of a competitive economy would fail, because the officials would lack the incentives provided by private ownership of business.

These convictions provided the starting point for The Road to Serfdom, published first in the United Kingdom in March, 1944. By 1944, the Western world had been immersed in World War II for five years. The war had brought vast increases in government planning and control of the economy for war purposes. Many intellectuals felt these developments would lead logically to peacetime management of economic life by government in the interest of full employment and social justice.

Hayek observed the similarities of these ideas, prevalent in Great Britain and the United States, to those he had been exposed to as a youth growing up in the German intellectual environment. He believed that “the rise of fascism and Naziism was not a reaction against the socialist trends of the preceding period, but a necessary outcome of those tendencies.” Hayek stressed the underlying similarities between the oppressive regimes of Adolf Hitler in Germany and Joseph Stalin in the Soviet Union.

A common goal of collectivists was to supplant economic competition with government control. To Hayek, however, competition was a source both of economic efficiency and of personal freedom, reducing the scope for government to act coercively. He conceded that advocates of planned economy had many laudable objectives and that any one of those might readily be achieved. In a world of scarce resources, however, many of the conflicting goals would not be accomplished.

Individuals differ widely in their tastes and preferences, and Hayek emphasized that many of these would necessarily be sacrificed by centralized economic control. Efforts to “persuade” people to work toward a common set of goals would lead to propaganda and suppression of free discussion and dissent. The regime might seek an acceptable common goal through fanatical nationalism or through making scapegoats of potentially unpopular minorities. Hayek did not believe that the satisfaction of multiple individuals’ various tastes and preferences was itself a common goal imposed on a populace by propaganda or ideology.

Centralized economic control, Hayek pointed out, is likely to be delegated to autonomous public organizations, remote from direct democratic control, and endowed with wide discretion, guided by empty generalities such as “fair” and “reasonable.” Hayek had been impressed by the breakdown of democracy in Germany after 1929, when parliamentary stalemates led successive chancellors to rule by decree.

Hayek believed that comprehensive economic control can determine winners and losers and thus place a huge premium on gaining positions of power. Freedom of occupational choice, moreover, is difficult to maintain under such conditions. The effort to improve one’s economic status would be redirected into political activity rather than into productive economic enterprise. Hayek feared that extensive government economic interventions would be difficult to reverse.

Hayek accepted the desirability of providing everyone in an advanced economy such as Britain with some minimum level of the necessities of life and of developing a comprehensive system of social insurance. He also thought that demand management policies could be developed to tame the business cycle and avoid mass unemployment without the negative implications he assigned to economic planning. However, he warned against measures to promote the security of specific producer groups by curbing competition and limiting entry into a given economic sector—measures that arguably worked to the disadvantage of all outside the privileged insider group.

In The Road to Serfdom’s most striking chapter, “Why the Worst Get on Top,” Hayek asserted that leaders who undertake to plan economic life will either develop dictatorial powers or abandon their plans. Once the government’s power is so extended, the opportunities it offers become an enormous temptation to the unscrupulous or the corruptible. A potential dictator is most likely to find mass support among the low-paid and less educated. Such a powerful government would find it easy to reward its supporters and punish its opponents.

Significance

Hayek’s book received a lot of attention and aroused strong emotions among readers. In the United States, Reader’s Digest published an abridged version, and more than 600,000 additional copies of this version were distributed by the Book-of-the-Month Club. In Britain, John Maynard Keynes, with whom Hayek had had sharp disagreements in the past, praised Hayek’s book; Keynes had, after all, raised similar issues in his The General Theory of Employment, Interest, and Money General Theory of Employment, Interest, and Money, The (Keynes) (1936), recognizing that demand management policies could successfully alleviate depression and unemployment without seriously impairing individual freedom and democracy.

Howls of outrage came, however, from advocates of expanded governmental economic intervention. Herman Finer’s Road to Reaction Road to Reaction (Finer) (1945) called Hayek’s book “the most sinister offensive against democracy to emerge from a democratic country.” Much of the book reiterated contemporary notions about the evils of free market economic organization. Finer’s central criticisms were well taken: He argued that Hayek’s Austrian background did not prepare him for a real appreciation of American or British democracy. Finer denied that fascist regimes evolved out of socialist programs and people, and he felt that Hayek had ignored that “planning” could be a matter of more or less.

Contemporary developments put many of Hayek’s ideas to the test. In Britain, the Labour Party Labour Party, British gained political power in 1945 and undertook a program to nationalize some key industries; maintain temporary price controls, foreign-exchange controls, and rationing; and develop noncoercive economic plans. As Hayek had anticipated, such measures proved disappointing. In 1948, economist John Jewkes extended Hayek’s major propositions in Ordeal by Planning. Ordeal by Planning (Jewkes) He supported much of Hayek’s analysis by reference to (primarily British) policies and pronouncements. However, civil liberty and democratic processes were maintained in socialist Britain. Much of the Labour economic intervention was ultimately reversed (particularly under Prime Minister Margaret Thatcher, an avowed fan of Hayek).

In Germany, postwar economic recovery was greatly accelerated by free market policies. The collectivist economic policies of the Soviet Union and (after 1949) mainland China were revealed to be severely inefficient and incapable of sustaining the kind of vigorous economic growth experienced by Western countries. In the United States, the Employment Act of 1946 committed the federal government to employ monetary and fiscal measures to stabilize the macroeconomy in a manner consistent with a free market economy. The avoidance of another severe Depression seemed to some to answer the most potent anti-free-market arguments of the 1930’s.

Hayek continued to publish extensively on topics involving the interaction of economic, political, and social elements. His work continued to attract attention, aided by the enthusiasm for (American-based) “Austrian” economics. Hayek’s book explained how centrally controlled economies would be unable to achieve the specific objectives set forth in so many pre-1944 Western writings. However, his gloomy forecasts of a one-way path prejudicial to democracy and individual freedom did not come to pass in the West. Perhaps his book helped alert people to those dangers. Road to Serfdom, The (Hayek) Centralized planning, economic Economic systems;capitalism Capitalism Economic policy;and F. A. Hayek[Hayek]

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Boettke, Peter J. “Hayek’s The Road to Serfdom Revisited: Government Failure in the Argument Against Socialism.” Eastern Economic Journal 21, no. 1 (Winter, 1995): 7-26. A good guide to the reception of Hayek’s book and the subsequent development of its themes.
  • citation-type="booksimple"

    xlink:type="simple">Ebenstein, Alan. Friedrich Hayek: A Biography. Chicago: University of Chicago Press, 2001. An informative and accessible biography; chapter 16 deals with The Road to Serfdom.
  • citation-type="booksimple"

    xlink:type="simple">Finer, Herman. Road to Reaction. Boston: Little, Brown, 1945. Critiques The Road to Serfdom and reliance on free markets generally.
  • citation-type="booksimple"

    xlink:type="simple">Hayek, Friedrich A. The Fatal Conceit. New York: Routledge, 1988. Extends many of the themes presented in The Road to Serfdom.
  • citation-type="booksimple"

    xlink:type="simple">_______. Individualism and Economic Order. Chicago: University of Chicago Press, 1948. Here are Hayek’s path-breaking essays on information and the impossibility of achieving economic efficiency without a price system.
  • citation-type="booksimple"

    xlink:type="simple">Jewkes, John. Ordeal by Planning. London: Macmillan, 1948. Attempts to refute Finer’s anti-free-market argument; cites post-1944 British developments supporting Hayek’s points.
  • citation-type="booksimple"

    xlink:type="simple">Vane, Howard R., and Chris Mulhearn, eds. The Nobel Memorial Laureates in Economics. Northampton, Mass.: Edward Elgar, 2005. Puts The Road to Serfdom in the context of Hayek’s Nobel award.

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