Friday, May 10, 2019

In praise of Hayek’s masterwork

Destroy personal freedom, and ultimately the state destroys itself. No state succeeds in the long run by taking away freedom from individuals, other than those strictly necessary for guaranteeing individualism. And unless the state recognises this established fact its destruction will be both certain and brutal. Alternatively, a state that steps back from the edge of collectivism and reinstates individual freedoms will survive. This is the theoretical advantage offered by democracy, when the people can peacefully rebel against the state, compared with dictatorships when they cannot.

Nevertheless, democracies are rarely free from the drift into collectivism. They socialise our efforts by taxing profits excessively and limiting free market competition, which is the driving force behind the creation and accumulation of personal wealth and the advancement of the human condition. At least democracies periodically offer the electorate an opportunity to throw out a government sliding into socialism. A Reagan or Thatcher can then materialise to save the nation by reversing or at least stemming the tide of collectivism.

Dictatorships are different, often ending in revolution, the condition in which chaos thrives. If the governed are lucky, out of chaos emerges freedom; much more likely they face more intense suppression and even civil war. We remember dictatorships through a figurehead, a Hitler or Mussolini. But these are just the leaders in a party of like-minded statists.

When comparing dictatorships to democracy we think in terms of black and white, which allow one to express concepts clearly. But reality always comes in shades of grey. Far from being always bad, dictatorships can be successful if they permit individuals to retain the freedom to improve their lives and accumulate the benefits of their success. This is the freedom to compete, make and keep profits. A dictatorship on these lines is mercantile, offsetting the absence of political freedom by allowing personal freedom to develop within the confines of state direction. This is the current situation in China and Russia.

Modern democracy is usually flawed, a cover for the state to rob Peter to pay Paul to the point where Peter is impoverished or refuses to play the game and both the state and Paul are then bereft of funds and purpose. This is the condition to which Western democracy has evolved in modern welfare states. We can all sympathise with the underlying concept: there are those in life who through circumstances fall on hard times, and if they are given a helping hand, will eventually benefit society as a whole. But it becomes counterproductive when it discourages the individual from returning to productive society. Not only is the individual’s contribution to society lost, but he becomes a burden upon it.

For its revenue the state relies on the production of many Peters. The consequence is even more Pauls. The cost of welfare increases with its scope. It becomes welfare for all, with everyone having a right to it. Each Peter ends up funding ninety-nine Pauls. This is Mediterranean Europe today, and perhaps to a lesser extent Britain and America.

With compulsion, the state no longer protects the rights of the individual. Democracy has permitted the modern state to evolve into a separate entity no longer the servant of the population.
The cross-over between democracy and dictatorships
In economic terms, a high-spending statist democracy is indistinguishable from a dictatorship. Instead of promoting free markets, both create the conditions where commercial success is achieved by influencing the government. The difference is in the form this corruption takes. In the case of a high-spending democratic government, obtaining control over the regulatory process is vital for a business to secure market advantage and keeping competitors at bay. In a dictatorship corruption is usually more direct.

So long as free markets are not completely prohibited by the state, this crony capitalism thrives. From banks to pharmaceuticals, it is the way business is done today. It angers ordinary people, who are then persuaded by support-seeking politicians that big business is motivated by profit without social consideration, and that the socialising policies of the government are the solution. As the Austrian economist Friedrich von Hayek put it, the people are now embarking on the road to serfdom.

The Road to Serfdom was about the cross-over between democracy and dictatorships. Hayek wrote his famous book in 1942-44 (it was first published in 1944), drawing on the example of Germany’s contemporary experience. He showed how the organisation of a war-time economy by the state, in Germany’s case the First World War, becomes a template for central planning in peacetime. While Hayek showed that a government’s central planning of a war-time economy forms the template for peacetime central planning, peacetime planning also develops on its own.

The planners always promise a utopian view of the future. People are easily persuaded that planning for the benefit of everyone is an advancement on the sole motivation of profit. However, disagreements arise on what plan is best, reflected in the split between different political parties. The planners from different factions all have plans but no unity of purpose. The people disagree as well. What is needed is government propaganda to dispel disagreement and unite the people behind the government’s preferred plan.

The propaganda machine goes into action. Information is selectively fed into it to obtain public support for government policies. Statistics are manipulated to promote success and obscure failure. Any reporter who does not cooperate with the government line is excluded from the planners’ briefings, giving his rival journalists an advantage. He conforms. The use of the press to support state planning becomes increasingly important in covering up its failures.

The failures of central planning proliferate. The propaganda machine cannot cover up all the evidence, and the planners respond with even more planning, yet more suppression of personal freedom. There is no turning back. They argue it is not their fault, but the fault of the people failing to cooperate and comply with government policies. They argue that the people are uneducated and not responsible enough to have a say in central planning. What’s needed is someone strong enough to force the plans through. At the same time, ordinary people want a strong man to kick out the useless bureaucrats and make the plans work.

A new leader emerges. The democratic establishment see his function as temporary. When order in the planning process is restored, he will no longer be needed. But this is the cross-over point between democracy and a dictatorship. He is a Chavez, a Putin, a Lenin, a Mussolini, a Hitler. It was the latter fascists that were perhaps freshest in Hayek’s mind, but he was also fully aware of Lenin and Stalin.

Not all strongmen emerging from the chaos of planning failures turn out to be a Lenin or a Hitler. Those who follow a mercantilist path, contemporary examples being Russia’s Putin and China’s Xi, are careful to allow individuals the freedom to run their affairs without the heavy hand of the state. But they are also careful not to let democracy undermine their control: the people cannot have both and opponents to the state are ruthlessly dealt with.

Anyone intending to be Hayek’s strong leader promises to make order out of bureaucratic chaos. Those on the far left (in the UK, Corbin and McDonnell, in the US Bernie Sanders) believe the political solution to growing economic chaos is to take collectivism to a higher plain. Free-marketeers are derided by the planners as being antisocial, profit-seeking right-wing extremists. If Corbin and Sanders are to succeed in their desire for office, they must wish for an economic or political failure that damns capitalism and will see them swept into office.

Then what happens?

We will continue with Hayek’s narrative. The new leader uses the chaos that led to his election as the pretext to consolidate his power. Opposition is not permitted, because it restricts the leader’s ability to resolve matters. With dissenters excluded, democracy becomes little more than a propaganda exercise. The leader only permits people to vote for him and his party. To encourage national unity in the face of deteriorating economic conditions, a minority in society is made a scapegoat. With Hitler it was the relatively prosperous Jews. Corbin’s apparent dislike of Britain’s Jewish community is striking a raw nerve,

In truth, we cannot forecast what class or creed will be tomorrow’s scapegoat. It will depend on the nation, the strongman and his immediate supporters, their religious beliefs perhaps, and how rapidly planning undermines the economy. Wealthy communities with wealth for the state to acquire will be at risk. But one thing is for sure, increasing numbers of secret police will be deployed to supress all opposition. Dissent is dealt with ruthlessly.

Hayek went on to detail what we have subsequently seen, in Africa with Mugabe, in Venezuela with Chavez and then Maduro. These are the most egregious of many contemporary examples, mainly confined to developing nations. Now the mature economies in Europe, of America and Britain are drifting that way.

The current regimes in Russia and China are different, having become post-Hayekian political economies. They are mercantilist in nature. Individualism is allowed to flourish, with collectivism limited. But for these regimes to survive a wider global Hayekian transition from democracy to a lasting mercantile dictatorship, they will need to give up money-printing and return to sound money. This is our next topic.

- Source, Goldmoney