[American Affairs, Vol. 11, No. 1 (1949), pp. 46–48]
For the acclaim it received at the time, Friedrich A. Hayek’s small book, The Road to Serfdom, owed nothing to style and everything to its intensity of feeling and the immediacy of the subject matter. It was written to make the British shudder. The voice was that of a Viennese economist who had witnessed the rise of the totalitarian tide in Europe and ran before it into England, where he changed his citizenship and began to teach in the London School of Economics.
But the omens of disaster to economic freedom were already there, and that was what he was trying to tell the people of his adopted country. He knew the signs. He had seen it all happen before; and now he had the sensation of seeing it happen again. But if he thought his book might arrest the tide he was disappointed. The British went on with their Fabian revolution. Now in a more distant and scholarly mood he does another book entitled Individualism and Economic Order, which no doubt will give rise to controversy, but only in the ivory towers, high above the dust of the market place. In the preface he says:
Since I published not long ago a more popular book on problems related to some of those discussed here, I should in fairness warn the reader that the present volume is not intended for popular consumption.
The book is a collection of twelve lectures and essays “with a range from discussions of moral philosophy to the methods of the social sciences and from problems of economic policy to pure economic theory;” and he regards them all as fragments, or pieces of detail, belonging to a great philosophical work in progress. One is entitled, “The Use of Knowledge in Society”; another, “The Ricardo Effect”; another, “Economics and Knowledge.” In one entitled, “A Commodity Reserve Currency,” he unexpectedly embraces the theory of commodity money. The two that make the book readable, and with an easier style might have made it popular, are entitled, respectively, “Individualism: True and False,” and “The Meaning of Competition.”
In the first his keen powers of distinction are exercised to fine purpose. True individualism, he says,
is primarily a theory of society, an attempt to understand the forces which determine the social life of man, and only in the second instance a set of political maxims derived from this view of society. This fact should by itself be sufficient to refute the silliest of the common misunderstandings: the belief that individualism postulates (or bases its arguments on the assumption of) the existence of isolated or self-contained individuals, instead of starting from men whose whole nature and character is determined by their existence in society. If that were true, it would indeed have nothing to contribute to our understanding of society.
The great theme of true individualism is that in the spontaneous collaboration of many free minds there is a mysterious creative power far greater than the power in any individual mind. But this is a philosophy that may be very easily misunderstood:
Perhaps the best illustration of the current misconceptions of the individualism of Adam Smith and his group is the common belief that they have invented the bogey of the “economic man” and that their conclusions are vitiated by their assumption of a strictly rational behavior or generally by a false rationalistic psychology. They were, of course, very far from assuming anything of the kind. It would be nearer the truth to say that in their view man was by nature lazy and indolent, improvident and wasteful, and that it was only by the force of circumstances that he could be made to behave economically or carefully to adjust his means to his ends. But even this would be unjust to the very complex and realistic view which these men took of human nature. Since it has become fashionable to deride Smith and his contemporaries for their supposedly erroneous psychology, I may perhaps venture the opinion that for all practical purposes we can still learn more about the behavior of men from the Wealth of Nations than from most of the more pretentious modern treatises on “social psychology.”
However that may be, the main point about which there can be little doubt is that Smith’s chief concern was not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst. It would scarcely be too much to claim that the main merit of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system which does not depend for its functioning on our finding good men for running it, or on all men becoming better than they now are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid. Their aim was a system under which it should be possible to grant freedom to all, instead of restricting it, as their French contemporaries wish, to “the good and wise.”
Secondly, true individualism requires a system based upon principles, one that
uses the universal acceptance of general principles as the means to create order in social affairs. It is the opposite of such government by principles when, for example, a recent blueprint for a controlled economy suggests as ‘the fundamental principle of organization … that in any particular instance the means that serves society best should be the one that prevails.” It is a serious confusion thus to speak of principle when all that is meant is that no principle but only expediency should rule; when everything depends on what authority decrees to be “the interests of society.”
True individualism is not equalitarian. It
can see no reason for trying to make people equal as distinct from treating them equally. While individualism is profoundly opposed to all prescriptive privilege, to all protection, by law or force, of any rights not based on rules equally applicable to all persons, it also denies government the right to limit what the able or fortunate may achieve. It is equally opposed to any rigid limitation of the position individuals may achieve, whether this power is used to perpetuate inequality or to create equality. Its main principle is that no man or group of men should have power to decide what another man’s status ought to be, and it regards this as a condition of freedom so essential that it must not be sacrificed to the gratification of our sense of justice or of our envy.
If all men were completely equal in their gifts and inclinations, we should have to treat them differently in order to achieve any sort of social organization. Fortunately, they are not equal; and it is only owing to this that the differentiation of functions need not be determined by the arbitrary decision of some organizing will but that, after creating formal equality of the rules applying in the same manner to all, we can leave each individual to find his own level … There is all the difference in the world between treating people equally and attempting to make them equal.
False individualism, on the other hand, deriving from Rousseau and the French revolution, is equalitarian. “The deepest cause which made the French Revolution so disastrous to liberty was its theory of equality,” said Lord Acton. “Democracy and socialism,” said De Tocqueville, “have nothing in common but one word, equality. But notice the difference; while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude.”
False individualism takes no account of the unpredictability of man’s nature. Its god is reason. Its exaggerated belief in the powers of individual reason may lead one way to anarchy, and, oppositely, its conclusion “that social processes can be made to serve human ends only if they are subject to the control of individual reason” may lead, and does lead, to the planned economy and socialism. Between these two extremes there is nothing.
In the essay on “The Meaning of Competition,” Professor Hayek plays jujitsu with ideas such as competitive equilibrium and perfect competition, and tells the planners that what they think they are talking about when they use these terms is nothing that means competition in the common language. He says,
The peculiar nature of the assumptions from which the theory of competitive equilibrium starts stands out very clearly if we ask which of the activities that are commonly designated by the verb “to compete” would still be possible if those conditions were all satisfied. Perhaps it is worth recalling that, according to Dr. Johnson, competition is “the action of endeavoring to gain what another endeavors to gain at the same time.” Now, how many of the devices adopted in ordinary life to that end would still be open to a seller in a market in which so-called “perfect competition” prevails? I believe that the answer is exactly none. Advertising, undercutting, and improving (”differentiating”) the goods or services produced are all excluded by definition — “perfect” competition means indeed the absence of all competitive activities. And again:
The belief in the advantages of perfect competition frequently leads enthusiasts even to argue that a more advantageous use of resources would be achieved if the existing variety of products were reduced by “compulsory” standardization. Now there is undoubtedly much to be said in many fields for assisting standardization by agreed recommendations or standards which are to apply unless different requirements are explicitly stipulated in contracts. But this is something very different from the demands of those who believe that the variety of people’s tastes should be disregarded and the constant experimentation with improvements should be suppressed in order to obtain the advantages of perfect competition. It would clearly not be an improvement to build all houses exactly alike in order to create a perfect market for houses, and the same is true of most other fields where differences between the individual products prevent competition from ever being perfect.
In the essay entitled, “Free Enterprise and Competitive Order,” he develops a thesis that was already suggested in The Road to Serfdom — the thesis that a proper function of government is to plan competition and to clarify the principles that govern its freedom.
About a hundred years ago John Stuart Mill, then still a true liberal, stated one of our present main problems in unmistakable terms. “The principle of private property has never yet had a fair trial in any country,” he wrote in the first edition of his Political Economy. “The laws of property have never yet conformed to the principles on which the justification of private property rests. They have made property of things which never ought to be property, and absolute property where only a qualified property ought to exist … if the tendency of legislators had been to favor the diffusion, instead of the concentration of wealth, to encourage the subdivision of the large units, instead of striving to keep them together; the principle of private property would have been found to have no real connection with the physical and social evils which have made so many minds turn eagerly to any prospect of relief, however desperate.” But little was in fact done to make the rules of property conform better to its rationale, and Mill himself, like so many others, soon turned his attention to schemes involving its restriction or abolition rather than its more effective use.
While it would be an exaggeration, it would not be altogether untrue to say that the interpretation of the fundamental principle of liberalism as absence of state activity rather than as a policy which deliberately adopts competition, the market, and prices as its ordering principle and uses the legal framework enforced by the state in order to make competition as effective and beneficial as possible — and to supplement it where, and only where, it cannot be made effective — is as much responsible for the decline of competition as the active support which governments have given directly and indirectly to the growth of monopoly. It is the first general thesis which we shall have to consider that competition can be made more effective and more beneficent by certain activities of government than it would be without them. With regard to some of these activities this has never been denied, although people speak sometimes as if they had forgotten about them. That a functioning market presupposes not only prevention of violence and fraud but the protection of certain rights, such as property, and the enforcement of contracts, is always taken for granted. Where the traditional discussion becomes so unsatisfactory is where it is suggested that, with the recognition of the principles of private property and freedom of contract, which indeed every liberal must recognize, all the issues were settled, as if the law of property and contract were given once and for all in its final and most appropriate form, i.e., in the form which will make the market economy work at its best. It is only after we have agreed on these principles that the real problems begin.
This was not meant to be a book that you could take up and put down lightly. Many who read The Road to Serfdom may find it difficult. But reading Hayek is work that pays.
This review originally appeared in American Affairs, Vol. 11, No. 1 (1949), pp. 46–48.
