Power & Market

While much of Friedrich Hayek’s The Road to Serfdom focused on correcting erroneous ideas and sloppy thinking that misled (and still mislead) many to support socialistic expansions of government power, that is not all it did. It also reiterated the case for individualism and its economic manifestation—free markets. Since convincing careful thinkers requires such an affirmative case as well as defensive debunking, the book’s diamond 75^th anniversary is a propitious time for Americans to remember what only individualism provides, so that we will not continue to follow a path of “replacing what works with what sounds good,” as Thomas Sowell described it.

• The essential features of…individualism…are the respect for the individual man qua man…the recognition of his own views and tastes as supreme in his own sphere…and the belief that it is desirable that men should develop their own individual gifts and bents.
• The attitude of the liberal toward society is like that of the gardener who tends a plant and, in order to create the conditions most favorable to its growth, must know as much as possible about its structure and the way it functions.
• The holder of coercive power should confine himself in general to creating conditions under which the knowledge and initiative of individuals are given the best scope so that they can plan most successfully.
• The successful use of competition as the principle of social organization precludes certain types of coercive interference with economic life.
• Planning and competition can be combined only by planning for competition but not…planning which is to be substituted for competition.
• It is the very complexity of the division of labor under modern conditions which makes competition the only method by which such coordination can be adequately brought about.
• Nobody can consciously balance all the considerations bearing on the decisions of so many individuals…coordination can clearly be effective only by… arrangements which convey to each agent the information he must possess in order effectively to adjust his decisions to those of others…This is precisely what the price system does under competition and what no other system even promises to accomplish.
• The economist…His plea is for a method which effects such co-ordination without the need for an omniscient dictator.
• The various kinds of collectivism…[refuse] to recognize autonomous spheres in which the ends of the individuals are supreme.
• Recognition of the individual as the ultimate judge of his ends…that as far as possible his own views ought to govern his actions…forms the essence of the individualist position.
• What are called “social ends” are…merely identical ends of many individuals…to the achievement of which individuals are willing to contribute…Common action is thus limited to the fields where people agree on common ends.
• The clash between planning and democracy arises simply from the fact that the latter is an obstacle to the suppression of freedom which the direction of economic activity requires.
• The more the state “plans,” the more difficult planning becomes for the individual.
• The important question is whether the individual can foresee the action of the state…that the individual knows precisely how far he will be protected against interference from others, or whether the state is in a position to frustrate individual efforts.
• In a planned society the Rule of Law cannot hold…the use of the government’s coercive powers will no longer be limited and determined by pre-established rules.
• Economic control is not merely control of a sector of human life…it is the control of the means for all our ends.
• To believe that the power which is thus conferred on the state is merely transferred to it from others is erroneous. It is a power which is newly created and which in a competitive society nobody possesses. So long as property is divided among many owners, none of them acting independently has exclusive power to determine the income and position of particular people.
• The power which a multiple millionaire…has over me is very much less than that which the smallest fonctionnaire possesses who wields the coercive power of the state on…whether and how I am to be allowed to live or to work.
• Contrast…two types of security: the limited one, which can be achieved for all, and which is therefore no privilege but a legitimate object of desire; and absolute security, which…if it is provided for some, it becomes a privilege at the expense of others.
• Individualism is thus an attitude of humility…the exact opposite of that intellectual hubris which is at the root of the demand for comprehensive direction of the social process.
• It was men’s submission to the impersonal forces of the market that…has made possible the growth of a civilization without which this could not have developed; it is by thus submitting that we are every day helping to build something that is greater than any one of us can fully comprehend.
• If the democracies themselves abandon the supreme ideal of the freedom and the happiness of the individual…they implicitly admit that their civilization is not worth preserving.
• It is more important to clear away the obstacles with which human folly has encumbered our path and to release the creative energy of individuals than to devise further machinery for “guiding” and “directing” them—to create conditions favorable to progress rather than to “plan progress.”

Friedrich Hayek’s The Road to Serfdom defended the individual—the only ultimate locus of choice, responsibility and morality—as the appropriate focus of efforts toward human improvement, at a time when failing to keep that focus threatened the entire world. That is a lesson we need to remember now as well, when many do not remember the horrors that can lead to, and so support constantly expanding government powers over its citizens, which is in precisely the opposite direction of what once created America as a unique beacon of hope for the world.

In addition to providing crucial insights into the cleavages between social organization based on freedom and social organization based on coercion, Friedrich Hayek’s The Road to Serfdom provided many other insights. Many of them dealt with the morality of collectivism. In honor of the books 75^th anniversary this year, please consider Part 2 of our considerations— Collectivism and Morality. (See Part I here.)

• Is there a greater tragedy imaginable than that, in our endeavor consciously to shape our future in accordance with high ideals, we should in fact unwillingly produce the very opposite of what we have been striving for?
• It seems almost as if we did not want to understand the development which has produced totalitarianism because such an understanding might destroy some of the dearest illusions to which we are determined to cling.
• Democratic socialism…is not only unachievable, but…produces something so utterly different that few of those who now wish it would be prepared to accept the consequences.
• [Beyond] the power to make general rules…delegation means that some authority is given power to make…arbitrary decisions.
• Any policy aiming directly at a substantive ideal of distributive justice must lead to the destruction of the Rule of Law.
• The question raised by economic planning is…whether it shall be we who decide what is more, and what is less, important, or whether this is to be decided by the planner.
• The kind of state action which really would increase opportunity is almost precisely the opposite of the “planning” which is now generally advocated and practiced.
• Although the professed aim of planning would be that man should cease to be a mere means, in fact—since it would be impossible to take account in the plan of individual likes and dislikes—the individual would more than ever become a mere means, to be used by the authority in the service of such abstractions as the “social welfare” or the “good of the community.”
• Planning…consists essentially in depriving us of choice, in order to give us whatever fits best into the plan.
• It soon becomes the one burning question which of the different sets of ideals shall be imposed upon all by making the whole resources of the country serve it.
• The more we try to provide full security by interfering with the market system, the greater the insecurity becomes; and…the greater becomes the contrast between the security of those to whom it is granted as a privilege and the ever increasing insecurity of the under-privileged.
• The democratic statesman who sets out to plan economic life will soon be confronted with the alternative of either assuming dictatorial powers or abandoning his plans.
• The ethics produced by collectivism will be altogether different from the moral ideals that lead to the demand for collectivism.
• Socialism can be put into practice only by methods of which most socialists disapprove.
• The practice of socialism is everywhere totalitarian.
• The principle that the end justifies the means in individualist ethics is regarded as the denial of all morals. In collectivist ethics it becomes necessarily the supreme rule.
• Once you admit that the individual is merely a means to serve the ends of the higher entity called society or the nation…the pursuit of the common end of society can know no limits in any rights or values of any individual.
• Since it is the supreme leader who alone determines the ends, his instruments must have no moral convictions of their own…no ideas about right or wrong which might interfere with the intentions of the leader.
• Even the striving for equality by means of a directed economy can result only in an officially enforced inequality—an authoritarian determination of the status of each individual in the new hierarchical order.
• Morals are of necessity a phenomenon of individual conduct…they can exist only in the sphere in which the individual is free to decide for himself...Only where we ourselves are responsible for our own interests…has our decision moral value.
• In this sphere of individual conduct, the effect of collectivism has been almost entirely destructive.
• A movement whose main promise is the relief from responsibility cannot but be antimoral in its effect, however lofty the ideals to which it owes its birth.
• Injustices inflicted on individuals by government action in the interest of a group are disregarded with an indifference hardly distinguishable from callousness…the grossest violations of the most elementary rights of the individual...more and more often are countenanced.
• Almost all the traditions and institutions in which democratic moral genius has found its most characteristic expression…are those which the progress of collectivism and its inherently centralistic tendencies are progressively destroying.
• Neither good intentions nor efficiency of organization can preserve decency in a system in which personal freedom and individual responsibility are destroyed.
• To imagine that the economic life of a vast area…can be directed or planned by democratic procedure betrays a complete lack of awareness of the problems such planning would raise…To undertake the direction of the economic life of people with widely divergent ideals and values is to assume responsibilities which commit one to the use of force; it is to assume a position where the best intentions cannot prevent one from being forced to act in a way which to some of those affected must appear highly immoral.
• We shall never prevent the abuse of power if we are not prepared to limit power.

The Road to Serfdom made a powerful case that collectivism, by its nature, produced moral decline, and that it remains true even for collectivism supported out of desires for moral improvement. Since the direction that a system of social organization actually changes our morality is far more important than the direction one might hope it would lead, Hayek’s insights into the dystopian results of utopian collectivist thinking still merit careful consideration, three-quarters of a century later, at a time when support for socialist government interventions is again on an upswing.

Back when I taught political science, a phrase I used when preparing students for the tests was "he who makes distinctions well, teaches well."

That is, if we're talking about regime types, dear student, you better know the difference between a totalitarian regime, and a regime that is merely authoritarian. If we're talking about eighteenth-century American ideologies, you better know the difference between Alexander Hamilton and Thomas Jefferson. If we're talking economic policy, know the difference between fiscal policy and monetary policy.

And when it comes to different groups of Americans often considered to be homogeneous, it is often helpful to dig a little deeper to see some of the differences.

One such group is indigenous Americans. Or in the common parlance: "Indians."

Often, whenever one reads a news-media article about Indians, it usually begins with a few sentences about how poor they are, and how terrible the reservations are in terms of their standards of living. Usually, the Pine Ridge reservation in South Dakota is mentioned.

But at all reservations equally poor?

After all, some reservations have forests and ample access to water. Others are in the middle of deserts with few natural resources. Some relatively near metro areas and all the services they provide. Some reservations are hours from good healthcare and good shopping.

Well, it turns out that all reservations certainly aren't all the same.

Looking at the top-25 most populous reservations, we find that the median income among people who self-identify as Indians varies from $18,890 on the Gila River reservation (AZ) to $79,167 on the Agua Caliente reservation (CA). That's for the period from 2013 to 2017.

The overall US median income during the period was about $57,000, which means the median income for Indians on the Isabella and Tulalip reservations were about equal to everyone else.

Indeed, given that many reservations are in rural areas, it's helpful to compare incomes not to the US overall, but to the incomes of Rural Americans. The rural median income for the same period is $44,020. That means income for the median household on the Agua Caliente, Isabella, Tulalip, Uintah and Ouray, Osage, Wind River, and Puyallup reservations are all higher than the median household in rural America.

Even on the reservations with higher median incomes, poverty rates at the lower end remain elevated. The overall US poverty rate of 14.6 percent (against, from 2013-2017) was lower than all of the 25-largest reservations. The US rural poverty rate of 17.2 percent was lower than all but two (Osage and Tulalip) of the reservations.

One aspect of reservation populations that is often ignored, however, is the fact that on many reservations, people who self-identify as Indian are in the minority.

Among the 25-most populous reservations, the portion of the resident population that was Indian ranged from 1.7 percent on the Agua Caliente reservation to 96.8 percent on the San Carlos reservation.1

Reservations with lower proportions of non-Indian residents tend to be poorer. This may reflect several factors:

• Residents on reservations that are more geographically isolated tend to encounter fewer non-Indian residents, thus leading to less intermarriage, and fewer residents who are not Indians.
• Geographically isolated reservations tend to be poorer, and poorer reservations tend to attract fewer non-Indians engaged in commerce and employment on or near a reservation.
• In many cases, reservations with more laissez-faire economic policies have more "checkerboarding," or mixing of privately owned and tribally-owned lands within this reservation. Checkerboarding may correlate with higher incomes.

In general, rural reservations are often affected by many of the same problems that rural communities in general encounter. There are fewer jobs, and the jobs that do exist often pay lower wages than in metropolitan areas. The US rural median income, for instance is approximately $44,000, while the urban median income is approximately $59,900.

Geographic isolation tends to be a clear factor in cases where the tribe owns a casino. When the casino is near a metropolitan area, it attracts large numbers of visitors to the reservation who spend freely. The most extreme case of this, perhaps, is the Mdewakanton Sioux of Minnesota (a group of under 1,000 people) which owns two casinos within the Minneapolis metro area. Members of the tribe receive nearly one million dollars per year in payments from tribal business organizations.

Another extreme case is the Agua Caliente reservation which is adjacent to Palm Springs, California. The tribe and is one of the city's largest land owners. Only a tiny percentage of residents are actually enrolled in the tribe.

Less-extreme examples of relatively prosperous reservations include the Southern Ute reservation — near the college and resort town of Durango Colorado — and the Tulalip reservation, which owns a casino and business park near I-5 in Washington State, near the Seattle-Tacoma metro area.

[A note on the data: In the first and second graphs, I've used median incomes that correspond to the group labeled  "AIANa," which according to the Minneapolis Fed's report on reservation incomes, "includes only individuals who self-identify racially as American Indian or Alaska Native alone." In the third graph, the Indian population corresponds to "AIANac" which "includes AIANa individuals and also those who self-identify as American Indian or Alaska Native in combination with other races." See report here: https://www.minneapolisfed.org/indiancountry/resources/reservation-profiles/]

Photo credit: I-5 Design & Manufacture via Flickr (image cropped)

• 1. The number of residents who are members of the tribe governing the reservation is lower than the number of residents who self-identify as Indian.

Consumers do not gain because there are many producers of the same good, the number is irrelevant. They also do not gain from firms competing with each other, their strategies matter little. Consumers gain from production directed toward value creation.

We have been taught that competition "is" many actors trying to do exactly the same thing, which "forces" them to outdo each other. But it is a simplification that gets very close to being a lie.

The reason is that  the competitive pressure that makes a business continue to innovate and even reinvent itself is not that there "are others." What matters is that others may beat them in the future. This is more than hairsplitting. 

Consider a runner who is so fast that nobody in that sport can beat her/him. Does that mean s/he stops training or just works to maintain that skill? No. Because there is no guarantee that others, who have trained differently and developed a new set of skills, won't enter. So to stay on top, the runner needs to continue to get better. For business, it is more difficult, since those who judge the outcome -- consumers -- might change their minds and develop new wants. 

The same thing holds true though, it is not enough to "simply" beat the existing competition, because there may be new entrants with innovations that undermine the value of your offering. And competitors may reinvent themselves to do the same. 

True competition, which any business needs to deal with, is the possibility of better offerings in the future.

More importantly: this pressure exists regardless of how many are currently producing a certain good. Competitors in the flip phone market were not disrupted by a better/cheaper flip phone, but a different type of device: the smart phone. 

In other words, what really matters is the value proposition, how well one satisfies consumers -- not the number of competitors in the present market.

While firms in the existing market try to keep prices lower and quality higher than the existing competition, and try to position their offering with respect to competitors' similar offering, this "dance" is not what creates value. Innovative, imaginative, entrepreneurship is what facilitates value for consumers and creates, reshapes, and destroys industries. 

In other words, all that is needed for a competitive product offering is *one* producer -- as long as others are not hindered from entering. There is this mistaken belief that what matters to consumers is the number of firms already busy producing a good, preferably almost the same good, which has made us think of competition not in terms of entrepreneurship but "how many." It often is true that more firms competing for limited demand will therefore engage in innovation, but it is not the fact that there are other firms that benefits consumers--it is the innovation. 

And what drives innovation is the pursuit of future profitability. You can have a market with hundreds of similar firms producing, which is disrupted by one innovative entrepreneur, and that one entrepreneur is much more important than any of the hundreds of competitors. 

The entrepreneur creates the valued new offering that satisfies consumers; s/he destroys the old by creating the new. That's what matters, not the number of firms. 

Formatted from Twitter @PerBylund