Planning & The Rule of Law

A government should ultimately be bound by rules that are fixed and announced before it takes up any activity, this allows an individual to plan how they will go about their affairs, or in a more macro sense how firms should behave as they understand the manner in which government may use coercive power. Of course this system is not perfect in that the creators and administrators of these laws are fallible.

However, it does create the assurance that a pursuit of certain aims will not be stifled by a governing body, in the case where all the conditions are realised, so that law rather than stifling freedom allows it to flourish. Here Hayek makes a distinction between the rule of law which enables a government to fix conditions in which resources are used, but the ends they meet is ultimately decided by the individual, and arbitrary government where it directs the means of production to particular ends.

Central planning cannot allow the first to exist, in that the formal rules we have provide a framework rather than step by step guidance, central planning would require these rules to be exact in what they suggest in that the particular ends are met, and it is not by the individuals whim the product of these means. Here arises another problem with central planning and as such collectivism. When a government has to make every decision framework rules are useless, imagine trying to solve at this very moment how many buses should operate. Whereas in our current society the government provides the legal framework for their operation but it then comes down to competition, market forces, etc. which decides the operation of buses. A controlling government would have to make this decision under the circumstances that the problem arises, and this means that it would have to balance all the different aims and needs at that given moment as to not favour one, but inevitably somebody’s views have to be given greater significance.

Hayek uses the example of the Highway Code, which does not instruct people on where to go and exactly how they go about it (planning attempts to do this), it instead offers a framework in which the individual can operate but also ensure that society is not harmed, and is better off on the whole. It is here that the concept of formal rules is developed, in that we create rules that are useful to a yet unknown people, under circumstances which cannot be foreseen in detail.  They are formed on the basis that society is better off due to their existence. Thus, this avoids the need of dealing with each individual’s means and ends, the recognition that precise results are hard to come by, and that by providing a structure of which everyone is aware of, everyone will be better off.

Micromanagement is unsuccessful as concrete rules for a given situation would have to be applied, but we lack this information, and in the ultimate end only one aim can be pursued as otherwise it may conflict with another. Thus Hayek notes that the state should confine itself to providing rules to general types of situations as only the individual currently in the current circumstance possess the correct information to make a viable decision. Also there is the recognition that we cannot see into the future, the state would struggle to see the effect of certain actions on particular people. Furthermore, the state chooses between the different ends consequently favouring one over the other, as it cannot know what would have happened if the other aimed were to be picked. Thus planning in regards to law in the creation of definite rules means that it perpetuates the problem of asymmetric information, whereas formal rules reduce the asymmetry’s influence.

Hayek emphasises that as planning becomes increasingly extensive the struggle in asserting what is “fair” or “reasonable” increases. Providing the need for more authority in making executive decisions, and that this facilitates more deliberate discrimination between the particular needs of different people. It would ultimately determine how “well-off” a certain person will be compared to another, in that only one’s needs are met through this discrimination in choice. The rule of law in a non-planned system ensures that there is an absence of legal privilege. Hayek establishes the paradox that in aiming for equality it is necessary to facilitate a legal system in which not everyone is equal in front of it.

“To produce the same result for different people it is necessary to treat them differently.”

The rule of law undeniably can lead to economic inequality (but to some extent this is the only thing that is truly inevitable), thus socialism protests against “formal justice” in that judges are too independent for example. Hayek ascertains that the rule of law is only effective if it is universal and as such does not work in socialist system, in which again there is the breakdown of political freedom. “It does not matter whether we all drive on the left or on the right-hand side of the road so long as we all do the same.” Rules are meant to enable us to predict each other’s behaviour to a needed extent, in that I won’t drive onto the motorway and find that people are driving in the opposite direction.

The individual should be able to foresee the actions of the state on the basis of the rules of law, and as a consequence use this knowledge to form his own plans and how he goes about his affairs. Here the individual knows where the state can stifle his efforts, and that it is not set arbitrarily on the specific circumstance of that moment. From this Hayek makes an acute reference to the Enlightenment:

“Man is free if he needs to obey no person but solely the laws” – Immanuel Kant

In a socialist system the rule of law will be applied in a manner which is as if a person were to be commanded by another. Legislation in a democratic government is confined by the continued discourse and disagreement, whereas in a socialist system in will be pushed through ultimately serving one individual’s ends at the cost of another.

When a state embarks on the complete control of economic life the significance of minority rights, and individual rights are diminished, without even breaking the rule of law at times. Hayek states that ruthless discrimination occurred through a change in economic policy first before and statutory change. Due to the nature of Socialism and the need for an overriding decision to be made, power lands in the hands of few and in that there is the inevitable service of their vested interests, or an ability to go against a large minority.

Planning & Democracy

 

One of the base arguments supporting central planning is that society left alone is guided by the fancies and whims or irresponsible individuals. Therefore, once again we are left back at collectivism. It desires the organisation of society in achieving things which are in the “general interest” or “general welfare”. The problem with this is that the complexity of happiness or welfare is ever-present. Hayek uses the individual happiness of a man as an example; we do not place our happiness in the result of one central goal, but create a hierarchy of goals in which completion aids our well-being or happiness. Thus, planning must attempt to find out all of these micro goals, and place them in relative importance to each other, and this ultimately is an impossible task.

Furthermore, this imposes the need for an ethical code. This would have to establish the significance of each aspect of our lives in contributing to the general interest. However no such code exists or could ever be comprehensively completed, due to the innumerable differences between each individual. Additionally, Hayek states that it “would be impossible for anyone mind to comprehend infinite variety of different needs of different people” even more so as to some extent we all compete for available resources. The central planning system could only cater to one set of needs, whereas individualism (not in the sense of being egoistic or selfish) allows each individual his own value placement, and thus through coordination with other common areas can be reached, or an individual pursuit can occur, not being limited by an overriding power. Hayek is not against voluntary association as in that case it is simply the realisation amongst a group of individuals their common goal and how they go about it, however this can of course depend on whether there is a leadership in this association.

Contributing to this is the concept of voluntary agreement, whereby the state should only be allowed to intervene in the case where agreement exists. At any moment when there is no agreement and the state intervenes there is a loss of freedom. He notes that at a given point of intervention the state holds enough of resources or income, that it indirectly controls all aspects of economic life. Thus, individual ends become inevitably dependent on the state, and then they are not met as the state cannot cater for every individual end.

This brings Hayek onto democracy and planning, as he seeks the importance of making an ultimate agreement. Hayek mentions that the use of “general welfare” or “general interest” is actually just a cloak for the fact that socialism struggles to agree on one definite end:

“As if a group of people were to commit themselves to take a journey together without agreeing where they want to go: with the result that they may all have to make a journey which most of them do not want at all”

Thus democracy and planning do not coincide! Democracy attempts to allow each individual to voice his desires, and thus in places like parliament there is a tendency for more conversation then agreement because our aims conflict. Hayek states that in most cases there is no real majority but a compromise which ultimately satisfies no one. Socialism comes to the conclusion that there should be a removal of democracy in order to push through certain decisions and that in itself is the removal of both political and economic freedom.

Even if a plan were to be broken down, and clause by clause voted on this would not satisfy anyone to a full degree. Even if it were delegated to separate bodies in which they developed it in regards to expert knowledge, it would then become difficult to integrate the individual plan with all other plans. Democracy struggles with planning as it reduces democracy in itself, as it loses the power of guidance and a reliance on each individual institution. He then accounts for how democracy can decay (a great example of this being Weimar Germany) in that “people reach the agreement that planning is necessary, then democratic assemblies struggle to produce a plan, thus invoking demands that the government or a single individual should be given power to act on their own responsibility.” Thus this leads to the loss of political freedom, almost in arguing that there is a need for an economic dictator “unfettered by democratic procedure”.

There exist today many harsh critiques of democracy from a variety of places. But there is evidence as Hayek states that a democratic government can work effectively:

“restricted to fields where agreement among a majority could be achieved by free discussion; and it is the great merit of the liberal creed that it reduced the range of subjects on which agreement was necessary to one on which it was like to exist in a society of free man”

The use of competitions reduces the amount of things that require agreement, and allows government to concern itself only where it truly fails to operate. Democracy will inevitably destroy itself under the guidance of collectivism, as stated previously one body or person will have to prevail with the responsibility for making the decision.

To round of the chapter Hayek quotes Lord Acton in regards to liberty:

“is not a means to a higher political end. It is itself the highest political end”

Where democracy is the manner in which we safeguard liberty (individual freedom), this is not to say that democracy achieves this at all times, but it is the best method in our possession. Power regardless of where it lies can be arbitrary; democracy can at times bring the illusion that due to things being the will of the majority that power cannot be arbitrary. Democracy tries its best to prevent this.

The “Inevitability” of Planning

There was an argument for the inevitability of planning for example technological change bringing about the existence of natural monopolies, consequently requiring government planning as to some extent the lesser evil than production by private monopolies.

Hayek breaks down this argument once more by considering social infrastructure and existing policies. He asks the question whether the development of natural monopolies is a consequence of new technology, or more simply the economic conditions in which they operate. Hayek argues that the latter is true. He uses the breakdown of the following example:

A large firm having superiority over a small firm, due to technological change may result in greater economies of scale, and an as such lower cost per unit produced and thus begins a process of underbidding and driving out small firms in order to increase market share.

Now at first glance the argument stated above is reasonable, but Hayek notes how this is not the case from a congressional report by the temporary national economic committee in that it states:

“The superior efficiency of large establishments has not been demonstrated; the advantages that are supposed to destroy competition have failed to manifest themselves in many fields. Nor do the economies of size, where they exist, invariably necessitate monopoly.”

This leads Hayek on to argue that it was the policies within countries which facilitated the growth of monopolies, which would then drive out smaller firms. He takes the creation of cartels, and syndications as a consequence of governments seeking regulation in prices and sales as the factor that led to the growth of large monopolies. This goes back to his overarching argument of travelling down one road completely or not at all, as there is greater flaw in attempting a mixture. Then going on to state that “monopoly capitalism” became acceptable even more so as countries such as the United States erected protectionist policies and pursued semi-isolation. He uses the example of Great Britain in stating that planning is not inevitable, in that yet again policy had promoted the growth of natural monopolies. He notes that the British system had been extremely competitive up until 1931 where similar to America protectionist policies arose, and economic planning was introduced and thus monopolies came about. Not of technological change, but the actual structure of the economic system.

He then delves into another segment where planning is not inevitable. Arguing against those who make the assertion that the complexity of modern industrial civilisation creates the need for central planning otherwise we cannot combat its problems effectively. They additionally state that it is increasingly difficult to obtain a coherent picture of economic process, thus things should be coordinated or else dissolve into chaos.

Hayek breaks this down by simply stating that if conditions were simple enough for one person or board to have perfect information then planning works, but as they note in their own argument there is this existing complexity where it is increasingly difficult to attain this information. Thus Hayek argues that decentralisation becomes imperative, as then there is the coordination between separate agencies to bring about “mutual adjustment”. Furthermore, he states that “nobody can consciously balance all the considerations bearing on the decisions of so many individuals.” Thus he arrives at the price system and how it operates without the need for recording every single change in information by a central body. It also allows for the greater complexity in our system which helps the growth of the industrial system and that planning ultimately stifles it.

It is here that he comes to point which is of particular interest to me, he writes about how technological change can be stifled in order to maintain the status quo. For example the industrial revolution promised to enhance the productivity of labour; however it came at the cost of employment for many people. So here arises the argument for the need of central planning to efficiently create the change over such that the short term loss does not override the short term gain. To this Hayek states that planning is not needed as either the short term loss can be accepted, or the change can be delayed up until the necessary infrastructure or policy is erected to minimise any loss.

Specialisation & the Allure of Planning

Hayek states there are many good things, which all agree are highly desirable, and possible, that are difficult to achieve within our own lifetime. This develops the allure of planning in that it seems possible to circumvent the barrier that is time, collective action leading to the achievement of these goals.

He then brings this into regards of specialists (technocrats) in that a planned society seems to offer a route to achieving their objectives. He states that this is an illusion and a misdirection of resources, in that the specialist will obviously place greater importance on his aims then others. Hayek uses a nice example to illustrate this:

“The lover of the country-side who wants above all that its traditional appearance should be preserved and that the blots already made by industry on its fair face should be removed, no less than the health enthusiast who wants all the picturesque but insanitary old cottages clear away, or the motorist who wishes the country cut up by big motor roads, the efficiency fanatic who desires the maximum of specialisation and mechanisation no less than the idealist who for the development of personality wants to preserve as many independent craftsmen as possible.”

However, they all have a wish to go about this planning and therefore they will ultimately come into conflict with each other. As such this brings about the central issue, that not everyone can be pleased. It’s attractive to those who have devoted their lives to a single task and want to see it done universally. But practically this cannot occur, also defining to some extent the authoritarian nature of central planning, only one direction can be pursued and thus not everyone will be pleased.

Individualism & Collectivism

 

The concept of socialism must be defined it its aims and the actions it proposes to take in order to achieve them. He recognises that its general use is to describe the ideals of social justice, equality, and security. However it becomes more specific in the way that this is brought about such as the abolition of private enterprise, private ownership of the means of production, and the use of central planning.

Hayek laments that many proclaimed socialists are only looking at the first aim of social justice or equality but “neither care nor understand how they can be achieved”. Therefore he understands that there is dispute in that some people support the ends but not the means, and it also raises the question of whether socialisms ultimate aims can be achieved simultaneously.

Here he begins to breakdown the problem that socialism proposes, first by noting that central planning can result in two separate ends in regards to distribution of income, where one use of it may result in equal distribution, similar use of it may result in income reaching the hands of few. Thus, he states that socialism must be approached as a species of collectivism. As collectivism claims that we are interdependent which conflicts with Hayek’s libertarian outlook in that each individual is sovereign of his/hers decisions. So this conflict also applies to socialism, in that there is a loss of an individual’s sovereignty. However, he does mention that the root support of planning comes from rational thought. In that we plan our own decisions, and governments before putting through policy plan in considering bad or good action, or wise or short-sighted action. However he argues that modern socialism does not take the stance of liberal planning in that a framework should be erected in order to achieve this aims, he states that socialism looks to establish is a central direction for all economic action, where all resources are consciously directed. He summarises the dispute in the question:

“For this purpose is it better that the holder of coercive power should confine himself in general to creating conditions under which the knowledge and initiative of individuals is given the best scope so that they can plan most successfully; or whether a rational utilisation of our resources requires central direction and organisation of all our activities according to some consciously constructed “blueprint”

In order to argue his point he clarifies that a libertarian approach must be accompanied with the correct infrastructure and institutions in order to make competition and the benefits of market forces actually work and to not simply leave things be. I believe that it is here that Hayek begins to develop the point where a system must travel down one road completely or risk failure. In that he expands upon his point citing that legal framework is one example of ensuring competition achieves its purpose. Furthermore, competition should not be supplemented by conscious direction as it is a method in itself which provides the adjustments to our behaviour without the intervention of authority. Then he delivers an integral point: “any attempt to control prices or quantities [he previously mentions how competition solves this problem, e.g. market forces creating price signalling] of particular commodities deprives competition of its power of bringing about an effective co-ordination of individual efforts, because price changes then cease to register all the relevant changes in circumstances and no longer provide a reliable guide for the individual’s actions.”

I think that at points like these it seems that Hayek portrays himself against any form of corrective intervention, however he fully realises the existence of negative externalities or factors that may corrupt competition’s benefits. He simply asks the question “are the advantages gained greater than the social costs which they impose” as a condition in which intervention is decided. Hayek considers both the existence of negative and positive externalities, and where price signalling through competition seems to have failed. He argues that the fact we may bring in direct regulation through authority where it is difficult or impossible to develop regulation for competition is not proof to suppress competition where it may function. Here he states that in “no system that could be rationally defended would the state just do nothing”, for the system to be effective however the need for state activity needs to be realised but also stress the creation of effective competitive system by “continuously adjusting legal framework” (alongside the already well-established institutions) thus reducing the occurrence of fraud, deception, exploitation, etc. as the existence of asymmetric information, moral hazards, adverse selection are all realised, and can be acted against appropriately.

Finally, Hayek states the point that not only is complete centralisation an unbelievably difficult task, but more so the sheer loss of freedom in that one single centre decides everything. He argues that there is no middle position, that by going down one path you must commit to it consistently he states that:

“Both competition and central direction become poor and inefficient tools if they are incomplete, they are alternative principles used to solve the same problem.”

“Planning and competition can be combined only by planning for competition, but not by planning against competition.”

It is determined that planning is inevitable, a necessity in ensuring that competition works well, Hayek only critiques the planning that is working against competition, as he has stated before not only due to economic outcomes, but on the fundamental principle of maintain political freedom.

 

The Great Utopia

 

It is here that Hayek delves into the traditionally authoritative roots of socialism, bringing forward the example of early socialism which its founders during the French Revolution felt that it could only be put in practice through a dictatorial government. Then its transfer to being considered an agent of liberty in regards to the development of “democratic socialism”, and this saw greater acceptability in western societies.

It is established that democracy and socialism stood at an “irreconcilable conflict” through reference to Alexis de Tocqueville who stated:

“Democracy extends the sphere of the individual freedom, socialism restricts it. Democracy attaches all possible value to each man,’ socialism makes each man a mere agent, a mere number.”

Further Hayek notes the development of thought in regards to people placing greater importance over economic freedom than political freedom, of which Hayek argues that one cannot have economic freedom without political freedom. Socialism aims to provide economic freedom without political freedom in that equality can be reached. To finish the Tocqueville quote:

“Democracy and socialism 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”

In this there is a change in the meaning of freedom from “freedom from coercion, freedom from the arbitrary power of other men, etc.” to “freedom from necessity, and to free from the despotism of material want,”. He notes that rather it being a demand of a new freedom it was simply the old demand for equal distribution of wealth. In this he notes the appeal of socialism and its promise of greater freedom as it lured more liberals, from this he makes his most bold remarks in regards to socialism “The Road to Freedom was in fact The High Road to Servitude” and that to the followers of socialism in a progressive manner from liberalism that “it should appear inconceivable of socialism leading to the opposite of liberty”

This is then developed into the political sphere where at first approach communism and fascism appear to be at opposite poles, but to some extent they are actually the outcome of similar tendencies. Where “socialism achieved by democratic means seems definitely to belong to the world of utopias”

Then with reference to Italy and Germany as being examples where dictators arose from socialist backgrounds into fascist and Nazi forces respectively, which would appear to be at opposite sides of the spectrum but are ultimately as he notes was realised in 1930s Germany it was easy to transfer young communist to a Nazi and vice-versa. History tells the tale of how the two sides have clashed and Hayek argues this was because they sought the support of similar minds, as in actual fact they were both against the old type of liberalism. His use of Hitler and Mussolini as examples of the rise of Socialism is interesting in that when being taught history often the struggle between fascists and communists for power is portrayed and that they appealed to different parts of society. However, Hayek notes their similarities and that their forms of policy were rooted in socialism as the agent for pushing through authoritarianism and nationalism (notably through central control).

Thus, here Hayek concludes that those whom argue socialism can coincide with freedom have simply not yet realised the extent to which they are irreconcilable ideals. Ultimately stating that democratic socialism or individualist socialism, or however many ways socialists who still believe in liberal ideals express it are arguing for the creation of an impossible utopia.