It is not necessary to review the familiar economic arguments which show why mere ‘interventionism’ is self-defeating and self-contradictory, and how, if the central purpose of intervention is to be achieved, intervention must expand until it becomes a comprehensive system of planning.Footnote 1
Ben Jackson has persuasively argued that many early members of the Mont Pèlerin Society, such as John Jewkes and Lionel Robbins, were not particularly hostile to expansionary demand management policy.Footnote 2 Jackson also noted that many early market liberals, such as the German Ordo-liberals, had no objection per se to government-provided social insurance schemes. Accordingly, Jackson explains that much commentary on the early market liberals mistakenly judged their work to occupy the ‘same ideological space as the neo-liberalism’ of the mid- to late 1970s.Footnote 3 Although we find Jackson's general thesis highly compelling, we suggest that the views of F. A. Hayek – founder of the Mont Pèlerin Society and arguably also the leading market liberal theorist – provide a particularly notable counter-example to any claim that market liberals of the 1940s did not stringently object to the idea that the mixed economy and ‘welfare state represented a stable middle way between capitalism and socialism’.Footnote 4 For Hayek, ‘muddling through’Footnote 5 with middle-way policy was decidedly misguided and would inexorably mutate into wholesale totalitarian planning.
Hayek often acknowledged that The road to serfdom was intended to provide a warning about the supposed consequences of doggedly adhering to interventionist policy. Alluding to the policies adopted by Clement Attlee's government between 1945 and 1948, Hayek explained that his book ‘was meant as an appeal that we must once more think through the whole system of ideas on social affairs which rules us, and as a warning that if we do not succeed in solving some extremely difficult intellectual problems but go on with the present muddle and confusion, we shall all end in disaster’.Footnote 6 As the allusion to the Attlee government strongly implied, Hayek's warning was intended to have applicability to a relatively wide-ranging spectrum of interventionist policies.Footnote 7 In particular, Hayek's familiar objections to Keynesian policy and the redistributive welfare state in the 1970s mirrored the rather less well-known negative assessment of those particular policies that Hayek had initially provided in the mid- to late 1940s. Indeed, there is scant substantive difference between Hayek's gloomy 1975 prediction that Keynesian policy would inevitably drive the ‘Western countries into a planned economy via price controls’,Footnote 8 and his similarly bleak 1944 claim that Keynesian cheap money policy would inevitably mutate into wholesale command planning. To support our case, we invoke a piece of evidence originally marshalled by Jackson (Hayek's unpublished draft 1948 postscript to The road to serfdom) and a relatively little-known article by Hayek that was published in the Sunday Times in April 1944.Footnote 9
I
As Jackson explains, the early market-liberal ‘opposition’ to Keynesian theory and policy was scarcely ‘as clear or vociferous as might be expected’.Footnote 10 For example, Hayek himself only provided a cursory discussion of Keynesian remedies for cyclical unemployment in The road to serfdom. In particular, Hayek noted that many economists, including himself, ‘hope’ that the ‘solution’ – ‘the ultimate remedy’ – to large-scale cyclical unemployment (‘one of the gravest and most pressing problems of our time’) can be ‘found in the field of monetary policy’. At the same time, however, many ‘others’ maintained that public works programmes ‘undertaken on a very large scale’ provided the only adequate remedy for cyclical unemployment.Footnote 11 Importantly, Hayek warned that large-scale public works programmes ‘might lead to much more serious restrictions of the competitive sphere’. As Hayek noted, ‘we shall have carefully to watch our step if we are to avoid making all economic activity progressively more dependent on the direction and volume of government expenditure’ (emphasis added).Footnote 12 Although Hayek argued that Keynesian policy provided ‘neither the only nor … most promising way’ of addressing economic slumps, he insisted that ‘the very necessary efforts to secure protection’ against cyclical unemployment ‘do not lead to the kind of planning which constitutes … a threat to freedom’.Footnote 13
For Jackson, Hayek's phraseology suggests that Hayek ‘did not view counter-cyclical government intervention as the principal, or even a major, threat to the free society and distinguished between this approach to economic downturns and full-scale economic planning’. As Jackson noted, Hayek ‘made this even clearer in an unpublished postscript to The Road to Serfdom … where he acknowledged his differences with “Keynesian” analysis’.Footnote 14 Although Hayek acknowledged the need to ‘combat general fluctuations of economic activity and the waves of large-scale unemployment which accompany them’, his remarks are intended to signify that he did not advocate full-blown laissez faire and hence saw no ‘incompatibility in principle’ between the adoption of an appropriate ‘countercyclical’ policy per se and the long-run ‘preservation of individual freedom’.Footnote 15 Hayek's acceptance of the need to ‘combat’ cyclical unemployment, however, is not intended to imply that he thought that any variety of ‘counter-cyclical government intervention’Footnote 16 whatsoever – such as, for instance, Keynesian fiscal and monetary policy – was compatible ‘in principle’ with individual ‘freedom’. Accordingly, we would argue that Jackson's reading of Hayek leads him to draw an unnecessarily sharp distinction between Hayek's criticisms of full-blown command planning and his negative assessment of Keynesian full-employment policy. Indeed, the particular variety of counter-cyclical policy – macroeconomic ‘planning in the good sense’ – that Hayek himself was seemingly envisaging when he initially drafted The road to serfdom is not particularly compatible with traditional Keynesian doctrine.Footnote 17
Moreover, and as the evidence invoked below demonstrates, Hayek consistently argued that Keynesian policy (cheap money policy and large-scale expansionary fiscal policy) would mutate into de facto totalitarian command planning.
II
As Jackson explains, Hayek's ‘differences with “Keynesian” analysis’ were ‘chiefly technical in nature’.Footnote 18 Accordingly, when Hayek argued that the Keynesian analysis of unemployment was ‘erroneous’ and that Keynesian remedies for cyclical unemployment were ‘both ineffective and harmful’, he noted that ‘I may be wrong in this. But whether I am right or wrong, the technical reasons for my dissent from the now prevalent view have little to do with the main argument of this book’ (emphasis added).Footnote 19
Tellingly, Hayek's allusion to the technicalities underlying his ‘dissent’ from Keynesianism appears in a section of the 1948 postscript where he explained that he does not consider the published draft of The road to serfdom – ‘this small volume’ – to provide an ‘adequate treatment of the great subject with which it is concernced [sic]’.Footnote 20 Indeed, Hayek's original draft underwent a ‘severe process of trimming and slimming’ prior to publication.Footnote 21 Accordingly, Hayek noted that the postscript provided ample opportunity to ‘point out some of the inadequacies’ inherent to the published draft.Footnote 22 In particular, Hayek maintained that any ‘fuller discussion’ of the economic consequences of government planning and intervention would necessitate paying much ‘careful attention’ to a variety of issues that had been ‘deliberately omitted or touched on only very briefly’ in the final draft of The road to serfdom.Footnote 23 Although Hayek noted that he had paid scant attention to Keynesian economics in the published draft, he explained that he had wanted to avoid addressing the wealth of technicalities that any adequate discussion of Keynesianism and unemployment would have necessitated. As Hayek put it, he wanted to avoid ‘technicalities which have nothing to do with the main issue’.Footnote 24 At the same time, however, Hayek's 1948 postscript makes it clear that he deemed the supposed political implications of Keynesian policy – if not the specific technicalities underlying his dissent from Keynesian doctrine – to have much relation to his general thesis.
III
As is similarly implied by Hayek's suggestion in The road to serfdom that any adequate ‘solution’ to large-scale unemployment will ‘require much planning in the good sense’, Hayek noted in his 1948 postscript that the ‘existing monetary and credit mechanism contains … disequilibrating forces [e.g., changes in the money multiplier] … [which] tend to cause grave disturbance and … ought to be counteracted by a sensible monetary policy’.Footnote 25 As Hayek explained, however, he was not advocating a countercyclical policy of the Keynesian type favoured by ‘many of … [his] fellow economists’.Footnote 26 Instead, Hayek insisted that ‘sensible’ monetary policy ‘should be guided by known rules’.Footnote 27 Indeed, Hayek – speaking at the initial Mont Pèlerin Society meeting in 1947 – had similarly argued that ‘one of our main concerns’ would be ‘how far it’ was ‘possible to make monetary management automatic or at least predictable because bound by fixed rule’.Footnote 28 As Hayek explained in his postscript, Keynesian monetary policy – supposedly ‘entirely discretionary and therefore unpredictable’ – ‘may be as harmful, and in most respects [is] similar in its effects to that of other interferences into the functioning of the price system’.Footnote 29 Accordingly, ‘sensible’ countercyclical policy would automatically adjust the money stock to counteract the various ‘disequilibrating forces’ to which Hayek had alluded.
Having noted that he differed with the majority of his colleagues on the appropriate ‘nature’ of – but ‘not’ on the necessity for – a ‘sensible’ countercyclical policy, however, Hayek bemoaned the supposedly baneful influence of Keynesian doctrine:
Thanks to the influence of Keynesian theories the belief in inflationary pressure as a means of securing ‘full employment’ has in the greater part of the world become a sort of substitute end for socialism … its results [totalitarian command planning], though brought about by a more indirect route, are the same [emphasis added].Footnote 30
Importantly, Hayek noted that, when he penned the final draft of The road to serfdom he had inadequately ‘foreseen … how much harm the particular theories which have become associated with the phrase ‘full employment’ would do in the near future, and how much their influence would contribute to drive us towards a centrally planned system’ (emphasis added). Indeed, Hayek argued that if he had adequately ‘foreseen’ the supposed consequences of Keynesian theory, he would ‘have overcome … [his] reluctance to bring in technicalities’ (emphasis added). As Hayek explained, Keynesian full-employment policy had generated worldwide ‘inflationary pressure’. Accordingly, Hayek maintained that ‘we are everywhere driven into more controls and more planning … the alternative is often only between abandoning these policies and extending the system of controls of prices and production almost indefinitely’.Footnote 31
The road to serfdom was initially published in early March 1944. Shortly thereafter, Hayek tellingly noted that Keynesian monetary policy would ultimately prove incompatible with freedom. For Hayek, while ‘intelligent monetary policy is a sine qua non of the prevention of large-scale unemployment, it is equally certain that it is not enough’.Footnote 32 According to Hayek, large-scale cyclical unemployment could never be ‘lastingly’ conquered until ‘we succeed in breaking’ the various ‘maladjustments’ and ‘rigidities’, such as labour immobility and wage rigidity, created by the ‘monopolies of capitalists and labour’. To ‘forget this’, however, and to ‘trust solely’ to the ‘intoxicating’ drug of cheap money policy (‘the artificial stimulus of credit expansion and ever-increasing Government investment’) would supposedly ‘force us into progressively increasing Government control of all economic life, and eventually into the totalitarian state’.Footnote 33
Fritz Machlup – writing to Hayek during the Second World War – similarly maintained that the ‘generation brought up by Keynes and Hansen … [were] blind to the political implications of their economic views’.Footnote 34 Importantly, Jackson notes that many of the early market liberals did not necessarily object to Keynes's own thinking per se, but rather to what they interpreted as a popular and manifestly inflationary version of Keynesian doctrine, as in, for example, the work of William Beveridge and Alvin Hansen. As Jackson explains, market liberals deemed the popular Beveridge–Hansen view to have adopted an overly ambitious ‘full employment’ target since full employment would supposedly be attained at a 3 per cent unemployment rate.Footnote 35 For Keynes, by contrast, full employment was associated with a 5 per cent unemployment rate.Footnote 36 Revealingly, in 1946, Hayek provided a negative assessment of both versions of Keynesian doctrine.Footnote 37 As Hayek explained, the full-employment target associated with Keynes himself is not ‘really full employment in the sense in which the term is now popularly understood … a guarantee to everyone of the kind of work and pay to which he thinks himself … entitled’.Footnote 38 For Hayek, this popular understanding of ‘full employment’ would ‘do only harm’.Footnote 39 Indeed, Hayek chided those such as Keynes, ‘who in the first instance deliberately chose a popular catchword for a highly technical concept’.Footnote 40 Accordingly, any dogged adherence to a Beveridge–Hansen type full-employment target would ultimately necessitate the adoption of ‘direct controls designed to conceal the symptoms of inflation’.Footnote 41 As Hayek put it, ‘we shall see a good deal more of the same people on the one hand advocating more credit expansion, lower interest rates, etc., … and on the other demanding more controls to keep in check the inflation they are creating’. According to Hayek, however, it was similarly ‘more than doubtful’ whether Keynes's own ‘proposals’ (a policy to maintain ‘purchasing power’) offered anything ‘more than a palliative’.Footnote 42 Keynesian policy could not ‘cure unemployment’ and would ‘inevitably’ lead to government control over ‘not only the amount of expenditure but also the way in which it is spent’, and would ‘lead us further and further away from a free economy’.Footnote 43
IV
Aside from noting that he regretted having paid scant attention to Keynesianism in The road to serfdom, Hayek argued that the published draft – ‘this little book’Footnote 44 – had not provided an adequate discussion of the importance that ‘many other fields’ – e.g., education policy, law, morals, and the general organization of scientific inquiry – had for the general thesis of the book.Footnote 45 As Hayek explained:
In all of them [the fields to which Hayek had alluded] the general tendency towards a paternalistic welfare state, which is the result of a misunderstood rationalism … is constantly producing results which are only too similar to those produced by economic planning and which also had shown themselves clearly in Germany long before they became visible elsewhere. They contribute almost as much as the economic factors to that profound transformation of society which follows from increasing governmental regulation and leads towards another direction not in the least intended by those who advocated these regulations.Footnote 46
Indeed, Hayek – in handwritten notes accompanying the draft postscript – argues that Britain had been steadily travelling down the interventionist road to serfdom for at least twenty-five years prior to Labour's 1945 election victory.
Rather tellingly, material drawn from Hayek's 1948 postscript makes an appearance – much of it verbatim – in Hayek's preface to the 1956 American paperback edition of The road to serfdom. In particular, Hayek's preface makes extensive use of his 1948 reflections on the way in which British experience under the Labour government supposedly illustrates the prescience and veracity of his argument. Then as Hayek – again alluding to the consequences of any failure to mend one's ways or to heed his warning – explains, ‘British experience convinces me … that the unforeseen but inevitable consequences of socialist planning create a state of affairs in which, if the policy is to be pursued, totalitarian forces will get the upper hand’.Footnote 47 The policy stance adopted by the 1945–51 Labour government, however, bears scant resemblance to full-blown command planning: For example, Richard Toye has noted that ‘the Attlee government's policy in the 1940s was merely interventionism under the barest veneer of planning’.Footnote 48 Similarly, Stephen Brooke has observed that command planning ‘was a notable, if unlikely casualty of Labour government after the Second World War … The old creed of physical controls had given way to a new one: demand management’(emphasis added).Footnote 49 As we have argued, however, Hayek maintained that the new creed would no less assuredly culminate in totalitarianism than would the supposed old creed of full-blown physical planning itself. Indeed, as Hayek noted in 1945, the ‘more sensible planners’ indicated that they did not want a ‘completely planned system, but merely a judicious admixture of planning to correct the evils of competition’. They had inadequately noted, however, that ‘principles to which one commits oneself have a way of producing corresponding social systems, whether we wish it or not’. Accordingly, partial planning would mutate into totalitarian planning because ‘every step forces us to further steps if the remaining free forces are not to upset our plans … [Partial planning] thus constantly reduces our freedom of action and makes us more and more the servants of the machinery we have created.’Footnote 50
Hayek's rejection of Keynesian demand management policy was, in many ways, out of step with the views held by other 1940s market liberals. For example, George Stigler and Lionel Robbins – when participating in the 1947 Mont Pèlerin Society session on ‘Contra-cyclical measures, full employment and monetary reform’ – emphasized the necessity to combat any possibility of severe deflation. Indeed, Jackson similarly notes that Karl Popper and Michael Polanyi (both of whom also participated in the initial Mont Pèlerin Society meeting in 1947) had both written favourably about the merits of Keynesian policy.Footnote 51 As has been amply documented elsewhere, however, Hayek's objections to Keynesianism and the mixed economy became increasingly influential in New Right circles.Footnote 52 Indeed, Hayek's bleak 1940s predictions about the way in which Keynesian policy would supposedly lead to disaster – a view that many mid- to late 1970s commentators appeared to deem particularly prescient – eventually came to influence macroeconomic policy at the highest level.
