The Road to Serfdom is a singularly influential book published in 1944. The book was written by the Nobel Prize-winning economist Friedrich Hayek and is probably the single most popular book on economic theory to be read and known, thanks to the Reader’s Digest which published an abridged version of this classic in 1945.
Standing on the Shoulders of Giants
While most economic theory outlives its context, the theories of Hayek outlive their era and are still applicable to the world’s current problems.
By the end of the 1960s, Milton Friedman was the most famous scholar of his time, thanks to his espousal of convincing people on the importance of having a functional and unhampered free market to operate. While both Friedman and Hayek are often referred to as the direct successors of Adam Smith, it was Friedman’s unflinching promotion of free markets that made him slightly narrower in vision of the two.
Friedman insisted that there should be absolutely no government intervention other than the bare minimum required to ensure the survival of its citizens. He insisted that the best economic conditions will only prevail if free markets are completely free and there is absolutely no government intervention.
Friedman’s theory is backed by real-life implementation by the Government of Chile. In his letter to the military dictator of Chile, President Augusto Pinochet, in 1975, Friedman advised cutting government spending to reduce the fiscal deficit in order to deal with Chile’s raging inflation rate of 10-20% every month. The end result was that adopting free market policies fixed Chile’s economic crisis and even helped the country on its gradual road to recovery to a democracy in 1990.
“The Boom was the Illusion; the Slump is the Reality”
While Friedman was all for Chile and Hong Kong, Hayek’s theory of what he called the Minimum State, which he presented in his work, La constitution de la Liberté (The Constitution of Liberty, pub.1960). It was 15 years since he published The Road to Serfdom and his program listed the elimination of ruling classes, the promotion of privatization, the elimination of subsidies in housing and rent control, reduction of expenditure on social security and limiting trade union powers.
In short, he stated that it was no business of the state to redistribute but simply to serve the concept of ‘social justice.’ His salvo was a hard blow for leftist thinking in those times which dreamed of a political democracy and the philosophy of ‘collectivism.’ He clearly stated that economic planning without understanding that planning entails a totalitarian state.
Every major politician and head of state from Ronald Regan to George Bush and, most notably, Margret Thatcher have been influenced by Hayek. Thatcher, at the Conservative Research Department function in 1975, grew impatient with the speaker and slammed Hayek’s book, The Constitution of Liberty, on the table while announcing to one and all that, “This is what we believe.” Interestingly, Hayek eventually attributes the birth of civilization to private property in his book, The Fatal Conceit (1988).
To us, Hayek’s message for the current economic recessions and slowdowns is simply that you cannot cut your way out of a slump; you have to grow your way out. According to Hayek, the cause of the economic collapse of 2008 was excessive credit creation by the banks leading to overspending. He suggested that instead of cutting government spending, it is more important to increase spending to offset the decline in public spending.
According to him, the government support to keep bad banks going was like a drunk throwing up the morning after to get rid of bad investments. If the boom was the illusion; the slump is the reality and there are no automatic recovery forces in a market economy. His view of international organization (read as ‘globalization’) was that of a threat to individual freedom since he believed that the policy of freedom for the individual is the only truly progressive policy today.