The road to serfdom

This is one of Glenn Beck’s best shows (from June 8). The conversation he has with Thomas Woods, Jr. of the Ludwig von Mises Institute and Yuri Maltsev of Carthage College is amazing. Listen very carefully to what Woods says. What he reveals is that in the 20th century, over and over and over again, and possibly in recent years as well, we the people have been fooled by a combination of market failures and supposed leaders who come along and confidently tell us that under their plan we will never experience this failure again. All that their plans do is set the stage for the next failure which inevitably occurs. The point is not that their plans cause the next failure (even though they do). The point is, as Beck points out, that this is what market economies DO! They rise and fall. It’s in their nature. Our supposed leaders never solve the problem, yet they assure us each time that “this time” will do the trick. By the time the next market failure happens we either conclude that we were lied to, or we forget that some past leader had put a supposed “solution” in place. The problem is not that their plans fail, it’s that their plans often have an ulterior purpose. They tell you that the plan is a salve for the problem we all want solved (which is a false hope), when all it really does is satisfy the desires of an interest group. The idea that the plan was for you was just marketing. It wasn’t for you. It was for someone else.

Each “plan” along the way compounds the previous problem. As years pass we forget the past “solutions”. We think they’ve always been with us, and just become a part of the “established order”. We feel secure knowing that they’re there, or we’re not even conscious of them anymore.

Each “solution” increases the power of the state, and takes away a little of your freedom. In this context I’m talking about, it’s not necessarily a legal restriction on your freedom. It could be the fact that the federal government has the ability to inflate the currency you use to conduct transactions and save for your retirement. It could be that it allows the government to mismanage its fiscal situation, raising interest rates that impact your ability to do what you need to do, both vices making everything you depend on cost more, sapping your wealth, your future. This has political implications as Friedrich Hayek says in his book, “The Road to Serfdom”, leading to a country that is less and less free, and eventually turns into a dictatorship, where the common people are all serfs of the state. This could happen because we the people are ignorant and do not understand the nature of our own systems. Instead we’re always trying to change it to make it “better”, screwing it up further, and always in a state of denial.

The road to serfdom is not inevitable. We can change course if we learn to recognize what it means to live in liberty: socially, politically, legally, and economically, and understand that this is the best system yet devised–warts and all. Any attempt to improve on it should be taken in small steps with great care, and always, always, always in most cases err on the side of individual liberty, as Woods said. Any attempt to do otherwise will likely lead to disaster.

Edit 6-21-10: The focus of this article is the economic means by which we happen to restrict our freedom. However, I did mention a legal component. To be clear, there’s a caveat I would apply to the above paragraph in the case of state security. I still believe as I have long believed, taking a lesson from 9/11, that if there is a conflict between protecting individual liberty and protecting that state which protects our liberty, I would err on the side of protecting the state over our liberty. Otherwise we could end up in a paradoxical situation that’s analogous to a saying I’ve heard about in the Far East: “One man, one vote, one time.” In other words, by erring on the side of individual liberty, even to the point of risking the security of the state, we could end up losing our freedom that way as well.

Below is a video I found a while back done by Econstories.tv. It’s an entertaining “rap” contest between John Maynard Keynes and Friedrich Hayek. It focuses in on their economic theories.

What I like about this video is it shows the intuitive notion that Keynes presents, something that seems to make sense to most people. Hayek presents a non-intuitive point of view, that it’s the boom, caused by artificially low interest rates (created by the Federal Reserve Bank), which you need to be wary of, not the bust, because it’s the boom that potentially leads to a horrendous financial collapse. It all depends on what created the boom.

Keynesian economic theory dominated the 20th century since the 1930s. It got its “big break” during the Great Depression. There was a brief period in the 1980s where it was rejected in favor of Hayek’s and Milton Friedman’s theories. But Keynesian theory has since come back to life in the political world. It’s a sad tale. Some in the political class in the developed world realized that Keynesian economics doesn’t work, at least not anymore, and managed to gain power in the 1980s, but the universities never made that realization. They’ve been teaching Keynesian economics as THE established economic theory ever since the middle of the 20th century. They’ve been blithely unaware of what the political class discovered, for a brief time, 30 years ago. This isn’t surprising. Since Keynes’s theory was so dominant, the only university that would hire Hayek as a professor of economics in the U.S. was the University of Chicago. Hayek eventually went back to Austria to continue his work. This is where he lived out his remaining days.

From what I remember, listening to some von Mises Institute lectures, is Hayek advocated that interest rates need to be allowed to “float” (find their own level in the marketplace). This will coordinate times of investment for future production, and times of consumption when the new production can be put to use by the economy. Allowing for this requires delaying gratification in our society. It means that consumers need to become more thrifty sometimes. What we’ve had for the last 20 years, perhaps longer, is government policy, coordinated with Fed policy, that always tries to drive consumption, spending, and gratification. It interrupts the investment cycle, thereby leaving little room for development of new forms of production.

My own theory from experience is that in this environment the investment is only in optimizing old forms of production, which is cheaper, and is compatible with low capital reserves (low savings rate). This leads to more automation, possibly joblessness and flat wages, because bold new ideas, which tend to be more capital-intensive, labor-intensive, and require creativity, are discouraged in the economy.

A good documentary mini-series on Keynes, Hayek, and Friedman was produced by PBS in 2002 called “Commanding Heights: The battle for the world economy”. When I saw this it was the first time I had heard of Hayek.

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2 Responses to The road to serfdom

  1. altonwoods says:

    After reading your post I thought it appropriate to share this with you, sorry for the length…

    >>> How Long Do We Have?
    >>>
    >>> About the time our original thirteen states adopted
    >> their new
    >>> constitution in 1787, Alexander Tyler, a Scottish
    >> history professor at
    >>> the University of Edinburgh , had this to say about
    >> the fall of the
    >>> Athenian Republic some 2,000 years earlier:
    >>>
    >>> “A democracy is always temporary in nature; it
    >> simply cannot exist as
    >>> a permanent form of government.”
    >>>
    >>> “A democracy will continue to exist up until the
    >> time that voters
    >>> discover they can vote themselves generous gifts from
    >> the public
    >>> treasury.”
    >>>
    >>> “>From that moment on, the majority always
    >> vote for the candidates who
    >>> promise the most benefits from the public treasury,
    >> with the result
    >>> that every democracy will finally collapse due to
    >> loose fiscal policy,
    >>> which is always followed by a dictatorship.”
    >>>
    >>> “The average age of the world’s greatest
    >> civilizations from the
    >>> beginning of history, has been about 200 years”
    >>>
    >>> “During those 200 years, those nations always
    >> progressed through the
    >>> following sequence:
    >>>
    >>> 1. from bondage to spiritual faith;
    >>>
    >>> 2. from spiritual faith to great courage;
    >>>
    >>> 3. from courage to liberty;
    >>>
    >>> 4. from liberty to abundance;
    >>>
    >>> 5. from abundance to complacency;
    >>>
    >>> 6. from complacency to apathy;
    >>>
    >>> 7. from apathy to dependence;
    >>>
    >>> 8. from dependence back into bondage

    Or “serfdom” as you call it!

  2. PIBoulder says:

    @altonwoods:

    Yes, that’s part of it. The other part is stuff like establishing the Federal Reserve system, and trying to engineer business behavior via. regulations or outright takeover. I’m sure some regulation is necessary for a functioning economy, but as Jefferson said, “The government governs best when it governs least.”

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