Friday, 5 September 2003

A New Road to Serfdom?

Recently, I was invited by the Ludwig von Mises Institute Europe to address an audience on what Friedrich von Hayek would have thought about the enlargement of Europe. I decided to reread his classic, The Road to Serfdom. Old hat, of course, because since Francis Fukuyama’s The End of History and the Last Man, we know that after the collapse of the Berlin Wall, capitalist liberal democracies are the end-state of the historical process. So there is nothing to worry about. Yet, even before finishing the introduction (by Milton Friedman) and the (three) prefaces of Hayek’s magnum opus, I realised that I was completely wrong. The Road to Serfdom still contains insights that today are as visionary and relevant as when they were published for the first time in 1944.


Imagine the Zeitgeist of the thirties and forties! The free market economy was under siege, because it was believed to generate chaos with its business cycles and monopoly power. The planned society envisaged under socialism was supposed to be not only more efficient than capitalism, but socialism — with its promise of social justice — was expected to be fairer. I­t was considered the wave of the future. Only a reactionary, it was argued, could resist the inevitable tide of history. In this context The Road to Serfdom appeared with a seemingly anachronistic message.


But the message was not obsolete. It had a profound impact on the development of our economies and societies at large. In his recently published book European Integration, 1950 – 2003, Superstate or New Market Economy?, the American historian John Gillingham reveals that a few years before, in 1939, Hayek published an article on a (classical) liberal project for the integration of Europe. That is why Gillingham ranks Hayek alongside Jean Monnet and many others as one of the founding fathers of the new era.


Subsequently, in the seventies, because of the collapse of the Keynesian paradigm, there was a renewed interest in Hayek’s thinking. In that period, it not only offered a major source of inspiration for political and economic development in the West — as it manifested itself, for instance, in the Reagan/Thatcher revolution — but also for developments elsewhere in the world.


In their magnificent book, Commanding Heights, The Battle Between Government and the Market­place That is Remaking the Modern World (which reads like a novel), Daniel Yergin and Joseph Stanislaw recount the story of the prominent Chinese economist, Li Yining, who challenged the entire premise of state control over the economy. Li had begun as a follower of Oskar Lange, the Polish economist who had advocated market socialism with a system of state ownership. But during the years of the cultural revolution, Li thought back on the debates between Hayek and Lange and concluded that he had come out on the wrong side and that Hayek had been more correct than Lange. And everybody knows what followed. Similarly, many leaders in Central and Eastern Europe have found a rich source of inspiration in the works of Hayek.


So, all in all we can conclude that the battle is over and that the “Road to Serfdom” will be block­ed forever, can’t we? My answer to this question is that, unfortunately, we cannot.


Our freedom and economic well-being are still exposed to hazards, which could be grouped as follows:

  • Egalitarianism 
  • High taxes
  • Interest groups
  • Trade unionism
  • The ideology of stasis
  • Regulation
  • Precautionary principle
  • Man-made global warming and Kyoto.

I venture the thought that, taken together, these tendencies may carry the risk of a new “Road to Serfdom.”




If there is anything at all which socialism still separates from other political currents, it is its emphasis on egalitarianism. “Hot” socialism is old-fashioned; that is, turning the economy into a government monopoly, either through direct state ownership of the means of production or through complete state direction of economic life. It is not this type of socialism that is a risk; instead, it is the type of socialism that aims at a massive redistribution of income through taxation and subsidies to rearrange economic out­comes in order to bring about a more egalitarian income distribution. There is a vast political majority in all countries in favour of some kind and some degree of income redistribution. But there is permanent fight about the extent of it, partly because there is a trade-off between the creation of wealth and the distribution of wealth. Overgenerous income redistribution will under­­mine incentives, thus diminish­ing the creation of wealth, from which we all suffer. In many countries in Europe, critical thres­holds have already been exceeded in that respect.


High Taxes


Tax reduction was part of the so-called supply side revolution. Its aim was to improve the supply side of the economy, as opposed to the demand side, which was the main focus of Keynesianism. The underlying philosophy was illustrated by the so-called Laffer Curve in the seventies, named after the American economist Arthur Laffer. He posed that, beyond a certain level, high tax rates would stifle economic activity, thus lowering total tax revenues for govern­ment, while lower tax rates would pro­mote economic activity, with increased government revenues as a result. Tax reduction was a favourite objective of our ministers of finance but has faded into the background over the last few years in many countries because of the reces­sion.


Interest Groups


But there are more risks that challenge our freedom and economic well being. They are of a different kind and more diffuse. Take for instance the role of interest groups in our societies. The (classical) liberal project for an integrated Europe includes the repeal of the privileges to minority groups at the expense of the immense majority, because they invariably result in impairing the wealth and income of the majority. It was the American economist Mancur Olson who first analysed the growing ossification of national economic systems caused by the advent of special interest groups. The latter are acting as distributional coalitions, i.e., to receive special favours from the government in the form of protection, subsidies, monopolistic status, or other forms of barriers to exit and entry in a particular industry. If successful, their actions turn market participants into rent-seekers, thus stifling economic dynamism and growth.


The European common market (subsequently the single European market) has fostered Europe-wide competition. In doing so it was applying the basic tenets of Hayek’s philosophy. It has indeed successfully reduced the power of many national interest groups. At the same time it has not been able to substantially constrain the power of the European-wide agricultural lobby and the trade unions.


As far as agriculture is concerned, Eurocommissioner Franz Fischler has announced reform measures to cut back on European agricultural support. At the same time the U.S. and Europe have recently reached agreement on a proposal to liberalise worldwide agricultural market with a view to the Doha Trade Round. But as an observer of European agricultural policy for many decades, I will only believe it when I see it. So far, agricultural support has been like a bump of trapped air between the wall and the wallpaper. When you try to remove it, it moves to somewhere else. The so-called multi­func­tionality of agriculture offers a case in point. It is intended to offer support and protection to European farmers when they make an extra effort to pay heed to food safety, the environment, animal welfare, as well as the preservation of rural com­munities and the countryside. But depending upon the way multifunctionality will be im­plemented, it could easily turn into the latest “cre­ative” wave of protectionism.  


Trade Unionism


Trade unions deserve separate treatment in the colourful parade of interest groups. European integration and the increased competition that it entails have not substantially weakened their political power. In many countries trade unions are being regarded as esteemed partners in so-called social dialogue. Their involvement has even been enshrined in the institutional arrangements on European level in the framework of the macroeconomic dialogue of the EMU. But the same well-respected dialogue partners have for a long time held our societies hostage, in the sense that they have effectively blocked all kinds of socio-economic reforms which are long overdue, including the efforts to make labour markets more flexible and to reform pension schemes, so that they will become sustainable. It should not be forgotten that society as a whole pays a high price for this kind of behaviour of a minority imposing its will on the majority. Just by way of illustration, in Germany only 18 percent of the workers are member of a trade union.


But there are signs that the public at large is fed up with it. In France — of all places — a popular movement has emerged, called Liberté, j’écris ton nom (Freedom, I write your name), led by a young student Sabine Herold. The movement has publicly opposed the strikes of civil servants and public sector employees, which have become a favourite pastime in France. It has mount­ed a massive counter-demonstration mobilizing 100,000 people. It never happened before, either in France or anywhere else.


The Ideology of Stasis


Then there is the ideology of stasis, a notion that has been coined by the American author Virginia Postrel. She points out that despite the fact that today we have greater wealth, health, opportunity, and choice than at any time in history, there is a chorus of intellectuals and politicians who loudly lament our condition. Technology, they say, enslaves us. Economic change makes us insecure. Popular culture coarsens and brutalizes us. Consumerism despoils the environment. The future, they say, is dangerously out of control, and unless we rein in these forces of change and guide them closely, we risk disaster.


In her book, The Future and Its Enemies, Virginia Postrel explodes this myth, embarking on a bold exploration of how progress really occurs. In a multitude of areas of endeavour she shows how and why unplanned, open‑ended trial and error ‑- not conformity to one central vision ‑- is the key to human betterment. Thus, the true enemies of humanity’s future are those who insist on prescribing outcomes in advance, circumventing the process of competition and experiment in favour of their own preconceptions and prejudices.


Postrel argues that these conflicting views of progress, rather than the traditional left and right, increasingly define our political and cultural debate. On one side, she identifies a collection of strange bedfellows with different political backgrounds — from right to left — who all share a devotion to what she calls “stasis,” a controlled, uniform society that changes only with permission from some central authority. On the other side is an emerging coalition in support of what Postrel calls “dynamism”: an open‑ended society where creativity and enterprise, operating under predictable rules, generate progress in unpredictable ways. Dynamists are united not by a single political agenda but by an appreciation for such complex evolutionary processes as scientific inquiry, market com­peti­tion, artistic development, and technological invention.


Regulation: Good, Bad, and Ugly


As far as regulation is concerned, deregulation efforts of the eighties seem to have reversed gears and degenerated into something what looks like a new regulation frenzy. But like Sergio Leone in his masterly spaghetti Western “The Good, the Bad and the Ugly,” we have to make a clear distinction between different sorts of regulation. The good regulation is supportive of free markets. This sort of regulation manifests itself for instance in the European financial services sector. The bad regulation stifles markets. This kind of regulation manifests itself if many markets of goods, especially as regards overzealous safety and environmental require­ments. And the ugly regulation has a protec­tionist effect. In agriculture, for instance, the de facto prohibi­tion of the use of genetically modified organisms (GMOs) in Europe, offers a case in point. All is all, one can hardly escape the feeling that there is far too much regulation of the bad and ugly types.


Precautionary Principle


Furthermore, there is the precautionary principle. Who doesn’t want to be better safe than sorry? Yet, there are limits. If pushed to extremes, the cost of precaution could easily outweigh the benefits. We finance the fire brigade via our taxes, but not every house has a sprinkler installation. And at the apogee of the Cold War, there were even people who did not possess a nuclear shelter in their backyard.


In other words, a risk-free world is unthinkable and there are limits to the application of the precautionary principle. We believe that some risks are too small to warrant additional expenditure. If we would spend more on them, then we will have to forgo the satisfaction of other needs, including the precautionary measures that will protect us against other risks that we believe to be more likely. In short, the application of the precautionary principle should be subject to the same simple cost-benefit analysis, which we also apply in all other fields of human decision-making.


But in Europe precaution is running out of control. The most recent example is REACH, the acronym for Registration, Evaluation and Authorization of Chemicals. It will impose a new layer of regulation on the many layers already in existence. It is a proposal that requires manufacturers and importers to submit information to a central database on hazard, exposure, and risk on 30,000 new and existing substances that are produced or imported in yearly quantities exceeding 1 metric ton. It also covers “downstream” products, which are widely used by consumers and business of all sorts, that contain these chemicals. Of course, this will divert resources and attention from new, innovative products, to testing of chemicals known to be safe in normal use.


More generally, the precautionary principle requires scientific demonstration of absolute safety when new products or processes are being introduced. On balance, however, over­cautiousness suppresses scientific knowledge in favour of political considerations, false beliefs and irrational fears. Excessive application of the precautionary principle prevents action until there is complete certainty that it will not produce any harm. But 100 percent safety can never be guaranteed. The result is paralysis and stagnation.


Man-Made Global Warming and Kyoto


At the same time another spectre is haunting us, if we may believe the official position of the EU: man-made global warming! But the putative threat of man-made global warming is probably a statistical artefact. Surface-based temperature measurements do indeed show some increase in worldwide temperatures, but these measurements are unreliable. They are skewed because of several reasons; for instance, the closing down of two-thirds of weather stations over the past three decades. The remaining stations are often in urban regions that are exposed to the so-called urban heat island effect, which means that cities are warming up as the population increases, while the open countryside is not. The most accurate temperature measurements — those by satellites — do not show any significant global warming. So global warming does not pose a serious threat. But the measures that have been proposed to counter it do! They entail an additional layer of costly bureaucratic regulation and will stifle economic growth.


So, all in all, I believe that the tendencies that have been covered in this overview could very well constitute the harbinger of a new “Road to Serfdom.”


Follow the Frogs


There’s an old folk story that if you throw a frog into boiling water he will quickly jump out. But if you put a frog into a pan of cold water and slowly raise the temperature, the gradual warming will make the frog doze happily. In fact the frog will eventually cook to death, without ever waking up. Will this be the fate of European citizens in the face of the hazards of a new “Road to Serfdom”?


It need not be so. Biologists have tested whether the story of the frogs is true. And they have found out that it isn’t. The frogs will jump out long before the water becomes too hot for them. 


What do we make out of all of this?  The conclusion is clear: Europeans should follow the frogs.  Europe needs a change.

Hans H.J. Labohm

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