Tuesday, December 1, 2009

America's Return to a Road to Serfdom? by Richard M. Ebeling

Under the cover of one of the most severe economic crisis in the post-World War II period, the United States is witnessing the largest and most dramatic increase in the size and scope of government power since the 1930s and 1940s.

We are dangerously returning to “the road to serfdom” that free market, Austrian economist and Nobel Laureate, Friedrich A. Hayek, warned about in a book with that title that was originally published in 1944. A spider’s web of regulations, controls, and commands were imposed on the free enterprise system at that time, first under the crisis conditions of the Great Depression and then expanded in Great Britain and the United States during the emergency years of the Second World War.

Hayek feared that with this growth in government control over the economic affairs of the nation, individual freedom was being seriously threatened. He argued that with government commands over production, pricing, and resource use there inevitably came government control over peoples’ lives.

“We, the People,” or Government Control

The vital issue, Hayek insisted, is whether “we, the people” decide what shall be produced and for what purposes based on what we think goods and resources are worth through the free interplay of supply and demand in a competitive free market; or whether it shall be those in political power who will increasingly dictate through those commands, controls and planning regulations what we, the citizens of the country, should have available to use and consume, in what quantities and qualities, and for what purposes and at what costs.

At least in America and some other Western nations, Hayek’s warning was partly heeded. Neither the United States nor the rest of the Western world ever fully reversed the extent to which governments had grown in size and intrusiveness in the 1930s and 1940s. But they did step back and did not follow either Nazi Germany or the Soviet Union all the way down that road to serfdom under which individual freedom is completely crushed and each human being is reduced to a mere expendable cog in the wheel of state planning and power.

Unfortunately, over the decades since the Second World War Western governments have continued to incrementally encroach on people’s liberty through the expansion of the Interventionist-Welfare State. Taxes have increased, regulatory powers have expanded, and redistributive programs have grown so much that many in America and Europe truly believe that they have an “entitlement” to other people’s income and wealth.

Economic Crisis and Massively Growing Government

But it is under the cover of the current economic crisis, that this growth in government power and control is accelerating at a gravely dangerous pace. If this trend is not halted, we once again seem headed down that road to serfdom about which Hayek warned more than six decades ago.

Starting in 2008, Big Brother in Washington has been poured hundreds of billions of dollars into various sectors of the U.S. economy. With these dollars have come more and more government control and influence over the private enterprise system.

In the autumn of last year, the Bush Administration decided to spend nearly $700 billion in the American financial sector to prop up banks and other lending institutions facing either insolvency or in some cases bankruptcy, under the argument these corporations were “too big to fail.” In exchange for these vast sums of bailout money, the U. S. Treasury took partial stock ownership over many of the leading banks and financial institutions in the United States.

Now, under the guise of being the steward of the taxpayers’ money, the Obama Administration has appointed a “pay czar” who has been imposing wage controls on the salaries to be received by senior executives employed in these financial institutions.

In addition, the regulatory reach of the Federal government and the Federal Reserve System is being extended to more closely oversee and determine the types of risk management and lending strategies banks and investment houses may be allowed to follow in the years ahead. The capital markets of America are threatened with even far more politicization of investment decision-making than has been the case in the past.

More than $80 billion of taxpayers’ money has been spent in an attempt to prop up the declining American automobile industry. In the process, ownership over General Motors has been turned over to the United Auto Workers Union, with Uncle Sam as a powerful voice in the background influencing the future technology and production direction of the American auto manufacturing. After three Washington bailouts, now, since the 1970s Chrysler has been merged with Fiat, with the government still serving as a backseat driver.

The $820 billion cap-and-trade bill wanted by the Obama administration would basically nationalize the entire atmosphere over the United States, with the government selling and assigning permits dictating the amount of emissions that may be associated with every type of manufacturing in the U.S. With this power, those in political authority in Washington can determine not only the technologies with which every private enterprise in America can undertake any form of production, but will be able to decide who will be allowed to stay in business, as well as what they produce and for what purpose.

It will represent a crushing stranglehold over all of the county’s industry that will also be extremely expensive for the buying public. It has been estimated that within a decade or so, the higher costs of manufacturing due to cap-and-trade will raise by at least $3,000 a year the consumption expenditures of the average American household.

And to top all of this off, the Congress is now in the process of very well passing what will amount to the virtual nationalization of the entire health care industry in America. The government will dictate even more comprehensively than it already does the medical fees and treatments that will be available to every single American citizen. The price tag for having this dubious government bedside manner is estimated to be around $1 trillion and rising over the next decade.

There will be government rationing of a widening circle of medical services and facilities. There will be increasing government regulatory controls over the availability of pharmaceuticals for various diagnosed diseases. There will be political determination of who lives and who dies based on government actuarial judgments concerning the elderly, the young, and the chronically ill. It will not be patients and their doctors who will have the greatest influence and control over this most personal and intimate matter. Rather, it will be pressure group politics and expected voting patterns in upcoming election days that will determine what a particular life is worth in terms of government dollars allocated out of the Federal budget.

Human Diversity or Government-Imposed Uniformity

The essence of a free enterprise society is that each individual has the personal liberty to determine his own goals, weigh the costs of achieving the various ends he values, and make the personal trade offs that he considers worthwhile, given what he would like to do so his life has meaning and fulfillment.

But as Hayek also warned many years ago, as the government takes over control of more and more aspects of our life the more we are confined within and made to conform to the hierarchy of values and goals that the political authorities are determined to impose on each and every one of us. By taxing way our income and wealth, and by dictating what may be produced and to whom it will be supplied, the government reduces the members of society to a homogeneous mass made to fit the mold that the political elite thinks is best for us.

Gone is the diversity and pluralism of human difference that is usually considered one of the hallmarks and benefits of the open and free society. We all become interchangeable parts of an economic plan designed by others to reflect their conception of “fairness” and “social justice.” The death of individual liberty is the end point of our new road to serfdom under which we are reduced to subservient and obedient subjects of our political masters.

The Rationality of the Market vs. Government Chaos

There is another equally dangerous dimension to this growth in government and the resulting destruction of economic liberty and the free market: the loss of any rationality to the working of the country’s entire economic system. As Hayek and his fellow Austrian economist, Ludwig von Mises, cogently argued, without a competitive pricing system based on the free play of supply and demand, there is no way of knowing whether the scarce resource of the society are being utilized in the most economically efficient manner.

Market-based prices serve as the information steering mechanism to determine how resources, labor, and capital should be allocated among all the alternative and competing uses for which they may be applied to manufacture desired goods and services.

President Obama’s “pay czar” has dictated the maximum cash salaries that may be paid to senior executives in the part of the financial sector in which the government has a stake. This means that the use of executive talent will be irrationally employed in this part of the economy. Unless people may freely convey on the market what they think someone’s abilities and talents are worth as expressed in the wage they are willing to pay that person to perform a valuable service, the right people will not be performing the right job in the right place. There will be mismatches between work to be done and the best person assigned in the market to get it accomplished.

Now extrapolate that to the entire economy and the use all types of labor, land, resources, and capital equipment. The government will then be mandating, manipulating and distorting the pricing system though controls, regulations, and artificial subsidies for more and more of all the things people want in society, whether it be health care, automobiles, a functioning financial sector, or all types of manufactured goods.

The end result is a dysfunctional economy with growing waste, inefficiency, and imbalances between supplies and demands for various the goods and services desired by all of us as income earners and consumers. The profit motive is undermined, the incentive for innovation is weakened, and improvements in material prosperity are slowed down and in the extreme finally may grind to a halt.

Prices have work to do. When government commands and controls replace the free price system generated by peaceful market competition, people not only find themselves reduced to a new form of serfdom but discover they are living in a world that Ludwig von Mises once called politically created “planned chaos.”

This is a very high price to pay for the false promises of political paternalism and the illusionary security of the welfare state. Liberty and prosperity are too precious to trade away even during the emotional times of economic crisis and uncertainty.

Our task must be to reason with our fellow Americans before we have traveled so far down that new road to serfdom that it becomes almost impossible to turn back.


  1. Http://abcdunlimited.com/ideas/liberalism.html:

    What limits the limited welfare state?

  2. Dear Barry Loberfeld,

    The answer is that it is extremely difficult or impossible to limit the limited welfare state.

    Once the premise has been accepted that the government may go beyond its classical liberal-defined responsibilities of protecting each individual's life, liberty and honesty acquired property, it becomes a mere matter of ideological pragmatism and political expediency how far the arm of the State then reaches into our pockets and over our lives.

    Hayek once pointed out:

    "When we decide each issue solely on what appear to be its individual merits, we always over-estimate the advantages of central direction. Our choice will regularly appear to be one between a certain known and tangible gain and the mere probablility of the prevention of some unknown beneficial action by unknown persons. If the choice between freedom and coercion is thus treated as a matter of expediency, freedom is bound to be sacrificed in almost every instance."

    Hayek went on to say,

    "The end of the [classical] liberal era of principles might well be dated at the time when, more than eighty years ago, W. S. Jevons pronounced that in economic and social policy 'we can lay down no hard and fast rules, but must treat each case in detail upon its merits.'"

    And Hayek concluded:

    "A successful defence of freedom must therefore be dogmatic and make no concessions to expediency, even where it is not possible to show that, besides the known beneficial effects, some particular harmful result would also follow from its infringement. Freedom will prevail only if it is accepted as a general principle whose application to particular instances requires no justification."

    Richard Ebeling

  3. If I may be permitted the Randian indulgence of self-quotation:

    "It's all really very easy to understand as the philosophic analogue to Mises' economic analysis [viz., the price-controls-on-milk example]. The initial introduction of a socialist law into a liberal society forces the question: Do we accept or reject this violation of the liberal ethic? If we accept it, we set a precedent for the next proposed socialist law. We have made a very clear moral decision -- collectivism trumps individualism. In contrast to the cynicism that leads to a deluge of special interest groups, this trend involves taking ideas seriously -- i.e., recognizing the mutual exclusiveness of the capitalist and socialist paradigms, and thus the imperative to choose one. It acknowledges the hypocrisy -- the incoherence -- of bringing the socialist outlook to issue A but not issue B, to the 'economic' issue but not the 'social' issue. "

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