Hayek - A Collaborative Biography - Part VI - Good Dictators

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Hayek: A Collaborative Biography

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Archival Insights into the Evolution of Economics Series Editor: Robert Leeson This series provides a systematic archival examination of the process by which economics is constructed and disseminated. All the major schools of economics will be subject to critical scrutiny; a concluding volume will attempt to synthesise the insights into a unifying general theory of knowledge construction and influence. Titles include: Robert Leeson (editor) THE KEYNESIAN TRADITION Robert Leeson (editor) THE ANTI-KEYNESIAN TRADITION Robert Leeson (editor) AMERICAN POWER AND POLICY Roger Frantz and Robert Leeson (editors) HAYEK AND BEHAVIORAL ECONOMICS Robert Leeson (editor) HAYEK: A COLLABORATIVE BIOGRAPHY PART I Robert Leeson (editor) HAYEK: A COLLABORATIVE BIOGRAPHY PART II Robert Leeson (editor) HAYEK: A COLLABORATIVE BIOGRAPHY PART III Robert Leeson (editor) HAYEK: A COLLABORATIVE BIOGRAPHY PART IV Robert Leeson (editor) HAYEK: A COLLABORATIVE BIOGRAPHY PART V Robert Leeson (editor) HAYEK: A COLLABORATIVE BIOGRAPHY PART VI Leslie Marsh (editor) PROPRIETY AND PROSPERITY New Studies on the Philosophy of Adam Smith Forthcoming titles: Robert Leeson (editor) HAYEK: A COLLABORATIVE BIOGRAPHY PART VII Robert Leeson (editor) HAYEK AND THE AUSTRIAN SCHOOL Leslie Marsh and Roger Franz (editors) HERBERT SIMON

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Hayek: A Collaborative Biography Part VI Good Dictators, Sovereign Producers and Hayek’s ‘Ruthless Consistency’ Edited by

Robert Leeson

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Introduction, selection and editorial matter © Robert Leeson 2015 Individual chapters © Contributors 2015 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2015 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN: 978–1–137–47924–2 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress.

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Contents

List of Illustrations

vi

Notes on Contributors

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1

Introduction Robert Leeson

1

2

The Battle of Ideas: Neoliberal Economics and Politics in the 20th Century Philip Plickert

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3

Hayek, Orwell, and The Road to Serfdom Andrew Farrant

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4

Pigou and the Pigouvian Legacy Rogério Arthmar

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F. A. Hayek and the Demise of the Socialist System Yuri N. Maltsev

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Hayek in Australia, 1976 Rafe Champion

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Hayek and Coase Travel East: Privatization and the Experience of Post-Socialist Economic Transformation Kiryl Haiduk

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Anders Breivik, Fascism and the Neoliberal Inheritance Tad Tietze

Index

249 281

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List of Illustrations

Figures 7.1 7.2

Dynamics of crude oil prices, 1970–2013 Foreign bank ownership in the selected transition economies and broad money-to-GDP ratio (left-hand scatter) and the share of non-performing loans in total volume of loans (right-hand scatter), 1996–2009

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Tables 3.1 7.1

Number of persons who were directed under Defence Regulation 58A Asset share of foreign-owned banks in the selected transition economies, 1996–2009, percentage of total volume of assets

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Notes on Contributors

Rogério Arthmar is Visiting Professor, University of Western Australia Business School, and Associate Professor of Economics, Federal University of Espírito Santo. Rafe Champion is an independent researcher. Andrew Farrant is Assistant Professor of Economics, Dickinson College. Kiryl Haiduk was formerly at the Belarusian Economic and Outreach Center (Minsk, Belarus), Research Center of the Institute for Privatization and Management. Robert Leeson is Visiting Professor of Economics, Stanford University, and Adjunct Professor of Economics, University of Notre Dame Australia. Yuri N. Maltsev is Professor of Economics, Carthage College, Wisconsin, and Senior Fellow, the Ludwig von Mises Institute. Philip Plickert is Economics Editor, Frankfurter Allgemeine Zeitung, and Lecturer in Economics, Goethe-University. Tad Tietze, School of Psychiatry, University of New South Wales, Australia.

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1 Introduction Robert Leeson

1 ‘Ruthless consistency’: from Manchester to Vienna via London and Chicago Ideologies – like religions – mix ‘knowledge’ with faith: followers are often unable to distinguish between the two, and have little understanding about ‘knowledge’-to-faith quotients within their own community. As a result, ideologues are often incapable of predicting the consequences of their actions. Bringing deregulated ‘personal liberty’ to both the financial sector and the former Soviet Empire facilitated one form of tax-funded producer sovereignty: ‘the strife over subsidies’, as oligarchs cornered both markets and governments (see Chapter 7). Feudalism and capitalism interacted in four phases: co-existence, partial economic elimination (neo-feudalism), social submergence, and liberty-driven reappearance through deregulatory capture in the financial sector and in post-communist Russia (financial neo-feudalism). Before the 1974 Nobel Prize for Economic Sciences, the British branch of the Neoclassical School had dominated economic discourse (mixed with some Lausanne elements, such as Pareto ‘efficiency’); Marshallians proposed regulation and market-based remedies to encourage private and social benefits and discourage social costs. Coal symbolizes both: energy is tapped for productive or household consumption uses; and – assuming the evidence and analysis of relevant scientific community is more likely to be correct than false – climate change is the Pigouvian externality. Coal-fired steam ships transported millions of migrants to the New World in the decades before the Great War, initiating vast social, as well as geographical, mobility. In 1895 (at aged 14), Milton Friedman’s mother, Sarah, migrated to the United States and worked as a ‘seamstress 1

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in a “sweatshop”’. On 25 March 1911, Sarah Friedman leapt from an open ninth-floor elevator door to escape the Triangle Factory Fire. 140 mostly young migrant women were either burnt alive or jumped to their deaths. This 9/11-style New York trauma spontaneously intensified the 20th-century regulation wave – that lasted until Friedrich von Hayek’s 1974 Nobel Prize for Economic Sciences. The two Sarah Friedmans were, presumably, not related: Milton once knew his father’s surname but was ‘too uncertain now to record my present impression’. His parents, who had ‘heated discussions about where the money was to come from to pay incoming bills’, spoke Hungarian ‘only when they wanted to keep something from the children’ (Friedman and Friedman 1998, 19–21; Stein 1962, 220). The New World market-based correction of externalities provided Friedman with a subsidized education; in September 1946, his achieved status was rewarded by an appointment to the University of Chicago. Six months later, von Hayek’s Old World-ascribed-status-assisted ability to acquire tax-exempt donations from businessmen (primarily, the ‘Volker Fund of St Louis’) facilitated an ‘expenses paid’ trip to the London Dorchester Hotel, the Paris Grand Hotel, and from there to Pilgrim Mountain (Mont Pèlerin): It was George [Stigler]’s and my first trip abroad ... Here I was, a young naïve provincial American, meeting people from all over the world ... This marked the beginning of my active involvement in the political process. (Friedman and Friedman 1998, 159–161) Stigler’s (1982) parents had migrated separately to the United States at the end of the 19th century: ‘my father from Bavaria and my mother from what was then Austria-Hungary (and her mother was in fact Hungarian)’. The Victorian liberal, John Bright, found in America ‘a free church, a free school, free land, a free vote, and a free career for the child of the humblest born in the land’ (cited by Bradley 1980, 61). The post-1870 British system of publically-funded elementary education was influenced by the American model: compared to the Habsburg Empire, Britain and America have been relatively successful in promoting human-capital-fuelled social mobility. The 1954 Brown versus Board of Education Supreme Court decision was a marker on the road-from-slavery: Little Rock became the symbol of resistance to ‘interference’ with the Arkansas anti-integration laws. In September 1957, a mob of over 1000 white protesters prevented nine African-American high school students from exercising their consti-

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tution right by enrolling – and attending – Little Rock Central High School. Arkansas Governor Orval Faubus questioned both the authority of the Supreme Court and the validity of desegregation. President Dwight D. Eisenhower (24 September 1957) declared: At a time when we face grave situations abroad because of the hatred that communism bears towards a system of government based on human rights, it would be difficult to exaggerate the harm that is being done to the prestige and influence and indeed to the safety of our nation and the world. Our enemies are gloating over this incident and using it everywhere to misrepresent our whole nation. We are portrayed as a violator of those standards which the peoples of the world united to proclaim in the Charter of the United Nations. (cited by Damms 2002, 129) The year after Brown versus Board of Education, Friedman (1955) noted that there had been sizable underinvestment in human beings ... This underinvestment in human capital presumably reflects an imperfection in the capital market: investment in human beings cannot be financed on the same terms or with the same ease as investment in physical capital ... The productivity of the physical capital does not – or at least generally does not – depend on the co-operativeness of the original borrower. The productivity of the human capital quite obviously does – which is, of course, why, all ethical considerations aside, slavery is economically inefficient. All bureaucracies – public and private – are prone to inefficiencies: Friedman (1955), who invoked Pigouvian externalities ‘neighborhood effects’ to justify public-funded education, proposed a ‘mixed’ system under which governments would continue to administer some schools but parents who chose to send their children to other schools would be paid a sum equal to the estimated cost of educating a child in a government school, provided that at least this sum was spent on education in an approved school. Friedman’s voucher system may improve outcomes through marketbased incentives: the mission of The Friedman Foundation for

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Educational Choice – to advance ‘school choice for all children’ – is within the Marshallian tradition (Pigou 1925); so too is Friedman’s mea culpa capacity. In Britain and elsewhere, the divisions within the working class are as strong as the divisions between classes: the aspirations of the upper working class require a distance to be maintained. Their relative social success can be explained through different discount rates: the interest rate in the brain. Education and business are both vehicles for social advancement for those who value deferred consumption; the ‘business conservative’ donor class can acquire a belated and ideology-loaded ‘education’ through Austrian-influenced think tanks. Those with low ascribed and achieved status, who heavily discount future consumption, pose problems for public policy and future tax liabilities. Wartime patriotism facilitated a no-strike pledge by American labour unions: by autumn 1946, average real weekly wages had fallen to Great Depression levels. In 1945, Philip Murray, head of the steelworkers’ union complained that steel company stockholders had received more than $700 million in wartime dividends. By the early 1950s, labour union membership reached its highest-ever level (Horowitz and Carroll 2002, 7, 9). Most Americans describe themselves as middle class. In contrast, Leo Rosten noted the depth of the [English] class distinction, which is just beginning to disappear, has created degrees of bitterness which I’ve never found in the United States. There is a hatred. Hayek (1978) replied: My impression of England may be wrong in the sense that I only really know the south. All you are speaking about is the north of England, where I think this feeling prevails. But if you live in London – Right now my relations are mainly in the southwest of England, where my children live, and I don’t find any of this sharp resentment. And the curious thing is that in the countryside of southwest England, the class distinctions are very sharp, but they’re not resented. [laughter] They’re still accepted as part of the natural order.1 Hayek’s (1949; 1975; 1994, 92) plan for social revolution was designed with previous failure in mind:

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the more conservative groups have acted, as regularly as unsuccessfully, on a more naïve view of mass democracy and have usually vainly tried directly to reach and to persuade the individual voter. Hayek referred to the silver voice of that genius in persuasion, Lord Keynes ... ... [who] was exceedingly difficult to resist in conversation or discussion. Even if you knew that he was wrong, you sometimes found it extraordinarily hard to maintain your position while you talked to him – although once you turned away, you realised that you had been misled ... people got enchanted by merely listening to his words.[His Old Etonian] voice was so bewitching. ‘The English working class, as Mr Wyndham Lewis has put it, are ‘branded on the tongue’ (Orwell 1968a, 5). Two advertising executives, the Baghdad-born brothers Charles and Maurice Saatchi, recruited the actor Laurence Olivier to equip the former Secretary of State for Education and Science to ‘speak’ persuasively to the British individual voter. Mrs. Thatcher regarded the Saatchi and Saatchi ‘Labour isn’t working’ poster as ‘wonderful’; their ‘Britain is going backwards’ television advertisement had shots of climbers inching their way down Mount Everest (Fallon 2007; Edwards 2011). Hayek (1978) reflected: I oughtn’t to praise them because the suggestion of the Institute [of Economic Affairs] came from me originally; so I let them on the job, but I’m greatly pleased that they are so successful.2 In addition to the Old Etonian Anthony Fisher, the IEA was founded and run by Ralph Harris (2006, 171–172) and Arthur Selden, who were ‘proud’ of their own upward social mobility and the ‘unprivileged backgrounds’ of the more ‘robust’ IEA authors. Harris, the son of a working class, council-housed tramways inspector, was the beneficiary of the primary vehicle of British social mobility: for-social-profit public education. At Cambridge University, Stanley Dennison introduced him to von Hayek’s aristocratic social philosophy. At the IEA, ‘poverty was the spur to invention’ in ‘proclaiming the missionary truths’. After ennoblement by a grocer’s daughter – as Baron Harris of High Cross – he became President of the Mont Pelerin Society (1982–1984).

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Neoclassical theory is not required to predict that British Airways would use ‘dirty tricks’ to sabotage their more cost-efficient Virgin competitor (Gregory 1993); all incumbents have incentives to deter entrants. Capitalism combined with tax-funded education allows achieved status to compete with its ascribed status incumbent – those who value democracy must protect its most valuable property: human capital formation. According to Ludwig von Mises’ (1985 [1927], 19, 44, 42–51) Liberalism in the Classical Tradition, Austrians have different priorities: The program of liberalism, therefore, if condensed into a single word, would have to read: property, that is, private ownership of the means of production (for in regard to commodities ready for consumption, private ownership is a matter of course and is not disputed even by the socialists and communists). All the other demands of liberalism result from this fundamental demand. [emphasis in original] Mises left an eternal instruction: It cannot be denied that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history The ‘similar movements’ of ‘bloody counteraction’ that von Mises referred to included the French anti-Semitic ‘l’Action Française’ plus ‘Germans and Italians’. The Italians obviously refers to Mussolini’s 1922 March on Rome; reference to ‘Ludendorff and Hitler’ obviously refers to the 1923 Ludendorff–Hitlerputsch (or Munich Beer Hall Putsch). The demand for free trade in corn was followed by the demand for free trade in land: an attack on the landed aristocracy in the name of peasant proprietorship (Bradley 1980, 201–202). Hayek (1978) dismissed the First Austrian Republic as a ‘republic of peasants and workers’;3 Mises (1985 [1927], 43–44) described the foundations of Hayek’s (2010 [1960]) The Constitution of Liberty: Those of the old regime had displayed a certain aristocratic dignity, at least in their outward demeanor. The new ones, who replaced them, made themselves contemptible by their behavior. Nothing has done more harm to democracy in Germany and Austria than the hollow arrogance and impudent vanity with which the Social-Democratic

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leaders who rose to power after the collapse of the empire conducted themselves. Thus, wherever democracy triumphed, an antidemocratic doctrine soon arose in fundamental opposition to it. There is no sense, it was said, in allowing the majority to rule. The best ought to govern, even if they are in the minority. This seems so obvious that the supporters of antidemocratic movements of all kinds have steadily increased in number. The more contemptible the men whom democracy has placed at the top have proved themselves to be, the greater has grown the number of the enemies of democracy. There are, however, serious fallacies in the antidemocratic doctrine. What, after all, does it mean to speak of ‘the best man’ or ‘the best men’? The Republic of Poland placed a piano virtuoso at its head because it considered him the best Pole of the age. But the qualities that the leader of a state must have are very different from those of a musician. The opponents of democracy, when they use the expression ‘the best,’ can mean nothing else than the man or the men best fitted to conduct the affairs of the government, even if they understand little or nothing of music. But this leads to the same political question: Who is the best fitted? Was it Disraeli or Gladstone? The Tory saw the best man in the former; the Whig, in the latter. Who should decide this if not the majority? And so we reach the decisive point of all antidemocratic doctrines, whether advanced by the descendants of the old aristocracy and the supporters of hereditary monarchy, or by the syndicalists, Bolsheviks, and socialists, viz., the doctrine of force. The opponents of democracy champion the right of a minority to seize control of the State by force and to rule over the majority. The moral justification of this procedure consists, it is thought, precisely in the power actually to seize the reins of government. One recognizes the best, those who alone are competent to govern and command, by virtue of their demonstrated ability to impose their rule on the majority against its will. Here the teaching of l’Action Française coincides with that of the syndicalists, and the doctrine of Ludendorff and Hitler, with that of Lenin and Trotzky. Many arguments can be urged for and against these doctrines, depending on one’s religious and philosophical convictions, about which any agreement is scarcely to be expected. This is not the place to present and discuss the arguments pro and con, for they are not conclusive. The only consideration that can be decisive is one that bases itself on the fundamental argument in favor of democracy.

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Hayek (1978) agreed – democracy had one advantage and ‘no other’: You see, my concern has increasingly become that in democracy as a system it isn’t really the opinion of the majority which governs but the necessity of paying off any number of special interests. Unless we change the organization of our democratic system, democracy will – I believe in democracy as a system of peaceful change of government; but that’s all its whole advantage is, no other.4 Hayek (1978) just learned [Mises] was usually right in his conclusions, but I was not completely satisfied with his argument. That, I think, followed me right through my life. I was always influenced by Mises’s answers, but not fully satisfied by his arguments. It became very largely an attempt to improve the argument, which I realized led to correct conclusions. But the question of why it hadn’t persuaded most other people became important to me; so I became anxious to put it in a more effective form.5 Hayek (1978) reflected that omnipotent democracy which we have is not going to last long. What I fear is that people will be so disgusted with democracy that they will abandon even its good features.6 During the rule of the Habsburg Empire, Mises was legally allowed to add ‘von’ to his name; before the First Austrian Republic collapsed into a one-party police state, he had become a card-carrying Austro-Fascist (member number 282632) and a member of the official Fascist social club (number 406183) (Hülsmann 2007, 677, n149). In an apparent reference to Liberalism in the Classical Tradition (Caldwell 1995, 70, n67), Hayek (1995 [1929], 68), while praising Edwin Cannan’s ‘fanatical conceptual clarity’ and his ‘kinship’ with Mises’ ‘crusade’, noted that British-Austrians had failed to realise necessary consequences of the whole system of classical liberal thought: ‘Cannan by no means develops economic liberalism to its ultimate consequences with the same ruthless consistency as Mises.’ Without making any connection to Hayek and Mises, George Orwell’s (1968b [1940], 12–13) review of Hitler’s Mein Kampf made two Austrian School-related observations. First, ‘the situation in Germany, with its

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seven million unemployed, was obviously favourable for demagogues’. And second, Hitler had recently been respectable. He had crushed the German labour movement, and for that the property-owning classes were willing to forgive him almost anything. Both Left and Right concurred in the very shallow notion that National Socialism was merely a version of Conservatism.7 According to Jeremy Rifkin (2005), in the first post-communist decade, 89 countries find themselves worse off economically than they were in the early 1990s ... The 356 richest families on the planet enjoy a combined wealth that now exceeds the annual income of 40% of the human race. Rifkin is a critic of capitalism – most economists are not; and his data must be critically evaluated. However, Elizabeth Warren’s (2007) ‘The Coming Collapse of the Middle Class’ suggests that America has not been well served by Austrian-style policy advice. The pre-Hayek liberal Utopian/optimism mix is primarily associated with 1776, 1789, 1832, 1833, 1846, 1848 and 1883. In 1903, the 1846 repeal of the Corn Law was defended by Henry Campbell-Bannerman, the leader of the Liberal Party, then in opposition: ‘We believe in free trade because we believe in the capacity of our countrymen.’ The 1833 abolition of slavery in the British Empire reflected the growing liberal consensus (Bradley 1980, 75, 68). The 1832 Great Reform Act was followed by the 1867 enfranchisement of the ‘labour aristocracy’, and the 1884 enfranchisement of agricultural labourers: stepping stones on the road to the universal franchise. Benjamin Disraeli, who complained that the 1867 Act would ‘lead to an American constitution’, contemptuously described Richard Cobden and Bright as ‘the two members for the United States’. The 3rd Viscount Palmerston complained that they had ‘run amuk against everything that the British Nation respects and values – Crown, Aristocracy, Established Church, Nobility, Gentry and Landowners’ (Bradley 1980, 62–63). The bust of the anti-Austrian hero of 1848, Lajos Kossuth, is displayed in the United States Capitol, atop Capitol Hill, with the inscription: Father of Hungarian Democracy, Hungarian Statesman, Freedom Fighter, 1848–1849. Von Hayek apparently wished it to be known – posthumously – that The Road to Serfdom was written to justify the liberty of the ‘old’ European aristocracy and to provide the road-back-to-serfdom

10 Robert Leeson

for the tax-paying ‘new’ aristocracy of labour (Leeson 2014a, chapter 3). Three years after The Road to Serfdom (1944), Hayek’s fundraising provided a ‘private railroad car’ (Friedman and Friedman 1998, 161): the April Fool’s Day convening atop Pilgrim Mountain.

2

The Magic Pilgrim Mountain

John Davenport described the ascent: From the station platform at Vevey, Switzerland, a little funicular railroad pointed up the mountain-side. As I swung aboard and as the cables tightened, I was vaguely conscious that something new and exciting lay at the top. It did, for the first meeting of what became known as the Mont Pelerin Society ... was indeed a unique gathering and a turning point in the life of most participants. (cited by Friedman and Friedman 1998, 160) The year Hayek was awarded the Nobel Prize for Economic Sciences, his Society met in Brussels: Murray and Joey [Rothbard] had met up with Ralph Raico in Germany and they made their own way by car to Brussels ... As is customary, the Mt. Pelerin meetings were held in one of the most expensive hotels in the city as befitted the fact that almost all attendees were either think-tank executives traveling on expense accounts, South American latifundia owners, for whom hundred-dollar bills were small change, or the officers of the Society itself, a self-perpetuating oligarchy who, thanks to its members’ dues, traveled around the world in first-class accommodations. (Hamowy 2003) To Victorian classical liberals, the United States was ‘regarded as a shining example of all that was best in modern civilization’ (Bradley 1980, 60). The Buchanans of Tennessee include a State governor and a Nobel Laureate (Kyle 2012); James Buchanan (1992, 130) met his first ‘Princess’ through one of Hayek’s ‘luxurious’ Mont Pelerin Society meeting. Hayek (1978) explained to Buchanan that the Constitution of the United States must be collapsed into a single sentence written by a European aristocrat.8 The essence of Victorian liberalism was self-reliance: as Cobden explained, ‘while I will not be the sycophant of the great, I cannot become the parasite of the poor’ (cited by Bradley 1980, 70). Buchanan (1992, 130) observed that at Mont Pelerin Society meetings, there was

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‘too much deference accorded to Hayek, and especially to Ludwig von Mises who seemed to demand sycophancy’. In return, Mises conjured-up an alluring aristocratic demeanor: He could be unbelievably stubborn, but people would not detect that in daily life, for he had excellent manners. He was brought up at a time when Austria was an empire and good manners and self-discipline were not only a prerequisite of the court, but a must for a member of every cultured family. One does not lose good habits in later life, nor did Lu. He would never sit down with me at mealtime, even on the hottest day, without wearing his jacket. (Margit Mises 1976, 143) Raico (2012), Ronald Hamowy (2002; 2010) and Rothbard (1973) made careers as courtiers and fools to von Hayek and von Mises:9 For those of us who have loved as well as revered Ludwig von Mises, words cannot express our great sense of loss: of this gracious, brilliant and wonderful man; this man of unblemished integrity; this courageous and lifelong fighter for human freedom; this all-encompassing scholar; this noble inspiration to us all. And above all this gentle and charming friend, this man who brought to the rest of us the living embodiment of the culture and the charm of pre-World War I Vienna. For Mises’ death takes away from us not only a deeply revered friend and mentor, but it tolls the bell for the end of an era: the last living mark of that nobler, freer and far more civilized era of pre-1914 Europe ... Mises himself, spinning in his inimitable way anecdotes of Old Vienna ... a mind of genius blended harmoniously with a personality of great sweetness and benevolence. Not once has any of us heard a harsh or bitter word escape from Mises’ lips. Unfailingly gentle and courteous ... an inspiration and as a constant star ... Ludwig Mises never once complained or wavered ... stand[ing] foursquare for the individualism and the freedom that he realized was required if the human race was to survive and prosper ... We could not, alas, recapture the spirit and the breadth and the erudition; the ineffable grace of Old Vienna. But I feverently [sic] hope that we were able to sweeten his days by at least a little ... But oh, Mises, now you are gone, and we have lost our guide, our Nestor, our friend. How will we carry on without you? But we have to carry on, because anything less would be a shameful betrayal of all that you have taught us, by the example of your noble life as much as by your immortal works. Bless you, Ludwig von Mises, and our deepest love goes with you.10

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During the Great War, Hayek (1994, 44–45) developed a great interest in the drama, and this must have been the first interest which I pursued systematically for some time and where I showed real initiative. In addition to reading and watching the ‘ancient Greek dramas’, he even started to write tragedies myself. On rather violent and more or less erotic historical themes (Andromache, Rosamund, etc), but I never finished a play, though I was working up towards some rather effective scenes I had thought out. One theme occupied him most for quite a long time. It was a play about Andromache. With all the implications; very obscure, and only half understood. But ending in a magnificent scene which indeed would be theatrically very effective – Andromache is the slave of Achilles’s son, wandering from the castle out onto the sea, onto a rock extending out into the sea, and the sun rises and she runs up to the sun: ‘It’s you, it’s you, my Hector.’ And she falls into the sea. Hayek (1978) was enthralled by Johann Wolfgang von Goethe (1749– 1832), the author of the play in which Doctor Faustus sells his soul to the devil in return for academic advancement: In a purely literary field, I was reading much more fine literature as a young man and, as you have probably become aware, I was a great Goethe fan. I am thoroughly familiar with the writings of Goethe and with German literature, generally, which is incidentally partly because of the influence of my father. My father used to read to us after dinner the great German dramas and plays, and he had an extraordinary memory and could quote things like the ‘Die Glocke,’ Schiller’s poem, from beginning to end by heart, even in his – I can’t say his old age; he died at fifty-seven. He was, in the field of German literature, an extraordinarily educated man. As a young man before the war, and even immediately after, I spent many evenings listening to him. In fact, I was a very young man. Of course, I started writing plays myself, though I didn’t get very far with it. But I think if you ask in this sense about general influence, Goethe is really probably the most important literary influence on my early thinking.11

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13

The Bildungsroman – the coming-of-age literary genre – is conventionally dated to Goethe’s (Schiller-assisted) Wilhelm Meister’s Apprenticeship: the chronicle of a personal ascent via the mysterious Tower Society. When Robert Chitester asked about classical education being ‘no longer at all a common thing in the United States’, Hayek (1978) replied: You see, I used to define what the Germans call Bildung, a general education, as familiarity with other times and places. In that sense, Americans are not very educated. They are not familiar with other times and places, and that, I think, is the basic stock of a good general education. They are much better informed on current affairs ... I doubt whether the Americans are book readers. You see, if you go to a French provincial town, you’ll find the place full of bookstores; then you come to a big American city and can’t find a single bookstore. That suggests a very fundamental contrast.12 Hayek told Charlotte Cubitt (2006, 5) that he and his fellow European émigrés sat in the ‘sardonic corner’ of the London School of Economics (LSE) Common Room making ‘malicious’ comments about the competence of their English colleagues. The classically-educated Hayek (1994, 84) concluded Department of Economics meetings with a call-to-action against the LSE Director: ‘Beveridge delendus est’ (‘Beveridge should be destroyed’). But: It turned out that the LSE economists, and even Lionel Robbins, had not had a classical education ... I found out that not one of them understood what I was saying. It’s a famous phrase, a story from, I believe, Cicero ... I assumed this to be popular knowledge. In Thomas Mann’s (1960 [1924]; 372–373, 380, 390, 403, 441; 1953) Magic Mountain, the ascenders are transported from mundane ‘flatlands’ to fantasyland, where – through medical institutionalization – those with ‘a grudge against life’ achieve ‘a higher sanity’. Vienna is described as ‘a sort of mummy, as it were, of the Holy Roman Empire of the German people’; Hans Castor – who may have symbolized both the Weimar Republic and the Revelation of St John of the Cross – is the ‘pure fool’, the Knight in pursuit of the Holy Grail. Two characters compete for Castor’s loyalty: Settembrini, the authorial ‘homo humanus’ voice; and the ‘well dressed’ Jewish ‘homo dei’, Naphta, who compared ‘Manchester liberalism’ with ‘the kingdom of God’. Naphta’s medical problems may be associated with his father’s death, ‘nailed crucifix-like on the door of his burning home’.

14

Robert Leeson

Those on The Magic Mountain are exposed to ‘Mental Gymnastics’ in ‘the charmed circle’ and ‘mystic triangle’, before ‘sudden enlightenment’, which leads to ‘Freedom’, ‘Research’, ‘Changes’, the ‘Fullness of Harmony’ and a ‘contemptuous aristocratic air’ (Mann 1960 [1924], 65, 149, 276, 203, 219, 267, 345, 635, 464). Psychiatry flourished in post-Habsburg Vienna. The Freudian Mises, whose first episode of mental illness may have been triggered by his father’s death in 1903, lived with his devoutly Jewish mother until she died in 1937 (Hülsmann 2007, 75, 726). Cubitt (2006, 168), Hayek’s secretary and appointed biographer, did not specify which school of psychiatry her employer was supervised by; but Hayek (1978) told Earlene Craver: ‘it seems that it was through psychiatry that I somehow got to the problems of political order.’13 Austrians attribute Hayek’s and Mises’ academic market failure status to ideology-driven corruption. However, in Viennese academic circles, Mises was ‘regarded as a monstrosity – a Jew who was neither a capitalist nor a socialist’ (Hayek 1978).14 Mises’ hysteria has explanatory power: The one thing about Lu that was as astonishing as it was frightening was his temper. Occasionally he showed terrible outbursts of tantrums. I do not really know what else to call them. I had experienced them in Vienna on various occasions. Suddenly his temper would flare up, mostly about a small, unimportant happening. He would lose control of himself, start to shout and say things, which coming from him, were so unexpected, so unbelievable, that when it happened the first few times I was frightened to death. Whatever I said would enrage him even more. It was impossible to reason with him. So I kept silent or went out of the room. I gradually realized that these outbursts had nothing to do with me. I was just there, I was the outlet which gave him the opportunity to relieve himself. And I learned to understand that these terrible attacks were really a sign of depression, a hidden dissatisfaction and the sign of a great, great need for love. Sometimes I could not help myself, I cried when I was alone. But it never took long, and he followed me to my room or wherever I was. He could not bear to see me crying. He took me in his arms; he kissed me again and again and started to apologize. I stopped him. I could not be angry with him. I pitied him too much. (Margit Mises 1976, 44) Intervention is required to counterbalance the efforts of those who seek to kick away the ladder of social and economic mobility. Von Mises (2009a [1946]), a paid business sector lobbyist, suspected that Hayek had

Introduction

15

invited some to ascend Pilgrim Mountain who might question, rather than obediently consume, his producer-sovereignty ‘knowledge’: What makes for freedom – political, intellectual and religious as well as economic – is not government interference, but the market economy. No government interference is needed to prevent the emergence of monopoly prices ... Laissez faire does not mean: let the evils last. It means: let the consumers, i.e., the people, decide – by their buying and by their abstention from buying – what should be produced and by whom. The alternative to laissez faire is to entrust these decisions to a paternal government. There is no middle way. Either the consumers are supreme or the government. Mises (2009a [1946]) explained the importance of his a priori scientific method: The weak point in Professor Hayek’s plan is that it relies upon the cooperation of many men who are known for their endorsement of interventionism. It is necessary to clarify this point before the meeting starts. As I understand the plan, it is not the task of this meeting to discuss anew whether or not a government decree or a union dictate has the power to raise the standard of living of the masses. If somebody wants to discuss these problems, there is no need for him to make a pilgrimage to the Mount Pèlerin. He can find in his neighborhood ample opportunity to do so. [Mises’ emphasis] For Friedman (1955), market-based intervention was required to address ‘neighborhood effects’; Mises ‘stomped’ out of one of the inaugural Mont Pelerin sessions because ‘You’re all a bunch of socialists’ (Friedman and Friedman 1998, 161); Lionel Robbins recounted that Mises made a dreadful exhibition of himself – attacking us all calling us Socialists and Interventionists and indulging in a degree of irrelevance quite unbelievable to those who didn’t know his prickly temperament. (cited by Howson 2011, 662–663) The Great War and its aftermath undermined intergenerational entitlements. Arthur Koestler (1950, 19) described some of the affected: Those who refused to admit that they had become déclassé, who clung to the empty shell of gentility, joined the Nazis and found

16

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comfort in blaming their fate on Versailles and the Jews. Many did not even have that consolation; they lived on pointlessly, like a great black swarm of tired winter flies crawling over the dim windows of Europe, members of a class displaced by history. Free Traders like Bright described the aristocracy as a moribund social class; Whigs and Tories saw a noble background and land ownership as ‘essential requirements for political power’. In the public policy domain, experts confronted landowning aristocratic amateurs for influence (Bradley 1980, 52, 66). A century later, von Hayek (1949, 420–421), in reaffirming the predemocratic view, appropriated the label of expertise for the aristocratic amateurs: there was a crucial distinction between ‘the real scholar or expert and the practical man of affairs’ and non-propertied intellectuals, who were ‘a fairly new phenomenon of history’, and whose low ascribed status deprived them of what Hayek regarded as a central qualification, ‘experience of the working of the economic system which the administration of property gives’.15 Capitalism utilized more potent sources of wealth than land; the mid-19th century struggle for influence was, symbolically, between ‘the millowners of Manchester and the landowners’ (Bradley 1980, 58). To maintain their aristocratic lifestyles, von Hayek and von Mises ‘plundered the mill’ through ‘business conservative’ donors. Before Hayek, liberals had an entirely different vision. ‘Trust the People’ was the motto of the Victorian liberals; Gladstone had more faith in Scottish crofters than ‘the upper ten thousand’ (Bradley 1980, chapter 6). Before Mises – The Last Knight of Liberalism – the Manchester Party vision was that ‘the battle plain is the harvest-field of the aristocracy, watered with the blood of the people’; and the foreign policy establishment was ‘a gigantic system of outdoor relief for the aristocracy of Great Britain’ (Bright cited by Bradley 1980, 124). The writing of Mann’s The Magic Mountain (Der Zauberberg) spanned 12 years but two distinct worlds (1912–1924): in 1912, Hayek and Mises were legal aristocrats; by 1924, they were ‘von’ criminals. Mann (1953), whose Berghof sanatorium was located atop a Swiss mountain – both geographically and figuratively – recommended that those seeking to understand this imaginary world should read it at least twice.

3

Hayek, Mises, McCarthy and Nixon

Shortly after Fritz Machlup’s recommendation that Hayek be awarded the Nobel Prize for Economic Science, John Kenneth Galbraith’s (1973,

Introduction

17

1) presidential address to the American Economic Association addressed the ‘insufficiently normative’ content of economics. According to Galbraith, earlier in the century Businessmen and their political and ideological acolytes kept watch on departments of economics and reacted promptly to heresy’ including ‘anything that seemed to threaten the sanctity of property, profits ... or which involved sympathy for unions ... public regulation. This could have been addressed at Hayek, Stigler and the Mont Pelerin Society. In 1936, Charles Walgreen, the founder of the largest drug retailing chain in the United States, withdrew his niece from the University of Chicago because he observed that she was being corrupted by free love and communism. The Chicago Tribune stirred up the case, and the Illinois legislature set up an investigating committee. Walgreen, who was then persuaded that his observation was wrong, donated $500,000: after 1958, Stigler (1988, 157) held the ‘princely salary’ and ‘luxuriously upholstered chair, the Charles R. Walgreen Professorship of American Institutions’. Half a century after the end of the American civil war, Europe confronted its own dysfunctional neo-feudal legacy. Mises (2009b [1978], 62–63) described his role as the preeminent intellectual White Terrorist: My political activity from 1918 to 1934 can be broken down into four stages. The most important task I undertook during the first period, which lasted from the time of the monarchy’s collapse in the fall of 1918 until the fall of 1919, was the forestalling of a Bolshevist takeover. The fact that events did not lead to such a regime in Vienna was my success and mine alone. Mises (1985 [1927], 49, 50) expected to become the intellectual Führer of a Nazi–Classical Liberal Pact. Fascists would have to embrace Mises’ liberalism to achieve their common aims: if Fascism wanted really to combat socialism it would oppose it with ideas ... Fascism will never succeed as completely as Russian Bolshevism from freeing itself from the power of liberal ideas. Mises would provide these ideas: ‘There is however only one idea that can be effectively opposed to socialism, viz, liberalism’.

18 Robert Leeson

Mises (1951 [1922], 87, 104, n1, 105, 89, 88; 2009b [1978], 62–63) instructed his disciples to examine ‘life history through the psychoanalytical method ... The sickness of a man whose sexual life is in the greatest disorder is evident in every line of his writings.’ In his successful post-First War anti-communism: ‘Few supported me in my efforts, and any help was relatively ineffective.’ In the competitive post-Second War anti-communist environment, Mises often had in his hand a list of figures: whenever a discussion or a speech bored him, he took out one of the little scraps of paper he used to carry with him and started to write. People who watched him must have thought he made notes, but he wrote nothing but irregular rows of figures, and once in a while he added them up. They must have been meaningless, and I considered them a sort of doodling, but I never asked him about it. (Margit Mises 1976, 27) Eighty-five years after the end of the American civil war, on Lincoln Day (9 February) 1950, Senator Joe McCarthy began his crusade for a ‘new birth of honesty and decency in government’ by claiming to have in his hand a list of figures: This is a time of ‘the cold war’ ... war between two diametrically opposed ideologies. The great difference between our western Christian world and the atheistic Communist world is not political, gentlemen, it is moral. For instance, the Marxian idea of confiscating the land and factories and running the entire economy as a single enterprise is momentous. Likewise, Lenin’s invention of the one-party police state as a way to make Marx’s idea work is hardly less momentous ... The real, basic difference, however, lies in the religion of immoralism ... invented by Marx, preached feverishly by Lenin, and carried to unimaginable extremes by Stalin. This religion of immoralism, if the Red half of the world triumphs – and well it may, gentlemen – this religion of immoralism will more deeply wound and damage mankind than any conceivable economic or political system. Today we are engaged in a final, all-out battle between communistic atheism and Christianity. The modern champions of communism have selected this as the time, and ladies and gentlemen, the chips are down – they are truly down ... Ladies and gentlemen, can there be anyone tonight who is so blind as to say that the war is not on? Can there by anyone who fails to realize that the Communist world has said the time is now? ... that this is the time for the show-down

Introduction

19

between the democratic Christian world and the communistic atheistic world? Unless we face this fact, we shall pay the price that must be paid by those who wait too long ... The reason why we find ourselves in a position of impotency is not because our only powerful potential enemy has sent men to invade our shores ... but rather because of the traitorous actions of those who have been treated so well by this Nation. It has not been the less fortunate, or members of minority groups who have been traitorous to this Nation, but rather those who have had all the benefits that the wealthiest Nation on earth has had to offer ... the finest homes, the finest college education and the finest jobs in government we can give. This is glaringly true in the State Department. There the bright young men who are born with silver spoons in their mouths are the ones who have been most traitorous ... I have here in my hand a list of 205. McCarthy wrote to President Harry S. Truman: I have in my possession the names of 57 Communists who are in the State Department at present ... While the records are not available to me, I know absolutely of one group of approximately 300 certified to the Secretary for discharge because of communism. He actually only discharged approximately 80 ... Failure on your part will label the Democratic Party of being the bedfellow of international communism. Certainly this label is not deserved by the hundreds of thousands of loyal American Democrats throughout the Nation, and by the sizable number of able loyal Democrats in both the Senate and the House.16 Disraeli (20 February 1846) referred to ‘the disciples of the school of Manchester’ to denigrate the promoters of laissez-faire – especially Cobden and Bright, founders of the Manchester-based Anti-Corn Law League. In a letter to Henry Drummond, Disraeli (19 November 1848) described himself as a ‘wretched correspondent – in the matter of letter writing, being of the Manchester school & caring only for the imports’ (Chaloner 1962, 137; Monypenny 1912, 363; Disraeli and Gunn 2004, 482). For the classical-liberal intellectual wing of the Democratic Party, New York was the ‘Manchester of America’ (Bradley 1980, 36). In April 1945, Hayek (1978), on a Road to Serfdom promotional lecture tour, began with a tone of profound conviction, not knowing how I would end the sentence, and it turned out that the American public is an exceedingly grateful and easy public ... I went through the United

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States for five weeks doing that stunt [laughter] everyday, more or less, and I came back as what I thought was an experienced public lecturer, only to be bitterly disappointed when I went back to England [where his American ‘stunt’ didn’t work]. Well, after all, you see, the New York audience apparently was a largely favorable one, which helped me. I didn’t know in the end what I had said, but evidently it was a very successful lecture ... what I did in America was a very corrupting experience. You become an actor, and I didn’t know I had it in me. But given the opportunity to play with an audience, I began enjoying it. [laughter]17 Eight months later, the American Economic Review published Hayek’s (1945) ‘Use of Knowledge in Society’ – a prelude to his 1974 Nobel lecture on ‘The Pretence of Knowledge’. At the 1949 Mont Pelerin Society meeting in Seelisberg, Popper led a session on the ‘Role of the State in Education and Research’ which addressed ‘Selection of teachers.’18 At the same meeting, Hayek scribbled a note with three sections: first ‘summer reading’ (which contained ‘Mill–Taylor’), second an eight-person list of prospective Mont Pelerin Society members (which included ‘Nymeyer’), plus ten ‘Source[s] of Funds’ (which also included Frederick Nymeyer).19 Shortly after leaving Britain, Hayek (23 December 1950) informed Lawrence A. Kimpton, the University of Chicago Vice-President, that he had just had lunch with a rather exceptionally intelligent and educated businessman who had startled him by seriously asserting that the first two of the sequential Social Science courses were organized by communist sympathisers. This apparently honest and intelligent man, whose son was studying at the University, had undertaken continuous observation before reaching this conclusion.20 The evidence suggests that Hayek was referring to Nymeyer who, through the Libertarian Press, had devoted a large part of his life and presumably his finances to locating and publishing everything he could find on the second-generation Austrian School economist Eugen Böhm-Bawerk – a project that Hayek (4 September 1962) assisted him with. Kimpton rose to the bait. After an arranged lunch with Kimpton, Nymeyer (22 January 1951) informed Hayek that the University authorities now knew that they could not claim the reputation of being an institution of learning; they could, instead, be perceived rather as an institution of propaganda with an anti-capitalist and subversive to freedom and a competitive freedom bias. Nymeyer suggested to Kimpton that someone who holds to Individualism should be designated to audit all courses.21

Introduction

21

Nymeyer’s (2 April 1951) objectivity consisted of as much information on Menger–Böhm Bawerk–Mises–Hayek as on Marx–Veblen–Keynes, with naturally the material heavily weighted for the former. Hayek (30 March 1951) replied that his tactic had worked: Nymeyer’s lunch with Kimpton had evidently made a considerable impact. Somewhat conspiratorially, Hayek (23 December 1950) forwarded to Kimpton a pamphlet – apparently written by Representative William Horsley – which he explained incidentally, he had received in a plain envelope soon after he arrived in Chicago.22 Hayek (7 November 1953) invited Nymeyer to join the Mont Pelerin Society.23 In 1954, the US House of Representatives investigated tax exempt foundations (H. Res 217). Mr Reese of Tennessee investigated ‘Pro-communist and pro-socialist propaganda financed by tax-exempt foundations’. The University of Chicago was targeted: its ‘Roundtable is propaganda not education’. Moreover ‘The U of C under Hutchins has distinguished itself by being the ‘only institution for higher learning in America which has been investigated five times for immoral or subversive activities’. In the fifth hearing, Horsley sought to deny the University of Chicago tax exemption.24 As noted above, William Beveridge, the LSE Director and designer of the British Welfare State, recruited Hayek (1994, 84), who concluded LSE Department of Economics meetings with: ‘Beveridge delendus est’ (‘Beveridge should be destroyed’). Hayek also told Nadim Shehadi: ‘I personally believe that Beveridge was completely incapable of any sexuality’ (cited by Dahrendorf 1995, 156). President Robert Hutchins attempted to persuade the Department of Economics to accept Hayek; when they refused, he appointed him to the Committee on Social Thought as the Professor of Social and Moral Sciences. Hayek (30 March 1951) speculated to Nymeyer that this ‘knowledge’ could prove to be of ‘considerable importance’ for the future. According to the University of Chicago website, in 1949 ‘Hutchins steadfastly refused to capitulate to red-baiters who attacked faculty members’; in 1951 he was replaced by Kimpton.25 When in 1955, the University of Michigan considered promoting the Keynesian econometrician and future recipient of the Nobel Prize for Economic Sciences, Lawrence Klein, from part-time lecturer to full professor, William A. Paton, an accountant and soon-to-be Mont Pelerin Society member, informed Gardner Ackley, the Chair of the Department of Economics, that this was ‘all a plot’ to ‘solidify Jewish control of the department’ (Ackley cited by Hollinger 1998, 152, n76). Paton (11 February 1955) insisted that Hayek be allowed to ‘respond candidly’ to the proposed promotion. Just in case Hayek was unaware of the

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ideological dimension, Paton reminded him that Klein was ‘completely in the wrong camp’. The University of Michigan formally invited Hayek to pass judgement on Klein. Hayek’s written reply (if he made one) is not in the Hayek archives.26 The anti-Semitic Hayek (1978) ‘never sympathized with either macroeconomics or econometrics’: the Klein episode, and Hayek’s role, have not been exhaustively examined (see, for example, Schrecker 1986, 253–255; Brazer 1982, 219–228). In a postscript to Science Jews and Secular Culture Studies in Mid-Twentieth-Century American Intellectual History (1998), David Hollinger (2013) reported that he had been unable to use some evidence because of a restriction that had since expired (Ackley describing Paton’s anti-Semitic statements in a 1979 interview with Marjorie Brazer): Paton’s ‘successful opposition to Klein is central to my discussion of the McCarthy Era at Michigan’. William Haber, a University of Michigan economist who aided Jewish refugees, believed that Paton’s anti-Semitism underpinned his opposition to Klein – a charge contested by Paton’s son, William A. Paton, Jr (Hollinger 1998, 152, n76; Howe Verhovek 1989). The restricted 1979 Ackley interview supports Haber’s judgement.27 According to Klein (1986, 28), the campaign succeeded: A large scale digital computer was installed at Michigan, and we started a project for automatic model solution – simulation, if you like – but it was not quite brought to fruition before I was to leave Ann Arbor. In the McCarthy era I left Michigan for the peace and academic freedom of Oxford ... In 1958 I returned to America and took up a professorship at Pennsylvania, where I admired the position of the president, provost and deans on the serious matter of academic freedom. In the 1946 election, the Republican Party national chairman proclaimed: ‘The choice which confronts Americans is between Communism and republicanism’. Richard Nixon (House of Representatives) and McCarthy were beneficiaries. In 1957, McCarthy died in disgrace; on 9 August 1974, Nixon was forced to resign the presidency after being pursued by The Washington Post and then by the broader press. Alive, Mises (1881–1973) had been a liability: the planning for the June 1974 Austrian revivalist meeting only began when he was unambiguously incapable of attending. On 9 October 1974, the Nobel Foundation issued a press statement: von Hayek’s contributions in the field of economic theory are both profound and original. His scientific books and articles in the twenties

Introduction

23

and thirties aroused widespread and lively debate. Particularly, his theory of business cycles and his conception of the effects of monetary and credit policies attracted attention and evoked animated discussion. He tried to penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.28 After eight decades, evidence in support of this assertion has yet to surface (Klausinger 2012, 172, n10; 2010, 227).

4

Hayek’s triangles: the flow of fashionable opinion

Hayek (1978) believed there is a chance of making the intellectuals proud of seeing through the delusions of the past. That is my present ambition, you know. It’s largely concerned with socialism, but of course socialism and unlimited democracy come very much to the same thing. And I believe – at least I have the illusion – that you can put things in a way in which the intellectuals will be ashamed to believe in what their Fathers believed.29 Chitester asked: How does one translate, then, from the theoretical to the practical and political? Who is the intermediary? Is there a class of individuals, then, that must lie between the intellectual and the politician? How do you bridge the gap? Hayek (1978) replied: Well, I think under normal circumstances it ought not to be too difficult, because what I call the intellectuals, in the sense in which I defined it before – the secondhand dealers in ideas – have to play a very important role and are very effective.30 According to Hayek (1978), fashionable opinions blocked his influence: I never sympathized with either macroeconomics or econometrics. They became the great fashion during the period as a curious

24 Robert Leeson

pattern, thanks to Keynes’s influence. In the case of macroeconomics, it’s clear. But Keynes himself did not think very highly of econometrics, rather to the contrary. Yet somehow his stress on aggregates, on aggregate income, aggregate demand, encouraged work in both macroeconomics and econometrics. So, very much against his own wishes he became the spiritual father of this development towards the mathematical econometric economics. Now, I had always expressed my doubts about this, and that didn’t make me very popular among the reigning generation of economists. I was just thought to be old-fashioned, with no sympathy for modern ideas, that sort of thing.31 Hayek (1978), who was prone to self-pity and was seeking funding for a televised debate (‘The Paris Challenge to Socialists’), explained to Chitester, a television entrepreneur: But, of course, in my particular span of life I had the misfortune that the intellectuals were completely conquered by socialism. So I had no intermediaries, or hardly any, because they were prejudiced against my ideas by a dominating philosophy. That made it increasingly my concern to persuade the intellectuals in the hopes that ultimately they could be converted and transmit my ideas to the public at large. That I cannot reach the public I am fully aware. I need these intermediaries, but their support has been denied to me for the greater part of my life. I did not teach ideas which, like those of Keynes, had an immediate appeal and whose immediate relevance for practical problems could be easily recognized.32 Hayek (1978) added: I don’t think there could ever be any communication between Mr. Galbraith and myself. I don’t know why, but it’s a way of thinking which I think is wholly irresponsible and which he thinks is the supreme height of intellectual effort. I think it’s extremely shallow. I go so far as that when in this recent plan, which had to be postponed, of challenging an opposite group of socialist intellectuals, he was one of three whom I would exclude. I won’t use the exact phrase, which would be libelous and which I don’t want to be recorded, but he and two others I on principle excuse because they think in a way with which I could not communicate ... I don’t want to be offensive, but it’s a certain attribute which is common to journalists of judging opinions by their likely appeal to the public. [Galbraith was] more of a journalistic type.33

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25

At the IEA, Harris (2006, 171) and Selden recruited Harold Wincott (Financial Times), Oscar Hobson (News Chronicle), William Clark (The Times), Richard Fry (Manchester Guardian), Paul Bareau (Statist) and Andrew Alexander (Yorkshire Post and the Daily Mail); the Daily Telegraph appeared to be entirely captured by the IEA. To support merit-based rule by intellectuals and ‘non aristocratic’ professionals, John Stuart Mill (1848, 546) proposed that the government should provide ‘endowments or salaries for the maintenance of what has been called a learned class’. This ‘clerisy’ would educate the people in their political responsibilities and ‘free them from their habitual enslavement to custom and arbitrariness’ (Bradley 1980, 90). In The Constitution of Liberty, von Hayek (2010 [1960], 190–193) provided an ascribed status alternative: However important the independent owner of property may be for the economic order of a free society, his importance is perhaps even greater in the fields of thought and opinion, of tastes and beliefs ... The importance of the private owner of substantial property, however, does not rest simply on the fact that his existence is an essential condition for the preservation of the structure of competitive enterprise. The man of independent means is an even more important figure in a free society when he is not occupied with using his capital in the pursuit of material gain but uses it in the service of aims which bring no material return ... The leadership of individuals or groups who can back their beliefs financially is particularly essential in the field of cultural amenities, in the fine arts, in education and research, in the preservation of natural beauty and historic treasures, and, above all, in the propagation of new ideas in politics, morals, and religion ... It is only natural [emphasis added] that the development of the art of living and of the non-materialistic values should have profited most from the activities of those who had no material worries. Hayek (1978) didn’t ‘believe a word’ of religion So far as I do feel hostile to religion, it’s against monotheistic religions, because they are so frightfully intolerant. All monotheistic religions are intolerant and try to enforce their particular creed ... In spite of these strong views I have, I’ve never publicly argued against religion because I agree that probably most people need it. It’s probably the only way in which certain things, certain traditions, can be maintained which are essential ... It so happens that an Indian girl, who is trying to write a biography of myself, finally and very hesitantly

26 Robert Leeson

came up with the question which was put to Faust: ‘How do you hold it with religion?’ [laughter] But that was rather an exceptional occasion. Generally people do not ask. I suppose you understand I practically never talk about it. I hate offending people on things which are very dear to them and which doesn’t do any harm.34 Hayek (1978), while asserting ‘that there are in the surrounding world a great many orderly phenomena which we cannot understand and which we have to accept’, created his own ‘free’ market religion whilst promoting faith in traditional religions (particularly Catholicism) and the ‘spontaneous’ order as an alternative to Enlightenment endeavours in the social sciences.35 We must, he informed his Mont Pelerin Society ‘intermediaries’, recognize that we owe our civilization to beliefs which he used to call ‘superstitions’ but which for polemical purposes he now called ‘symbolic truths’. Our lives must be co-governed by ‘morals’ and reason, where the ‘truth of morals is simply one moral tradition, that of the Christian West, which has created morals in modern civilization’ [Hayek’s emphasis] (1984; cited by Leeson 2013, 197).36 Hayek (1949) urged that we must make the building of a free society once more an intellectual adventure. ... What we lack is a liberal Utopia, a deed of courage ... the courage to be Utopian. In ‘The Road from Serfdom’, Erik ‘Ritter von’ Kuehnelt-Leddihn (1992) explained: with the exception of Fritz Machlup, the original Austrian School consisted of members of the nobility ... [Hayek] descended from a family ennobled at the end of the eighteenth century by the Holy Roman Emperor. Although Americans are prohibited from using European titles, some attach ‘Jr.’ and ‘III’ to the names of their heirs. According to Llewellyn Rockwell Jr. (2008), the co-founder of the Ludwig von Mises Institute, Erik was a Catholic, an Old Liberal, and a trusted advisor to Otto von Habsburg and Cardinal Ratzinger (now Benedict XVI). He was a hereditary knight of the Holy Roman Empire and an adjunct scholar of the Mises Institute (great combination!). The Holy Roman Emperor (HRE) and the Pope (P) were at the apex of the feudal triangle, with the First (clergy), Second (nobility) and Third (commoners) Estates below them:

Introduction

27

HRE + P I II III

Resources (tithes and taxes) and deference flowed up the triangle. In private, von Mises (2007 [1958], 11) explained that the masses must learn: you are ‘inferior and all the improvements in your conditions which you simply take for granted you owe to the effort of men who are better than you’. In public, Mises (1944, 88, 20), informed them: Profit is the reward for the best fulfillment of some voluntarily assumed duties. It is the instrument that makes the masses supreme. The common man is the customer for whom the captains of industry and all their aides are working ... Free enterprise is the characteristic feature of capitalism. The objective of every enterpriser-whether businessman or farmer-is to make profit. The capitalists, the enterprisers, and the farmers are instrumental in the conduct of economic affairs. They are at the helm and steer the ship. But they are not free to shape its course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain’s orders. The captain is the consumer. Invoking a phrase usually reserved for prostitutes, Mises (1960 [1948], 55) referred to the camp-followers of Lord Keynes [who were] imitating their idol’s own procedures. For what many people have admiringly called Keynes’ ‘brilliance of style’ and ‘mastery of language’ were, in fact, cheap rhetorical tricks. Hayek utilized the fashion industry model – a near-perfect example of producer sovereignty – to explain his plan for revolution: C+P

A

M

The ‘free’ market ‘Captains’ (C) of producer sovereignty, in this instance, Hayek plus the politicians (P), are at the top of the Austrian School

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neo-feudal knowledge triangle; at the bottom are academics (A), or intellectuals, and the ‘masses’ (M). In Hayek’s (1978) fashion-driven CAMP model, the persuasive influence of propertied intellectuals (C) trickles down the triangle to the non-propertied intellectuals, the ‘secondhand dealers in ideas’ (A), who use their producer sovereignty to persuade the masses (M), to whom the politicians, through a trickle-up-the-triangle process, have to respond: Oh, I’m sure you can’t operate any other way. You have to persuade the intellectuals, because they are the makers of public opinion. It’s not the people who really understand things; it’s the people who pick up what is fashionable opinion. You have to make the fashionable opinion among the intellectuals before journalism and the schools and so on will spread it among the people at large.37 According to Hayek (1978), Americans were particularly prone to fashion: Oh, yes, particularly in the sense that the Americans are more liable to this sort of quick change. There is a much more deeply ingrained tradition on the Continent than there is in American urban life. I don’t know American rural life at all, and I may do injustice to the rural America. All I see is the urban America, and urban America certainly [represents] often an instability and changeability which I have not come across anywhere else ... The very balance consists in the fact that they are passing fashions. They have great influence for the moment, but I should not be surprised if – In this case, I might be surprised, but let me just give an example: if I come back again, say, in two years, which is my usual interval, I shall find people are no longer jogging. As a wartime General, Eisenhower deployed the 101st Airborne Division – the ‘Screaming Eagles’ – in Operation Overlord and the liberation of Europe; as President, he deployed them – and invoked ‘human rights’ – to prevent White Terrorists from denying African-American children their constitutional rights (Damms 2002, 129). According to Hayek (1978), Americans were particularly prone to the ‘fashion’ of ‘human rights’: You see, my problem with all this is the whole role of what I commonly call the intellectuals, which I have long ago defined as

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the secondhand dealers in ideas. For some reason or other, they are probably more subject to waves of fashion in ideas and more influential in the American sense than they are elsewhere. Certain main concerns can spread here with an incredible speed. Take the conception of human rights. I’m not sure whether it’s an invention of the present administration or whether it’s of an older date, but I suppose if you told an eighteen year old that human rights is a new discovery he wouldn’t believe it. He would have thought the United States for 200 years has been committed to human rights, which of course would be absurd. The United States discovered human rights two years ago or five years ago. Suddenly it’s the main object and leads to a degree of interference with the policy of other countries which, even if I sympathized with the general aim, I don’t think it’s in the least justified. People in South Africa have to deal with their own problems, and the idea that you can use external pressure to change people, who after all have built up a civilization of a kind, seems to me morally a very doubtful belief. But it’s a dominating belief in the United States now.38 According to Hayek (1978), fashion is a very serious problem so far as moral change is concerned. While, on the one hand, I believe that morals necessarily evolve and should change very gradually, perhaps the most spectacular and almost unique occurrence in our lifetime was a fashion which refused to recognize traditional morals at all. What was the final outbreak of the counterculture was the people who believed that what had been taught by traditional morals was automatically wrong, and that they could build up a completely new view of the world. I don’t know whether that had ever occurred before. Perhaps it came in the form of religious revolutions, which in a sense are similar; but this sense of superiority of the deliberately adopted rules of conduct as against all the cultural and traditional rules is perhaps, in the moral field, the most spectacular thing I’ve seen happening in my lifetime. It certainly began in – Well, I have to correct myself at once. It did happen in Russia in the last century. But in my lifetime, it happened the first time in the forties and fifties and started from the Englishspeaking world – I’m not quite sure whether it began in England or the United States – and that created in some respects a social atmosphere unlike anything I can remember or has happened in Western European history.39

30 Robert Leeson

Hayek (1978) berated American fashion for ending European empires: It’s so clear that in some respects America is bringing pressure on the other countries in respects that are by no means obvious that they are morally right ... An early instance was the extreme American anticolonialism: the way in which the Dutch, for instance, were forced overnight to abandon Indonesia, which certainly hasn’t done good to anybody in that form. This, I gather, was entirely due to American pressure, with America being completely unaware that the opposition to colonialism by Americans is rather a peculiar phenomenon.40

5

Dynasties or democracies: ‘my system of democracy’

In either the public or the private sector, concentrated power can be socially weakening. America could have been ‘discovered’ by the first Tudor king, Henry VII, had Christopher Columbus’ brother, Bartholomew, been more rhetorically persuasive; the second Tudor king, Henry VIII, later promoted the 12th-century Welsh Prince Madoc as the true ‘discoverer’ so as to legitimize himself as an emperor rather than a mere king and thus escape the papal prohibition on divorce (Kimberley 2014). The de-concentrated power of early modern Europe allowed Columbus to request expeditionary funding from John II of Portugal plus two republics (Genoa and Venice), before succeeding with Ferdinand II of Aragon and Isabella I of Castile. In 1474, Columbus was in awe of the Chinese: ‘this country is as rich as any that has ever been found’ (cited by Wiesner, Ruff and Wheeler 2008, 296). The Chinese could have established a world hegemony, temporarily at least, as a result of Admiral Zheng He’s expeditionary voyages (1405– 1433); but a subsequent Ming emperor decreed that such entrepreneurial activities violated some dynastic foundational documents: concentrated political and patronage power prevented further explorations. The Chinese relative decline was only sustainably reversed after 1978. Victorian classical liberals sought to construct the world to reward merit, rather than patronage. Through monarchical-imperial patronage, wealthy families like the Hayeks and the Mises became aristocrats. Four years after the fall of the Habsburg Empire, Mises (1951 [1922], 234–235) found a replacement: The wars waged by England during the era of Liberalism to extend her colonial empire and to open up territories which refused to admit foreign trade, laid the foundations of the modern economy ... England, which had become the greatest colonial power, proceeded to manage

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31

her possessions according to the principles of free trade theory ... It was not cant for English free traders to speak of England’s vocation to elevate backward people to a state of civilization. England has shown by acts that she has regarded her possessions in India, in the Crown colonies, and in the Protectorates as a general mandatory of European civilization. ... In judging the English policy for opening up China, people constantly put in the foreground the fact that it was the opium trade which gave the direct, immediate occasion for the outbreak of war complications. But in the wars which the English and French waged against China between 1839 and 1860 the stake was the general freedom of trade and not only the freedom of the opium trade. Victorian liberals, such as Bright, promoted Indian independence; Cobden sought to construct an international order ‘based on free trade rather than military power’ (Bradley 1980, 126, 131). At the beginning of the long post-World War II boom, and four years after Indian independence, Mises (1951 [1922], 234–235) asserted: Were England to lose India today, and were that great land, so richly endowed by nature, to sink into anarchy, so that it no longer offered a market for international trade – or no longer offered so large a market – it would be an economic catastrophy of the first order. Mises explained that opium addicts were displaying consumer sovereignty; Hayek explained to Cubitt (2006, 15) that of the two empires he had watched decline, ‘England’s downfall had been the more painful to him’. The Chinese Qing dynasty (1644–1912), like the Habsburgs and Hohenzollerns, left a legacy of only partly legitimized governments – although the Republic of China (1912–1949) survived longer than either the First Austrian Republic (1919–1934) or the Weimar Republic (1919– 1933). The national humiliation caused by the Opium Wars, combined with aggression from the Empire of Japan (1937–1945), facilitated the Maoist seizure of power (1949). Between the Great Chinese famine (caused by the Great Leap Forward, 1958–1961) and the revival of Mao’s power (the Cultural Revolution, 1966–1976), market forces were used more productively. After 1978, China resumed Admiral Zheng He’s legacy through export-led industrialization. For reasons that are inexplicable from a Machiavellian geopolitical perspective, American ‘tear down this wall’ foreign policy facilitated the economic and military catch-up of two (at the time of writing) cooperating super-powers: communist China and the Russia of the Oligarchs. Having provided the intellectual

32 Robert Leeson

justification of the Opium Wars, Mises (and Hayek) promoted the relative weakening of the West through international anti-communism. The modern state emerged through the decline of the Habsburg quasi-monopoly-power – exercised through the Holy Roman Empire. Henry VII humbled his ‘overmighty subjects’, the English nobility – an unintentional marker on the road to civil society. In pursuit of his first divorce, Henry VIII humbled the other pillar of the feudal edifice: the Roman Catholic Church. Cost–benefit analyses of modern concentrated power must focus on the State and one of its enemies, tax havens, the Third Estate (labour and employer trade unions) and the Fourth (the media). Tax strikers can have their power degraded through international cooperation (the ‘International Gottfried von Haberler Conferences’ have been organized by the Austrian Schooler, Kurt Leube, in the Liechtenstein tax haven);41 capital strikes (credit squeezes) cause recessions; labour strikes disrupt production and deter investment (symbolized by the corrupt ‘Spanish Practices’ of the British print unions). Rupert Murdoch’s 1984–1985 victory over the unions – and his overbearing influence on election outcomes – symbolizes another aspect of this power-concentration dysfunction. Murdoch’s Fox News and The Times relentlessly promote the aristocratic von Hayek. In a Manhattan Institute third annual Walter B. Wriston Lecture in Public Policy, Murdoch (1990) described ‘The War on Technology’ in Hayekian terms: we were encouraged by Mrs. Thatcher’s victory in the miners’ strike and by signs that authorities were prepared to protect private property from the actions of massed pickets ... The war between new technology and outmoded social institutions continues. At stake is the very idea of human progress ... The great truth, which being an immigrant perhaps I can see more clearly than the average citizen, is this: Modernization is Americanization. It is the American way of organizing society that is prevailing in the world ... The decision to rely on market forces is the essence of modernization. Yet technological change often provokes atavistic, authoritarian responses. The real danger of the present technological revolution is that we may be panicked by future shock into regressive schemes of regulation ... The immediate result of our victory was greater freedom and flexibility, and higher profits, for News Corp. But the Battle of Wapping also ushered in a silver age of British newspaper journalism.42 Twentieth-century human capital analyses, which can dissipate tensions about competing factor shares, provided a formalized version of Victorian

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33

liberalism: societal conflict could be mitigated through widespread capital ownership and co-ownership. From this perspective, there are two class-promoting parasites: communists, on the mythical working class, and aristocratic Austrians on business-owning donors. Classical economics was alchemy-based: through public policy intervention, markets could turn the base metal of primitive self-interest into the gold of the socially optimal result. Before Stigler’s (1966) Coase theorem, non-Austrian neoclassical economics was externality-based: public policy should aim for full-cost pricing through the price-induced elimination of ‘spontaneous’ subsidies; shortly after Stigler’s (1971) insightful ‘regulatory capture’ application of Pigouvian negative externalities to public/private sector interaction, deregulation produced both benefits and costs (deregulatory capture). Externalities apply not only to third-party costs and benefits but also to an individual’s second party. When asked, many report that they want to save for retirement; most tobacco consumers report that they want to – and will, some day – quit. But short-run (impulsive) neurons frequently override long-run utility maximization. Full-cost pricing and public health information can counterbalance subtle advertising, and nudge individuals towards their reported outcomes; likewise, incentives can increase the number of self-funded retirees and thus reduce the burden on future taxpayers. Austrian School economists acquired ruling class status through dynastic patronage. The ‘Liberal Awakening’ in Britain was based on the faith that the extended franchise would be used to ‘promote high ideals’ rather than self-interest. Self-interest combined with idealism: many were excluded from office by the aristocratic establishment (Bradley 1980, 15, 49). Some societal change requires intervention – through, in this instance, revolution, or ruling class retreat, driven in part by fear of revolution: an externality-internalization modification of the entry-restricting incentives of incumbents. Austrians fear the taxation powers of the propertyless; the Marshallian tradition sought to expand the property-owning democracy through human capital formation. Four years after the collapse of the Habsburg Empire, Mises (1922, 435; 1951, 443–434) declared that ‘the Lord of Production is the Consumer’ (‘Der Herr der Produktion ist der Konsument’). According to Mises, From this point of view the capitalist society is a democracy in which every penny represents a ballot paper. It is a democracy with an imperative and immediately revocable mandate to its deputies ... Special means of controlling [the entrepreneur’s] behaviour are unnecessary. The market controls him more strictly and exactingly than could any government or other organ of society.

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Hayek (1978) told Buchanan: in general the question of the franchise is what powers they can confer to the people they elect. As long as you elect a single, omnipotent legislature, of course there is no way of preventing the people from abusing that power without the legislature’s being forced to make so many concessions to particular groups. I see no other solution than my scheme of dividing proper legislation from a governmental assembly, which is under the laws laid down by the first. After all, such a newfangled conception gradually spreads and begins to be understood. And, after all, in a sense, the conception of democracy was an artifact which captured public opinion after it had been a speculation of the philosophers. Why shouldn’t – as a proper heading – the need for restoring the rule of law become an equally effective catchword, once people become aware of the essential arbitrariness of the present government.43 According to Hayek (1978), democracy led to other types of ‘social justice’ interventions: But with our present method of democracy, you don’t have to agree, but you have to – You are pressed, on the pretext of social justice, to hand out privileges right and left;44 with the usual rules of the parliamentary system in which they function, they [the masses] realize that with the present type of democracy, government is inevitably driven into intervention, even against its professed principles. It’s always the sort of cynicism of people who still believe it would be nice if we could stick to our liberal principles, but it proves in practice to be impossible. So they resign themselves reluctantly, and perhaps some more cynically. They believe other people are getting out things from the process of corruption; so they decide to participate in it. It’s quite cynical.45 In England, the Republican Interregnum (1649–1660) resurrected fears of the ‘many-headed monster’: ‘no King, no nobles’. Four years after the collapse of the Habsburg edifice, von Mises (1951 [1922], 76) expressed the same fear: Grave injury has been done to the concept of democracy by those who, exaggerating the natural law notions of sovereignty conceived it as limitless rule of the volonté générale [general will]. There is really no essential difference between the unlimited power of the democratic state and the unlimited power of the autocrat. The idea that carries

Introduction

35

away our demagogues and their supporters, the idea that the state can do whatever it wishes, and that nothing resists the will of the sovereign people has done more evil perhaps than the Caesar-mania of degenerate princelings. Both have the same origins in the notion of a state based purely on political might. The legislator feels free of all limitations because he understands from the theory of law that all law depends on his will. It is a small confusion of ideas, but a confusion with profound consequences, when he takes his formal freedom to be a material one and believes himself to be above the natural conditions of social life. The conflict which arises out of this misconception shows that only within the framework of Liberalism does democracy fulfil a social function. Democracy without Liberalism is a hollow form. Hayek (1978) explained: Sometimes in private I say I have made one discovery and two inventions in the social sciences: the discovery is the approach of the utilization of dispersed knowledge, which is the short formula which I use for it; and the two inventions I have made are denationalization of money and my system of democracy.46 Hayek (1978) told Robert Bork that he wished to resurrect the ‘old tradition’: I’m frankly trying to destroy the superstitious belief in our particular conception of democracy which we have now, which is certainly ultimately ideologically determined, but which has created without our knowing it an omnipotent government with really completely unlimited powers, and to recover the old tradition, which was only defeated by the modern superstitious democracy, that government needs limitations. For 200 years the building of constitutions aimed at limiting government. Now suddenly we have arrived at the idea where government, because it is supposedly democratic, needs no other limitations. What I want to make clear is that we must reimpose limitations on governmental power.47 Capitalism was the problem: Well, capitalism has, of course, raised expectations which it cannot fulfill. Unless we take from government the powers to meet the demand of particular groups, which are raised by their success, I think it will destroy itself. This applies to both capitalism and democracy.48

36 Robert Leeson

Hayek (1978) explained: You know, it was The Road to Serfdom [1944] which led me to The Constitution of Liberty [1960]. Having done The Constitution of Liberty, I found that I had only restated in modern language what had been the classical-liberal view; but I discovered there were at least three issues which I had not answered systematically ... So I felt I had to fill the gaps;49 in The Constitution of Liberty I was still mainly attempting to restate, for our time, what I regarded as traditional principles. I wanted to explain what nineteenth-century liberals had really intended to do. It was only at the time when I had practically finished the book that I discovered that nineteenth-century liberals had no answers to certain questions. So I started writing the second book on the grounds that I was now tackling problems which had not been tackled before. I was not merely restating, as I thought, in an improved form what was traditional doctrine; I was tackling new problems, including the problem of democracy.50 With understatement, Stephen Kresge (1994, 29) noted that Hayek ‘never felt entirely at home in Chicago’. In 1962, Hayek (1978) retired from the University of Chicago and returned to Europe: I believe that in a way the thing on which I have now been working for seventeen years, which I have now at last finished – Law, Legislation and Liberty [1973–1979] – is probably a much more original contribution to the thing. It’s not merely a restatement, but I have developed my own views on several issues – on the whole relation between rule and order, on democracy, and the critique of the social justice concept, which were absolutely essential as complements to the original ideas, answering questions which traditional liberalism had not answered.51 Hayek (1978) reflected: And anything or anybody which will help the politician be elected is by definition a good purpose. I think people can be made to recognize this and to restore general limitations on the governmental powers; but that will be a very slow process, and I rather fear that before we can achieve something like this, we will get something like what [J. L.] Talmon [1960] has called ‘totalitarian democracy’ – an elective

Introduction

37

dictatorship with practically unlimited powers. Then it will depend, from country to country, whether they are lucky or unlucky in the kind of person who gets in power. Possibly referring to Austro-Fascism, Hayek added: After all, there have been good dictators in the past; it’s very unlikely that it will ever arise. But there may be one or two experiments where a dictator restores freedom, individual freedom.52 Americans embrace Benjamin Franklin in this context: ‘those who give up essential liberty to gain a little temporary safety, deserve neither liberty nor safety’ (cited by Napolitano 2010, 232). Rosten exclaimed to Hayek: I can hardly think of a program that will be harder to sell to the American people. I’m using ‘sell’ in the sense of persuade. How can a dictatorship be good? To which Hayek (1978) replied: ‘Oh, it will never be called a dictatorship; it may be a one-party system.’53

6 Caldwell’s Challenge: ‘democracy is dangerous and ought to be limited’ In The Road to Serfdom: The Definitive Edition, the third general editor of The Collected Works of F. A. Hayek described Hayek’s martyrdom: The worst of the lot, Herman Finer’s scabrous Road to Reaction, was also picked out for mentioning by Hayek in the 1956 foreword. The overarching message of the book was evident in its very first sentence: ‘Friedrich A. Hayek’s The Road to Serfdom constitutes the most sinister offensive against democracy to emerge from a democratic country for many decades.’ According to Finer, Hayek’s call for constitutionalism and advocacy of the rule of law was indicative of his antidemocratic biases, the ‘very essence’ of Hayek’s argument being ‘the idea that democracy is dangerous and ought to be limited.’ Toward the end of the book (published, we remember, in 1945) we find Finer remarking on ‘the thoroughly Hitlerian contempt for the democratic man so perfectly expressed by Hayek [unattributed emphasis]. (Caldwell 2007, 21)

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In public interviews, Hayek repeatedly explained that democracy is dangerous and ought to be limited. Rosten asked: You created a furore in the United States, England, and I imagine around the world, with The Road to Serfdom, because it came out at a time when you were a lone voice speaking in the wilderness about the terrible dangers which were inherent in turning over to government – even good government by a good and well-intentioned people – powers which were both dangerous and inexorable ... Has it occurred to you since then that this was one reason there was so much vicious response, because the English and the Americans could not believe that they were in danger of becoming serfs. It seemed unthinkable ... If you were to write that book over again, first. Would you make any changes? and secondly, what would you call it? Hayek (1978) replied: Well, I suppose I would still call it the same, although I was never quite happy with the title, which I really adopted for sound. The idea came from [Alexis de] Tocqueville, who speaks about the road to servitude; I would like to have chosen that title, but it doesn’t sound good. So I changed ‘servitude’ into ‘serfdom,’ for merely phonetic reasons.54 ... You can tell the people that our present constitutional order forces politicians to do things which are very stupid and which they know are very stupid. I am not personally trying to blame the politicians; I rather blame the institutions which we have created and which force the politicians to behave not only irrationally but I would say almost dishonestly. But they have no choice. So long as they have to buy support from any number of small groups by giving them special privileges, nothing but the present system can emerge. My present aim is really to prevent the recognition of this turning into a complete disgust with democracy in any form, which is a great danger, in my opinion. 55 In consequence, Hayek promoted ‘a system of really limited democracy’.56 Hayek (1978) warned Thomas Hazlett that democracy is dangerous and ought to be limited: It’s not the ultimate solution, but it may not only delay or slow down the process; it may do even more. It may affect opinions in the right direction. People may come to understand what the trouble is. So I’m all in favor of it, particularly since I have been watching the thing

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operating in Switzerland, where again and again referendums stopped action which the politicians believed they had to take in order to satisfy the majority. Then it turned out when they asked the majority that the majority turned them down. It happened so frequently in Switzerland that I became convinced that this is a very useful brake on the bad features of our present-time democracy. I don’t think it’s a longtime solution, but it might give a sufficiently long pause for the public to appreciate what the dangers are.57 Hayek (1978) told Armen Alchian that democracy is dangerous and ought to be limited: The general phrase which I am using so often that you probably have heard of it is that I am pessimistic in the short run, optimistic in the long run. If the politicians don’t destroy the world in the next thirty years, I think there’s good hope for it. But the chances are not very good. [laughter]. I think the great danger is that the so-called fight against inflation will lead to more and more controls and ultimately the complete destruction of the market. I hope that on Monday there will be a letter from me in the Wall Street Journal, which just suggests that I hope they would put in every issue in headline letters the simple truth: ‘Inflation is made by government and its agents. Nobody else can do anything about it.’58 Bork asked: in your latest book. Law, Legislation and Liberty, you’re starting from a premise, I take it, that liberty is really declining throughout Western democracies, and in fact is in considerable danger of extinction within the foreseeable future. I wonder if you’d care to talk a little bit about the evidence you see for the proposition that liberty is, in fact, declining and is in danger. In reply, Hayek (1978) explained that democracy is dangerous and ought to be limited: Well, of course, the original occasion was my analysis of the causes of the intellectual appeal of the Nazi theories, which were very clearly – I mean, take a man like Carl Schmitt, one of the most intelligent of the German lawyers, who saw all the problems, then always came down on what to me was intellectually and morally the wrong side. But

40 Robert Leeson

he did really see these problems almost more clearly than anybody else at the time – that an omnipotent democracy, just because it is omnipotent, must buy its support by granting privileges to a number of different groups. Even, in a sense, the rise of Hitler was due to an appeal to the great numbers. You can have a situation where the support, the searching for support, from a majority may lead to the ultimate destruction of a democracy.59 With respect to ‘Hitlerian contempt for the democratic man’: Victorian liberalism was based on faith in ‘the people’ as opposed to the ‘effete values of the aristocrat’. Mill’s promotion of representative government was based on ‘the moral and educative value of the vote’. As Bright put it: ‘if class has failed, it was time to try the nation’ (Bradley 1980, 150, 159, 167). Trade unions were the ‘spontaneous expression of working class self-help and political maturity’ (Bradley 1980, 176; Jackson 2014); for Hayek, they posed the greatest ‘danger’ to his ‘personal liberty’. Hayek (1978) explained to Buchanan: with our present method of democracy, you don’t have to agree, but you have to – You are pressed, on the pretext of social justice, to hand out privileges right and left ... I am most concerned, because it’s the most dangerous thing at the moment, with the power of the trade unions in Great Britain. While people are very much aware that things can’t go on as they are, nobody is still convinced that this power of the trade unions to enforce wages which they regard as just is not a justified thing. I believe it’s a great conflict within the Conservative party at the moment that one-half of the Conservative party still believes you can operate with the present law and come to an understanding with the trade union leaders, while the others do see that unless these privileges of the trade unions to use coercion and force for the achievement of their ends is in some form revoked or eliminated, there’s no hope of curing the system. The British have created an automatic mechanism which drives them into more and more use of power for directing the economy. Unless you eliminate the source of that power, which is the monopoly power of the trade unions, you can’t [correct this] ... Fifteen years ago, when I knew more about it, it seemed to me that the American trade unions were a capitalist racket rather than, in principle, opposed to the market as such. There seem to be tendencies in public opinion and in American legislation to go the British way, but how far it has gone I don’t know. The reason why I was so very much acutely aware of the British significance

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is because I happened to see the same thing in my native country, Austria, which is also a country governed by the trade unions. At the present moment, nobody doubts that the president of the trade union association is the most powerful man in the country. I think it works because he happens to be personally an extremely reasonable man. But what will happen if they get a radical in that position I shudder to think. In that sense, the position in Austria is very similar to that in Britain.60 Hayek (1978) informed Rosten that there was ‘a comic part’ about two dead Jewish-born colleagues: ‘I think I can now tell you the story behind it.’ Herman Finer’s parents were killed by Hitler; Finer’s 1945 Road to Reaction provided an interpretation of Hayek’s intentions which are quite similar to that which Hayek – in public, and for private-until-posthumous consumption – provided himself (Leeson 2014a, chapter 3). According to Hayek, Finer [1898–1969] had come to hate the London School of Economics, and particularly Harold Laski [1893–1950], because when he had come to the United States and war broke out, he had asked for a leave, an extension of leave, and it was denied him because he was needed for teaching. He was so upset about this that he turned against the London School of Economics, and particularly Laski. Then it happened that I was the first member of the London School of Economics on which he could release all his hatred of the place. So I had to suffer for Harold Laski. [laughter] Rosten replied: ‘I am horrified to hear you adopt so simple a psychological point of view’[laughter]. When Laski died, it was thought that the 1920–1950 era might become known as ‘The Age of Laski’ (Ebenstein 2003, 56).61 According to Hayek (1978), Laski, of course, at that time had become a propagandist, very unstable in his opinions ... he was frightfully offended by my The Road to Serfdom. He was very egocentric and believed it was a book written especially against him ... He still had the capacity of getting students excited at first, but even they noticed after two or three months he was constantly repeating himself. And he was extraordinarily inconsistent ... he was wholly unreliable, both his stories and his theoretical views. I was present one evening in August 1939, when he held forth for half an hour on the marvels of Communist achievement.

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Then we listened to the news, and the story of the Hitler-Stalin Pact came through. And when we finished the news, he turned against Communism and denounced them as though he had never said a word in their favor before.62

7 Hayek’s trickle-down-the-triangle: Orwell and General Motors Hayek’s (1949, 418) ‘intellectuals’ consisted of journalists, teachers, ministers, lecturers, publicists, radio commentators, writers and artists: all of whom may be masters of the technique of conveying ideas but are usually amateurs so far as the substance of what they convey is concerned. The General Motors cartoon promotion of The Road to Serfdom explained why government interference with the market is poison and why we must choose between firing squads and the power to fire employees.63 For Hayek’s ‘masses’, Orwell’s message is synonymous with The Road to Serfdom (Lane 2013). In his review of The Road to Serfdom, Orwell (1944) largely agreed with Hayek’s two ‘negative’ suggestions. First, Hayek’s thesis is that Socialism inevitably leads to despotism, and that in Germany the Nazis were able to succeed because the Socialists had already done most of their work for them, especially the intellectual work of weakening the desire for liberty. By bringing the whole of life under the control of the State, Socialism necessarily gives power to an inner ring of bureaucrats, who in almost every case will be men who want power for its own sake and will stick at nothing in order to retain it. [And second, Britain] is now going the same road as Germany, with the left-wing intelligentsia in the van and the Tory Party a good second ... In the negative part of Professor Hayek’s thesis there is a great deal of truth. It cannot be said too often – at any rate, it is not being said nearly often enough – that collectivism is not inherently democratic, but, on the contrary, gives to a tyrannical minority such powers as the Spanish Inquisitors never dreamed of. But Orwell (1944) objected to Hayek’s notion that The only salvation lies in returning to an unplanned economy, free competition, and emphasis on liberty rather than on security ... Professor Hayek is also probably right in saying that in this

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country the intellectuals are more totalitarian-minded than the common people. But he does not see, or will not admit, that a return to ‘free’ competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State. The trouble with competitions is that somebody wins them. Professor Hayek denies that free capitalism necessarily leads to monopoly, but in practice that is where it has led, and since the vast majority of people would far rather have State regimentation than slumps and unemployment, the drift towards collectivism is bound to continue if popular opinion has any say in the matter. The former Nazi, Reinhard Kamitz, was a Mont Pelerin Society member. A few weeks before the announcement of his Nobel Prize, Hayek told a secondhand dealer in ideas: It may be said that effective and rational economic policies can be implemented only by a superior leader of the philosopher-statesman type under powerful autocracy. And I do not mean a communistdictatorship but rather a powerful regime following democratic principles. The interviewer, Seigen Tanaka (1974), reported ‘Saying this, Prof. Hayek shifted his eyes to the snow capped mountains at a distance.’64 In 1978, referring to General Augusto Pinochet, Hayek explained in The Times that under certain ‘historical circumstances,’ an authoritarian government may prove especially conducive to the long-run preservation of liberty: there are ‘many instances of authoritarian governments under which personal liberty was safer than under many democracies’ (cited by Farrant, McPhail and Berger 2012).

8 Hayek’s trickle-up-the-triangle and ‘secondhand dealers’ in financial opium In Austrian Economics in America: The Migration of a Tradition, Karen Vaughn (1994, 8) described the 1970s–1990s flowering of a new Austrian literature ... eventually, the small group grew larger (and older) and opened up their conversation to include friendlier voices closer to the mainstream. In 1994, Long-Term Capital Management hedge fund was launched; and collapsed in 1998, after a US$3.6 billion bailout. Two Long Term

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Capital Management directors, Myron Scholes and Robert Merton, were awarded the 1997 Nobel Prize for Economic Sciences. The British Chancellor of the Exchequer, Gordon Brown (2005), referred to the ‘economic stability’ of the ‘post 1997 monetary and fiscal settlement’. In his Mansion House speech to the City of London annual dinner, Brown (2004) stated that ‘in budget after budget I want us to do even more to encourage the risk takers’. Four years before Lehman Brothers disappeared, Brown opened their London headquarters and told their bankers: I would like to pay tribute to the contribution you and your company make to the prosperity of Britain ... During its 150 year history, Lehman Brothers has always been an innovator, financing new ideas and inventions before many others even began to realize their potential.65 Brown (2005) told a CBI audience that I believe 2005 will go down in history as ... an important economic moment ... My vision is of a Britain made for globalisation – the location of choice and the place for business to be ... Britain is well placed to become world leaders in some of the worlds’ fastest growing, most wealth creating sectors ... my first and foremost commitment is to maintain economic stability: stability yesterday, today and tomorrow ... at every point I want to work with you and listen to your concerns so that just as we are meeting the stability challenge, we can meet all long term challenges by making the reforms you need and the modernisation you require and the country requires for economic success. ... We all agree that at the heart of the modern enterprise challenge is minimising regulatory concerns ... Whenever I go to the USA and talk to businessmen and women there, they express exactly the same frustrations about regulation and the same hopes about reducing burdens. And I know that you feel that what we need is real delivery – and I want to underline this by a better understanding of risk and indeed implementing a modern risk based approach to regulation so that the culture change we all agree upon can be advanced ... In the old regulatory model – and for more than one hundred years – the implicit principle from health and safety to the administration of tax and financial services has been, irrespective of known risks or past results, 100 per cent inspection whether it be premises, procedures or practices. So regulation came to mean that government routinely and continuously inspected everyone and everything, demanded information from all of us on a blanket basis, required forms to be filled in for all issues subject to regulation

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and inspection – the only barrier to complete coverage usually being a lack of resources. This approach, followed for more than a century of regulation by governments of all parties is outdated. The better, and in my opinion the correct, modern model of regulation – the risk based approach – is based on trust in the responsible company, the engaged employee and the educated consumer, leading government to focus its attention where it should: no inspection without justification, no form filling without justification, and no information requirements without justification, not just a light touch but a limited touch. The new model of regulation can be applied not just to regulation of environment, health and safety and social standards but is being applied to other areas vital to the success of British business: to the regulation of financial services and indeed to the administration of tax. And more than that, we should not only apply the concept of risk to the enforcement of regulation, but also to the design and indeed to the decision as to whether to regulate at all. Brown (2005) promised new legislation: we will make this risk based approach a statutory duty of the regulators. And driving further the risk based approach in financial services, I will publish at the Pre Budget Report 10 new simplification and deregulatory measures which will cut demands for information, forms and reporting requirements including cutting by 15 per cent disclosures of change of control and up to 20 FSA consultations each year. So we will abolish this requirement and reduce the burdens placed upon you – the first of a series of regulatory requirements which by working together we can abolish in the interests of the British economy. This was Brown’s radical commitment to minimize regulation and to maximize flexibility and to reach out and to take our rightful place in the world. A vision of Britain as the place to be. Let us together make Globalisation work for Britain to the benefit of all – for British companies, the British economy and the British people.66 Two years later, in his Mansion House speech, Brown (2007) congratulated his audience on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London ... I believe it will be said of this age, the first decades of the 21st century, that out of the greatest restructuring of the global economy, perhaps

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even greater than the industrial revolution, a new world order was created.67 Two years after Brown’s Mansion House speech, the Mont Pelerin Society President, Deepak Lall (2009), came close to issuing a Society mea culpa: ‘complacency’ about financial sector deregulation had preceded the Global Financial Crisis. The following year, in a Newsweek Business Elite essay on ‘The Triumphant Return of Hayek’, Ruchir Sharma (2010) declared: Last year the consensus opinion was that we are all Keynesians now. Virtually everyone in the commentariat believed that John Maynard Keynes’s solution for the Great Depression – heavy government spending to resuscitate the economy – was also the answer to today’s global downturn. The first cracks in the consensus appeared with the outbreak of the fiscal crisis in Greece earlier this year. Across the developed world, critics began to argue that government spending had reached the point of diminishing returns, and was producing an anemic recovery that mainly benefited specialinterest groups. And the electorate listened. From Europe to the United States, as voters started to reward candidates focused on fiscal discipline and less government intervention, Keynesianism quickly fell out of favor. Sharma (2010) provided the epistemological foundations: In a sign of the times, some of the most popular videos on YouTube this year are satires on economic policy; the latest lampoons the Fed amid a growing feeling that policymakers are committing what economist Friedrich Hayek called the ‘fatal conceit’ in micromanaging the economic cycle. Hayek hated policy intervention of any kind ... Hayek was associated with the Austrian school, ascendant in the 19th and early 20th centuries, which argued that the private sector should be left free to carry out the task of any readjustment in a downturn. Faith in the market’s purging power served the U.S. well in the 19th century, when the economy emerged stronger after each recession, but was taken too far in the policy mix of tight money and high taxes that led to the Great Depression and the rise of the Keynesians. Austrian School economists promote the deregulated financial sector ‘free’ market liberty that led to the global financial crisis – Sharma

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(2010), the head of Emerging Markets at Morgan Stanley Investment Management, concluded that Keynes’ and Friedman’s fortunes had fallen, ‘leaving Hayek triumphant, once again’.

9

Hayek, power and sovereignty

Hayek (1978) reflected about his intellectual evolution: I think I was just taken in by the theoretical picture of what democracy was – that ultimately we had to put up with many miscarriages, so long as we were governed by the dominant opinion of the majority. It was only when I became clear that there is no predominant opinion of the majority, but that it’s an artifact achieved by paying off the interests of particular groups, and that this was inevitable with an omnipotent legislature, that I dared to turn against the existing conception of democracy. That took me a very long time.68 In the 19th and 20th centuries, labour unions began to rival employer trade unions: von Mises (1909–1973) and von Hayek (1950–1992) were paid aristocratic lobbyists for employer trade unions and their ‘free’ market. Stigler (1988, 148) recalled: ‘There was no Chicago School of Economics when the Mont Pelerin Society first met.’ Before then, most classical liberals – with the notable exception of von Mises – promoted de-concentrating power to increase liberty. Gradually, liberty came to be defined asymmetrically: the state should re-regulate labour unions, whilst providing deregulation for employer unions (especially in the financial sector), leaving the taxpayer to fund inevitable bailout. Hayek created a split within Marshallian Neoclassical School. Rhetorically, Hayek’s (1944) The Road to Serfdom echoed the influences of the ordo-liberal Freiburg School and pre-Hayek Chicago economists: To split or decentralise power is necessary to reduce the absolute amount of power, and the competitive system is the only system designed to minimize by decentralization the power exercised by man over man. Henry Simons’ (1948 [1934], 42, 43, 58) pre-Hayek Chicago manifesto, ‘A Positive Program for Laissez Faire’, proclaimed: It is an obvious responsibility of the state under this policy to maintain the kind of legal and institutional framework within which competition

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can function effectively as an agency of control. ... The great errors of economic policy in the past century may be defined – and many of our present difficulties explained – in terms of excessive political interference with relative prices and in terms of disastrous neglect of the positive responsibilities of government under a free-enterprise system. For Simons: The great enemy of democracy is monopoly, in all its forms ... corporations, trade associations ... trade-unions – or, in general, organization and concentration of power in functional classes. The state had a duty to eliminate monopolies and ‘our gigantic corporations’ needed ‘outright dismantling’. Does tobacco consumption reflect advertising-induced producer sovereignty, or Austrian-promoted consumer sovereignty? As chairman of the smokers’ ‘personal liberty’ group, Forest, Harris insisted that tobacco consumers had the right to impose second-hand costs on others. In 1995, he unsuccessfully led a light-up-in-the-buffet-car civil disobedience campaign against the smoking ban. In Murder a Cigarette, Harris and Judith Hatton (1998) explained that the externalities of secondhand smoke were based on ‘pseudo-science, anecdotal evidence, selective surveys and statistical jiggery-pokery’. Is knowledge-construction and dissemination influenced by the incentives associated with the search for funding? At the IEA, Harris (2006, 169) described ‘[t]he crucial role of intellectuals in opening minds to radical changes in public and business policy’: what – implicitly or explicitly – is being exchanged in this market? Does it matter if the Austrians are funded by the tobacco lobby and tax havens? Harris (2006, 167) explained: ‘The IEA was a charitable trust and therefore forbidden from conducting anything approaching political propaganda.’ At the 1959 Oxford meeting of the Mont Pelerin Society, Harris and Seldon described ‘The Tactics and Strategy of the Advance to a Free Economy’: Before the war and up to about 1950, the warnings of liberal economists went largely unheeded, and only the short-sighted, stop-go ideas of interventionists had the ear of the politicians and the public. But for some years now, it has been possible to preach the free economy with some hope of being understood and without the automatic accusation of acting as the lackeys of capitalists. (Chapter 2)

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The IEA was founded as Galbraith’s (1958) The Affluent Society was published; according to Harris (2006, 167), this enabled ‘critics to link the advertising industry in this high brow campaign against free markets.’ At the IEA, there was ‘spontaneous agreement’ that Galbraith had to be rebutted. The IEA pursued two fascinating aspects of marketing: the first the supply of finance for domestic durables and the second the promotion of consumer demand for the changing goods and services on offer in the marketplace. The neoclassical bathwater – consumption creates goods (utility), while work produces bads (disutility) – is in the process of being thrown out by the insights of behavioural economics and neuroscience. But many neoclassical insights are still serviceable: what does the neoclassical assumption of self-interest reveal about the response of Hayek’s (1949) ‘inferior’ and ‘mediocre’ ‘secondhand dealers in ideas’ to pecuniary incentives? As Adam Smith (1827 [1776], 137) famously noted: People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. The Mont Pelerin Society had to be funded: in his 1952 Mont Pelerin Society President’s circular, Hayek, referring to his European financier, bemoaned that he had yet to find ‘an American Dr. Hunold’ (Chapter 2). Before the Mont Pelerin Society, neoliberals had insisted on an active role for the state to de-monopolize the economy and establish a legal framework to safeguard competition against cartels and concentration tendencies. This was the position of the pre-Hayek Chicago economists and the Freiburg School, which propagated vollständigen Wettbewerb (a kind of perfect competition). Hayek dismissed the concept of ‘perfect competition’ as a fiction: anti-cartel activity would be an intolerable threat to the rule of law (Chapter 2; Vanberg 2013; Goldschmidt and Hesse 2013). The year after Friedman’s Nobel Prize, Hayek (1992a [1977]) declared that after three decades of trickle, the Mont Pelerin Society’s main purpose has been wholly achieved. I became very much aware that each of us was discovering the functioning of real freedom only

50 Robert Leeson

in a very small field and accepting the conventional doctrines almost everywhere else. So I brought people together from different interests. Any time one of us said, ‘Oh yes – but in the field of cartels you need government regulation,’ someone else would say, ‘Oh no! I’ve studied that.’ That was how we developed a consistent doctrine and some international circles of communication. Harris’ (2006) justification for the IEA contribution to the road Towards a Liberal Utopia was that ‘the Keynesian curtain [had] descended on independent scholarship’. In his Memoirs, Dalton (1953, 115) described how Hayek’s ‘consistent doctrine’ was applied at the LSE: Robbins became an ‘addict of the Mises–Hayek anti-Socialist theme’, ‘variety’ tended to disappear, and the LSE began to teach a ‘more uniform brand of right wing economics’. In 1932, Dalton wrote to a friend that the ‘Robbins– Hayek tendency (and they have several echoes on the staff) is very retrograde’ (cited by Pimlott 1985, 215). After a visit to Nazi Germany in spring 1933, Dalton noted that ‘Geistige Gleichschaltung [intellectual coordination] is the Nazi ideal in education. There is something of this too in the economics department of the [London] school of economics’ (cited by Durbin 1985, 103).

10

The Pilgrim Mountain street code

Internet communities reveal what many suspected: individuals are often motivated by curiosity and community as much as by the cash nexus. Organized communism in the Soviet Union collapsed largely because of the technological advances of Silicon Valley ‘garage communists’ (many of whom had little concern for their own property rights), marketed by Schumpeterian entrepreneurs and utilized by the US military. Hayek took the credit: he thoroughly enjoyed watching the television pictures from Berlin, Prague, and Bucharest. ‘He would beam benignly, and the comment was “I told you so”,’ said Hayek’s son. (Cassidy 2000) Mill described Toryism as ‘tout bonnement [simply] a reverence for government in the abstract’;69 Austrians revere markets in the abstract. Post-communist euphoria evaporated as a result of the abstract, institutionless application of Stigler’s (1966) Coase Theorem to the former Soviet Empire. At the first international meeting of ‘neoliberals’ – the 1938 Paris Colloque convened to discuss Walter Lippmann’s (1937) An

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Enquiry into the Principles of the Good Society – the French philosopher, Louis Rougier, stated: To be a liberal does neither mean to let as the ‘Manchester man’ circulate the cars in all directions such as they wish, which results in traffic jams and permanent accidents; nor does it mean to prescribe as the planner every car a precise departure time and route; it means to decide on a street code. Hayek ‘Liberal Utopia’ sought to make ‘possible what only recently seemed utterly remote’ to ‘influence on public opinion, which made possible step by step what only recently seemed impossible’. This could not be achieved through ‘practical’, ‘sensible’ and dull, ‘realistic’ arguments (Chapter 2). By reverentially ignoring non-Utopian reality (drinkor drug-impairment etc.), the Coase theorem denies the need for a street code: drivers could choose their speed and thus their efficiency-maximizing time of arrival if – through telepathy – each could costlessly negotiate with all. In 1991, the Soviet Union collapsed and the anti-Pigouvian Ronald Coase (who had been repeatedly nominated by Hayek) was awarded the Nobel Prize for Economic Sciences. Rothbard (1992), the co-founder of the Ludwig von Mises Institute descended from Pilgrim Mountain with eight Commandments, including the Austrian street code: ‘In a sense the strategy we are now proclaiming is a strategy of Outreach to the Rednecks.’70 Rothbard proposed to establish an Austrian police state with, in effect, only notional controls on coercive power: 4. Take Back the Streets: Crush Criminals. And by this I mean, of course, not ‘white collar criminals’ or ‘inside traders’ but violent street criminals-robbers, muggers, rapists, murderers. Cops must be unleashed, and allowed to administer instant punishment, subject of course to liability when they are in error. 5. Take Back the Streets: Get Rid of the Bums. Again: unleash the cops to clear the streets of bums and vagrants. Where will they go? Who cares? Hopefully, they will disappear, that is, move from the ranks of the petted and cosseted bum class to the ranks of the productive members of society. Rothbard (1992) was describing ‘Right-Wing Populism: A Strategy for the Paleo Movement’; Hitler promoted street-based disorder so as to promote himself as the ‘order’-restoring saviour. According to Rothbard’s hero:

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What distinguished liberal from Fascist tactics is not a difference of opinion regarding the use of armed force to resist armed attackers, but a difference in the fundamental estimation about the role of violence in a struggle for power. Violence was ‘the highest principle’ and must lead to civil war. The ultimate victor to emerge will be the faction strongest in number ... The decisive question, therefore always remains: How does one obtain a majority for one’s own party? This however is purely an intellectual matter. (Mises (1985 [1927], 49, 50) According to Hayek (1978), it’s, of course, no longer the will of the majority, or the opinion of the majority, I prefer to say, which determines what the government does, but the government is forced to satisfy all kinds of special interests in order to build up a majority. It’s as a process. There’s not a majority which agrees, but the problem of building up a majority by satisfying particular groups. So I feel that a modern kind of democracy, which I call unlimited democracy, is probably more subject to the influence of special interests than any former form of government was. Even a dictator can say no, but this kind of government cannot say no to any splinter group which it needs to be a majority.71 You have to build up a majority, which then acts.72

6.

Mea culpa

After the onset of the Great Depression, Hayek and Mises were, in effect, academic cheerleaders for the deflation and labour liquidation that facilitated Hitler’s rise to power (Leeson 2014b). In his Nobel Lecture, John Hicks (1972) emphasized that he had abandoned his attachment to the Austrian business cycle: It is not the case (as used to be supposed) that there is any single physical index by which we can distinguish those techniques which lie ‘further down’ the spectrum from those which lie ‘higher up’. There is no such index which can be employed without exception. I could already show (in 1939) that the ‘Period of Production’ that was used for this purpose by Böhm-Bawerk and Hayek will not in general serve.

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In the second edition of Theory of Wages, Hicks (1963, 307) stated: I can date my own personal ‘revolution’ rather exactly to May or June 1933. It was like this. It began (rather oddly, as it turned out) with Hayek. His Prices and Production is one of the influences that can be detected in The Theory of Wages. Hayek (1933) had professionally discredited himself before he delivered his University of London Tooke Professor of Economic Science and Statistics inaugural lecture (Sraffa 1932a; 1932b). The lecture took place on 1 March 1933, as newspapers reported the Reichstag Fire. Hicks (1972), who taught at the LSE between 1926 and 1935, was ‘deeply ashamed’ of the influence exerted over him in the first edition of Theory of Wages (1932) the tradition in which I was working in [chapters] IX–X – the tradition of Böhm-Bawerk and [Knut] Wicksell – was much less familiar to English readers than that of Pigou, on whom I was drawing in VI ... even before the General Theory appeared in 1936, I had begun to draw some of the consequences ... The first result of the new point of view, when I reached it in 1933–35, was to make me deeply ashamed of what in those chapters I had written. I realised (too late) how inappropriate it was. It had nothing to do with the state of the world at the time when I was writing. I had diagnosed a disease, but it was not the right disease. The unemployment of 1932 was of quite a different character from what I had supposed. Robbins (1971, 154), Hayek’s LSE colleague, also issued a post-Austrian mea culpa: I shall always regard this aspect of my dispute with Keynes as the greatest mistake of my professional career, and the book, The Great Depression, which I subsequently wrote, partly in justification of this attitude, as something which I would willingly see be forgotten ... Now I still think that there is much in this theory as an explanation of a possible generation of boom and crisis. But, as an explanation of what was going on in the early ’30s, I now think it was misleading. Whatever the genetic factors of the pre-1929 boom, their sequelae, in the sense of inappropriate investments fostered by wrong expectations, were completely swamped by vast deflationary forces sweeping away all those elements of constancy in the situation which otherwise might have provided a framework for an explanation in

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my terms. ... The theory was inadequate to the facts. Nor was this approach any more adequate as a guide to policy. Confronted with the freezing deflation of those days, the idea that the prime essential was the writing down of mistaken investments and the easing of capital markets by fostering the disposition to save and reducing the pressure on consumption was completely inappropriate. To treat what developed subsequently in the way which I then thought valid was as unsuitable as denying blankets and stimulants to a drunk who has fallen into an icy pond, on the ground that his original trouble was overheating. Friedman spent autumn 1950 in Europe as Special Representative attached to the Organisation for European Economic Cooperation. PostHitler Germany left its mark: those members of Rose Friedman’s family who had not left their homeland ‘all died in the Holocaust. We have never learned where or how’. As Milton worked, Rose apprehensively guarded their two children: Of course I knew there were no Nazis in the park but somehow there was always in my subconsciousness those terrible stories about what happened to Jewish children during the Nazi era. That trip to Germany haunted me for many years. (Friedman and Friedman 1998, 3, 180) Friedman (6 November 1950) wrote to Don Patinkin about his experiences: on coming into Germany, Rose and I had a tremendous feeling of revulsion, the hatred of years came to the surface + we saw a Nazi in every German face. That softened a bit but did not disappear in a few days ... Industrially, Europe is a mess. By comparison, the U.S. is the purest of pure competitive economies. Everything here is rigid + controlled and competition almost nonexistent. God knows what can be done about it. (cited by Leeson 2003, 239–240) In his Nobel Lecture, Hayek (1974) provided the anti-Pigouvian answer: those remarkable anticipators of modern economics, the Spanish schoolmen of the sixteenth century, who emphasized that what they

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called pretium mathematicum, the mathematical price, depended on so many particular circumstances that it could never be known to man but was known only to God. One of the two Germanic powers has successfully avoided responsibility for Hitler: ‘We have persuaded the world that Hitler was German and Mozart was Austrian.’ Hayek was at pains to point out and was to repeat this many times, that his family could not have Jewish roots ... when I asked him whether he felt uncomfortable about Jewish people he replied that he did not like them very much, any more than he liked black people. When Mrs Thatcher elevated Peter Bauer to the House of Lords, Hayek reminded Cubitt (2006, 51) of his ascribed status: a ‘small ... Jewish boy from Hungary’, and indicated that he was ‘the size of a dwarf’. What did the diminutive Friedman see in Hayek’s face, or faces? Hayek’s childhood friend, J. Herbert Fürth (20 April 1984), informed Gottfried Haberler that Hayek’s family ‘adhered to Nazism long before there was an Adolf Hitler’.73 Fürth (23 March 1992) told Paul Samuelson that Hayek’s father was the president of a ‘highly nationalistic society of “German” physicians’ who competed with the politically neutral general Medical Association. Hayek’s mother was ‘equally nationalistic, and mad at me because I had “seduced” her son from nationalism.’74 Hayek explained to Cubitt (2006, 17, 51) that to ‘his certain knowledge’, in Austria, Nazism ‘had been actively upheld long before it had reached Germany’. Hayek’s (1978) youngest brother, Erich, was part of a völkisch group, whose members, according to Mises (1944, 94–96), became ‘obedient and faithful slaves of Hitler’.75 Hayek’s middle brother, Heinz, joined the German Nazis; but was prematurely released by the Americans from the Würzburg de-Nazification camp after informing his interrogators that he was related to the author of the Reader’s Digest trickle-down version of The Road to Serfdom (Blundell 2007, 146–147). Hayek’s (1992b [1945], 223) other ‘face’ implicitly – and implausibly – insisted on ‘justice’ to members of his own Austrian family: ‘shooting in cold blood’. Friedman (2002) issued a mea culpa: We have learned about the importance of private property and the rule of law as a basis for economic freedom. Just after the Berlin Wall fell and the Soviet Union collapsed, I used to be asked a lot: ‘What

56 Robert Leeson

do these ex-communist states have to do in order to become market economies?’ And I used to say: ‘You can describe that in three words: privatize, privatize, privatize.’ But, I was wrong. That wasn’t enough. The example of Russia shows that. Russia privatized but in a way that created private monopolies-private centralized economic controls that replaced government’s centralized controls. It turns out that the rule of law is probably more basic than privatization. Privatization is meaningless if you don’t have the rule of law. What does it mean to privatize if you do not have security of property, if you can’t use your property as you want to?76 Friedman’s willingness to acknowledge error – here and elsewhere – is evidence that he should be located at the scientific end of the ‘knowledge’-to-faith spectrum.

11

Hayek, ‘the Other’, and ‘financial considerations’

In 1945, Harold Luhnow, President of the Volker Fund, pressed Hayek (1994, 126–7) to write an American version of The Road to Serfdom. Hayek recalled that he estimated that it would cost $30,000 over three years, adding that he would need an American university appointment. Lucknow told Hayek, ‘Money is yours.’ Cubitt (2006, 122, 10) reported that Hayek was caught in the ‘cheating matter’ – stealing, or doubledipping, from ‘educational charities’ – to maintain his aristocratic lifestyle. When Walter Morris complained to Cubitt about being deceived [,] Hayek laughed, and told me that he had wanted to have nothing to do with this but did not mind being told about it as an anecdote. The editor of The Road to Serfdom: The Definitive Edition, explained: I owe a special debt to Mrs. Dorothy Morris of the Morris Foundation, Little Rock, who provided me with the ‘seed money’ for the project ... Walter Morris was instrumental in the creation of the Collected Works [of F. A. Hayek] project, and the Morris Foundation has been constant in its support throughout the years. I first sought financial support for the project at the Mont Pelerin meeting. (Caldwell 2007, x)

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The Old World ‘discovery’ of America was matched by ‘the invention of America’ and the ‘construction of the Other.’ Hayek (1978) had a visceral dislike of ‘the Other’: I don’t have many strong dislikes. I admit that as a teacher – I have no racial prejudices in general – but there were certain types, and conspicuous among them the Near Eastern populations, which I still dislike because they are fundamentally dishonest. And I must say dishonesty is a thing I intensely dislike. It was a type which, in my childhood in Austria, was described as Levantine, typical of the people of the eastern Mediterranean. But I encountered it later, and I have a profound dislike for the typical Indian students at the London School of Economics, which I admit are all one type – Bengali moneylender sons. They are to me a detestable type, I admit, but not with any racial feeling. I have found a little of the same amongst the Egyptians – basically a lack of honesty in them.77 In 1918, 85 per cent of those ruled by the Habsburgs were illiterate (Taylor 1964, 166); Habsburg reconquistadors appear to suffer functional illiteracy and papal-infallibility-blindness. According to one of the editors of The Collected Writings of F. A. Hayek: But I must say, I understand what Hayek is saying. Many years ago I taught for two years in ... I had a much older student originally from Iraq, who had, himself, taught mathematics for awhile in Libya. He happened to live not far from where I was staying outside ... , and he invited me for a drink one evening. We had a couple of pints, and chatted for a few hours (he did have some interesting stories of life in Iraq under Saddam). At the end of the school year, when he discovered that he had earned a passing but relatively low grade, he came to see me in my office, and asked, how I could give him such a grade? After all, hadn’t he bought me a drink? Were we not, now, ‘friends’? I came to notice this attitude frequently among a number of the Middle Eastern students; that establishing ‘friendships’ was supposedly the way to (I don’t want to say, ‘buy’) ‘influence’ their situation in life. Now, of course, we all know the phrase, ‘It’s not what you know, but who you know.’ And, obviously, that is an element of life everywhere. But I discovered that it is far stronger and pervasive in some cultures compared to others. As for cheating. My institution, ... University, has an associative relationship with two Chinese universities, and a sizable

58 Robert Leeson

number of Chinese students come to ... as part of their final year of study. There is ‘statistically significant’ degree of attempted group cheating among many of them. My ... , who earned her ... degree from ... told me she observed the same thing when she studied there. I was doing consulting work on market reform and privatization in the former Soviet Union during the regime’s last years of existence. I found that there was a pervasive attitude among many that personal connections and bribery were the primary means of survival and improvement in life. Now, it is true, the nature of the communist regime created these perverse institutional incentives. But, nonetheless, it did influence the behavioral patterns of many people. Those in the bureaucracy and the Party were especially cynical about all of this, and contemptuous of all verbal and written promises and commitments.78 Certain Americans appear susceptible to Romanov princesses, Bilgewater dukes and Habsburg vons. Hayek (1978) explained: The robber baron was a very honored and honorable person, but he was certainly not an honest person in the ordinary sense. The whole traditional concept of aristocracy, of which I have a certain conception – I have moved, to some extent, in aristocratic circles, and I like their style of life. But I know that in the strict commercial sense, they are not necessarily honest. They, like the officers, will make debts they know they cannot pay. For the last 25 years of his life, Hayek refused to pay his secretary/ soiled-bed nurse, who reported: because of the many gaps between one donor and another, and because cheques were lost, or not sent, or forwarded to the wrong bank, I was almost permanently in debt until about three years before Hayek’s death. I once asked Hayek whether he did not mind having to beg for money so often. He just laughed, and said he did not mind it in the least, that all his professional considerations had been based on financial considerations. (Cubitt 2006, 10) Those who have been summoned by bells to aristocratic service through, for example, hagiographic editing of The Collected Writings of F. A. Hayek, maintain: Those, like Hayek, who had grown up and then still worked in societies in which rule of law, ‘fair play,’ ‘honesty is its own reward,’ a

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sense of individual responsibility, etc., meant something would be shocked and bothered when they came into contact with people from cultures and institutional orders in which the ‘rules of the game’ were viewed as being very different. By the way, any such accusation that Hayek was racist is totally misplaced, just as was the accusation a few years ago that he was antisemitic (in an article in HOPE [Reder 2000] that tried to link Hayek with the presumed antisemitism of [Joseph] Schumpeter and Keynes). Among his closest friends and associates in the old Vienna where Austrian Jews such as Mises, Fritz Machlup, and the sociologist, Alfred Schutz. (Machlup helped to edit Hayek’s The Pure Theory of Capital for readability – alas, without much success!) Karl Popper was saved from ‘oblivion’ in New Zealand, after he had to leave Austria, by Hayek helping to have it [sic] appointed to a position at the LSE.79

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In Chapter 2, Philip Plickert describes the evolution of deregulated liberty – beginning with the ‘existential crisis’ that the philosophy of economic liberalism faced in the first half of the twentieth century. In three post-war decades, Hayek influenced post-1974 deregulation, Chinese communist-capitalism and the collapse of the Soviet Empire. Plickert analyses Hayek’s intellectual strategy, and the neoliberal influence on the intellectual climate and on specific policy outcomes. Orwell’s (1945; 1949) Animal Farm and Nineteen Eighty-Four were as influential as The Road to Serfdom, especially the Reader’s Digest and General Motors cartoon versions. In Chapter 3, Andrew Farrant explores the connections between Hayek, Orwell and The Road to Serfdom in the context of their conflicting attitudes towards the post-war British Labour government. Friedman recalled that Britain was still in a sad way two years after the war [and that he would] never forget [Walter Eucken’s] pleasure at eating the first orange he had seen in seven or eight years ... His courage in resisting the Nazis became legendary. Eucken and Ludwig Erhard ‘laid the foundation’ for the ‘German economic miracle’ and the ‘groundwork’ for their ‘social market economy’ (Friedman and Friedman 1998, 159, 160). Six years after Erhard’s (1897–1977) death, Hayek (1983, 55) dropped a bombshell: at a

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Mont Pelerin Society meeting, Erhard had – allegedly and exclusively – confided in him: I hope you don’t misunderstand me when I talk of social market economy. I mean that the market in itself is social, not that is must be made social. The following year, Hayek dropped another bombshell: Pigouvian externalities were invented not by a Great War ambulance driver and co-recipient of the 1947 Nobel Peace Prize but by one of Stalin’s 1905 gun-runners (Leeson 2014c). In Chapter 4, Rogério Arthmar documents Arthur Cecil Pigou’s life and legacy. Chapters 5–8 examine Hayek’s influence on four contrasting environments: pre-demise communism, Australia, post-communism and the subterranean world of those who are attracted to ‘personal liberty’ and animosity towards ‘the Other’. In Chapter 5, Yuri Maltsev describes the problem of restraining one location of concentrated power: the State. At the Moscow State University, he risked seven years in jail for reading The Road to Serfdom (he didn’t know if the supplier was a ‘charming fish’ KGB informer). He ‘became an ardent anti-socialist armed with Hayekian logic and arguments after I’ve finished it’. In the 1970s, the Institute of Labor Research in Moscow (where Maltsev worked) set 460,000 wage rates and over 90 million work quotas for 110 million government employees; the 400 employees of the State Committee on Prices set and ‘managed’ over 23 million prices. Maltsev highlights a central Hayekian insight: the division of labour is matched by the division of knowledge. The Austrian fourth generation also has a division – between Hayek and Rothbard: Hayek’s argument rests on ignorance; the Mises/Rothbard argument rests on the inability to calculate (because of the absence of a price mechanism). Thus for Miseans, Hayek was a social democrat. Hayek and Mises were both advocates – and while they marketed slightly different products, in their negative rhetoric they jointly succeeded. To those oppressed by communism, they provided a ‘vision’. Prime Minister of Estonia Mart Laar told Maltsev that he studied The Road to Serfdom and other banned ‘pro-capitalist’ literature in secret seminars long before the collapse of the Soviet Empire. As Caldwell (2010) reported in The Washington Post, one of Rupert Murdoch’s Fox News employees, the television entrepreneur and conspiracy theorist, Glenn Beck, created an Austrian bull market for The Road to Serfdom.

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Caldwell also used the analogy of a horse’s orifice when confronted with Hayek’s lies. In 1962, Hayek’s The Road to Serfdom was officially translated into Chinese: bureaucratic ‘capitalist roaders’ wished to get acquainted with Hayek. The Chinese translation was a not-to-be-circulated ‘internal document’. The translator, Weizao Teng, who referred to Hayek as a ‘loyal lackey defending the capitalist system’, claimed that Hayek’s books were ‘full of poison’: the translated book would allow academics to ‘criticize modern bourgeois reactionary economic theories’. In Chapter 6, Rafe Champion provides the first detailed account of Hayek’s five-week 1976 visit to Australia, including a somewhat unprofitable meeting with the Liberal Party Prime Minister, Malcolm Fraser (1975–1983). On Remembrance Day 1975, the Labor Prime Minister, Gough Whitlam (1972–1975), had been dismissed by the GovernorGeneral, Sir John Kerr; yet Australia remained a functioning democracy, and in 1982, Bob Hawke, the former president of the Australian Congress of Trade Unions (1969–1980), became Labor Party Prime Minister (1983–1991). Australia was a quasi-corporate state: government and trade unions (labour and employer) cooperated through high wages, tariff protection, export marketing boards and industrial relations courts. This equilibrium was shattered by the Labor Party through tariff reductions (under Whitlam) and extensive deregulation (under Hawke). It is difficult to assess Hayek’s direct country-specific influence on Australia; the policy directional change was more directly influenced by a remarkable group of public-spirited neoclassical public policy intellectuals, mostly located in Canberra. Indeed, the establishment of the Melbourne-based Institute of Public Affairs (1943–) had preceded the establishment of Hayek’s Mont Pelerin Society. It is easier to assess the influence of both Hayek and the Coase theorem on the countries of the post-Soviet Empire. In Utopia, Thomas More (1997 [1516]) argued that the practice of enclosure – attaching legal property rights to land previously held communally – had produced anti-social results, specifically theft. The Enclosure Acts created England of the Oligarchs: in Chapter 7, Kiryl Haiduk compares the ‘vision’ of ‘liberal Utopia’ to the reality – asymmetric privatization and the rise of Russia of the Oligarchs. The qualifications of one post-communist contributor, Richard Ebeling, appeared to include no more than a California State College undergraduate degree, a Rutgers University MA plus the Hillsdale College Ludwig von Mises Professorship of Economics.

62 Robert Leeson

Two-thirds of a century after Mises (1985 [1927]) embraced Fascism, Rothbard (1994a; 1994b) defended Byron De La Beckwith, Jr. (the Ku Klux Klan assassin of civil rights worker Medgar Evers, who was convicted because he was politically ‘incorrect’), Silvio Berlusconi (newly elected to the Italian Chamber of Deputies, media tycoon, a ‘dedicated free-marketeer’, and later convicted tax-fraudster and Prime Minister), Mussolini (because he had a reluctant ‘anti-Jewish policy’), Islamo-Fascists, and those described as ‘neo-fascists’. Hayek and his disciples believe that Pigou (18 November 1877–7 March 1959) was a communist spy, and ‘Bill Phillips’ (18 November 1914–4 March 1975) was an underground communist who operated transmission stations for the Soviets (Leeson 2014c). On 18 November 1991, Hayek received the Presidential Medal of Freedom from President George W. H. Bush: we honor Professor Friedrich von Hayek for a lifetime of looking beyond the horizon. At a time when many saw socialism as ordained by history, he foresaw freedom’s triumph. Over 40 years ago, Professor von Hayek wrote that The Road to Serfdom was not the road to the future or to the political and economic freedom of man. A Nobel laureate, he is widely credited as one of the most influential economic writers of our century. Professor von Hayek is revered by the free people of Central and Eastern Europe as a true visionary, and recognized worldwide as a revolutionary in intellectual and political thought. How magnificent it must be for him to witness his ideas validated before the eyes of the world. We salute him.80 On 23 March 1992, President Bush issued a press release: Barbara and I are saddened by the death of Friedrich August von Hayek. I presented him the Presidential Medal of Freedom in 1991 because he was one of the great thinkers of our age who explored the promise and contours of liberty. Professor von Hayek revolutionized the world’s intellectual and political life. Future generations will read and benefit from his works.81 The following year (26 February 1993) the World Trade Center was bombed, killing six, and injuring thousands: the ‘Blind Sheik’, Omar Abdel-Rahman, apparently an al-Qaeda affiliate, was sentenced to life

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imprisonment. Six months after the attack, Rothbard (1993) declared: the ‘A-rabs’ under investigation haven’t done anything yet. I mean, all they’ve done so far is not assassinate former President George Bush, and not blow up the UN building or assassinate [United States Senator] Al D’Amato; ... I must admit I kind of like that bit about blowing up the UN building, preferably with [Secretary General] Boutros BoutrosGhali inside. In ‘A New Strategy for Liberty’, Rothbard (1994c) provided the final solution to the ‘coordination problem’ between Austrian economists and ‘Redneck’ militia groups: A second necessary task is informational: we can’t hope to provide any guidance to this marvellous new movement until we, and the various parts of the movement, find out what is going on. To help, we will feature a monthly report on ‘The Masses in Motion.’ After the movement finds itself and discovers its dimensions, there will be other tasks: to help the movement find more coherence, and fulfil its magnificent potential for overthrowing the malignant elites that rule over us. Rothbard (1994d) explained that ‘the least’ Austrians could do ‘is accelerate the Climate of Hate in America, and hope for the best’.82 Do businesses have social responsibilities? Do those in the business of public policy promotion have the responsibility to channel social passion into outcomes that strengthen democracy? Should hate groups be funded by the taxpayer? In Chapter 8, Tad Tietze describes one consequence of the ‘Outreach to the Rednecks’: the influence of Austrian School of Economics visions on the Norwegian mass murderer Anders Breivik.

Notes 1. 2. 3. 4. 5. 6.

UCLA oral history interview with Leo Rosten. UCLA oral history interview with Thomas Hazlett. UCLA oral history interview with Robert Chitester. UCLA oral history interview with Leo Rosten. UCLA oral history interview with Earlene Craver. UCLA oral history interview with Leo Rosten.

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7. Orwell (1968 [1940]) also noted that Hitler was not a Benthamite: ‘After a few years of slaughter and starvation ‘Greatest happiness of the greatest number’ is a good slogan, but at this moment ‘Better an end with horror than a horror without end’ is a winner.’ 8. ‘I think the phrase ought to read, ‘Congress should make no law authorizing government to take any discriminatory measures of coercion.’ I think this would make all the other rights unnecessary and create the sort of conditions which I want to see.’ UCLA oral history interview with James Buchanan. 9. Hamowy (2003) recalled that at Hayek’s Committee on Social Thought tutorials there were ‘three students and only two chairs! Having arrived last, I was compelled to use the table as a seat, which I tried to mount by turning Hayek’s wastepaper basket upside down to use as a step, all this while Hayek continued to complete the point he was making when I entered his office. It probably comes as no surprise that my attempt proved disastrous. The wastepaper basket overturned and rolled away, I fell to the ground, and the table, unable to sustain the pressure I was placing on it as I grabbed for it, tipped over, knocking one of the other student’s chairs into Hayek’s desk. All and all, the effect was that Hayek’s office looked a shambles but to my great surprise and pleasure Hayek was guffawing to the point where his eyes were tearing.’ In Hayekian circles, Hamowy was known as the ‘gay dwarf’ (Cubitt 2006, 265). 10. http://mises.org/rothbard/misesobit.asp 11. UCLA oral history interview with Axel Leijonhufvud. 12. UCLA oral history interview Robert Chitester. 13. UCLA oral history interview with Earlene Craver. 14. UCLA oral history interview with Armen Alchian. 15. ‘Though nobody will regret that education has ceased to be a privilege of the propertied classes, the fact that the propertied classes are no longer the best educated and the fact that the large number of people who owe their position solely to the their general education do not possess that experience of the working of the economic system which the administration of property gives, are important for understanding the role of the intellectual.’ 16. US Senate, State Department Loyalty Investigation Committee on Foreign Relations, 81st Congress; Joseph McCarthy to President Harry Truman February 11, 1950, Congressional Record, 81st Congress 17. UCLA oral history interview Robert Chitester. 18. Hayek Papers Box 81.12. 19. Hayek Papers Box 81.6. 20. Hayek Papers Box 55.1. 21. Hayek Papers Box 40.23. 22. Hayek Papers Box 55.1. 23. Hayek Papers Box 78.22. 24. http://archive.org/stream/TheWorldOrder_329/22-Reece-CommitteeHearings-Tax-Exempt-Foundations-1953_djvu.txt 25. http://president.uchicago.edu/directory/robert-maynard-hutchins. In 1960, Kimpton left the University of Chicago to work for Standard Oil of Indiana. http://president.uchicago.edu/directory/lawrence-kimpton 26. Hayek Papers Box 67.6.

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27. George Katona, in his 1979 interview with Brazer, insisted that the tape recorder be turned off before he would answer questions about Paton and Klein. 28. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1974/ press.html 29. UCLA oral history interview with James Buchanan. 30. UCLA oral history interview with Robert Chitester. 31. UCLA oral history interview with Jack High. 32. UCLA oral history interview with Robert Chitester. 33. Ibid. 34. Ibid. 35. Ibid. 36. Closing Mont Pelerin Society address. Hayek Papers Box 110.38. 37. UCLA oral history interview with Thomas Hazlett. 38. UCLA oral history interview with Robert Chitester. 39. Ibid. 40. In UCLA oral history interview with Axel Leijonhufvud, Armen Alchian, and Earlene Craver, Hayek (1978) also referred to ‘a great general fashion in Vienna due to the influence of Mach on the whole intellectual outlook’; ‘the man who drew my attention to Menger’s book was Othmar Spann. I don’t know if the name means anything to you. He was semicrazy and changed violently from different political persuasions – from socialism to extreme nationalism to Catholicism, always a step ahead of current fashions;’ ‘there was a stage in which I was reading all the Taylor stuff, but that was a little later. I think it was at the beginning of my economics reading, but that was the time of the great fashion of Taylorism.’ 41. http://www.ecaef.li/index.php?catID=518&navID=338&GOTO=1 42. http://www.city-journal.org/article01.php?aid=1631 43. UCLA oral history interview with James Buchanan. 44. Ibid. 45. UCLA oral history interview with Thomas Hazlett. 46. UCLA oral history interview with Armen Alchian. 47. UCLA oral history interview with Robert Bork. 48. UCLA oral history interview with Leo Rosten. 49. UCLA oral history interview with Armen Alchian. 50. UCLA oral history interview with James Buchanan. 51. UCLA oral history interview with Armen Alchian. 52. UCLA oral history interview with Leo Rosten. 53. Ibid. 54. Ibid. 55. Ibid. 56. UCLA oral history interview with Jack High. 57. UCLA oral history interview with Thomas Hazlett. 58. UCLA oral history interview with Armen Alchian. 59. UCLA oral history interview with Robert Bork. 60. UCLA oral history interview with James Buchanan. 61. In Why Orwell Matters, Christopher Hitchens (2002, 81) incorrectly stated that Hayek inherited Laski’s chair at the LSE. 62. UCLA oral history interview with Leo Rosten.

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63. (http://mises.org/books/TRTS/). 64. Hayek Papers Box 52.28. 65. http://www.telegraph.co.uk/news/newstopics/politics/2969215/GordonBrowns-curse-did-the-prime-minister-kill-Lehman-Bros.html 66. http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc 7/ee59d1c32ce4ec12802570c70041152c?OpenDocument 67. http://webarchive.nationalarchives.gov.uk/+/http:/www.hm-treasury.gov. uk/2014.htm 68. UCLA oral history interview with Leo Rosten. 69. http://archive.spectator.co.uk/article/18th-june-1910/20/the-letters-of-johnstuart-mill-john-stuart-mill-h 70. Rothbard (1926–1995) did not attend the inaugural Mont Pelerin Society meeting. 71. UCLA oral history interview with James Buchanan. 72. UCLA oral history interview with Thomas Hazlett. 73. Fürth Papers. Hoover Institution. Box 5. 74. Ibid. Box 6. 75. UCLA oral history interview with Leo Rosten. 76. http://www.cato.org/special/friedman/friedman/friedman4.html 77. UCLA oral history interview with Robert Chitester. 78. Email to Leeson, 30 August 2010. 79. Ibid. 80. http://bushlibrary.tamu.edu/research/public_papers.php?id=3642&year=&month= 81. h t t p : / / b u s h l i b r a r y . t a m u . e d u / r e s e a r c h / p u b l i c _ p a p e r s . php?id=4098&year=1992&month=all 82. http://www.unz.org/Pub/RothbardRockwellReport-1994sep-00001

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Howson, S. 2011. Lionel Robbins. Cambridge: Cambridge University Press. Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism. Auburn, Alabama: Ludwig von Mises Institute. Jackson, B. 2014. In Leeson 2014. Kimberley, H. 2014. ‘Deacon’ McCormick and the Madoc Myth. In Leeson, R. ed Archival Insights into the Evolution of Economics Volume 7: Hayek: a Collaborative Biography Part 3 Fraud, Fascism and Free Market Religion. Basingstoke, England: Palgrave Macmillan Klausinger, H. 2010. Hayek on Practical Business Cycle Research: A Note. In H. Hagemann, T. Nishizawa, Y. Ikeda (eds.), Austrian Economics in Transition: From Carl Menger to Friedrich Hayek. Basingstoke: Palgrave Macmillan. 218–234. Klausinger, H. Ed. 2012. Editorial notes. Business Cycles Volume VII The Collected Works of F. A. Hayek. Chicago: University of Chicago Press. Klausinger, Hayek, F. A. 2012. Business Cycles Volume VII The Collected Works of F. A. Hayek. Chicago: University of Chicago Press. H. Klausinger Ed. Klein, L. 1986. Lawrence R. Klein. In Breit, W. and Spencer, R.W. eds. Lives of the Laureates. Cambridge: MIT Press. Koestler, A. 1950. Arthur Koestler. In Crossman, R. 1950. Ed. The God that Failed. New York: Harper and Row. Kresge, S. 1994. Introduction. In Hayek, F. A. 1994. Hayek on Hayek an Autobiographical Dialogue. Chicago: University of Chicago Press. Supplement to The Collected Works of F. A. Hayek. Stephen Kresge and Leif Wenar Eds. Kuehnelt-Leddihn, E.R. 1992. The Road from Serfdom. National Review 44.8: 32. Kyle, R. 2012. The Buchanans of Tennessee: From Nashborough to the Nobel Prize. Murfreesboro, TN: Twin Oaks Press. Lal, D. 2009. The Mont Pelerin Society: A Mandate Renewed. The Mont Pelerin Society Presidential Address New York 5th March. http://www.econ.ucla.edu/ lal/MPS%20Presidential%20Address%203.5.09.pdf Lane, M. 2013. The Genesis and Reception of The Road to Serfdom. In Leeson, R. ed. Archival Insights into the Evolution of Economics Volume V Hayek: A Collaborative Biography Part 1: Influences, from Mises to Bartley. Basingstoke, England: Palgrave Macmillan. Leeson, R. 2003. ed. Keynes, Chicago and Friedman. London: Chatto and Windus. Leeson, R. 2014a. Archival Insights into the Evolution of Economics Volume VI Hayek: A Collaborative Biography Part III Austria, America and the Rise of Hitler 1899– 1933. Basingstoke, England: Palgrave Macmillan. Leeson, R. 2014b. Archival Insights into the Evolution of Economics Volume XI Hayek: A Collaborative Biography Part VII The 1974 Nobel Prize for Economic Sciences.Basingstoke, England: Palgrave Macmillan. Leeson, R. 2014c. Archival Insights into the Evolution of Economics Volume VIII Hayek: A Collaborative Biography Part IV Fraud, Fascism and Free Market Religion. Basingstoke, England: Palgrave Macmillan. Lippmann, W. 1937. An Enquiry into the Principles of the Good Society. Boston: Little, Brown. Mann, T. 1953. The Making of the Magic Mountain. The Atlantic January: 41–45. Mann, T. 1960 [1924]. The Magic Mountain. London: Penguin. Mill, J. S. 1848. Principles of Political Economy: With Some of Their Applications to Social Philosophy, Volume 2. London: John Parker.

70 Robert Leeson Mises, L. 1922. Die Gemeinwirtschaft: Untersuchungen über den Sozialismus. Germany: Gustav Fischer Verlag. Mises, L. 1944. Bureaucracy. New Haven: Yale University Press. Mises, L. 1951 [1932]. On Socialism. New Haven: Yale University Press. Mises, L.1960. Planning for Freedom and twelve other essays and addresses. South Holland, Illinois: Libertarian Press. Mises, L. 1985 [1927]. Liberalism in the Classical Tradition. Irvington-on-Hudson, New York: Foundation for Economic Education. Translated by Ralph Raico. First edition 1927. Mises, L. 2009a [1946]. Observations on Professor hayek’s Plan. Libertarian Papers Vol 1 No 2. Mises, L. 2009b [1978]. Memoirs. Auburn, Alabama: Ludwig von Mises Institute. Mises, M. 1984. My Life with Ludwig von Mises. Cedar Falls, Iowa. Center for Futures Education. Second edition. Monypenny, W. F. 1912. The Life of Benjamin Disraeli, Earl of Beaconsfield Volume II 1837–1846. London: The Times Publishing Company. More, T. 1997 [1516]. Utopia. New York, NY: Dover Thrift Edition. Murdoch, R. 1990. The War on Technology. Manhattan Institute third annual Walter B. Wriston Lecture in Public Policy. City Journal Autumn. http://www. city-journal.org/article01.php?aid=1631 Napolitano, A. 2010. A Judicial Odyssey towards Freedom. In Block, W. 2010. Ed. I Chose Liberty: Autobiographies of Contemporary Libertarians. Auburn Alabama: Ludwig von Mises Institute. Orwell, G. 1944. The Road to Serfdom by F. A. Hayek/The Mirror of the Past by K. Zilliacus Observer 9 April. Orwell, G. 1968a. The Collected Essays, Journalism and Letters of George Orwell: As I Please 1943–1945. England: Penguin Books. Edited by S. Orwell and I. Angus. Orwell, G. 1968b. The Collected Essays, Journalism and Letters of George Orwell My Country Right or Left 1940–1943. England: Penguin Books. Edited by S. Orwell and I. Angus. Orwell, G. 1945. Animal Farm. London: Secker and Warburg. Orwell, G. 1949. Nineteen Eighty-Four. London: Secker and Warburg. Peart, S. and Levy, D, 2005. The ‘Vanity of the Philosopher; From Equality to Hierarchy in Post-Classical Economics. Michigan: University of Michigan Press. Pigou, A.C. 1925. Memorials of Alfred Marshall. New York: Macmillan Co. Pimlott, B. 1985. Hugh Dalton A Life. London: Cape. Raico. R. 2012. Classical Liberalism and the Austrian School. Auburn, Alabama: Ludwig von Mises Institute Reder, M. W.2000. The Anti-Semitism of Some Eminent Economists. History of Political Economy Winter 32.4: 1011–1016. Rifkin, J. 2005. Capitalism’s future on trial. The Guardian 22 June http://www. theguardian.com/politics/2005/jun/22/eu.world1 Robbins, L. 1971. Autobiography of an Economist. London: Macmillan. Rockwell, L. H. Jr. 2008. Remembering Erik von Kuehnelt-Leddihn. LewRockwell.com http://www.lewrockwell.com/lrc-blog/remembering-erik-von-kuehnelt-leddihn/ Rothbard, M. N. 1973. Ludwig von Mises: 1881–1973 Human Events October 20, p. 7 http://mises.org/rothbard/misesobit.asp

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Rothbard, M. N. 1992. Right-Wing Populism: A Strategy for the Paleo Movement. Rothbard Rockwell Report Vol 3.1. http://www.unz.org/Pub/ RothbardRockwellReport-1992jan-00005 Rothbard, M. N. 1993. Who Are the Terrorists? Rothbard Rockwell7 Report August Vol 4.8. http://www.unz.org/Pub/RothbardRockwellReport-1993aug00001 Rothbard, M. N. 1994a. Those Jury Verdicts. Rothbard Rockwell Report May Vol 5.5. http://www.unz.org/Pub/RothbardRockwellReport-1994may00009 Rothbard, M. N. 1994b. Revolution in Italy! Rothbard Rockwell Report July Vol 5.7. http://www.unz.org/Pub/RothbardRockwellReport-1994jul-00001 Rothbard, M. N. 1994c. A New Strategy for Liberty. Rothbard Rockwell Report October Vol 5.10. http://www.unz.org/Pub/RothbardRockwellReport-1994oct00001 Rothbard, M. N. 1994d. Invade the World. Rothbard Rockwell Report September Vol 5.9. http://www.unz.org/Pub/RothbardRockwellReport-1994sep-00001 Schrecker, E. W. 1986. No Ivory Tower: McCarthyism and the Universities. Oxford: Oxford University Press. Sharma, R. 2010. The Triumphant Return of Hayek. Newsweek (Pacific Edition), 01637061, 12 June, Vol. 156, Issue 23. Simons, H. C. 1948. Economic Policy for a Free Society. Chicago: University of Chicago Press. Smith, A. 1827 [1776]. An Inquiry into the Nature and Causes of the Wealth of Nations. Edinburgh: Thomas Nelson and Peter Brown. Sraffa, P. 1932a. Dr. Hayek on Money and Capital. Economic Journal 42.165, March: 42–53. Sraffa, P. 1932b. Rejoinder. Economic Journal 42.166, June: 249–251. Stein, L. The Triangel Factory Fire. New York: J.B. Lippincott Company. Stigler, G. J. 1966. The Theory of Price. Chicago: University of Chicago Press. 3rd ed. Stigler, G. J. 1971. The theory of economic regulation. Bell J. Econ. Man. Sci. 2:3–21 Stigler, G. J. 1982. George J. Stigler. Biographical. http://www.nobelprize.org/ nobel_prizes/economic-sciences/laureates/1982/stigler-bio.html Stigler, G. J. 1988. Memoirs of an Unregulated Economist. New York: Basic Books. Talmon, J. L. 1960. The Origins of Totalitarian Democracy. Britain: Secker & Warburg. Tanaka, S. 1974. What will happen to the world as Keynesian economic theories are disproved? Views of Professor Hayek, a World-Famous Authority on Inflation Sought. Shuukan Post May 17. Taylor, A. J. P. 1964. The Habsburg Monarchy 1809–1918: A History of the Austrian Empire and Austria Hungary. England: Peregrine. Van Horn, R. and P. Mirowski. 2009. The Rise of the Chicago School of Economics and the Birth of Neoliberalism. In The Road from Mont Pèlerin, edited by, P. Mirowski and D. Plehwe. Cambridge, MA: Harvard University Press. Vanberg, V. 2013. Hayek in Freiburg. In Leeson, R. Ed Archival Insights into the Evolution of Economics Volume V Hayek: A Collaborative Biography Part 1: Influences, from Mises to Bartley. Basingstoke, England: Palgrave Macmillan.

72 Robert Leeson Vaughn, K. 1994. Austrian Economics in America: The Migration of a Tradition. Cambridge: Cambridge University Press. Warren, E. 2007. The Coming Collapse of the Middle Class. http://gradlectures. berkeley.edu/lecture/collapse-of-middle-class/ Wiesner, M.E. Ruff, J.R. and Wheeler, W. B. 2008. Discovering the Western Past: A Look at the Evidence Volume 1 to 1789. Boston: Houghton Mifflin.

2 The Battle of Ideas: Neoliberal Economics and Politics in the 20th Century Philip Plickert

The first half of the 20th century was a tragic time for classical liberals. Their philosophy, arguing for a limited state and a self-regulated economy, had dominated policies in the 19th century in the Western world. But from the late 19th and early 20th centuries, progressive intellectuals suspicious of capitalism were beginning to play a greater part in public discourse. In the war from 1914 to 1918, the classical liberal world came to an end, politically as well as intellectually. As Hayek (1967 [1951]) later remembered: ‘At the end of the First World War the spiritual tradition of liberalism was all but dead.’ The war had triggered a massive expansion of (military) government. It brought the first large-scale experiments with central coordination of resource allocation, production and distribution, as well as trade restrictions and strong regulation. After 1918, the liberal social order lay in ruins, in Russia and – to a lesser extent –in the Western countries as well. As a result of the huge build-up of public debt for war financing, the end of the Gold Standard and the subsequent rapid expansion of the paper money supply, hyperinflation emerged in Central Europe, with devastating consequences for social stability. Many intellectuals looked with sympathy at the advance of socialism. ‘Socialism is the watchword of our days,’ Ludwig von Mises (2008 [1922], 1), one of the few unreconstructed liberals, warned in his book Die Gemeinwirtschaft (Socialism). Five years later, he sounded even more pessimistic, and lamented: ‘The world does not want to hear about liberalism any more’ (1993 [1927], 2). By contrast, John Maynard Keynes (1926) welcomed the end of ‘laissez-faire’. Further advances of state control over the economy were made during the Great Depression. The economic crisis was popularly interpreted as a failure of ‘chaotic capitalism’ which brought mass unemployment, social hardship and political instability. Governments responded with state interventions, 73

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and launched public employment projects. This was the case not only in national socialist Germany, where economic dirigisme corresponded with political dictatorship, but also in America, where the New Deal administration substituted market coordination with centralized regulation of prices and production.1 Public opinion and many economists applauded. The philosophy of economic liberalism was thus facing an existential crisis in the first half of the 20th century. This chapter explores how embattled liberals in various places tried to cope with the fundamental challenges, and how they organized after the Second World War. Their aim was to debate and disseminate a reconstructed liberalism. The most important platform for these efforts was the Mont Pèlerin Society, founded in 1947 by a group of economists and intellectuals, who convened in Switzerland at the invitation of Friedrich August von Hayek. At the opening session (1 April 1947) Hayek, quoting from the last paragraph of Keynes’ General Theory declared Public opinion ... is the work of men like ourselves, the economists and political philosophers of the last few generations, who have created the political climate in which the politicians of our time must move. I do not find myself often agreeing with the late Lord Keynes, but he has never said a truer thing than when he wrote ... that ‘the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else’.2 At first, their enterprise was not taken seriously. Joseph Schumpeter (1950, 449) even ridiculed their attempt to stop the ‘March into Socialism’,3 stating sarcastically, I believe that there is a mountain in Switzerland on which congresses of economists have been held which have expressed disapproval of all or most of these things [the ‘March into Socialism’]. But these anathema have not even provoked attack. During the coming decades, the economists from Mont Pèlerin in Switzerland succeeded in forming an international network with affiliated think tanks which proved extremely influential. Their mission was to revise and revive liberal economics and promote them in intellectual circles. Many of the men Hayek convened rose to academic prominence and influenced the climate of opinion or managed to win over decision makers among the elites. Thus they stopped the ‘March into

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Socialism’, and even started a movement towards a reversal of the trend. The historical contexts that enabled them to do that will be examined in this chapter. However, one must be careful not to fall into the trap of conspiracy thinking when uncovering the organizational and personal connections between the group of MPS thinkers and political circles. Several Leftleaning scholars have succumbed to that temptation. Their expositions of the influence of MPS members and of Hayek’s long-term strategy (‘battle of ideas’) culminated in allegations of a neoliberal ‘intellectual hegemony’, a concept propagated by Marxist theoretician Antonio Gramsci.4 This is a historical fabrication. When Hayek started his efforts to bring together like-minded (neo-)liberals, any notion of short-term ‘hegemony’ seemed to be a fantasy. The intellectuals that he convened were isolated in their respective countries, and Hayek saw himself practically drowned by the ‘Keynesian avalanche’.5 Thus, he tended to aspire to an anti- or counter-hegemonic enterprise. His was a long-term strategy to break the dominance of collectivist public opinion by offering intellectuals an alternative: a neoliberal utopia as a counterweight to the socialist utopias. The remainder of this chapter is structured as follows: I start with a short account of the four centres of origin of neoliberal thought – Vienna, London, Freiburg and Chicago – presenting the main thinkers and their approaches to a renewed liberalism in the context of the interwar period. One important aspect is their reaction to the Great Depression, the emergence of Keynesianism and their position on stimulus policies. The second section describes the debates at the first international meeting of ‘neoliberals’ in Paris 1938 at the Colloque Walter Lippmann. The third section briefly analyses the emergence of the new liberal research programme, with reference to the theory of science of Imre Lakatos. The fourth section shows how Hayek developed the idea of an international intellectual organization, and seized the opportunity to start the Mont Pèlerin Society in 1947. Sections 5 and 6 offer a short analysis of Hayek’s intellectual strategy and how it was implemented with the MPS. Sections 7 to 10 present case studies of the influence that neoliberals had on (economic) policy and the intellectual climate in different national environment in the post-war era, such as West Germany, Italy, France, Britain and the United States. Section 11 gives an account of the later development of (neo-)liberal economic theory and their partial return to classical liberal optimism and ‘laissez-faire’. Section 12 assesses a number of different factors how the MPS network helped to generate an intellectual ‘turn of tide’ or even an intellectual ‘counter-revolution’,

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as some commentators put it, in Britain and the USA since the 1970s, culminating in the governments of free market politicians with a strong presence of MPS advisers. The chapter concludes with some thoughts on the power of ideas in the making of history.

1 Four centres of liberalism: Vienna, London, Freiburg, Chicago During the inter-war period and especially after the onset of the depression, classical economic liberalism was at its lowest ebb. Although these historic shocks triggered massive interventions into the economy and society which were approved of by the great majority, there were still some intellectuals who opposed these developments. As Hayek (1967 [1951], 195) later remembered, the main body of liberal thought has been safeguarded through that eclipse in the intellectual history of liberalism ... indeed, during that very period the foundations were laid for a new development. He identified four centres of renewed liberalism: London, Vienna, Chicago and Freiburg. In London, there was the circle of colleagues and disciples of Edwin Cannan. The group in Vienna consisted of Ludwig von Mises and his students. The Chicago School grew up around Frank Knight and Henry Simons, with Aaron Director, Milton Friedman and George Stigler as the younger generation. Finally, the German group had Walter Eucken as its intellectual leader, with Wilhelm Röpke closely connected. Another group which Hayek mentioned existed in Italy, with Luigi Einaudi at its head. In Switzerland and in France there were also some local networks which sought to revive liberal ideas. With the ‘old’ or classical liberal paradigm heavily under attack, these groups were forced to think ahead. In their specific national-political and intellectual-cultural settings, they developed different strategies to reconfigure their liberal ideology, to meet the new challenges, and save the ‘hard core’ of market economics. To achieve this aim, some distanced themselves from parts of the classical liberal heritage, namely the ‘laissez-faire’ approach. The furthest steps towards a liberal revisionism were made in Freiburg and Chicago – in remarkably similar directions, as we will see. Vienna In Vienna, Mises led the way for orthodox liberalism. His Privatseminar for economists and other social scientists became the rallying point of

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some of the brightest minds of the younger Austrian generation of economists, most notably Hayek, Gottfried von Haberler and Fritz Machlup. The seminar acquired intellectual fame well beyond Austria. With his radical theoretical critique of communism in the famous ‘socialist calculation debate’, Mises sparked a controversy that impressed many young economists at the time (see Lavoie 1985; Caldwell 1997). He claimed that a ‘rational cost calculation’ would be impossible in a socialistic economy. Due to the lack of information about scarcity relations (prices), the planner had no orientation on what to produce and in which way. Waste and inefficiency would be inherent in a socialist economy. In the 1920s, Hayek was his collaborator at a small private institute for business cycle research, and he later continued the debate with a refined argument about dispersed knowledge which a planning authority would not be able to centralize. Hayek also adopted Mises’ ‘idealistic’ vision of history with regard to the trend towards socialism. It was ideas rather than material forces that mattered; and intellectual elites rather than ordinary people were the main supporters of socialism. Mises (2008 [1922], 471–472) wrote in his celebrated and controversial book Die Gemeinwirtschaft: Only ideas can overcome ideas and it is only the ideas of Capitalism and of Liberalism that can overcome Socialism. Only by a battle of ideas can a decision be reached. London The London School of Economics, where Hayek took up a post as professor in 1931, was also a difficult environment for liberals. The ideas which informed the founding of the LSE were anti-liberal.6 Surprisingly and ironically, it was at the economics faculty of the LSE that a small liberal bastion developed under the influence of Edwin Cannan, who was responsible for a widely acclaimed edition of Adam Smith’s The Wealth of Nations. Although Cannan was in many respects close to the classical ideals of economic liberalism, especially free trade, he also combined elements of Utilitarianism and welfare economics in his world view. Contrary to advocates of laissezfaire, he emphasized that the institutional and legal framework of the market could and should be organized so as to maximize the utility that consumers could draw from the economy. He did not share the vision of an ‘invisible hand’ to regulate market interaction and called instead for conscious design of institutions (see Cannan 1997 [1912], 24–25).

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During the interwar period, Cannan and his friends at LSE called for a return to unrestricted free trade and a repeal of protectionist privileges and restrictions. Only with such reforms would competition work. Among the cartels nurtured by the state, Cannan and his colleagues, Lionel Robbins (1971 [1934], 186) and W. W. Hutt, targeted trade unions. In their eyes, the power of the unions coupled with nominally inflexible wages were to a large extent responsible for high unemployment in Britain in the 1920s and the 1930s. On all these issues there was a bitter fight between socialists and liberals, and between economists and political scientists, at the School. Left-leaning students of economics preferred to go to Cambridge rather than LSE. After Cannan’s retirement in 1928, Lionel Robbins took over his chair and became the dominant figure in the economics department. It was Robbins who made the Austrian business cycle explanation of the economic crisis popular in the English-speaking world. When Hayek joined LSE, he rose to become the principal opponent of Keynes’ theories, as his colleague John Hicks (1967, 203) remembered. For some time, LSE students were fascinated by the Austrian professor. But then later he was completely outflanked by Keynes and the Cambridge group. In the late 1930s, Hayek and Robbins were standing in the shadow while Keynes was hailed by the public. Robbins (1971, 153–154) later came to regret his anti-interventionist writings and policy advice during the Great Depression. Freiburg Of all the centres of neoliberal economics, the Freiburg School, with Walter Eucken and Franz Böhm as the outstanding protagonists, supported by Wilhelm Röpke and Alexander Rüstow, went furthest in its efforts to redefine the essence of liberal economics; it thereby prepared the ground for the later ‘social market economy’ in Germany.7 The Freiburg group of economists and legal scholars began their discussions in the early 1930s and were active in church-affiliated resistance circles against the National Socialist regime.8 At the heart of their research program was a quest for a ‘workable and humane order’ for the economy and society alike, as Eucken (1990 [1952], 14), the Head of the School, put it. This involved a redefinition of the relationship of state and market. They accused earlier liberals of a mistaken ‘laissez-faire’ attitude which they claimed was self-defeating, and instead they advocated a ‘strong state’ as an arbiter for a true competition order. Eucken claimed that only such a state would be able to resist the gradual occupation by interest groups.9

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In a similar vein, Alexander Rüstow (1963 [1932], 258) complained at the annual meeting of German-speaking economists in the Verein für Socialpolitik in Dresden 1932, about the decline of the liberal state, and advocated the need for a ‘new liberalism’, stating: The new liberalism, which is reasonable today and which I and my friends represent, calls for a strong state, a state above the economy, above the interests, where it belongs.10 Contrary to the existing interventionist state, his ideal neoliberal ‘strong state’ gained its strength through self-restraint and its ability to say ‘no’.11 Wilhelm Röpke,12 in his analysis of the growth of special interest groups and the subsequent ‘monopolistic-interventionist regidification’ came close to what Mancur Olson (1982, 17–35) later called ‘collectivist sclerosis’ (cf. Schüller 2003, 26). Rüstow’s speech is commonly regarded as the first public manifesto of German ‘neoliberalism’, although many of the Freiburg group adopted the label ‘ordoliberalism’ after the war. Like his friend Wilhelm Röpke (1930), an outspoken enemy of the Nazi party, Rüstow was among the first non-Jews and non-socialists to emigrate in 1933 after the Nazi seizure of power. They both settled in Istanbul where they accepted posts at the university. Röpke moved to Geneva after four years, where he found a congenial environment among Swiss liberals and other émigrés. The members of the Freiburg School, however, stayed in Germany although they were in a dangerous position; in 1944, Constantin von Dietze and Adolf Lampe were arrested and questioned by the Gestapo, as was, briefly, Eucken. The Freiburg School’s research program was based on the fundamental idea of the ‘interdependence’ of the economic, the political and legal systems as well as the social order. Their preoccupation with a competition order was not only – and not even primarily – inspired by economic efficiency or welfare concerns, but by ethical considerations about a free society. By dismantling monopoly powers and establishing a legal framework for competition, individuals would gain freedom and also security. Both were endangered by ‘any major concentration of power ... be it political, public power or be it the power of single persons or social groups’ (Böhm 1957, 112). Some of the ordo- or neoliberal ideas could be called romantic-conservative or communitarian, especially in Röpke’s writings on the small-scale Mittelstand society. Others had a Kantian constructivist approach to establishing the competition order, which was opposed to the evolutionary approach to social order that Hayek

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forcefully embraced later.13 In the 1930s and 1940s, however, Hayek was very much impressed by the works of his German colleagues. Chicago At the same time, in Chicago there emerged a school of nonconformist liberal economists who were on the one hand strongly opposed to the collectivist politics of the New Deal, but on the other hand deeply sceptical about a simple revival of old liberal ideas. Frank Knight and Jacob Viner are usually presented as the main founding figures of the Chicago School in the late 1920s. Less well known today is Henry Simons who at the time was ‘slowly establishing himself as the head of a school’ (Director 1948). Simons is of special interest for this study of neoliberalism because his concepts, and the thrust of the whole Old Chicago School, show a striking parallelism to the thoughts of the neoliberals of the Freiburg School (see Plickert 2008, 80–86; van Horn 2009, 209–213; Köhler and Kolev 2011).14 Contrary to today’s prejudice about the Chicago School, the old generation had serious concerns about the workability and the results of free markets. Knight had made important contributions to economic theory with his distinction between ‘risk’ and ‘uncertainty’ and also his qualifications about Pigou’s externalities and market-failure argument (Breit and Ranson 1982, 193–197), but he had ethical reservations against competitive capitalism (Knight 1999 [1923]). He only reluctantly accepted the market economy on the basis of its superior efficiency, and because he held that the alternative, a planned economy, was an extremely dangerous threat to personal freedom (see Kasper 1993, 429). His younger colleague, Simons (1948 [1934], 42, 43, 58), was also far from being an apologist for capitalism. In 1934, he published the essay ‘A Positive Program for Laissez Faire’ with a radical redefinition of old liberal ideas: The representation of laissez faire as a merely do-nothing policy is unfortunate and misleading. It is an obvious responsibility of the state under this policy to maintain the kind of legal and institutional framework within which competition can function effectively as an agency of control. ... The great errors of economic policy in the past century may be defined – and many of our present difficulties explained – in terms of excessive political interference with relative prices and in terms of disastrous neglect of the positive responsibilities of government under a free-enterprise system.

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Simons, similar to the Freiburg professors, advocated an active role for the state in establishing and enforcing an effective framework for a competitive order. At the same time, he held an equally damning judgement of monopolies and their consequences: The great enemy of democracy is monopoly, in all its forms ... corporations, trade associations ... trade-unions – or, in general, organization and concentration of power in functional classes. In his ‘positive program’ he assigned to the state the duty to eliminate monopolies,15 and he called for the ‘outright dismantling of our gigantic corporations’ and also the labour organizations who have power over society and had been greatly strengthened by the policies of the New Deal. The ideas of the Old Chicago and the Freiburg School were echoed by Hayek (1994 [1944], 21, 160) in the 1940s. In The Road to Serfdom he condemned the ‘wooden insistence of some liberals on certain rules of thumb, above all the principle of laissez faire’ and he further explained: To split or decentralise power is necessary to reduce the absolute amount of power, and the competitive system is the only system designed to minimize by decentralization the power exercised by man over man. Many years after the deaths of Simons and Eucken, he still acknowledged his intellectual indebtedness to both of them, mentioning them in The Constitution of Liberty as among ‘those who have contributed most to shaping my ideas’ (2011 [1960], 41). The leading figures of the younger Chicago School, like Milton Friedman and George Stigler, later rejected Simons’ economic policy prescriptions as too interventionist and ‘populist’, especially his condemnation of large corporations and his preference for progressive taxation and egalitarian income distribution. They even questioned his credentials as an economic liberal (see DeLong 1990, 601–602). Notwithstanding his pupils’ reservations, Simons had a lasting impact on the Chicago School, and especially on Friedman in particular, through his preference for rules over discretion in economic and monetary policy.16 The Great Depression and stimulus policies The economists of the Chicago School were sceptical about the discretionary fiscal policies proposed by the New Deal administration. It is,

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however, a myth that ‘Chicago’ was totally opposed to expansionary policies for fighting the depression, and that they relied entirely on the self-healing forces of the markets. As J. Ronnie Davis (1971, 25) has shown, all major Chicago economists, like Knight, Viner and Simons, had been supporting an anti-cyclical fiscal policy since 1930; together with prominent left-wingers like Alvin Hansen, they were calling for a stimulus to overcome the depression. Knight told Senator Robert Wagner that all economists agreed that in bad times the government should spend as much as possible, and reduce taxes. In contrast to the later Keynesian doctrine of the high unemployment equilibrium, most Chicago economists maintained that the labour market would always eventually come back to full employment. But the way to recovery by self-correction might be too long and painful. The pragmatic response of the Chicago economists differed from the more doctrinaire stance which the Austrian economists Mises and Hayek took at the time; the latter objected to expansionary measures to reflate the economy. In this regard, Vienna was far distant from Chicago (see Klausinger 2003). Interestingly, in Germany Wilhelm Röpke developed a peculiar ‘protoKeynesian’ theory of an expansionary fiscal policy to push the economy back on a growth path. Röpke was one of the most promising German researchers in the business cycle theory. In principle, he followed the Austrian ideas of business cycle fluctuations driven by monetary expansions, and he thought it necessary that distortions in the production structure must be corrected by ‘cleansing recessions’. When the German economy kept contracting, and total output had shrunk more than a fifth since the summer of 1929, he acknowledged that this was far more than a normal recession. In the winter of 1930/31, Röpke was a member of the Brauns Commission advising the government on the question of unemployment, which climbed to more than 5,000,000 the following year. To stop the downward spiral, Röpke called for an Initialzündung, a state stimulus to get the engine of the economy going again. The crisis, he warned, had degenerated into a secondary phase, a vicious circle, where recession feeds recession.17 The Brauns Commission report proposed public investments in infrastructure, energy, agriculture and housing, all financed by credit, to boost the economy. For normal times, Röpke opposed state involvement to stimulate the economy, however, since this would generate inflationary pressures (see Plickert 2008, 69–70). It is not surprising therefore, that Röpke – like Knight and Simons – vigorously rejected the permanently expansionary fiscal policies that Keynes’ followers advocated. Knight (1999 [1937], 365) wrote a review of Keynes’ General Theory in which he saw ‘a concept of inflation as a

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remedy for depression and unemployment’; Simons (1936) went so far as to condemn the book as potentially becoming ‘the economic bible of a fascist movement’. Keynes (1952 [1936], ix) himself could also attract such polemic reproaches. In the introduction to the German translation of his General Theory, which came out in 1936, he seemingly made advances to the regime by writing that his theory could ‘much more easily be adapted to the circumstances of a total state’ than the theory of production and distribution with laissez-faire.18

2

Paris 1938: Birthplace of neoliberalism

In the late 1930s, Walter Lippmann’s (1965 [1937]) book The Good Society provided important inspiration to the nascent movement of neoliberals. The American writer, a much respected journalist in Washington of the progressive camp, had spent most of his life on the Left.19 When The Good Society came out it was evidence of a profound ideological break with earlier socialist and collectivist beliefs. In the first part of the book, Lippmann (1965 [1937], 3) warned of the advance of ‘collectivist movements’ and ideologies of different colours that, although seemingly opposed, all ‘worshipped the same god’, the coercive power of the state; ‘[t]heir promise is that through the power of the state men can be made happy’. In essence, as Lippmann explained, these movements were not progressive, but a primitive and fearful reaction to the dynamics of an open, complex and globally interdependent market society. The Good Society contained one of the earliest expositions of the structural similarities of totalitarian regimes from Right and Left; not only did he warn of fascism and National Socialism but also of Soviet communism. Lippmann emphasized their common traits, and claimed that on the altar of collectivist planning they were sacrificing individual freedom. Central economic planning would follow the wartime formula, with rationing of consumption and forced labour, and would lead to the suppression of political rights, especially the right to express dissent on the plan.20 One of Lippmann’s arguments particularly provocative to his progressive friends was his denunciation of ‘gradual collectivism’ – including the New Deal – as a pre-stage for open, totalitarian collectivism. Economic protectionism would ultimately turn into military conflict. Lippmann (1965 [1937], 139–140) warned that ‘the early nineteenth-century dream of international socialism has given way to the twentieth-century nightmare of national socialism’. In contrast to this apocalyptic vision, the second part of the book pleaded for ‘A Reconstructed Liberalism’. He started with a trenchant

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critique of classical liberalism, especially the dogma of laissez-faire. It had allowed the economy to operate in a legal vacuum, ignoring the fact that the market system and private property were man-made institutions that could and should be modified to suit human needs. Lippmann (1965 [1937], 227) proposed a wide field for ‘liberal reforms’. Most notably, he advocated strict regulation against giant, monopolistic corporations. Furthermore, he advocated a tax scheme with the aim of a more egalitarian income distribution. Today’s reader can perceive a certain tension between the two parts of the book; Lippmann’s blunt repudiation of all ‘collectivist’ policies, including the New Deal, contrasted with the compromising and egalitarian reformist agenda.21 To the contemporary reader, however, the prevailing message of Lippmann’s manifesto was his rejection of ‘collectivism’ and his insistence on the market as the only suitable coordination mechanism for a free society. The Good Society attracted a great deal of interest not only in America but also in Europe. As Hayek (1967 [1951], 199) later recalled, Walter Lippmann had delighted and encouraged all liberals by the publication of his brilliant restatement of the fundamental ideals of classical liberalism. In France, the philosopher Louis Rougier was enthusiastic about the book and organized a translation which was published in 1938. The 49-year-old professor was at the time a key figure in the emergence of a renewed liberalism in France and beyond.22 When he learned that Lippmann was going to travel to Europe for his honeymoon, Rougier seized the opportunity to organize a conference in honour of the American author. The Colloque Walter Lippmann (CWL 1939, 11) was held from 26 to 30 August 1938 in Paris at the Institut International de Coopération Intellectuelle. Rougier invited a group of 26 scientists, civil servants, economists and industrialists, more than half of whom were French, including the philosopher Raymond Aron and the and lawyer Louis Baudin. Of the other Europeans, many were living in exile, such as Röpke and Mises who at the time both taught in Geneva, Hayek who taught in London, and Alexander Rüstow who lived in Istanbul. Many of these contacts Rougier had established with the help of William Rappard, a Zurich-based economic historian. Besides the academics, some highranking French civil servants like Jacque Rueff and Roger Auboin, as well as several industrialists, took part in the Colloque.

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All of the participants of this small convention in autumn 1938 – just one month before the Munich conference – were aware of the imminent threat to peace and freedom in the world. They wanted to rescue what was left of liberal doctrines and explore new ways to defend the basic tenets. Since liberalism seemed fatally ill, the conference became the place of birth for neoliberalism; the Colloque Walter Lippmann became the first international convention of liberals wishing to connect to launch a counter-attack on the collectivist zeitgeist. As will be shown and analysed in the following section, they tried to explain why classical liberalism had failed, and then they attempted to develop an agenda diverging from that classical doctrine although the contours and ideological content of that redefined liberalism were still unclear (for a detailed analysis, see Plickert 2008, 87–112). Lippmann emphasized in his introductory remarks that pre-war ‘old liberalism’ had shown ‘essential defects’ and was ‘a conglomerate of truths and errors’. The task of the Colloque, Rougier (CWL 1939, 21) asserted, should be to formulate a new doctrine about which ‘none of us has now more than a vague idea’. The discussions indeed showed a great variety of opinions on the crisis of liberalism. Yet despite many differences on the details, the great majority of the conference agreed to abandon the idea of laissez-faire. This marked a decisive break with earlier classical liberals of the 19th century.23 In the economic sphere, many of the participants, especially the German economists Röpke and Rüstow, warned that there was a dangerous growth of cartels and monopolies. While Mises insisted that most monopolies were created or encouraged through government regulations, for instance by protective tariffs and other market entry barriers,24 Röpke and Rüstow also saw an inherent tendency in modern capitalism towards concentration and giant corporations. They cautioned against the social consequences of these developments. At the root of the world economic crisis and the political drive towards collectivism, Röpke and Rüstow asserted, lay not economic problems but the problem of social disintegration. In an atomistic and ‘uprooted’ mass society, workers demanded social security. Classical liberalism had ignored the need of people for social integration, so people had turned towards the promises of collectivist movements.25 The liberal revisionists now devised a positive programme to prevent economic concentration and exploitative monopolies. It was suggested that the state should conduct a vigorous competition policy. Rüstow (CWL 1939, 41) lamented the ‘intellectual and moral weakness of the state’ which was negligent of its ‘duties as a market police [and] lets competition degenerate’. Instead

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of the alleged ‘night-watchman state’ of the classic era, Rüstow advocated the concept of a ‘strong state’ which could neutrally set the rules of the game and in some cases intervene in a pro-market direction.26 Clearly, Mises and Rüstow marked the extremes of the opinion spectrum with the Austrian apologetic of classical liberalism and Rüstow going very far in his renunciation of ‘paleo-liberalism’. Another field of debate was the right-liberal approach towards social policy. This discussion quickly turned towards the causes of the great depression and mass unemployment. Here again, two poles of opinion emerged. At one end were Mises and Rueff, who asserted the self-healing power of the market and denounced state interventions and social security schemes – especially unemployment insurance and minimum wages – as part of the problem; Rueff declared apodictically that the market would come into equilibrium if not hindered or distorted by interventions. At the other end was a smaller group of sceptics led by Lippmann, who claimed the ethical responsibility of the state to alleviate the social hardships of unemployment.27 Hayek’s contributions to the crucial debates on competition and social policy have not been recorded but for a few short technical remarks.28 On some points he was close to Mises’ stance, but he also saw the need for a more fundamental reorientation of liberalism as his introductory statement to the founding meeting of the Mont Pèlerin Society nine years later would make clear. As Lippmann had demanded in his opening speech, the Colloque was to develop an agenda for a new liberalism. One key feature of this new liberalism was its insistence on a legal framework for competition instead of a ‘laissez-faire’ attitude. Notwithstanding many differences in the details, the majority of the Colloque Walter Lippmann acknowledged that this was a sine qua non for a free economy and society. Otherwise, competition would degenerate into cartels, and society would be torn apart by opposing rent seeking forces, and eventually it would fall into chaos or totalitarianism, as the German participants warned. At the beginning of the five-day conference, Rougier (CWL 1939, 16) had compared the new liberal policy concept to the regulation of traffic: To be a liberal does neither mean to let as the ‘Manchester man’ circulate the cars in all directions such as they wish, which results in traffic jams and permanent accidents; nor does it mean to prescribe as the planner every car a precise departure time and route; it means to decide on a street code.

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– and that set of rules had to be adapted to the conditions of the times and technology. The extent to which the contours of the new liberalism were still unclear also became apparent through their difficult search for a name for the new approach. On the first day, Louis Baudin (CWL 1939, 30, 31, 33, 7) expressed his misgivings about the term ‘liberalism’ and stated that he preferred ‘individualism’ for which Rougier also showed sympathy. Mises warned that to give up the self-designation of liberals could be seen as a concession to the totalitarians. Rueff raised objections to using the prefix ‘neo’, stating that if one aspired to ‘a restoration of liberalism’ this should be stated openly. However, the conference made clear that they did not seek a restoration but an innovation. On the last day of the conference, Rueff suggested ‘liberalism from the left’ since ‘it tends to bring the poorest classes the greatest welfare’. Louis Marlio, one of the businessmen, preferred ‘positive liberalism’ or ‘social liberalism’ – or ‘neoliberalismus’.29 In his introduction to the printed record of the Colloque, Rougier took up this name for the new doctrine. Apparently, he was using this term strategically; in liberalism’s fundamental crisis, it was to signal a fresh intellectual beginning. While the international exchange of minds in Paris had been a promising start, no further action materialized. The participants of the Colloque agreed to set up a research institution, a kind of think tank, named ‘Centre International d’Études pour la Rénovation du Libéralisme’ (CIRL). The Centre was intended to hold conferences, and they planned a conference for early 1939 on the subject of ‘The Liberal State’. Lippmann, Hayek and Röpke were entrusted with establishing the American, British and Swiss sections of the CIRL. However, these branches never displayed any activity. The CIRL in Paris, however, did organize six public conferences with discussions in the following year. As Rougier pointed out in a letter to Aron, the centre should be a political action group ‘absolutely above the parties’. Röpke congratulated him for having managed to attracted some leaders of non-communist trade unions (Denord 2001, 28–29). This indicates the political openness and pragmatism of early neoliberalism in its choice of allies. With the outbreak of the war, however, the CIRL ceased operations, and the international network among neoliberals was severely disrupted.

3

Neoliberalism as a new research programme

The first attempt at neoliberal revision in 1938, although abortive in the short run, became a milestone in the intellectual development of

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liberalism. In the late 1930s, mainstream economic theory had turned away from the classical liberal doctrine of a self-regulated market. The Keynesian idea of government interventions to overcome macroeconomic slumps was increasingly accepted, although it took more than a decade for it to break through fully. Shortly after the war, this development was called a ‘Keynesian revolution’ by Lawrence Klein (1949), and later the account was made to fit in with Thomas Kuhn’s (1970 [1962]) framework for ‘scientific revolutions’.30 In politics, most governments now adhered to the idea that the state had to intervene in order to secure ‘full employment’ and also to provide a wide social security net. Market regulations were ubiquitous and strict. Dissenting economists who did not subscribe to these new policies were increasingly regarded as out of touch. However, liberal economics did not totally vanish, but metamorphosed into neoliberalism and remained a competitor to the interventionist economists. After being an undercurrent for nearly three decades, the neoliberal current gradually re-emerged in the 1970s. When Keynesianism got into trouble, a new wave of free market economics became increasingly influential and managed to turn the tide against Keynesianism. This metamorphosis from liberal to neoliberal economics in the 1930s can best be explained by the more differentiated theory of science by Imre Lakatos (1968; 1970) which seems more suited to social sciences than Kuhn’s account.31 According to Lakatos, scientific research programs consist of a ‘hard core’ (fundamental hypotheses of a theory) and a ‘protective belt’ (auxiliary hypotheses and assumptions). In the case of liberal economics, the hard core postulates that a decentralized coordination of economic activity through the market and the price system is superior to central planning and administration. However, that pro-market thesis was under strong pressure for justification after the debacle of the Great Depression. As testified by the Colloque Walter Lippmann, many of the remaining liberals were full of self-doubt. To rescue the central tenets of economic liberalism, they endeavoured to adjust the ‘protective belt’ of auxiliary hypotheses. Among them was the recognition that the self-regulating market mechanism was seriously damaged. In many respects, competition was eliminated by the emergence of cartels and monopolies – on the goods markets as well as on the labour markets. Thus, the flexibility of the price mechanism was hampered; downward adjustments in particular were slow or even impossible. Furthermore, expansionary monetary policy in the 1920s had distorted price signals, thereby causing a distorted allocation of capital investments and resources, as

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the Austrian business cycle theory postulated. The persistent economic problems were blamed on a ‘market economy’, which – in the eyes of the liberals – was not really a market economy. Consequently, in order to save their ‘hard core’ hypothesis and their normative theory, the embattled liberals modified the ‘protective belt’. Above all, they abandoned the laissez-faire stance and acknowledged the need for a legal framework. The state was assigned the task of safeguarding competition and reforming monetary policy. This idea was shared by the German ordoliberals around Eucken, Simon’s ‘old’ Chicago School, and Hayek (Köhler and Kolev, 2011). To some classical liberals like Mises, the revisionism went too far, implying a dangerous concession to the interventionists, but the majority of liberals thought it necessary and not in contradiction with the fundamentals of liberal economics. In the introduction to a German translation of Lippmann’s The Good Society, Röpke (1945a, 29) wrote explicitly of a ‘hard core’ of liberalism, that the revisionists not only wish to preserve, but they have become such decisive critics of historical liberalism for the sake of its preservation.

4

The Road to Mont Pèlerin

Hayek did not forget the impetus arising from the Paris conference. During the war, he developed his own ideas for international cooperation of liberal minds. From the late 1930s he abandoned ‘technical’ economics, and concentrated instead on studies in social philosophy and the history of ideas. In several essays published in Economica, later collated in the book The Counter-Revolution of Science: Studies on the Abuse of Reason, Hayek (1952a) took aim at the French rationalist and constructivist-utopian traditions of thought. As a by-product of his research on the German tradition of idealizing the power of the state, he produced his famous book, The Road to Serfdom (1944), in which he warned the British public against adopting socialist policies. Both works testify to the immense importance he attributed to the long-term impact of intellectuals on political developments. In order to reverse the fatal trends, he considered a move towards intellectual-historical revisionism as mandatory. Thus, the road that eventually brought him to Mont Pèlerin started with a plan for a German–English historical society. Hayek (1967 [1944], 136) first presented this plan in February 1944 at King’s College,

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Cambridge, in a lecture entitled ‘Historians and the Future of Europe’. There he focused on the tasks for the years immediately following the war. If Germany finally collapsed, Hayek feared that the whole of central Europe might get drawn into a firestorm. He demanded that Germany should be won back to the values of European civilization by way of re-education. In the midst of the ‘moral and intellectual desert’ a few isolated ‘oases’ with uncorrupted intellectuals existed; in order to strengthen their position, Hayek proposed establishing a network of international contacts with like-minded liberals. To institutionalize the cooperation between British and German historians, he called for the foundation of an ‘Acton Society’ to discuss and disseminate ‘Whig historical’ teaching.32 In August 1945, Hayek (1945, 5) wrote a memorandum for a broader and bigger project with a longer time horizon, now named the ‘ActonTocqueville Society’.33 He sketched out the idea for an ‘International Academy for Political Philosophy’ with its headquarters in the Swiss or Austrian Alps. To realize this ambitious vision, Hayek wished to invest $500,000 – but without saying a word about how this sum could be raised. The academy should abstain from day-to-day politics and solely engage in the exchange of philosophical ideas. Interestingly, Hayek seemed ready to invite a fairly wide spectrum of opinions; within the confines of ‘a wide liberalism that was once common good of almost all Englishmen and Americans’, he saw a place for ‘many shades of opinion, from “liberal socialists” at the one end to “liberal conservatives” on the other’. In another note ‘The Prospects of Freedom’, written in October 1946, Hayek took an even more long-term view. His plans were not primarily about the immediate post-war ideological reconstruction, but he sought to influence the coming generation. Significantly, he referred to Keynes’ conviction about the long-term impact of ideas; once they were brought into circulation, it would be some time before they became effective. Though Hayek was regaining some optimism for the long-term prospects, the immediate future looked bleak, with communist movements not only gaining dominance in Eastern Europe but also attempting to seize power in some Western European countries. Hayek wrote to Leonard Read, President of the Foundation for Economic Education,34 commenting that [w]hile there are many hopeful signs in the trend of public opinion and while I by no means despair of a return to reason if enough time is granted for the present confusion to clear ... The danger of a violent

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communist rising in Italy, in France and in other parts of central Europe has to be taken quite seriously.35 At the same time as Hayek was refining his plans for a European academy, he was involved in launching an American project to further the study of free-market economics. Rob van Horn and Philip Mirowski (2009) interpret this as the origins of the post-war Chicago School. A central role in these efforts was taken by Simons. Hayek’s first contact with Simons, the leading figure of the older Chicago economists apart from Frank Knight, dated back to 1934. During the war they discussed problems of a competition policy that Simons had raised in his Positive Program for Laissez Faire. Hayek felt deep sympathy for Simons, and had great respect for his attempts to reformulate liberal economics, though on some points he himself did not go as far in his revisionism. In April 1945, when Hayek went to America on a Road to Serfdom promotional tour, he met Harold Luhnow, president of a Kansas Citybased furniture company and responsible for the charitable Volker Fund. Luhnow offered Hayek a grant from the Fund if he provided a version of The Road to Serfdom modified for an American readership. Later that month, Hayek discussed the matter with his friend Friedrich A. Lutz, a student of Eucken, who at the time was teaching in Princeton. Before returning to Britain, Hayek wrote to Luhnow, saying that the right place for the projected research would be Chicago ‘where there are a number of people whose collaboration would be extremely useful’.36 In the course of the next 12 months in Chicago, there were preparations and an intense exchange with Hayek, who travelled to the USA again in 1946. Above all, Simons was very active. He dreamt about creating an institute that over a period of 20 years would produce scholarly and semi-popular literature for the promotion of liberal ideas. In this regard, Hayek’s and Simons’ visions of long-term influence were very similar. Hayek succeeded in persuading the Volker Fund to offer the university sufficient money to pay for a tenured position for Aaron Director, Milton Friedman’s brother-in-law. Director was to become administrative head of the ‘Free Market Study’ as the project was to be called, and he was expected to write a book on the issue. However, on 19th June, just one month before the launch of project was finally agreed upon, Simons committed suicide. His death came as a shock to Hayek, who feared the whole plan could falter.37 Nevertheless, the Chicago project went ahead, even though Director never wrote the promised book-long study.38 Meanwhile, an unexpected offer from Switzerland opened a window of opportunity to Hayek to realize his plans for an international

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association of liberals in central Europe. During the war, Hayek had had an exchange of letters with Röpke, who was working tirelessly on newspaper articles and three books, thus becoming an important voice in Europe.39 After the war, Röpke was very pessimistic about the future, and planned to establish an international, tri-lingual scholarly journal as a forum for liberal intellectuals. Through the ‘immense destructions of this new ‘Thirty Years War’ Röpke saw ‘the forms of occidental life and thinking fundamentally shattered’.40 He warned of the danger if Fascism and National Socialism were replaced ‘by other forms of collectivism’, namely Soviet communism. The monthly journal, titled Occident, was intended to mobilize ‘a front of all those with good intentions’. Like Hayek in his memorandum for the ‘Acton-Tocqueville Society’, Röpke wanted to form a broader coalition of thinkers, and suggested that this coalition should include in party political terms ‘liberals’ as well as ‘conservatives’ or ‘democrats’, possibly even moderate socialists.41 For his project, Röpke received crucial support from Albert Hunold, a businessman in Zurich, who was keen on mobilizing liberal intellectuals.42 He used his business contacts to raise SFr 50,000, mainly from banks, insurance companies and the chemical industry.43 During the winter of 1945 and the spring of 1946, Röpke and Hunold were negotiating with publishing houses; however, their relationship turned sour in a conflict about the ownership of Occident and editorial competence relating to its contents. Hunold was about to return all the money he had collected, but his interest was then revived by William Rappard telling him of Hayek’s plans. In June 1946, Hunold offered Hayek the money.44 At first, Hayek responded with a very pessimistic note and politely declined the offer.45 But a month later, he changed his mind and seized the opportunity to convene a first international convention of 20 to 30 scholars ‘on neutral ground’.46 Hunold finally managed to secure SFr 15,000 from the initial capital for the new cause.47 Thus, Hayek had unexpectedly obtained quite considerable funds to start his intellectual organization. In the last days of 1946, eight years after the Colloque Walter Lippmann, Hayek sent a three-page letter of invitation for a conference in April 1947 at Mont Pèlerin, near the small resort of Vevey on Lake Geneva. According to a typewritten list, the letter was sent to more than 50 academics and intellectuals. Six of those invited – most notably Mises, Röpke and Rüstow – had already been part of the first attempt in Paris to form an international group of intellectuals to rethink liberalism.

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In the end, 39 people came to attend the first meeting at Mont Pèlerin. The largest group came from the United States – 17 people including, most importantly, the Chicago economists Knight, Director, Friedman and Stigler.48 The travel expenses of the scientists, journalists and several representatives of the Foundation for Economic Education were paid for by the Volker Fund. Ideologically, these think-tankers were uncompromising economic liberals and ardent supporters of Mises, who had only reluctantly joined the conference to make ‘a pilgrimage to Mont Pèlerin’.49 The strong presence of Americans marked a difference from the Colloque Walter Lippmann, where mainly French and continental European liberals had dominated. Since travelling through Europe was still difficult in 1947, only Eucken was able to overcome the travel restrictions from Germany.50 An important contingent of eight participants came from the UK, most notably Lionel Robbins of the LSE and Karl Popper, who had with Hayek’s help gained a professorship there.51 Four participants came from France, among them the economist Maurice Allais and the philosopher Bertrand de Jouvenel; four came from Switzerland, led by Hunold, Röpke and Rappard; one from Italy and three from Scandinavia.52 Despite the adverse circumstances, Hayek had been able to convene a remarkable group at the Hotel du Parc in the village of Mont Pèlerin, near Vevey. Among the 39 guests at Mont Pèlerin there were several outstanding economists, no less than four of them – Hayek, Friedman, Stigler and Allais – later to be awarded the Nobel Prize. In his invitation letter in December 1946, Hayek stressed the ‘strong desire for closer contacts among all those who have become gravely concerned about the chances of preserving a free civilization’. There was a danger that societies were driven ‘ever further in a totalitarian direction’, Hayek told his friends. While in each country there were only a few who thought actively on those questions, according to Hayek combined they represent a considerable force and I have been struck by the similarity of the aims and of the conclusions reached by many of the isolated men in different parts of the world. Again, he mentioned the names of Lord Acton and de Tocqueville, whose works could serve as starting points for the intellectual effort. As topics for discussion, he suggested the following: Free Enterprise or Competitive Order, The Problems and Chances of European Federation, The Future of Germany, Liberalism and Christianity, Modern Historiography, and Political Education.53

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Hayek’s aim was, as he explained in a second circular letter, different from that of a political organization, such as the ‘Liberal International’ which was founded at the same time: Our purpose is not to spread a given doctrine, but to work out in a continuous effort, a philosophy of freedom which can claim to provide an alternative to the political views now widely held. Our goal, in other words, must be the solution not of the practical task of gaining mass support for a given program, but to enlist the support of the best minds in formulating a program which has a chance in gaining general support ... This task was essentially a long-run effort, concerned not so much with what would be immediately practicable, but intellectual foundations of individual freedom.54 Over the years the Mont Pèlerin Society (MPS) has served the purpose of enabling an intellectual exchange over the fundamentals of (neo-)liberal philosophy. By providing a space for frank discussion between scientists who often felt ideologically isolated in their home countries, it helped to strengthen their ideological morale. As Friedman, one of the youngest participants, remembered later: ‘The importance of that meeting [in April 1947] was that it showed us that we were not alone’ (quote in Nash 1976, 26). For many members, the society’s meetings became veritably ... a spiritual fountain of youth, to which we could all repair once a year or so to renew our spirits and faith in a growing company of fellow believers; the one time a year when a generally beleaguered minority could stop looking over their shoulders and let themselves go in a thoroughly supportive environment. (Friedman 1976, xxi–xxii) One of the early members from Germany, Alfred Müller-Armack (1971, 44), recalled the importance of the MPS meetings in a similar way: To those who were in a constant struggle in the German discussion about the validity and applicability of liberal principles, the spiritual environment of this Society provided a sense of liberation and the chance to meet likeminded people who were striving to excel each in liberality. At the beginning, the political currents ran against Hayek’s creed – not just in Eastern Europe and China where the communists had taken over, but in most countries of the world. With regard to economic policy, the participants

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of Hayek’s conference also abhorred what they saw after 1945 in the West: the continuation of many wartime controls, and the nationalization of key industries in several large European countries, as well as the expansion of a collective welfare state. The discussions at Mont Pèlerin testify to the degree to which many of the liberal intellectuals almost despaired of the situation. Therefore, the MPS was founded to counter these tendencies through intellectual work and to re-establish the foundations of liberal philosophy. In retrospect, the project of the Mont Pèlerin Society was surprisingly successful, and according to John Davenport (1981, 1) some declared that the first meeting was a ‘turning point in the life of most participants’. This is also true to a certain extent for liberalism itself as the discussions at the meeting in Vevey confirmed that the metamorphosis into neoliberalism begun in the 1930s would continue in the post-war era. In his opening speech, Hayek (1967 [1947], 149) emphasized the ‘great intellectual task’ that they faced. This consisted of ‘purging traditional liberal theory of certain accidental accretions’ and also ‘facing up to some real problems’ with an over-simplified liberalism that had ‘turned into a somewhat stationary and rigid creed’. In the first session (the title had been changed to ‘Free Enterprise and Competitive Order’), Hayek’s remarks sounded ‘ordoliberal’ in the Freiburg sense when he acknowledged that it had been a fatal tactical mistake of many nineteenth century liberals to have given the impression that the abandonment of all harmful or unnecessary state activity was the consummation of all political wisdom. (MPC 1947, 46; the speech is reprinted in Hayek 1952 [1947]) Because they had not specified a positive role for the state and its legitimate and necessary government activities. Hayek demanded 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. [The lack of such a policy had been] as much responsible for the decline of competition as the active support which governments have given directly and indirectly to the growth of monopoly. (MPC 1947, 48) With these statements, Hayek had distanced himself from the laissezfaire creed (that his older friend Mises was nostalgic for) and adopted

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the neoliberal stance.55 Similarly, Aaron Director (MPC 1947, 48, 70) was critical of the fact that the substantial and increasing amount of state intervention which tends to destroy the competitive order is a direct consequence of the incomplete character of the theory of liberalism as developed in the nineteenth century. This metamorphosis of liberalism into neoliberalism is exemplified in Hayek’s (MPC 1947, 48, 42) statement: 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. As the main obstacles to a functioning competitive economy, he identified cartels in the products markets as well as labour market. While he harshly criticized the ‘organised violence’ of the unions,56 he also complained about the entrepreneurs saying that many of the pretending defenders of ‘free enterprise’ are in fact defenders of privileges and advocates of government activity in their favor rather than opponents of all privilege.57 Walter Eucken reported on the German situation, where the economy was still being run by government and military agencies. All important resources were centrally allocated. However, in Eucken’s view, neither a ‘planned economy’, where the state steers the daily economic process, nor a ‘free economy’ where ‘there is the danger, that freedom is abused to finally kill freedom’, was the right approach. Instead he called for a ‘competitive order’ which brings freedom and order into the right balance.58 Along very similar lines, Director, the Chicago economist, mentioned several ‘fields in which state action is required to make the competitive order work: (1) The prevention of private monopolies; (2) The control of combinations among either business concerns or workers; (3) The provision of monetary stability’ (MPC 1947, 78). There was no disagreement between the Freiburg School and the old Chicago School on these essential points (cf. Köhler and Kolev 2011). As with the competition policy, the Mont Pèlerin meeting also revised its liberal stance towards the social policy. Hayek and Director acknowledged both saying that the call for ‘social security’ was now a powerful

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demand by the people. But they warned about policies which blocked the market. Director wanted to abolish all kinds of measures, such as subsidies, minimum wages, protection for small shops, and tariffs that gave privileges for special groups. Instead, he advocated measures to increase equality of opportunity, such as improving the health of children from poor families and giving them a better education. Friedman proposed his ‘negative income tax’ scheme as a way to provide some social benefits to the needy yet at the same time to preserve incentives to work. The broader sociological approach that Röpke and Rüstow had presented at the Paris meeting was not accepted by the majority at Mont Pèlerin. Röpke’s call to preserve the traditional small-scale structure of family agriculture, and to exempt it to a certain extent from market pressure to change, was rejected by Karl Brandt, an agricultural economist at Stanford University; although Brandt was a native German, he had American agricultural structures in mind. Contrary to the Colloque Walter Lippmann, where European thinkers dominated, at the MPS founding meeting discussions the large group of Americans, especially the younger Chicago economists as well as the libertarian activists, represented a different flavour of neoliberalism.59 When the Mont Pèlerin gathering debated about a common manifesto, it turned out that they shared a concern for freedom but could not agree on a more specific political or economic programme. A first draft for a ‘Statement of Aims’ for their society (in HIA, MPS coll.; reprinted in Hartwell 1995, 49–50) was provided by Hayek, Eucken, Gideonse, Hazlitt, Iversen and Jewkes, although Hayek was at first opposed to issuing any public manifesto. Their ten-point statement put a clear emphasis on economic questions, starting with the first thesis: Individual freedom can be preserved only in a society in which an effective competitive market is the main agency for the direction of economic activities. Only the decentralization of control through private property in the means of production can prevent those concentrations of power which threaten freedom. Such a system would ‘maximize output in terms of individual satisfaction’. A necessary condition for a free society with an effective competitive order was a ‘proper legal and institutional framework’ and the respect of government activity for the rule of law to limit discretionary power. This draft for the ‘Statement of Aims’ did not meet with general approval. Therefore, Robbins was asked to sketch another draft which was limited to more general statements. It began dramatically:

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The central values of civilization are in danger. Over large stretches of the earth’s surface the essential conditions of human dignity and freedom have already disappeared. In others they are under constant menace from the development of current tendencies of policy. The position of the individual and the voluntary group are progressively undermined by the extensions of arbitrary power. Even that most precious possession of Western man, freedom of thought and expression, is threatened by the spread of creeds which, claiming the privilege of tolerance when in the position of a minority, seek only to establish a position of power in which they can suppress and obliterate all views but their own. The Society should further study inter alia the ‘present crisis’ and think on a ‘redefinition of the functions of the state’, explore ‘methods of re-establishing the rule of law’, ‘the possibility of establishing minimum standards by means not inimical to initiative and the functioning of the market’, think of ‘methods of combating the misuse of history’ and discuss ‘the problem of the creation of an international order conducive to the safeguarding of peace and liberty’.60 To this day, this short programme has been the only collective statement by the MPS in a history of over 60 years. The reduced form would probably in fact have proved to be of advantage, as it left room for discussions among a society of individualists, and gave flexibility for them to adjust to changing historical and political conditions. As Hayek had wanted, the MPS as a collective never became a political pressure group advocating certain reforms, but it did create a space for discussions among like-minded intellectuals who shared the same philosophical ideals and educated each other to strengthen their arguments. One surprising difficulty for them was to agree on a specific and more concrete programme, and another problem was to choose a name for the Society. In this regard, as Knight pointed out, none of the names stood for anything in economics. Hayek’s suggestion of ‘Acton-Tocqueville Society’ was rejected for several reasons. Neither of those names stood for anything in economics, criticized Knight. Other members had historical or religious objections. Friedman didn’t want the society to be named after a person but rather after principle; Popper suggested the ‘Periclean Society’. In the end, Karl Brandt’s solution ‘The Mont Pèlerin Society’ was accepted, although Popper stated that he found that name meaningless. Finally the participants elected Hayek as the first president of the Society. Eucken, Jewkes and Rappard became vice-presidents. The Swiss

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businessman Hunold, who had shown his organizational and fundraising talents, was chosen as executive secretary, and Director was to be treasurer. Between the board members and the officers of the society, there emerged a spontaneous division of labour, but the bulk of the work was done by Hayek and Hunold in tandem. They were the driving forces: Hayek intellectually and Hunold as organizer.

5

The beginning of the revival of liberal movement

The establishment of the MPS had a significant effect on the consolidation of the nascent (neo-)liberal movement. It helped to internationally coordinate the rise of this intellectual force, which eventually became a political factor. Looking back on this development, as Hayek (1983a, 19) declared in the early 1980s, the founding conference at Mont Pèlerin marked ‘the beginning of the revival of a liberal (freiheitliche) movement in Europe’. However, the post-war origins were quite humble and the circumstances adverse. In the beginning, it resembled a refuge for embattled neoliberals whose ideology was deemed obsolete by the vast majority of the public, and in academic spheres as well. Schumpeter was quite correct in observing that the economists’ protests from the ‘mountain in Switzerland’ did not bother many. In economics, Keynesianism was the dominant research programme. In practical politics, this translated into expansionary fiscal politics, which became the ‘new orthodoxy’ (Bleaney 1985, 83). In Britain and the USA, legislation more or less explicitly stated the aim of ‘full’ or ‘maximum’ employment. Most Western countries embarked on establishing and expanding a welfare state, with Britain a forerunner. And some, like Britain and France, nationalized large industries as well as financial institutions (cf. Dunkerley and Hare 1991; Chadeau 2000). Government controls over the economy (price controls, rationing etc.) that had been established and extended during the war were left in place. Apart from one notable exception, namely West Germany, economic policy in Europe and America tended to ignore neoliberal economists’ critiques and proposals. As an organization, the MPS also had a difficult start. After the first meeting at Mont Pèlerin, Hunold received enthusiastic letters of gratitude from Stanley Dennison, John Davenport, Carl Iversen, Milton Friedman, Michael Polanyi, Karl Brandt and others.61 A characteristic reaction came in the judgement from John Jewkes of Oxford University, who stressed the importance of connecting liberal thinkers across nations, stating:

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I have always felt that the first conference was of very great importance in enabling the liberal social scientists to exchange views and establish personal relations. Since that conference there has been most fruitful collaboration among many of the members.62 For the American participants, the exchange with European liberal thinkers was important. Prior to the Mont Pèlerin convention, Friedman had expressed his regret that the Chicago economists knew so little about the work of the ‘Europeans in the same tradition’.63 It was Eucken who had made a particularly strong impression on the Americans, as Röpke reported64 and Friedman later recalled. For Eucken, having been interrogated by the Gestapo in 1944 about his contacts with the anti-Hitler conspirators, the journey to Switzerland was the first trip abroad for many years. Friedman recalled Eucken’s reaction to being there, ‘I shall never forget his pleasure at eating the first orange he had seen in seven or eight years’. What Eucken told his American colleague showed what it was like to live in a totalitarian country, as well as in a country devastated by war and by the rigidities imposed by the occupying authorities. (Friedman and Friedman 1998, 160) As inspiring as the first meeting was, for almost a year thereafter the society more or less stagnated. In late 1947, the society was officially incorporated as a ‘General Not for Profit Corporation’ in the State of Illinois.65 However, this administrative move was not yet followed by any concrete activities. In the spring of 1948, Hayek himself confessed being worried about the slow progress.66 Hunold, who was impatient to get things started, reported that he was hearing from different sides that the MPS was regarded as a ‘lame society’.67 Meanwhile, the confrontation between the USA and the USSR, the former wartime allies, had hardened into the Cold War. In late summer of 1948, the Russian military blockade of West Berlin increased the pressure on this symbolic frontline city. From the point of view of the neoliberal intellectuals, the free civilization was in an extremely perilous state, particularly since communist and socialist ideas were gaining influence in many Western European countries. Within the society, there emerged two camps with different views about the right strategy to counter the threat. At a meeting of MPS Board of Directors in September 1948 in Basle, Karl Brandt pushed for public activities declaring that ‘[i]f our work is not completed in six years, it

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will not make any sense any more’. He and others wanted immediate and direct political actions; otherwise, they claimed ‘the world will be drowned under the wave of collectivism’. Jacque Rueff urged the publication of a liberal manifesto. But Hayek cautioned these wishes, referring to the experience at Mont Pèlerin where the group had had great difficulty in agreeing on a common statement. Any public declaration, he emphasized, should be based on deeper prior research and studies. Friedrich Lutz supported that call for a strictly scientific orientation of any publications. As Brandt remarked, the group around Hayek followed the line that the society should concentrate on scholarly work and keep away from politics.68 In his eyes, the MPS was far too passive. In June 1949, he circulated a memorandum on the future of the MPS in which he again criticized the way that the MPS activities were confined by its statutes to an internal exchange of ideas. He warned that the preclusion of a journal or publications of the society frustrated its self-proclaimed aim to defend freedom.69 Some of the financial supporters of the MPS also criticized the Society’s operations as too discreet.70 Hunold secretly shared these concerns.71

6

‘What we lack is a liberal Utopia’

None of the calls for a more activist and political approach could change Hayek’s (1967 [1949], 179) mind. The project he envisioned was strictly intellectual and long-term in orientation. In his paper ‘The Intellectuals and Socialism’, distributed to his MPS friends after its first meeting, Hayek had set out a theory of how fundamental political changes, namely the sweep towards socialism since the late 19th century, had been prepared by intellectual forces. According to his analysis – and in line with Mises’ earlier reasoning – the intellectual battle was decisive. The efforts of his fellow Mont Pèlerins should therefore be directed at gaining the support of the intellectual elite, not at the masses of the people directly. As an example of such a successful strategy, he referred to the Fabians, an elitist socialist group in Britain. By contrast, he said the more conservative groups have acted, as regularly as unsuccessfully, on a more naïve view of mass democracy and have usually vainly tried directly to reach and to persuade the individual voter. The figure of the ‘intellectuals’ that Hayek (1967 [1949], 180, 191) had in mind comprised a rather broad class of professionals, namely jour-

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nalists, teachers, ministers, lecturers, publicists, radio commentators, writers and artists, all of whom may be masters of the technique of conveying ideas but are usually amateurs so far as the substance of what they convey is concerned. These intellectuals Hayek called ‘secondhand dealers in ideas’ as opposed to the ‘original thinkers’ or scholars who had more profound knowledge and engaged in real scientific research. The slightly pejorative name Hayek chose did not reduce his high esteem in their eyes, or his power: He realized that they acted in a way similar to gatekeepers by controlling the flow of news and commentary that ordinary people consumed and which shaped the climate of opinion. According to Hayek’s theory that he also shared with Keynes, the influence of the intellectuals was greater than the influence of material interests.72 The Left had gained intellectual supremacy Hayek contended, with speculative-utopian socialist visions of a future planned economy and society, whereas liberal intellectuals had only limited influence with their ‘practical’, ‘sensible’ and rather dull ‘realistic’ arguments. Furthermore, Hayek (1992 [1949], 53–54, 194) urged that [w]e must make the building of a free society once more an intellectual adventure. ... What we lack is a liberal Utopia, a deed of courage. His Constitution of Liberty, which he presented first to his MPS fellows in the late 1950s, could be regarded as such a utopian politico-economic order. What liberals had to learn from the socialists was the ‘courage to be Utopian’. This would make their thinking more attractive to the intellectuals, thereby gaining influence with public opinion and ‘making possible what only recently seemed utterly remote’. In the German translation of the article, this strategic advice was put even more clearly as ‘influence on public opinion, which made possible step by step what only recently seemed impossible’. Following this line, the advice of ‘thinking the impossible’ or ‘thinking the unthinkable’ echoed in many (neo-)liberal think tanks in the following years (cf. Cockett 1994). In the late 1940s and early 1950s, the prospects of winning public opinion did indeed seem ‘utterly remote’. The neoliberal academics were faced with a largely hostile intellectual climate. But at least they had established their ideological refuge, where they discussed economic and philosophical issues and learned from each other. In July 1949, the Mont

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Pèlerin Society met again in Switzerland, at Seelisberg, a small town near the Vierwaldstädter lake.73 The conference was attended by 56 members. The next meeting, in 1951, took place in Beauvallon, a small town on the French Riviera. In 1953, however, they returned to Seelisberg, and then in 1954 they held a conference in Venice – as usual, Hunold understood the importance of combining working sessions with tourist trips to make the conventions all the more attractive. In 1956, the MPS held a small meeting in (West) Berlin, while some members took the opportunity to make a trip into the communist eastern part of the city. For the tenth anniversary of the MPS foundation, the members convened in St. Moritz. In 1958, the Society for the first time managed to arrange a meeting in Princeton, USA, after many years of unsuccessfully trying to raise enough funds. Hayek attributed this to ‘the fact ... simply that I have not found an American Dr. Hunold’.74 The Princeton conference was largely organized by the retired businessman Jasper Crane, a former director of Dupont Corporation. At this meeting, tensions with the European secretary Hunold surfaced, which over the next four years led the Society into a deep crisis (Hartwell 1995, 100–133). At the heart of the conflict lay a personality conflict – a growing alienation between Hayek and Hunold, which turned into bitter enmity. Although Hunold tried to give the impression that there was also an ideological dimension to the fight, careful study of the archival evidence suggests that this was not the case (Plickert 2008, 178–189). The antagonism split the Society. Hunold mobilized many of the members, especially the Swiss and the German section, and even corresponded with the German Ministry of Economics. On his side he had Röpke, who had been elected President of the MPS in 1960; but Hunold was finally forced to give up his position as executive secretary of the Society. In the end, Hunold and Röpke were so embittered that they left the MPS in late 1961, and several of their friends, Rüstow in particular, also quit. The result was that the American element of the Society became dominant and the sociological and ordoliberal elements were lost. But even before that, there had been occasional setbacks and frustrations on the part of Hayek.75 Nevertheless, the 1950s were, for the most part, a time of rapid expansion for the Society. On the fifth anniversary of the foundation of the MPS, Hayek (1952b, 731) seemed fairly optimistic about the prospects for intellectual liberalism. He said: Gone are the days when the few outmoded liberals walked their paths lonely, ridiculed and without response from the young.

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Referring implicitly to the MPS network he emphasized that ‘at least personal contact among the proponents of neo-liberalism has been established’. The numbers of attendees at the meetings rose from fewer than 50 to 120 in St. Moritz and about 140 in Princeton. The membership climbed from 39 after the 1947 founding meeting to 172 in 1951, and to 258 in 1961. By the mid-1960s the Society had, despite the resignation of a number of members in the course of the so-called Hunold affair, exceeded 300 members. The Society was now mobilizing large conventions of increasingly self-confident academics and intellectuals. Some members even started complaining that the MPS was growing too large, and the original intimate atmosphere was lost. As Hayek’s biographer, Hans Jörg Hennecke (2000, 262) stated, the meetings were now resembling ‘troop parades of economic liberalism’. This was similar to the way that MPS secretary Hunold had earlier used military metaphors for their intellectual enterprise. He had been full of pride when conveying ‘greetings from the general staff of liberal economists’ to a conference of the Liberal World Union in Knokke (Bieri 1954). A sign of the growing importance of the MPS was the number of prominent political figures it attracted, most notably the German economics minister, Ludwig Erhard, and the Italian president, Luigi Einaudi. Erhard joined the Society at the invitation of Eucken.76 Several of his most important economic advisers were from the ranks of the Freiburg School, such as Eucken, Franz Böhm and Leonhard Miksch, or came from the wider ordoliberal camp, such as Müller-Armack, Erhard’s state secretary.77 One of the most active members in the 1950s was certainly Röpke. The Frankfurter Allgemeine Zeitung, whose founding publisher Erich Welter also became an MPS member, featured long essays by Röpke and extensive reports of the Society’s meetings. From Italy, Einaudi followed the call for membership from Röpke, with whom he shared a long-standing intellectual friendship and a similar understanding of neoliberalism.78 From Austria, Reinhard Kamitz, the finance minister, and later the president of the central bank, joined the MPS. Several prominent Swiss figures gave their support to the MPS. They also had the backing of the Neue Zürcher Zeitung and its editor-in-chief, Willy Bretscher. While there was a concentration of supporters in continental Europe, the British section consisted mainly of Hayek’s former LSE colleagues, apart from Robbins, who left the Society in 1950. Antony Fisher, a businessman and think-tank founder, became an active member. His Institute of Economic Affairs (IEA) provided an important source of studies and ideas which inspired some of the Thatcherite reforms. The largest

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number of MPS members, more than a third of the total, lived in the USA – with Chicago being the dominant intellectual stronghold. Milton Friedman became the rising star of the younger generation of Chicago economists, and in the MPS. In the 1950s and early 1960s, however, the MPS was still centred around Hayek as its intellectual ‘leader’. Although the Society was registered as an American charity, in its early years it was culturally very much an ‘old European’ Society.

7

A surprise breakthrough in Germany

The revival of liberal economics owed much to the political breakthrough that neoliberal ideas gained in West Germany. This development started in 1948 and was all the more surprising, as a return to a market economy was regarded as totally unfeasible, even absurd, by most in the aftermath of the war. Most Western countries stuck to the ‘lessons of the Great Depression’, namely that an uncoordinated ‘capitalist’ market produced unacceptable results, such as cyclical breakdowns and mass unemployment. They therefore retained many elements, such as interventionism, regulation and the central allocation of resources, which had been established in the 1930s and in the 1940s during the war. The Marxist historian Eric Hobsbawm (1994, 176–177) correctly remarked that after 1945 they were virtually all states which, deliberately and actively, rejected the supremacy of the market and believed in the active management and planning of the economy by the state. In this environment, ‘champions of complete market freedom, such as Friedrich von Hayek, saw themselves and their like as prophets in the wilderness’. Surprisingly, the neoliberals were able to break this pattern in Germany, a country with a long statist and collectivist tradition, where state-led economic centralization and planning had reached its apex under the National Socialist regime. Virtually all consumption and investment goods were rationed and allocated according to political plans. After the military, political and economic breakdown, many aspects of this economic policy were not changed at first by the allied occupation authorities; for instance, the price freeze ordered in 1936 by Göring to repress inflationary tendencies was kept in place after 1945. As Eucken (1948a; 1948b) pointed out, the repressed prices did not reflect the real relative scarcities. Therefore, the market mechanism was paralyzed; much of the production was sold on the black market. In the harsh

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winter of 1946/47, millions of Germans, among them many refugees and those expelled from the East, starved. Since economic conditions showed no signs of improvement, the US military authorities under General Lucius D. Clay began to see the need for reform. However, many of the top US economic advisors were thinking along dirigist lines. For instance John K. Galbraith (1966 [1948], 95), then the head of the US State Department section for economic policy in the occupied areas, argued in an article on ‘The German Economy’ that there was only one way to stop the deterioration of the situation through organized action; that meant planning. The German neoliberals were highly dissatisfied with the advisers defending the system of controls and rationing. From exile in Switzerland, Röpke spoke critically: ‘Like their old Jeeps they discharge their New Dealers in Germany’.79 Radical economic reform came on 20 June 1948. Although the outlines for the currency reform had been drafted by the American military authorities and supported by General Clay, the crucial part of the economic reforms, the decontrol of most prices, was the unauthorized work of German neoliberals. Ludwig Erhard had only become director of the economic administration in the Bizone in March of that year, but during the war he had already been thinking about monetary reform.80 In the decisive months of 1948 as director of the economic administration for the English and the American occupation zones, Erhard received crucial support from the neoliberal economists in his advisory council, namely Eucken, Böhm and Miksch. Some of them had been active in the resistance, and had elaborated plans for economic reforms in a post-war Germany.81 They were able to dominate the discussions in the advisory council against the social democratic and socialist economists who insisted on a continuation of state economic planning with price and wage controls (Nicholls 1994, 186–205). To understand just how risky and revolutionary the abolition of price controls appeared at the time, the discussions at Mont Pèlerin in 1947 are quite telling. There, Röpke and Eucken had presented their analyses of the political and economic situation of Germany for the first time to an international audience. Eucken (MPC 1947, 114, 129, 133) warned: The present development shows that the planned economy of the separate states is so inefficient that it is decaying. ... [and] ... ,. [t]he [food] rations are so small that nobody, literally nobody, can live on them.

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Since the controlled economy had degenerated into a barter system and was totally unproductive, Eucken advocated an end to the rationing and price-fixing system, stating I believe that prices must be allowed to rise but only if at the same time a free market and international trade are resumed. This conclusion, however, was met with scepticism by some fellow Mont Pèlerins. Robbins replied that he did not think that the consumption rationing system could be removed, and Brandt, wary of the extremely difficult nutritional situation, warned that establishing in Germany a free price market system, particularly with respect to food, without first having replenished the stocks, would absolutely lead to starvation, unless you took a large number of people and fed them on public relief. When Erhard presented his ideas for decontrol, deregulation and a private market economy, the socialist SPD and even many Christian Democrats raised strong opposition.82 In the Bizone administration, Erhard was helped by Miksch and Müller-Armack who drafted a law (the Leitsätzegesetz) that allowed the economics director to remove price controls. The SPD opposition in the Bizone warned him of the ‘steel bath of free prices’ and that a return to a market economy was tantamount to ‘throwing a fatally ill man in cold water’ (quoted in Erhard 1957, 106–107). By contrast, Müller-Armack (1974 [1948], 104) predicted that decontrol would set free the economic forces and would not be ‘a leap into the dark and into chaos, but quite the contrary, a step out of chaos into the natural order’. Indeed, this prediction proved correct. The day after Erhard announced the end of most price controls, shop windows were suddenly full of consumer goods. Moreover, after the central allocation of resources ended, industrial production started to recover. However, at the same time as repressed inflation was being dealt with by the currency reform, previously concealed underemployment was revealed. Thus, workers who had hitherto been paid with worthless currency were laid off. Wage increases lagged behind consumer price increases. As a result, the trade unions organized mass protests against Erhard. In this situation, he received helpful intellectual support from Röpke. Adenauer had asked Röpke (1950, 18) to write a study, which was presented in August 1948. Under the title ‘Is the German economic

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policy right?’ he vigorously defended the measures taken by Erhard, and concluded that the difference between today and then [before the reforms of June 1948] is so immense that foreigners, who return to Germany after years, talk of a miracle. In 1950, after the Korean War had given another boost to industrial production, the German economy embarked on a long-term boom. With an average growth rate of more than 8 percent during the 1950s, unemployment was falling rapidly and wealth was growing. The talk of an ‘economic miracle’ was now ubiquitous, but the neoliberals vigorously opposed the ‘miracle’ interpretation. In an article for an American libertarian journal, The Freeman, Röpke (1953, 844–845) emphasized that it was neither the Marshall Plan which had started the recovery nor the exceptional thrift and energy of the German people, but the right institutional reforms, ‘the restoration of a comparative market economy and the dismantling of socialism’. Furthermore, he credited Erhard with having broken the myth that the advance of socialism was a ‘historical necessity’. To refute the ‘miracle’ thesis, Hunold (1953) edited a book, Wirtschaft ohne Wunder, with contributions by his Mont Pèlerin friends, including Einaudi and Hayek. Decades later, Hayek mused that the Germans had never really understood that the true miracle of their economic revival was ‘that the other persons in authority let Ludwig Erhard have his way’ (quoted in Hennecke, 2000, 269–270). At the same time, Hayek was concerned that the term ‘social market economy’ would lead to confusion and could blur the liberal meaning of the concept.83 The German economic reform had taken place in a kind of political vacuum, when parties and interest groups were not yet entrenched. This gave Erhard scope for his deregulation measures. His successful political action showed that Hayek’s intellectual strategy was complemented and strengthened by good policy examples to which the economists could point as empirical evidence. As the Economy Minister, Erhard benefited from the intellectual support that liberal circles provided him; indeed, he would not have succeeded without their earlier efforts in the ‘battle of ideas’. Unfortunately, two of his most trusted advisers and collaborators, Eucken and Miksch, died suddenly in 1950, and after the initial economic reforms, the right legal framework for competition was still missing. Franz Böhm, who was active in the CDU and was elected member of Parliament in 1953, took over the crucial task. It was a hard and long fight. A first draft of an anti-cartel law had been devised by a

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friend of Böhm in 1946, but the proposal was blocked by industrialists. In letters to Hunold, the MPS secretary, Böhm complained about the opposition of ‘cartel friendly entrepreneurs’ saying ‘[t]heir delight that I ... have remained isolated is unconcealed’.84 The MPS secretary replied with a call to continue the fight of the neoliberals for the cause of the consumer and ... against the historical liberalism, i.e. against monopoly capitalism.85 Although avoiding such radical language in public, Böhm and Erhard agreed about the cartelists ,and they continued fighting for almost a decade for the core project of the German neoliberal competition economics. Finally, in 1957, the Law against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen) was passed, which declared the principal illegality of cartels, albeit with some exceptions. The law did not go as far in its anti-concentration effect as some German neoliberals had wished, but nevertheless it marked a decisive break with the cartel tradition of German industry. Together with increasing international competition, it contributed to eroding the efficacy of national cartelist formations (cf. Giersch, Paqué and Schmieding 1992, 85).

8

Difficult countries for neoliberals: Italy and France

While West Germany was developing a highly successful market economic order, in other countries the efforts of neoliberal economists were too little or of no avail at all. One reason might have been that in Germany the intellectual preparations had begun much earlier than elsewhere. In addition, the economic planning and controls system was associated in Germany with a discredited political system, whereas in Britain and the USA the collectivist or New Deal policies were part of the anti-depression and war-time industrial policies which the majority of the people supported and wanted to continue after the war. In Italy, neoliberal economists, most prominently Luigi Einaudi, gained some positions of influence after the defeat. As Governor of the Bank of Italy from 1945 he succeeded, with a restrictionist policy, in halting the inflation of the lira. The monetary stabilization laid the basis for the subsequent economic upswing, which was also fostered by a restructuring of the agrarian economy and the development of small and medium-size enterprises. With Einaudi, a few other Italian economists became MPS members, most notably Costantino Bresciani-Turroni, Minister of Trade from 1946 to 1947, and Giovanni Demaria, a director

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of a university of commerce in Milan, and Head of the Economics Commission of the Constitutional Assembly. The group of Italian neoliberals vigorously opposed concentrations of economic and political power, as well as the cartelization and corporatist structures inherited from Mussolini’s regime.86 Einaudi regarded monopolies as ‘enemy no. 1’ and found their development was fostered mainly by state actions, tariffs, subsidies and licences (cf. Richter 1963, 39–40). The Italian neoliberals criticized the heavy presence of state enterprises and made proposals for privatization, but these were not realized. As President of the Republic from 1948 to 1955, Einaudi had a merely representative function, with little influence on the direction of economic policy. He died in 1961, two months after delivering the opening speech at the MPS general meeting in Torino. In France, economic policy after the war was centred on dirigiste planning concepts. Significant sections of French industry had been nationalized already during the Resistance days, and radical unions were in a strong position. In 1946 General de Gaulle instituted a Commissariat Général du Plan, which drafted ‘indicative’ plans for economic development and investments. In the opinions of Hayek (1952a, 182–213) and Röpke (1944, 103–167), this planning attitude of the administration represented in part a rationalist and constructivist French tradition of thought that had been followed since the 18th century, and which tended to overestimate the capacity of the ‘scientific’ social engineer to improve society and economy. At MPS meetings, Hayek’s French friends complained that the ‘indicative’ plans were a fiction, since the small statistical unit produced only crude aggregate pictures of the economy, and the technocratic planners lacked the necessary knowledge for the modernization of industry (cf. Villey 1964; Grün 1964). Since the mid-1950s, when it had become clear that Germany was in the lead economically and that the indicative plans were not as effective as hoped, the French governments had changed their strategy; now they put more emphasis on a Keynesian expansionary fiscal and credit policy, to stimulate growth and achieve full employment. As a consequence, the franc lost internal value and was under devaluation pressure, but ‘the erosion of the currency was a price the government was ready to pay for demand management’ (Dormois 2004, 59) – for some years at least. Towards the late 1950s, the situation became untenable. When de Gaulle returned to power as President of the Republic in 1958, he nominated Jacque Rueff as head of a reform commission. The Rueff plan suggested an end to budget deficits, by making cuts in expenditures and

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subsidies as well as introducing some tax increases. Besides this fiscal consolidation, Rueff advocated a more restrictive monetary policy. As a result, the inflation rate slowed down. To improve its external competitiveness, France devalued its currency, and at the same time trade barriers were abolished. Growth was thus boosted considerably in the next few years, though France was still unable to catch up with Germany. Another plan by Rueff (1961, 118–119) in 1959/1960 for a wider liberalization to get rid of ‘sclerosis in our economic structure’ was not accepted by the Debré government, which was again leaning towards dirigiste concepts.

9

The Keynesian welfare consensus in Britain

A cause for great concern for Hayek were the developments in Britain, his home country before his move to America in 1950. His warning of the Road to Serfdom had been directed at British voters, whom he had tried to convince that the central planning of the economy and the promise of total ‘social security’ by the state presented a danger to individual freedom. His provocative warnings generated a heated debate, in which a remark by Churchill in a radio broadcast, his so-called ‘Gestapo speech’, caused a public outcry. The Prime Minister’s polemic was criticized as having been inspired by Hayek (see Sheamur 2006). Labour won a landslide victory in 1945, and Prime Minister Attlee had a free hand to recast the British economy, nationalize large parts of industry and build an extensive welfare state.87 In contrast to West Germany, where Erhard radically liberalized the economy and sought to break with the past, in Britain the wartime planning mindset prevailed. Price controls and rationing of commodities as well as consumer goods continued well into the 1950s. Hayek (1992 [1947], 40) was highly critical of the policies, and warned of recurrent British balance of payments crises as a consequence of the relative decline in competitiveness. He was also, however, pessimistic about the prospects for a change, and suggested that [i]t is more probable that in the relevant government circles the failure of planning efforts will be regarded as proof that not enough planning and not enough coercive measures have been applied. The new government was carried by a ‘Keynesian welfare’ consensus, which had already begun to develop during the war (Addison 1975). Stafford Cripps, the first post-war Chancellor of the Exchequer, had

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introduced the rhetoric and methods of aggregate demand management and deficit spending. His successor, Hugh Gaitskell, became a fully fledged Keynesian finance minister working for ‘full employment’. In the eyes of an increasing number of voters, however, the policies did not bring the promised great successes. John Jewkes, one of the most active British MPS members, wrote quite optimistically in March 1950 that the tide of Socialism is running back. Even in England, after five years of experience, the people are beginning to change their minds about nationalization and planning. At the next election the socialists will go out of office.88 Indeed, the Conservative party and Churchill regained office in 1951, but they left most of Labour’s economic legacy unchanged. Only the socialization of the steel industry was reversed, and some price controls and rationing for consumer goods were lifted. In the main areas of social and fiscal policy, however, there was an astonishing degree of continuity. Among the Tories, progressives like Harold Macmillan, who had long proposed a ‘middle way’, and R. A. Butler dominated the party line. As Finance Minister, Butler followed Gaitskell’s Keynesian line to the extent that the press spoke of a synthesis – ‘Butskellism’. Labour had laid the fundamentals for a new political consensus lasting three decades, which rested on four main pillars: a mixed economy with a large state sector; powerful trade unions; a comprehensive welfare state; and a Keynesian fiscal policy and ‘demand management’ to achieve full employment (cf. Addison 1975, 270–278). Neoliberal critics of the Keynesian welfare state had little influence, and stood at the fringe of the debate. In this situation, the only viable path for change seemed to be to pursue a Hayekian long-term intellectual strategy to win over public opinion. The opportunity of starting such an enterprise presented itself through the financial help of Antony Fisher, a farming entrepreneur; inspired by Hayek’s ideas, he founded the Institute of Economic Affairs in 1955 in a small office in London.89 According to Cockett (1994, 130), he ‘modelled the IEA very much on the Fabians and the early Socialists’, imitating their methods of disseminating ideas through educational efforts with future opinion leaders in the media, academia and politics. In this, the IEA was following Hayek’s advice precisely. As director for the think tank, Fisher hired Ralph Harris, a young journalist from a working-class background. The second key figure of the Institute’s staff was Arthur Seldon, who proved to be very talented in writing and editing publications. Both had an

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academic background influenced by prominent neoliberals.90 The LSE and other British universities provided a pool of academic collaborators for the Institute with its international network being mainly established through the Mont Pèlerin Society.91 Over the years, the IEA became the focal point of efforts to influence the British climate of opinion. It did so by publishing short and easy-to-read pamphlets on economic policy issues directed at journalists, teachers and students as well as politicians. In the late 1950s, the Institute had already acquired a modest reputation for its work, and had established contacts with academics, journalists and some politicians. At the 1959 Oxford meeting of the MPS, Harris and Seldon (1959, 2, 6, 12) presented a paper entitled ‘The Tactics and Strategy of the Advance to a Free Economy’. Their account sounded modestly optimistic: Before the war and up to about 1950, the warnings of liberal economists went largely unheeded, and only the short-sighted, stop-go ideas of interventionists had the ear of the politicians and the public. But for some years now, it has been possible to preach the free economy with some hope of being understood and without the automatic accusation of acting as the lackeys of capitalists. Established interests, politicians and intellectuals as well as monopolistic entrepreneurs were seen as the main obstructive forces: The Institute’s battle of argument has thus often to be waged on two fronts: not only with intellectuals and politicians who deny or do not understand the basic tenets of a free society, but also with businessmen who profess them but who wish to contract out of competition when it suits them. As for their tactics and strategy, Harris and Seldon advocated their educational approach which was directed at the influencers of public opinion. They insisted that [t]he philosophy of the market economy must be widely accepted; this requires a large program of education and much thought about how to finance it. The first politician of any importance who openly embraced IEA ideas was Enoch Powell, a man of high intellectual and rhetorical capacities who could appeal to elite circles as well to the broader public. Powell had

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resigned in 1957 from the post of Financial Secretary to the Treasury in the Macmillan government in protest over a budget deficit; now he was free to openly criticize the interventionist policies of the Conservatives. He attended IEA discussions and contributed to two publications. One was entitled ‘Rebirth of a Nation’, the other a comparative study on ‘Economic Miracles’, focusing on the German example of a successful non-planned economy. In mid-1960, Powell also became a member of the MPS. Some other promising young Conservative MPs also began to show an interest in the IEA’s ideas. The first was Sir Geoffrey Howe, followed by Sir Keith Joseph and Margaret Thatcher. They were critical of the British government’s attempts to imitate the French model of ‘indicative planning’ as a response to the lack of economic dynamics.92 Yet even if some British politicians began to see by the early 1960s that their country was falling behind more dynamic economies like Germany, most of them thought a major turn in economic policies impossible – even Joseph was sceptical as to whether the radical IEA ideas were ‘politically practical’ (cf. Denham and Garnett 2001, 137–139). At the MPS meeting in France in 1967 Powell (1967, 1–2) discussed the following: What is meant by politically impossible? ... The politician may, and often does, have to take a view upon what is ‘politically practicable’ though only for the immediate future – he must beware of the vulgar error of supposing that there are acts or propositions which are permanently, necessarily and inherently ‘politically impractically’. A year later, this extraordinary politician was pushed out of the Heath shadow cabinet after making a speech denouncing the social consequences of mass immigration, which was criticized as ‘racist’. The younger MPs sympathetic to the IEA, above all Howe, Joseph and Thatcher, kept a low profile. However, in 1968 the Fabian Society, the socialist counterpart of the IEA, published a tract warning that an IEA-inspired ‘New Right’ was becoming more influential. David Collard (1968, 1–5), the author of the booklet, cautioned that ‘the New Right must be respected for the quality, consistency and rigour of its approach’. He warned that while the Left was insisting on nationalizations and economic controls, it was ‘successfully outflanked by the New Right’. The 1970 Conservative party election victory seemed at first to provide an opportunity for a decisive turn towards more market-friendly policies.93 However, the IEA’s hopes were dashed. When the business cycle slowed down and unemployment rose, Heath went back to expansionary Keynesian fiscal and monetary policies, and ignored inflationary

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tendencies. In trade union politics, too, the economic liberals suffered a defeat. Heath’s efforts to push through a reform in union legislation faced fierce resistance from the powerful workers’ interest groups, and as a result of the miners’ strike in the winter of 1972, Heath finally gave in to their demands. Lastly, in his conflict with the Trade Union Congress, he resorted to price and wage controls. The only Conservative MP who voted against these measures was Enoch Powell. In 1974, the Heath government was voted out of office. During all those humiliating years, the IEA-friendly ministers such as Sir Keith Joseph (Secretary of State for Social Services), Margaret Thatcher (Secretary of State for Education) and Sir Geoffrey Howe (Secretary of State for Trade) were subject to Cabinet discipline, and acquiesced.94 By 1972, the IEA editorial director Seldon had given up writing letters urging Joseph and Howe to consider alternative policies. That same year, the IEA went public, publishing a ‘Memorandum’ with harsh criticisms of the government,95 but to no avail (cf. Cockett 1994, 204–210). At the 1974 MPS meeting in Brussels, Arthur Shenfield (1974), the MPS president, gave a speech on ‘The English Disease’, summing up the main features of the ailing economy, including militant unions, low productivity development and high wage demands after the oil price shock – all this resulted in rampant inflation and rising unemployment. Among middle-class voters there was a growing concern about the economic future of the country, but the first attempt of the neoliberals to turn the tide had failed.

10

The post-New Deal era in America

The American MPS members had similarly disappointing experiences with politicians of the Right, who, it was supposed, would challenge the Keynesian zeitgeist but failed to deliver. The United States had been profoundly changed by its New Deal of the 1930s and its involvement in the war. As Robert Higgs (1987, 169–174, 197–204) has convincingly argued, each crisis episode triggered a lasting period of growth in the government. The New Deal brought the biggest leap thus far towards a more centralized government; in the 1940s, the US federal administration had expanded so much that it could exercise powers over the economy which the founding fathers could never have envisaged. The policies started in the emergency situation of the 1930s and 1940s led to a fundamental change in attitudes concerning the relationship between state and market. The old norm of a balanced budget was erased by a Keynesian-inspired ‘fiscal revolution’, as Herbert Stein (1996) called it. An expansionary budget policy was now thought necessary to counter

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insufficient private investment and consumption expenditure. With the Employment Bill of 1945, the state assumed the responsibility of securing the highest possible employment. There were dissenting voices, like those of Henry Simons, Senator Robert Taft and MPS writer Henry Hazlitt. But the opposition could only marginally change the new employment policies. In the economics profession, the Keynesian wave had overwhelmed most of the younger generation with the force of an almost religious conversion (see Samuelson 1966 [1946]). In the Council of Economic Advisers (CEA), created in 1946, the most prominent members were Keynesian and interventionist economists, such as Leon Keyserling in the early 1950s, and Walter Heller, Paul Samuelson and James Tobin in the early 1960s. The most influential popular economist of that time was John K. Galbraith; in his much acclaimed book The Affluent Society he criticized wasteful private consumption, stimulated by manipulative advertising, and claimed that the state was chronically underfinanced. Within the MPS, such critiques were met with anger: At the Kassel meeting of the Society, Hayek and Stigler criticized the arbitrary distinction between real and artificial consumer demand; Stigler also pointed out that the share of federal government to GDP without military expenses had doubled since the beginning of the century.96 In the late 1950s, James Buchanan and Gordon Tullock came forward with their ‘Public Choice’ explanations about the growth of governments. According to their reasoning, interacting interest groups and politicians would engage in log-rolling, and in this way they would make the state finance projects and subsidies which would bring profits for them but were nonetheless not in the public interest. Buchanan (1960 [1959]) became one of the most active speakers at MPS meetings, and the University of Virginia, where Buchanan developed his Public Choice theory, became another academic pillar for economic liberals in the USA besides Chicago. Most other universities, however, had yet to become involved. As in the scientific community, the economic liberals were marginalized in the political spectrum. They had even lost their traditional selfdesignation as ‘liberals’ to the Left, and now social democrats used this name.97 Those who did not welcome the New Deal and were unhappy with its legacy were now called ‘conservatives’ or even reactionaries. The rise of the social democratic liberalism to intellectual pre-eminence, and the eclipse of traditional liberalism (‘conservatism’) seemed so definite that Lionel Trilling (1950, ix) wrote in his The Liberal Imagination:

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In the United States at this time Liberalism is not only the dominant but even the only intellectual tradition. For it is the plain fact that nowadays there are no conservative or reactionary ideas in general circulation. He acknowledged that there were some strong ‘impulses’ towards conservatism or reaction, but they did not, as he wrote disdainfully, express themselves in ideas but only in action or in irritable mental gestures which seek to resemble ideas. The remaining liberal-conservatives were confined to a ‘remnant’, as they themselves put it. Edwin Feulner (2003, 4), an influential conservative and later MPS president, wrote of that time: It is difficult now to remember how isolated the conservative remnant seemed in the 1940s and early 1950s, meeting by torchlight in its catacombs. Probably out of this sense of isolation and defeat, the remaining economic liberals and traditional conservatives developed alliances that historian George Nash (1976) traced in his book The Conservative Intellectual Movement in America since 1945. One of the rallying points for the market liberals was the Foundation for Economic Education, which published pamphlets with a Misesian tone, and also a little study written by the Chicago economists Stigler and Friedman. In 1955 a small think tank in Irvington, outside New York, bought the magazine The Freeman which published essays by Mises, Hayek and Röpke, among others. Also in 1955, William Buckley founded the National Review. This magazine gained rapidly in circulation and intellectual reputation, and thereby provided a breakthrough for the nascent ‘conservative movement’. Buckley’s magazine successfully implemented the strategy of ‘fusionism’ between economic liberalism and moral conservatism.98 Within the MPS, the tensions were also felt. For example, Hayek was unhappy about an invitation for Russell Kirk, author of The Conservative Mind, for whom Röpke was full of praise,99 and when Kirk held a speech at the MPS general meetings 1957 in St. Moritz, Hayek reacted by giving the paper ‘Why I am not a Conservative’. This was subsequently reprinted as annex to his Constitution of Liberty. The first opportunity to gain real political power presented itself to the liberal-conservative movement when Barry Goldwater surprisingly

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received the Republican nomination in 1964 and ran for US president. Although vilified by the left-liberal media as a dangerous extremist – a label which he had acquired with his notorious ‘extremism in the pursuit of liberty is no vice’ quote and other statements concerning the use of nuclear weapons in the Cold War – Goldwater gained the support of not only right-wing conservatives but also many economic liberals. They put their hopes in the sympathy that the senator had expressed for market economics, and Goldwater seemed willing to substantially roll back the New Deal structures. In his best-selling book The Conscience of a Conservative, Goldwater (or rather his ghostwriter, Brent Bozell, Buckley’s brother-in-law) had laid out his philosophy of limited government and his general distrust in centralist power; he even called the federal administration a ‘leviathan’ out of control, which must be cut back (Goldwater 1960, 20). During the election campaign, Milton Friedman offered his assistance with economic advice, as did some other MPS members such as Karl Brandt, Warren Nutter and Yale Brozen.100 Goldwater’s crushing defeat at the polls against Lyndon B. Johnson dealt a blow to the hopes of the intellectual liberal-conservative movement. However, the Goldwater episode had two longer lasting effects. For the first time since the war, it had opened a political-intellectual window to ‘think the unthinkable’ – a radical turn for more market-oriented politics. In the long run this enabled, as Friedman remarked in his memoirs, a swing in public opinion towards free-market conservatism (Friedman and Friedman 1998, 369). From this perspective, the Goldwater episode was not a defeat but an indirect victory in the ‘battle of ideas’ which later materialized. The second lasting effect of the Goldwater campaign in 1964 was that it encouraged a whole generation of young conservative activists to enter politics. One of them was Ronald Reagan, who delivered his first nationally broadcast speech, and impressed the nation with his talent for rhetoric. Many of the economic liberals’ hopes for a political about-turn were also focused on Richard Nixon, who became president in 1968 and presented himself as a market-oriented politician. Friedman was his principal economic advisor during the election campaign. The political constellation seemed favourable for a change in politics. After Nixon was elected, he appointed some of Friedman’s friends to key positions in his administration, in particular George Shultz, who served at first as Secretary of Labor and later as Secretary of the Treasury. Paul McCracken and Herbert Stein, two market-liberal economists, joined the CEA. In addition, Friedman’s mentor Arthur Burns was named Chairman of the Federal Reserve. From the point of view of the economic liberals, the Nixon government had already ended tragically in late 1971 because it could not

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cope with the slowdown in growth, the rising unemployment and the inflationary pressures emerging simultaneously. In this difficult situation, Nixon committed what Friedman considered a fatal sin: he opted for price and wage controls to contain inflation.101 While the public welcomed the measures, liberal economists condemned them as a big mistake. CEA member Stein (1994, 167) later remarked regretfully about the ‘radical departure from conservative, free market philosophy’. In 1973, when the first price controls failed to contain inflationary pressures, Nixon resorted to a total price freeze for many goods, including gas. The consequences were recurrent shortages of energy supplies. Friedman went so far as to say that Nixon’s wage and price controls did even more harm to the country than the Watergate scandal (Friedman and Friedman 1998, 387). As a reaction to the government’s anti-market policies, some radical activists broke with the Republican Party. Nixon’s decision to end the Bretton Woods system, suspend the convertibility of the dollar into gold on 15 August 1971, and devalue the currency provoked a band of activists into setting up the Libertarian party. Although it never gained much voter support, it was a catalyst for the libertarian movement. Some of the later advisers to the Reagan administration were members of the Libertarian party, like Ed Crane and David Boaz who in 1977 founded the Cato institute (Kelley 1997, 142–143).

11 The re-orientation of neoliberalism towards ‘laissez faire’ Within the Mont Pèlerin Society, which was the key intellectual organization of neoliberal economists, Americans had gained numerical and intellectual dominance. Since the 1960s, the younger Chicago School, with Friedman as leader, made progress in the discussions. This was particularly relevant to the two central issues of neoliberalism: the conception of a competition order, and the role of the state relating to it. The term ‘neoliberalism’ was used only very rarely by the American MPS members, but shortly after the foundation of the Society they were strongly influenced by the ideas of the early neoliberals. Friedman (1951 [1950]) wrote an essay, ‘Neo-liberalism and its prospects’, in which he identified with the name and the cause. He described the central ideas of neoliberalism as follows: Neoliberalism would accept the nineteenth century liberal emphasis on the importance of the individual, but it would substitute for the nineteenth century goal of laissez-faire as a means to this end, the goal of a competitive order ... The state would police the system, establish

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conditions favourable to competition and prevent monopoly, provide a stable monetary framework, and relieve acute misery and distress. As this shows, the early neoliberals in the 1930s and 1940s had called for an active role by the state to demonopolize the economy and establish a legal framework to safeguard competition against cartels and concentration tendencies. This was the position of the Freiburg School, which propagated ‘vollständigen Wettbewerb’ (a kind of perfect competition) as the ultimate aim, and also the older Chicago School around Simons. Their position had greatly impressed Hayek in the 1940s; but by the late 1940s and early 1950s he had distanced himself from the concept of ‘perfect competition’, which he declared a fiction. A special anti-cartel authority with discretionary powers to intervene and break up big corporations, as advocated by some German ordoliberals, and by Simons, seemed to Hayek an intolerable threat to the rule of law (Hayek 1954). Later, he continued to advocate a general ban on cartels, but he thought that even without such a ban, cartel agreements and tacit collusion would not be stable without legal protection (as had been given them in Germany for many years). A legal decree of annulment in combination with decisive progress towards free trade would be, Hayek thought, sufficient to strengthen competition. Also within the Chicago tradition there was a marked re-orientation. The young Chicago School turned away from the position of ‘Old Chicago’ and from Simons’ rigorous stance on the competition issue. Friedman and Stigler were the leading voices in this re-orientation, supported by Yale Brozen, Harold Demsetz and Sam Peltzman, and later by the legal scholars Richard Posner and Robert Bork. Since the mid-1950s they had become more relaxed about concentrated industries and, conversely, warier of state regulations supposedly enhancing competition and welfare.102 They started to carry out empirical research into the monopoly question. Perfect competition was unrealistic, but monopolies were not as abundant as the older generation had thought. While the old generation of neoliberals were extremely sceptical about big corporations, the younger generation in Chicago now came to appreciate that big corporations also had a positive role in terms of economic efficiency and innovative power. The fact that there were only a small number of suppliers for a certain good would not be sufficient evidence that there was no competition. They therefore concluded that concentrated industries could well be innovative and dynamic (Martin 1976, 304). In Capitalism and Freedom, Friedman (2002 [1962], p.121, 123, 28) referred to G. Warren Nutter’s dissertation, ‘The extent of enterprise

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monopoly in the United States’, and a paper by Stigler who showed that monopolistic structures were not a ubiquitous phenomenon, as critics of the market economy claimed. Consequently, Friedman complained about the ‘over-estimation of the importance of monopoly’. The most common source of monopolies, Friedman stated, were direct or indirect government interventions, as radical liberals like Mises had affirmed. It was protectionist measures by the state that allowed single producers to reap monopoly profits. In a dynamic environment with free trade, monopolistic positions could not be sustained for long, except in those situations where technical conditions made it unavoidable: When technical conditions make a monopoly, the natural outcome of competitive market forces, there are only three alternatives that seem available: private monopoly, public monopoly, or public regulation. All three are bad, so we must choose among the evils. Friedman then made explicit reference to Henry Simons and Walter Eucken, and wrote about them, saying that ‘having learned from both, I reluctantly conclude that, if tolerable, private monopoly may be the least of the evils’. With their ‘revision of the revision’, a reversal of the pessimistic view of early neoliberals regarding competition, cartels and concentration, the neoliberals of the 1960s and 1970s were coming close to preaching the old ‘laissez faire’ view of the free market. Their emphasis now was on deregulation, and their scepticism focused on the activities of the state. This was due to the empirical and theoretical research carried out in Chicago. The ‘Public Choice’ theory also played a role, because it showed that ‘benevolent’ actions of politicians and bureaucrats, who would create a favourable framework for competition, were not the rule but rather the exception. However, the free-market economists just had to keep hoping for some dedicated politician who would realize their agenda.

12

Turning the tide: the intellectual counter-revolution

In the early 1970s, the tide of economic liberalism was still very low. Both the Heath and the Nixon episodes were bitter disappointments. There was reason for frustration on the part of dedicated liberals. A quarter of a century after its inception, the MPS had grown to a large organization, with around 350 members; most of them were professors at prestigious universities and it was no longer isolated.103 Friedman had emerged as the dominant economist within the Society in the 1960s, at which point

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his star was temporarily shining brighter than Hayek’s. In 1970, he was elected President of the Society. When preparing for its silver jubilee meeting, Friedman discussed the idea of dissolving the MPS, as in his view it had served its purpose of providing a refuge for liberals in the difficult times after the war. The great majority of members, however, wanted to continue the organization, which had proved to be an excellent platform for intellectual exchange and networking. The meeting in Montreux, near Mont Pèlerin itself, passed in a joyful atmosphere and also lifted Hayek’s mood; he had been plagued by depression for years. He regained some hope that the tide might be turning – in academic circles at least, the anti-Keynesian front was making great advances. There are three factors which precipitated the change: first, inflationary pressures had emerged since the late 1960s while the world economy was deteriorating significantly. The Keynesian deficit spending policies only produced more inflation, but did not stimulate the economy or reduce unemployment. This development seemed to falsify the Phillips curve with its alleged trade-off between inflation and employment, and it vindicated critics like Friedman (1968) who had warned of this in his address as President of the American Economic Association. Soon, there was talk of a monetarist ‘counter-revolution’ against Keynesianism (Johnson 1971), although in practical politics this counter-revolution had not succeeded at the first attempt. The second factor was that prominent neoliberal economists received high academic honours. The Nobel Prizes for Hayek in 1974 and Friedman in 1976 not only raised their scientific reputation but also boosted their fame and credibility in popular political debates. ‘Nobels’ have an advantage in the ‘battle of ideas’, since their words count more than those of normal scientists.104 The award for Hayek, then already 75 years old, had come as quite a surprise. In the half-decade since the inception of the Nobel Prize in Economic Sciences, financed by the Swedish Riksbank, it had been awarded to technical or statistical economists, mostly macroeconomists, with no liberal leaning at all, but rather socialist and Keynesian preferences.105 The third factor was the expanding network of affiliated think tanks which grew around or connected with the MPS organization.106 This increased the firepower of the economic liberals in the battle of ideas. As mentioned, the FEE was the earliest aggressive think tank to promote free-market ideas in the United States.107 In the 1960s, the Volker Fund transferred part of its remaining funds to start the Institute for Humane Studies (IHS). Although these were small bodies with a limited reach, their continual educational efforts prepared the ground for bigger think

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tanks of national importance (Kelley 1997, 62–69, 83–84). Among the most influential of these was the Hoover Institution, located at Stanford University, which began in the 1970s to provide a welcoming research environment for prominent MPS members such as Friedman, Stigler and Thomas Sowell. The American Enterprise Institute became an influential advocacy tank and a counterweight to the left-leaning Brookings Institution in Washington.108 In 1973, the Heritage Foundation began its operations as an advocacy think tank close to the Republican Party with a free-market and socially conservative agenda. Their greatest success was the publication of the volume Mandate for Leadership, which was widely regarded as a blueprint for the Reagan administration. In 1977, the libertarian and anti-establishment Cato Institute opened its offices in San Francisco, receiving funds from the Koch brothers among others. In London, the IEA provided the main platform for Hayek as well as Friedman and other ‘monetarists’. Then the Centre for Policy Studies (CPS), a rival to the Conservative party’s official research department, and the radical Adam Smith Institute came to the fore; they were both advocates for aggressive strategies against the status quo while operating on much smaller budgets than the American think tanks. The most important person for the building of an international network of think tanks was IEA founder Anthony Fisher. After his successful business career, he moved to San Francisco in the 1970s and lived in the same apartment block as the Friedmans. He helped to build up some new liberal public policy research bodies, starting in 1974 with the Canadian Fraser Institute, and later the Manhattan Institute in New York. In 1981, Fisher launched the Atlas Economic Research Foundation to support new public policy research think tanks with liberal agendas around the world. Atlas director John Blundell described it as his mission ‘to litter the world with free-market think-tanks’ (quoted in Cockett 1994, 307). With all these institutes as ‘secondhand dealers in ideas’ it was much easier to reach out to the public and the politicians. The late 1970s saw the rise of and the radicalization of two politicians, Thatcher and Reagan, who shared many views with the neoliberals of the MPS. A radical change in economic policy now became feasible. This change was precipitated by the deterioration of economic conditions during the stagflation period since the mid-1970s. Neoliberals attributed the increase in inflation to the expansionist demand policies after the oil price shock; these produced rising debt levels and inflation but were ineffective at bringing down unemployment. The more the Keynesian welfare state model got into crisis, the more a discussion of market economic alternatives started. In Britain by that time, the IEA had been

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disseminating these ideas for almost two decades; by the early 1970s they had published around 250 studies on public policy issues, many authored by MPS members. Cockett (1994) described the multifaceted efforts of think-tankers, academics and political activists, many with ties to the MPS, to propagate a drastic liberalization of the economy. The first prominent politician to fully convert to the IEA ideas was the conservative Sir Keith Joseph. His wake-up call was a series of articles by the journalist Alfred Sherman, a former communist who had turned radical liberal-conservative. In speeches during the spring and summer of 1974, even before Heath’s defeat in the general election, Joseph (1975, 6) had publicly condemned the effects of socialism and inflation on the British economy and called for a monetarist cure. What shocked the party establishment was that he included the Conservatives in his bitter criticism when he complained: ‘Since the end of the Second World War we have had altogether too much Socialism.’ In 1976, the economic situation worsened dramatically. The public deficit rose to more than 10 per cent relative to the GDP, and Britain had to ask for a credit package at the International Monetary Fund. In the fall of 1976, Prime Minister Callaghan (1987, 425–427) admitted the failure of the Keynesian deficit spending policy that his government had pursued: We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting Government spending ... that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.109 As Dominik Geppert (2002) has suggested, the late 1970s saw the collapse of the post-war consensus based on a mixed economy with a large state sector, powerful trade unions, a comprehensive welfare state and ‘demand management’ to achieve full employment. It was this development, and the interpretations given by the ‘New Right’ to it, which made the rise of a non-consensus politician like Thatcher possible. In the ‘winter of discontent’, 1979, a chain reaction triggered by excessive union demands and reckless strikes tipped public opinion and led to the election of Thatcher as Prime Minister. On both sides of the political spectrum there was talk of an intellectual ‘counter revolution’. Cockett (1994, 286) saw the electoral triumph of Thatcher as ‘the culmination of almost forty years of intellectual and

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political work’ since the Colloque Walter Lippmann and the convention at Mont Pèlerin. Thatcher herself knew how much she owed to the intellectual preparation of her government, and wrote a letter to Hayek in which she said: I am very proud to have learnt so much from you over the past few years. I hope that some of those ideas will be into practice by my Government in the next few months. As one of your keenest supporters, I am determined that we should succeed. If we do so, your contribution to our ultimate victory will have been immense.110 She (1995, 659) described the credo of her government in her memoirs as follows: We intended policy in the 1980s to be directed towards fundamentally different goals from those of most of the post-war era. We believed that since jobs (in a free society) did not depend on government but upon satisfying customers, there was no point in setting targets for ‘full’ employment. Instead, government should create the right framework of sound money, low taxes, light regulation and flexible markets (including labour markets) to allow prosperity and employment to grow. Within the Thatcher government, there were still strong forces unwilling to confront the economic challenges with radical methods: although Thatcher’s choices for key positions in the cabinet were close ideological allies like Sir Keith Joseph (Secretary of State for Industry), Sir Geoffrey Howe (Chancellor of the Exchequer) and John Biffen (Chief Secretary of the Exchequer), there was opposition by moderates like Ian Gilmour (Lord Privy Seal) and Jim Prior (Employment Secretary), the ‘wets’, who did not want a downright confrontation with the trade unions. It was not until the autumn of 1981 that Thatcher could circumvent these obstacles to carry out fundamental reforms of trade union laws. The papers delivered at MPS meetings in the early 1980s testified to doubts and criticisms, for instance by Ralph Harris, about the speed of reforms, the privatization process initiated by Joseph, fiscal policy and monetary stabilization. In the end, however, the general assessment was that the Thatcher government had achieved a remarkable reform record, although in some areas like welfare and education the changes were not as radical as the more ardent supporters from the IEA had wished (Plickert 2008, 404–415).

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In the United States, economists from the ranks of the MPS featured prominently in Ronald Reagan’s advisory team for the 1980 election. One of his key aides was Martin Anderson (1987, 3), a former economics professor from Columbia and a White House staff member under Nixon. MPS member Anderson drew his support from the network of the Society. Among the 74 economic policy advisors in Reagan’s team, 22 – almost a third – were members of the MPS, with a heavy representation of the younger Chicago School. George Shultz headed the Economic Policy Coordination Committee that also included Arthur Burns, Milton Friedman, Alan Greenspan, Paul McCracken and William E. Simons. The Inflation Policy Task Force was dominated by ‘monetarists’ like Karl Brunner, while James Buchanan and William Niskanen contributed to the advisory group on regulation policy. In the advisory group on tax policy, a prominent role was played by the ‘supply side’ economist and tax cut advocate Paul Craig Roberts, who would become Assistant Secretary of the Treasury. For the public, probably the most important economist to give intellectual credence to the Reagan economic policy was Friedman. His manifesto Free to Choose (1980), rapidly turned into a TV series, reached millions. Many of the advisors during the campaign continued to serve the Bush administration.111 Although there remained differences in opinion between ‘supply siders’, ‘monetarists’ and ‘structuralists’ about how to overcome the economic problems of the late 1970s and early 1980s, one key question was about the priorities – fighting inflation (monetarists), cutting taxes (supply siders) or deregulating and opening up competition (structuralists). There were some heated arguments about that, but they were united in their general thrust to give market solutions a preference and ‘roll back the state’ (see Plickert 2008, 420–437). While the restrictive monetary policy to cure inflation resulted in a temporary sharp slump in 1981 and 1982, the economy started a remarkable recovery after 1983 and enjoyed seven years of strong growth and job creation.

13

The power of ideas in politics

Let us finally turn to an assessment of the power of ideas in the development of history. As noted earlier in this chapter, Mises and Hayek held that the ‘power of ideas’ was the driving force. In their idealistic conception, great thinkers (as opposed to ‘great men’ or material or structural forces) possess the decisive long-run influence – in economic and general politics. However, even very attractive and compelling ideas

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cannot radically change the ideological climate or the world unless there are favourable circumstances for such efforts.112 Political and bureaucratic structures have a high degree of inertia. Friedman (2002 [1962], xiv) spoke of the ‘tyranny of the status quo’ and he emphasized: Only a crisis – actual or perceived – produces the real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. Of course, ideas are never simply ‘lying around’ – coordinated effort was needed to get these ideas into the heads of the (relevant) people. Hayek had developed a multi-level model of the intellectual world where his primary objective was to create an environment conducive to liberal ‘original thinkers’. They would then generate convincing ideas that gained the support of ‘secondhand dealers’. This strategy was implemented with the foundation of the Mont Pèlerin Society and the expansion of a network of affiliated think tanks with access to the media and to political circles. The media and politicians became more receptive in the 1970s when the material conditions of the economy deteriorated, and Keynesian policies and the welfare state in general entered a fundamental crisis. As Higgs (2008) elaborates, ‘ideological change’ is a complex and often dialectical process in which ideas, events and sociopolitical structures play a role, and which is nondeterministic. The environment of the 1970s was marked by a deteriorating economy, ineffective Keynesian policies and growing awareness by broad sections of the population, especially the middle classes, who felt their economic status threatened. This all contributed to a swing in public opinion and the media which were influenced by neoliberal intellectuals. In this situation, it was the additional ‘human factor’, the rise of dedicated politicians like Thatcher and Reagan, as IEA founderpresident Arthur Seldon (1988, 20–23) put it, which made radical change possible. With regard to the intellectuals that Hayek sought to win over, it must be said that the majority, especially in the social sciences, were and still are critical to neoliberal economics. Although Marxist and Keynesian ideas are no longer as abundant as they were 30 years ago, and it might be said that the Left’s ‘cultural hegemony’ is broken, the claim of a ‘neoliberal hegemony’ seems to be a phantasm. Some researchers have downplayed the influence that particular think tanks had on specific reforms (see Hames and Feasey 1994). Nevertheless, it cannot be denied

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that the 1980s saw dramatic policy changes in the Anglo-Saxon world which had a lasting effect on the political landscape. While the term ‘revolution’ seems exaggerated, given that the basic structure of the welfare state was not removed, the 1980s brought profound reforms in the role of the state in the economy and a rediscovery of the virtues of the market and private initiative. The author wishes to thank Robert Leeson, Stefan Kolev (Erfurt/ Zwickau) and Adam Cleary (London) for corrections and helpful comments on this chapter. The usual caveat applies.

Notes 1. For some striking similarities of the ‘Three New Deals’ in America, Italy and Germany, see Schivelbusch (2006). 2. Hayek’s statement during the session titled ‘Free Economy and Competitive Order’ can be found in the MPS Collection at Hoover Institution Archives, Box 5; another copy is available in the Liberaal Archief in Gent, Belgium. Hayek’s statement has been published in a German translation, see Hayek (1947, pp. 142–143). For a reconstruction of the history of neoliberalism, archival evidence is crucial. The most important documents on the early Mont Pèlerin Society (MPS) are kept in the Hoover Institution Archives (HIA) at Stanford University. Its collection of MPS papers comprises three dozen boxes with correspondence and some of the papers presented at meetings. Until the early sixties, the material was mainly collected by Albert Hunold, the first secretary of the MPS. Furthermore, HIA has another collection of documents on the MPS, assembled by the historian and former MPS president Max Hartwell. A nicely ordered collection of almost all papers delivered at MPS general meetings from 1947 to 1998 is kept in the Liberaal Archief (LA) in Gent, Belgium. These have been collected by the Danish MPS member Christian Gandil and by Jacques van Oeffelen, a former Belgian minister of trade. The LA has published an inventory of its MPS papers (Haegemann, 2004) which is available online: http://www.liberaalarchief.be/MPS2005.pdf. Insights into the network of the (neo-)liberal economists can be drawn from the personal papers of Friedrich August von Hayek at Hoover Institution, the personal literary legacy of Wilhelm Röpke and Hunold in the Institut für Wirtschaftspolitik (IWP) at Cologne University, as well as the papers of Alexander Rüstow in the Bundesarchiv Koblenz (BAK). Most of the correspondence and writings of these key personalities in the LA, as well as about 250 papers presented at MPS meetings, were evaluated for the purpose of the author’s doctoral thesis on the MPS (Plickert 2008). Max Hartwell’s ‘History of the Mont Pelerin Society’ (1995) is more or less confined to organizational issues. Bernhard Walpen’s study (2004) is based on rich historical material, but suffers from poor structuring and strong ideological bias, in particular the Gramscian ‘hegemonic’ approach, coming close to a conspiracy theory. Also relying on this approach, Nordmann (2005, p.223) concluded that the MPS was in fact a ‘combat instrument of a great plan for a neoliberal seizure of power’. This chapter will shed some light on the ‘great plan’ and

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4.

5. 6.

7. 8.

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its realization. One more recent account of the MPS history and its importance for ‘reinventing free markets’ is Burgin (2012). This book focuses on the American intellectual developments, and emphasizes the outstanding impact of Milton Friedman for a return to ‘Laissez faire’ but neglects the debates of early German neoliberals. This was the title of his last public lecture on December 30, 1949, at the American Economic Association, just one week before his death. Schumpeter underlined ‘how far the process of disintegration of capitalist societies has gone’ and pointed out that even the business class and a large number of economists who feel themselves to be opposed to socialism agreed on policies that would enlarge the sphere of public activity and control. Most economists, he claimed, approved of stabilization policies, egalitarian redistributive taxation, regulative measures as regards prices, public control over the labour and the money market and an ‘indefinite extension of the sphere of wants that are, now or eventually, to be satisfied by public enterprise, either gratis or on some post-office principle’ as well as all types of security legislation (Schumpeter, 1950). One of the first who raised the ‘hegemonic’ claim was political scientist Stuart Hall in the context of the Thatcher government. The analysis was then applied specifically to the MPS by Radhika Desai (1995). Plehwe has recently denied the charge of conspiracy theory (Plehwe, 2009, p.36) See ‘Hayek and the Keynesian Avalanche’ by Brian McCormick (1992). They were, according to Ralph Dahrendorf (1995, p.29), ‘a reaction against Gladston, against Cobden and Bright, against individualism and laissez-faire, cosmopolitanism and free trade’. On the German neo- and ordoliberals, see the collection of essays edited by Peacock and Willgerodt (1989). See Goldschmidt (2005) for an account of the Freiburg professors’ courageous involvement with the resistance movement. As early as 1933, Eucken spoke out against Martin Heidegger, who tried to transform the university into an institution subject to the Führerprinzip. After the state-orchestrated November 1938 pogroms against Jews, the professors and protestant pastors met regularly to discuss the Christian duty of resistance to a criminal authority. Later, Eucken and others were active in official as well as covert private research groups on the economic order, where they devised alternatives to the National Socialist command economy. There have been attempts to paint these balancing acts as collaboration, but this completely fails to perceive the intentions of Eucken and his friends. Accounts such as that of Ptak (2009) suffer from heavy ideological bias. In a 1932 paper, Eucken analysed the degeneration of the liberal state from the late 19th century into a post-liberal state. It was drawn into the economic process after it had tolerated the emergence of large corporative structures with the rise of cartels and monopolies. In the end, that laissez-faire state had fallen prey to powerful interest groups who successfully demanded privileges and protection (Eucken 1932, p.327). This analysis was inspired by the special German experience where the Imperial Court had ruled private cartels legal in 1897. Consequently, Germany became a country with a heavily cartelized and concentrated heavy industry, but also with very strong trade unions.

130 Philip Plickert 10. For an account of his life see Meier-Rust (1993). In the late Weimar Republic, Rüstow was head of the research department of the association of German machine producers (VDMA), one of the few business groups still in favour of free trade, and was also very active in political circles. In his youth, Rüstow had been close to a kind of Christian socialism-pacifism but in the 1920s he converted to economic liberal ideas. Still, he must be considered as the most left-leaning of all neoliberals. His sociological thoughts centred on the idea of social integration which was the result of market processes. Nevertheless, for reasons of equality he was a vigorous proponent of open markets. 11. Interestingly, Rüstow also held that there could be ‘liberal interventions’. As opposed to the usual protectionist interventions and subsidies which prevented or slowed down structural changes in the economies, such ‘liberal interventions’ could be employed to alleviate the structural changes. The interventions should be done ‘in the direction’ of market forces (see Rüstow 1932/1963, pp.252–253). One example might be state assistance to strengthen productivity in agriculture in order to make farmers independent of state subsidies. Social policy should also be ‘market conforming’; instead of maximum prices being set for certain goods and rents, or giving subsidies, social transfers should be in cash. This would not distort the price and production structure of the economy, and would at the same time give recipients more freedom. This proposal was later a standard neoliberal idea. Rüstow’s theory of liberal or ‘market conforming’ interventions had a more etatist flavour. It was taken up by Röpke. They were both proponents of a ‘Third Way’ between the extremes of laissez-faire and collectivism (see Röpke 1942/1979, pp.42–43, and 1944, pp.77–80). In his private correspondence with Röpke, Hayek expressed his scepticism about the idea of a ‘Third Way’: the term could be misleading if it suggested an equal distance from liberalism as from socialism. ‘We must have the courage to profess the ideals of old liberalism and individualism, as much as we may criticize the ignorant manner in which some people in the nineteenth century tried to put them into practise’, Hayek insisted, after having praised Röpke’s ‘civitas humana’ as a ‘great achievement’ with which he confirmed in the main arguments but also in the details (Hayek to Röpke, June 6, 1942, in IWP, Röpke papers). 12. On Röpke, see the fascinating biography by Hennecke (2005). 13. On this, see Streit and Wohlgemuth (2000). 14. As Köhler and Kolev emphasize, Eucken cited Simons three times in his posthumously published ‘Grundsätze der Wirtschaftspolitik’ (1952/1990, pp.255, 260, 269). It is unclear whether Simons also read Eucken. Köhler and Kolev rightly identify Hayek as the bridge between the Freiburg and the Chicago Schools. 15. In those cases where competition was not feasible for technical reasons – for instance the railways and the telephone companies, usually called ‘natural monopolies’ – Simons was in favour of socialization. Regulation was not effective, he thought. Eucken, who had the example of the state-run German railways and telecommunication right in front of him, was of different opinion asserting that ‘nationalisation does not solve the monopoly problem’ (Eucken 1949, p.66). 16. One of Simons’ most famous essays was titled ‘Rules versus Authorities in Monetary Policy’ (1936/1948). He advocated a plan for a 100 percent reserve

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19.

20.

21.

22.

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for banks so as to cut back the ability of the commercial banks to increase the money supply and thereby cause large fluctuations in the economy which they held accountable for adverse business cycle shocks. The plan was known as the ‘Chicago plan’, although it was popularized by Irving Fisher (see Köhler/Kolev 2011, p.12). It was on the 100 percent aim, but the rule-oriented approach and the critique of discretionary policies by the central banks later that became the cornerstone for Friedman’s monetarist framework (see as an early exposition: Friedman 1948/1953). Röpke later explained this to an international audience (see Röpke 1933). In the German original, the controversial passage reads as follows: The General Theory could ‘viel leichter den Verhältnissen eines totalen Staates angepaßt werden als die Theorie der Erzeugung und Verteilung einer gegebenen, unter Bedingungen des freien Wettbewerbes und eines großen Maßes von Laissez faire erstellten Produktion’ (Keynes, 1936/1952, p. IX). Lippmann’s biography, with his astounding intellectual journey, is told by Steel (1980) and Riccio (1996). In the early 1930s Lippmann was a staunch supporter of Franklin D. Roosevelt’s New Deal. As late as January 1935 he declared himself very satisfied, stating that ‘the vogue of planning, regimenting and regulation and being generally bureaucratic and officious’ coming from Washington was ‘an amazing intellectual and moral recovery in this country’ (quoted in Steel 1980, p.310). But then Lippmann became increasingly irritated by what he perceived as a dangerous tendency of giving the state too much power. His friendship with Roosevelt ended abruptly after the president’s 1936 assault on the independence of the Supreme Court which had obstructed many of the president’s collectivist reform plans. In 1937, Lippmann denounced FDR’s controversial ‘Court packing’ scheme (installing new judges to overturn the Court’s majority) as ‘a bloodless coup d’etat which strikes a deadly blow at the vital center of constitutional democracy’. (quoted in ibid., p.319). These arguments on the practical difficulty of statist planning owed a lot to the Misesian and Hayekian critique of socialism. Their central thesis was that a rational calculation in a planned economy was impossible, since the planner lacked the signalling and allocative function of prices indicating the relative scarcity of and demand for certain goods. When consumers were not allowed to communicate their wishes in a market, central planning would become increasingly dictatorial as well as uneconomical. The so-called socialist calculation sparked off by Mises caused heated discussion between liberal and leftwing economists, see Lavoie (1985). In a letter to Hayek, Lippmann declared: ‘In a crude way I had discerned the inherent difficulty of a planned economy, but without the help I have received from you and from Professor Von Mises, I could never have developed the argument.’ (Riccio 1996, pp.124–125). Steel (1980, p.323) remarks: ‘The book seemed intellectually split down in the middle: half classic laissez-faire, half welfare state liberalism.’ (with ‘liberalism’ in the new American sense). For his turbulent and controversial biography, see Denord (2001) and Marion (2004). In brief, as an academic philosopher, Rougier did not enjoy a major career. As an atheist, he stood aside from the French mainstream of neoThomist philosophy in the inter-war period. In 1936 he took up a position at Lyon University and tried to get involved in politics. The hard Left

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23.

24.

25.

26. 27.

‘front populaire’ government had just assumed power, but their aggressive demands supported economic policy (including a massive increase in real wage costs), alienated entrepreneurs and failed to foster economic recovery. In 1938, the Front had to cede to a centre-right government. Rougier was opposed to democratic egalitarianism and socialism, regarding such systems as dangerous quasi-religious fictions. (He wrote two books on ‘La mystique démocratique’ and ‘Les mystiques économiques’.) In 1938 he published a manifesto ‘Retour au libéralisme’, advocating a ‘constructive liberalism’. During the war, Rougier emigrated to New York and was active in the Comité de la défense des Israélites, but continued his disputes with left-leaning émigrés and also Gaullists. He was later accused of collaboration with the Vichy government because of negotiations he carried out with Churchill in London on behalf of Marshal Pétain over a Franco-British rapprochement, and the help he gave to the Vichy government with the supply of milk powder and other humanitarian causes. After the war, the charges of collaboration and ideological hostility prevented his return to his former academic position. It was not until 1954 that he was rehabilitated. After 1968, Rougier became close to the Nouvelle Droite, with whom he shared a fascination for Greek antiquity. The sentence ‘Laissez faire, laissez aller! Le monde va de lui-même’ is ascribed to the French physiocrats of the late 18th century. One can, however, argue that the slogan was less often used by the partisans of classical liberalism than by later critics of ‘laissez faire capitalism’ of the British liberal political tradition (Greenleaf 1983a). However, he also notes (Greenleaf 1983b, p. 25) that during the parliamentary debate in 1846 over the repeal of the corn laws and free trade i, which were demanded in the movement by Richard Cobden from Manchester, he could not find a single mention of ‘Laissez faire’. Mises’ dynamic concept of competition put an emphasis on the possibility of market entrance, not the entrance of actual competitors. Even if there was only single supplier of a product, this would not be to the detriment of consumers as long as there was the threat of potential competition (cf. Kirzner 2001, pp.104–108 and 110–113). On Mises’ condemnation of government interventions to stop the development towards great enterprises, see his early article ‘Interventionismus’ (1926/1976). The paper ‘A note on the Urgent Necessity of the Re-Orientation of Social Science’, which they presented in Paris, is not included in the booklet of the conference proceedings but can be found in the HIA, MPS coll., Box 5. For this, see his earlier speech at the Verein für Socialpolitik 1932 in Dresden: Rüstow (1932/1963). The ideological split within the Colloque was made explicit by Rüstow’s remark: ‘It is undeniable that here in our circle two different viewpoints are represented[:] Those who do not find anything essential to criticize or to change in traditional liberalism ... In their opinion the responsibility for the whole misfortune lies solely with the opposing side those who, due to foolishness or wickedness or a mixture of both, cannot or will not perceive the salvatory truth of liberalism. We, the others, are searching for the responsibility for the decline of liberalism in liberalism itself; and consequently, we are seeking a solution in a fundamental renewal of liberalism.’ (p.91). The tensions erupted later in private correspondence. In a letter to Röpke,

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29.

30.

31. 32.

33.

34. 35. 36. 37.

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Rüstow later complained about Hayek and ‘his master Mises’ who should be put ‘in spirit in a museum as one of the last surviving examples of that otherwise extinct species of liberals that have caused the current catastrophe’. Reminiscing on the failure of the Colloque in 1938, Rüstow regretted that the resolution passed at the end of the meeting that sought to demonstrate a compromise had ‘upheld the pretence of unity where in reality the sharpest and most fruitful sub-contrarian contrast existed’ (Rüstow to Röpke, February 21, 1942, in BAK, Rüstow papers, Folder 7). In a footnote to the introduction to ‘Compte-rendue des séances du Colloque Walter Lippmann’ Rougier wrote that regrettably the ‘very interesting interventions of Professor F. A. von Hayek’ could not be reconstructed from memory (CWL 1939, p.8). The word néo-liberalisme was added later, probably by Marlio himself before the record was printed; in the provisional version of the typed record that was sent to all participants it was missing (see Colloque Walter Lippmann, Texte provisoire, p.111, in BAK, Rüstow papers, Folder 287). From this perspective (see Coats 1969), the liberal ‘paradigm’ became increasingly embarrassed by intractable ‘anomalies’, above all its alleged inability to explain persistent mass unemployment – until Keynes’ General Theory provided a new ‘paradigm’ which could explain the existence of underemployment and which at the same time offered practical political solutions (deficit spending). Some younger contemporary economists of the time have reported their experience of almost religious conversions to Keynesian macroeconomics (see for instance Samuelson 1946/1966, pp.1517–1518). However, the heroic account of a ‘Keynesian revolution’ against an ossified orthodoxy has been discounted as a myth (cf. Hutchison 1978, Blaug 1991, Laidler 1999). Another point is also problematic: in the Kuhnian framework, a new scientific paradigm completely displaces the old, discredited paradigm, but liberal economics did not disappear. See also: Blaug (1976) and Drakopoulos/Karayiannis (2005). Potential members on the German side that he had in mind were Franz Schnabel, Erich Eyck, Gerhard Ritter, Friedrich Meinecke, Alfred von Martin and Adolf Weber as well as the Freiburg economist Walter Eucken. See handwritten list in HIA, Hayek papers, Box 61–6. Hayek had not had direct contact with Eucken, who had stayed in Germany in ‘inner exile’, but learned of his difficult situation and his intellectual development through Röpke, who also sent him a copy of Eucken’s text book Die Grundlagen der Nationalökonomie (1939/1965). Hayek reacted enthusiastically. ‘It’s a very excellent piece of work which has raised my sincere admiration for our friend. To have retained this independence of thought in this environment!’ (Hayek to Röpke, 17 August 1941, in IWP, Röpke papers, File 5) Hayek 1945: ‘Memorandum on the Proposed Foundation of an International Academy for Political Philosophy Tentatively Called “The Acton-Tocqueville Society”’, in HIA, Hayek papers, Box 61–8. Leonard Read, a former head of the Los Angeles chamber of commerce and after the war a vice president. Hayek to Read, October 16, 1946, in HIA, Hayek papers, Box 20–1. Hayek to Luhnow, May 3, 1945, in HIA, Hayek papers, Box 58–16. Hayek to Luhnow, 25 June 1946, in HIA, Hayek papers, Box 58–16.

134 Philip Plickert 38. Van Horn and Mirowski (2009) has given a detailed account of this project and the funding it received by the Volker Fund. However, the idea that Hayek and other key neoliberals radically changed their economic theory with regard to competition policy in order to please their donors appears as a speculative conspiracy theory. 39. He also influenced the later German Minister of Economics, Ludwig Erhard. Röpke’s trilogy Gesellschaftskrisis der Gegenwart, Civitas Humana and Internationale Ordnung contained his fundamental criticism of collectivist tendencies towards a centralized, over-expanded and intrusive state, and a mass society vulnerable to totalitarian movements. With regard to economic policy, he campaigned for a ‘third way’ to overcome ‘the fruitless alternative between laissez faire and collectivism’ (Röpke 1942/1979, p.43). His social ideal, as laid out in Civitas Humana, was a decentralized economic and political order suitable for self-reliant individuals and small communities. This was a liberal vision with a conservative flavour. In general, he demanded a reduction of state interventions and a reversal of the trend towards state expansion; if interventions in the economy were considered, they should ‘conform’ to the market. This meant that the state should not block the market and the price mechanism, but should rather confine itself to ‘liberal interventions’. Röpke argued along the same lines as Rüstow. (Röpke 1944, pp.77–80). Hayek was full of praise for the Gesellschaftskrisis, and called the book a ‘great achievement’: ‘I almost fully agree with you, not only what concerns the main argument but also with the details.’ However, he was critical of the plea for a ‘third way’, and showed his scepticism regarding the idea of ‘conforming interventions’ (Hayek to Röpke, 6 June 1942, in IWP Röpke papers). In another letter, Hayek criticized ‘again the exaggerated condemnation of laissez faire philosophy’ that Röpke had adopted from Rüstow (Hayek to Röpke, 24 October 1942, in IWP Röpke papers). 40. See Röpke: Projekt einer internationalen Monatsschrift, 1945, 1, in HIA, Hartwell coll., Box 4. 41. Ibid, p.3. A list of contributors he could count on included the wealthy Swiss diplomat, economic historian and scientific activist Rappard, a very important figure of the Swiss liberal intellectual movement; the Italian economist and first post-war Governor of the Banca d’Italia, Luigi Einaudi, later Italian president; and his friends Rüstow, Eucken and Hayek. Furthermore, Röpke hoped to enlist Lippmann, Benedetto Croce, Salvador de Madariaga and Ortega y Gasset as contributors for ‘Occident’ (p.6). 42. Hunold had been the secretary of the Swiss Börsenverein (stock exchange association). In 1945, he worked briefly for a bank and then became Managing Director of the Watchmakers’ Association. He was not so much an intellectual economist as an organising talent. Already in 1943, Hunold had developed his own ideas for a liberal ‘study group’ on economic and political ideas but with a narrower Swiss focus. See (‘Memorandum’, in HIA, MPS Coll, Box 5) and also Plickert (2008, p.131). 43. See the Finanzplan, in HIA, MPS coll., Box 5. 44. Hunold to Hayek,17 June 1946, in IWP, Hunold papers. They had met for the first time in October 1945, when Hunold had invited Hayek to a lecture on ‘The Problem of Full Employment’ in Zurich. 45. Hayek to Hunold, 10 August 1946, in IWP, Hunold papers.

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46. Hayek to Hunold, 9 October 1946, in IWP, Hunold papers. 47. Hunold to Hayek, 3 March 1947, in IWP, Hunold papers. 48. Among the American economists there was also the Princeton professors Frank D. Graham and Fritz Machlup, then at the State University of New York at Buffalo. Furthermore, the American contingent included three notable journalists: Henry Hazlitt, who had been at the New York Times and switched to Newsweek; Felix Morley, one of the founders of Human Events; and John Davenport of Fortune. 49. At first Mises did not want to come to Europe. The idea seemed horrible to him, since he had seen ‘already enough decline’; furthermore, he was concerned about the outcome of a redefinition of liberalism and about the participation of ‘interventionists’ like Röpke. He had unpleasant recollections of the Paris meeting and their discussions. All in all, he saw ‘no need ... to make a pilgrimage to the Mont Pèlerin’ (See Mises: ‘Observations on Professor Hayek’s Plan (Memorandum), 31 December 1946, in HIA, Hayek papers, Box 71–3). Nevertheless, in the end, Mises was persuaded to attend the conference. While he was anxious about any signal of concession, the other extreme position was taken this time by Karl Popper, the author of The Open Society and Its Enemies. He urged Hayek to invite people from the Left: ‘I feel, for such an academy, it would be advantageous, and even necessary, from the very beginning, to secure the participation of some people who are known to be socialists or to be close to socialism. ... My own position was always to try for a reconciliation of liberals and socialists.’ (Popper to Hayek, 11 January 1947, in HIA, Hayek papers, Box 78–36). 50. He was helped by Jacque Rueff, then the head of the inter-allied agency of reparations, who intervened on Eucken’s behalf at the request of the French military authorities. Rüstow could not leave Istanbul because he had not had a new passport since his emigration from Nazi Germany. 51. Other British participants were John Jewkes, Professor of Economics at Oxford; Stanley Dennison of Cambridge University; Michael Polanyi, a chemist turned philosopher at Manchester University; and Veronica Wedgwood, editor of the weekly journal Time and Tide. 52. See ‘Mont Pèlerin Conference, April 1st to 10th, 1947, List of participants’, in HIA, MPS Coll., Box 1. The full list of participants is reprinted in Hartwell (1995, pp.45–46). 53. Hayek circular letter, 28 December 1946, in HIA, Hayek papers, Box 75–10. 54. Hayek circular letter, 2 February 1947, in HIA, MPS Coll., Box 5. 55. The aspired ‘competitive’ order was by no means to be confused with ‘ordered competition’, Hayek cautioned (p.49). 56. Here Hayek referred to Simons’ ‘Reflections on Syndicalism’ (1936/1948). 57. The dangers of monopoly were, as Hayek had pointed out in his ‘Road to Serfdom’ aggravated by the combination of producer and union power who shared in the monopoly gains. Monopolistic structures thus were stabilised and reinforced. ‘The recent growth of monopoly is largely the result of a deliberate collaboration of organized capital and organized labor where the privileged groups of labor share in the monopoly profits at the expense of the community and particularly at the expense of the poorest, those employed in the less-well-organized industries and the unemployed.’ (Hayek 1944, p.207). For a recent econometric study on the New Deal which corroborates

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58. 59.

60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70.

71.

the thesis that cartelized industries made monopoly profits which they were urged to pass over to labour through higher wages, see Cole and Ohanian (2004, pp.783–786). See ‘Votum von Herrn Dr. W. Eucken’, in HIA, MPS coll., Box 27. In a letter to Rüstow, Röpke complained about the slightly ‘strange composition’ of the meeting because of the mass nomination of American participants. Although Mises had been ‘isolated in an almost tragical way’, Röpke wrote that at Mont Pèlerin there was besides Mises ‘of course still a sizeable group of quite hard boiled (men) who shook their heads if reminded of our framework problems’ (the legal and social framework Röpke deemed indispensable for a functioning market economy). On the other hand, he had also experienced support from some; he praised the ‘type of humanistic American of Jeffersonian tradition’ (Röpke to Rüstow, 22 April 1947, in IWP, Röpke papers; reprinted also in Röpke 1976, p.96). Alfred Müller-Armack recollected in his memoirs a ‘dominance of the Anglo-Saxon temperament’. He commented: ‘Attempts to bring into play the social, vital and societal policy, that Röpke, Rüstow and I sought, were met by little echo if not outright opposition.’ (Müller-Armack 1971, p.45). ‘Statement of Aims’, reprinted in Hartwell 1995, pp. 41–42. All these letters are in HIA, MPS Coll., Box 29 Jewkes to Hunold, 20 December [1947], in HIA, MPS Coll., Box 29. Friedman to Hayek, 2 January 1947, in HIA, Friedman papers 86–1. Röpke to Rüstow, 24 April 1947, in IWP, Röpke papers. Certificate No. 4992, State of Illinois, 6 November 1947, in HIA, Hartwell coll., Box 1 Hayek to Read, 22 January 1948, in HIA, MPS Coll., Box 29. Hunold to Hayek, 14 May 1948, in HIA, MPS Coll., Box 29. Quotes from: Minutes of the meeting of the Board of Directors in Basle [in French], in HIA, MPS Coll. Box 1. Brandt memorandum, 28 June 1949, in HIA, MPS Coll., Box 6. Sir Arnold Suenson-Taylor was a prominent figure in the City of London and a liberal activist in Britain from the 1940s, and was raised to the peerage as Lord Grantchester. He warned, in a letter to Hunold, that the business community, if asked to contribute to the funding of MPS meetings, would take a rather ‘short-term view of judging such matters [as][t]he work done at the conferences does not gain the publicity it sometimes deserves’, SuensonTaylor wrote to the MPS secretary: ‘One of the complaints I hear often is that the views of our members are not expressed in time to be of practicable value in dealing with current problems.’ (Suenson-Taylor to Hunold, 8 November 1954, in HIA, MPS Coll., Box 1). From time to time he felt the urge to engage in direct political activism. In a letter to Rüstow he urged: ‘The MP Society must absolutely step in the limelight of the public and must cease to be a wallflower. It is strange that Hayek is such a courageous man, but perhaps he is simply worried because of the not always favourable experiences he had had with the ‘Road to Serfdom’ when he inadvertently became absorbed into the political struggle’, Hunold speculated. ‘For this reason I have full understanding for his scruples.’ (Hunold to Rüstow, 23 February 1953, in HIA, MPS Coll., Box 7). In public, Hunold presented a different view – that of the majority of the Council: The work

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72.

73.

74. 75.

76. 77. 78. 79. 80.

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of the MPS must ‘in no way be about political action with programs, resolutions, and manifests’ he wrote in an article for a Swiss newspaper, the Neue Zürcher Zeitung. It is ‘[w]holly in the liberal tradition [that] the members want to be active individually and personally and will not hide behind programs or resolutions’ (Hunold 1955). This was a total revision of the Marx’s materialistic interpretation of how political worldviews are shaped. According to his famous expression ‘it is not the consciousness of men that determines their existence, but on the contrary their social existence determines their consciousness’. Although the Marxist Left allegedly adhered to a theory of materialism as the driving force of history, they had understood the key issue of social and moral ideals. Not far from Seelisberg, the Swiss Confederates had taken their famous Rütli oath. Hunold drew an explicit parallel between this oath and the vision of the MPS members. The Swiss decentralized political system, with self-governing local communities and a very limited federal power, appeared to liberals worldwide to be a kind of role model. President’s circular, November 1952, in HIA, MPS Coll., Box 1. The abrupt end to Hayek’s long-standing friendship with Robbins during the course of Hayek’s divorce from his first wife caused a setback to the British MPS group in the early 1950s (cf. Cockett 1994, p.120). Hunold spoke of ‘a certain animosity in England against the MPS’ (Hunold to Hayek, 23 November 1955, in IWP, Hunold papers). Robbins would not communicate with Hayek for more than a decade, and had declared his resignation from the Society. At the same time there was a controversy among German members over the issue of economic cartels (the economic journalist Volkmar Muthesius, a proponent of the Misesian standpoint, attacked the ordoliberals of the Freiburg School). Hayek grew tired of these personal quarrels and complained about the workload. As he wrote to Hunold, an MPS secretary: ‘For a longer time, such an organization cannot be based solely on two men’. Hayek continued, saying: ‘If the prospects are not better in a year, I would like to bring the story formally to an end as long as it is a respectable affair, rather than to see it disintegrate slowly.’ (Hayek to Hunold, 5 February 1956, in IWP, Hunold papers). In a letter to Machlup, Hayek expressed his inclination to hold only one further jubilee meeting in Switzerland and then ‘let the whole thing go to sleep’ (Hayek to Machlup, 18 February 1956, in HIA, Hayek papers, Box 36–17). However, the exciting meeting in Berlin, and especially the anniversary meeting in St. Moritz held in some luxury, revived his determination to go on with the Society. Erhard to Eucken, 13 February 1950, in HIA, MPS Coll., Box 30. On Müller-Armack’s peculiar ideas on the Social Market Economy and his connection with ordoliberalism see Starbatty (1982). For Einaudi’s review of Röpke’s Gesellschaftskrisis der Gegenwart see Einaudi (1942/1954). Röpke to Dohrn, 1 June 1948, in IWP, Röpke papers. For detailed accounts of his earlier life and his emergence as the pre-eminent West German economics politician after the war, see Hentschel (1998) and Mierzejewski (2005). Erhard, who by 1948 was already 50 years old, had been thinking about monetary and economic reforms during the war when he was head of a small private economic research institute. Although plans for

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81.

82.

83.

84. 85. 86.

87.

post-war time reforms assuming defeat of the Nazi regime had been illegal, he had written a memorandum on the issue of war debts. He identified the monetary overhang resulting from the expansionary financing methods of the Nazis as the central problem, (cf. Herbst 1982, pp.410–415). To consolidate the debt, currency reform was necessary. Furthermore, he advocated a step-by-step abolition of price controls, and a return to economic coordination by the market mechanism. He wrote: ‘I was and am of the opinion that the best method to satisfy demand of the public is competition on the market.’(Erhard 1943–44/1977, p.ix). His memorandum closed with remarks resounding to the neo- or ordoliberal credo: ‘The state will never again be relegated into the role of a night-watcher because even the freest market economy, and this one in particular, needs a body of law-making and law enforcement.’ Making clear that he was no advocate of laissez faire, Erhard nevertheless insisted that ‘the desirable aim remains in any case the free market economy based on true performance competition with the regulatives inherent to that economy’ (ibid, p.264). Scientists from the Freiburg School around Eucken had been active since the late 1930s in covert opposition to the Nazi regime (see Goldschmidt 2005). In 1943, they had formed with others a private working group, headed by Erwin von Beckerath, that drafted concepts for a reform of the war economy into a civil market economy based on the price mechanism rather than on political directives. These studies became important conceptual forerunners for the concept of the ‘social market economy’ (Blumenberg-Lampe 1973; Klump 2005). Eucken advocated a competitive order as a ‘third way’ between laissez faire and planning (Rieter and Schmolz 1993, p.100). As a prerequisite for a return to a market economy, he demanded currency reform and the decartelization of the economy, as well as more effective control against monopolies. Eucken made similar proposals in the scientific advisory council to the economic administration body of the Bizone. The CDU had, in 1947, adopted the Ahlener programme that called for the socialization of heavy industry and the banking sector. It was not until Erhard had made his full influence felt that the CDU embraced the Soziale Marktwirtschaft in its Düsseldorf programme of guiding principles two years later. See Hayek’s essay ‘Was ist und was heißt sozial?’ (1957). At an MPS meeting, Erhard told Hayek: ‘I hope you don’t misunderstand me when I talk of social market economy. I mean that the market in itself is social, not that it must be made social.’ (Hayek, 1983b, p.55). Böhm to Hunold, May 12, 1951, in HIA, MPS Coll., Box 30. Hunold to Böhm, June 15, 1951, in HIA, MPS Coll., Box 30. A large part of the Italian economy, including banks, heavy industry and consumer goods producers (i.e. textiles), had been subject to direct or indirect control by the state since the 1930s, through credit and investment rationing by the Istituto per la Ricostruzione Industriale (IRI). After 1945, many key corporations, among them telecommunications, airlines, the majority of shipyards, almost all of the iron and steel industry and a quarter of the financial sector, remained under state control. The oil company ENI was presented as an example of how successfully a corporation could operate under state influence. The bitter controversy during the election campaign should not obscure the fact that in essence both major parties were in fact quite close on many

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88. 89.

90.

91.

92.

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areas of economic and social policy. Some key proposals had been prepared by prominent members of the Liberal Party such as Lord Keynes and Lord Beveridge. The famous 1942 Beveridge plan for a comprehensive national social security system, which Churchill explicitly endorsed, finally resulted in the creation of the NHS. Already during the war there had developed a growing ‘Keynesian-welfare state’ consensus, as demonstrated by Paul Addison (1975, 1993). Jewkes to Hunold, March 5, 1950, in HIA, MPS Coll., Box 30. Fisher had read Hayek’s The Road to Serfdom in the Reader’s Digest version, and was immediately struck by its arguments. In 1947, Fisher went to see Hayek in his LSE office and asked him for advice on how to become active in politics to counter the collectivist wave. He got quite precise instructions. According to Fisher’s memoirs: ‘Hayek first warned against wasting time – as I was then tempted – by taking up a political career. He explained his view that the decisive influence in the battle of ideas and policy was wielded by intellectuals whom he characterized as the ‘second-hand dealers in ideas’. It was the dominant intellectuals from the Fabians onwards who had tilted the political debate in favour of growing government intervention with all that followed. If I shared the view that better ideas were not getting a fair hearing, his counsel was that I should join with others in forming a scholarly research organisation to supply intellectuals in universities, schools, journalism and broadcasting with authoritative studies of the economic theory of markets and its application to practical affairs.’ (quoted in Cockett 1994, pp.123–124). Immediately after the war, former RAF fighter pilot Fisher had bought a 400-acre farm in Sussex. He first suffered a heavy loss when his herd of cattle was decimated by a disease, but in 1952 he changed his operation, to raising broiler chickens in an agro-industrial method. This new technique had been shown to him in America by F. A. Harper of the FEE, whom Fisher had met at an MPS meeting. Fisher’s idea of mass production of chickens was a great commercial success, and made him a millionaire. Out of this fortune, he financed the IEA. Harris had been trained in economics at Cambridge. His principal teacher there had been Stanley Dennison, one of the founding members of MPS. Seldon, a disillusioned activist from the left-leaning Liberal party, had studied at London School of Economics and was much impressed by Robbins, Hayek and Arnold Plant. The Advisory Council of the IEA was staffed with MPS members, namely Lord Grantchester, Eric Nash, an expert in agricultural economics, and the LSE economists George Schwartz and Graham Hutton. The welfare economist Colin Clark, an ex-Fabian, and financial journalist Sir Oscar Hobson were not members of the MPS, but occasional participants at its conferences. Most British academic members of the Society, including Dennison, Jewkes, Robbins and Paish, as well as Hutt, now a professor at Cape Town, contributed papers to the IEA series. During the 1960s and 1970s, Seldon successfully approached American MPS economists of high academic standing to write publications for the IEA. Those who contributed included Hayek, Haberler, James Buchanan and Milton Friedman. The IEA had warned that the high expectations could not be realized since they rested on unrealistic assumptions. When the ‘National Plan’ failed, the Labour Secretary responded directly to IEA critics. This official reaction was

140

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94.

95.

96. 97.

98.

Philip Plickert seen as an important step for the Institute in its efforts to gain political reputation (cf. Denham/Garnett 1998, p.96). During the election campaign, the Conservative leader Edward Heath had given the impression of being determined to fight inflation and to end the policy of budget deficits. Furthermore, he had promised to confront the power of the trade unions. At a meeting at Selsdon Park, his shadow cabinet published a manifesto that sounded staunchly economic liberal, with a commitment to privatization and deregulation. In newspaper articles, Keith Joseph announced that the Conservatives were now the ‘true radicals’. Labour warned of a radically free-market ‘Selsdon man’ who was about to [? destroy] the Keynesians’ idea of a welfare state. Devoted economic liberals placed high expectations on the Heath government, and Seldon even wrote to Joseph about the prospect of ‘destroying socialism for ever’ (Cockett 1994, p.202). Thatcher later wrote in her memoirs about the Heath episode: ‘His errors – our errors, for we went along with them – did huge harm to the Conservative Party and to the country.’ Her political outlook and plans for the future were shaped by this experience of failure. ‘The Heath Government showed, in particular, that socialist policies pursued by Tory politicians are if anything even more disastrous than socialist policies pursued by Labour politicians. Collectivism, without even the tincture of egalitarian idealism to redeem it, is a deeply unattractive creed.’ (Thatcher 1995, pp.195–196). The text was written by LSE professor Alan Walters, one of the leading British advocates of ‘monetarism’, and signed among others by S. H. Frankel, Harry Johnson and David Laidler, all of whom were members of the MPS. They warned Heath of the over-rapid increase in money growth and consequently the mounting inflationary pressure. Because Heath did not heed Walter’s warning, Walter resigned from his post as government adviser. The papers delivered at the Kassel meeting were printed in the short-lived Mont Pèlerin Quarterly (October 1960); see also Plickert (2008, pp.304–305). The gradual usurpation of the term ‘liberalism’ and the change of its original meaning by the Left had already begun during the ‘progressive era’ at the beginning of the century. Traditionally, a ‘liberal’ had emphasized individual liberty and limited state actions, but the new egalitarian ‘liberals’ called for more collective security and public intervention in markets. John Dewey, the influential ‘pragmatist’, declared in his book Liberalism and Social Action that in the 20th century the ends of liberalism could not be reached by dynamic and self-coordinated, decentralized markets, but ‘only by reversal of the means to which early liberalism was committed’, namely ‘organized social planning’ (Dewey 1935/1991, p.40, emphasis added). The strategy was thought out by Frank A. Meyer, one of Buckley’s closest confidants. The National Review opened its columns to economic liberals and even radical libertarians like Murray Rothbard, as well as traditional, religious conservatives like Russell Kirk or the Catholic Erik von Kuehnelt-Leddihn. The alliance was not always easy, and tensions emerged, with the traditional conservatives accusing the liberals of moral relativism and the radical liberals suspicious of authoritarian traits of the former (see Carey 2004). Nevertheless, the tactical alliance held and grew over the years to become a relevant force in American politics.

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99. Röpke had taken interest in Kirk early on, and urged Hunold to invite him: ‘In my opinion, Kirk would be very worthy of becoming a member a member of our Society.’ (Röpke to Hunold, June 12, 1955, in HIA, MPS Coll, Box 7). See also his article ‘Liberaler Konservatismus in Amerika’ (1955). In the eyes of Hayek, Kirk was ‘representative of a distinctive direction of conservatism which despises the economy and is in many respects truly reactionary’ (Hayek to Hunold, March 23, 1958, in IWP, Hunold papers). 100. For Friedman’s influence on Goldwater, see Leeson (2003, pp.118–124). 101. One of the driving forces was Finance Minister John Connally, who advocated an ‘incomes policy’ to stop a wage–price spiral. In August 1971, with the end of the Bretton Woods system already close, plus the subsequent devaluation of the dollar that would push import prices up, the government and its advisors agreed on wage and price controls. 102. For a comparison of the early neoliberals’ positions on competition and competition policy and the later shift away from those radical propositions, see Plickert (2008, pp.198–206 and 372–382). Trebing (1976, p.314) argues that the experience of the New Deal and some scandals in regulations agencies led the younger Chicago economists to rethink the approach to regulation. One very powerful argument became the ‘regulatory capture’ theory of Stigler (1971), who claimed that most regulation agencies that were supposedly imposed to benefit consumers and the public at large was in fact installed at the demand of the regulated industry to advance their special interests. Van Horn (2009) has a different explanation for the change in the younger Chicago School’s position and their ‘reorientation toward monopoly’; he suspects that they served the interests of corporate donors. 103. A clear sign of its high reputation were the leading functions that MPS members had held in scientific organizations such as the American Economic Association since the 1960s. In 1963, Gottfried Haberler had become President of the AEA, in 1964 Stigler, in 1966 Fritz Machlup and in 1967 Milton Friedman. 104. Weary of the inherent risk of hubris, Hayek warned in his acceptance speech not only of the dangerous ‘pretence of knowledge’ by economists, but called for prize-winning economists to swear an oath not to transgress the boundaries of their discipline (Hayek 1974/1978). 105. In 1969 to Ragnar Frisch and Jan Tinbergen, both moderate socialists who were convinced of the supremacy of central allocation of resources; in 1970 to Samuelson, and 1972 Hicks, prominent Keynesians; and in 1971 to Simon Kuznets, whose statistical methods on national accounting was also used mainly by Keynesians. In 1973 and 1975, the preference of the Swedish academy for economic planning theories was again apparent, with the awards to Wassily Leontief for his input–output models, to the Soviet statistician Leonid Kantorovich for ‘linear programming’, and to the Dutch Tjalling Koopmans for his research on optimal resource allocation. 106. On this, see for instance Denham (1996). 107. The FEE ideology was more radical than that of many MPS members. After the founding meeting, Leonard Read wrote a letter stating: ‘So far as I am concerned, I can see no hopes whatever for [MPS] to become a useful force in the fight for freedom ... the philosophies range all the way from middleof-the-roaders to one who is an out-and-out socialist’ (quote in Doherty

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108.

109. 110. 111.

112.

2007, p.214). Later the foundation had a dispute with Friedman and Stigler, who had written a pamphlet on rent controls (‘Roofs or Ceilings’) with a passage in which they argued that it might be morally desirable for the government to take actions in order to reduce inequality in a society. FEE added a footnote to distance itself from this position. Friedman and Stigler were outraged about this (see Diamond 2008, p.260). From the 1950s, there were many MPS economists like Friedman, Haberler, McCracken and Nutter on the scientific advisory board of the AEI. In the 1970s, it also included some neoconservative intellectuals, namely Irving Kristol (see Smith 1991, pp.174–180). The crucial parts of that speech were written by Callaghan’s son-in-law, the financial journalist Peter Jay, who was close to the IEA. Thatcher to Hayek, May 18, 1979, The letter is online available at the Thatcher Foundation: http://www.margaretthatcher.org/document/112178 In an interview years later Hayek praised the choice of advisors. He stated that Margaret Thatcher ‘understands a lot that her aides don’t understand. Reagan only has a common sense and is totally dependent on his staff’, but he went on to say that Reagan ‘has picked the same people as I would have chosen’. The interview was titled ‘An intellectual turnaround in the West’ (Hayek 1985). Among liberals, many remembered John Stuart Mill’s insight from the middle of the 19th century that ideas do not operate in a vacuum. Mill wrote that ‘unless outward circumstances conspire with them, [ideas] have in general no very rapid or immediate efficacy in human affairs; and the most favourable outward circumstances may pass by, or remain inoperative, for want of ideas suitable to conjecture. But when the right circumstances and the right ideas meet, the effect is seldom slow in manifesting itself’ (quoted in Smith 1988, p.21).

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Friedman, Milton (1950/1951), Neo-Liberalism and Its Prospects [typoscript without date, probably late 1950.], HIA, Friedman papers, Box 42–8. Norwegian translation ‘‘Nyliberalismen Og Dens Muligheter’ in: Farmand, February 17, 1951. Friedman, Milton (1962/2002), Capitalism and Freedom, Chicago: University of Chicago Press. Friedman, Milton (1968), ‘The Role of Monetary Policy’, American Economic Review 58, March 1968, pp.1–17. Friedman, Milton (1976), ‘Foreword’, in Fritz Machlup (ed.): Essays on Hayek, New York: New York University Press, pp.xxi–xxv. Friedman, Milton and Rose Friedman (1980), Free to Choose. A Personal Statement, New York/London: Harcourt Brace Jonanovich. Friedman, Milton and Rose Friedman (1998), Two Lucky People. Memoirs, Chicago: University of Chicago Press. Galbraith, John Kenneth (1948/1966), ‘The German Economy’, reprinted in Seymour E. Harris (ed.) (1966): Foreign Economic Policy for the United States, Cambridge, Ma./New York: Harvard University Press, pp.91–103. Geppert, Dominik (2002), Thatchers konservative Revolution. Der Richtungswandel der britischen Tories 1975–1979, München: Oldenbourg. Giersch, Herbert, Karl-Heinz Paqué and Holger Schmieding (1992), The fading miracle. Four decades of market economy in Germany, Cambridge: Cambridge University Press. Goldwater, Barry (1960), The Conscience of a Conservative, Shepherdsville, Ky., Victor Publishing. Greenleaf, W. H. (1983a), The British political tradition, Vol. 1: The rise of collectivism, London/New York: Methuen Greenleaf, W. H. (1983b), The British political tradition, Vol. 2: The ideological heritage, London/New York: Methuen. Grün, Karl (1964), ‘Planung gefährdet die Europäische Einheit. Die 14. Jahrestagung der Mont-Pèlerin-Gesellschaft’, Frankfurter Allgemeine Zeitung, September 18, 1964. Haegemann, Marc (2004), Inventory of the General Meeting Files of the Mont Pèlerin Society (1947–1998), Ghent: Liberaal Archief (Belgium). Hames, Tim and Richard Feasey (1994), ‘Anglo-American think tanks under Reagan and Thatcher’, in Andrew Adonis and Tim Hames (eds.): A Conservative Revolution? The Thatcher–Reagan decade in perspective, Manchester/New York: Manchester University Press, pp.215–237 Harris, Ralph and Arthur Seldon (1959), ‘The Tactics and Strategy of the Advance to a Free Economy’, [paper presented at the MPS general meeting in Oxford 1959], in Liberaal Archief / Gent (Belgium). Hartwell, R. M. (1995), A History of the Mont Pelerin Society, Indianapolis: Liberty Fund. Hayek, Friedrich August von (1944/1994), The Road to Serfdom. 50th Anniversary Edition, Chicago: University of Chicago Press. Hayek, Friedrich August von (1944/1967), ‘Historians and the Future of Europe’, in Friedrich August von Hayek (1967): Studies in Philosophy, Politics and Economics, London: Routledge & Kegan Paul, pp.135–147. Hayek, Friedrich August von (1947/1952), ‘Free economy and competitive order’, German translation in Hayek (1952): Individualismus und Internationale Ordnung, Erlenbach-Zürich: Rentsch, pp.141–155. Hayek, Friedrich August von (1947/1967), ‘Opening Address to a Conference at Mont Pélèrin’, reprinted in Friedrich August von Hayek (1967): Studies

146 Philip Plickert in Philosophy, Politics and Economics, London: Routledge & Kegan Paul, pp.148–159. Hayek, Friedrich August von (1947/1992), ‘Probleme und Schwierigkeiten der englischen Wirtschaft’, (reprinted 1992), Schweizer Monatshefte 92, 5a/1992, pp.24–40. Hayek, Friedrich August von (1949/1967), ‘The Intellectuals and Socialism’, in F. A. Hayek (1967): Studies in Philosophy, Politics and Economics, London: Routledge & Kegan Paul, pp.178–194. Hayek, Friedrich August von (1951/1967), ‘The Transmission of the Ideals of Economic Freedom’, in F. A. Hayek (1967): Studies in Philosophy, Politics and Economics, London: Routledge & Kegan Paul, pp.195–200. Hayek, Friedrich August von (1951/1967), ‘The Transmission of the Ideals of Economic Freedom’, in Friedrich August von Hayek (1967): Studies in Philosophy, Politics and Economics, London: Routledge & Kegan Paul, pp.195–200. Hayek, Friedrich August von (1952a), The Counter-Revolution of Science. Studies on the Abuse of Reason, (reprinted 1979) Indianapolis: Liberty Fund. Hayek, Friedrich August von (1952b), ‘A Rebirth of Liberalism’, The Freeman, July 28, 1952, pp.730–731. Hayek, Friedrich August von (1949/1992), ‘Die Intellektuellen und der Sozialismus’, (reprinted 1992) Schweizer Monatshefte 5a/1992, pp.41–54. Hayek, Friedrich August von (1954), ‘Marktwirtschaft und Wirtschaftspolitik’, Ordo 6, pp.3–29. Hayek, Friedrich August von (1957), ‘Was ist und was heißt sozial?’, in Albert Hunold (ed.): Masse und Demokratie, Erlenbach-Zürich/Stuttgart: Rentsch, pp.71–84. Hayek, Friedrich August von (1960/2011), Constitution of Liberty, in The Collected Works of F.A. Hayek (ed. by Ronald Hamowy), Chicago: University of Chicago Press Hayek, Friedrich August von (1974/1978), ‘The Pretence of Knowledge’, in F.A. Hayek (1978): New Studies in Philosophy, Politics, Economics and the History of Ideas, London: Routledge & Keegan Paul. Hayek, Friedrich August von (1983a), ‘Die Wiederentdeckung der Freiheit – Persönliche Erinnerungen’, in VDMA and IW (ed.): Produktivität, Eigenverantwortung, Beschäftigung. Für eine wirtschaftspolitische Vorwärtsstrategie, Köln: Deutscher Institut Verlag, pp.9–22 Hayek, Friedrich August von (1983b), ‘Hayek on the Crisis’ [interview], in: Encounter 60, Nr. 5, S. 54–57. Hayek, Friedrich August von (1985), ‘Eine intellektuelle Wende im Westen’ [interview], in: Die Welt, May 5, 1985. Hennecke, Hans Jörg (2000), Friedrich August von Hayek. Die Tradition der Freiheit, Düsseldorf: Verlag Wirtschaft und Finanzen. Hennecke, Hans Jörg (2005), Wilhelm Röpke. Ein Leben in der Brandung, Stuttgart: Schäffer-Poeschel. Hentschel, Volker (1998), Ludwig Erhard: Ein Politikerleben, Berlin: Ullstein. Herbst, Ludolf (1982), Der Totale Krieg und die Ordnung der Wirtschaft: Die Kriegswirtschaft im Spannungsfeld von Politik, Ideologie und Propaganda 1939– 1945, Stuttgart: DVA. Hicks, John R. (1967), ‘The Hayek Story’, in John R. Hicks: Critical Essays in Monetary Theory, Oxford: Clarendon Press.

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Higgs, Robert (1987), Crisis and Leviathan: Critical Episodes in the Growth of American Government, New York: Oxford University Press USA. Higgs, Robert (2008), ‘The Complex Course of Ideological Change’, American Journal of Economics and Sociology 67, 4/2008, pp.547–565. Hobsbawm, Eric (1994), The Age of Extremes. The short twentieth century, London: Penguin. Hunold, Albert (1953) (ed.), Wirtschaft ohne Wunder, Erlenbach-Zürich/Stuttgart: Rentsch. Hunold, Albert (1955), ‘Die Mont Pèlerin Society’, Neue Zürcher Zeitung, May 19, 1955. Hutchison, T. W. (1978), ‘Demythologising the Keynesian revolution: Pigou, wagecuts, and The General Theory’, in T. W. Hutchison: On revolutions and progress in economic knowledge, Cambridge: Cambridge University Press, pp.175–199. Johnson, Harry G. (1971), ‘The Keynesian Revolution and the Monetarist Counterrevolution’, American Economic Review 61, May 1971, pp.1–14. Joseph, Keith (1975): ‘This is not the time to be Mealy-Mouthed: Intervention is Destroying us’, in Keith Joseph: Reversing the Trend, London: Barry Rose. Kasper, Sheryll (1993), ‘Frank Knight’s Case for Laisser Faire: The Patrimony of the Social Philosophy of the Chicago School’, History of Political Economy 25, 3/1993, pp.413–433. Kelley, John L. (1997), Bringing the Market Back In. The Political Revitalization of Market Liberalism, New York: New York University Press. Keynes, John M. (1936/1952), Die Allgemeine Theorie der Beschäftigung, des Zinses und des Geldes, Berlin: Duncker & Humblot. Keynes, John Maynard (1926), The End of Laissez Faire, London: Hogarth Press. Kirzner, Israel M. (2001), Ludwig von Mises: The Man and His Economics, Wilmington, Del.: Intercollegiate Studies Institute. Klausinger, Hansjörg (2003), ‘How Far Was Vienna From Chicago in the 1930s?’ The Economists and the Depression’, in Günter Bischof, Anton Pelinka and Alexander Lassner (eds.): The Dollfuss / Schuschnig Era in Austria: A Reassessment, New Brunswick/ London: Transaction Publishers, pp.56–72. Klein, Lawrence R. (1949), The Keynesian Revolution, New York: Macmillan. Klump, Rainer (2005), ‘Der Beitrag der Freiburger Kreise zum Konzept der Sozialen Marktwirtschaft’, in Nils Goldschmidt (ed.), Wirtschaft, Politik und Freiheit. Freiburger Wirtschaftswissenschaftler und der Widerstand, Tübingen: Mohr Siebeck, pp.383–401. Knight, Frank (1923/1999), ‘The Ethics of Competition’, in Frank Knight (1999) (ed. by Ross B. Emmett), ‘What is Truth’ in Economics?, Chicago: University of Chicago Press, pp.61–93. Knight, Frank (1937/1999), ‘Unemployment: And Mr. Keynes’s Revolution in Economic Theory’, in Frank Knight (1999) (ed. by Ross B. Emmett), ‘What is Truth’ in Economics?, Chicago: University of Chicago Press, pp.345–371. Köhler, Ekkehard and Stefan Kolev (2011), The conjoint quest for a liberal positive program: ‘Old Chicago’, Freiburg and Hayek, HWWI Research Paper 109, Hamburg. Kuhn, Thomas S. (1962), The Structure of Scientific Revolutions, 2nd ed. 1970, Chicago: University of Chicago Press. Laidler, David (1999), Fabricating the Keynesian Revolution. Studies of the Inter-war Literature on Money, the Cycle, and Unemployment, Cambridge: Cambridge University Press.

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Lakatos, Imre (1968), ‘Criticism and the Methodology of Scientific Research Programmes’, Proceedings of the Aristotelian Society 69, pp.149–186. Lakatos, Imre (1970), ‘Falsification and the Methodology of Scientific Research Programmes’, in I. Lakatos and A. Musgrave (ed.): Criticism and the Growth of Knowledge, Cambridge: Cambridge University Press, pp.91–195. Lavoie, Don (1985), Rivalry and central planning: The socialist calculation debate reconsidered, Cambridge, Cambridge University Press. Lavoie, Don (1985), Rivalry and central planning: The socialist calculation debate revisited, Cambridge: Cambridge University Press. Leeson, Robert (2003): Ideology and the International Economy. The Decline and Fall of Bretton Woods, London: Palgrave Macmillan. Lippmann, Walter (1937/1965), The Good Society, (reprinted 1965) New York: Grosset & Dunlap. Marion, Mathieu (2004), ‘Investigating Rougier’, Cahiers D’Épistémologie 314, 2/2004. Martin, David Dale (1976), ‘Industrial Organization and Reorganization’ in Warren J. Samuels (ed): The Chicago School of Political Economy, East Lansing, Mich.: Association for Evolutionary Economics, pp.295–310. McCormick, Brian J. (1992), Hayek and the Keynesian Avalanche, New York: St. Martin’s Press. Meier-Rust, Kathrin (1993), Alexander Rüstow: Geschichtsdeutung und liberales Engagement, Stuttgart: Klett Cotta. Mierzejewski, Alfred C. (2005), Ludwig Erhard. Der Wegbereiter der Sozialen Markwirtschaft, München: Siedler. Mises, Ludwig von (1922/2008), Die Gemeinwirtschaft: Untersuchungen über den Sozialismus, (reprinted 2008) Stuttgart: Lucius & Lucius. Mises, Ludwig von (1926/1976), ‘Interventionismus’, in Ludwig von Mises (1976), Kritik des Interventionismus: Untersuchungen zur Wirtschaftspolitik und Wirtschaftideologie der Gegenwart, Darmstadt: Wissenschaftliche Buchgemeinschaft, pp.1–41. Mises, Ludwig von, (1927/1993), Liberalismus, (reprinted 1993) Sankt Augustin: Academia Verlag. MPC (1947): Mont Pèlerin Conference: (typed manuscript), in Liberaal Archief, Gent (Belgium) and also in HIA, MPS Coll.. Müller-Armack, Alfred (1948/1974), ‘Vorschläge zur Verwirklichung der Sozialen Marktwirtschaft’, reprinted in Alfred Müller-Armack (1974): Genealogie der Sozialen Marktwirtschaft, Frühschriften und weiterführende Konzepte, Bern/ Stuttgart: Haupt Verlag, pp.90–109 Müller-Armack, Alfred (1971), Auf dem Weg nach Europa. Erinnerungen und Ausblicke, Tübingen and Stuttgart: Wunderlich Nash, George H. (1976), The Conservative Intellectual Movement in America, Since 1945, New York: Basic Books. Nicholls, Anthony (1994), Freedom with Responsibility. The Society Market Economy in Germany 1918–1963, Oxford: Clarendon Press. Nils Goldschmidt (ed.) (2005), Wirtschaft, Politik und Freiheit. Freiburger Wirtschaftswissenschaftler und der Widerstand, Tübingen: Mohr Siebeck. Nordmann, Jürgen (2005), Der lange Marsch zum Neoliberalismus. Vom Roten Wien zum freien Markt – Popper und Hayek im Diskurs, Hamburg: VSA Verlag.

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Olson, Mancur (1982), The Rise and Decline of Nations. Economic Growth, Stagflation and Social Rigidities, New Haven, Conn./London: Yale University Press. Peacock, Alan and Hans Willgerodt (1989) (eds.), German Neo-Liberals and the Social Market Economy, London: Palgrave Macmillan. Plehwe, Dieter (2009), ‘Introduction’, in Philip Mirowski and Dieter Plehwe (eds.), The Road from Mont Pèlerin, Cambridge, MA, and London: Harvard University Press, pp.1–42. Plickert, Philip (2008), Wandlungen des Neoliberalismus. Eine Studie zu Entwicklung und Ausstrahlung der ‘‘Mont Pèlerin Society’, Stuttgart: Lucius & Lucius. Powell, Enoch (1967), [paper without title, presented at the MPS general meeting in Vichy 1967], in Liberaal Archief / Gent (Belgium). Ptak, Ralf (2009), ‘Neoliberalism in Germany: Revisiting the Ordoliberal Foundations of the Social Market Economy’, in Philip Mirowski and Dieter Plehwe (eds.), The Road from Mont Pèlerin, Cambridge, MA./London: Harvard University Press, pp.98–138. Riccio, Barry D. (1996), Walter Lippmann – Odyssey of a Liberal, New Brunswick, NJ, and London: Transaction Publishers. Richter, Ingo (1963), Die wirtschafts- und sozialpolitische Konzeption des italienischen Neoliberalismus. Eine vergleichende Betrachtung der Auffassungen Luigi Einaudis, Costantino Bresciani-Turronis und Giovanni Demarias, Tübingen: J.C.B. Mohr. Rieter, Heinz and Matthias Schmolz (1993), ‘The ideas of German Ordoliberalism 1938–45: pointing the way to a new economic order’, European Journal of the History of Economic Thought 1, pp.87–114. Robbins, Lionel (1934/1971), The Great Depression, reprinted 1971, New York: Books for Libraries Press. Robbins, Lionel (1971), Autobiography of an Economist, London/Basingstoke: Macmillan. Röpke, Wilhelm (1930), ‘Nationalsozialisten als Feinde der Bauern. Ein Sohn Niedersachsens an das Landvolk’, in Albert Hunold (ed.) (1959), Wilhelm Röpke: Gegen die Brandung. Zeugnisse eines Gelehrten unserer Zeit, Erlenbach-Zürich/ Stuttgart: Rentsch, pp.84–86. Röpke, Wilhelm (1933), ‘Die sekundäre Krise und ihre Überwindung’, in Economic Essays. In honour of Gustav Cassel, London: Routledge, pp.553–568. Röpke, Wilhelm (1942/1979), Die Gesellschaftskrisis der Gegenwart, (reprinted 1979) Bern/Stuttgart: Haupt Verlag. Röpke, Wilhelm (1944), Civitas humana: Grundfragen der Gesellschafts- und Wirtschaftsreform, Erlenbach-Zürch: Rentsch. Röpke, Wilhelm (1945a), ‘Einführung’, in Walter Lippmann: Gesellschaft freier Menschen, Bern: Francke, 27–33. Röpke, Wilhelm (1945b), Internationale Ordnung, Erlenbach-Zürch: Rentsch. Röpke, Wilhelm (1945c), Projekt einer internationalen Monatsschrift [Typoscript], in: HIA, Hartwell Coll., Box 4. Röpke, Wilhelm (1950), Ist die deutsche Wirtschaftspolitik richtig? Analyse und Kritik, Stuttgart/Köln: Kohlhammer Verlag. Röpke, Wilhelm (1953), ‘Economic ‘Miracle’ in Germany’, The Freeman, August 24, 1953, pp.843–846. Röpke, Wilhelm (1955), ‘Liberaler Konservatismus in Amerika’, in: Neue Zürcher Zeitung, May 5,.1955.

150 Philip Plickert Röpke, Wilhelm (1976), Wilhelm Röpke: Briefe 1934–66. Der innere Kompaß, Eva Röpke (ed.), Erlenbach-Zürich: Rentsch: Rueff, Jacques (1961), ‘Die Französische Wirtschaftsreform’, ORDO 12, pp.111–126. Rüstow, Alexander (1932/1963), Die staatspolitischen Voraussetzungen des wirtschaftspolitischen Liberalismus, in Alexander Rüstow (1963), Rede und Antwort, Ludwigsburg: Martin Hoch. Samuelson, Paul A. (1946/1966), ‘The General Theory’, reprinted 1966 in Joseph E. Stiglitz (ed.), The Collected Scientific Papers of Paul A. Samuelson, Vol. 2, Cambridge, MA, and, London, pp.1517–1533. Schivelbusch, Wolfgang (2006), Three New Deals: Reflections on Roosevelt’s America, Mussolini’s Italy and Hitler’s Germany. 1933–1939, New York: Metropolitan Books. Schüller, Alfred (2003), ‘Wilhelm Röpke – Werk und Wirken in Marburg: Lehren für die Gegenwart und Zukunft’, Ordo 54, pp.21–47. Schumpeter, Joseph A. (1950), ‘The March into Socialism’, American Economic Review 40, 2/1950, pp.446–456. Seldon, Arthur (1988), Freedom and Prosperity in the East and the West. The equation with Capitalism and Socialism with special reference to The British Economic ‘Miracle’, [paper presented at the MPS general meeting in Tokyo 1988], in Liberaal Archief / Gent (Belgium). Sheamur, Jeremy (2006), ‘Hayek, The Road to Serfdom, and the British Conservative Party’, Journal of the History of Economic Thought 28, 3/2006, pp.309–314. Shenfield, Arthur (1974), ‘Presidential lecture: The English desease’, [paper presented at the MPS general meeting in Brussels], in LA. Simons, Henry (1934/1948), ‘A Positive Program for Laissez Faire: Some Proposals for a Liberal Economic Policy’, in Henry Simons (1948), Economic Policy for a Free Society, Chicago: Chicago University Press. Simons, Henry (1936), ‘Keynes’ Comment of Money’, Christian Century, July 22, 1936 Simons, Henry (1936/1948), ‘Rules versus Authorities in Monetary Policy’, in Henry Simons (1948), Economic Policy for a Free Society, Chicago: University of Chicago Press, pp.160–183. Simons, Henry (1944/1948), ‘Some Reflections on Syndicalism’, in Henry Simons (1948), Economic Policy for a Free Society, Chicago: Chicago University Press. Smith, G. W. (1988), ‘Introduction’, in G. W. Smith (ed.): John Stuart Mill’s Social and Political Thought. Critical Assessments, London: Routledge. Smith, James Allen (1991), The Idea Brokers: Think Tanks and the Rise of the New Policy Elite, New York: Free Press. Starbatty, Joachim (1982), ‘Alfred Müller-Armacks Beitrag zur Theorie und Politik der Sozialen Marktwirtschaft’, in Ludwig-Erhard-Stiftung (ed.): Soziale Marktwirtschaft im vierten Jahrzehnt ihrer Bewährung, Bonn: Gustav Fischer, pp.7–26. Steel, Ronald (1980), Walter Lippmann and the American Century, Boston and Toronto: Little, Brown and Company. Stein, Herbert (1994), Presidential Economics. The Making of Economic Policy From Roosevelt to Clinton, Washington: AEI. Stein, Herbert (1996), The Fiscal Revolution in America, Washington: AEI Press.

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Stigler, George J. (1971), ‘The theory of economic regulation’, Bell Journal of Economics and Management Science 2, 1/1971, pp.3–21. Streit, Manfred E. and Michael Wohlgemuth (2000), ‘The Market Economy and the State. Hayekian and Ordoliberal Conceptions’, in Peter Koslowski (ed.), The Theory of Capitalism in the German Economic Tradition, Historism, Ordo-Liberalism, Critical Theory, Socialism, Berlin/Heidelberg: Springer. Thatcher, Margaret (1995), The path to power, London: HarperCollins Publishers. Trebing, Harry M. (1976), ‘The Chicago School versus Public Utility regulation’, ‘ in Warren J. Samuels (ed): The Chicago School of Political Economy, East Lansing, Mich.: Association for Evolutionary Economics, pp.311–340. Trilling, Lionel (1950), The Liberal Imagination, New York: Viking Press. Van Horn, Rob (2009), ‘Reinventing Monopoly and the Role of Corporations: The Roots of Chicago Law and Economics’, in Philip Mirowski and Dieter Plehwe (eds.), The Road from Mont Pèlerin, Cambridge, MA./London: Harvard University Press, pp.204–237. Van Horn, Robert and Philip Mirowski (2009), ‘The Rise of the Chicago School of Economics and the Birth of Neoliberalism’, in Philip Mirowski and Dieter Plehwe (eds.), The Road from Mont Pèlerin, Cambridge, MA./London: Harvard University Press, pp.139–178. Villey, Daniel (1964), No title [paper presented at the session ‘Recent Experience of Economic Planning in Western Countries’ at MPS meeting 1964 in Semmering], in LA. Walpen, Bernhard (2004), Die offenen Feinde und ihre Gesellschaft: Eine hegemonietheoretische Studie zur Mont Pèlerin Society, Hamburg: VSA Verlag.

3 Hayek, Orwell, and The Road to Serfdom Andrew Farrant

1

Introduction

In mid-April 1948, F. A. Hayek ceased work on a relatively lengthy draft postscript to The Road to Serfdom.1 Unfortunately, Hayek’s draft postscript – meant to appear in a new edition of Hayek’s book that was initially suggested by the University of Chicago Press in late 1945 – was never published.2 Nevertheless, aspects of Hayek’s partially completed postscript – for example, Hayek’s late 1940s assessment of Clement Attlee’s Labour government – would later appear in Hayek’s 1956 preface to the first American paperback edition of The Road to Serfdom.3 Unsurprisingly, Hayek’s 1956 preface readily ceded that Britain had not gone totalitarian during the Attlee years. In early 1948, however, Hayek had provided a far less sanguine analysis of the way in which Attlee’s government was seemingly taking Britain down the road to serfdom.4 In particular, Hayek was much perturbed by the Attlee government’s late 1947 reintroduction of the wartime power to direct labour. In his draft postscript, Hayek had similarly displayed much concern that the United States might find itself unwittingly heading down the totalitarian road. As Hayek explained, I am convinced that for some time the U.S.A. will continue to move towards state planning ... The basic ideas have already got too much hold. Whether the U.S. will continue on this way into a completely totalitarian system will depend on whether we are willing now to support efforts in the intellectual sphere which may bear fruits only in five or ten years or even later.5

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As Hayek rather more sanguinely told his American audience in 1956, however, while twelve years ago it seemed to many almost sacrilege to suggest that fascism and communism are merely variants of the same totalitarianism which central control of all economic activity tends to produce, this has become almost a commonplace. ... [Similarly, it was] now even widely recognized that democratic socialism [the Attlee government] is a very precarious and unstable affair, ridden with internal contradictions and everywhere producing results most distasteful to many of its advocates.6 Unsurprisingly, Hayek was much gratified by the readily apparent change in public opinion. For Hayek, however, the change in opinion – this ‘sobered mood’ – was primarily attributable to the ‘lessons of events and ... popular discussions of the problem’. As Hayek explained in a footnote, the most effective of these [‘popular discussions’] was undoubtedly George Orwell’s 1984 ... [Orwell] had earlier kindly reviewed this book.7 Much the same assessment of Orwell’s importance can be found in Hayek’s The Constitution of Liberty (1960).8 As Hayek noted, ‘socialist intellectuals’ had ‘indignantly rejected’ the ‘contention that socialism and individual liberty were mutually exclusive’ when The Road to Serfdom was initially published in 1944. Nevertheless, the nub of Hayek’s thesis had subsequently made a very ‘deep impression when [it was] stated in powerful literary form by one from their own midst’.9 Needless to say, Hayek was again invoking Orwell’s writings, and in a footnote he particularly singled out Orwell’s ‘Nineteen Eighty-four ... [and] his review of The Road to Serfdom in the Observer (London), April 9, 1944’.10 Orwell’s Nineteen Eighty-Four is often portrayed as an attack upon socialism. Indeed, while relatively few economists have paid scholarly attention to Orwell’s work, they appear naturally drawn to Hayek’s assessment of Nineteen Eighty-Four.11 For instance, Jennifer Roback argues that ‘Orwell believed that socialism led to totalitarianism ... that is the chief message of Orwell’s 1949 classic’.12 As Roback explains, Orwell thought that capitalism was inevitably unjust and inefficient ... [but thought] that socialism, the best alternative he could come up with, would lead toward totalitarianism.

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He expresses this view most starkly in his ... review ... [of] Hayek’s The Road to Serfdom: ‘Capitalism leads to dole queues ... Collectivism leads to concentration camps.13 Accordingly, ‘1984 is not about television screens and computers ... [1984 is] about totalitarianism and socialism’.14 As I explain in this chapter, however, the portrayal of Orwell as an anti-socialist writer is wide of the mark. For one thing, in the late 1940s Orwell took many pains to repudiate any ‘anti-socialist’ reading of his message in Nineteen Eighty-Four. Indeed, Orwell similarly repudiated any suggestion that his book was an attack upon Clement Attlee’s Labour government. As we shall see, Orwell took a very different view to Hayek when it came to assessing whether the Attlee government’s commitment to democratic planning would ultimately prove compatible with individual liberty.15 In particular, I compare the way in which Hayek and Orwell evaluated the Attlee government’s late 1940s use of Defence Regulation 58A to formally direct labour to take ‘essential’ work. This chapter is organized as follows. Section 1 evaluates the way in which Orwell himself viewed Nineteen Eighty-Four. As we shall see, Orwell did not view his book as an anti-socialist tract. Indeed, Orwell had much familiarity with the writings of Hayek and other anti-socialist writers who would subsequently become members of the Mont Pèlerin Society (for example, Michael Polanyi and John R. Baker) and was well aware of the strengths of their arguments against centralized planning. Nevertheless, Orwell’s faith in the viability of democratic socialism never faltered. Section 2 compares the way in which Hayek and Orwell evaluated the Attlee years. Sections 3 and 4 provide a detailed examination of the Control of Engagement Order, and use primary source material (for example, the yearly reports produced by the Ministry of Labour and National Service) to try and evaluate whether Hayek or Orwell had the more accurate assessment of the way in which the Attlee government made use of its power to direct labour in the late 1940s. Section 5 provides concluding remarks.

2

Hayek, Orwell, and the Logic of Economic Planning

As already noted, Hayek was much pleased by Orwell’s April 1944 review of The Road to Serfdom.16 Nevertheless, Orwell’s review – Hayek’s book was ‘an eloquent defense of laissez-faire capitalism’ – was not the only occasion upon which Orwell discussed Hayek’s ideas in print. Indeed, Orwell had familiarity with the writings of several scholars who would

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later attend the initial meeting of the Mont Pèlerin Society in 1947. As Orwell noted in January 1946, the years since the outbreak of the war in 1939 had seen an unmistakable ‘drift’ towards economic planning and away from ... [the] individualistic society in which property rights are absolute and money-making is the chief incentive.17 Nevertheless, Orwell explained that the highly planned and ‘centralised State’ had been heavily attacked on the ‘ground that, even in terms of its own objectives, it does not work’. Indeed, ‘Professor Hayek’s The Road to Serfdom’ provided by far the ‘ablest exposition’ of this particular ‘viewpoint’. As Orwell himself summarized Hayek’s thesis: Economic planning would destroy ‘liberty’ and was incapable of affording as high a standard of living as laissez-faire capitalism ... [Hayek claimed] that before Hitler came to power his essential work had been done for him by the German Social-Democrats ... who had succeeded in breaking down the average German’s desire for liberty and independence.18 Indeed, Orwell repeated his 1944 assessment of the merits of Hayek’s thesis when he noted that a ‘centralized economy necessarily’ gave immense power to the bureaucrats at the center ... [with] people who want power for its own sake ... [inevitably gravitating] towards the key positions.19 As Orwell explained, however, Michael Polanyi – having ‘studied conditions in the USSR over a number of years’ – had adopted a rather similar line of argument in his 1940 Contempt of Freedom.20 Nevertheless, Orwell maintained that Hayek’s ‘able defence of capitalism’ was scarcely more than ‘wasted labour’ because hardly ‘anyone wishes for the return of old-style capitalism’. Indeed, when faced with the manifestly unpleasant choice ‘between serfdom and economic insecurity’ the average man or woman would ‘probably choose outright serfdom, at least if it were called by some other name’.21 Indeed, Orwell was sure that ‘old style, laissez-faire capitalism is finished’.22 As Orwell had himself put in his 1944 review of The Road to Serfdom, the vast majority of the British populace would seemingly much prefer ‘State regimentation ... [to the] slumps and unemployment’ which he viewed as the inevitable concomitant

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of laissez-faire capitalism.23 Nevertheless, Hayek and similar writers had ‘uttered much useful criticism of the folly and wickedness of the Totalitarian age’.24 Orwell was also familiar with John R. Baker’s Science and the Planned State.25 Although Baker was an early member of Hayek’s Mont Pèlerin Society (but not an attendee at the initial meeting in Switzerland in 1947) he apparently resigned from the MPS shortly thereafter on the grounds that a non-economist such as himself had little to contribute to the MPS’s work (Hartwell 1995, 229). Nevertheless, Baker’s work (namely his August 1944 lecture) appears to have provided the initial spark which ultimately led Orwell to ‘begin serious work’ on the draft manuscript that ultimately became Nineteen Eighty-Four.26 As noted above, Hayek and Roback view Nineteen Eighty-Four as an attack upon socialism per se. Much to Orwell’s chagrin, however, Life magazine had itself taken much the same stance in early July 1949 when it described Orwell’s book as a scathing satire about the fate of man in a highly ‘regimented left-wing police state’.27 According to Life, Orwell was warning the world of the fate which awaits it if it confuses liberalism [i.e., New Deal type ‘socialism’] with regimentation.28 As Life had revealingly noted in an accompanying editorial, however, while Orwell’s trenchant analysis of the inherent logic of totalitarianism would scarcely surprise ‘Liberal Germans’ who had lived through the horrors of Nazism or any ‘Italians who suffered from Mussolini’s castor oil’ it would assuredly have similarly familiar overtones [‘in England’ itself] ... [Orwell’s] book reinforces a growing suspicion that some of the British Laborites revel in [post-war] austerity [rationing, etc.] and would love to preserve it. Indeed, Life argued that much the same could be said of the ‘more fervent’ and power-hungry ‘New Dealers in the U.S.’ and added that the ‘world of Orwell’s 1984’ appeared to be the ultimate outcome of ‘trends already at work’ in the United States itself and noted a stark similarity between Big Brother and ‘some of the most dedicated of the U. S. proponents of the welfare state’.29 As I now explain, however, Orwell was greatly perturbed by the way in which Life had erroneously portrayed his book. Indeed, as Orwell explained in a statement he shortly thereafter dictated to his publisher

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(Fredric Warburg), he was not making a prophecy of what would necessarily ‘happen inside the next forty years in the Western world’. Instead, he – much like Hayek himself in The Road to Serfdom – was providing a warning: ‘something like NINETEEN EIGHTY-FOUR could happen ... Don’t let it happen. It depends on you.’30 As Orwell explained, however, while ‘something’ much like Nineteen Eighty-Four ‘could happen’ – ‘This is the direction in which the world is going’ – the ‘trend’ itself lay very ‘deep in the political, social and economic foundations of the contemporary world situation’. In particular, Orwell flagged the ‘danger’ that was inevitably generated by the tendency toward an increasingly centralized and powerful state structure [which was] imposed on Socialist [e.g., Britain circa the midlate 1940s] and on Liberal capitalist communities [e.g., the United States] by the necessity to prepare for total war with the USSR.31 Orwell was similarly eager to rebut any suggestion that his book was an attack upon Clement Attlee’s Labour government. As Orwell explained in his dictated statement, the Attlee government was facing some very ‘hard problems’ (e.g., Britain’s balance of payments problem), and he added that If there is a failure of nerve and the Labour party breaks down in its attempt [to address these] problems ... tougher types than the present Labour leaders will inevitably take over, drawn probably from the ranks of the Left, but not sharing the Liberal aspirations of those now in power. Nevertheless, Orwell insisted that Members of the present British government, from Mr. Attlee and Sir Stafford Cripps down to Aneurin Bevan will never willingly sell the pass to the enemy ... the older men, nurtured in a Liberal tradition, are safe ... the younger generation is suspect ... the seeds of totalitarian thought are probably widespread among them.32 Orwell’s publisher shortly thereafter sent Orwell’s dictated statement to Life but it was never published. Instead, Life printed part of a very similar statement that Orwell had sent to the United Automobile Workers.33 As Orwell had explained in his statement to the UAW, however, Nineteen Eighty-Four was not

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an attack on socialism ... [or the] British Labor party ... but ... [was] a show-up of the perversions to which a centralized economy is liable, and which have already been partly realized in Communism and fascism. I do not believe that the kind of society I described necessarily will arrive, but I believe ... something resembling it could arrive ... totalitarian ideas have taken root in the minds of intellectuals everywhere, and I have tried to draw these ideas out to their logical consequences. As Orwell noted, the scene of the book is laid in Britain in order to emphasize that the English-speaking races are not innately better than anyone else ... totalitarianism, if not fought against, could triumph anywhere.34 As is clear, Orwell’s book was not an attack upon democratic socialism or Attlee’s Labour government: as Ralph Thompson of The New York Times subsequently told his readers, when Orwell wrote to the UAW he had amply explained that My recent novel is NOT intended as an attack on socialism or on the British Labor party (of which I am a supporter). (In and Out of Books, The New York Times July 31 1949: BR8)35 Accordingly, I now compare the way in which Hayek and Orwell evaluated the Attlee years.

3

The Attlee government and totalitarian planning?

According to Hayek, the way in which events had unfolded under Attlee’s Labour Government (1945–1951) provided ample evidence to buttress his argument in The Road to Serfdom.36 For example, Hayek argued that the Attlee government’s reintroduction of the wartime Control of Engagement Order in October 1947 more than sufficed to illustrate Hayek’s argument that the ‘inherent logic’ of socialist ‘policies’ would ultimately drive even the most ‘unwilling’ of socialist governments – for example, the Attlee government in the mid-late 1940s – into eventually adopting the ‘kind of coercion’ it ‘disliked’. As Hayek explained, the Attlee government had ‘found itself in peacetime forced to put the conscription of labor back on the statute book’. As Hayek added from the vantage point of 1956, however, it

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hardly diminishes the significance of this [the reintroduction of the power to direct labor under Defence Regulation 58A] when it is pointed out that the power was in fact never used because, if it is known that the authorities have power to coerce, few will wait for actual coercion.37 Although Hayek unsurprisingly ceded that Britain had not gone totalitarian during the Attlee years, he reminded his readers that his 1944 argument had presupposed that the ‘old socialist parties’ – for instance, the Weimar Social Democrats – were much ‘inhibited by their democratic ideals’ and had consequently lacked the ‘ruthlessness required for the performance of their chosen task’. As he revealingly noted in his preface, however, he had gained the impression ... that these inhibitions were if anything weaker among the British socialists than they had been among their German fellowsocialists twenty-five years earlier. As Hayek explained, the ‘German Social Democrats ... under equally or more difficult economic conditions’, had ‘never approached as closely to totalitarian planning as the British Labour government has done’.38 As I now explain, however, Hayek had made much the same highly negative judgement of Attlee’s government following a rather heated early 1948 disagreement with Evan Durbin (a former colleague in the Economics Department at the London School of Economics and a very junior minister in the Attlee government at that time).39 Unsurprisingly, the source of their disagreement appears to have been the Labour government’s re-introduction of the Control of Engagement Order in October 1947. The archival evidence suggests that Durbin had been toying with the idea of resigning from the Attlee government over the issue. Accordingly, Hayek wrote to Durbin shortly after their disagreement – Hayek apologized to Durbin for the way in which he had publicly baited Durbin (Hayek noted that he was ‘rather ashamed’) – and sought to persuade Durbin that he did not really belong in the Labour Party. As Hayek noted, the last three years have confirmed and even exceeded my worst apprehensions ... I begin to fear that your friends may themselves sooner or later create a truly totalitarian system ... [whereas] when I [initially] wrote my book [The Road to Serfdom] I thought that a Socialist government would produce both the general mess and the state of public

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opinion favourable to the creation of a totalitarian system by somebody else. As Hayek rather acidly noted, however, You have certainly more complete totalitarians in your party than e.g., the Weimar Social Democrats had in theirs.40 As is clear, Hayek was much concerned that Britain was heading down the road to serfdom after a mere three years of Labour government. Nevertheless, several months after Hayek’s early 1948 letter to Durbin, Orwell himself published a rather more measured assessment of the first three or so years of Labour government.41 As Orwell explained to his American audience (Orwell’s essay was published in Commentary), Britain – facing a ‘threatening and perhaps desperate economic situation’ (347) – had lived in a ‘state of almost continuous crisis’ for nigh on ‘three years’ but had so far managed to avert the always seemingly imminent ‘supreme calamity’. Indeed, national bankruptcy had been averted by ‘American loans’, by Crippsian ‘austerity’, and by the spending of Britain’s foreign exchange reserves [particularly US dollars] ... [and] when those expedients cease to work it may be put off still further, possibly for decades, by a successful drive for exports.42 Nevertheless, Britain’s ‘fundamental problem’ – that of assuring national solvency while not simultaneously ‘sinking the standard of living to an unbearably low level’ – had remained all but ‘untouched’.43 Orwell’s essay covers much ground. Nevertheless, Orwell noted an all-too-stark incongruence – Orwell aptly calls it a ‘tug of war’ – between Labour’s ‘pre-election promises’ and the exigencies of post-war ‘reconstruction’.44 As Orwell himself put it, Britain’s immediate aim must be to make her exports balance her imports ... [but this must be done] with worn-out industrial equipment ... [various] foreign preoccupations which demand large armed forces and are therefore a heavy drain on man-power [and Britain’s hard currency reserves], and with a working class which is tired and not too well fed, and which fought the war and voted at the General Election in the expectation of something quite different.45

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Indeed, while Labour had won a landslide election victory in July 1945, Orwell very much doubted whether the majority of Labour voters would consider themselves to have voted for ‘Socialism’ per se. As he explained, the average Labour voter had cast their vote on behalf of ‘full employment, bigger old age pensions’, an increase in the ‘school leaving age’, and rather ‘more social and economic equality, and more democracy all round’.46 Accordingly, the Attlee government was unable to ‘disappoint its supporters altogether’ and thus found itself having to combine ‘basic reconstruction with immediate reforms’ that would necessarily make the requisite ‘reconstruction more difficult’.47 As Orwell explained, however, ‘two facts’ – facts which he charged were all-too frequently ignored by the Socialist movement – ultimately underlay Britain’s ‘present [economic] difficulties’. As Orwell himself noted, certain jobs which are vitally necessary are never done except under some kind of compulsion ... [thus] full-employment ... [means] you have to make use of forced labor – [albeit provided with a rather] more soothing name – [for the] dirtier kinds of work [for instance, coal mining].48 Secondly, Britain was greatly impoverished by nine years or so of wartime and post-war exigencies: Thus, the impossibility, at this stage, of raising the working-class standard of living ... [or perhaps of even] maintaining it at its present level.49 Ultimately, the fact that the average worker had not seen their lot significantly improve meant that they were simply unwilling (or unable) to provide the higher work effort that would help Britain successfully overcome its economic woes. Nevertheless, Orwell greatly doubted whether the Attlee government would find itself ‘turned out of office’ prior to the 1950 election. For one thing, Labour had no ‘ideological rival’. As he explained, the Conservative party – viewed by the average Labour voter as the Party of ‘class privilege and ... unemployment’ – was utterly bereft of ideas (we can infer Orwell did not place much weight on the muchvaunted Industrial Charter). Nevertheless, the Conservative party – supposing they were to win an envisaged mid–late 1948 election – would necessarily find themselves having to ‘follow much the same policy’ as the Labour government but would lack the support of the ‘people who matter most’ (that is, the workers).50 As Orwell had similarly noted

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in November 1945, ‘any’ government ‘at this time’ would find itself having to continue with military conscription ... ‘direct’ labour into hated jobs such as coal-mining ... [and] clean up the mess left over from the war.51 Ultimately, Orwell much doubted whether Britain would find itself facing ‘mass starvation’. Rather, the relevant ‘question’ was whether Britain would survive as a ‘democratic country’ with a vibrant and robust political culture of tolerance and ‘decency’. As Orwell himself put it, unless something particularly calamitous – such as economic collapse and ‘mass unemployment’ – were to occur, the ‘main problem’ facing the Attlee government (or any viable and likely replacement) would be that of how to induce the British populace to ‘work harder’. As he himself wondered, can we do it without forced labor, terrorism, and a secret police? So far ... [despite] the cries of agony from the Beaverbrook press [such as the Daily Express, the Evening Standard and the Sunday Express], the government has encroached very little upon individual liberty. It has barely used its powers [for example, the power to direct labour under Regulation 58A], and has not indulged in anything that could reasonably be called political persecution. Nevertheless, Orwell noted that ‘the decisive moment’ (e.g., presumably national bankruptcy or wholesale economic collapse) had yet ‘to come’.52 As noted earlier, by mid-February 1948 Hayek clearly thought that Britain was speedily heading down the road to serfdom. For Orwell, by contrast, while the direction of labour per se was highly objectionable, the Attlee government had ‘barely’ made use of its power to direct labour under Defence Regulation 58A. Accordingly, we now turn to the evidence and take a closer look at the Control of Engagement Order to try and assess whether it was Hayek or Orwell who had the better understanding of the Control of Engagement Order and the Attlee government’s power to direct labour to take essential work.

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The Control of Engagement Order

In August 1947 Clement Attlee told Parliament that the Labour government planned to reintroduce the wartime Control of Engagement Order. According to Attlee, this would help to much alleviate the severe labour shortages that were plaguing a variety of ‘essential’ industries (primarily industries that produced for export to dollar markets). As Attlee himself explained, We propose to re-impose the control over the engagement of labour which was almost universal during the war, but has since been removed from all industries except coalmining, building [various relatively minor controls that are beyond our scope in this chapter] and agriculture. This will enable all workers, leaving one job and entering another to be guided into that class of work in which they can best assist towards overcoming our economic difficulties [for example, the ever-burgeoning balance of payments deficit]. Control of engagement only controls the movement of those falling out of employment. To find necessary manpower for essential employment, it may be necessary to take steps to limit employment on less essential work.53 The Control of Engagement Order 1947, was made on 18 September 1947 under Regulation 58A of the Defence (General) Regulations, 1939, and came into effect on 6 October 1947.54 The Order applied to men aged between 18 and 50 and women aged between 18 and 40. According to the Order, no employer was able to legally engage any person subject to the Order ‘otherwise than through a Local Office of the Ministry of Labour and National Service’ or an approved Employment Agency (such as a trade union). Similarly, any person covered by the Order was legally required to visit an official Ministry of Labour Employment Exchange (or approved equivalent) whenever they wanted to obtain employment or change their job.55 As George Isaacs (Attlee’s Minister of Labour) told Parliament in early November 1947, any person seeking employment or wanting to change their job would be offered employment in a firstpreference industry (they would be ‘offered on an average, four different jobs of an essential character’),56 and any person who repeatedly refused to accept an offer of ‘essential work’ (whether because they preferred to take an ‘inessential’ job or wanted to remain unemployed) could ultimately be directed to take a suitable vacancy in a first-preference industry.57 The penalties for refusing to obey a Ministry of Labour direction (or for breaching the Order more generally) included imprisonment

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(‘anything up to three months’), a ‘fine up to £100 ... or both fine and imprisonment’.58 Needless to say, any employer who was convicted of failing to comply with the Order – for instance, by engaging a worker who was subject to the Order without obtaining the prior approval of the Ministry of Labour – was subject to similar legal penalties.59 On the face of it, the Order may appear highly draconian, and Hayek may seem to have had more than ample justification when he charged the Attlee government with having restored industrial ‘conscription’.60 Nevertheless, the Order did not apply to every sort of work ... you do not have to obtain the following kinds of work through an Employment Exchange: – agriculture, coalmining, dock work ... fishing, employment without pay ... and employment in a managerial, professional, administrative or executive capacity.61 In addition, women with children of their own who were aged 15 and under and lived with their mother were also not subject to the Order. Similarly, the Order did not apply to part-time employment (officially defined as 30 hours or less per week), juveniles, or anyone who was registered disabled. As George Isaacs explained to Parliament in late 1947, while a person who was directed to take essential employment was legally required to ‘stay in that job for six months and ... must not leave without permission’, any worker who voluntarily accepted a first-preference vacancy could leave their job ‘at the end of a week or a fortnight if he thinks fit and ... go back [to the employment exchange] and ask for other employment’.62 Furthermore, any person directed to take essential work by the Ministry of Labour could directly appeal to their Local Appeal Board to have the direction withdrawn.63 The interests of any directed person were safeguarded by the Control of Employment (Directed Persons) Order, 1943. Accordingly, any worker who was subject to a direction under Regulation 58A could not be dismissed by their employer for anything other than serious misconduct while the direction was in force. Even in the latter case, however, any directed worker who was dismissed on such grounds could appeal to their Local Appeal Board, and if the Board found that their dismissal for supposed misconduct was unjustified it would subsequently request that a National Service Officer direct their former employer to immediately reinstate the wrongly dismissed employee. Moreover, any worker who was subject to a direction per se could apply to a National Service Officer seeking to have the direction

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withdrawn and their employment in a specific ‘essential’ job terminated.64 Similarly, any directed worker who found themselves ‘stood off by ... [their] employer from ... [their] work without wages’, could apply to a National Service Officer to have the direction withdrawn.65 Finally, the wages and conditions of employment were safeguarded by the provisions of paragraph 2 of Defence Regulation 58A. Accordingly, the wages paid to a directed worker could not be less than the prevailing ‘rate for the job’, and employment conditions had to meet the usual ‘standard conditions’. Needless to say, trades unions were ever-vigilant in assuring that these particular safeguards had binding force. As noted earlier, managerial labour was exempt from the Order. Accordingly, the Ministry of Labour issued a set of guidelines explaining what counted as ‘managerial’ labour per se. As the Ministry of Labour explained, ‘managerial labour’ did not necessarily include all employees who were called ‘managers’. Instead, the category comprised all ‘salaried’ officials in ‘executive charge of a department, works, contract or office’, and thus included ‘superintendents, and general foremen and head foremen in charge of other foremen’, but did not include ‘foremen, chargemen, piece-workers or anyone in receipt of hourly rates of pay’.66 The Ministry of Labour’s descriptions of ‘Professional, Administrative’ and ‘Executive’ labour were similarly opaque. For instance, while the category ‘Professional’ labour included all persons who held ‘standard qualifications of a professional nature’, not ‘all qualified persons ... [were] necessarily employed in a professional capacity’. For example, a qualified accountant who was employed as a mere ‘audit clerk could not be said to be employed in a professional capacity’.67 For the Ministry of Labour, the category ‘Administrative and Executive’ labour signified employment that required the employee to ‘make decisions’, and to ‘organize or to develop ideas’ on their own ‘initiative, even within a clearly defined policy or directive’.68 Despite providing a relatively detailed explanation of the ‘priority system under which First Preference’ would be accorded to vacancies in industries of particular national importance, the Ministry ceded that it was nigh-on ‘impossible to give Local Offices an exact definition of Essential Work’.69 Accordingly, Local Offices would have to ‘reach decisions on individual vacancies [by] taking account’ of the prevailing ‘national situation, the nature of vacancies’ and whatever ‘general guidance’ they might receive from the Ministry of Labour itself.70 As the Ministry of Labour explained to Local Offices, the ‘output of the manufacturing industries is required in the national interest either for export or for essential home production’. Hence, it was ‘not desirable in present

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circumstances that the building and civil engineering industries’ expand any further, and the fishing, food processing, and extractive industries (‘i.e. mining and quarrying’), together with laundries (other than dry cleaning), domestic work in hospitals and similar institutions (and in households where there ‘are special circumstances of hardship’), should ‘all be regarded as essential’ industries and services. Although ‘employment by public utilities’ was deemed ‘essential’ to the national interest, any vacancies in their ‘showrooms’ were stated to be vacancies in ‘retail distribution’.71 Similarly, ‘certain jobs’ in catering ... garages, hotels ... wholesale and retail food or fuel distribution ... or the retail and wholesale distribution of supplies to agriculture or industrial establishments or for export ... [were] clearly ... essential. Although the Ministry did not specify the particular jobs to which they were referring, they did note that ‘not all such jobs will be’ included in the Essential ‘category’.72 The Control of Engagement Order – while obviously something of a bureaucratic quagmire – had scant resemblance to the industrial regimentation and forced labour that springs to mind when one thinks of totalitarian regimes (such as the Soviet Union.)73 Nevertheless, it is readily understandable why Hayek would have maintained that the Attlee government’s ‘attempts at economic planning’ necessitated the significant ‘growth of a measure of arbitrary administrative coercion’.74

5 The Control of Engagement Order: The Road to Serfdom? As noted earlier, Hayek heavily chided the Attlee government for having reintroduced industrial ‘conscription’ in peacetime. Similar sentiments were readily apparent during Parliamentary debates over the Order (for instance, the debate that followed the Prayer to annul the Order in early November 1947), and a bevy of Conservative MPs eagerly lambasted the Order as a mere way-station on the road to wholesale industrial slavery and totalitarian dictatorship. Indeed, the Labour MP who moved the Prayer to annul the Order (J. Rhys Davies – MP for Westhoughton) predicted that the Order would result in many ‘working class people’ being sent to prison under the ‘new regulations’.75 Nevertheless, Orwell had much cause to argue that the Attlee government ‘encroached very little upon individual liberty ... [and has] barely used its powers’.76 As the Ministry of Labour explained in 1949, only one case of non-compliance

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with the Control of Engagement Order was successfully prosecuted.77 Similarly, while the Order was in force (early October 1947 to midMarch 1950), a mere ‘29 persons’ were formally directed ‘to take new employment’.78 As I now explain, however, the Ministry of Labour also had the legal authority to invoke Defence Regulation 58A to legally compel persons who were usually engaged in coalmining or agriculture to remain in their industry. Nevertheless, as George Isaacs regularly explained to Parliament, these particular directions were not included in the official figures for the number of persons formally directed to essential work as a ‘direct consequence of the new Order [the COE]’.79 The reason for this was relatively simple. As Attlee had himself told Parliament when he announced the Labour government’s intention to ‘re-impose’ the wartime ‘control over the engagement of labour’, the various wartime and early post-war Control of Engagement Orders (such as the Control of Engagement Order, 1945, the Control of Engagement (Amendment) Order, 1945, and the Control of Engagement (No. 3) Order, 1946) had already been ‘removed from all industries’, but this was not the case for ‘coalmining ... [or] agriculture’.80 Thus, these particular industries were still surrounded by the wartime ‘“ring fence”, inside which workers already in the industry were to be retained’.81 As the Ministry of Labour subsequently explained, workers in these particular industries were subject, if necessary, to the issue of directions under Regular 58A to secure compliance with the [‘ring fence’] ... [and their] position was not substantially altered by the Control of Engagement Order, 1947, under which the ‘ring fence’ round the ... [industries] remained.82 Consequently, the ‘number of directions issued under the new arrangements [the COE] was negligible’.83 Table 3.1 provides figures for the number of persons who were directed under Defence Regulation 58A – whether to remain in a ‘ring-fence’ industry or to take new employment – between early October 1947 and mid-March 1950.84 Orwell’s 1948 essay in Commentary – written in July 1948 – had concluded with a rather brief allusion to the Attlee government’s Registration for Employment Order (‘the recent tightening up of employment regulations’).85 This particular Order (made under Defence Regulation 58A in early November 1947) initially came into effect in early December 1947 and gave the Minister of Labour the legal authority to require the registration of men and women ‘who either were not

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Andrew Farrant Table 3.1 Number of persons who were directed under Defence Regulation 58A Month – Year October 1947 November 1947 December 1947 January 1948 February 1948 March 1948 April 1948 May 1948 June 1948 July 1948 August 1948 September 1948 October 1948 November 1948 December 1948 January 1949 February 1949 March 1949 April 1949 May 1949 June 1949 July 1949 August 1949 September 1949 October 1949 November 1949 December 1949 January 1950 February 1950 March 1950

Coal Mining

Agriculture

COE

84 58 40 35 26 15 19 14 20 10 4 13 13 16 7 7 15 11 6 9 3 1 5 21 24 25 11 NA NA NA

7 15 14 19 6 43 3 9 7 3 3 0 1 1 1 2 4 8 0 3 1 1 2 3 3 0 0 NA NA NA

10 4 1 1 1 2 0 2 0 3 4 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

seeking employment at all or were engaged on work that was obviously unproductive’.86 As noted by the Ministry of Labour, the Order provides that the Minister may, by public notice, require such persons, or those of a class or description specified in the notice, to register particulars about themselves as and when required by the notice.87 The Order similarly provided the Minister of Labour with the authority to require that ‘Employers in specified kinds of undertakings’ register ‘particulars about themselves [directors and partners included] and

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their employees’.88 As George Isaacs himself explained to Parliament in November 1947, The age limits will be the same as those imposed by the Control of Engagement Order, 1947. The occupations at present in mind are employment in betting and gambling, including football pools and amusement arcades, night clubs and street trading in urban areas.89 As Isaacs noted, individuals who registered their ‘particulars’ with their Local Ministry of Labour Office would subsequently be called to the employment exchange for interview and dealt with in exactly the same way as persons seeking employment under the control of engagement procedure. This means that in appropriate cases they will then be offered employment on essential work and, if necessary, formally directed to it.90 Although a total of 95,965 persons had registered themselves by the early April 1948 deadline, the Ministry of Labour had only managed to place 7563 of these persons in essential work by the time Orwell’s essay appeared in print (October 1948). Indeed, the Ministry of Labour had shortly thereafter ‘decided that further action [i.e., the calling of registered persons for interview] would not be justified’.91 As Orwell had noted in his essay, the Registration for Employment Order made it ‘possible, in theory, to classify any unsuccessful writer or artist, as a non-worker’, and thus ‘direct him’ to take ‘gainful employment’.92 Nevertheless, Orwell added that this did not actually occur in ‘practice’. As George Isaacs told Parliament in 1949, the ‘use of formal direction’ under Regulation 58A was ‘found to be necessary only in one case’.93 Similarly, a total of two people were prosecuted for contravening the provisions of the Order: one woman was fined for failing to register as a person who was not gainfully employed, and one man was fined for failing to register as a street trader.94 Despite his measured assessment of the way in which the Attlee government had ‘barely’ used its power to direct labour under Regulation 58A, Orwell was nevertheless opposed to Regulation 58A itself and to the direction of labour per se. Indeed, Orwell had immediately lent his support to the Freedom Defence Committee (he became vice-chairman) – set up to provide a non-communist rival to the National Council for Civil Liberties – when it was initially formed in August 1945. Aside from defending civil liberties in general (such as freedom of speech and a free

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press), however, the Committee was especially opposed ‘to all forms of military and industrial conscription’ and worked for the abolition of the Emergency Powers Act, Defence Regulations [58A and 80B included] and all existing statutes restricting the freedom of political action.95

6

Conclusion

In early January 1947 Karl Popper wrote to Hayek to accept an invitation to become a member of the nascent Mont Pèlerin Society. Popper also noted that Hayek had earlier expressed much sympathy with Popper’s view that it was vital to ‘try for a reconciliation of liberals and socialists’.96 As Popper explained, he did not think that there was any necessity to refrain from emphasizing the ‘dangers of socialism’ but it was necessary to avoid ‘everything’ which might serve to further widen the ‘gulf between [the Hayekian liberals and] those [socialists] who really love freedom, and might yet be won for co-operation’.97 Indeed, Popper told Hayek it would prove ‘advantageous ... to secure the participation of some people who are known to be socialists or to be close to socialism’. Accordingly, Popper provided Hayek with a list of 12 ‘socialists who might be invited’ to join the nascent MPS. Popper’s suggestions included luminaries such as Bertrand Russell, Victor Gollancz (a co-founder of the Left Book Club and Orwell’s former publisher), H. D. Dickinson, Abba Lerner, Barbara Wootton, and Evan Durbin.98 Needless to say, Orwell also appeared on Popper’s list. As Popper told Hayek, Orwell et al. may ultimately make an ‘invaluable ... and even indispensable’ contribution to the work of the Society.99 Although I have been unable to find a copy of Hayek’s reply to Popper, we can readily imagine why Popper would have proven so keen to have Hayek reach out to thinkers such as Orwell. Indeed, a few days earlier Popper had himself told Rudolf Carnap that I fully share ... the conviction of the [Hayekian] liberals that freedom is the most important thing in the political field. But I am convinced that freedom cannot be saved without improving distributive justice, i.e., without increasing economic equality.100 Popper had told Hayek himself much the same in March 1944, when he noted that any attack on ‘interventionism’ per se would much undermine the possibility of ‘uniting ... liberals and socialists’ because the

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latter would ‘rightly’ view any such dogmatically anti-interventionist stance as an ‘undesirable wish to return to laissez faire’.101 In 1946, Orwell noted that ‘[e]very line of serious work’ he had ‘written since 1936 has been written, directly or indirectly, against totalitarianism and for democratic Socialism, as I understand it’.102 Nevertheless, any detailed analysis of Orwell’s writings on democratic Socialism – ‘economic security without concentration camps’ – is far beyond the scope of this chapter. As Orwell himself explained, however, democratic socialism was ‘bound up with liberty, equality, and internationalism’ and he much hoped that the idea of a ‘Socialist United States’ of ‘Western Europe and Africa’ would ‘take root among British Socialists’.103 Nevertheless, as Orwell himself clearly explained in 1941, the ‘common ownership of the means of production’ per se was not ‘in itself a sufficient definition of Socialism’. It was vitally necessary to also add the following: approximate equality of incomes (it need be no more than approximate), political democracy, and abolition of all hereditary privilege, especially in education. The latter provided the all-toonecessary safeguards against the reappearance of a class-system. Centralized ownership has very little meaning unless the mass of the people are living roughly upon an equal level, and have some kind of control over the government. ‘The State’ may come to mean no more than a self-elected political party, and oligarchy and privilege can return, based on power rather than on money.104 Indeed, Orwell refused to entertain any foolish and baneful illusions about the way in which a planned and highly centralized economy might supposedly be combined with benevolent dictatorial power. Whether Orwell adequately managed to square his advocacy of democratic Socialism – for instance ‘a socialist United States of Europe seems to me the only worth-while political objective today’105 (164) – with his assessment of the merits of aspects of Hayek’s 1944 thesis (‘the negative part of ... Hayek’s thesis’ contains a ‘great deal of truth’), however, is far beyond the scope of this chapter. As Orwell himself put it in his review of The Road to Serfdom, whether it was possible to steer a safe passage between the baneful consequences of Capitalism (‘dole queues, the scramble for markets, and war) and the evils of Collectivism (‘concentration camps, leader worship, and war’) would depend on whether a

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way could be found by which to combine a ‘planned economy ... with the freedom of the intellect’. For Orwell, however, this was only possible ‘if the concept of right and wrong is restored to politics’.106 Ultimately, and as Orwell himself explained in a May 1944 letter, he had immense faith in the ‘English people’, and similarly believed in their ‘capacity to centralize their economy without destroying freedom in doing so’.107 Hayek would himself no doubt view Orwell’s ‘bestcase’ view of central planning as exceedingly naïve and rather dangerous.108 Nevertheless, as noted earlier, Hayek gave Orwell much credit for the change in public opinion that had occurred in the 12 years or so that followed the initial publication of The Road to Serfdom. As Hayek explained when he gave the closing address at the March 1984 Regional Meeting of the Mont Pèlerin Society in Paris, he had initially broached the idea of what would ultimately become the MPS when he gave a late February 1944 address in Cambridge: A ‘few weeks’ after Hayek’s speech ‘at King’s College, a certain gentleman named George Orwell published a review’ of Hayek’s 1944 book (which had appeared in the meantime). As Hayek generously noted, I know, now, that he was already looking for a publisher for his first famous book [Animal Farm], but ... [Orwell] has contributed much more, than The Road to Serfdom has in its original form, to cause the reaction to totalitarianism of which the history of this Society is of course a very important element.109

Notes 1. I thank the Estate of F. A. Hayek for permission to quote from Hayek’s unpublished early 1948 letter to Durbin and his unpublished 1984 address to the Mont Pèlerin Society. I thank Robert Leeson and Guinevere Nell for helpful comments on an earlier draft and David M. Levy for helpful conversation about Hayek, Orwell, and related topics.F. A. Hayek, The Road to Serfdom. Chicago: University of Chicago Press, [1944] 1994. 2. See B. Caldwell, ‘Introduction’, in Caldwell, B. (Ed.), The Road to Serfdom: Text and Documents. Chicago: University of Chicago Press, 2007, 22. 3. F. A. Hayek, Preface to the 1956 paperback edition: The Road to Serfdom. Chicago: University of Chicago Press, [1956] 1994, xxvii–xliv. 4. Andrew Farrant, Hayek and the Labour Government of 1945–1951, Working Paper, 2014. 5. Hayek quoted in A. Farrant and E. McPhail, Hayek, Samuelson, and the logic of the mixed economy? Journal of Economic Behavior & Organization 69 (2009) 5–16. 6. F. A. Hayek, Preface to the 1956 paperback edition. The Road to Serfdom. Chicago: University of Chicago Press, [1956] 1994, xxxii–xxxiii.

Hayek, Orwell, and The Road to Serfdom 7. 8. 9. 10.

11. 12.

13. 14. 15.

16. 17.

18.

19.

20.

21.

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Ibid., xxxiii. F. A. Hayek, The Constitution of Liberty, London: Routledge, 1960. Ibid., 254–255. Ibid., 502. Orwell had written that the ‘negative part’ of Hayek’s trenchant thesis contained much ‘truth’. Collectivism gave a ‘tyrannical minority such powers as the Spanish Inquisitors never dreamed of’ (G. Orwell, Grounds for Dismay, The Observer, 9 April 1944, 3). G. Orwell, Nineteen Eighty-Four. New York: Harcourt, 1949. J. Roback, The Economic Thought of George Orwell, The American Economic Review, Vol. 75, No. 2, Papers and Proceedings of the Ninety-Seventh Annual Meeting of the American Economic Association [May, 1985], 127–132. Ibid., 128. Ibid., 129 The Labour Government which came to power in 1945 was ‘committed to honouring the objectives of both the 1944 White Paper on Employment Policy and the Beveridge Report on the Social Services ... this was to be realized by a rather nebulous economic policy which they referred to as ‘democratic planning’ ... [which is best] described as a mixture of physical controls, nationalization and exhortation, laced with a dash of Keynesianism and a liberal dose of wishful thinking’ (Sir Edwin Plowden, An Industrialist in The Treasury, London: Andre Deutsch, 1989: 4). According to R. W. (‘Otto’) Clarke (an important Treasury civil servant and an advocate of planning), the Attlee government’s attempt to ‘plan’ was ‘bricks without straw ... there was no known plan and no known means of implementing a plan even if there had been a plan’ (Clarke’s Diary quoted by David Hubback, ‘Sir Richard Clarke –1910–1975’, Public Policy and Administration. Volume 3 No. 1, 1988: 27). G. Orwell, Grounds for Dismay, The Observer, 9 April 1944, 3. G. Orwell, ‘The Intellectual Revolt’, in The Complete Works of George Orwell, ed. Peter Davison, vol. xviii, Smothered Under Journalism: 1946 (London: Secker & Warburg, 2001), 57. Ibid., 58. As Orwell noted in 1944, Hayek thought that ‘salvation’ lay only in a return to ‘an unplanned economy, free competition, and emphasis on liberty rather than security’ (G. Orwell, Grounds for Dismay, The Observer, 9 April 1944, 3). G. Orwell, ‘The Intellectual Revolt’, in The Complete Works of George Orwell, ed. Peter Davison, vol. xviii, Smothered Under Journalism: 1946 (London: Secker & Warburg, 2001), 59. As Orwell himself observed in March 1947: ‘I became pro-Socialist more out of disgust with the way the poorer section of the industrial workers were oppressed and neglected than out of any theoretical admiration for a planned society’ (G. Orwell, ‘Preface to the Ukrainian Edition of Animal Farm’, in The Complete Works of George Orwell, ed. Peter Davison, vol. xix, It is What I Think: 1947–48 (London: Secker & Warburg, 2002), 87. G. Orwell, ‘The Intellectual Revolt’, in The Complete Works of George Orwell, ed. Peter Davison, vol. xviii, Smothered Under Journalism: 1946 (London: Secker & Warburg, 2001), 59. Ibid., 59. Orwell argued much the same in early 1946, ‘it is not much use telling people that compulsory education, compulsory social insurance,

174

22.

23. 24.

25.

26.

27. 28.

29. 30.

Andrew Farrant control of investments, and direction of labour add up to slavery ... even if true, the great mass of the people would far rather have slavery than the alternative’ (G. Orwell, ‘Review: The Democrat at the Supper Table by Colm Brogan’, in The Collected Essays, Journalism and Letters of George Orwell, ed. S. Orwell and I. Angus, vol. iv, In Front of Your Nose: 1945–1950 (New York: Harcourt, 1968), 97. G. Orwell, ‘The Intellectual Revolt’, in The Complete Works of George Orwell, ed. Peter Davison, vol. xviii, Smothered Under Journalism: 1946 (London: Secker & Warburg, 2001), 57. G. Orwell, Grounds for Dismay, The Observer, 9 April 1944, 3. G. Orwell, ‘The Intellectual Revolt’, in The Complete Works of George Orwell, ed. Peter Davison, vol. xviii, Smothered Under Journalism: 1946 (London: Secker & Warburg, 2001), 59. John R. Baker, Science and the Planned State, New York: Macmillan, 1945. Orwell attended an August 1944 lecture in which Baker had vehemently denounced the way in which Soviet science was purportedly ‘planned’ – ‘The scientist’s most fundamental liberty is gravely threatened ... by the would-be central planners of the subject ... Lysenko provides a vivid illustration of the degradation of science under a totalitarian regime’ (John R. Baker, ‘Science, Culture and Freedom’, in ed. Herman Ould, Freedom of Expression: A Symposium (London: Hutchinson, 1945), 118–119.) Peter Davison, The Lost Orwell: The Lost Letters and Writings of George Orwell, ed. Peter Davison (London: Timewell Press, 2006), 128–133. As Orwell noted in a March 1946 letter to Arthur Koestler, he had finally managed to obtain a copy of Baker’s 1945 Planned Science (see, Peter Davison, George Orwell: A Life in Letters (New York: Liveright Publishing Corporation, 2013), 296. Koestler and Orwell had corresponded in late 1945 and early 1946 about the possibility of setting up an international organization to oppose any variety of totalitarianism – ‘an organization of this type would in practice be anti-Russian, or would be compelled to become anti-Russian’– with suggested names for any such organization including the League for the Freedom and Dignity of Man and the League for the Defence and Development of Democracy (G. Orwell, ‘Letter to Arthur Koestler’ in The Collected Essays, Journalism and Letters of George Orwell, ed. S. Orwell and I. Angus, vol. iv, In Front of Your Nose: 1945–1950 (New York: Harcourt, 1968), 76. Bertrand Russell had been much taken by the idea and urged Orwell and Koestler to arrange a small conference to discuss the envisaged organization. The conference was tentatively slated to occur in Easter 1946 but never took place (ibid., 121). Orwell had suggested that Baker might play a role in the organization when he wrote to Koestler in March 1946 (see Peter Davison, George Orwell: A Life in Letters (New York: Liveright Publishing Corporation, 2013), 296. Life, 4 July 1949, 78. Life, 4 July 1949, 78. Arthur Schlesinger Jr. shortly thereafter took Life to task: ‘The essence of Orwell’s position is a warning against totalitarianism ... not, as your editorial writer puts it, just against ‘left wing’ totalitarianism’ (Life, 25 July 1949, 4). Life, 4 July 1949, 18. ‘Orwell’s Statement on Nineteen Eighty-Four’, in The Complete Works of George Orwell, ed. Peter Davison, vol. xx, Our Job Is to Make Life Worth Living: 1949–50

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32.

33. 34. 35.

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(London: Secker & Warburg, 2002), 134. Interestingly enough, Veronica Wedgwood – an associate of Hayek and the only female participant in the initial meeting of the Mont Pèlerin Society – was much taken with Orwell’s book and noted that Orwell’s book had been ‘no doubt’ written with the ‘intention of preventing his prediction from coming true’ when she reviewed Nineteen Eighty-Four for Time and Tide (Bernard Crick, George Orwell – A Life, Boston: Little, Brown & Company, 1980, 393). Wedgwood had attempted to persuade Orwell to allow Time and Tide to serialize Animal Farm in its literary pages after Orwell’s manuscript had been rejected by Jonathan Cape. Wedgwood was employed by Cape at the time and had read Orwell’s draft manuscript. Needless to say, she strongly favoured publication (she was also about to leave Cape to become the literary editor of Time and Tide). Although Orwell was very grateful to Wedgwood for making the arrangement with Time and Tide possible, he said that ‘the politics of Time and Tide were far too far to the Right for him ... [and] he felt it to be the wrong background for the book’ (ibid., 313). ‘Orwell’s Statement on Nineteen Eighty-Four’, in The Complete Works of George Orwell, ed. Peter Davison, vol. xx, Our Job Is to Make Life Worth Living: 1949–50 (London: Secker & Warburg, 2002), 134. In particular, Orwell explained that the very existence of the totalitarian state (Oceania) he had so trenchantly analyzed in Nineteen Eighty-Four was necessarily predicated on the supposition that the world was itself divided into ‘several super states’. As Orwell noted, he had explained this point in much detail in his book and also noted that it had been similarly discussed at length by ‘James Burnham in THE MANAGERIAL REVOLUTION’ (ibid., 134). As Orwell summarized this particular aspect of his book, ‘Two of the principal super states will obviously be the Anglo-American world and Eurasia ... the Anglo-Americans will not take the name of their opponents and will not dramatize themselves on the scene of history as Communists ... they will have to find a new name for themselves. The name suggested in NINETEEN EIGHTY-FOUR is of course Ingsoc, but in practice a wide range of choices is open.’ (ibid., 134). Orwell had earlier noted that Burnham had provided a ‘good description’ of what was ‘happening in various parts of the world, i.e., the growth of societies neither capitalist or socialist, and organized ... on the lines of a caste system’ (G. Orwell, ‘Burnham’s View of the Contemporary World Struggle’, in The Complete Works of George Orwell, ed. Peter Davison, vol. xix, It is What I Think: 1947–48, London: Secker & Warburg, 2002, 104. ‘Orwell’s Statement on Nineteen Eighty-Four’, in The Complete Works of George Orwell, ed. Peter Davison, vol. xx, Our Job Is to Make Life Worth Living: 1949–50 (London: Secker & Warburg, 2002), 134–135. Life, 25 July 1949, 4, 6. See The Complete Works of George Orwell, ed. Peter Davison, vol. xx, Our Job Is to Make Life Worth Living: 1949–50 (London: Secker & Warburg, 2002), 136. Tosco Fyvel – a close associate of Orwell – noted that Orwell was much pleased by the ‘firmness with which the Labour Government ... [had] continued in office after mitigating the worst harshnesses of British society by means of the Health Service, the National Social Insurance Act, the nationalisation of the mines, the development of the depressed areas, and so on ... these measures were [all] steps in the direction Orwell desired ... [and while in hospital]

176

36.

37.

38. 39.

40. 41. 42. 43.

44. 45.

Andrew Farrant was keenly interested in the coming election and the chances of his various friends among Labour M.P.s. He also said that one point in 1984 had been misunderstood by the critics [e.g. Life]. ‘Ingsoc’, the totalitarian society, was not represented as arising out of democratic socialism.’ See The Complete Works of George Orwell, ed. Peter Davison, vol. xx, Our Job Is to Make Life Worth Living: 1949–50 (London: Secker & Warburg, 2002), 136. ‘Little more than a year after The Road to Serfdom first appeared, Great Britain had a socialist government which remained in power for six years ... this experience has strengthened my concern and ... taught the reality of the difficulties I pointed out to many for whom an abstract argument would never have carried conviction’ F. A. Hayek, Preface to the 1956 paperback edition. The Road to Serfdom. Chicago: University of Chicago Press, [1956] 1994, xxxvii. Ibid., xxxviii. Under Defence Regulation 58A, the ‘Minister of Labour and National Service or any National Service Officer ... [can] direct any person in Great Britain to perform such services in the United Kingdom or in any British ship ... as may be specified by or described in the direction, being services which that person is ... capable of performing’ (Defence Regulation 58A quoted by John Boyd-Carpenter, ‘The Political Abuse of the Defence Regulations’, The New English Review. July, 1946, 11). F. A. Hayek, Preface to the 1956 paperback edition. The Road to Serfdom. Chicago: University of Chicago Press, [1956] 1994, xlii The disagreement occurred at a party at the LSE: ‘Hayek ... abused [Durbin], the Labour Government, and socialism ... at some length’ (S. Brooke, ‘Problems of ‘Socialist Planning’: Evan Durbin and the Labour Government of 1945’, (The Historical Journal, 34: 3, 1991, 695). British Library of Political and Economic Science, Evan Durbin papers, 3/10, Hayek to Durbin, 17 Feb. 1948. G. Orwell, ‘Britain’s Struggle for Survival: The Labour Government after Three Years’, Commentary, October 1948, 343–349. Ibid., 343. As Orwell had presciently noted in early June 1945, whichever party won the election (slated for early July 1945), would be ‘in for an uncomfortable time, and a Left government [i.e., any Attlee government] especially so. War-time controls will have to be continued and even tightened up ... Then there is the coal problem ... [which is] not soluble until the mines have been nationalized and then renovated by a process that will take several years. For the time being any government ... will be obliged to both coerce the miners and ... let the public shiver through the winter’ (G. Orwell, ‘London Letter to Partisan Review 5 June 1945’ in The Collected Essays, Journalism and Letters of George Orwell, ed. S. Orwell and I. Angus, vol. iii, As I Please: 1943–1945 (New York: Harcourt, 1968), 381.. After Labour’s election victory Orwell wrote that the British populace grasped that post-war reconstruction would be a ‘big job, involving rationing and ‘direction’ of labour over a long period’ but inadequately grasped that ‘for a long time to come we may be unable to afford any improvement in our way of life’ (London Letter to Partisan Review 15? August 1945, ibid., 397). G. Orwell, ‘Britain’s Struggle for Survival: The Labour Government after Three Years’, Commentary, October 1948, 347. Ibid., 344.

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46. Ibid., 344. As Orwell had similarly noted in November 1945, the election had been primarily fought over the ‘nationalization of industry, social security, demobilization, housing, old age pensions, continuation of wartime controls and also of wartime facilities such as day nurseries, and the raising of the school-leaving age’. The Conservative Party had been ‘forced’ to reveal itself as the ‘champions of laissez-faire’ (G. Orwell, in The Complete Works of George Orwell, ed. Peter Davison, vol. xvii, I Belong to the Left: 1945 (London: Secker & Warburg, 2001), 337. The average voter viewed Labour as the party which stood for ‘full employment, free milk for school-children, old age pensions of thirty shillings a week ... [and] a fair deal for the working man’ (ibid., 339). 47. G. Orwell, ‘Britain’s Struggle for Survival: The Labour Government after Three Years’, Commentary, October 1948, 344. 48. Ibid., 345. Conditions in the mining industry are ‘so intolerable that without direct coercion, or the threat of unemployment, it is almost impossible to recruit sufficient labor to keep them going’ (Ibid., 345). 49. Ibid., 347. 50. G. Orwell, ‘Britain’s Struggle for Survival: The Labour Government after Three Years’, Commentary October 1948, 347. 51. G. Orwell, ‘The British General Election’, in The Complete Works of George Orwell, ed. Peter Davison, vol. xvii, I Belong to the Left: 1945 (London: Secker & Warburg, 2001), 339. 52. G. Orwell, ‘Britain’s Struggle for Survival: The Labour Government after Three Years’, Commentary, October 1948, 348. 53. 441 Parl. Deb., H. C. (5th ser.) [1947] 1500. 54. The Order was initially slated to expire at the end of 1948, but was renewed until 1 January 1950 in early December 1948 (The Ministry of Labour Gazette, December 1948: 413. 55. The Ministry of Labour Gazette, September 1947: 286. 56. (443 Parl. Deb., H. C. (5th ser.) [1947] 1362) 57. Although the Ministry of Labour was obligated to make ‘every effort’ to find a worker a job in their normal occupation, the Ministry would – after a minimum period of 14 days of unemployment – offer them essential employment in some other occupation. Single men and woman who sought to change their job or obtain employment and who did not have family responsibilities would initially be offered essential employment that was within reasonable daily travelling distance. Nevertheless, the Ministry of Labour could offer them – and ultimately direct them to take – a job in an industry located elsewhere if there was a dearth of suitable local vacancies. This, however, was only the case if suitable accommodation was also readily available in the area to which they were directed to move (Ministry of Labour and National Service – Report for the Year 1947: 34). Women who were aged 20 or under could not be legally directed to take a job away from home, however, nor could any person who had family responsibilities be directed to take any essential work that would necessitate that they live away from their family. Nevertheless, in very special circumstances, men with family responsibilities might find themselves directed to live away from their family but they would be entitled to special ‘living-away-from-home allowances’ (Ministry of Labour and National Service – Report for the Year 1947: 34). Women with family responsibilities could never be directed to live away from their family.

178 Andrew Farrant 58. Ministry of Labour and National Service, Control of Engagement Order Quiz: How does the Order affect me? 1947: 2. 59. According to the Order, employers were unable to engage or recruit labour by advertising vacancies unless their notice of a vacancy clearly stated that they would only accept applications for employment from candidates who were not subject to the Order. Consequently, job vacancies appearing in a newspaper could only be published in a ‘column bearing a cautionary heading’ (The Ministry of Labour Gazette, September 1947: 286) which read: ‘None of the Vacancies in these columns relates to a man between the ages of 18 and 50 inclusive or a woman between the ages of 18 and 40 inclusive unless he or she is exempted from the provisions of the Control of Engagement Order, 1947, or the vacancy is for employment excepted from the provisions of that order’ (see, e.g., The Times, 23 Oct 1947: 1). 60. Hayek, The Road to Serfdom, [1956] 1994: xxxviii. 61. Ministry of Labour and National Service, Control of Engagement Order Quiz: How does the Order affect me? 1947: 2. 62. (443 Parl. Deb., H. C. (5th ser.) [1947] 1365). A direction remained in force for six months and a directed worker was then free to leave their job unless an additional direction was issued. Before issuing a direction to take essential work, the Ministry of Labour had the authority under Defence Regulation 80B to legally require that a person who was subject to the Order undergo a medical examination or submit themselves ‘for interview with a view to determining what, if any, direction [under Regulation 58A] ought to be given him to employment’ (Ministry of Labour Gazette, September 1947: 286). George Isaacs told Parliament that he was arranging for a direction to be withdrawn because the directed person had not been offered alternative employment (444 Parl. Deb., H. C. (5th ser.) [1947] 305w). 63. As George Isaacs explained, the ‘the local appeal board ... is composed of representatives of employers and workers, with an independent chairman’ (444 Parl. Deb., H. C. (5th ser.) [1947] 1335). 64. An employer of a directed worker could similarly apply to a National Service Officer seeking to have the direction withdrawn. Nevertheless, a directed person or their employer could ultimately appeal to their ‘Local Appeal Board against the decision of a National Service Officer to withdraw or to refuse to withdraw the direction’ (Ministry of Labour Gazette, September 1947: 286). 65. The direction would be withdrawn if the Officer was satisfied that the worker had accurately represented the facts and if they had made their application to have the direction withdrawn within seven days of their having initially been stood-off (Ministry of Labour Gazette, September 1947: 286). 66. Ministry of Labour Gazette, October 1947: 320. 67. Ministry of Labour Gazette, October 1947: 320. 68. The Ministry provided the following list (needless to say, not ‘intended to be exhaustive’) of ‘examples’ of professional and administrative or executive workers: ‘accountants, actuaries, architects (including town planners), auctioneers, average adjusters and underwriters, barristers and solicitors, buyers, clerks of works, commercial travellers, dentists, dieticians, insurance assessors, journalists, medical practitioners, nursery nurses (certificated), nurses and midwives (including students, pupils, and probationers), opticians, patent agents, pharmacists, physiotherapists and radiographers,

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70. 71.

72.

73.

74. 75. 76. 77.

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political organizers and agents, scientists, secretaries to clubs, companies and institutions, social workers, surveyors, teachers, technical advisers and representatives, theatrical artists and professional workers, valuers, [and] welfare supervisors’. An employer could directly engage any worker who was to be employed in a ‘Professional and Administrative or executive’ capacity, unless the person engaged was normally employed in agriculture or coal mining in which case they could only be engaged with the approval of the Ministry of Labour (Ministry of Labour Gazette, October 1947: 320). ‘First Preference’ was given to ‘very important’ industries or services which were known to be ‘generally undermanned’. This ‘category ... [included] coal mining, agriculture, iron and steel, and certain of the principal export industries (e.g., cotton and wool textiles)’. Vacancies in important industries where labour shortages were ‘not general or where the work concerned ... [was] normally only a part of the output of individual undertakings’, were accorded a lower priority (the Ministry noted that these particular undertakings would have to be ‘individually identified and notified to Local Offices’). The Ministry assigned lowest priority to any vacancy in an industry that was subject to shortages of a ‘small number of workers’ and engaged in ‘urgent and important work essential to the national prosperity’. As the Ministry explained, this final provision would keep ‘arrangements flexible’ and ‘not unduly centralized’ and was thus able to address ‘important individual cases ... and enable urgent cases to be dealt with rapidly’. (Ministry of Labour Gazette, October 1947: 320). The Ministry of Labour Gazette, October 1947: 320). The Ministry of Labour held that any vacancy for work in retail or wholesale distribution other than that which was associated with essential work was not be filled with workers for whom suitable essential work could be otherwise found. The same applied in the case of vacancies in ‘entertainment and sport ... personal services, such as hair-dressing, window cleaning, etc., ... green keeping and sports ground maintenance’ and ‘road passenger services other than public omnibus services or ... works buses’. ((Ministry of Labour Gazette, October 1947: 320). The Ministry also noted that any vacancies in day nurseries that that were provided to ‘facilitate the employment of married women should be regarded as essential’. ((Ministry of Labour Gazette, October 1947: 320). For Orwell, Soviet-type regimes were ‘technically collectivist, but’ concentrated ‘all power in very few hands ... [were] based on forced labour’, and eliminated their opponents (be they ‘real or imaginary’) by ‘means of terrorism’. (G. Orwell, ‘Burnham’s View of the Contemporary World Struggle’, in The Complete Works of George Orwell, ed. Peter Davison, vol. XIX, It is What I Think: 1947–48 (London: Secker & Warburg, 2002), 97. Hayek, The Road to Serfdom, [1956] 1994: xliii. 443 Parl. Deb., H. C. (5th ser.) [1947] 1343. G. Orwell, ‘Britain’s Struggle for Survival: The Labour Government after Three Years’, Commentary October 1948, 345. Ministry of Labour and National Service – Report for the Year 1948: 18. Sarah Alterkovsky’s employer was successfully prosecuted in October 1948 for failure to engage her through an official Ministry of Labour employment exchange. Alterkovsky herself, however, was not penalized (459 Parl. Deb., H. C. (5th ser.) [1948] 239).

180 78. 79. 80. 81.

82. 83. 84.

85. 86. 87.

88. 89. 90. 91.

Andrew Farrant George Isaacs, 475 Parl. Deb., H. C. (5th ser.) [1950] 187W. 444 Parl. Deb., H. C. (5th ser.) [1947] 1768. 441 Parl. Deb., H. C. (5th ser.) [1947] 1500. H. M. D. Parker, Manpower: A Study of War-time Policy and Administration. London: Her Majesty’s Stationery Office, 1957: 222. Any worker usually employed in agriculture or coal mining was free to move between jobs within their particular industry, but could not leave their industry without official approval. Accordingly, the Ministry of Labour had the legal authority under Defence Regulation 58A to direct any worker who wanted to leave coal mining or agriculture to remain in their industry. Ministry of Labour and National Service – Report for the Year 1947: 63. Ministry of Labour and National Service – Report for the Year 1947: 35. Source: The Ministry of Labour Gazette (1947, 1948, 1949, 1950). Hansard (1947, 1948, 1949, 1950). The ring-fence provisions were eventually revoked on 1 January 1950. As the Minister of Labour (George Isaacs) told Parliament in March 1950: ‘There have been progressive relaxations in administration of the [Control of Engagement] Order and for long the practice of giving directions to specified work ... has been almost entirely in abeyance. At the end of last year the ring fences round coalmining and agriculture were abolished ... it will no longer be compulsory for engagements of labour to be made through the employment exchanges of the Ministry of Labour.’ (472 Parl. Deb., H. C. (5th ser.) [1950] 470.) G. Orwell, ‘Britain’s Struggle for Survival: The Labour Government after Three Years’, Commentary October 1948, 349. Ministry of Labour and National Service – Report for the Year 1947: 36. The Ministry of Labour Gazette, November 1947: 370. Married women who lived with their husbands and women who had children aged younger than 15 living with them were exempt from the Order. Ministry of Labour and National Service – Report for the Year 1947: 36. 444 Parl. Deb., H. C. (5th ser.) [1947] 182. George Isaacs, Ibid. Ministry of Labour and National Service – Report for the Year 1948: 19. Initially, male street traders who were born between 1898 and 1929 and female street traders who were born between 1908 and 1929 were required to register. Similarly, men who were born between 1923 and 1929 and were designated as not ‘Gainfully Employed or Gainfully Occupied’ were required to register. Women born between 1927 and 1929 who were not gainfully employed or occupied were similarly required to register (The Ministry of Labour Gazette, January 1948: 9). According to the Ministry of Labour, ‘gainfully employed’ meant ‘employed [for 30 hours per week or more] for wages, salary or other money payment; ‘gainfully occupied’ meant ‘occupied in or carrying on [for 30 hours per week or more] some trade, business, profession or occupation for profit’ (9). In mid-February 1948 ‘further age-groups of persons not gainfully employed or gainfully occupied’ were required to register their particulars: ‘men born between 1917 and 1922 and women born between 1923 and 1926’ (Ministry of Labour Gazette, February 1948: 49). In mid-March 1948, ‘further age-groups’ who were not gainfully employed or occupied were similarly required to register: ‘men born between 1898 and 1916 and women born between 1908 and 1922’ (Ministry of Labour Gazette, March 1948: 86).

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92. G. Orwell, ‘Britain’s Struggle for Survival: The Labour Government after Three Years’, Commentary October 1948, 349. 93. George Isaacs, 463 Parl. Deb., H. C. (5th ser.) [1949] 1012. This particular direction would have been included in the official figures for the number of directions that were deemed to have been made as a consequence of the Control of Engagement Order. 94. Ministry of Labour and National Service – Report for the Year 1948: 19. 95. ‘The Freedom Defence Committee’, in The Collected Essays, Journalism and Letters of George Orwell, ed. S. Orwell and I. Angus, vol. IV, In Front of Your Nose: 1945–1950 (New York: Harcourt, 1968), 447. As explained by the Ministry of Labour, ‘249 directions were issued [in 1948] under Regulation 80B of which 212 ... were to attend for interview’. (Ministry of Labour and National Service – Report for the Year 1948: 21). 96. Popper to Hayek – quoted in Karl Popper: After The Open Society, ed., J. Shearmur and P. Turner, London Routledge, 2012, 116. Popper had seemingly long been waging a campaign to unite ‘the camp of humanitarianism ... the camp of “the left”, if this term is used to include liberals who appreciate the need for social reform’ (Ibid., 113–114). 97. Ibid., 116. 98. Ibid., 117. Gollancz was famously unwilling to publish Animal Farm (see Crick 1980: 310–312). 99. Popper to Hayek – quoted in Karl Popper: After The Open Society, ed., J. Shearmur and P. Turner, London Routledge, 2012, 117. 100. Popper to Carnap – quoted in Karl Popper: After The Open Society, ed., J. Shearmur and P. Turner, London Routledge, 2012, 105. 101. Popper to Hayek – quoted in Karl Popper: After The Open Society, ed., J. Shearmur and P. Turner, London Routledge, 2012, 115. 102. G. Orwell, ‘Why I Write’, in The Collected Essays, Journalism and Letters of George Orwell, ed. S. Orwell and I. Angus, vol. I, An age like this: 1920–1940 (New York: Harcourt, 1968), 7. 103. G. Orwell, ‘Burnham’s View of the Contemporary World Struggle’, in The Complete Works of George Orwell, ed. Peter Davison, vol. XIX, It is What I Think: 1947–48 (London: Secker & Warburg, 2002), 102. 104. G. Orwell, The Lion and the Unicorn: Socialism and the English Genius, (London: Secker and Warburg, [1941] 1962), 49. 105. G. Orwell, ‘Toward European Unity’, in The Complete Works of George Orwell, ed. Peter Davison, vol. XIX, It is What I Think: 1947–48 (London: Secker & Warburg, 2002), 164. 106. G. Orwell, Grounds for Dismay, The Observer, 9 April 1944, 3). It may well be possible that Keynes – arguing that Hayek’s fears about planning were somewhat exaggerated and also similarly rejecting Hayek’s supposed desire to make a return to the ‘no planning’ status-quo that had typified the interwar years – may have been influenced by Orwell’s earlier review when he told Hayek that ‘Moderate planning will be safe if those carrying out are rightly orientated in their own minds and hearts to the moral issue ... Dangerous acts can be done safely in a community which thinks and feels rightly, which would be the way to hell if they were executed by those who think and feel wrongly’ (J. M. Keynes, [1944] 1980. Letter to Hayek. in The Collected Writings of John Maynard Keynes, vol. 27, ed. Donald Moggridge. London: Macmillan, 386–387).

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107. Orwell to Noel Willmett (see Peter Davison, George Orwell: A Life in Letters (New York: Liveright Publishing Corporation, 2013), 232. 108. On best-case theorizing see: Levy, D.M., 2002. Robust Institutions. The Review of Austrian Economics 15, 2.3, 131–142. 109. Hayek Archives, Box 110: Folder 38.

4 Pigou and the Pigouvian Legacy Rogério Arthmar

This chapter provides an overview of Arthur C. Pigou’s life and works, evaluating his general contribution to economics. Firstly, some aspects of Pigou’s biography are sketched in order to track his trajectory as an academic within the establishment of Cambridge University, and also to depict the main fields of scientific inquiry to which he dedicated his life. Secondly, it summarizes Pigou’s main ideas on welfare economics, industrial fluctuations, employment and applied economics. After that, in order to assess Pigou’s standing within the international community of economists, the paper retrieves the contemporary reviews of some of his most famous books such as Wealth and Welfare, The Theory of Unemployment and Lapses from Full Employment. Finally, the analytical disputes centred on Pigou’s theories about utility comparisons, and the determinants of employment are presented, along with a survey of the most recent appraisals of his work. In the end, a brief comment on Pigou’s intellectual career is offered.

1

Introduction

In 1937, the presidency of the Royal Economic Society was conferred on the Cambridge Professor Arthur Cecil Pigou, then aged 60, for a fouryear mandate. The choice could hardly have been more appropriate. From its inception, the organization had attempted to bring together members not only with a scientific expertise but also with some practical background in economics, so it had laid down no rules for membership (Coats 1968a). The new president had indeed a prolific lifelong dedication to academic inquiries on the subject, but, as he insisted regularly, even his most theoretical studies were inspired by concrete problems. In one of his most renowned books, The Economics of Welfare, Pigou had 183

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already established a distinction between two kinds of sciences, claiming that however important the light, or truth, of pure abstract economic reasoning, a far greater importance can be attributed to the fruit, or welfare enhancement, resulting from the application of economic knowledge to address real economic problems in the known society. We shall endeavour to elucidate, not any generalized system of possible worlds, but the actual world of men and women as they are found in experience to be. (Pigou 1962, 7)1 Pigou’s complete works comprise a dozen books and more than 100 articles, many of them strictly analytical indeed, but a considerable number as well of an applied nature, dealing with themes such as poor relief, unemployment, housing, inflation, tariffs, public finances, land ownership etc. (Pigou 1965, 1935; Collard 2002; Knight and McLure 2013). He also achieved wide international recognition. From early on, his books were reviewed in Britain, France, Germany, Italy, Spain and the United States. In 1828, the American Academy of Arts and Sciences elected him a Foreign Honorary Member. In 1955, Pigou received the Antonio Feltrinelli Prize in Economics and Social Sciences from the Italian Accademia Nazionale dei Lincei, accompanied by a money grant of 5 million lire (Accademia 1955). The basic purpose of this chapter is to provide a general overview of Pigou, his scholarship and his reception in the scholarly world. To that end, the chapter commences with a biographical note on Pigou. His overall contribution to economics is then presented in three subsections, the first one dealing with economic welfare; the second reflecting on industrial fluctuations and employment; and the third considering the Keynesian challenge to Pigou, as well as his applied economics. This is followed by an assessment on Pigou’s standing within the academic community of economists, covering both the contemporary receptions accorded to his main works shortly after publication; and modern historically reflective appraisals of Pigou’s legacy. The chapter concludes with a few comments on the main phases in the development of Pigou’s career.

2

Biographical sketch

Pigou was born at Beachlands, Ryde, Isle of Wight, on 18 November 1877, son of the retired army officer Clarence George Scott Pigou and his wife Nora Frances Sophie. He was schooled at Harrow (1891–1896), as his father had been. By 1895 he was awarded the Clayton Scholarship for

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modern studies, which allowed him to move to King’s College, Cambridge and, in 1896, enrol in the ‘undivided’ Historical Tripos. In 1899, Pigou obtained a first-class degree and, the following year, continued study at Cambridge, obtaining a first as well in Part two of the Moral Sciences. His education at the time spanned history, ethics, philosophy and economics, which allowed him to assimilate the broad teachings of the Cambridge Professor of Political Economy, Alfred Marshall.2 As an undergraduate, Pigou was quite active, being President of the Cambridge Union Society, where he earned a reputation as a brilliant speaker. He also won the Chancellor’s Medal for English Verse, and, after that, the Burney Prize with the essay Robert Browning as a Religious Teacher. In 1901, Pigou began lecturing economics in Cambridge, relieving Marshall of some of his duties. He also wrote an essay entitled The Causes and Effects of Change in the Relative Values of Agricultural Produce in the United Kingdom during the Last Fifty Years, for which he was awarded the Cobden Prize and secured election as a Fellow of King’s College, with the support of Marshall. The labour movement and its history was also one of Pigou’s main topics of interest at this time, which led him to compose The Principles and Methods of Industrial Peace, for which he won the Adam Smith Prize in 1903, and which was turned into a book two years later. During this period Pigou also became heavily involved in the tariff controversy, by signing the famous economists’ manifesto with Marshall and others, travelling around the country to speak for free trade, and regularly writing articles and letters to the press on the issue. He also published The Riddle of the Tariff (1903) and Protective and Preferential Import Duties (1906) against the British Colonial Secretary Joseph Chamberlin’s idea of raising a common tariff wall embracing the whole British Empire; a proposal that was defended by a number of historically minded economists such as William J. Ashley, William Cunningham and Herbert Foxwell. The summer of 1904 also brought to Pigou his appointment to the Girdler’s Lectureship in Cambridge, making those years exceptionally vibrant for the young academic (Coats 1968b; McLure 2013). Prior to his retiring in 1908, Marshall undertook a concerted series of furtive manoeuvres to ensure that his Chair of Political Economy would be offered to the fresh 30-year-old lecturer Pigou, and not to long-time Cambridge lecturer Herbert Foxwell, who was the clear heir apparent. The Economics Board ended up electing Marshall’s man by what appears to have been a very narrow vote. Humiliated by this outcome, and by Marshall’s evident behind-the-scenes manoeuvring in favour of Pigou, Foxwell resigned from Cambridge University. The election process was

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so traumatic that John Neville Keynes later reflected that it turned out to be like ‘a black cloud throwing its shadow over the whole of the term’ (quoted in Jones 1978, 241; on the episode, see Coase 1972; Coats 1972; Groenewegen 1995, 618–627). It seems, though, that Pigou went relatively unscathed through the obscure process surrounding his election to Marshall’s chair. A few years later, he published his most famed work, Wealth and Welfare (1912), dealing with a subject that would remain the centre of his attention for the rest of his life and for which he achieved immediate international respect. In the book, following the Cambridge tradition, Pigou claimed that a purely competitive system would not always bring about the best results from a purely economic standpoint. That would be so because the analysis of the maximum level of welfare must take into account not only the actions admitting explicit measurement in prices, but also their effects on society at large and not expressible in pecuniary terms, a consideration most often absent in the discussions of welfare economics. When World War I broke out, since Pigou was 36 years old and liable to conscription, he asked to be excused from war as a conscientious objector. The competent military tribunal judged his services too relevant to be vacated, and so he remained in Cambridge during term-times, taking care of his routine academic duties.3 During his vacations, though, Pigou volunteered as a driver in the Friends’ Ambulance Unit, which attended the French front, a service organized by his former student, the British pacifist and later (1959) Nobel Peace Prize winner, Philip NoelBaker. After 1915, Pigou performed the same activity in the British Red Cross ambulance unit operating in Italy and commanded by his former Harrow colleague, the historian George M. Trevelyan. In both countries, Pigou worked close to the firing line, under conditions of extreme stress. The scenes of horror and tragedy he witnessed during this dreary period profoundly affected his personality, contributing somehow to his move toward a reclusive and ascetic existence.4 In January 1918, as the war was drawing to an end, the Ministry of Reconstruction and the Treasury set up a Committee on Currency and Foreign Exchanges, having as its chairman Lord Cunliffe, Governor of the Bank of England, to inquiry on the necessary measures to restore to normality the exchanges and the currency of the country. Pigou was one of the members of that Committee, which identified the excessive issue of Bank of England notes, due to the advancement of extensive credits to the government, as a major hurdle to the restoration of gold convertibility. According to this diagnostic, the Committee’s final report

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indicated the necessity of an immediate cessation of the government borrowing, a legal limitation of the rate of increase of fiduciary issue of money, and the prompt resumption of the gold standard as soon as monetary conditions had regained a sense of normality (Cunliffe Committee Report in Eichengreen and Flandreau 2005). In 1924, Pigou was also appointed to the Treasury’s Committee on the Currency and Bank of England Note Issues, or the Chamberlin–Bradbury Committee as it became popularly known, which had been established to assist the then Chancellor of the Exchequer, Winston Churchill, decide whether to return Britain to the gold standard. Although the second draft of the report, written by the Professor himself, was somewhat cautious in assessing the timing of any return to gold at the pre-war parity of US$4.86, the final draft of that report adopted the view of the Committee’s chairmen by stressing the desirability of a rapid return to gold, which Churchill announced in his 28 April 1925 budget speech (Moggridge 1969; McLure 2013).5 Interestingly, while Keynes regularly conducted exchanges with other economists about the drafts of the General Theory in the 1930s, Pigou was not party to such discussions (Dimand 1988, chapters 4–6; Clarke 1990, chapters 10–11). In that stage, the Professor had become a more isolated figure, possibly as a consequence of his war experience and also due to coronary disease, which had seriously affected his vigour from 1925 onwards following an incident while on a climbing expedition. As Austin Robinson stated when recalling his days as a student under Pigou: He was remote and aloof from us all. After a lecture on one or two occasions, when I was still an undergraduate, I took my courage into my hands and asked him a question about something. He gave a careful and considered answer and then retreated into his shell. (Robinson 1977, 30) In those years, Pigou was also extremely busy writing his own The Theory of Unemployment (1933), claiming, in short, that the permanent lack of opportunities for the able-bodied men seeking job was a consequence of too-high wages. As we know today, that is a view Keynes was deliberately trying to break away from. To Pigou, organizations bargained consistently for a level of wages based upon the average productivity of the whole workforce, and above, therefore, the marginal product of the less productive workers, irrespective of the state of the demand for labour, leaving many men in a difficult position to find suitable job

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posts (Pigou 1968, 227–231, 252–262, 293–297; see also Aldrich 1979; Ambrosi 2004, 47–71; Leeson and Schiffman 2013; 2014).6 To Keynes, as will be seen below, this explanation ignored the question of effective demand. In his review of the General Theory, Pigou (1936) censured Keynes for not perceiving the uselessness of manipulations in aggregate demand, since unions would always adjust their bargaining strategy to reach a situation of higher real wages and fewer employed men. But one of the more basic reasons why Pigou took exception to the General Theory lay in the fact that he understood Keynes’s criticism of The Theory of Unemployment as an indirect reproach of Marshall. Pigou’s reaction, however, was not entirely negative: We have watched an artist firing arrows at the moon. Whatever be thought of his marksmanship, we can all admire his virtuosity.7 While the rupture between Pigou and his famous junior colleague was profound, it did not permanently spoil their working relationship. But it did, of course, put strains on their connection for a period. Notwithstanding their differences at the time, Pigou and Keynes had more than 25 years of acquaintanceship, and that was not swept aside in one fell swoop. As Richard F. Kahn (1984, 197) has noted, Each, in a different way, admired the other. Pigou recognized that Keynes was breaking valuable new ground. He wished that he would clarify his exposition ... Keynes was sad that Pigou, whom as a man he admired, found it so difficult to appreciate new modes of thought. (see also Robinson 1977) In an obituary published in the Proceedings of the British Academy, Pigou (1946) attempted to reconcile Keynes’s theory with the Marshallian tradition, explaining that Marshall was concerned with long-run forces, like the slow succession of the tides, while Keynes directed his attention to short-run problems, like a sea-captain worried about rogue waves. Three years later, the retired Professor delivered two lectures on the same subject at the Cambridge Faculty of Economics, published the following year as Keynes’s General Theory, a Retrospective View (1950). On that occasion, Pigou made clear that the identification of a deficiency of investment as the sole cause of unemployment was misleading, for in a mutually determined system, all variables had a role in setting up the resulting equilibrium, especially the prevailing level of wage-rates,

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assumed as fixed by Keynes. Furthermore, the chief deficiency of the Keynesian system consisted in the missing dynamics of the transition between different equilibrium positions, since cumulative changes in expectations due to exogenous disturbances could render the whole system unstable. Although recognizing the merit of Keynes’s approach in stirring up discussion, Pigou (1952, 65) remarked that the subjacent theory involved no revolution at all, being more properly a development of previous contributions on the field. The same arguments would be restated in Alfred Marshall and Current Thought (1953, chapter IV), in a chapter evaluating the Keynesian and the Marshallian views on the interest rate. To understand Pigou’s long-lasting agenda for welfare-enhancing economics, and indeed its similarity with those of Marshall and Keynes, one needs look no further than the preface to the third edition of The Economics of Welfare (1962 [1928], vii): The misery and squalor that surround us, the injurious luxury of some wealthy families, the terrible uncertainty overshadowing the families of the poor – these are evils too plain to be ignored. After a reclusive but fertile life dedicated to building the analytical instruments he believed necessary to improve the condition of the most needy, Pigou died peacefully in Cambridge on 7 March 1959, aged 81.

3

Pigou’s contribution to Economics

Economic welfare Given the extent of Pigou’s contribution to a variety of fields in economics, it is just possible to cover here his major works. The starting point is, obviously, his magnum opus, Wealth and Welfare, published in 1912 and later transformed and extended as The Economics of Welfare (1920), which went through four editions in Pigou’s lifetime. The message contained in those books was considered by Mark Blaug as a virtual ‘blueprint for the welfare state’ (Blaug 1970, 307). In his peculiar approach to welfare economics, Pigou was heavily influenced by the marginalist method of Marshall, the ethical philosophy of Henry Sidgwick, and the British idealism of Thomas H. Green. Most noticeably, Wealth and Welfare became one of the main references in the education of Cambridge economists during the 1920s and the 1930s (Robinson 1972, 91; O’Donnell 1979; McLure 2012).

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In the book, Pigou attempted to establish the general principles of welfare for a community and develop from this basis a theory capable to be applied as an instrument for the betterment of society. But the welfare he dealt with was not that superior feeling of personal gratification in its broader sense, encompassing humans’ different states of consciousness. Rather, Pigou was concerned with the narrower material part of welfare that could be referred to money as the measuring rod of utility, as this provided a clear basis for careful deliberation about the role of public agents in correcting market failures. Right at the beginning of his reflections, Pigou advanced three fundamental criteria to further economic welfare: (1) an increase in the national dividend without reducing the absolute share of each group; (2) a reduction in income inequality, everything else remaining unaltered; (3) an attenuation in the variability of the national dividend, especially in that part accruing to the poorer families (Pigou 1912, 20–32).8 The most controversial of these three propositions was of course the second one, which partly rested on the utilitarian inspired proposition that interpersonal comparison of utilities was legitimate for policy purposes. Before claiming the functionality of income redistribution to increase economic welfare, Pigou disposed of some of the key objections to possible policies toward that end. Firstly, he discredited the classical iron law of wages, arguing that in the long run increased material prosperity would make people more inclined to consider other ways of satisfaction than the rearing of additional children. Secondly, contrary to the then popular biological thesis that more income to the poor would debilitate the strength of the race, Pigou observed that the alleged ‘bad’ qualities of the lower ranks of society were essentially the result of their adverse environment, which, once improved, would allow the full blossoming of the virtues dormant in every individual. After that, he criticized Pareto’s law, which suggested that an absolute increase in income accruing to the poor could only be achieved through a real per capita rise in economic growth. Not only was the empirical evidence insufficient to buttress such relation, said Pigou, but also the specific configuration assumed by each country’s income distribution depended on the national laws of inheritance, a factor liable to considerable variation along national borders (Pigou 1912, 52–65, 70–77). Pigou’s criticism of Pareto’s law was, however, based on a misreading of what Pareto had actually said on income distribution, and his critique is misleading (see McLure 2013). Nevertheless, Pigou (1962, 89) drew on the law of diminishing utility, predicated on interpersonal comparisons of utilities and the declining

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propensity to consume, to assert that income redistribution favouring the very poor may in fact increase the wellbeing of society. In presence of these conditions, stated Pigou, [I]t is evident that any transference of income from a relatively rich man to a relatively poor man of similar temperament, since it enables more intense wants to be satisfied at the expense of less intense wants, must increase the aggregate sum of satisfaction. Apart from some obstructing factors, like imperfect mobility or the indivisibility of certain productive resources, Pigou (1912, 109–147) contended that the pursuit of self-interest would lead to the highest possible national dividend, when net private returns attained a common level across the economic sectors. This general conclusion was, however, significantly altered because he recognized that the marginal social net product resulting from the action of private agents, rather than the marginal private net product, must be considered in a world dealing with welfare propositions. This fundamental concept within Pigou’s theory of welfare concerns the aggregate contribution to the national dividend by the addition of a unit of capital in a certain line of production, account being taken of all impacts of the expanded activity on other members of the community besides the owners of the invested resources. These resulting effects comprise what the literature has designated as externalities, currently considered the ‘most enduring contribution’ of Wealth and Welfare to the analysis of the deficiencies affecting a competitive economy (McLure 2012).9 Pigou’s (1962, 134–35) own definitions, formulated in greater detail in The Economics of Welfare, read as follow: The marginal social net product is the total net product of physical things or objective services due to the marginal increment of resources in any given use or place, no matter to whom any part of this product may accrue. It might happen, for example, as will be explained more fully in a later chapter, that costs are thrown upon people not directly concerned, through, say, uncompensated damage done to surrounding woods by sparks from railway engines ... The marginal private net product is that part of the total net product of physical things or objective services due to the marginal increment of resources in any given use or place which accrues in the first instance – i.e. prior to sale – to the person responsible for investing resources

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there. In some conditions this is equal to, in some it is greater than, in others it is less than the marginal social net product. In some instances, explained Pigou, a discrepancy between these two economic measures might demand some kind of state intervention to restrict the unchecked action of self-interest in order to increase the society’s material welfare. Situations like this could arise in certain kinds of long-term contract such as, when a tenant farmer, before returning the land to its owner, takes out from it more capital than he has invested during his tenure. Yet the situation of many hourly-paid workers would be similar, since in this kind of arrangement the employer avoids paying an additional sum to the most productive labourers for fear of setting a precedent for wage demands by the unions. In addition, the work of mothers in factories before or after childbirth may adversely affect the health of their children. Several other similar examples are listed in the book. State intervention, in Pigou’s view, would be required to correct any discrepancy between private and social net returns involving third parties, generally by favouring or penalizing specific forms of investment. Taxes might be used to discourage building in crowded areas, or agricultural grants to encourage families to live in rural areas. In the case of monopolies, though, anti-combination laws to prevent or dismantle cartels would most likely prove ineffective, as firms are always able to act in unison following some undisclosed or tacit agreement. Pigou’s idea of auctioning a licence to conduct public services could be a convenient way of handling a natural monopoly, as long as periodical revision of the regulations were specified, in order to adjust them to market-changing conditions. Public ownership of large enterprises, however, should be avoided in general, and implemented only when the quality of the service or product was of paramount importance, as with the water supply. Even though it might be possible to manage public companies as efficiently as private firms, public companies would always have the propensity to adopt non-commercial practices in order to curb competition. Moreover, enterprises under the control of public authorities are in general risk-averse, rarely attempting innovative forms of producing or marketing. Lastly, the jurisdictional areas of some municipalities are simply inadequate for the adoption of a company’s optimum size, thus making prices higher than those charged to consumers by a similar-sized private firm (Pigou 1912, 246–289). Industrial fluctuations and employment The third alternative to increase economic welfare, that is the reduction in the variability of the national dividend, saw the corresponding chapters

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removed from the second edition of The Economics of Welfare (1924) and later rearranged and expanded as Industrial Fluctuations (1927; 1929). Earlier, though, in a book chapter titled Correctives of the Trade Cycle, Pigou (1924) had asserted that the main element causing economic fluctuations, even taking harvest variations, wars and inventions into account, was the psychology of the businessman; entrepreneurs would get carried away by alternate waves of optimism and pessimism, occasioning errors in the forecasts of the actual demand for their production. In Industrial Fluctuations, Pigou developed this line of reasoning further. The labour supply schedule, according to him, could be taken as relatively stable over the course of the trade cycle, so that the key factor in determining the level of employment would remain the volatility of the demand for labour due to changing expectations relating to the anticipated return from new capital outlays. To Pigou (1927, chapters IV–VIII), the causes capable of initiating the successive waves of excitement and distrust could be grouped under three heads: 1. Real factors, including harvest variations or large-scale innovations such as railway construction and electricity, with the power to affect the expectations of return in a wide range of activities within the economy; 2. Psychological factors, or the varying mind-sets of the people who command industry in general and which give birth to errors of calculation from an excess of either pessimism or optimism. These errors would come about from insufficient information on the state of the markets or the absence of adequate coordination among the investors’ plans. To Pigou, this particular factor would explain much of the dynamic of the commercial cycles, since businessmen are generally in close contact with one another due to their commercial and financial ties; 3. Monetary factors, affecting the conditions of credit across the economy, particularly under the gold standard regime, and associated with sudden changes in the world supply of the metal. Pigou mentions, for instance, the discovery or improvement of mines in gold-producing countries, changes in the demand for the metal by the Central Banks, and large international transferences of specie. Once a prosperity phase had started, for whatever apparent reason, the supplementary elements of the cycle come into play, such as the facility in obtaining credit and the speculative frenzy generated by the rising prices. Excessive confidence then fosters the pile-up of errors, which are kept veiled by the gestational period of the new investments, as well as

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by the prolonged time required by the banks to revert to their policy of easy credit. When the new capital goods eventually reach full operation, the mistakes are finally revealed, and the former wave of optimism gives place to the rapid spread of disappointment and pessimism. Or, in Pigou’s own account of what succeeds when errors are discovered, prices fall and credit shrinks: This movement inevitably reacts upon business confidence. Under its influence the dying error of optimism gives birth to an error of pessimism. This new error is born, not an infant, but a giant. For an industrial boom has necessarily been a period of strong emotional excitement, and an excited man passes from one form of excitement to another more readily than he passes to quiescence. (Pigou 1927, 85) As practical remedies to soften the movements in prices, credit and employment, Pigou advised the adoption of a tabular standard of value by wage and loan contracts in order to avoid uncalled-for income transferences due to unexpected price changes. The best course of action, though, consisted in the stabilization of prices in general, which might be achieved through preventive small adjustments in the discount rate of the Bank of England just before the economic cycle gathered momentum. In addition, the temporal reallocation of public spending from the years of growth to the years of sluggishness would occasion a decline in wages during prosperity without a corresponding increase in periods of depression. This fine fiscal tuning would allow the government to buy an enlarged amount of labour over time, thus expanding the national dividend and economic welfare.10 In The Theory of Unemployment, Pigou (1933) revisited the conditions surrounding the labour market, yet introducing several interesting considerations about the business cycles. He believed that by dividing his theory into two parts, one dealing exclusively with a real economy and the other with a monetary one, it would be possible to find some grounds common to both approaches. In his analysis of the real economy, he assumed two major economic sectors: one sector producing wage-goods and subject to the production function F(x) depends on the available stock of wage-goods produced by x men, expressed through the equation ... φ( x) x + y . But what is left of the wage-fund to hire new men after K is absorbed by the capitalists, while a real wage that equals the marginal product of labour F’(x)is given by the formula φ( ) [ ( ) ] / ′( ) (Pigou 1933, 92: see Aldrich 1979; Ambrosi 2003, 47–71; Leeson and Schiffman 2013; 2014).

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For a production function of wage-goods with decreasing returns, the aggregate demand for labour linking the real wage with total employment has a negative slope. On the other hand, with a highly elastic supply of labour, the amount of unemployment existing at any specific time results from the interaction between the real demand for labour and the normal wage-rate defined by the wage policy in place: The unemployment that exists at any time is not the summed effect of a number of causes acting independently; it arises because a number of factors are balanced against one another in a particular way ... When a ship is too low in the water, this effect is a combined result of the weight of the cargo and of the capacity of the ship. (Pigou 1933, 27) Given the formula for the available stock of wage-goods during some period, an expansion in the volume of employment could only take place if the consumption of wage-goods K by the capitalists is reduced (new savings) or if the real wage-rate F’(x) declines (Pigou 1933, 143–177). Things become more complex, though, when money is added to the model in the second part of The Theory of Unemployment. A standard monetary system, according to Pigou’s definition, would be one capable of replicating the prevailing conditions in the real sector of the economy in such a way that the actual rate charged by the banks equals the real rate that would be practised in borrowing operations under pure barter. That being so, price stability and, therefore, the neutrality of money obtain. In reality, though, the banking system does not automatically adjust its interest rate as soon as conditions in the credit market change or the supply of currency increases. This characteristic behaviour of banks causes a detachment between the proper and the actual rates, with a corresponding creation or destruction of credit, irrespective of the events taking place in the real sector of the economy. The inevitable outcome of this process, in Pigou’s theory, arises through a primary adjustment in prices. This initial disequilibrium then sets off a series of subsequent events including: (1) forced levies and antilevies caused by the rigidity in certain kinds of incomes and contracts; (2) monopolists’ agreements in times of economic contraction, with the intention of reducing supply and the level of employment; (3) bankruptcies and industrial disorganization consequent on the sudden curtailing of credit to the firms in general; (4) changes in the relative prices of domestic and imported materials, affecting the real value of prime costs; (5) an increase in speculation, due to the speculators’ belief that they

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can anticipate the behaviour of prices better than their creditors. As a whole, all these concurrent factors would work together to amplify the original disequilibrium over the economic cycle. Plainly, this cumulative process is of great importance. It means that from small origins large consequences, whether of evil or of good, may be built up. (Pigou 1933, 232–243) The Keynesian challenge and applied economics Among the many criticisms of Pigou’s theory of employment formulated by Keynes in the General Theory, three may be mentioned here: (1) the fact that Pigou did not postulate a well-behaved and positively sloping supply curve of labour which, once specified, would define an equilibrium real wage-rate at which there would be no undesired unemployment; (2) the omission of investment expenditures as the main determinant of the level of employment, instead of the available amount of wage-goods and the prevailing real wage-rate; (3) the nonexistence of any kind of multiplier effect on jobs associated with public works in times of depression due to the constancy of the wage-fund (JMK VII 1973, 272–279). Keynes’s attacks on Pigou’s model of aggregate employment can be considered as partially justified. The first one may be accepted as pertinent in the sense that only after the General Theory did Pigou really make clear his idea with respect to the labour supply curve, assumed by him as strictly horizontal at the real wage-rate set by the prevailing wage policy (letter to Keynes, May 1937, JMK XIV 1973, 54). Keynes’ other two critiques are based exclusively on the real economy section of Pigou’s theory, thus omitting its multifaceted analysis of the cycle under a nonstandard monetary system. Near the end of The Theory of Unemployment, Pigou actually acknowledged the major role of investment spending in economic fluctuations, but that possibility was not explored further in the book, most likely because he had already extensively dealt with it in Industrial Fluctuations. In his own words: variations in the real demand for labour due to changes in desires and expectations about capital goods and other non-wage goods take place on a much larger scale, and play a much larger part in shortperiod economic movements, than variations due solely to changes in the productivity of wage-goods industries. (Pigou 1933, 295–296) As for Keynes’s third criticism, the fact of the matter is that Pigou always made his position clear in favour of public works in order to mitigate the

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negative effects of an economic depression on employment. So, by the time he wrote Wealth and Welfare (1912, 476–477, emphasis added), for instance, when pondering on some alternatives to reduce the variability in the demand for labour, he explained: [We must] recognise that the contributions to welfare, which enhances changes of this kind [changes that reduce the variability of the demand for labour], do not, in general, enter into the calculations of private captains of industry. Consequently, they decide, quite rightly, that there is ground for philanthropic or government action designed to increase the stability of earnings of the representative working man, even though such action involves a direct cost. The larger the direct cost, of course, the far less it will be socially advantageous to press equalising action. When such action involves the setting of men to work in times of depression on something which is physically perishable, or is liable to lose its value through a change of fashion, and, still more, when it involves the making of employment that is avowedly useless, the direct cost is large. When, on the other hand, workpeople, who would otherwise have been unemployed, can be turned to some task of ‘actual and substantial utility’, it may be comparatively small. This class of consideration helps to determine from how large a quantity of equalising action economic welfare would benefit. In all circumstances, however, advantage can be obtained from some quantity of equalising action. In The Theory of Unemployment, Pigou (1933, 243) indicated as well that in the case of a very low real rate of interest not replicated by the monetary rate, extra public spending could be the thrust needed to lift the economy out of a depression through its positive effects on businessmen’s expectations: For example, a small injection of money into the income-expenditure circuit in bad times in connection with skilfully chosen public works ... might lead to a progressive and far-reaching improvement in the employment situation. The only lasting solution for a chronic situation of unemployment, though, as conceived by Pigou (1933, 270), involved some kind of restraint on the workers’ wage aspirations, since any artificial stimulus to the demand for labour would be answered ultimately by a corresponding increase in the wage-rate accepted as normal. For instance,

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when talking about the stagnant situation of the British economy after World War I, he observed: To reduce unemployment from the side of wages it would have been necessary, after wage inequalities had been reduced and labour appropriately redistributed, also to reduce the average rate of wages. After some bitter exchanges with Keynes over the Economic Journal in 1936–37 (Rima 1983; Ambrosi 2003, chapters 15–18; Takami 2011) Pigou got back to macroeconomic theory in the book Employment and Equilibrium (1941), as well as in the articles ‘The Classical Stationary State’ (1943) and ‘Economic Progress in a Stable Environment’ (1947). In these works he maintained that in a situation where individual preferences, production techniques and the labour force were constant, a positive investment would be accompanied by an increase in income and consequently in the capital stock, but yielding a declining profit rate due to the diminishing returns of the land and the fixed population. In the long run, investment and savings would end up null, with the interest rate reproducing the prevailing time-preference rate. If money wages were flexible, the stationary state would settle in at the full employment level, although sometimes a different picture could emerge due to temporary disturbances. In the General Theory, Keynes had already contemplated the possibility of a rapid growth in the capital stock exhausting all profitable opportunities of investment in the timeframe of a single generation. When the marginal efficiency of capital eventually declined to zero, investment spending would be non-existent. Given a positive propensity to save, prices and income would fall back to a point where current production was carried on just to cover the basic needs of the population, with a zero amount of savings (JMK VII 1973, 217–220). Pigou (1947, 187) christened this gloomy scenario Judgement Day, and countered that the decision to save had as its determinants not only the level of income and the interest rate, but also the purchasing power of the assets owned by the individuals, especially in monetary form. Once admitted that people in general attribute some value to the convenience and the feeling of power associated with increasing wealth, a deflationary process like that devised by Keynes would be automatically extinguished. With time, the propensity to save would weaken and consumption would go up, due to the decline in the marginal utility of the additional wealth measured in consumption goods at declining prices, the so-called Pigou Effect.

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Hence, with employment the same as it was when the rate of interest first became nothing, the marginal amenity yield of savings expressed in consumption goods must become smaller and smaller as money income contracts, until finally, it plus the rate of interest coincides with the rate of time preference and a genuine equilibrium is established. Since Pigou’s final stance regarding the Keynesian theory has already been mentioned, we may go on to take a look at his purely applied works, which have received far less attention in the literature than his contributions on economic welfare and macroeconomic theory. Pigou’s unique approach to dealing with these matters, most noticeably on social issues, can be interpreted as a direct development of the approach framed in Wealth and Welfare. His applied analysis, generally speaking, involved three steps, namely: an initial assessment, historical or analytical, of the situation; the detection of potentially under-covered social costs or welfare gains that might entail some kind of public interference; and, lastly, if appropriate, the indication of certain measures to correct or to minimize the problem under scrutiny. For instance, the ideal size of land holdings is discussed by Pigou (1913) in an essay titled ‘Small Holdings’. According to him, larger unities had been more profitable in 19th-century Britain, when meat and wheat had been domestically cultivated with the help of machinery on large farms. In the 1870s, though, the westward expansion of railways in the USA to new arable lands, together with improvements in freezing and cold storage, allowed American meat and grain to reach Europe at highly competitive prices, reducing the profitability of domestic production. In 1913, with small tracts of land, dairy farming and vegetable growing had been economically more attractive to the rural population than growing wheat or rearing beef cattle. But when large farms began to dominate the British landscape, that situation prevented a considerable number of workers from having a stake in agricultural production and, therefore, from learning how to manage the land in innovative ways. This was the hidden social cost of the aggregation of land ownership. Hence, given the social advantages arising from a more fragmented structure of property in the countryside, state interference in this sector could be safely recommended. The partition of lands in a variety of areas, in Pigou’s (1966, 92–111) opinion, would create the likelihood of a gradual social climb for many working men, who would be able to increase the size of their land holdings as their farming and managerial skills evolved over time. Furthermore, access to a plot to cultivate would afford a

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labourer an alternative occupation in periods of economic distress. Small tenancy in publicly owned lands was also an option advised by Pigou to spare the workers the heavy costs of acquiring a holding and to facilitate their movement across holdings of different sizes. The following year, in the Warburton Lecture for 1914, Pigou was invited to talk about the housing problem in Britain. Firstly, he advanced the idea, already formulated in Wealth and Welfare, that any modern state should have the duty to give every citizen a minimum standard of access to certain fundamental necessities of life, such as education, medical care and living space. The extent of that minimum would depend on each country’s stage of economic progress, but whenever families were found below the established standard, a social cost would be incurred, and public authorities should step in to correct the lapse. After this preamble, Pigou explained that by living space he meant a house in good condition, providing space, ventilation, lighting, and sanitation. Also, specific laws should prevent the overcrowding of rooms or the taking in of lodgers in small single dwellings. Besides, whenever house construction was left unregulated, buildings tended to be crammed together in narrow streets with no yards, parks or open spaces, as commonly seen in England’s industrial districts, where the quality of life was very low. The main prescriptions he suggested to his audience comprised firstly the constitution of a town planning authority in charge of formulating a broad housing policy and of overseeing the compliance of new buildings to the pertinent legislation. Secondly, the provision of public assistance should be directed to the improvement of existing residences. Thirdly, there should be a prohibition on selling units unfit for human use, as already in place for food. Lastly, the demolition of sub-standard houses, but only after new ones were available to relocate the dislodged people. Finally, the most important initiative, the state should grant subsidies to underprivileged families in order to give them the opportunity to build or to acquire their own dwellings (Pigou 1965, 112–125).

4

The contemporary reception of Pigou’s work

A qualitative approach to Pigou’s contribution to economics may be conducted by taking stock, first, of a sample of contemporary reviews of his main books, viz. Wealth and Welfare (1912), the second edition of Economics of Welfare (1920), the first edition of Industrial Fluctuations (1927), The Theory of Unemployment (1933), Employment and Equilibrium (1931) and Lapses from Full Employment (1944). The following section presents other contemporary reactions to Pigou’s work as well as more recent evaluations of his legacy.

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Wealth and Welfare In his brief review of Wealth and Welfare, Alfred W. Flux (JRS 1913) 11 underlined the dialectical skill and the admirable analytical techniques of the author – virtues that might not be enough, however, to command full acceptance by its readers of the many questionable conclusions formulated in some chapters. Allyn Young (QJE 1913), in a detailed examination of the book, praised it as a plea for social reform, but also commented that only those readers familiar with Marshallian economic reasoning would be able to grasp Pigou’s arguments, woven as they were in rather unappealing prose. The main shortcomings of Pigou’s reasoning lay in the cursory treatment of the population issue and the ambiguity regarding the monetary or real character of marginal net products. The equivocal treatment of decreasing returns as a social cost was also pointed out by Young. On the other hand, the chief virtue of Wealth and Welfare consisted in the judicial appraisal of the practical issues raised in it, namely, the efficacy of purchasers’ associations, the role of state intervention, the control of monopolies, and the public operation of big companies. Francis Y. Edgeworth’s (EJ 1913) short review of Wealth and Welfare pointed out the influences of Marshall and Sidgwick on Pigou’s theory. To Edgeworth, Pigou’s overall argument reached its most consistent form when backed by mathematical formulae, while the profuse and purely deductive conclusions were not always convincing. John M. Clark (AER 1913) was less forgiving, and criticized Pigou for his tedious rhetoric, the excess of algebra and the graphical analyses underscored by weak assumptions, burdening the reader with tortuous and unnecessary arguments. To Clark, the interesting parts of the book were the practical chapters on alternatives to correct negative social costs (for a thorough analysis of the above reviews, see McLure 2012). The Economics of Welfare Moving on, Frank Knight (AER 1926) viewed the second edition of The Economics of Welfare (1924) as economics at its best, for its unique combination of scholarship, analytical penetration and lucidity of exposition. However, he thought the book should have displayed a more vigorous dose of realism on how to make things happen, along with some signs of scepticism toward the notion of utility. He also mentioned a degree of confusion in Pigou’s treatment of increasing returns, as already noted by Young, but adjudged the more empirical chapters as admirable. Industrial Fluctuations With respect to Pigou’s macroeconomic studies, the first edition of Industrial Fluctuations was rather negatively assessed by Warren Persons

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(QJE 1928), who remarked that it had not brought anything new to the table. He also decried the absence of a more refined statistical approach, the unreliability of the annual data used, and the disparity between some of the book’s conclusions – particularly the spurious connection between phases of prosperity and rising prices –and the figures for the United States economy. The Theory of Unemployment The Theory of Unemployment was evaluated by four eminent economists, who in general rated the volume as not only very difficult reading with few practical conclusions, but also as including formal errors and dubious estimates of the model’s parameters. Roy Harrod (EJ 1934), after praising the book as a rich storehouse filled with many treasures, indicated that the key flaw of Pigou’s argument lay in its proposition that wage-cuts were necessary to reduce unemployment, for any expansion in demand could achieve that end irrespective of the level of wages. Ralph Hawtrey (Ec 1934) criticized the omission of gross profits in the formula for the elasticity of employment, as well as the segmentation of the analysis in distinct real and monetary terms, since in reality all economic transactions, especially with respect to wages, are conducted in money. Paul Sweezy (JPE 1934) complained about the book’s cryptic text and its vague definitions of short period and wage-goods. However, he disagreed with Harrod, maintaining that a reduction in money wages would actually mean more income for non-wage earners, inducing them to spend more and consequently generating an increase in employment. To Sweezy, the best portion of the book was the chapters on wage policy (Part V, chapters II and III), which he saw as written with unusual common sense. A list of corrections and misprints was added. Finally, Seymour Harris (QJE 1935) produced a highly technical appraisal of The Theory of Unemployment, rectifying many errors and mistypes in Pigou’s equations, while questioning the assumption of a rigid wage-fund in limiting the scope of an expansion in employment. Overall, he rated the book a great theoretical contribution, but lacking in simplicity and applicability.12 Employment and Equilibrium Paul Samuelson (AER 1941) judged Employment and Equilibrium to be one of the most important books published at the time, in view of the fruitfulness of its analyses. However, he contested the mechanics of the so-called Pigou effect. To avoid Keynes’s Judgement Day, said Samuelson,

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it would be better to search at once for new outlets for investment or innovative channels to finance it than to bet on a rise in consumption from a protracted long-run increase in the purchasing power of money. Nicholas Kaldor (EJ 1941) prepared a systematic review of Pigou’s basic model, which he regarded as one of the best things ever written by the Professor. Kaldor criticized the book, however, for not assessing the effect of the level of employment on investment, for treating as equal the short and the long-run interest rates, for not taking into due account the changes in the capital stock over time and, lastly, for the confusion about the model’s effective stability conditions. Kaldor still questioned Pigou’s omission in specifying which of the possible theoretical scenarios were more likely to happen in reality. Abba Lerner (RES 1942) found Employment and Equilibrium useful as an intellectual exercise, but emphasized that it added little to the available knowledge. Its arguments were intricate and fatiguing, making it hard for the reader to understand the actual economic processes taking place behind the awkward mathematical notation – which happened to be totally out of line with the one shared by the academic community. Lapses from Full Employment Lapses from Full Employment was first reviewed by John Hicks (EJ 1945), who regarded it as a critique of policies recommending the expansion of aggregate demand. He agreed with most of Pigou’s diagnosis of unemployment as the result of the unions’ pressure for higher wages, although making exception for the slump, when the demand for labour could actually be very inelastic. George Stigler (AER 1946), on his turn, judged Pigou’s exposition as being too elliptical, abstract and brief in detailing the logical chain of events, but nonetheless a valid attempt at reaching out to the layman. Evsey Domar (JPE 1947), who effectively agreed with Stigler, considered the book too sophisticated for the general reader. In regard to theory and policy, Domar felt that Pigou had erred by setting aside the fundamental role of expectations, but that he was correct in emphasizing the dilemma between inflation and unemployment. From the contemporary reviews of some of Pigou’s principal books, it can be seen that the Professor paid a more than trifling toll for his distinctive habit of working in almost complete isolation. Despite his personal prowess as a thinker, applauded by most of his fellow economists, he did not develop a practice of having his drafts systematically discussed, as he did not cultivated a group of students or colleagues willing to go through his notes in order to provide him with constructive comments. His tendency for mathematical ‘slips’ was also compounded by a practice

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of relying on a few scholars to provide feedback; some of these were very busy themselves and so found it difficult to provide detailed comment, and others were not well suited to the task of reviewing mathematically intense theory. The potential for receiving collaborative feedback was also, no doubt, reduced by Pigou’s atrocious handwriting, which could be read only by the most practised readers (and even then with great difficulty). In deliberately maintaining distance from the community of economists, Pigou lost touch with the common rhetoric and did not keep up with some advances taking place in economics at the time, notably those concerning statistical techniques and mathematics. This aspect appears as a recurrent theme in a number of reviews of his books, with several reviewers declaring their unease with the Professor’s obtuse language, use of rudimentary statistical methods, crude data and guesswork, not to mention his algebraic slipups. Still, Pigou’s shyness and conflict-avoiding personality that surfaced in his maturity made it much more difficult for him to get his message across to the academic community, particularly at when competing paradigms were rebutting the Marshallian heritage; here, the influence of his teacher, who had deplored controversy, was highly noticeable.13 Furthermore, the communication problems were in both directions, for Pigou also had great difficulty in assimilating divergent viewpoints and seeing that he might be wrong. Lastly, the acceptance of Pigou’s works certainly would have been largely facilitated if his abstract and ‘light-bearing’ speculations had been supplemented more often by his more reasoned ‘fruit-bearing’ digressions on matters of applied nature, an exercise invariably commended by his fellow economists. Notwithstanding these limitations, Pigou’s books were generally received with great respect and even, in his later years, with some reverence.

5

Pigou: the legacy

During the interwar years, Marshall’s paradigm was contested on all fronts,14 while Pigou’s approach to welfare economics underwent a serious assault on its very foundations through Lionel Robbins’ An Essay on the Nature and Significance of Economic Science (1932), which advocated a truly positive economic science purged of all unscientific normative propositions. Additionally, Hicks launched an all-out offensive against the Pigouvian welfare theory. In his 1939 article ‘Foundations of Welfare Economics’, he deemed it impossible to establish meaningful comparisons of utility between individuals, so that no particular distribution of

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income could be singled out as better than any other. Instead, the only correct and scientific approach to welfare, as indicated by Hicks, was the one initiated by Vilfredo Pareto, which professed no judgements about individual preferences, and where each distribution entailed a situation of optimum welfare where no-one could be better off without encroaching on the well-being of others (Hicks 1939; see also Aslanbeigui 1990, 1992; Hennipman 1992; McLure 2012). Pigou remained impervious to the criticisms of his theory. A decade later, in the paper ‘Some Aspects of Welfare Economics’ (1951), and the following year, in his lectures on Marshall, he retorted that interpersonal comparisons of utilities were crucial to economics, since this assumption made it possible to devise public or private actions designed to improve the material welfare of the nations. Apart from that, people, whatever their constitution or origin, were in many ways fundamentally alike, asserted Pigou (1953, 292), continuing: In all practical affairs we act on that supposition. We cannot prove that it is true. But we do not need to do so. Nobody can prove that anybody besides himself exists, but, nevertheless, everybody is quite sure of it. We do not, in short, and there is no reason why we should, start from a tabula rasa, binding ourselves to hold every opinion which the natural man entertain to be guilty until it is proved innocent. The burden is the other way. To deny this, is to wreck not only Welfare Economics, but the whole apparatus of practical thought. After World War II, Pigou’s welfare theory was the target of another serious, and largely successful, challenge by Ronald H. Coase. In his article ‘The Problem of Social Cost’ (Coase 1960), he argued that the suggestion of imposing taxes or some other constraint on the action of companies inflicting damage to third parties, as advanced originally in Wealth and Welfare, was basically wrong. The important aspect to consider instead, in this kind of problem, was that any gain accruing to someone from limiting the operation of an individual or firm would always be accompanied by a corresponding loss befalling the agent whose activities were curtailed or penalized. Sometimes it might prove impossible to accommodate such contrary claims, but more often than not the parties involved would be able to settle their differences in monetary terms when property rights were well defined and transaction costs negligible or low.15 Moving on to Pigou’s contribution to macroeconomics – more specifically the Pigou effect – most of the contemporary reactions to this idea were lukewarm at most. Michal Kalecki (1944), then at Oxford,

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doubted that a deflationary process could boost savings in any appreciable magnitude, since only the small amount of gold-backed currency would benefit from an increase in its purchasing power. To Don Patinkin (1948), the decline in prices required to trigger the Pigou effect would adversely impact the value of real estate, stocks, paintings and all other kind of assets, thus creating a negative net balance of the deflationary process on the real value of wealth in general. Moreover, speculation might result in a continuance in the decline in prices, in this way intensifying the economic slump. Alvin Hansen (1951) sustained that the most the Pigou effect could do was to put a brake on the economic recession, for once the economy entered the recovery phase prices would go up again. Gottfried Haberler (1952) was the only contemporary to positively evaluate the Pigou effect. From a long-run perspective, wrote Haberler, in the case of the accumulated deflation in bad times ending up more intense than the accumulated inflation in good times, the consumption function would shift upwards, easing the movement of the economy towards the full employment state. Appraisals of Pigou’s overall contribution to economics have been more positive than some put forward by his contemporaries, especially when focusing on macro-economic theory. Schumpeter, to begin with, considered Wealth and Welfare as the main fountain from which all AngloSaxon work on welfare sprang up (Schumpeter 1986, 1038). David G. Champernowne (1954) mentioned somewhat oddly in his obituary to Pigou his lack of concern with social and applied issues as one of his main shortcomings, along with improper training in mathematics and the difficulty in grasping the chief economic relations in his analyses. He held up the power of Pigou’s logical mind, though, as his most conspicuous quality. Harry Johnson (1960), for his part, considered the Professor’s lasting contribution to economics the prescient view that the existing economic system could be improved, a principle shared by most post-war economists. Even Hicks (1975), when reassessing the status of welfare economics in the 1970s, retracted his former position and accepted that useful theory must be normative, as Pigou had always proposed.16 Austin Robinson (1977), in the International Encyclopedia of the Social Sciences, pointed to Pigou’s self-imposed mission of keeping Marshall’s economics alive as his foremost virtue and fault. That was so because Pigou offered to generations of Cambridge students a clear architecture of Marshallian economics, painfully lacking in the teachings of the old master. This noble objective, though, was achieved at the cost of an uncritical support of Marshall’s concepts, barring the emergence of new ideas. With respect to Pigou’s studies on welfare, its originality consisted in his concern of formulating true productive science, that is, a theory effectively

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applicable to improving the life of the poor. Johannes de Villiers Graaff, in the 1988 edition of The New Palgrave Dictionary of Economics, reported the major theoretical contributions of Pigou as being his writings on wage bargaining, industrial fluctuations and economic welfare. Although Graaff (1988, 878) did not see the Professor as initiating a true revolution in the field of economic welfare, he hailed Pigou as the one who had made the economists start to think about welfare in a systematic way. He did not achieve this by a single bold stroke, but through his lectures and a steady stream of writing that extended over more than fifty years. In that way his influence was immense. David Collard (2004), in his biographical essay for the Oxford Dictionary of National Biography, mentioned the stationary state, the Pigou effect and the whole family of multipliers derived in Employment and Equilibrium as theoretical achievements of first order, but frequently underrated because of Pigou’s habit of presenting his macroeconomic theories as partial developments of his wide approach to welfare economics. More recently, Collard (2013) proposed a ‘lifetime achievement award’ to Pigou for the Professor’s continuous and outstanding work in many fields of economics during the 20th century. Nahid Aslanbeigui (2008), in the last online edition of the New Palgrave Dictionary of Economics, basically agreed with Collard by elaborating on the various branches of the economic science which had benefited from Pigou’s systematic studies, such as the theories of value, distribution, business cycles, index numbers, labour economics and the real national income. Knight and McLure (2013, 24), in their recent essay The Elusive Arthur Pigou, stressed the Professor’s dedication both to improving the lives of the working people and to correcting pressing social problems, as the key motivation behind his lifelong work in economics: Pigou appeared to find an avenue to address his intellectual concerns in the interests of all people, especially working people, by drawing upon his philosophical reflections of what was ‘good’ for the individual and society.

6

A final comment

The preceding paragraphs have shown that Pigou’s academic career went through three distinct phases. The first, comprising the opening two decades of the 20th century, was the time of his swift rise through the ranks of Cambridge University, where he assumed the undisputed

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leadership of the Marshallian group of academics. The most lasting product of this glittering period was undoubtedly Wealth and Welfare, a work where theory and its practical applications happened to be very well-balanced, and which assured him immediate international recognition among his peers and a place in economic courses in England and abroad. In the second phase, which comprised the 1930s and 1940s, the Marshallian analytical structure started to be seriously questioned and Pigou’s propositions were also subject to fierce debate, whether over the measurability of utility or the demand for labour during the time of depression. As Pigou’s studies on economic fluctuations and employment gradually started to engage most of his attention, the Keynesian circle begun to dispute the Professor’s key propositions on these fields. After Pigou’s retirement from Cambridge in the early 1940s, the third phase of his career emerged. During that time he continued to work along the lines already defined in his fruitful academic life, but in a less stressful environment; this allowed him to make an attempt at some sort of reconciliation between the Keynesian theory and the Marshallian paradigm. This third period may be seen as Pigou’s most serene phase, when the dust from the previous disputes had finally settled down and he could thus consolidate his legacy to economics, mainly in the important field of welfare economics, which would command the admiration of modern economists.

Notes 1. The author would like to express his gratitude to Professor Michael McLure (Business School, UWA) for the valuable comments and suggestions to previous versions of this paper. The usual disclaimer applies.This view echoed the one expressed by Alfred Marshall years earlier when addressing the Cambridge Economic Club in 1896: ‘We must not picture to ourselves an unreal world as it might be, or ought to be, and make schemes for it ... Our first duty as economists is to make a reasoned catalogue of the world as it is’ (Marshall in Pigou, 1956, 302–303). 2. After moving from Oxford to Cambridge in 1885, Marshall did not hide his unease with the restricted amount of economics he was able to squeeze into the courses he offered as part of the Moral Sciences Tripos. With Pigou’s collaboration, Marshall eventually succeeded in establishing the Economics and Political Science Tripos in 1903. During Marshall’s long stay in Cambridge, just a handful of his disciples gave him pride; Pigou was the one who stood above the few (Groenewegen 1995, 321–29). 3. Pigou’s refusal to go to war was the object of censure in a few letters to the editors of local and national newspapers, leaving the Professor in an embarrassing situation during the hearings to deliberate on his request to be exempted from conscription (Knight and McLure 2013).

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4. ‘I have seen, he (Pigou) wrote, the shattered ruins of Ypres Cathedral; I have watched the mudstained soldiery staggering homeward from their trenches; I have been near by when children in Dunkirk have been maimed and killed from the air’, observed Saltmarsh and Wilkinson, adding yet from their own hand, ‘and the sorrow, terror and pain that these things represented (the words are his own) imbued him with an intense and lasting hatred of war, deep-rooted in his pity for the wrongs of suffering humanity’ (Saltmarsh and Wilkinson 1960, 9). 5. The proposals to re-establish the old pre-war parity were disputed on several occasions by John Maynard Keynes on the grounds that it would entail an ineffective deflationary policy based on a rigid stringency of credit in order to close the existing gap between American and British prices. Despite the dismal record of the British economy under the inter-war gold standard, Pigou never regretted his role in this result, having declared later that in both committees the question in debate concerned only the most appropriate moment to implement the resumption of gold convertibility and not the convenience of this monetary regime in itself (Milgate 1983; Kahn 1984). 6. The subject had been already treated by Pigou (1909) in a short book titled Unemployment, where this factor was singled out as the chief cause of long run ‘involuntary idleness’. 7. Keynes, in a letter to Dennis Holme Robertson, complained about the frivolous content of Pigou’s review, from which he expected a genuine theoretical assessment of the General Theory (JMK XIV 1973, 87). 8. This triad defined Pigou’s (1952) research agenda for the remainder of his life, as he made clear almost four decades later in his speech at the Annual Schools Conference held at the University of London on 26 September 1950, and later published as One Way of Looking at Economics. 9. According to definition from the New Palgrave Dictionary of Economics: ‘Externalities are indirect effects of consumption or production activity, that is, effects on agents other than the originator of such activity which do not work through the price system’ (Laffont 2008, 1). 10. Pigou recognized that aggregate consumption and investment moved in tandem along the cycle, so he maintained that public works in times of economic contraction could indeed reduce unemployment in view of the elasticity of the wage fund due to forced savings, accumulated stocks or increased imports. He was unable, however, to come up with an estimate of how much work could be created by an increase in public spending. An unsuccessful attempt at that was conducted in his paper ‘The Monetary Theory of the Trade Cycle’ (1929). 11. AER=The American Economic Review, EJ=The Economic Journal, Ec=Economica, Econ=Econometrica, JPE=Journal of Political Economy, JRS=Journal of the Royal Statistical Society, RES= The Review of Economic Studies, QJE=The Quarterly Journal of Economics. 12. For a full treatment of the origins of Pigou’s printed slip of misprints in the Theory of Unemployment, see Knight (2014). 13. About Marshall’s behaviour regarding controversy, Pigou (1956, 88) noted: ‘He did not care for mere negative criticism. Nearly everything, he said once, of a positive sort that the great classical economists wrote, is, when properly interpreted, right: but much of what they have written in criticism of

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one another wrong’. On Pigou’s own position toward academic polemics, see his 1939 letter to Joan Robinson (reproduced as an appendix in Knight and McLure 2013), where he made explicit to her: ‘I think that in recent years the men have been put into a terrible muddle by having controversies, largely, in my opinion, about minor more or less verbal difference.’ 14. The pre-war years may be called a time of development of normal science in Cambridge, with Pigou as the leading exponent of the Marshallian group, which also comprised Dennis Holme Robertson, Keynes, William Ernest Johnson, Walter Layton, Charles Ryle Fay, Leonard Alston, Gerald Shove and a few others. Their prime mission apart from lecturing involved consolidating the Economic Tripos, carrying out research along the lines of the Marshallian paradigm, and editing The Economic Journal (Collard 1990). 15. The subsequent discussion on welfare theory which emanated from Coase’s criticism lies outside the scope of the present chapter (see, however, Simpson 1996; Aislanbegui and Medema 1998; McLure 2012). 16. ‘I have tried, in this scheme, to put ‘welfare economics’ back into the frame in which it was set by Pigou; for I think that when it is reinserted, we understand it better’ (Hicks, 1975).

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Collard, David. 2004. ‘Pigou, Arthur Cecil’. In H.C.G. Matthew, B. Harrison (eds.). Oxford Dictionary of National Biography. Oxford, Oxford University Press, vol. 44, 296–99. Collard, David. 2013. ‘Pigou: an Appreciation’. Paper presented at the mini-conference on Pigou at Robinson College, Cambridge on 29th November 2013. Dimand, Robert. 1988. The Origins of the Keynesian Revolution. London, Edward Elgar. Domar, Evsey. 1947. ‘Lapses from Full Employment by A.C. Pigou’. Journal of Political Economy, v. 55, n. 4, Aug., 362–63. Edgeworth, Francis Y. 1913. ‘Wealth and Welfare. By A.C. Pigou, Professor of Political Economy in the University of Cambridge’. Economic Journal, v. 23, n. 89, 62–70. Eichengreen, Barry and Flandreau, Marc (Eds.). 1985. The Gold Standard in Theory and History. New York, Methuen. Flux, A. W. 1913. ‘Wealth and Welfare. By A.C. Pigou’. Journal of the Royal Statistical Society, v. 76, n. 2, 227–30. Graaff, J. de v. 1988. ‘Pigou, Arthur Cecil’. In J. Eatwell, M. Milgate, P. Newman (eds.). The New Palgrave Dictionary of Economics. London, Macmillan, volume 3, pp. 876–78. Groenewegen, Peter. 1995. A Soaring Eagle: Alfred Marshall 1842–1924. London, Edward Elgar. Haberler, Gottfried. 1946. Prosperity and Depression. New York, United Nations, 3rd ed. Harris, Seymour E. 1935. ‘Professor Pigou’s Theory of Unemployment’, The Quarterly Journal of Economics, v. 49, n. 2, Feb., 286–324. Harrod, Roy. 1934. ‘Professor Pigou’s Theory of Unemployment’, The Economic Journal, v. 44, n. 173, Mar, 19–32. Harrod, Roy. 1951. ‘Keynes’s ‘General Theory’ by A.C. Pigou’. The American Economic Review, v. 41, n. 4, Sep., 665–71. Hawtrey, Ralph G. 1934. ‘The Theory of Unemployment by Professor A.C. Pigou’. Economica, New Series, v. 1, n. 2, Mar, 147–66. Hennipman, Peter. 1992. ‘Hicks, Robbins, and the Demise of Pigovian Welfare Economics: Rectification and Amplification’. Southern Economic Journal, v. 59, n. 1, Jul., 88–97. Hicks, John. 1939. ‘The Foundations of Welfare Economics’. The Economic Journal, v. 49, n. 196, Dec., 696–712. Hicks, John. 1945. ‘Lapses from Full Employment by A.C. Pigou’. The Economic Journal, v. 55, n. 220, 398–401. Hicks, John. 1975. ‘The Scope and Status of Welfare Economics’. Oxford Economic Papers, v. 27, n. 3, Nov., 307–26. Kahn, Richard F. 1984. The Making of Keynes’ General Theory. Cambridge, Cambridge University Press, Rafaelle Mattioli Foundation. Kaldor, Nicholas. 1941. ‘Employment and Equilibrium – A Theoretical Discussion. By A. C. Pigou’. The Economic Journal, v. 51, n. 204, Dec., 458–73. Kalecki, Michal. 1944. ‘Professor Pigou on ‘The Classical Stationary State’. A Comment’. The Economic Journal, v. 54, n. 213, 131–32. Keynes, John M. 1973. The General Theory of Employment, Interest and Money. In D. Moogridge (ed.). The Collected Writings of John Maynard Keynes, v. VII, London, Macmillan for the Royal Economic Society.

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Knight, Frank. 1926. ‘Economics at its Best’. The American Economic Review, v. 16, n. 1, Mar., 51–58. Knight, Karen. 2014. ‘A. C. Pigou’s Theory of Unemployment and its Corrigenda: the Letters of Maurice Allen, Arthur L. Bowley, Richard Kahn and Dennis Robertson’. Discussion Paper 14.08, Business School, University of Western Australia. Knight, Karen and McLure, Michael. 2013. ‘The Elusive Arthur Pigou’. Discussion Paper 12.05, Business School, University of Western Australia. Laffont, J.J. 2008. ‘Externalities’. In S.N. Durlauf and L.E. Blume (Eds.). The New Palgrave Dictionary of Economics, 2nd ed. Leeson, Robert and Schiffman, Daniel. 2013. ‘A Reassessment of Pigou’s Theory of Unemployment. Part I – The Nonmonetary Economy’. Hoover Institution and University of Notre Dame Australia, Ariel University Center. Leeson, Robert and Schiffman, Daniel. 2014. ‘The Triumph of Rhetoric: Pigou as Keynesian Whipping Boy and its Unintended Consequences’. In R. Leeson (Ed.). Archival Insights into the Evolution of Economics Volume 7: Hayek: a Collaborative Biography Part 3 Fraud, Fascism and Free Market Religion, Basingstoke, England: Palgrave Macmillan. Lerner, Abba. 1942. ‘Employment and Equilibrium by A. C. Pigou’. The Review of Economics and Statistics, v. 24, n. 2, May, 87–92. McLure, Michael. 2012. ‘One Hundred Years from Today: A.C. Pigou’s Wealth and Welfare’. Discussion Paper 12.06, Business School, University of Western Australia. McLure, Michael. 2013. ‘A.C. Pigou and the Purpose of the ‘Chamberlain– Bradbury’ Committee’. Business School, University of Western Australia. Paper presented at the mini-conference on Pigou at Robinson College, Cambridge on 29 November 2013. Milgate, Murray. 1983. ‘Keynes and Pigou on the Gold Standard and Monetary Theory’. Contributions to Political Economy, n. 2, 39–48. Moggridge, Donald E. 1969. The Return to Gold 1925. The Formulation of Economic Policy and its critics. Cambridge, Cambridge University Press. Moggridge, Donald (Ed.) The Collected Writings of John Maynard Keynes. The General Theory and After, v. XIV, Part II, Defence and Development. London, Macmillan for the Royal Academic Society. Pigou, Arthur C. 1909. Unemployment. London, Richard Clay & Sons. Pigou, Arthur C. 1912. Wealth and Welfare. London, Macmillan. Pigou, Arthur C. 1924. ‘Correctives of the Trade Cycle’. In W.T. Layton et al. (Eds.). Is Unemployment Inevitable? London: Macmillan, 91–130. Pigou, A. C. 1927. Industrial Fluctuations. Macmillan, London. Pigou, Arthur C. 1929. ‘The Monetary Theory of the Trade Cycle’. The Economic Journal, v. 39, n. 154, 183–94. Pigou, A. C. 1933. The Theory of Unemployment. Macmillan, London. Pigou, Arthur C. 1935. Economics in Practice. Six Lectures on Current Issues. London, Macmillan. Pigou, Arthur C. 1946. ‘John Maynard Keynes’. Proceedings of the British Academy, v. 32, 395–414. Pigou, Arthur C. 1952. Essays in Economics. London, Macmillan. Pigou, Arthur C. (ed.). 1956. Memorials of Alfred Marshall. New York, Kelley and Millman.

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Pigou, Arthur C. 1962. The Economics of Welfare. London, Macmillan, 4th ed. Pigou, Arthur C. 1965. Essays in Applied Economics. London, Frank Cass. Rima, Ingrid. H. 1986. ‘The Pigou–Keynes Controversy about Involuntary Unemployment: a Half Century Reinterpretation’. Eastern Economic Journal, v. XII, n. 4, Oct./Dec., 467–77. Robinson, Austin. 1972. ‘Pigou, Arthur Cecil’. In D.L. Sills (Ed.). International Encyclopedia of the Social Sciences. New York, Macmillan, 90–97. Robinson, Austin. 1977. ‘Keynes and his Cambridge Colleagues’. In D. Patinkin and J.C. Leith (Eds.). Keynes, Cambridge and the General Theory. London, Macmillan, 25–38. Saltmarsh, John and Wilkinson, Patrick. 1960. Arthur Cecil Pigou 1877–1959. Fellow and Professor of Political Economy. Cambridge: King’s College. Samuelson, Paul. 1941. ‘Employment and Equilibrium by A.C. Pigou’. The American Economic Review, v. 41, n. 3, June, 433–34. Schumpeter, Joseph A. 1972. History of Economic Analysis. London, George Allen & Unwin. Scitovszky, Tibor. 1941. ‘Capital Accumulation, Employment and Price Rigidity’. Review of Economic Studies, v. VIII, 69–88. Simpson, A. W. B. 1996, ‘Coase v. Pigou reexamined’. The Journal of Legal Studies, v. 25, n. 1, Jan., 53–97. Stigler, George. 1946. ‘Lapses from Full Employment by A.C. Pigou’. The American Economic Review, v. 36, n. 5, Dec., 927–28. Sweezy, Paul. 1934. ‘Professor Pigou’s Theory of Unemployment’. Journal of Political Economy, v. 42, n. 6, Dec., 800–11. Takami, Norikazu. 2011. ‘Managing the Loss: How Pigou Arrived at the Pigou Effect’. Center for the History of Political Economy, Working Paper 2011. 06, Duke University. Young, Allyn. 1913. ‘Pigou’s Wealth and Welfare’. The Quarterly Journal of Economics, v. 27, n. 4, Aug., 672–86.

5 F. A. Hayek and the Demise of the Socialist System Yuri N. Maltsev

In The Fatal Conceit: The Errors of Socialism, Friedrich August Von Hayek (1988, 7) declared: The dispute between the market order and socialism is no less than a matter of survival. To follow socialist morality would destroy much of present humankind and impoverish much of the rest. The following year, the Berlin Wall collapsed – as, two years later, did the Union of Soviet Socialist Republics; on Christmas Eve 1991, the hammer and sickle flag of the Soviet Union was lowered in Kremlin for the last time, to be replaced with the czarist Russian tricolour. These developments changed the course of world history to an extent not yet fully understood by contemporaries. The socialist tragedy that had been initiated by the Bolshevik revolution of 7 November 1917 was not an isolated event in Russian history. The beginning of the 20th century had marked a significantly increased interaction between economic process and political power. It meant more government intervention, the militarization of economy and society, more regulation, more social and ethnic engineering. The huge bureaucratic regulatory state created by the government of the last emperor of Russia, Nicholas II, was the direct predecessor of socialism. The First World War led to total militarization and the centralization of the Russian economy. Meanwhile, Vladimir Lenin, from his exile in Switzerland, was observing how the German military-economic machine was replacing the market mechanism. He argued that the combination of this type of economic organization with the Social Democratic party in power is socialism: Here we have the last word in modern large-scale capitalist technology and planned organization ... it becomes evident that we have 214

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socialization of production, and not mere ‘interlocking’, that private economic and private property relations constitute a shell which no longer fits its contents, a shell which must inevitably decay if its removal is artificially delayed, a shell which may remain in a state of decay for a fairly long period (if, at the worst, the cure of the opportunist abscess is protracted), but which will inevitably be removed.1 Political reaction that followed the beginning of the First World War silenced critics of statism and interventionism both in Russia and elsewhere in Europe. The Russian ruling elite embraced both militarism and socialism. After the abduction of Nicholas II in February 1917, followed by the formation of the Provisional Government headed by the leader of the Socialist Revolutionary Party, Alexander Kerensky, it was the Socialist Revolutionaries and the Social Democrats (Mensheviks) who became the ruling parties. According to them, the whole nation should be organized as a community of warriors in which the economy’s primary goal was to supply the fighting forces with all they needed. Lenin argued that World War I was an ‘imperialistic’ war, by which he meant a war through which the bourgeoisie of the big powers aimed to secure monopolistic, colonial, and semi-colonial markets for their export trade and their capital export, and to get their hands on cheap raw materials. But this very imperialism would provide the bourgeoisie with extra profits, and thus put it in a position to bribe the upper strata of the proletariat; these people, by accepting such bribes, would naturally behave as ‘traitors’.2 In a seminal article ‘The Russian Revolution’, published at the end of 1900, Lenin uttered the unthinkable: ‘the labor movement, separated from Social-Democracy ... inevitably turns bourgeois’.3 He and other Marxist doctrinaires tried to prevent such a corruption of working class and create a socialist state before it was too late. The time, according to Lenin, was right – they faced ineffective and corrupt regime, unpopular and unsuccessful war, prohibition, hyperinflation and deteriorating conditions of life, especially in urban areas. After taking power in November 1917 by a relatively bloodless coup, the true Marxists – Bolsheviks – got down to implementing the orthodox Marxist vision of communism. They tried to introduce the direct power of the workers at all levels of management. Lenin’s government of People’s Commissars constructed a complete pyramid of worker control groups – from individual enterprise to the entire economy – as institutions of centralized management. In addition, they abolished private property and money, and designed a new, purely barter, system

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of distribution. Both the actions and the talk of communist leaders put the country on the verge of complete economic catastrophe. Within months, if not weeks, this approach demonstrated its complete failure: the country was sliding into disaster; millions perished and with the economy collapsing it was impossible to keep peasant majority of Russia under control. As a barbaric act of desperation, in the early hours of 17 July 1918 Tsar Nicholas II and his wife, their six children and their servants were herded into the cellar of their prison house and shot. Utopia had failed. To prevent total collapse, Lenin introduced the first series of reforms, known as the New Economic Policy (NEP), in March 1921. It was officially treated as a temporary retreat from Marxist methods of the ‘construction of communism’. It also signified the pattern of behaviour of the socialism leaders – reforms would be introduced as a last resort to save socialism, instead of abandoning it. Liberalization of economic life under NEP, coupled with the introduction of the gold standard and encouragement of foreign direct investments and technology transfers, revived economic activity and led to the fastest rates of economic growth experienced during the previous 90 years of Russian history. It could not last for long: the rapid growth of the private sector (in those branches of the economy in which it was permitted), and the evident advantages of the private sector over the inefficient state sector represented a political threat to the regime. Realization of this threat by the new leader, Stalin, and his colleagues led to the abandonment of NEP in the late 1920s and the creation of the Soviet socialist system, which survived (with minor modifications) from the 1930s until Gorbachev’s perestroika of 1985–1991. Economic centralism became absolute as the Kremlin leaders chose the only possible way of managing economy under socialism – direct government control and coercion based on the abolition of the private property, forced labour and mass murder. A totalitarian state, based on the command economy and state terror, was created. Socialist ideologues tried to find a basis for a possibility of a Great Leap Forward regardless of the state’s resources and capabilities. These ideologues – Felix Dzerzhinsky, Leo Trotsky, Josef Stalin and others – put forward a set of arguments according to which the plan would replacing the laws of supply and demand. ‘Mutually beneficial exchanges’ under capitalism should give way to direct distribution by the government; money should be turned into accounting signs, and the sales process into a purely formal operation of the government-directed distribution based on political rather than economic goals. Centrally planned investment based on unrestrained monetary policy and the official campaigns against ‘duplication and parallelism’ resulted

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in the formation of the huge government monopolies solely responsible for meeting the planned production targets. Competition was nonexistent. As a result, prices were calculated in a bureaucratic method of ‘cost accounting’ (whatever ‘cost’ meant in a centrally planned economy without markets or competition) and were not even supposed to reflect the laws of supply and demand.4 The management of production and distribution became the function of the central dictatorship. This system was coupled with the complete destruction of the consumer market. At the beginning of the 1930s, rationing was introduced for intermediary goods, means of production and consumer goods. Non-economic institutions were created, obliging people to work: mass repression provided cheap labour, peasants were banned from leaving collective farms, and this was followed by a ban on changes in jobs and residency for urban residents. Most Western historians believe that Stalin’s terror took place mainly in the cities, against intellectuals and political opponents. But the great purges were really an assault on the countryside. Over half of all executions took place in rural areas. The relatively successful peasants and farmers, the kulaks, were liquidated; 10 million of them were deported to Siberia together with their families, where most of them died. In Ukraine alone Stalin’s Holodomor starved over 7 million peasants to death during the the terrible winter of 1932–1933 and deported another 6 million to Siberia. Bloodthirsty communist leaders ordered the deportation of many women, children and cripples, who were no threat to the government but were considered a liability rather than an asset. Soviet authorities were cynically clearing out the people they might have to feed. The command economy and the perfect ‘killer state’ were created. The management of production and distribution were performed through emerging techniques and principles of central planning. Central planning was declared a ‘New science’, and economists of the ‘old school’, including numerous Marxists, were killed or sent to the dreadful Gulags. An absolute ‘thought monopoly’ of Marxism was enforced by mass deportations and slaughter of ‘bourgeois intellectuals’. The Russian natural elite was targeted for total liquidation. The luckier ones escaped, and continued the development of the Russian intellectual tradition elsewhere.5 The situation for natural elites of other countries enslaved in the Soviet Union was similar; Stalin’s secret decrees resulted in the clergy, ‘capitalists’ (whatever that meant), military and police officers as well as most politicians (including even those who supported socialism and Soviets) being designated for either immediate slaughter or slow death in the Gulag. The natural elites were considered to be the last obstacle to the creation of a ‘New Man’ – a selfless robot totally controlled and manipulated by the enlightened and visionary leader.

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Tens of millions of people suffered and died under the 74-year rule of the USSR. Governments of the Soviet Union and other socialist countries have killed millions of their own citizens, and the death toll has many times exceeded that of all wars in human history. The results are shocking: according to these figures, in the 20th century, excluding war and other types of conflict, governments murdered 174 million of their own people, of which Marxist governments accounted for about 95 million, and the Soviet Union alone nearly 62 million.6 The eminent American demographer R. J. Rummel writes about the scale of the socialist murders: Just to give perspective on this incredible murder by government, if all these bodies were laid head to toe, with the average height being 5’, then they would circle the earth ten times. Also, this democide murdered 6 times more people than died in combat in all the foreign and internal wars of the century. Finally, given popular estimates of the dead in a major nuclear war, this total democide is as though such a war did occur, but with its dead spread over a century.7 A common mistake Western observers made was to think that the Soviet Union’s fundamental problem was a lack of democracy. They completely overlooked that the institutional structure of such a political system, with no means of rational calculation, cannot overcome the problems inherent in an economic system. Hayek and Mises focused their analysis on this problem. The Soviet Union had a number of leaders who promised political reform, but none was able to put bread on the table. In fact, the primary problem in the Soviet Union was socialism, and it is still far from being dismantled in China and other nations that once made up the ‘Second World’. The number of murdered in China is estimated at 78 million. In late 1952 Bo Yibo 8 (father of Bo Xilai)9 said, approvingly, that 2 million had been executed. Children were not spared. Not everyone could be killed, Mao acknowledged. So a vast gulag was born, swallowing up counter-revolutionaries, vagabonds, prostitutes, capitalists, marketers, foreigners and, later, intellectuals. The population in the ‘reform through labor’ camps quickly reached about 2 million. The relentless indoctrination, one inmate later said, was nothing less than the ‘physical and mental liquidation of oneself’.10 The Road to Serfdom was officially translated into Chinese in 1962 after the failure of the ‘Great Leap Forward’, when China was making slow moves back towards market reforms after the Great Chinese Famine. The death toll of the Great Famine, personally designed and engineered

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by Mao Zedong, was staggering. ‘The most officials have admitted is 20 million,’ wrote Chinese researcher Yang Jisheng – but he put the true total at 36 million. He said it was equivalent to 450 times the number of people killed by the atomic bomb dropped on Nagasaki ... and greater than the number of people killed in the First World War. Many think that even this is a conservative figure: in his acclaimed book Mao’s Great Famine, Frank Dikotter estimates that the toll reached at least 45 million.11 In the wake of Great Famine, Mao became quite erratic in his foreign policy; splits in Sino–Soviet, Sino–Indian and Sino–Vietnamese relations were brewing.12 In these circumstances, the Chinese leadership decided to get acquainted with Hayek. This first Chinese translation of The Road to Serfdom was never meant to be circulated publicly; it was considered an ‘internal document’, and was not allowed to be taken out of the libraries of the high-level institutions. The translator, Weizao Teng, who referred to Hayek as ‘a loyal lackey defending the capitalist system’, and claimed that F. A. Hayek’s books were ‘full of poison,’ had wanted to translate the book so that academics could ‘criticize modern bourgeois reactionary economic theories’.13 Rumor has it that PRC Premier Zhou Enlai had a copy of this book on his desk. In today’s China, The Road to Serfdom and other Hayek works have become very popular among intellectuals. Hayek should be very happy that he is highly respected by Chinese people because of his right vision between economic freedom and civil liberties ... Hayek’s stress on the notion of private property as the basis for liberty is debated in China. One leading Hayek scholar, Liu Junking, has played a leading role to spread the ideas of private property in China. Liu has developed Hayek’s idea that ‘private property rights are the most basic human rights in the world.14 The regimes established in the USSR, China, Cuba, Vietnam and other socialist countries were variations of public slavery, with no property and other human rights or civil society in place. The most fundamental institution of the market economy is, in contrast, a system of private property rights. This is generally the definition of the difference between wealthy, stable, prosperous societies and poor, decimated nations.

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The most evident erosion of property rights happened in the 20th century. This process started under Soviet socialism, fascism and national socialism and continues in Western welfare states today. Hayek wrote: What our generation has forgotten is that the system of private property is the most important guarantee of freedom, not only for those who own property, but scarcely less for those who do not. It is only because the control of the means of production is divided among many people acting independently that nobody has complete power over us, that we as individuals can decide what to do with ourselves.15 The history of Soviet socialism, Italian fascism and German national socialism, Maoism, African socialism and other offspring of this deadly philosophy provides credible evidence that abolition of personal rights and freedoms in totalitarian states goes hand in hand with curtailment, if not outright abolition, of private property. In an effort to differentiate themselves from the nationalist, anti-Communist totalitarian regimes that sprang up in inter war Europe, regimes with which their own regime had embarrassingly much in common and often competed for the same constituencies, Soviet propagandists redefined the term ‘fascism’ to designate any government opposed to the Soviet Union – specifically, Mussolini’s Italy and Hitler’s Germany, but, when the occasion called for it, also the United States, Finland and Poland. This Soviet ‘tradition’ continues under the Putin regime blaming independent Georgia and Ukraine as fascist.16 It is still common in Western academia to identify Marxist socialists as the Left and National socialists as the extreme Right, as if they stood at opposite ends of the ideological spectrum. Stalin himself first coined these definitions at the 7th Congress of the Communist International in 1935. To see these regimes in their true perspective, however, we should realise that they are simply two versions of the same socialist ideology. The economic policies of Mussolini’s Italy and Hitler’s Germany resembled the ‘state socialism’ which Lenin wanted to institute in Soviet Russia upon coming to power, under which private enterprise would work for the government – an idea Lenin was forced to abandon under the pressure of the ‘Left Communists’. Under both fascist and communist regimes, government exercises central planning, and bureaucracy completely controls production and distribution; it decides what shall be produced, how much, for whom and how.

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Hayek’s mentor and friend Ludwig Von Mises analyzed ‘two patterns for the realization of socialism’. He wrote: The first pattern (we may call it the Lenin or the Russian pattern) is purely bureaucratic. All plants, shops and farms are formally nationalized (verstaatlicht); they are departments of the government operated by civil servants. Every unit of the apparatus of production stands in the same relation to the superior central organization, as does a local post office to the office of the postmaster general. The second pattern (we may call it the Hindenburg or German pattern) nominally and seemingly preserves private ownership of markets, prices, wages, and interest rates. There are, however, no longer entrepreneurs, but only shop managers (Betriebsfuhrer in the terminology of the Nazi legislation).17 The difference between the systems is that the German and Italian patterns did indeed allow – or, more accurately, tolerate – private property. However, it was ‘property’ in a peculiar and very restricted sense – not the virtually untrammelled private ownership of Roman law and 19th-century Europe, but rather conditional possession, under which the state, the owner of last resort, reserved for itself the right to interfere with and even confiscate assets which, in its judgement, were used in an unsatisfactory way. But in the event, the governments of fascist Italy and Nazi Germany directed production decisions, curbed entrepreneurship and the labour market, and determined wages and interest rates by means of centralized authority similar, to that in the communist states. Soviet Russia was the first country to completely abolish property rights, declaring them ‘a sanctification of capitalist oppression and exploitation’. Lenin pursued the expropriation of private property with fanatical zeal and unhesitating brutality ... When the massive expropriation was completed, the state sector of the USSR was officially reported to account for 99.3 percent of the country’s national income.18 The results of this action can be considered as the worst calamity experienced by humanity. The tragedy of the socialist experiment is that Ludwig von Mises and his most famous student, Friedrich August von Hayek, had already explained the deadly dangers of socialism, yet their warnings went

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unheeded. They exposed socialism as a utopian scheme that is illogical, uneconomic, and unworkable at its core. It is ‘impossible’, and must fail because it is devoid of economic rationale; it provides no means for any objective basis of economic calculation and thus no way it can assign resources to their most productive uses. Hayek wrote Economics has from its origins been concerned with how an extended order of human interaction comes into existence through a process of variation, winnowing and sifting far surpassing our vision or our capacity to design.19 Being a non-economic system, socialism could be implemented only with non-economic stimuli – coercion and mass murder. Socialist dictators attempted to replace billions of individual decisions made by sovereign consumers in the market with ‘rational economic planning’ by a few individuals vested with the power to determine what should be produced and consumed, how and when. It led to widespread shortages, frustration and mass starvation. When I worked for the Institute of Labor Research in Moscow in 1970s, it set 460,000 wage rates and over 90 million work quotas for 110 million government employees, while the State Committee on Prices set and ‘managed’ over 23 million prices. At one of economics conferences that I attended at that time, the Head of the Price Committee, Nikolai Glushkov, was grilled by the audience and ran out of arguments. He said, ‘We only have 400 employees and 23 million prices! What could we do?’ The inevitable result was chaos and widespread shortages. The socialist state destroyed the work ethic, deprived people of entrepreneurial opportunity and initiative, and led to a widespread welfare mentality. ‘They pretend they are paying us, but we pretend that we are working for them’, was a popular quip in socialist countries. It was by failing to appreciate the creative role of ideological diversity and of the clash of opinions in short-circuiting the process of discovery, debate and consensus, by employing inappropriate criteria to make judgements, and by allowing only one position on any question of the Marxist–Leninist legitimacy, associating all others with political deviations or outright treachery that socialist leaders set the stage for the intellectual bankruptcy which led to the final tragedy that would inevitably engulf them. Socialism produced political monsters like Lenin, Stalin, Mao Zedong, Kim Jong-un, Castro and Putin, and led to unheard-of crimes against humanity in all socialist states. The destruction of Ukraine, Cuba and Kampuchea, the humiliation of the Chinese people, the Venezuelans

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and the eastern Europeans, are not ‘distortions of socialism’ as the defenders of this doctrine would like to convince us. Hayek in his Road to Serfdom proved that these are inevitable consequences of the destruction of the market that started with an attempt to replace the economic decisions of free individuals by the ‘wisdom of the planners’. The true character of the centrally planned economy is clearly illustrated by Soviet econometrician Nikolai Fedorenko in Moscow, who quipped: a fully balanced, checked, and detailed economic plan for the next year would be ready, with the help of computers, in 30,000 years. There are millions of product variants; there are hundreds of thousands of enterprises; it is necessary to make billions of decisions on inputs and outputs; the plans must relate to the labour force, material supplies, wages, costs, prices, ‘planned profits’, investments, transportation, storage, and distribution. These decisions originate from different parts of the planning hierarchy. They are, as a rule, inconsistent and contradict each other because they reflect the conflicting interests of different strata of bureaucracy. But because the next year’s plan must be ready by next year, and not in 29,999 years, it is inevitably neither balanced nor rational. And Hayek definitively proved that without private property in the means of production, even with a million years of computer time, they still could not make socialism work. Any socialist never understood this. The last leader of the Soviet Union, Mikhail Gorbachev, once even complained that central planning should work well but the problem was that they never had ‘a good plan’. As a Russian reviewer of the The Road to Serfdom writes: Many conclusions of Hayek seem very obvious today – they are fully confirmed by history: he showed us how easy it is a conversion of the socialist government into a totalitarian dictatorship, and how fragile and short-lived are they. The ‘Road to Serfdom’ remains a powerful warning of the dangers of the excessive government intervention in the economy which is still the main obstacle to the development of Russia and many countries around the world.20 The last defenders of socialism – Mikhail Gorbachev and many of his ‘reformers’ – found themselves in a theoretical and practical deadlock as the institution of private property had been destroyed and the only market economy in the USSR – the black market – was prohibited. So they resorted to the creation of piecemeal remedies and artificial schemes. For example, as part of economic perestroika, the category of profit was introduced into the Soviet economy. In the absence of market competition,

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profit was planned as a function of the cost. Enterprises were given ‘control figures’ that determined the ‘planned profits’ as a normative percentage of the costs. Thus the more you spent, the higher your profits. Under the conditions of 100 per cent monopolization, this simple trick completely ruined the economies of the Soviet Union, Eastern Europe, and the other socialist states where it was used. The ‘planned profit’ approach significantly weakened socialist economic resiliency and accelerated the economic collapse and political demise of the Soviet Empire. Hayek analyzed these experiments with real socialism and various others. He wrote: The intellectuals’ vain search for a truly socialist community, which results in the idealization of, and then disillusionment with, and a seemingly endless string of `utopias’ – the Soviet Union, then Cuba, China, Yugoslavia, Vietnam, Tanzania, Nicaragua – should suggest that there might be something about socialism that does not conform to certain facts. But such facts, first explained by economists more than a century ago, remain unexamined by those who pride themselves on their rationalistic rejection of the notion that there could be any facts that transcend historical context or present an insurmountable barrier to human desires.21 As he noted in The Constitution of Liberty, Freedom granted only when it is known beforehand that its effects will be beneficial is not freedom. The freedom that matters is not the ‘freedom’ of the rulers or of the majority to regulate and control social development, but the freedom of the individual to live his own life as he chooses. The freedom of the individual to break old moulds, to create new things, and to test new paths is the mark of a progressive society. Hayek continues: If we proceed on the assumption that only the exercises of freedom that the majority will practice are important, we would be certain to create a stagnant society with all the characteristics of unfreedom. With the election of Mikhail Gorbachev (by 11 Politburo members) as the General Secretary of the Communist Party of the Soviet Union in March 1985, the USSR was crushed by the deadweight of its horrendous crimes and lies exposed. Gorbachev with his ‘new political thinking’ was trying to create a new utopia – ‘socialism with a human face’. With his

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policies of perestroika and glasnost, and incessant speeches about democratization and openness of society, fear was effectively removed from a system based only on fear.22 Today, the disastrous consequences of enforcing the utopia on the unfortunate populations of the socialist states are clear even to their leaders. Yet socialism is on the rise in the West, where its advocates in government and academia are discussing little else than how to further restrict property rights and replace the market with the ‘human design’ of central planning. Knowledge of the miserable failure of the world socialism really should not be an issue, after so many countries being attacked, occupied and devastated by socialists. Unfortunately, it is not the case. Anders Hjemdahl, of the Stockholm-based Institute for Information on the Crimes of Communism, writes If you are a young American, European or Japanese and you care about human rights and liberty, chances are that you will be wearing a Che Guevara T-shirt and a badge with a hammer and sickle and listening to rock stars singing about the revolution. And most likely you will perceive free market and capitalism to be unjust and wasteful and brutal and oppressive, with socialism standing for a hope of a brighter future, equality and cleaner environment.23 Nothing could be further from the truth. What Hayek and Mises had asserted in the socialist calculation debate of the 1920s and 1930s – the notion that the market is the only possible way to allocate resources – may be obvious to many, but it has not influenced many intellectuals and politicians of the West, who apparently ignore the importance of prices to the functioning of a market economy. In 1935, Hayek edited a collection of essays titled Collectivist Economic Planning, which included a translation of Mises’ famous article, ‘Economic Calculation in the Socialist Commonwealth’. The article was first published 1920 in German under the title ‘Die Wirtschaftsrechnung im sozialistischen Gemeinwesen’ and is based on a lecture that Ludwig Von Mises gave in 1919 in response to a book by Otto Neurath24 arguing for the feasibility of central planning. Mises argued that no prices for capital goods could be obtained in a socialist economy if the government owned the means of production, since all exchanges would merely be internal transfers rather than ‘objects of exchange’, putting the price mechanism out of order. Hayek wrote an introduction and a concluding chapter for the book, in which he challenged central planning as an impossible exercise in futility.

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Hayek’s research on the possibility of central planning resulted in a series of articles: ‘Economics and Knowledge’ (1937), ‘Socialist Calculation: The Competitive “Solution”’ (1940), ‘The Use of Knowledge in Society’ (1945), and ‘The Meaning of Competition’ (1946). Along with other writings, these seminal articles were published in a volume, Individualism and Economic Order, first published in 1948 by the University of Chicago Press and reprinted in 2009 by the Ludwig von Mises Institute. In this volume, Hayek emphasized that the division of labour has a counterpart: the division of knowledge. Each comes to possess specialized and local knowledge in his corner of the division of labour that he alone may fully understand and appreciate how to use. If all of these bits of specialized knowledge are to serve everyone in society, some method must exist to coordinate the activities of all these interdependent participants in the market. The market’s solution to this problem, Hayek argued, was the only viable one – a competitive price system. Prices not only generated incentives for people to work, but they also guided entrepreneurs about opportunities worth pursuing. ‘The Use of Knowledge in Society’ was the first of Hayek’s academic publications after The Road to Serfdom, and was published in the September 1945 issue of The American Economic Review. Written as a critique of an apology of a planned economy by Polish economist Oskar Lange, it argues against the establishment of a Central Pricing Board (advocated by Lange), as such an institution would eliminate market price fluctuations. Hayek argues that a ‘centrally planned market economy’ (a term used by Lange and later by Mikhail Gorbachev and his economic team) could never match the efficiency of the free market, because any individual possesses a fraction of all knowledge available in society. In Hayek’s words, The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction. The famous American libertarian critic of Hayek, Murray N. Rothbard (1926–1995) made a point that the problem is not a lack of information but the impossibility of rational economic calculation: For Hayek, the major problem for the socialist planning board is its lack of knowledge. Without a market, the socialist planning board has

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no means of knowing the value-scales of the consumers, or the supply of resources or available technologies. The capitalist economy is, for Hayek, a valuable means of disseminating knowledge from one individual to another through the pricing ‘signals’ of the free market. A static, general equilibrium economy would be able to overcome the Hayekian problem of dispersed knowledge, since eventually all data would come to be known by all, but the ever-changing, uncertain data of the real world prevents the socialist planning board from acquiring such knowledge. Hence, as is usual for Hayek, the argument for the free economy and against statism rests on an argument from ignorance. But to Mises [the central problem is not] knowledge. He explicitly points out that even if the socialist planners knew perfectly, and eagerly wished to satisfy, the value priorities of the consumers, and even if the planners enjoyed a perfect knowledge of all resources and all technologies, they still would not be able to calculate, for lack of a price system of the means of production. The problem is not knowledge, then, but calculability.25 The anarchocapitalist arguments of Rothbard, Raico, Hoppe and Salerno against Hayek maintain that Hayek is not a classical liberal but is actually a moderate social democrat, and since we live in the age of social democracy, this makes him a ‘respectable’ and ‘responsible’ scholar. Hayek, as you may recall, dedicated his ‘Road to Serfdom’ to ‘the socialists in all parties’. And the socialists in all parties now pay him back in using Hayek to present themselves as ‘liberals’.26 Anarchocapitalists are particularly critical of Hayek’s most popular books: The Road to Serfdom and The Constitution of Liberty. The Constitution of Liberty was first published in 1960;it is an interpretation of civilization as being made possible by the fundamental principles of liberty, which Hayek presents as prerequisites for wealth and growth, rather than the other way around. Anarchocapitalists do not agree with Hayek that government is ‘necessary’ to fulfil ‘law enforcement’ and ‘defense against external enemies’, nor with his idea that in an advanced society government ought to use its power of raising funds by taxation to provide a number of services which for various reasons cannot be provided, or cannot be provided adequately, by the market.27

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in addition to other concessions that Hayek gives to state power which anarchocapitalists find illegitimate – from subsidies for public goods to compulsory unemployment insurance to minimum income guarantees. According to Brian Doherty, Hayek and anarchocapitalists constitute different facets of the intellectual tradition of liberty, and should be considered as complementary rather than mutually incompatible. Doherty quite rightly points out that Hayek is so successfully remembered for his critique of central planning, his defense of a free-market price system, and his demolition of the concept of ‘social justice’ that many people familiar with him more as icon than as a thinker are surprised to learn that he believed the things Rothbard slams him for here. Both Hayek and Rothbard were more than intellectuals; they were advocates. And while what they ultimately advocated was different, in the context of today’s ever-growing government, the rest of the world isn’t too wrong in lumping them together for practical purposes. In many ways, though Rothbard certainly didn’t think so when contemplating the unpublished Constitution of Liberty, their approaches were complementary rather than competitive. In a world of different minds, different sorts of arguments are going to appeal to different people for different reasons. It’s the kind of intellectual division of labor that economists such as Rothbard and Hayek should both be able to appreciate.28 Unlike anarchocapitalism, Hayek’s ideas were widely influential among opposition intellectuals behind the Iron Curtain. He added to his importance in the East by stating clearly how societies based on freely grown institutions manage to have individual freedom and social order coexists, all within a context of prosperity. Samizdat versions of Hayek’s works circulated widely, including readings on cassette tapes.29 With the fall of the Berlin Wall, most former dissidents, now leaders of newly independent countries, were Hayek’s admirers. Pro-market policies in Poland, Hungary, Slovenia and Czechoslovakia greatly eased the pain of economic transition. Even in countries that had been integral parts of the Soviet Union with more repressive controls, we witnessed insatiable interest in Hayek. New government and opposition leaders of Estonia, Latvia, Lithuania, Belarus – and indeed Russia itself – were well acquainted with the work of Hayek, von Mises and Friedman.

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The Prime Minister of Estonia, Mart Laar, told me at our first meeting in August of 1994 that he and his friends had been studying The Road to Serfdom, Capitalism and Freedom and other free market literature at their weekly informal seminars at private apartments in Tallinn long before the collapse of the USSR. My Czech friend and colleague Josef Alan during my time at the Institute of Labor Research in Moscow in the 1970s read at that time more works of the ‘illegal’ Hayek than most Western academics have even heard of today. Like many other Czech intellectuals, he was seriously engaged in the development of an alternative, that is unofficial, culture based on the philosophical foundation of free markets and individual freedom. He summarized his analysis of the alternative thinking in his well-known book on alternative culture in Eastern Europe.30 Today free-market foundations and think tanks are spread all over Eastern Europe and in Russia itself. Several hundred websites promote and explain Hayek’s ideas. Prior to 1990, The Road to Serfdom, as well as other books by Hayek, was prohibited in the USSR. These books as well as other ‘pro-capitalist propaganda’ would be seized from foreign visitors at the border, while Soviet citizens could be imprisoned for having – and especially disseminating – this ‘anti-Soviet literature’. After the collapse of the Soviet Union The Road to Serfdom was first published in Russian in the 1990–1991 issues of the journal Problems of Philosophy, and then as a book in 1992 by the publishing house, Economy. In 2005, ‘the New Publishers’ published 100,000 copies, and ‘Astrel’ published new editions of it in 2010 and in 2012. In the United States, most members of academia hated the book when it was first published in 1944, and still hate it today. But its readers made it a huge success, quickly selling over half a million copies. In 2010 Dr Tom Woods and I were invited by a popular TV personality, Glenn Beck, to discuss The Road to Serfdom on Fox News. The programme was very successful, as it provided us with an opportunity to tell our stories about the book and warn its viewers about simple solutions that usually result in horrendous ‘unintended consequences’; I told the audience and Mr. Beck that it is almost impossible to make a U-turn on the road to slavery, and there is only one end for this road – the dead end. I was a student at the Moscow State University and was lent a blind typed copy of The Road to Serfdom for one night by another student, Gena, who I did not know well. So I was afraid of him being a KGB ‘charming fish’ informer. For reading the book I could get up to seven years of jail, and Gena could get all 12 for ‘dissemination of the antiSoviet propaganda’.31 For me, the book was worth the risk, up to the last

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minute of a jail time. I was not a socialist before reading it, but I became an ardent anti-socialist, armed with Hayekian logic and arguments, after I had finished it. Despite the clear lesson provided by the Soviet collapse, it looks as though nobody of any importance has learned anything from it. The way of thinking of many political leaders in the West appears to be no different from that of those in the Soviet state, which employed millions of bureaucrats engaged in the planning process to create a substitute for the price system and to outsmart the markets. Glenn Beck’s program stirred a lot of interest in reading and rereading Hayek: It wasn’t a Soviet-era breadline, but The Road to Serfdom has run into some supply and demand problems. The rush of orders caught Hayek publisher The University of Chicago Press short of copies, and it had to resort to print-on-demand services offered by Amazon and Ingram Content Group to fill the gap. That cuts into profitability, says director Garrett Kiely, but not as much as the orders the publisher would have lost if people had to wait for the book. He anticipates that as many as 120,000 copies of The Road to Serfdom will be sold this year, up from about 27,000 last year, and 7000 to 8000 a year before the financial crisis struck in fall 2008.32 The Road to Serfdom is among the most influential expositions of classical liberalism, and remains a worldwide best-seller. Eminent scholar of Hayek Professor Richard Ebeling noted that Hayek’s ideas are as timely and powerful in today’s discussions as in the middle of the last century. In his brief but brilliant summary of Hayek’s work, he concludes that An advanced society, therefore, must always be a ‘planless’ society, that is, a society in which no one overall ‘plan’ is superimposed over the actions and plans of the individuals making up the society. Instead, civilization is by necessity a ‘spontaneous order,’ in which the participants use their own special knowledge and pursue their own individually chosen plans without a higher will or mind guiding them.33 The lessons we can learn from the tragic experiences of nations enslaved in the Soviet empire and Hayek’s critique of socialism also provide us with a better perspective on our own situation, and on the dangers of our own large and out-of-control governments pursuing socialist schemes.

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Notes 1. Lenin V.I. Imperialism, the Highest Stage of Capitalism, Lenin’s Selected Works, Progress Publishers, 1963, Moscow, Volume 1, pp. 766. 2. http://www.chagala.com/ibaffairs/russia/lenin_reader.htm 3. http://www.chagala.com/ibaffairs/russia/lenin_reader.htm 4. Analyzing the Economic Impact of the Changing Soviet Economy by Yuri N. Maltsev at http://www.eurasiacenter.org/Japaenese/ Archive/1990–1999/1991analyzing_the_Economic_impact_of.htm 5. Among notable Russian émigrés were Vladimir Nabokov, Ayn Rand, Pitirim Sorokin, Mark Aldanov, André Andrejew, Yul Brynner, Ivan Bunin, Alexandra Danilova, Serge Diaghilev, Oleg Cassini, Dmitri Nabokov, Sergei Rachmaninoff, Nikolai Berdyaev, Anna Pavlova, Igor Stravinsky, Alexander Prokofief de Seversky, George Ignatieff, Igor Sikorsky, Otto Struve, economists Peter Struve, Wassily Leontief, Alexander Gerschenkron and tens of thousands of others. See: M.V. Nazarov, The Mission of the Russian Emigration, Moscow: Rodnik, 1994. 6. Rudy J. Rummel, STATISTICS OF DEMOCIDE: Genocide and Mass Murder Since 1900, Charlottesville, Virginia: Center for National Security Law, School of Law, University of Virginia, 1997; and Transaction Publishers, Rutgers University; Death by Government: Genocide and Mass Murder in the Twentieth Century, By R.J. Rummel, New Jersey: Transaction Publishers, 1994. 7. http://www.hawaii.edu/powerkills/NOTE5.HTM 8. Bo Yibo (1908 – 2007) was a Chinese Communist political leader. He was one of the most senior politicians in China during the 1980s and 1990s. 9. Bo Xilai (1949 – ) is a former senior Chinese politician, son of Bo Yibo, In 2013 Bo Xilai was found guilty of corruption, stripped of all his assets, and sentenced to life imprisonment. 10. ‘The road to Serfdom: A new history lays bare the violent heart of Mao’s revolution’. The Economist, 7 September 2013. 11. ‘China’s Great Famine: the true story’ by Tania Branigan, The Guardian, Tuesday 1 January 2013. 12. These splits later resulted in the Sino–Indian War (1962), the Sino–Soviet border conflict, which was a seven-month undeclared military conflict in 1969, and the Sino–Vietnamese War (1979). 13. http://www.amazon.com/Introduction-Communist-Translation-SerfdomTranslated-ebook/dp/B00CTB63NQ 14. China’s Break from Serfdom. By Kate Zhou, published on 29 March 2004, http://www.mackinac.org/6479 15. F. Hayek, ‘‘Road to Serfdom’ ‘, Routledge Classics, London 2006, p. 108. 16. Richard Pipes, Property and Freedom: The Study of How Through the Centuries Private Ownership Has promoted Liberty and the Rule of Law. Alfred A. Knopf, New York, 1999, pp. 217–218. 17. Ludwig Von Mises, Human Action. A Treatise on Economics, Third Revised Edition, Henry Regnery Company, Chicago, 1949, p. 717. 18. Richard Pipes, Property and Freedom: The Study of How Through the Centuries Private Ownership has promoted Liberty and the Rule of Law. Alfred A. Knopf, New York, 1999, p. 214.

232 Yuri N. Maltsev 19. The Collected Works of Friedrich August Hayek, Volume I, The Fatal Conceit, The Errors of Socialism, Ed. W. W. Bartley, III, Routledge, London. 1990, p. 14 20. Дорога к рабству, Хайек Фридрих at: http://www.koob.ru/hayek/ doroga_k_rabstvu 21. The Collected Works of Friedrich August Hayek, Volume I, The Fatal Conceit, The Errors of Socialism, Ed. W. W. Bartley, III, Routledge, London. 1990, p. 85–86. 22. A popular joke at time in Moscow was about a CIA spy sent to the USSR to find what perestroika is all about. He walks from one store to another, taking notes: ‘No bread left in bakeries’, ‘No meat in butchers shops’, ‘No shoes ... ’. A KGB agent assigned to follow him looked over his shoulder and commented: ‘Ten years ago you would have been shot for this’. ‘No bullets left’ entered the CIA officer in his notebook. 23. Interview: How Much Do Western Europeans Know About Communist Crimes? http://www.rferl.org/content/interview_how_much_does_west_ know_about_communist_crimes/24358883.html 24. Otto Neurath (1882–1945) was an Austrian socialist, philosopher of science, sociologist, and political economist. A Marxist of Jewish heritage, he escaped Nazi occupation by fleeing to Great Britain. Neurath was one of the leading figures of the Vienna Circle. 25. ‘The End of Socialism and the Calculation Debate Revisited’ by Murray N. Rothbard, Mises Daily, 8 December 2006. 26. ‘Why Mises (and not Hayek)?’ by Hans-Hermann HoppeMises Daily, 10 October 2011 27. ‘Why Mises (and not Hayek)?’ by Hans-Hermann HoppeMises Daily, 10 October, 2011. 28. Brian Doherty, ‘A Tale of Two Libertarianisms. The conflict between Murray Rothbard and F.A. Hayek highlights an enduring division in the libertarian world’.reason.com, March 2010. 29. Brian Lee Crowley: ‘We’re all Hayekians now’. National Post, 8 May 2012. 30. Josef Alan; et al. Alternativní kultura : příběh české společnosti 1945–1989. Praha : Nakladatelství Lidové noviny, cop. 2001. 31. Россия. XX век. Статья 58/10. Надзорные производства прокуратуры

СССР по делам об антисоветской агитации и пропаганде: аннотированный каталог. – М.: Межд. фонд «Демократия», 1999.

32. ‘The Glenn Beck Effect: Hayek Has a Hit’, Wall Street Journal, 17 June 2010. 33. Richard Ebeling. Friedrich A. Hayek: A Centenary Appreciation. Hayek Was Right About Both Keynesianism and Socialism. Freeman, May 1999.

6 Hayek in Australia, 1976 Rafe Champion

Between 3 October and 6 November 1976, F. A. Hayek spent five busy weeks in Australia, with more than 60 appointments, seminars, informal meetings and formal presentations (Appendix 1). He and his wife travelled almost the full length of the east coast, from Cairns and the Barrier Reef in Queensland to Melbourne, Canberra and Adelaide in the south, with excursions into the country in Victoria and Queensland. Roger Randerson, a finance journalist and economics commentator, masterminded the tour.The suggestion of a tour arose in 1975; but Hayek (1899–1992) did not pursue that proposal until he accepted an invitation to visit Japan late in 1976 and indicated to Randerson that he could fit in a short Australian tour. Initial inquiries yielded no major sponsors for the tour so Randerson (1912–1991) and Ronald Kitching (1929–2011) underwrote the costs. Eventually some 60 donors contributed sums ranging from AU$50 to AU$2000.

1

The political situation, 1976

The central issue in Australian politics was the willingness and ability of the newly elected Liberal and Country Party coalition led by Malcolm Fraser to regain control of the economy after the big spending and other initiatives of the Australian Labor Party (ALP) from 1972 to 1975 under the leadership of Gough Whitlam. Inflation had peaked at over 15 per cent in 1974: unemployment was 6 per cent during Hayek’s visit. There were also major issues to be resolved regarding monetary policy and the then-fixed exchange rate. The political debate was soured by the resentment of Labor Party supporters following the 1975 constitutional crisis which the Governor General, Sir John Kerr, resolved by dismissing the Whitlam government 233

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(11 November) and appointing Fraser as caretaker Prime Minister. The Liberal–Country party coalition won the resulting general election in a landslide (13 December). There were high hopes for the Fraser administration in conservative circles; some progressives were alarmed by a rumour that he was a reader of Ayn Rand. That was before it became apparent that Fraser was the kind of conservative who Hayek (1960, Appendix) had in mind when he wrote ‘Why I am not a conservative’ – a man more concerned with holding political power than limiting it, and prepared to protect existing industries rather than sweeping away obstacles to free development. A little-noticed chapter suggested that the conservative side of Australian politics at the 1974 election was less market-oriented than the Labor party (Ray 1974). Consequently, Hayek’s views were not music to the ears of Prime Minister Fraser (or the elders of the coalition government), as indicated by recollections of their meeting (Appendix 2). Milton and Rose Friedman (1998, 431–432) had received much the same reception from Fraser (then leader of the Opposition) when they visited Australia in 1975.

2

The climate of ideas, mid-1970s

In the mid-1970s, interventionism dominated the formation and discussion of public policy. The strength of interventionist tendencies on the both sides of politics can be seen in the tenor of criticism of the so-called New Right a decade later, when the Labor administration led by Bob Hawke and Treasurer Paul Keating initiated some significant deregulation. For many years, the Institute of Public Affairs (IPA) in Melbourne had been the major source of informed economic commentary on the conservative side of politics. Formed in 1943 – pre-dating the Mont Pelerin Society (1947) – it functioned as a check on the socialist agenda of the Australian Labor Party. J. Walter (1988) described how the war provided the incentive for central planning, and the federal public service doubled in size in Australia between 1939 and 1945: Curtin’s reform-oriented ALP government in 1941 caught the imagination of the intelligentsia who saw it as the vehicle for the new order. Walter drew on the autobiography of H. ‘Nugget’ Coombs (1981), the most influential advisor to Labor and Liberal governments over many

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years, to show how the new order would be based on central control of the economy, using the Keynesian insights to deliver sustained economic growth with full employment and other social benefits. It was not only ALP supporters who were impressed by John Maynard Keynes. Much the same happened to the some leaders of the non-Labor forces, chief among them the remarkable mover-and-shaker, Herbert Gepp, who formed the IPA and charged C. D. ‘Ref’ Kemp with the task of producing a program for it. This work turned out to be a major source of ideas for the new Liberal Party under Prime Minister Robert Menzies (1943–1946; 1949–1966). According to Walters (1988), By the late 1930s Gepp, like Coombs, had discovered Keynes, and begun to propound a version of neo-Keynesian economic planning. Unlike Coombs, however, he drew the line at anything that looked like collectivism. Walter’s account is supported by Kemp’s (1988) contribution to the same volume and by John Hyde’s (2003) later research. The Keynesian synthesis of private ownership and state planning provided a framework of ideas that the social engineers and the business community could share, even while they disagreed on details. This framework included a highly interventionist function for the state, and neglected the microeconomic foundations of productivity. Much of the institutional framework had been put in place by the first Federal Government in the early years of the 20th century, with tariff protection for industry and central wage fixing for the workers. Classical liberalism and libertarianism had practically no profile in Australia – until in 1975 a new party with a libertarian program aroused a deal of disbelief but little electoral support. First called the Workers Party – heightening disbelief – later the Progress Party, and currently the Liberal Democratic Party, it gained enough support in July 2014 to have a representative, David Leyonhjelm, in the Federal upper house. In 1976, the pros and cons of economic rationalism or deregulation were not yet significant topics for public discussion, and there was still a serious battle to be fought on the conservative side of politics before the agenda of deregulation achieved full support in the Liberal Party at the end of the 1980s. Hayek’s Australian tour came some time before the network of academics, the new think tanks and the ‘backbench Dries’ of the Liberal Party achieved some traction in the debate on public policy. For example the flagship of the new think tanks, the Centre for Independent Studies,

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was not even a drawer in Greg Lindsay’s filing cabinet when Hayek visited, although it rapidly progressed and three years later published some of the papers that Hayek (1979a; 1979b) delivered on the tour.

3

Hayek on Tour

Hayek arrived two years after sharing the 1974 Nobel Prize in Economic Sciences with Gunnar Myrdal for their work on money, economic fluctuations and the institutional analysis of economic phenomena. In a remarkable piece of synchronicity, in June 1974, a small group of American economists convened at South Royalton, Vermont, for the first of a series of meetings which started the revival of the Austrian School of Economics. Hayek’s most recent major works were the threevolume Law, Legislation and Liberty: Rules and Order (1973), The Mirage of Social Justice (1976a) and The Political Order of a Free Society (1979c); plus Full Employment at Any Price? (1975), Choice in Currency (1976b) and Denationalisation of Money (1976c). The Law, Legislation and Liberty trilogy were products of his ‘pathology of reason’ project that had commenced with The Road to Serfdom (1944) and extended to his last book The Fatal Conceit: The Errors of Socialism (1988). The three major speeches that he delivered on the tour drew upon that work, which was primarily philosophical and political in nature. In ‘The Atavism of Social Justice’, delivered at the University of Sydney, Hayek (1979a, 15) pursued the controversial theme that dominated much of his mature work, that our instinctive moral sentiments had been formed at a time when our ancestors lived in small bands, and the ethos of sharing has been recruited in modern times to support the idea that justice is all about redistribution of wealth. The result is a push for systems and institutions which politicize and undermine the classical principle of equalitarian justice, and also impede the generation of wealth which is required to improve the lot of everyone in the long term. At the conclusion of the talk, he very briefly made a crucial point about evolutionary theories and competition for ‘survival of the fittest’. His analysis had little to do with ‘social Darwinism’ and competition between individuals; he was concerned with the sustainability of social and political orders, and in this context the main benefit that we obtain from competitive selection is ‘the competitive selection of social institutions’. ‘Socialism and Science’ was delivered to the Canberra branch of the Economic Society of Australia and New Zealand (Hayek 1976e). Wolfgang Kasper’s (Appendix 3) account of the meeting conveys a sense of the excitement of the event and the responses aroused from all sides. Hayek established a good rapport with the audience, and delivered a line

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that ‘brought the house down’: ‘I have been ill and I have tried old age. It was not to my liking! Who has the next question?’ Hayek (1976e) mentioned some of the issues addressed in the ‘pathology of reason’ project, namely the unhelpful theories of science and rationality that he labelled ‘scientism’ and ‘constructivism’ respectively. He examined the way that socialists attempted to quarantine their ideas from scientific appraisal, and he went on to another aspect of the project concerned with rationality and the formation and appraisal of social norms and moral rules. His position in The Fatal Conceit (1988, 21) aroused concerns that his interest in social institutions had led him away from political individualism in the direction of collectivism, and some passages in this paper stand as a partial corrective to that perception. Against the genuine collectivists whose efforts to apply reason to generate new moral codes hark back to primitive instincts, he argued: The [classical] liberal must claim the right critically to examine every single value or moral rule of his society ... Our moral task must indeed be a constant struggle to resolve moral conflicts, or to fill gaps in our moral code ... [towards] the order of peace and mutually-adjusted efforts, which is the ultimate value that our moral conduct enhances. Our moral rules must be constantly tested against and if necessary adjusted to each other, in order to eliminate conflicts between the different rules, and also so as to make them serve the same functioning order of human actions. The purpose is to promote rules of the social game that tend to generate peace, freedom and prosperity.1 Rules to promote freedom and democracy were the focus of Hayek’s (1979b) speech to the IPA (Sydney Branch) on ‘Whither Democracy?’ He articulated serious doubts about the sustainability of democracy as long as the notion of ‘majority rule’ is not corrected by devices to minimize the risk of a tyranny of the majority. This has pressing contemporary relevance as the advance of welfare state entitlements has created a great deal of debt and doubts are raised about the capacity of any political party to find the will and the popular support required to make the system sustainable. Hayek’s (1976d) extempore address at the IPA Annual General Meeting (taped and published in the IPA Review) dwelt on economic themes, and revealed that Hayek’s long-standing connection with the Institute played a considerable role in the development of my writings ... I received an invitation to contribute an article to your Review. I

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wrote up for that purpose, which otherwise I would never have done, a diagnosis of the then existing situation ... under the title ‘Full Employment, Planning and Inflation’ [1950]. He claimed that his analysis at that time essentially predicted the kind of outcomes that eventually emerged as ‘stagflation’ in the 1970s, quoting the conclusion of the 1950 paper: It must appear more than doubtful whether, in the nature of democratic institutions, it is possible that democratic governments will ever learn to exercise that restraint, which is the essence of economic wisdom, of not using palliatives for present ills which not only create worse problems later but also constantly restrict the freedom of further action. Hayek obtained significant public exposure on the weekly current affairs TV programme ‘Monday Conference’ (11 October 1976) which was shown nationwide on the free-to-air public broadcaster, the Australian Broadcasting Commission (ABC). This aroused strong reactions from supporters; and a persistent Marxist critic, University of Sydney Associate Professor of Economics, Debesh Battarcharaya, received equally enthusiastic endorsement from the other side of the ‘house’. Battarcharaya elicited from Hayek one of the memorable takeaway lines of the tour: ‘I don’t want to trade discourtesies with you’. Robert Moore presided over the proceedings, and maintained a balance of voices in the exchanges, which enabled Hayek to range over many aspects of his social, political and economic ideas. One of these was the theme of his ‘Whither Democracy’ address, voicing concern that the erosion of authority by special interest groups would cause serious problems and this would discredit democracy. But he insisted that ‘what has failed is not democracy as such, it’s a particular form of democracy which we have had’.

4

Out of the public eye

There were many – mostly off-the-record – private engagements. The details of Hayek’s meeting with Prime Minister Fraser have not previously been reported (Appendix 2). Hayek and his wife went off the beaten track into the countryside. A trip to a Victorian forest enabled them to hear – and more rarely – see the famous lyre birds. On his visit to Melbourne, Hayek and his wife stayed for some days at the home of C. D. (Ref) Kemp and Mrs. Betty

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Kemp at Mount Macedon. Mrs. Hayek, with her interest in astronomy, was keen to see an eclipse, and Mount Macedon was expected to be a good vantage point. In the event, clouds prevented a sighting. The Sydney Morning Herald (25 October 1976) reported: Thousands of scientists and amateur astronomers, stationed at centres along the band of totality, were largely thwarted by the heavy cloud cover of much of south-eastern Australia on Saturday. Kemp had had a long acquaintance with Hayek’s thought, and The Road to Serfdom had been one of the intellectual inputs into the work of the IPA, where Kemp had been economic adviser and then director. The IPA Review from the late 1940s published articles by Hayek which Ref Kemp had sought out. The Kemps and the Hayeks got on well together, and greatly enjoyed each other’’ company. Hayek’s favourite room was the library. Ref Kemp recalled that Hayek took Tolstoy’s War and Peace off the shelves and commented that in his view this one was the best translations. Hayek inadvertently allowed his cigarette to burn a mark on a small polished coffee table in the library: the Kemps ever after referred to it as ‘the Hayek table’ and refrained from repolishing it. Ron Kitching hosted the Hayeks on his farm and provided an opportunity to come to grips with a giant bull named ‘Inflation’: When he arrived we had a celebratory drink of his favourite tipple, Johnny Walker Black Label. ‘Whenever I drink this brand of Scotch,’ Hayek announced, ‘I get ideas beyond my station.’ He was a past master at putting people at ease. He then noticed hanging on the wall of the bar, a large picture of a magnificent Brahman Bull I owned. He asked about the Bull, so I told him he was a prize winning show bull which I had nicknamed ‘Inflation’ as he would not stop growing. He weighs 2,500 pounds in his working clothes. Hayek laughed and said that he knew a bit about inflation and that he would like to meet this one. Next day I took him down the paddock and took several pictures of him and the bull. He was delighted to have a bit of fun. The caption of course was to be ‘Hayek’s Got Inflation By The Balls’ (Appendix 4).

5

Impact and outcome of Hayek’s visit

The major public record of the tour is a Centre for Independent Studies Occasional Paper containing the three major speeches, with some information about Hayek and a brief account of the tour including the partial

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itinerary (Appendix 1). Hayek wrote the Preface, with a graceful tribute to Randerson who organized the visit and was guide, philosopher and friend to Mrs. Hayek and myself; and finally crowned his efforts by editing these lectures and seeing them through the press. Hayek’s (1976d; 1976e; 1979d) address to the IPA appeared in the IPA Review, as did his paper on ‘Socialism and Science’. A version of ‘Whither Democracy’ was published as ‘Can Democracy be Saved?’ in Quadrant, November 1976. A survey of four daily newspapers, The Australian, The Sydney Morning Herald, The Melbourne Age and The Australian Financial Review revealed no mention of Hayek and the tour. The Sydney Morning Herald (15 October 1976) announced Friedman’s Nobel award on the front page, and that was an opportunity to mention that a recent Prize winner was in the country at the time. Another place where the Hayek tour could have been noted was The Australian Financial Review (5 October 1976) which ran a story on Myrdal, Hayek’s co-recipient. The impact of the visit is impossible to assess. Later in the decade Hayek would have found many more interested listeners as the forces for reform became better organized and more articulate. There is no doubt that his ideas energized many of the people engaged in the push for reform – but it took more than a decade and a change of government to achieve real progress to a more open and competitive economy.

Appendix 1

Itinerary

In the absence of a full itinerary, the following events are extracted from Randerson’s 1979 notes on the tour. On the public record 1. 6 October: ‘The Atavism of Social Justice’ (9th R. C. Mills Memorial Lecture, Sydney University). 2. 8 October: ‘Whither Democracy?’ (address, IPA, Sydney). 3. 11 October: ‘Monday Conference’ (ABC TV). 4. 19 October: ‘Socialism and Science’ (address, Economic Society of Australia and New Zealand, Canberra branch). Ex tempore addresses and academic seminars 1. 14 October: official lunch (hosted by the University of Queensland University Vice-Chancellor; plus a combined seminar of Queensland and Griffith Universities to discuss ‘The Use of Knowledge in Society’).

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2. 20 October: address on ‘The Errors of Constructivism’ (33rd Annual Meeting of the IPA, taped, transcribed and published in the IPA Review). 3. 21 October: after-lunch talk on ‘Liberalism’ (La Trobe University). 4. 25 October: address on ‘Competition as a Discovery Procedure’ (at Melbourne University for all the Melbourne universities, Melbourne, La Trobe and Monash). 5. 27 October: address (to a lunch organized by the Victorian branch of the Economic Society). 6. 2 November: combined seminar to discuss Hayek’s (1976b; 1976c) Choice in Currency and Denationalization of Money (at the University of New South Wales for the three Sydney universities, Sydney, New South Wales and Macquarie). 7. 3 November: seminar on ‘Full Employment At Any Price?’ (Kuring-gai College of Advanced Education). Business, official and political Discussions with The Commercial Banking Co., Bonds Coats Patons Ltd and ICIANZ Ltd. Lunch with Enterprise Australia and Fortune (Aust) Pty. Ltd. Seminar on inflation with the New South Wales Confederation of Industry. Separate meetings with Prime Minister Fraser, Deputy Prime Minister Doug Anthony, and Queensland Premier Sir Joh Bjelke-Petersen. Privately entertained by the Chief Justice of the High Court, Sir Garfield Barwick. Meetings with the designer of the Australian central bank, Sir Leslie Melville, and the public health administrator, Sir Raphael Cilento. Off the beaten track On the farm with the bull named ‘Inflation’ (Appendix 4). The lyre bird excursion (an informal account provided by a professional associate of Ref Kemp who travelled with Kemp and Hayek to a forest on the outskirts of Melbourne to hear the lyre birds. They had the unexpected good fortune to see a pair of the birds, which are more often seen than heard). The astronomy excursion to Mount Macedon (an informal account was provided by associates of Ref Kemp and his wife).

Appendix 2

Hayek’s Meeting with Prime Minister Fraser

This account is based on personal communications with Roger Randerson (late in his life) and, more recently, with officers who served

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in the Commonwealth Public Service and the Prime Minister’s office at the time. The meeting between Hayek and the Prime Minister occurred on 18 October 1976. Hayek went to Parliament House accompanied by Roger Randerson; they were met on their arrival by a Prime Ministerial staffer. Whilst waiting for Fraser to finish his previous meeting, the group chatted about Friedman’s recent Nobel Prize: Hayek declared himself to be very pleased. It was mentioned that The Constitution of Liberty had been the subject of seminars in the Melbourne University Liberal Club during the 1960s; Hayek responded that ‘you never know the influence of your work. Sometimes you write and it seems to have no effect at all’. Fraser emerged from his office, and after introductions the party went into the Prime Minister’s Office accompanied by another of Fraser’s staff. Fraser had discussed Hayek’s visit with his staff beforehand and received a written brief but it was apparent in the meeting that his mind was still on the issues of the previous meeting. After they sat down and exchanged pleasantries, Hayek opened the conversation by broaching the subject of the exchange rate, then under intense discussion, and asked the Prime Minister why it should not be allowed to float. Fraser responded by asking what further action would be necessary if this were done, but Hayek disclaimed enough detailed knowledge of the Australian scene to answer the question. Fraser seemed unwilling to pursue the matter and Randerson commented that he had not suggested to Hayek that he raise the issue. Fraser courteously replied that he did not imagine that Professor Hayek needed people to tell him what to say. Hayek, attempting to discuss a broader subject, turned to the issue of social justice: it was, he stated, a misleading and unsatisfactory term which encouraged the growth of government welfare spending. Fraser responded sharply: ‘What do you do when aboriginal children are dying?’ Hayek suggested that the government should consider a minimum income system, to avoid the obvious problems of the current system which simply encouraged special interest pressures for more spending. Fraser responded that this underestimated the common sense of the people, and that he had taken a strong stand himself in condemning politicians who kept promising new spending. Hayek responded that the system for deciding these matters was itself flawed and needed to be changed. In the short time allowed for the meeting, Fraser did not attempt to engage his visitor on the major issues he was facing, despite the opening provided. He had expressed interest beforehand, but it appeared that the Prime Minister had not read the brief prepared by his staff, and the opportunity to engage one of the great minds of the modern era in a serious policy discussion was passed over by the Australian leader.

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Appendix 3 Wolfgang Kasper on Hayek at the Australian National University (prepared at the request of the present author) In 1969, I had visited Hayek several times when he recuperated in a sanatorium in the Black Forest in Germany and I was a staffer of the German Council of Economic Advisors. By 1976, I had moved to the Australian National University (ANU), and found the atmosphere among the social scientists there not very congenial, to say the least. They were mostly neoclassical model builders or left-wing economic historians, most of whom might not even have heard of Austrian economics. But they were all very sure that they belonged to the noble religion of do-gooding reform and that the sacking of Whitlam was a gross injustice. It was against this background that the news of Friedrich Hayek’s visit came as a great and very pleasant surprise! Hayek was to speak at ANU in the big Coombs Lecture Theatre (named after ‘Nugget’ Coombs). When I turned up in the company of a businessman friend, the auditorium was already quite packed. I saw only few of my fellow economists from ANU in the audience, but many vaguely familiar faces from the Treasury and – oddly – the Canberra Fabian Society. Then, Hayek – a gangly old fellow – began to speak after an introduction that assumed few in the audience had even heard his name. I do not even recall the contents of his address only that it was lively and the audience were spell-bound. My businessman friend (and Chris Caton, then of Treasury, who sat next to us) loudly approved of what was said, but some around us began shaking their heads. Hayek clearly hailed from a different intellectual universe than the model builders, who were trained to assume ‘perfect knowledge’. After the talk, the questions came mostly from several senior civil servants, some of whom were eager to use our eminent visitor to score policy points. Hayek obliged in his good-natured and clear way. I do not believe that he changed minds of the ‘Whitlam tribe’, but he did much to cheer and reinforce those who shared his basic worldview and his understanding that economics is about a dynamic game to search and test useful knowledge. Well after the habitual closing time for such public events, the questions and answers were keeping the big audience spell-bound. The chair (it may have been John Stone from Treasury, I am not sure) pointed out Hayek’s advanced age, his recovery from serious illness and politely suggested we come to a close. Hayek interrupted him cheerfully: ‘Yes’, he said in his Vienna-accented English, ‘I have been ill and I have tried old age. It was not to my liking! Who has the next question?’ This brought the house down! With hindsight, I know that this

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remark was one of his standard party quips at the time – but he certainly won over the hearts of the audience, though possibly not their minds. His Canberra show was fondly remembered by those present, including the majority who were unable to jettison their old beliefs in favour of thinking in terms of Austrian-evolutionary economics.

Appendix 4

Ronald Kitching on the Tour

Originally reported in Capitalism. KH 2012, Vol. 1, Number 1 http://capitalism.hk/2012/03/08/how-hayek-got-inflation-by-theballs/ with a picture of Hayek and ‘Inflation’. The great Nobel Prize winning economist/social scientist F. A. Hayek made a month long lecture tour of Australia in October 1976. There is a bit of an inside story to this tour which so far few know about. Hayek was invited to Australia for a lecture tour by economist Mark Tier. However, Hayek, at that time, had to decline, but as circumstances changed and as he did not know anybody else in Australia, he wrote a note to Sydney Economist/Barrister Roger Randerson, whom he once tutored at the London School of Economics, saying that he could squeeze in a month before going on previously scheduled visits to New Zealand and Japan. Roger and I were good mates so he rang me with the good news. I then suggested to Roger that he immediately write back to Hayek and ask what his fee would be. I can still quote the answer. Hayek replied saying: ‘Should first class return airfares be provided for my wife and myself both internationally and nationally, and first class accommodation be provided for us, and also providing that my lectures are confined to no more than two per week, there will be no fee.’ Roger estimated that the total cost would be approximately $25,000. As he was well connected in the commercial world and I was well connected with the Australian Mining Industry, we thought that it would be an easy matter to get the tour underwritten. So we set off to see what we could do. After a week’s travelling and lobbying, I could not find a single executive willing to undertake part in such a ‘revolutionary’ activity. I returned to my home rather dispirited about it all. I rang Roger to see how he was doing. He replied to my query, ‘My boy, nobody wants to know me. They are all running for cover.’ I then went on to say that the average answer I got was, ‘We cannot be seen to be endorsing the right wing views of such a radical figure.’ He replied that that was precisely the response he got, too. So, I said, ‘Bugger it all Roger, I’ll underwrite the tour myself.’ He replied, ‘I won’t see you do that m’boy, I’ll go you halves.’

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So, with that settled, I suggested that we again go around the traps, and, seeing the tour was underwritten by somebody who wished to remain anonymous, try to see what could be raised for the venture. We were ably assisted in this effort by Mr. Ref Kemp, Director of The Institute for Public Affairs in Victoria, Mr. Viv Forbes in Brisbane, and Mr. R. H. (now Sir Robert) Norman OBE of Cairns. Roger later published a booklet titled Social Justice, Socialism and Democracy featuring three of Hayek’s [1979b] most important lectures on the tour. In that small book, he said: ‘Many publicly spirited citizens, institutions and organisations donated, (numbering no fewer than 62, in sums ranging from $50 to $2,000) towards the visit, but no list is given because some wish to be nameless. Their generosity is, however, gratefully acknowledged.’ The Hayek visit was a co-operative private enterprise. Indeed it had to be, because approaches at high levels for concessions from government owned or controlled internal and external airlines were refused. There were complaints from high level ‘intellectuals’ that the visit was everything from a white washing of dangerous capitalist ideology, a political plot of ever devious Jews, to a ‘bankers plot’. Hayek incidentally was a non-practising Catholic. Hayek was in great form and he appeared as Guest of Honour on the hour-long Monday Conference with Robert Moore, and televised by the ABC network in all states on 11 October 1976. In addition, in total he kept no less than 60 appointments, including visits to heads of state, seminar and lecturing engagements. A very heavy schedule for anybody, but at that time Hayek was 76 years of age. He was in scintillating form. Roger decided that in the middle of the tour he would give him four days off on the Atherton Tableland. I had a spacious home there and as half of my six children were away at boarding school, we had ample room to accommodate Roger, and Professor and Mrs. Hayek. When he arrived we had a celebratory drink of his favourite tipple, Johnny Walker Black Label. ‘Whenever I drink this brand of Scotch,’ Hayek announced, ‘I get ideas beyond my station’. He was a past master at putting people at ease. He then noticed hanging on the wall of the bar, a large picture of a magnificent Brahman Bull I owned. He asked about the Bull, so I told him he was a prize winning show bull which I had nicknamed Inflation as he would not stop growing. ‘He weighs 2,500 pounds in his working clothes,’ I told the small gathering present. Hayek laughed and said that he knew a bit about inflation and that he would like to meet this one. I told him that compared with the

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inflations he had witnessed, that this one was rather tame and that my boys jumped on to his back in the paddock. ‘I even jump on his back when he is in the yard and I can climb up the rails to do so,’ I told him. ‘Well, while I am here, I would like to meet him,’ Hayek exclaimed. So I put that on the agenda. I got this bright idea that I’d put the bull in the yard, get a step ladder, put Hayek on the bull, (if he agreed), and take a picture, which would carry the caption, ‘Hayek’s on Top of Inflation’. I told my wife and that was the end of it. She would not under any circumstances countenance such a move. ‘What if the Professor fell off and was injured,’ and all of that sort of chatter. So that project was abandoned. Nevertheless Hayek still wanted to meet the bull. Next day I took him down the paddock and took several pictures of him and the bull when another idea popped into my head and I quietly mentioned it to him. He was delighted to have a bit of fun. The caption of course was to be ‘Hayek’s Got Inflation By The Balls.’ Well, the old boy was delighted. He was quite at home with animals and had palled up with the bull, which was an easy matter with this particular animal. So he posed and I took the picture. He predicted that if the Americans got hold of a copy, the picture would become famous. I am happy to announce that I recently heard from Dr. Eamonn Butler of the Adam Smith Institute in London. He told me that at a recent luncheon in her honour in London, Mrs. Thatcher, much to her delight, had a picture presented to her of her favourite Economist/Philosopher and with Inflation by the balls. Hayek’s grand-daughter, who was present, read out the story.

Note 1. Hence the need to adopt a continuous ‘rules of the game’ approach to social and political arrangements, in the way that the rules of the game of football can be adjusted to make the game safer for the players and more attractive for the spectators, the rules of the road are modified to facilitate traffic flow and reduce accidents, and the rules of scientific method can be tuned to promote the growth of knowledge. That was the little-recognized thrust of Popper’s approach to science which Ian Jarvie (2001) called ‘the social turn’. The conscious and critical ‘rules of the game’ approach that Popper introduced into the philosophy of science is the counterpart to Hayek’s ‘rules of the game’ approach to the social and political order. That approach is an alternative to the traditional methods which either focus on the ‘essentialist’ effort to determine the essential meaning of the key concepts or the ‘historicist’ or ‘genetic’ approach to determine where the rules came from and where they are going in future. Wittgenstein and his followers made much of ‘forms of

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life’ and games, especially ‘language games’, and if they had adopted a critical, problem-solving approach to social problems, and the function and consequences of institutional arrangements, they could have supported the projects of Popper and Hayek.

Bibliography Coombs, H. C. 1981. Trial Balance. New York: Macmillan Friedman, M. F. and Friedman, R. D. 1998. Two Lucky People. Chicago: University of Chicago Press. Hayek, F. A. 1944. The Road to Serfdom. Chicago: University of Chicago Press. Hayek, F. A. 1988. The Fatal Conceit The Errors of Socialism. Chicago: University of Chicago Press. Hayek, F. A. 1950. Full Employment, Planning and Inflation. IPA Review, November–December, pp. 174–184. Hayek, F. A. 1960. The Constitution of Liberty. Chicago: The University of Chicago Press. Hayek, F. A. 1975. Full Employment at Any Price? Hobart Occasional Paper 45, London: Institute of Economic Affairs. Hayek, F. A. 1973. Law, Legislation and Liberty: Volume 1 Rules and Order. Chicago: University of Chicago Press. Hayek, F. A. 1976a. Law, Legislation and Liberty: Volume 2 The Mirage of Social Justice Chicago: University of Chicago Press. Hayek, F. A. 1976b. Choice in Currency A Way to Stop Inflation. London: Institute of Economic Affairs. Hayek, F. A. 1976c. Denationalisation of Money. London: Institute of Economic Affairs. Hayek, F. A. 1976d. Address at the 33rd Annual Meeting of the Institute of Public Affairs. IPA Review, October-December, pp. 83–86. Hayek, F. A. 1976e. Socialism and Science. An address to the Economic Society of Australia and New Zealand (Canberra branch) on October 19, 1976. IPA Review, October-December, pp. 8796. Also in Hayek (1979d). Hayek, F. A. 1979a. The Atavism of Social Justice, the 9th R. C. Mills Memorial Lecture at Sydney University, 6 October 1976, published in Social Justice, Socialism and Democracy: Three Australian Essays, The Centre for Independent Studies, Sydney. Hayek, F. A. 1979b. Whither Democracy. An address to the Institute of Public Affairs in Sydney, 8 October 1976, published in Social Justice, Socialism and Democracy: Three Australian Essays, The Centre For Independent Studies, Sydney. Hayek, F. A. 1979c. Law, Legislation and Liberty Volume 3 The Political Order of a Free Society. Chicago: University of Chicago Press. Hayek, F. A. 1979d. Social Justice, Socialism and Democracy: Three Australian Essays, The Centre For Independent Studies, Sydney. Hayek, F. A. 1982. Law, Legislation and Liberty: A New Statement of the Liberal Principles of Justice and Political Economy, Routledge, London. Hayek, F. A. 1989. The Fatal Conceit: The Errors of Socialism. London: Routledge. Hyde, J. 2003. Dry: in Defence of Economic Freedom. Melbourne: Institute of Public Affairs. Unabridged electronic form at http://www.ipa.org.au/publications/642/ dry-in-defence-of-economic-freedom-extended

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Jarvie, I. C. 2001. The Republic of Science: the Emergence of Popper’s Social View of Science, Rodopi, Amsterdam. Kemp, C. D. 1988. Liberalism and Conservatism in Australia Since 1944. Oxford: Oxford University Press, pp. 322–362. Ray, J. 1974. Postscript – The 1974 Elections. In Ray, J. (ed.), Conservatism as Heresy: An Australian Reader, Australia & New Zealand Book Company, Sydney, pp. 389–394. Walter, J. 1988. Intellectuals and the Political Culture, Intellectual Movements and Australian Society. Oxford: Oxford University Press, pp. 237–273.

7 Hayek and Coase Travel East: Privatization and the Experience of Post-Socialist Economic Transformation Kiryl Haiduk

1

Introduction

Privatization of property previously controlled by the state is the central tenet of the transition process from a communist to a non-communist state. In the vast majority of the socialist countries, the scale of privatization was truly unprecedented. In Russia, the chunks of former state property were acquired by a relatively small group of capitalists of national origins, while the construction of capitalist institutions remains (at the time of writing) incomplete. In contrast, in the central and eastern European and the Baltic states, foreign actors were heavily involved in privatization; capitalist institutions are constructed, but domestic capitalists are scarce (Eyal, Szelényi and Townsley 1998). A group of laggard reformers, including Belarus, Turkmenistan and Uzbekistan, postponed or avoided or significantly constrained privatization. In these countries, the state continues to dominate in the economy, while the private sector remains relatively small. Transformation of property has far-reaching implications for economic performance. Scholars connect privatization outcomes with the factors inherent to transforming economies and the environment in which reforms were launched. In particular, international political economists point to the unwarranted adoption of neo-liberal economic policies, which were originally applied in the totally different environment of well-functioning institutions (Bohle, Radice and Shields 2007; Assasi, Nesvetailova and Wigan 2007). Scholars of transition (see, for instance, Carlin 2010) increasingly share the view that ‘institutions matter’ by pointing to the absence of some core arrangements at the onset of reforms. Institutionalists stress the role of the communist past, where apparatchiks later became underground wheeler-dealers, and encouraged 249

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looting and paternalism instead of productive work, self-responsibility and competition (Grossman 1998). There were institutional ‘frictions’ in the late socialist and early post-socialist periods, including informational asymmetries and uncertainty, which greatly increased transaction costs. The Coase theorem – introduced by George Stigler (1966) – instructs policymakers that distribution of ownership rights is much less important than the establishment of freely exchangeable property rights. In particular, the theorem states that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. However, Coase (1960) acknowledged that real-world transaction costs are rarely low enough to allow for efficient bargaining. Yet, well-functioning markets minimize transaction costs and thus permit trading in property rights: less efficient owners are likely to find it profitable to sell assets they exploit less productively than those who are able to use them more efficiently and are willing to acquire them. Rather than trying to estimate transaction costs and associated market frictions, this chapter focuses on the interaction of structure and agency in construction of markets and property relationships. The structure is comprised of inherited assets and routines of agents’ behaviour that have to be transformed, as well as the external environment in which the process of transition occurred. This process is guided by the activities of concrete actors, including decision makers, intellectuals, enterprise managers and entrepreneurs. The major hypothesis is that although reforms in the post-socialist countries might have been strongly influenced by neo-liberal ideas and reform concepts dominant at the time of transition, they inevitably had to be grafted onto the inherited and pre-existing institutional structures as well as the modes of economic behaviour associated with them. Accordingly, reforms were supposed to drastically change behavioural routines. It happened, but not always in an abrupt or expected manner. It is, therefore, important to understand some essential institutional features of the late socialist economies. The latter were not ‘black boxes’ to which market reforms are blindly applied. The socialist economies had entrenched modes of economic interaction, institutional arrangements and practices regulating economic exchange. Therefore, the important factors at play in the context of post-socialist transformation are both the choice of a transformation scenario and the bureaucratic and institutional conditions of its launch and implementation. The second section traces the ideational background of economic transformation. This background was widely shared by the early post-socialist

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governments, which nevertheless implemented varying policies, including privatization. It is also important to look at the competing assessments of late socialist economic performance, because these visions defined reform strategies and designs. Sections 3–5 discuss these varying outcomes of economic transformation by relating those differences with the different legacies and the ways of coping with them.

2

The intellectual origins of transformation strategies

It is often argued that transition strategies have been shaped by ‘the broader global context of neo-liberal ideology’ and policy (Bohle, Radice and Shields 2007, 82). Nevertheless, there were transformation scenarios, alternative to neo-liberalism, including more active engagement of labour, ‘negotiated’ economy, and so on – but all of them remained on paper (Altvater 1993; Amsden, Kochanovicz and Taylor 1994). Arguably, one of the attractive features of the neo-liberal stance was its optimism about the predicament of post-socialist societies and the ability to provide simplified technocratic advice as a precursor to action (Pickel 1997). The case of Polish ‘Solidarity’ is illustrative of the difficulties of making transition in a non-neoliberal, ‘workers’ way’. In 1980–1981, ‘Solidarity’, together with Polish intellectuals, elaborated the theoretical and practical foundations for transforming the state property to private and communal property. However, the ‘shock therapy’ plan did not reflect upon any of these early propositions. Moreover, by 1989, the strength of a movement that had reached a membership of 10 million had weakened considerably. Internal social forces, such as Solidarity, ‘failed to elaborate a consistent economic policy, which reckoned with the realities of the economy’, although once they were powerful enough to weaken the existing system (Mirovits 2010, 172), foreign indebtedness and the overall poor condition of the Polish economy forced the government to launch a liberalization program. Also, opposition leaders, who participated in the roundtable talks, did not believe that transformation could be managed by workers and/or their representatives. Neo-liberalism is often used as a solution to destroy the outdated statecrafted economic institutions and to replace inefficient policies. In the UK, followers of neo-liberal ideas emphasized the need to dismantle the welfare state; while in Latin American countries they underscored the necessity to break with import-substituting industrialization. In Britain, Thatcherism, ‘an ideology armed with a set of (mainly economic) theories’ (Desai 1994, 34) produced largely ‘ideologically-driven’ welfare cuts

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(Huber and Stephens 2001, 219), particularly in the light of ‘modest’ retrenchment in European economies (Pontusson 2005, 183), which was induced by a rise of unemployment. The roots of Thatcherism can be traced to the activities of a network of think tanks, including the Institute of Economic Affairs and the Centre for Policy Studies. Hayek’s Mont Pelerin Society (MPS) aimed to have a long-term influence on the existing climate of opinion by developing a ‘philosophy of freedom’. This influence could also be strengthened by supplying intellectuals in universities, schools, journalism and broadcasting with authoritative studies of the economic theory of markets and its application to practical affairs. (Cockett 1994, 124) This is materialized by creating the Institute of Economic Affairs (IEA), aimed ‘to study markets and pricing systems as technical devices’ (Cockett 1994, 132). The MPS and the IEA stimulated the formation of the whole network of free-market think tanks, including the Centre for Policy Studies (1974), the Adam Smith Institute (1977) and the Social Affairs Unit (1980). These institutions were created to have, among other purposes, a long-term influence on the climate of opinion by converting ‘dealers in secondhand ideas’, predominantly socialist ‘journalists, teachers, teachers, ministers, lecturers, publicist, radio commentators, writers of fiction, cartoonists and artists’ (Hayek 1949, 418) into supporters of neoliberalism, given their ability to diffuse these ideas more widely (Desai 1994, 28, 31). Policies of the governments of Ronald Regan and Margaret Thatcher came closest to a Hayekian ideal of free-market economy. Hayek himself admitted that Thatcher ‘agrees with my basic concepts’ (quoted in Sereny 1985, 11). In Central and Eastern Europe, and to a lesser extent, the former Soviet Union republics, dissident intellectuals and mid-rank professionals in the public bodies were among secret admirers and sympathizers of market economy. They were ‘secretly translating and discussing [the works of] Hayek and Friedman’ (Eyal, Szelényi and Townsley 1998, 90). They hoped that one day their ‘sectarian’ dreams would come true, as freedom is superior to serfdom. Similar advances happened with Milton Friedman and other fellows of the MPS in the early 1970s. Once, they had been a small group discussing free-market ideas in the world shaped by Keynesian-type policies, but the crisis affecting the Western economies in the 1970s, together with Thatcher’s and then Reagan’s ascendancy to

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power, gave this group a chance to acquire voice, strength, and influence. This rise is associated with the partial inability of Keynesian policies to address the problems of unemployment and inflation (Hemerijck and Schludi 2000). The collapse of the socialist economies created a unique ‘politico-bureaucratic situation’, whereby domestic policymakers were allied with their foreign advisors, and acquired a discretionary influence and power in initiating and implementing sweeping economic adjustments and transformations. (Greskovits 1998, 16) In Russia in particular, the role of the so-called ‘Harvard–St. Petersburg partnership’ was important. This group, in which Jeffrey Sachs, his Harvard colleagues and his consulting firm advised on the content and promotion of a policy of ‘shock therapy’, which aimed to swiftly eliminate most of the price controls and subsidies. According to Wedel (2001, 130), by mid-1993, the Harvard-Chubais players had formed an informal, collusive and extremely influential group of ‘transactors’ that was shaping the direction and consequences of ... much Western economic policy toward Russia. Prior to the Harvard group, Richard Ebeling, the Ludwig von Mises Professor of Economics, Hillsdale College, had visited the USSR six times in 1991, to consult the Lithuanian government and Russian deputies on market reforms and privatization.1 In Lithuania, Ebeling provided advice to the first non-communist government on economic reforms and privatization.2 In his polemics with Andrei Shleifer on the experience of transition,3 Ebeling pointed to the dangers of ‘The Pretense of Knowledge’, as what had been perceived as ‘objective’ conditions for transformation differed from ‘subjective’ perceptions existing in the former socialist countries. This difference is neglected when ‘foreign social engineers’ seek to foster larger-scale transformation of societies and economies. A typical, ‘collective’ view of a defunct socialist economy was produced by Kornai (1992, 383). Among the public, including workers, peasants, low-ranking officials, pensioners, students, teachers, and health workers, there was a sense of frustration in the economic outcomes of the socialist system, which accumulated

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grave economic problems: the serious lag in technical development, shortage, backwardness in consumption, waste, and other losses. The strategy of forced growth had worked for some time, but from the 1970s onwards, standards of living were not improving, and the choice of products and their quality remained narrow and low respectively, while the services sector was underdeveloped. Official insolence, bureaucratic arbitrariness, propaganda and myriad forms of repression strengthened dissatisfaction. There were attempts to improve the functioning of the socialist system. Throughout the 1980s, the late socialist governments, particularly in the former Yugoslavia, Poland and Hungary, were trying to improve the functioning of their economies. They reacted to economic problems accumulated in the years preceding transition. These attempts resulted in the creation of ‘two-track systems’, in which a small nonstate sector was permitted at the periphery of some socialist economies. For instance, by 1989 in Hungary and Poland, the share of workers employed in the private sector amounted to 20 per cent and 37 per cent respectively (Borish and Noël 1996, 87). Nevertheless, these experiments had not improved the performance of state socialist economies. Resources continued to remain in the state sector rather than to flow to potentially more productive non-state activities. Moreover, reforms occurred ‘within the state sector alone’, disallowing the arguably more efficient coexistence of ‘a private sector with nationalized enterprises’ (Myant 1993, 60). At the same time, the external environment was not very favourable due to the impact of two oil shocks and the subsequent recession in the developed economies. There was the process of emancipation of civil society, which varied across post-socialist countries. In the former USSR, perestroika was ‘a reaction from above’ to the middle-class dissatisfaction with socialism expressed by the bureaucrats, the professionals, and the intelligentsia. Bruszt et al. (2010) find that the variations in the strengths of pre-1989 civil societies that had become evident during the last years of state socialism have determined the success or failure of the politico-institutional change. In the Visegrád countries, the socialist governments tolerated dissent more than in the former USSR republics. An oppressive stance toward civil society precluded the development of sound political institutions, economic reforms and democratization by giving rise to more bureaucratic-authoritarian regimes. In similar fashion, Pasynkova (2011) connects the institutional design of post-socialist political systems to the legacies of the previous regimes. In the Commonwealth of

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Independent States (CIS), political regimes are president–parliamentary or premier–president political systems with strong presidential powers. In contrast, in the Visegrád states, post-socialist transformations were negotiated, leading to parliamentary (in Hungary, the Czech Republic and Slovakia) or premier-presidential (in Poland) political systems. Ultimately, the socialist system was perceived as an anomaly standing in the way between the westernmost parts of the USSR and the Central and Eastern European Countries ... there was the universe of commodity, its generous abundance, and the joy of living embodied by capitalism. Images and sounds conveying Western life-style fed into the East in the early 1980s and gripped mass public in the Soviet orbit with the promises of consumerism. (Van der Pijl, 1993) In fact, a voucher privatization in Russia was advertised as a source of enrichment for an ordinary citizen. A privatization voucher was claimed to be worth ‘a Volga’ car – a vehicle used by apparatchiks in the Soviet Union, a hardly attainable dream for a Soviet citizen. Privatization was not merely a path to ‘an extensive division of labor, specialization, and the establishment of markets’, what Hayek (1978, 11) stresses as the major achievements of legally protected private property and the enforcement of contracts. It was also a means to orient the workers to money gains and associated privileged positions rather than going for ‘populism’. In Russia, the idea of voucher privatization was formulated before the demise of the USSR. A voucher privatization program was described in the book Another Life [Drugaya Zhizh]. It promised labour rewards according to its productivity and ownership of stakes in collectively owned enterprises. This book was written in 1985 by the member of Central Economic Mathematic Institute of the Academy of Sciences of the USSR, Vitaly Naishul. The book speculates on a shift from a publiclyowned to a shareholder economy. In particular, it passionately describes how: All enterprises of the country: stores, canteens, workshops, factories, plants, collective farms, haulage companies, and so on – all will be transferred to people: to you and us! For that purpose [of ownership transfer] you (and all other citizens of the country, including elderly and children) receive five thousand special individual investment rubles each. [This share] will be invested – fully or partially – to enterprises

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which you want to own. Other citizens ... will become co-owners. As a result, you become collective owners of enterprises. Inside the collective owners, disputes will be resolved by the majority vote, while each voter votes proportionally to his/her ownership share. For instance, if you invested 3000 rubles, you will have 3000 votes, while a fellow citizen who invested 1000 rubles will have 1000 votes. Naishul delivered his ideas at the seminar held in Leningrad, which was attended by the Russian businessman Anatoly Chubais. During the talk he pointed out that Naishul’s programme inevitably leads to a sharp rise in inequality.4 In fact, the book (correctly) predicted the emergence of a stratum of rich people, particularly managers of joint-stock companies. In a new economy, they were given the role of ‘organizers of production processes, but will be rewarded according to their talents/managerial abilities’. Naishul later admitted that he was influenced by the Chilean reforms of the 1970s, in which personalistic networks promoted by authoritarianism were substituted by the impersonal interplay of market forces.5 The influence of the Coase theorem on policymaking is often misleadingly traced to another Russian economist, Andrei Illarionov. However, Illarionov distances himself from the design of privatization program of the early 1990s. Instead, he points to the existence of an alternative, more gradual programme developed by the deputies of the last Supreme Soviet of the USSR. However, Chubais managed to influence Yeltsin, who adopted privatization by decree in 1991 in August, technically depriving the Supreme Soviet of the opportunity to impose a veto on this piece of legislation. Anatoly Chubais believed in the unambiguous necessity of privatization. His views were similar to one of the principles of the Washington consensus: privatization as ‘a panacea for all sorts of economic ills’ (Bayliss and Cramer 2003, 54). The theory behind this claim is that privatization improves the performance of enterprises by streamlining the relationship between enterprise owners and managers. A private manager/owner will exercise a greater monitoring effort than a bureaucrat, whose motives are affected by the place one occupies in the hierarchy and the opportunities to extract rents. The professional reception of Coase’s work, and in particular the Coase theorem, is attributed to George Stigler (1966, 110, 113), who gave the theorem its name in the third edition of his The Theory of Price by remaking original idea into a ‘theorem’. The divergence between private and social interests is illustrated by Coase’s (1960) example of conflicting land use by the farmer and the rancher. In the original example, the

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crops of the farmer are damaged by a neighbour’s herd, and if the farmer has no legal right against damage by a neighbour’s cattle, the two parties will arrive at the same efficient outcome that would have occurred in a world with well-defined property rights. The assignment of liabilities to the farmer and the rancher internalize all relevant costs, equating the private and social costs. This ‘fundamental asymmetry’ is illustrated by both Coase and Stigler with numerical examples. These examples demonstrate that ‘the manner in which the law assigns liability will not affect the relative private marginal costs of cattle and grain’ and this ‘obviously leads to the correct social results – the results which would arise if the cattle and grain farms were owned by the same man’. This result is given the name of ‘the Coase theorem’, which claims that ‘under perfect competition private and social costs will be equal’ (Stigler 1966, 113). He elaborates on the result by stressing that the assignment of liability does not affect output and pointing to similar result in theory of taxation: the effect of imposition of a sales tax on price and output is similar irrespective whether it is levied on the buyers or the sellers. There are some differences in formulations of the results made by Coase and Stigler. Whereas Coase states that the outcome will be efficient and invariant, Stigler simply argues that private and social costs will be equal. Stigler also emphasized the invariance result and the resulting generality of the efficiency proposition. Coase explicitly assumes some assignment of property rights and zero costs of transacting, whereas Stigler assumes perfect competition (including perfect knowledge that precludes informational asymmetries in the bargaining process). Both Coase and Stigler point to the limits of applicability of the theorem. Coase admits that under positive transaction costs the efficient outcome (in which the net sum of social wealth is maximized) may not be reachable. Stigler uses the example of air pollution to claim that when a large number of parties are affected by an activity, the costs of working out an agreement ‘may be prohibitive’. These limitations make the issue of the institutional design important. In the early post-socialist context, the absence of efficient owners and the dominance of bureaucracy were seen as the major impediments to increase in efficiency. The decision-making process was very slow. Innovations were very hard to adopt, because of numerous endorsements at various levels of bureaucratic hierarchy. In Without Capitalists, written from the perspective of an ordinary engineer, Efimov (1987) describes his vast experience of working at various production facilities. He provides evidence in the form of numerous on-the-spot examples of how the socialist economy promoted absenteeism and even discouraged innovation among skilled workers and engineers.

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These views of inefficiency of the Soviet version of the socialist economy were shared inside the USSR at three major centres of mathematical planning: in Novosibirsk, Leningrad, and Moscow, where mathematicians and economists were dealing with the problem of the revitalization of the Soviet economy. In Moscow, the mathematicians (including Naishul, Konstantinov and Rodnyi) worked for the Institute of Computation of the State Planning Committee and studied planning, while in Novosibirsk the mathematicians (including Kordonsky, Pavlenko, Shironin and Aven, who later become a banker and tycoon) focused on the functioning of one of the rural areas of Altai region of Russia. Both groups however, arrived at similar conclusions about the ills of the Soviet model, including bureaucratic bargaining. These groups were operating independently of each other, and met only in 1985 (or 1987), but both were surprised by the similarities of their observations, interpretations, and conclusions.6 The transition took place in a world dominated by one variant of neo-classical economics and one of its policy pedigrees, the Washington consensus, and there were domestic factors inducing policymakers to be receptive to neo-liberal ideas. The alternatives were not seriously considered. Moreover, ‘worldviews’ of early post-socialist policymakers remained rather limited, as Naishul himself admits.7 The socialist academic world remained rather close and even semi-autarchic. For instance, to read a Coase article in the USSR, one had to go to a capital city and seek a special permission, which was given only if a scholar specialized in ‘bourgeois economic thought’. However, the realities of the socialist economies proved to be a ground where new ideas could still be born, even if at the periphery of socialist academia.

3 From actually-existing socialism to transformation in Russia One of the notable features of late socialism was the spread of the shadow economy and corruption. Behind the facade of socialist entities, there were ‘crypto-private techniques’, including an unauthorized diversion of socialist-owned materials, labour, machine time, transport and so on. In fact, these crypto-private producers, the guild-workers, virtually ‘privatized’ some of the socialist production facilities (Jowitt 1983; Grossman 1998). Apart from this covert economic world, there was also a parallel process of negotiating on plans. In order to describe this process, Kornai (1992) introduced the term ‘plan bargaining’. In a nutshell, it operated in the

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following way: the drafters of the plan tried to insist on higher figures, while the directors would typically seek larger inputs and higher outputs. As a result, performance would be held down at lower levels by enterprises, because over-fulfilling the plan would lead to greater compulsory commitments the following year. Also, planning was never rigid, but involved reconciliation at various levels of bureaucratic hierarchy. Plans were often adjusted on the spot and sometimes even retrospectively. Plans were full of inconsistencies. In order to address them, managers developed their own networks of exchange, running parallel to the established formal hierarchies. These were ‘horizontal’ linkages that helped to organize production. As these operations involved risks, managers relied on personal connections to minimize those risks. At the end of his book, Naishul (1985) poses a question: ‘Is there [still] planning in the USSR?’ – and his answer is ‘no’. In the 1930s, the Soviet Union imported technologies from the West to industrialize the economy. Over time, production has become more complicated, thus requiring more complex planning. Planning failures were substituted by the spread of informal networks. These networks had probably matured to a level of ‘commodity exchange in a Western country’, as Naishul (1985) claims – but the ways of making and enforcing contracts were very different. Goods were exchanged through personal networks and mutual commitments. This process was conceptualized as ‘administrative markets’ (Kordonsky 2006). It appears that relations of superiority and subordination encourages economic actors to avoid tasks from above and simultaneously to develop their own networks to carry out production. In contrast, corporations run by large bureaucracies and operating in market economies are characterized by the accountability of their directors to the owners, who demand performance from their invested capital. In the socialist economies, however, ‘each head has another head over him or her; and there is no real owner whose pocket is affected by good or bad performance’ (Kornai 1992, 123). Accordingly, the whole ‘work organization system’ was characterized by ‘inability to secure and stabilize forms of incentives’ for economic actors to seek the best possible performance (Sapir 2002, 275). There were deeply-rooted institutional problems. A Regulation Theory perspective provides a useful insight on how accumulation is coupled with institutions, which regulate social relationships between economic actors (see, for instance, Lipietz 1987; Boyer 1990). The core of this theory is the concept of regulation (not in the sense of the existence of regulatory body or authority). When applied to market economies,

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this theory stresses that capitalist social relations do not automatically reproduce themselves on the basis of laws of change, but are actively constituted by social action and institutional structures, which result from the playing out of strategic struggles. The relations between production and consumption are seen to be central to economic growth. However, the allocation of ‘social product’ between reinvestment, profit and consumption, which constitute a ‘regime of accumulation’, is coupled with systems of institutional regulation, or ‘modes of regulation’. These are the institutional forms which are codifications of relations among economic actors such as entrepreneurs, investors, and workers. For the regulation theory, the wage relation is central. According to Aglietta (1978), market economies are constituted by a set of contradictions around wage-relations requiring management through the regulation of markets. Tensions between labour (consumption) and capital (investment and profits) tended to be resolved through collective bargaining and the particular form of the state, including the methods of ‘decommodification’ and the provision of collective consumption. Iversen and Eichengreen (1999) describe how wage moderation in exchange for services of the welfare state helped to increase investments and growth in post-war Europe. Thus, the advantage of regulationist analysis resides in its ability to understand the functioning of an economy as an intersection of forms of accumulation of capital and institutional structures. The application of the regulationist approach to the socialist economies shows that Soviet systems revolved around the contradiction between the production, appropriation, and redistribution of surplus product and its control by the state. (Altvater, 1993, 32) The socialist economy was excessively ‘regulated’ through the state. While in the West, mass consumption was conjoined with a system of rationalized mass production, socialism failed to develop a consumer goods sector and to expand working-class consumption. Moreover, the Soviet military complex was a heavy burden on the economy. This burden was partially relieved by oil rents. In the USSR between 1960 and 1980, petroleum extraction grew four times, and gas – ten times. A continued rise in world energy prices for oil and gas – about 12-fold between 1972 and 1983 – allowed the Soviet Union to increase its hard currency earnings and imports in order to compensate for military-diverted production. From 1983 onwards, the price of oil began to fall. Chubais

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in his interview refers to Egor Gaidar, who once provided the shortest description of the collapse of the Soviet Union: a graph of decreasing oil prices from 1983 to 1989.8, 9 According to this version of the collapse of the Soviet Union, declining oil revenues implied a lack of hard currency to buy consumer goods and grain from abroad and to service massive foreign debts; the Soviet Union ended with tiny foreign exchange reserves and the threat of hunger; urgent measures had to be taken to bring goods to the stores, mainly by the means of liberalization of prices. It is claimed that that fall in oil prices did not occur independently of the efforts of the Reagan administration. The latter’s interest was to target Soviet hard-currency earnings in order to weaken its overextended military machine. In 1983, the International Energy Agency put a limit on European exports of Soviet natural gas (New York Times, 1 April 1983).10 Next, US officials approached the Saudis and convinced them to increase oil production – from 2 to 9 billion barrels a day (Hart 1998). The resultant drop in oil prices benefited the USA, which gained from the lower costs of imports. At the same time, the fall in oil prices was expected to have a devastating effect on the Soviet economy, given the rising importance of energy exports. According to Illarionov, however, the situation was much less dramatic.11 The depletion of foreign currency reserves was exaggerated, as well as the levels of foreign debt to be serviced. Food was available in the required quantities: instead, there were ‘supply problems’ to rural areas. It followed that the ‘alarmist’ version of the economic decay of the Soviet Union, as formulated by Chubais and Gaidar, served as a good background to justify the adoption of radical reform measures of the 1990s. Prior to these measures, the Soviet Union bureaucrats had experimented with relaxation of economic controls. During perestroika, the formal Soviet economic hierarchies had already been weakened (Solnick, 1998); a notable measure was the adoption of the 1987 ‘Law on Enterprises’, which granted them greater autonomy. This legislation also gave managers more power in decision making. Some of the informal networks were ‘formalized’. Moreover, individual private activity was permitted, namely in the form of co-operatives. But more decisive reforms were difficult to implement. As Åslund (2002, 3) explained: the state enterprise managers, who dominated late Soviet politics, accepted only such [partial] reforms. These reforms also created opportunities for rent-seeking: buying at low price at home, often with the help of state loans, and selling it abroad at a

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$120 $100 $80 $60 $40

$0

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$20

Nominal price

Figure 7.1

Inflation-adjusted price

Dynamics of crude oil prices, 1970–2013

Source: http://inflationdata.com/inflation/inflation_rate/historical_oil_prices_table.asp.

world-market price, was one of the best strategies for amassing wealth. As a result, by 1991, state managers were quickly taking controls over the nominally state-owned enterprises. A decree on leasing of April 1989 allowed them to ‘lease’ their state enterprises, de facto using them as property. Between 1989 and 1991, implicit nomenklatura privatization was attempted. Many corporations and associations of enterprises were created. At the end of 1991, spontaneous privatization was steamrolling over everything. At the same time, in the first half of 1992 an intense public debate on privatization took place. The economy was dominated by large enterprises, so the discussions focused on their privatization. Accordingly, the managers of these enterprises remained powerful actors, and any reform that threatened their position could be blocked. In fact, even Gaidar’s government was unable to get rid of the influence of vested interests. Andrei Illarionov (2002) mentions the cases of direct support of particular companies and other forms of favouritism in the midst of what had been universally called ’monetarist’ policies. Apart from the ideas of the mid-1980s, an additional impetus for voucher privatization came from Czechoslovakia. The idea of voucher privatization for Russia was discussed publicly at Harvard University in February 1992 in a conversation between Chubais and the main Harvard privatization advisors. The Russian scheme was simpler than the Czechoslovak one; also, unlike in Czechoslovakia, the vouchers could be traded. Russia’s voucher privatization may have been the largest privatization in the world. Vouchers were issued after a decree of August 1992, and

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the voucher auctions were held between December 1992 and summer 1994. At these auctions, about 16,500 large companies (with more than 1000 workers each) were privatized. As a result, a critical mass of private enterprises was built. In 1995, there were already about 920,000 private companies; one of the major goals of reformers – to create private firms – was achieved. But although the voucher privatization had been completed in 1994, a large share of the Russian economy remained in the hands of the state. Many state-owned companies were not functioning efficiently. Moreover, the managers who acquired control over enterprises often displayed little knowledge of how to run businesses under the new conditions. They had been masters of covert deals in the past, but in the market economy new skills were required. Wage delays, non-payments and inter-enterprise arrears were widespread. Moreover, the fiscal deficit was growing, and the government was interested in revenues. There were many enterprises to sell, and there was a demand for them. This demand came from new actors, such as profit-seeking capitalists of new type, later called ‘oligarchs’ or tycoons. Seven of them were considered the most influential; of these six had come from the financial sector, except Berezovsky (though he was also involved in banking) (Hoffman 2002). Potanin formed the Consortium of Russian Commercial Banks, which included six ‘oligarchic’ banks. This association offered to lend Russian government US$2 billion for one year against the collateral of a big stake in some of the best state-owned companies. The banks would manage these companies in trust, and if the state did not repay the credit one year later, banks would be entitled to sell their collateral, even to themselves. The decisive decree was signed on 31 August 1995, and the ‘loans-for-shares’ auctions took place during November–December 1995 (Khlebnikov 2000, 198). There was a serious political consideration involved: these auctions were organized to finance the nearly bankrupt state and let Yeltsin to be elected in order to prevent communists from seizing power. As Freeland (2000, 169) notes, ‘the loans-for-shares deal was a trade of property for political support’. In fact, a group of businessmen contributed to Yeltsin’s re-election. The reformers had hoped that tycoons would support reforms, but later it appeared that capitalists and reformers had different views. The auctions were not open to Russian competitors, let alone foreigners. Prices were sometimes set at low levels. Although 43 companies were initially put up for auction, only 16 were eventually offered for sale, and then only 12 were actually sold, including five oil companies

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(Yukos, Sibneft, Sidanko, Lukoil, and Surgutneftegaz), the oil products trader (Nafta Moskva), two steel corporations, Norilsk Nickel, and two shipping companies. Loans-for-shares auctions ended the initial broadening of ownership that occurred during ‘managerial’ and voucher privatizations. Managers were ousted by outsiders, ‘exactly as the privatizers had hoped’ (Åslund 2002, 157). In fact, the oligarchs had been involved in the spontaneous privatization before 1993, but to only a very limited extent. These new actors were the product of transformation: ‘capitalists without capitalism’ (Eyal, Szelényi and Townsley 1998), while in Central and Eastern Europe national capitalists withered away in the course of economic transnationalization.

4 The emergence of transnationalized capitalism in Central and Eastern Europe In Central and Eastern European countries (CEECs), technocrats and dissidents quickly discovered that their plans for economic transformation stood little change of materializing without the support of the managers of individual firms. (Eyal, Szelényi and Townsley 1998, 99) Industrial managers had knowledge of their enterprises, their assets and liabilities, commercial partners, and so on. For reformers, what went on inside the enterprises was largely concealed by a ‘black box’. All black boxes looked alike: there was no need to differentiate among them. Thus, enterprises had to be subjected to the uniform mechanisms of financial control and of self-adjusting money supply. Naturally, managers of state-owned enterprises wanted – at least temporarily – protection from foreign competition, as they realized that many Western companies were largely superior in terms of technology, organization of production, and management techniques. Similar attitudes were observed in other cases of reform. For instance, in post-coup Chile – a ‘laboratory’ of neo-liberalism in the mid-1970s–early 1980s – the Pinochet state initially allied with certain business groups and assisted them economically. Silva (1993, 536, 539) distinguishes between three phases of Chilean neo-liberal restructuring. Radical economic policies had been implemented in the second phase of the fundamental reorganization of society (1975 to 1982). Prior to that, (1973 to 1975), those, who later

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became the ‘Chicago Boys’, did not have a free hand’. They initially represented the interests of the ‘gradualist coalition’ dominated by ‘internationally competitive producers for domestic markets’. This coalition, supported by one of the industry’s peak associations (abbreviated as SFF) and an umbrella organization of peak associations, the Confederation of Production and Commerce (CPC), had a meeting in December 1973 to agree on the support of privatization, price deregulation, creation of private capital markets, and more gradual reduction in protectionism. Later, private-sector leaders met with government officials to discuss the post-coup economic program. The ‘Chicago Boys’ had been promoted to positions of advisers in the Ministry of Economy and the government planning agency (ODEPLAN), with the help of the businessmen from the ‘the Edwards conglomerate’, who had later become members of the leading civilian authorities under the military junta (Silva 1993, 538–539, 544). Gradualist forces had soon become challenged by the ‘radical internationalist’ business groups that supported less gradual integration into the world economy. Authoritarian government had seen ‘internationalists’ as the only groups capable of stabilizing the Chilean economy. This is because of foreign connections that these ‘internationalists’ had preserved (even during the course of nationalization policies of 1971–1973) and the leading positions in the economy they had achieved through corporate acquisition strategies. The urgent requirement was to contribute to a very low foreign exchange reserves and to resolve the problem of credit crunches. These problems also resurfaced in the former socialist countries. The Chilean experience shows that despite the rhetoric, reforms, even if they seem to be ‘parachuted from above’, are refracted via domestic economic structure and decision-making procedures. Ideas have to be applied in certain contexts that are capable of modifying original policy proposals. Also, change is hardly likely to be orchestrated immediately: initially, some efforts are still made to maintain or to revitalize the inherited economic structure. In the CEECs, at the beginning of transition, state-owned enterprises remained under the control of national privatization funds (NPFs) (Young, 1996). These funds were state bodies searching real owners for the state properties. Therefore, at least for a while, state officials continued to engage in close hands-on supervision of enterprises. Under this supervision and guidance, a demand for subsidies resurfaced. But the state budgets had been increasingly incapable of delivering them. First, tax preferences were granted to newly created private companies to encourage their growth. Second, many companies and individuals exploited the existing opportunities for tax evasion, whereas in contrast,

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state-owned enterprises were paying taxes on wage increases and on the value of their assets, which together constituted a major source of state revenue (Tanzi 1992; Turley 2005). Later, from the mid-1990s onwards, tax breaks were offered to foreign companies and investors, often on a case-by-case basis (Appel 2006). Moreover, international financial institutions insisted on the maintenance of balanced budgets. In this situation, a reliable way to continue subsidization was to channel preferential loans through commercial banks, either explicitly or implicitly. In CEECs, an implicit mode of subsidization existed for a short period of time. First, both banks and enterprises shared the interest of ‘playing against the state’. Banks in particular were aware that enterprises were too big to fail and thus they could be bailed out. Second, newly created firms had no record of operations, so it was difficult for banks to decide on loans to them (Berglöf and Roland 1995). Commercial banks preferred to provide loans to state-owned enterprises rather than providing apparently riskier credits to newly created companies (Gorton and Winton 1998). It appears that post-socialist governments initially declined to allow unbridled market forces to operate, and decided to keep firms afloat through subsidies, additional credits at least implicitly guaranteed by the state, various kinds of tax relief, and tariff and non-tariff protection. (Van Brabant 1998, 77) This was ‘unintended, de facto industrial policy’ (Nielsen 1996, 73), which was clearly lacking the coherence and the comprehensiveness that were observed in the economies of East Asia. In the former Czechoslovakia after the liquidation of the State Planning Committee, two new ministries were established in 1990: the Ministry of Economy and the small Ministry of Strategic Planning. The creation of these bodies was inspired by Japanese-style developmental guidance. However, after the elections of 1992 they were seen as a throwback to communism, and their activities were terminated (Nielsen 1996). The often-quoted phrase by Poland’s first post-socialist Minister of Industry, Tadeusz Syryczyk, captures a laissez-faire approach to industrial transformation: ‘no industrial policy is the best industrial policy’ (Birch and Mykhnenko 2009, 369). The absence of consistent industrial policies cannot be explained only by the ideology-driven abandonment of planning, but also by the fact that ‘the targets and agents of a consistent policy were both overwhelmed by the magnitude of changes’ (Hunya 1997, 276).

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Moreover, the obligations accepted within the framework of the ‘Europe Agreements’ precluded the candidate countries (at least those aspiring to EU membership) from expanding state aid, protectionism and similar measures (Mayhew 1998). In addition, the emergence of post-socialist ‘passive’ industrial policy, which was lacking the strategic character of its East Asian counterpart, can be related to the initial weakness of institutions, particularly financial institutions including banks. The role of the banks was hardly recognized at all at the beginning of reforms (Csaba 2009; 2011; Ellman 2005). For banks, it was difficult to distinguish between enterprises worthy of a loan or not due to their inability to restructure. Before 1989, governments had been locked into financial relationships with a large number of firms facing restructuring tasks (Berglöf and Bolton 2002). In this situation, the state was supposed to provide banks with information by signalling to them which industries or companies were to be supported. A simplified story of the peculiar relationships between governments, banks and firms in CEE transition economies is as follows (Sherif, Borish and Gross 2003). In order to prevent output collapse, governments limited the speed of enterprise restructuring by allowing some poorly performing companies to stay afloat. The authorities make decisions about the volume of funds available to enterprises and collective farms through the banking system. The banks, co-owned by the state or for the reasons described above, choose whether or not to accommodate a stateinduced demand for loans. If enterprises selected by the state are unable to pay off their debts – and this is often the case – the banks experience solvency problems. The authorities then have to recapitalize banks by using budgetary funds, and budget deficits grow (or if debt is monetized, inflation rises). If the state does not provide support, the banks could run into severe portfolio problems because of the growing volume of unrecoverable loans. Bank insolvency can further increase the vulnerability of banks and ‘hollow out’ the banks’ capital. In order to break a vicious insolvency–recapitalization circle, banks should be allowed to get rid of bad loans, and both banks and companies should take it for granted that bailouts will not occur in the future. In CEE, sales of banks to foreigners were used to limit the discretion described above and to pull lending decisions out of the realm of politics (Mihalyí 2004). The asset share of foreign-owned banks increased across the transition economies considerably, and it has been associated with a growing size of the financial system (as measured by the broad moneyto-GDP ratio), a reduction of the share of non-performing loans and a higher private-credit-to-GDP ratio (see Table 7.1 and Figure 7.2).

Table 7.1 Asset share of foreign-owned banks in the selected transition economies, 1996–2009, percentage of total volume of assets Country/ Year Bulgaria Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

2009

2.4 0.9

4.2 3.0

1.9 6.6

3.8 40.3

21.6 84.1

65.3 89.3

76.7 90.2

79.7 91.0

80.9 91.3

90.9 91.3

94.0 90.8

93.8 90.4

95.0 90.8

94.5 91.0

19.0 15.2 na 51.5 na 14.4 0.2 12.7

23.3 26.7 18.3 70.6 na 16.0 0.6 19.3

26.4 19.3 35.8 79.1 22.4 17.4 0.5 23.7

38.4 15.9 16.5 74.0 34.4 49.3 0.4 24.1

65.4 16.5 24.6 74.4 39.8 72.6 0.5 42.7

89.1 15.3 32.7 65.2 34.9 72.2 13.2 78.3

85.8 12.2 50.4 42.8 36.7 70.7 27.0 84.1

86.3 34.9 61.2 53.0 35.2 71.5 38.4 96.3

98.0 58.1 70.1 48.6 33.6 71.3 37.7 96.7

99.4 75.9 73.6 57.9 19.6 74.3 66.0 97.3

99.1 86.9 71.5 63.3 22.9 74.2 78.7 97.0

98.8 90.6 58.7 63.8 24.8 75.5 75.5 99.0

98.2 90.8 72.0 65.7 31.6 76.5 75.3 99.2

98.3 89.1 na 69.3 41.0 72.3 na 91.6

Source: EBRD database, http://www.ebrd.com/pages/research/economics/data.shtml, viewed 20 April 2012.

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0

100

100

140 80

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60 NPL

M2GDP

120

80

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60 40

20

20 0

0 0

20

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FORBANK

80

100

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80

FORBANK

Figure 7.2 Foreign bank ownership in the selected transition economies and broad money-to-GDP ratio (left-hand scatter) and the share of non-performing loans in total volume of loans (right-hand scatter), 1996–2009 Source: EBRD database, http://www.ebrd.com/pages/research/economics/data.shtml, viewed 20 April 2012.Note: The sample includes 27 transition economies.

There was a need for ‘effective bonding devices’, or mechanisms to transfer control over capital accumulation to non-state investors. Without such devices, firms had been ‘confined to defensive cost-cutting measures and growth based on internally generated funds’ (Berglöf and Bolton 2002, 92). Fundamentally, the ‘transnationalization’ of postsocialist economies in the form of penetration of foreign banks has contributed to a solution to the problem of ‘chaotic hysteresis’: [this is] a situation in which the economy is heavily influenced by events of the past and the inherited institutional structure undermines attempts to reform it. Poor macroeconomic performance thus arises endogenously, and the growth path will be unstable. In addition, inherited behavioral routines and existing institutional structures endogenously reproduce routines that lead to socially destructive outcomes, thus reinforcing poor macroeconomic performance. (Poirot 2003, 34) In contrast, in many of the CIS countries privatization of the financial system has either occurred on a small scale or been limited to domestic actors. This suggests that the state was unwilling to give up control and/or the opportunity to interfere in the process of credit creation in the economy. Åslund (2002) summarizes the whole transition experience with a simple phrase: ‘the strife over subsidies’. This statement reflects the peculiarities of the presence of the state in the post-socialist

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economies at the early stages of transition and beyond. While in the CEE subsidization was abandoned by privatization of banks, in the former Soviet Union it endured because of the specific presence of the state within the economy.

5

Mutations between plan and market

The rapid privatization in Russia resulted in the accumulation of wealth and assets in the hands of the oligarchs: from this vantage point, privatization was unfair. In a way, privatization was ‘a lottery’ (Gaddy and Ickes 2002): the vast majority of people did not know whether they had won, nor what, until later. This is because the value of privatizing assets was not known ex ante, and became clear only ex post. Indeed, privatization in the former socialist countries was very different from the privatization of state-owned property in market economies, where even state-owned companies have a market valuation. Moreover, the redistribution of ownership of assets was taking place at the same time as liberalization, which was supposed to revaluate those assets in the new market-economy environment. Comparison with the lottery captures the outcomes of privatization, but disregards informational asymmetries. Some actors, including managers and bureaucrats, were better placed than others in the socialist hierarchies. Assuming that individuals tend to behave opportunistically, it could be claimed that economic agents disclose information in a selective and distorted manner, often in ways intended to mislead, disguise, and confuse. (Williamson 1989, 67) The result of such behaviour is that information is distributed asymmetrically. Since the privatization lottery produced very few winners and many losers, political authorities in Russia used a peculiar mechanism of wealth transfer to ‘lottery losers’. This mechanism was supposed to operate in the economy with private property. One of the legacies of ‘managerial’ early privatization has been the existence of poorly performing and even loss-making companies. Their business model was ‘survival without restructuring’, which was permitted by a set of practices and informal institutions. First, authorities were reluctant to use bankruptcy procedures against town companies, because whole communities depended on their existence. Second, barter and arrears allowed restructuring to

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be postponed. Third, privatization resulted in the creation of efficient companies whose revenues can be taxed and turned into subsidies. ‘Survival without restructuring’ was a specific business model, utilized in Russia and some other former Soviet Union republics, including Belarus and Uzbekistan. In Russia, it started to flourish after the tightening of monetary policy (1995). The use of this model required reliance on ‘relational capital’, as Gaddy and Ickes (2002) call skilful bargaining about subsidies by local authorities who were also keen to keep existing enterprises afloat; relational capital was an essential element of socialist plan bargaining. Enterprise directors and their expediters needed to utilize informal skills. The collapse of the Soviet system paved the way towards ‘privatization’ of this relational capital as the autonomy of enterprise directors increased. Directors were now able to capitalize on the relationships developed under the previous system and to appropriate related returns. Nevertheless, the use of relational capital was only possible due to the existence of value creators (for example, Gazprom and oil-exporting companies), injecting sufficient amounts to offset the destruction of value by inefficient enterprises. If subsidization was halted, enterprises could be forced into bankruptcy. The ‘virtual economy’ created a new reality and complicated market reforms. For instance, it has been estimated that in 1996 and 1997, explicit and implicit subsidies to manufacturing enterprises were between 15 and 20 per cent of GDP (Poser, 1998). Low gas prices and taxation of large companies, including private ones, helped poorly performing companies to survive, and postponed their closure. The economy of two realities, where productive and unproductive enterprises coexist, is not confined to Russia. In Belarus and Uzbekistan, the state has not withered away, but has continued to intervene in the economy, providing direct support to certain sectors and even to individual enterprises. Privatization has been limited to SMEs and services sector, while the majority of large industrial enterprises remain stateowned. Financial systems have been ‘repressed’: banks provide directed loans to favoured enterprises. Thus, political centralization and associated economic controls have resulted in the split of the economy into two distinct segments. One segment is populated by state-owned enterprises subsidized by the state, while the other is comprised of profit-making companies whose income is taxed to support firms in the first segment. One of the central features of ‘economic dualism’ is the extensive state management of the economy and property. While private property is permitted, large segments of industry remain unprivatized. Losses of poorly performing companies are ‘socialized’, that is, covered by explicit and implicit subsidies, state guarantees, and other forms of preferential

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treatment. Moreover, the welfare state is substituted by paternalistic social policies (Standing 2002). Instead of modern welfare states, the governments rely on various distorted forms of social protection such as guaranteed employment, toleration of paid administrative leave at lossmaking enterprises, price controls and so on. While in Russia the ‘virtual economy’ arose as a mechanism to compensate losers in the ‘privatization lottery’, reform laggards opted for a strategy of the prevention of adverse consequences of reforms. In fact, opposition to reform emerges as a reaction to incomplete information about what will happen to the individual once reform has taken place. This individual-specific uncertainty biases policy towards the status quo (Fernandez and Rodrick 1991). In transition economies, there is uncertainty about what incomes will be in the wake of reform, and agents cannot value their current productivity, nor project how it would look after the reforms. This is a strong motive for policymakers to capitalize on this uncertainty and put caps on reforms. Similar policy reactions were observed in the wake of the crisis of import-substituting industrialization in Egypt, India, Mexico and Turkey, where state capitalism was ‘the initial response to streamline and rationalize statist experiments’ (Waterbury 1989, 184). Thus, seemingly novel policy reactions tend to bear the stamp of the past. An additional factor for the emergence of dominant state was a weak civil society (Holman 1996; Bruszt et al. 2010). The economic dualism of laggard reformers illustrates how politics and economics are interrelated. Taxation and spending remain the most effective economic instruments in the hands of politicians who wish to remain in power. Indeed, politicians’ decisions on taxes and subsidies inevitably reflect the effort to reach compromises and to build consensus among the various economic and social groups (Steinmo 1993; Mares 2006). While tax systems in CEE and the Baltic countries draw more on ‘new sources’ of revenue, in the former soviet republics tax systems are ‘generally structured more around ‘old’ revenue sources’ (Gehlbach 2008, 17). These ‘old’ revenue sources are taxation of enterprises, including large industrial enterprises and groups of enterprises, and of goods and services. In the former Soviet Union (FSU) republics, encouragement of tax payments by large, sometimes monopolistic, enterprises – due to their better ‘taxability’, or vulnerability to tax – resulted in the disproportionate provision of collective goods to them, often at the expense of SMEs. As a result, the SME sector in the FSU lagged behind its counterpart in the CEECs and the Baltics (Borish and Noel 1996). Moreover, production factors tend to be concentrated in the favoured industries rather than being smoothly distributed across sectors.

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The reliance on enterprise taxation strengthens the interdependence between the state and selected government-favoured economic actors at the expense of private agents. Disproportionate support of important taxpayers makes them ‘winners’ capable of exerting economic and political influence. Apparently, these winners have incentives to slow down market reforms, including restrictions on foreign competition, in order to extract rents from bureaucratically-regulated markets (Hellman 1998; Sonin 2003). The protracted presence of the state in the economy has been conducive to the development of quasi-patron–client relationships between governments and enterprises in many CIS countries. Nölke and Vliegenthart (2009) label the CIS capitalisms ‘clan-based’. Clans can penetrate economic sectors (as in Ukraine), or even control the state apparatuses (as in Belarus and Uzbekistan). Investment decisions have become interwoven into a complex structure of favours and loyalties. In fact, the CIS countries are characterized by higher levels of corruption than the other post-socialist states (Transparency International 2011). As a result, enforcement of property rights occurs ‘selectively’ and is subject to bureaucratic discretion, which is itself open to vested interests. The latter are often advanced by the means of corruption, which turns into ‘a mechanism by which the legitimacy of the state is disseminated and wealth is distributed’ (Bayart, 1993, p. 192). As long as the state remains a powerful means to pursue economic and political elevation in society, patron–client relationships can flourish; the efficiency of clientelism is related to the ability of the state to deliver spoils for its clients. Support for the regime by its clients is exchanged for security and reward by the patron (Clapham 1986). Clientelism can be used by those who control instruments of power to keep the current leadership in the office (De Mesquita et al. 2003). In contrast to the CEECs and the Baltics, which represent varying versions of ‘transnational varieties of capitalism’ characterized by the active roles of foreign banks and multinationals, the CIS countries appear not to be in the same game for attracting foreign capital. In particular, they are characterized by smaller volumes of accumulated FDI and a more modest presence of foreign banks in their national financial systems. Thus, the CIS countries appear to be less ‘transnationalized’ than the new member states, if judged by the volumes of FDI attracted and the presence of foreign banks in the national financial systems. This is not to say that foreign companies avoid the CIS countries; for instance, in Russia, multinationals set up production facilities to supply consumer durables to the domestic market. As for exports, large CIS countries, including Azerbaijan, Russia and Kazakhstan, benefit from the export

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of raw materials, whereas smaller CIS countries are dependent on the energy supply from Russia and on its internal market as a destination for exports and for temporary labour migration. So in a way, post-Soviet capitalisms are indirectly shaped – by varying degrees – by the economic and political situation in Russia. In its turn, Russia has not severed its dependence upon export of raw materials, but retains its ambitions to follow a path of developmental states along the lines of South Korea and Taiwan. On this road of building a state-supported capitalism, the problem is how to secure the willingness of bureaucrats, managers, and politicians to forego large-scale rent-seeking and to refrain from devouring the units the state seeks to support. (Waterbury 1989, 190). To summarize, economies can be trapped into a condition of ‘stalled reforms’ (Havrylyshyn and Smee 2000): neither totally public nor totally private, but with their own rationality and incentive structure. The boundaries between private and public sectors become blurred; property lies somewhere in the middle between the old forms of state ownership and the well-defined rights of private property. This intermediate regime is a product of an uncertain environment in which governments initially resisted economic change or used various methods of compensating losers. However, over the years this resistance has become wellentrenched, because a number of economic actors, including managers of large enterprises linked to bureaucrats, can gain from rent-seeking. Some groups of the population benefit from being simply employed, which is an important factor in an underperforming economy.

6

What can be learned from the transition experience?

Privatization is probably the most important element of transformation. In the early days of transition, privatization was conceptually borrowed from Western experiences and the Washington consensus package. It was perceived as a technical problem of the transfer of assets from the state to private parties, or a move from one idealized state of affairs to another – from planned to market economy. Organizationally, it was seen an extreme form of hierarchy which, functioning inefficiently, has to be substituted by markets with atomistic agents. However, these idealized states do not exist in the real world. The experience of the socialist countries provides ample evidence for this claim.

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There is a variety of forms of capitalism among mature market economies. The transition from state planning to market spontaneity does not involve a straight switch from one institutional design to another. The transition appears to be more of an open-ended process which follows its own evolutionary course rather than moving along a predetermined trajectory. The evolutionary nature of transition is directly related to the characteristics of the institutional environment, or the set of fundamental political, social and legal ground rules of late socialism. Some of these rules have endured even after the demise of state socialism. Institutional arrangements between economic units that govern their ways of interaction function as a structure within which their members can cooperate and/or compete. At the same time, some initial reactions were similar across the post-socialist countries. For instance, the power of managers was an important factor to be considered in the early stages of transformation. In Russia, that power resurfaced in the form of spontaneous privatization, while in CEE it was in the form of subterranean redistribution. A specific social order cannot disappear just because actors and the practices they have developed within it are striving to find room for further movement. Although policymakers have been strongly influenced by neo-liberal economic ideas, the latter have not been straightforwardly transformed into policies. Visions of reform can be widely shared – but when implemented they will have been grafted onto the available concrete sets of practices, institutions and relationships. The state of affairs inherited from socialism matters to the outcome of reforms. These legacies are not related to ‘socialist mentalities’ or the lack of experience with market economy, but to the inherited modes of behaviour and interactions among agents. These interactions have contributed to the formation of new structures-in-the-making, subject to domestic and foreign influences. The former prevailed in the CIS countries, while the latter shaped market economies in the Central and Eastern European and the Baltic States. In CEECs and the Baltics, economic transnationalization appeared to be a response to distributional conflicts at home. In the CIS countries, states acted either ex post (for example, Russia) or ex ante (for example, Belarus and Uzbekistan) to deal with these conflicts. In Russia, the authorities created a mechanism of transfer of wealth to the losers in the privatization lottery, while in Belarus and Uzbekistan, inconsistent gradualism was directed to stifle distributional conflict in its cradle by allowing privatization on a limited scale.

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Notes 1. https://archive.today/pobH. 2. http://newmedia.ufm.edu/gsm/index.php/The_Free_Market_Economy_ and_its_Enemies_in_the_21st_Century. 3. http://www.coordinationproblem.org/2012/02/andrei-shleifer-on-what-helearned-from-the-transition-experience.html. 4. www.polit.ru from 11.08.2005. 5. www.polit.ru from 15.06.2012. 6. http://oetar.livejournal.com/3646.html. 7. www.polit.ru from 19.06.2012. 8. http://strana.lenta.ru/russia/chubais.htm. 9. echo.msk.ru/programs/dozor/41788. 10. http://www.nytimes.com/1983/04/01/business/french-unruffled-on-sovietgas-price.html. 11. http://www.iea.ru/article/macroeconom/2–02–2012.pdf.

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8 Anders Breivik, Fascism and the Neoliberal Inheritance Tad Tietze

On 22 July 2011, Norwegian national Anders Behring Breivik brutally murdered 77 people in the country’s capital, Oslo, and on the nearby island of Utøya. Just over 13 months later, he was found guilty, and mentally responsible for his crimes, by an Oslo court. Even though Breivik had released his 1500-page political manifesto, 2083: A European Declaration of Independence, onto the internet just hours before committing his crimes, much public debate about his motivations was preoccupied with the possibility that mental illness or individual psychological disturbance had driven his actions. The effect was a depoliticization of Breivik’s terror attacks, despite his having clearly declared their intensely political basis, one most accurately characterized as a modern variant of fascism (Humphrys et al. [eds] 2011). The court’s verdict and the passage of time provide us with the opportunity to re-evaluate Breivik’s beliefs on their own terms, as the ideological basis for his aim of radicalising the struggles of the far Right in Europe. His manifesto can therefore be a useful source of material to analyse. Breivik’s manifesto is a mixture of his own writing and material compiled from a wide range of right-wing websites, often copied verbatim (Boston 2011). Such websites are often characterized by a febrile mix of paranoid conspiracy theories about ‘cultural Marxist’ takeovers of institutions, warnings that Muslims will push white Christians into a demographic minority in Europe, and angry attacks on all manner of politically correct ‘fifth columnists’ – multiculturalists, feminists and globalizers. Norwegian defence expert Thomas Hegghammer explains: While Mr. Breivik’s violent acts are exceptional, his anti-Islamic views are not. Much, though not all, of Mr. Breivik’s manifesto is inspired by a relatively new right-wing intellectual current often referred to 281

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as counterjihad. The movement’s roots go back to the 1980s, but it gained substantial momentum only after 9/11. Its main home is the Internet, where blogs like Jihad Watch, Atlas Shrugs and Gates of Vienna publish essays by writers like Robert Spencer, Pamela Geller, Bat Ye’or and Fjordman, the pseudonym for a Norwegian blogger. (Hegghammer 2011) Less remarked upon has been Breivik’s deployment of references to and quotes from a wider range of writers whose ideas would seem counterposed to his, including from the Left and the neoliberal Right. In the case of the former, Breivik and his counterjihad sources are getting to know their ‘cultural Marxist’ enemies in order to more effectively fight them. But in the case of the neoliberal Right the relationship is more complex. While Breivik’s engagement with neoliberal thought and thinkers – in particular Friedrich von Hayek, Milton Friedman and Ludwig von Mises – is brief, his survey of political and economic thought more broadly is wideranging. It would be mistaken to try to ascribe direct blame for Breivik’s overall political conclusions on neoliberal theory and practice; nevertheless Breivik’s guarded interest in the neoliberal project is an opportunity to interrogate connections between fascism and neoliberalism.

1

Breivik, capitalism and free markets

In a long Q&A-style interview with himself late in the manifesto, Breivik summarizes his ideological trajectory in this way: I identified myself, during this time, as a cultural conservative, economical liberalist (from age 16 to 21). During this time I studied all the major ideologies in depth, everything from Marxism, socialism, Islam, fascism, nationalism, capitalism etc. I became increasingly interested in the libertarian school of thought (extreme liberalism and laissez faire capitalism) due to, my then capitalistic/self serving mindset. This mindset completely collided with my increasing interest for cultural identity and a more traditionalist conservative school of thought. At this point I had a hard time deciding what would be the driving force in the rest of [my] life – self interest or nation/cultural identity? Could it be combined? I understood early that libertarianism was not a sustainable political concept. If everyone acted in an egotistical manner in combination with the doctrines of multiculturalism the nation and people would wither and society would eventually fracture and seize [sic] to function. (Breivik 2011, 1396)

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Breivik’s ideological conflicts can at one level be understood in terms of the complex class and ethnic contradictions of suburban Oslo that shaped his ideological development (Seltzer and Tangen 2012). A supplement to this was his declared aim to become millionaire, a task he took to with gusto from his final year of Gymnasium (high school) when he started to use the wages he earned in a telephone sales job to speculate on the stock market. This was followed by aborted ventures in outdoor advertising and a successful online business selling fake university diplomas, produced – perhaps ironically given his later beliefs – by a low-paid forger living in Indonesia. This took him to his first million Norwegian kroner. However, the threat of exposure over the diplomas led him to abandon the business and return to the stock market in 2005, which was followed by sharp financial losses in the market decline of 2006. He was forced him to move back in with his mother, and this served as the background to his further political radicalization.1 In a list of right-wing tendencies he sees as competing with his own preferred path, he includes the pro-market, pro-multicultural European ‘new Right’ and ‘laissez-faire’ globalists (Breivik 2011, 1364–1365). He clarifies that his is neither a programme for class war nor one set up against the capitalist economic system. Rather, it is ‘a cultural war between cultural conservatives and cultural Marxists (nationalism vs. internationalism)’. Cultural conservatism, however, requires ‘a sustainable economy based on many free market mechanics’ but one that eschews the ‘destructive’ nature of ‘globalist’ capitalism (Breivik 2011, 1195). Breivik supports capitalism within certain limits: It is essential to ensure that entrepreneurs are awarded with incentives. I was quite bombastic about the issue when I was younger, very pro laissez-fair [sic] capitalism, but not anymore. There are so many flaws with the capitalistic system and it has to be regulated to a certain degree. (Breivik 2011, 1222) However, for Breivik free market policies in the USA have gone too far, leading to unsustainable concentrations of wealth and power (Breivik 2011, 1223). He also holds special contempt for ‘some libertarian rightwingers and Big Business supporters’, whom he calls ‘Islam’s useful idiots’ because they ‘see man only as the sum of his economic functions, as cheap labour and consumers, homo economicus. They believe not only in free markets but in free migration, and tend to downplay the impact of culture’ (Breivik 2011, 332). He also warns against low fertility rates produced by ‘extreme’ forms of liberal individualism, which end

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up placing the collective culture he seeks to re-empower at demographic risk (Breivik 2011, 1235). Overall Breivik supports a mixed market economy, tending ‘to favour a middle way, a compromise between the US version and the average EU system’ (Breivik 2011, 1368).

2

Breivik, neoliberal politics and democracy

Running through Breivik’s manifesto is a vein of hostility to classical liberal political thinking that assigns a minimal role to the nation-state (or, as would be Breivik’s preference, a future pan-European but monoculturally Christian state). It is this that leads him to reject neoliberal arguments that favour extreme freedom of markets from the state, or the culture-blind globalization of economic activity. At one point he calls for a rejigged World Trade Organization that excludes the Muslim world and China (Breivik 2011, 1222). However, this is not the end of the story when it comes to Breivik’s interest in neoliberalism. He is more interested in political aspects of neoliberalism that are less clearly associated with the classical liberal tradition. In particular, he reproduces two versions of commentary by the far Right blogger Fjordman on Naomi Klein’s famous quotation of Milton Friedman in The Shock Doctrine, where Friedman says that only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable. (Breivik 2011, 674, 704, taken from Friedman quote in Klein 2007, 6) Fjordman sees Friedman’s approach – the one that the Chicago economics professor believed he was enacting in Pinochet’s Chile – as a model political strategy for ‘Western survivalists’ like himself: The goal of European and Western survivalists – and that’s what we are, it is our very survival that is at stake – should not be to ‘fix the system,’ but to be mentally and physically prepared for its collapse, and to develop coherent answers to what went wrong and prepare to implement the necessary remedies when the time comes. (Breivik 2011, 674, 704) Breivik also quotes Hayek’s grudging admiration for socialist intellectuals, as part of the Austrian’s call for neoliberal defenders of ‘freedom’,

Anders Breivik, Fascism and the Neoliberal Inheritance 285

to similarly organize themselves for a long march through the institutions to achieve cultural hegemony (Hayek 1949, quoted in Breivik 2011, 55–56, 378–379). This is part of a recurring theme in 2083; the need for a right-wing antidote to the successful infiltration by the Left into modern educational, cultural and political institutions in the West – a process drawing on the ideas of Western Marxists like Lukács, Gramsci and the Frankfurt School (Seymour 2011). Breivik replays Hayek’s warning from The Road to Serfdom that democracy becomes impossible once socio-economic systems have grown beyond a certain size, thus requiring decentralized political control over local issues to fend off creeping bureaucratization. Breivik criticizes the bloated bureaucratic structures of the European Union as leading it to become ‘undemocratic’ and hence unresponsive to the needs of its Christian population (Hayek 2001[1944], quoted in: Breivik 2011, 528). While he calls for a violent civil war, Breivik remains committed to a classically limited liberal democratic model for the cultural conservative regime he wants installed, rather than any kind of more radical participatory experiment. In this he draws on Austrian economic liberal Mises’ view of democracy as an arrangement where it is not that everyone makes and administers laws but that lawgivers and rulers should be dependent on the people’s will in such a way that they may be peaceably changed if conflict occurs (Mises 2009 [1951], 75, quoted in: Breivik 2011, 556) Breivik’s focus on specific political features of neoliberalism assists us in clarifying misconceptions about the neoliberal project. In many popular accounts of neoliberalism it is seen as simply a variant of neoclassical economics – a type of ‘market fundamentalism’ – tied to extreme liberal or libertarian political conceptions of a minimal or ‘night watchman’ state. Many critiques of neoliberalism uncritically accept the claim that free markets and political freedom go together. However, as the definitive intellectual history of the Mont Pèlerin Society (the ‘neoliberal thought collective’ of which Hayek and Friedman were leading lights) makes clear, the neoliberals who were to gain international influence from the 1970s saw themselves carrying out a political project in which a strong state was needed to reshape society along the lines they called for. For them, the rise of bureaucratic command (or ‘collectivist’) economies under fascism and communism – as well as the greater role of state economic intervention in the West since the Great Depression – had shown that the economic liberty entailed in a market society was not ‘natural’ but could only be ensured via forceful state intervention. In

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this sense the ‘liberalism’ in neoliberalism has always been economic, and not political (Mirowski and Plehwe [eds] 2009). The Mont Pèlerin Society sought to win over business, academic, political and state elites to its vision. It is in this context that Friedman made his comments (quoted above) about taking advantage of a crisis to gain leverage for the kind of radical project the neoliberals were pushing for. The neoliberals’ often ambiguous and instrumental view of liberal democratic institutions fits with this project, given that democracy is not an end in itself. Rather, they seek the liberty that is based on a market society. This explains how both Hayek and Friedman ended up making comments that downplayed concerns over the blood-soaked early years of the Pinochet regime in Chile. A recent study of Hayek’s relationship to Pinochet recalls: Hayek – writing to The Times in 1978 and explicitly invoking Pinochet by name – noted that under certain ‘historical circumstances,’ an authoritarian government may prove especially conducive to the long-run preservation of liberty: There are ‘many instances of authoritarian governments under which personal liberty was safer than under many democracies.’ (Farrant et al. 2012) While perhaps more critical of the lack of democracy in Chile, Friedman praised Pinochet’s ‘top-down’ military state for being able to usher in ‘bottom-up’ ‘organizational principles of a free market and a free society’ (Yergin and Stanislaw 2002).

3

Fascism and economic liberalism

The tendency for economic liberal thinkers to favour authoritarian political projects has a long history. In The Apprentice’s Sorcerer, Ishay Landa argues against the pervasive narrative construing fascism and liberalism as antithetical [that] has attained something of a hegemonic status. (Landa 2010, 10) Instead, liberal bourgeois society’s inability to control the unruly subaltern classes which it called into being via its endless quest for self-expansion led it at times to look to authoritarian movements to resolve its problems: Fascism was an organic product of developments largely (that is to say: not entirely) from within liberal society and ideology. It was an

Anders Breivik, Fascism and the Neoliberal Inheritance 287

extreme attempt at solving the crisis of liberalism, breaking out of its aporia, and saving the bourgeoisie from itself. (Landa 2010, 9) In this way, the price of the preservation or extension of economic liberalism was the willingness to abandon political liberalism for despotic solutions (Landa 2010, 15–16). Such thinkers stretch back as far as Edmund Burke, a committed defender of bourgeois property who infamously turned against political freedoms after being traumatized by the destabilizing effect of the French Revolution (Macpherson 1980). A 20th-century example is Mises, who I noted Breivik quoted regarding his limited conception of democracy. Mises went further than this, arguing that democracy was ‘a hollow form’ if not based in economic liberty, and that democratic legislators should not impinge on ‘the natural conditions of social life’ (the economy) because their freedom to act is only ‘formal’ and not ‘material’ (1951, quoted in Landa 2010, 34). This is analogous to Hayek’s argument that ‘liberalism is incompatible with unlimited democracy’ (Landa 2010, 35). While only a few economic liberals have openly supported the fascist far Right, their condemnations of the forms of fascism actually in existence have often been more ambiguous than their modern defenders try to claim. Mises is the paradigmatic example in this regard, viewing fascist movements as ‘full of the best intentions’ whose ‘emergency makeshift’ regimes ‘saved European civilisation’ from the threat of communism (Landa 2010, 237). Less well known is his role as a financial adviser to the pro-Nazi Dollfuss administration in Austria, which combined an end to democracy with harsh economic reforms including ‘cuts to public spending, a balancing of the budget and support for business’ (Landa 2010, 184). As suggested above, superficial differences between neoliberalism and more radical right-wing authoritarian projects like Breivik’s give way to some deeper similarities. In particular, both projects are comfortable with the exercise of coercive state power to implement their respective visions of society. So while Breivik is critical of ‘laissez-faire’ ideologies, he is not opposed to free markets under the purview of a strong state. In this respect, he continues a tradition established by previous right-wing authoritarian and fascist thinkers. Close examination of fascist statements from the first half of last century shows how their apparently ‘collectivist’ corporatist and statist arguments are connected with a critique of democracy as the destroyer of the individual because of its majoritarian decision-making. Thus, whether in Mussolini’s fascio or Hitler’s Volksgemeinschaft, the individual reaches her or his potential in a purified national community (Landa 2010,

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259–260). Furthermore, while fascist movements have contained more radical or ‘revolutionary’ elements which sought greater egalitarianism and a more thoroughgoing challenge to capitalism, their entry into and maintenance of governmental power invariably meant that these had to be sidelined or purged as they got down to the business of running a state that depended on continued capital accumulation (Callinicos 2001). One of the reasons for the widespread presumption that economic liberalism is hostile to fascism is that key economic liberal and neoliberal thinkers have based their opposition to fascism on the myth that it is an egalitarian, collectivist attack on capitalism – the right-wing mirrorimage of socialism and communism. There is a long history of conservative analyses of fascism that sees it as in Zeev Sternhell’s formulation, Neither Right Nor Left (1986). It was on this basis that Hayek would reject fascism as just one form of collectivist excrescence, and which Mises would use to try to distance himself from fascist excesses despite his sympathies for and affiliations with actual fascist regimes.

4

Exploiting economic liberalism’s antinomies

My intention has been to elucidate the lack of clear boundaries between economic liberalism and neoliberalism on one side, and far Right and fascist politics on the other. However, there remain important distinctions. While economic liberal and neoliberal policies are compatible with the designs of right-wing extremists like Breivik, the neoliberal political project that rose to prominence with the Pinochet dictatorship in Chile – and Thatcherism and Reaganism in the West – does not require a fasciststyle extra-parliamentary movement to implement its program. Indeed, even in a highly authoritarian and anti-democratic example of neoliberal ‘shock and awe’ like that of Chile, it was an existing and deeply rooted traditional institution – the military – that crushed democracy and imposed neoliberal economic reforms. On the other hand, even though fascist movements, once in power, may start to behave more like traditional military dictatorships and rely on pre-existing state structures, their strategy involves mobilizing large-scale extra-legal activity (usually violent) in order to force their way to the attention of elites as a credible solution for political and social crisis (see Paxton 2004). Part of the confusion arises because of the paradoxical and often illogical claims made by extreme Right propagandists about their beliefs and aims: Those who wish to comprehend fascist ideology would do well to reckon with the fact that lies, myth-mongering and demagoguery

Anders Breivik, Fascism and the Neoliberal Inheritance 289

were built into it. This means that anybody who treats fascists as sincere immediately fails, whatever else he or she might be doing, to ‘take them seriously’. (Landa 2010, 17) One feature of fascist ideology is its tendency to deploy well-worn tropes from other political tendencies – often disjointedly mixed together – to give a shape and familiarity suggestive of being rooted in existing traditions. Breivik’s cut-and-pastes from various websites are an example of this in the era of the internet. Indeed, Breivik’s literary effort represents an attempt at a reconnaissance of the existing terrain of rightwing thought for the purposes of finding a way to break through the strategic impasse that he perceives the radical Right to be experiencing (Seymour 2011). He is critical of far Right currents that simply attempt to repeat past glories, and asks what strategies are appropriate to the current conjuncture. In that sense, the more interesting fact is that Breivik rejects the extreme economic liberalism commonly associated with the broader Right in the neoliberal era. His claim that it is too often tied to economic, social and cultural problems may reflect a right-wing version of the view that the neoliberal model of governance has reached its limit, especially after the 2008 global economic crisis. While they are only mentioned in Breivik’s manifesto in an appendix, the contrasting fortunes of the two main far Right parties in Greece in the period of harsh economic liberal austerity packages since 2009 suggests that from the far Right’s perspective a neoliberal stance is likely to prove to be more hindrance than help. Committed to a series of economic liberal reforms along with its nationalist platform, the Popular Orthodox Rally (LAOS) won 5.63 per cent of the vote and 15 MPs in the 2009 election. However, its 2011 entry into a technocrat-led government of national unity that was implementing austerity led to a collapse of LAOS’ vote in the two 2012 elections, and the loss of all its MPs. Meanwhile, the more openly fascist Golden Dawn could only garner 0.5 per cent of votes nationally in 2009. Yet by pushing antiausterity propaganda as part of its virulently racist program and violent street activities, Golden Dawn burst into parliament with almost 7 per cent, gaining 18 MPs in the second election of 2012. The pursuit of economically liberal austerity programs has accelerated the breakdown of long-standing political structures across Europe in recent years, with Greece the most dramatic example. This has created the space for projects of the radical Right to opportunistically draw on anger at such policies, and the political establishment driving them, in order to make significant breakthroughs. In previous years, adaptation

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to neoliberal ideas may have been a pathway to gaining a hearing within wider conservative sectors of society, especially given the homologies between fascist and neoliberal commitments to authoritarian statedriven economic transformation. However, more recent developments suggest that, like Breivik, right-wing extremists will have more to learn from neoliberalism’s political expediency and ruthlessness than its economic prescriptions.

Note 1. Seltzer, Michael. (2014), personal communication based on Seierstad, Åsne. (2013) En av oss: Breivik, En av oss: En Berättelse om Norge [One of Us: A Tale of Norway]. Sweden: Albert Bonniers Förlag.

Bibliography Boston, William (2011). The Politics behind the Norway Slaughter. In: Time, 24 July 2011. At: http://www.time.com/time/world/article/0,8599,2084901,00. html (Accessed on 3.2.2014). Breivik, Anders Behring (2011). 2083: A European Declaration of Independence. (Written under the pseudonym Andrew Berwick.) At: http://www.fas.org/ programs/tap/_docs/2083_-_A_European_Declaration_of_Independence.pdf (Accessed on 3.2.2014). Callinicos, Alex (2001). Plumbing the Depths: Marxism and the Holocaust. In: Yale Journal of Criticism 14, pp. 385–414. Farrant, Andrew, Edward McPhail and Sebastian Berger (2012). Preventing the ‘Abuses’ of Democracy: Hayek, the ‘Military Usurper’ and Transitional Dictatorship in Chile? In: American Journal of Economics and Sociology 71(3), pp. 513–538. Hayek, F. A. (1949). The Intellectuals and Socialism. In: University of Chicago Law Review 16 (Spring 1949) pp. 417–433. Hayek, F. A. (2001 [1944]). The Road to Serfdom. Abindgon: Routledge. Hegghammer, Thomas (2011). The rise of the macro-nationalists. New York Times, 30 July 2011. At: http://www.nytimes.com/2011/07/31/opinion/sunday/therise-of-the-macro-nationalists.html (Accessed on 3.2.2014) Humphrys, Elizabeth, Guy Rundle and Tad Tietze (eds) (2011). On Utøya: Anders Breivik, right terror, racism and Europe. [Kindle E-Book] London: Elguta Press. Klein, Naomi (2007). The Shock Doctrine: The Rise of Disaster Capitalism. New York: Metropolitan Books. Landa, Ishay (2010). The Apprentice’s Sorcerer: Liberal Tradition and Fascism. Leiden: Brill. Macpherson, C. B. (1980). Burke. Oxford: Oxford University Press. Mirowski, Philip and Plehwe, Dieter (eds) (2009). The Road from Mont Pèlerin: The Making of the Neoliberal Thought Collective. Cambridge: Harvard University Press.

Anders Breivik, Fascism and the Neoliberal Inheritance 291 Mises, Ludwig (2009 [1951]). Socialism: An Economic and Sociological Analysis. Auburn: The Ludwig von Mises Institute. Paxton, Robert (2004). The Anatomy of Fascism. New York: Alfred A. Knopf. Seierstad, Åsne. (2013) En av oss: En Berättelse om Norge [One of Us: A Tale of Norway]. Sweden: Albert Bonniers Förlag. Seltzer M. and Tangen K. F. A class framing of the Norwegian massacre of 22 July 2011. Conference paper from: How Class Works – 2012 Conference, Stony Brook University, 7–9 June 2012. At: http://www.stonybrook.edu/workingclass/ conference/2012/session12.3_Seltzer_Tangen.pdf (Accessed on 3.2.2014) Seymour, Richard (2011). 2083: Breivik’s 21st-century fascist manifesto. In: Humphrys, Elizabeth et al (eds) On Utøya: Anders Breivik, right terror, racism and Europe. London: Elguta Press. Sternhell, Zeev (1986). Neither Right Nor Left: Fascist Ideology in France. Princeton: Princeton University Press. Yergin, Daniel and Stanislaw, Joseph (2002). Interview with Milton Friedman. In: Commanding Heights: The Battle for the World Economy. At: http://www.pbs. org/wgbh/commandingheights/shared/minitext/int_miltonfriedman.html#10 (Accessed on 3.2.2014).

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Index Abdel-Rahman, Omar, 62 Acton-Tocqueville Society, 90, 92, 98, 133n33 Adam Smith Institute, 246, 252 Adam Smith Prize, 185 agriculture, Defence Regulation, 168 Alan, Josef, 229 Alchian, Armen, 39, 65n40 Alexander, Andrew, 25 Allais, Maurice, 93 America, post-New Deal era, 115–19 American Economic Association, 17, 122, 129n3, 141n103 American Enterprise Institute, 123 Anderson, Martin, 126 Animal Farm (Orwell), 59, 172, 173n19, 175 Anti-Corn Law League, 19 Aron, Raymond, 84, 87 Ashley, William J., 185 Aslanbeigui, Nahid, 207 atheism, communistic, 18 Atlas Economic Research Foundation, 123 Attlee, Clement, 111, 152–4, 157–9, 161–4, 166–7, 169, 173n15, 176n43 Auboin, Roger, 84 auctions, Russia, 262–264 Australia climate of ideas in mid-1970s, 234–6 Hayek on tour in, 236–8 Hayek’s meeting with PM Fraser, 241–2 impact and outcome of Hayek’s visit, 239–40 itinerary, 240–41 out of the public eye, 238–9 political situation (1976), 233–4 Ronald Kitching on tour, 244–6 Wolfgang Kasper on Hayek at Australian National University, 243–4

Australian Broadcasting Commission (ABC), 238, 240, 245 Australian Labor Party (ALP), 233, 234, 235 Austrian School of Economics, 8, 20, 26, 27, 32, 33, 46, 63, 236 Austro-Fascism, 8, 37 Baker, John R., 154, 156, 174n25–6 banking, foreign, 263, 267–9 Bareau, Paul, 25 Battarcharaya, Debesh, 238 Baudin, Louis, 84, 87 Bauer, Peter, 55 Beck, Glenn, 60, 229–30, 232n32 Beckwith, Byron De La, Jr., 62 Berlusconi, Silvio, 62 Beveridge, William, 21, 139n87 Beveridge Report, 173n15 Biffen, John, 125 Blaug, Mark, 189 Blundell, John, 123 Boaz, David, 119 Böhm, Franz, 78, 104, 106, 108–9 Böhm-Bawerk, Eugen, 20, 52, 53 Bolsheviks, 7, 17, 214, 215 Bork, Robert, 35, 39, 120 Boutros-Ghali, Boutros, 63 Bo Xilai, 218, 231n9 Bo Yibo, 218, 231n8–9 Bozell, Brent, 118 Brandt, Karl, 97–101, 107, 118 Brauns Commission, 82 Breivik, Anders Behring, 281–2 capitalism and free markets, 282–4 economic liberalism, 288–90 fascism and economic liberalism, 286–8 neoliberal politics and democracy, 284–6 Bresciani-Turroni, Costantino, 109 Bretscher, Willy, 104 Bright, John, 2, 40 293

294

Index

Britain, Keynesian welfare consensus in, 111–15 Brown, Gordon, 44–6, 66n65 Brown vs. Board of Education (1954), 2–3 Brozen, Yale, 118, 120 Buchanan, James, 10, 68n8, 116, 126, 139n91 Buckley, William, 117, 118, 140n98 Bulgaria, 268 Burke, Edmund, 287 Burns, Arthur, 118, 126 Bush, George H. W., 62 Campbell-Bannerman, Henry, 9 CAMP model, 27–8 Cannan, Edwin, 8, 76, 77 capitalism, 1, 6, 16, 35, 77, 171, 272–3 Breivik, and free markets, 282–4 competitive, 80 emergence of transnationalized, 264–70 failure of chaotic, 73–4 free enterprise, 27 free market and, 225 globalist, 283 laissez faire, 132n23, 154–6 monopoly, 85, 109 Orwell’s opinion, 153–4, 171 supply and demand, 216 transnational varieties of, 273–4 Western life-style, 255 Capitalism and Freedom (Friedman), 120, 229 Carnap, Rudolf, 170 Castor, Hans, 13 Cato Institute, 119, 123 Caton, Chris, 243 CEEC (Central and Eastern European Countries), transnationalized capitalism in, 264–70 Chamberlin, Joseph, 185 Chamberlin-Bradbury Committee, 187 Champernowne, David G., 206 Champion, Rafe, 61, 233 Chicago, liberalism, 80–1 Chicago School, 47, 76, 80, 81, 89, 91, 96, 119–20, 126, 130n14, 141n102 Chitester, Robert, 13, 23–4

Chubais, Anatoly, 256, 260, 261, 262 Churchill, Winston, 111, 112, 132n22, 139n87, 187 CIS (Commonwealth of Independent States), 254–5, 269, 273, 274 Clark, John M., 201 Clark, William, 25 Clay, Lucius D., 106 coal mining, Defence Regulation, 168 Coase, Ronald, 51, 205, 219n15, 256–8 Coase Theorem, 33, 50, 51, 61, 250, 256, 257 Cobden, Richard, 9, 19, 132n23 Cold War, 18, 100, 118 Collard, David, 114, 207 collectivism, 42, 43, 83–85, 92, 101, 130n11, 134n39, 140n94, 171, 235, 237 Columbus, Christopher, 30 communism, 3, 17–19, 22, 42, 50, 60, 77, 83, 92, 153, 158, 215–16, 266, 285, 287–8 conservatism, 9, 116, 117–19, 141n99, 283 Constitution of Liberty, The (Hayek), 6, 25, 36, 81, 102, 117, 153, 224, 227, 242 Control of Engagement Order, 162, 163–6, 166–70 Coombs, H. ‘Nugget’, 234, 235, 243 CPC (Confederation of Production and Commerce), 265 CPS (Centre for Policy Studies), 123, 252 Crane, Ed, 119 Crane, Jasper, 103 Craver, Earlene, 14 Cripps, Stafford, 111, 157 Cubitt, Charlotte, 13, 31, 55, 56 Cultural Revolution, 31 Cunningham, William, 185 Czech Republic, 255, 268 Davenport, John, 10, 95, 99, 135n48 Davies, J. Rhys, 166 Davis, J. Ronnie, 82 Defence Regulation 58A, 154, 159, 162, 165, 167, 168, 176n37, 180n81

Index Defence Regulation 80B, 170, 178n62, 181n95 de Gaulle, Charles, 110 Demaria, Giovanni, 109 democracy, 5–8, 23, 40, 52, 61, 63, 81, 101, 161, 218, 237–8 Breivik, neoliberal politics and, 284–6 Caldwell’s challenge, 37–42 system of, 30–7 Demsetz, Harold, 120 Dennison, Stanley, 5, 99, 135n51, 139n90 Dickinson, H. D., 170 Dikotter, Frank, 219 Director, Aaron, 76, 91, 96 Disraeli, Benjamin, 9, 19 Doherty, Brian, 228, 232n28 Domar, Evsey, 203 Durbin, Evan, 159, 160, 170, 172n1, 176n39 Dzerzhinsky, Felix, 216 Ebeling, Richard, 61, 230, 232n33, 253 economic dualism, 271 economic liberalism, 286–8 exploiting antimonies, 288–90 see also liberalism economic planning, Hayek, Orwell and logic of, 154–8 Economics of Welfare, The (Pigou), 183, 189, 191, 193, 201 economic welfare, Pigou’s contributions, 189–92 Edgeworth, Francis Y., 201 Einaudi, Luigi, 76, 104, 109, 110, 134n41 Eisenhower, Dwight D., 3, 28 employment industrial fluctuations and, 192–6 Keynesian challenge and applied economics, 196–200 Erhard, Ludwig, 59–60, 104, 106–9, 111, 134n39, 137–8n80, 138n82–3 Estonia, 60, 228, 229, 268 Eucken, Walter, 59, 76, 78, 96–8, 100, 104–8, 121, 129n8–9, 130n14–15, 133n32, 134n41, 138n81 Farrant, Andrew, 59, 153

295

fascism, 6, 17, 62, 83, 92, 153, 158, 220, 285–8 fashionable opinion, Hayek’s triangles, 23–30 Faubus, Orval, 3 Fedorenko, Nikolai, 223 FEE (Foundation for Economic Education), 90, 93, 117, 122, 141–2n107 Ferdinand II (King), 30 Feulner, Edwin, 117 Finer, Herman, 37, 41 First Austrian Republic, 6, 8, 31 First World War, see World War I Fisher, Antony, 5, 104, 112, 123, 139n89 Flux, Alfred W., 201 Forbes, Viv, 245 Foxwell, Herbert, 185 France, neoliberals, 109–11 Franklin, Benjamin, 37 Fraser, Malcolm, 61, 233–4, 238, 241–2 Freedom Defence Committee, 169, 181n95 Free to Choose (Friedman), 126 Freiberg, liberalism, 78–80 Freiburg School, 47, 49, 78, 79, 80, 81, 96, 104, 120, 137n75, 138n81 Friedman, Milton, 1, 76, 81, 91, 99, 105, 118, 126, 129n2, 139n91, 141n103, 252, 282, 284 Friedman, Rose, 54, 234 Friedman, Sarah, 1–2 Friedman Foundation for Educational Choice, 3–4 Fry, Richard, 25 Fürth, J. Herbert, 55 Fyvel, Rosco, 175–6n35 Gaidar, Egor, 261, 262 Gaitskell, Hugh, 112 Galbraith, John K., 16–17, 24, 49, 106, 116 General Motors, 42, 59 General Theory (Keynes), 53, 74, 83, 133n30, 187, 188, 196, 198, 209n7 Geppert, Dominik, 124 Germany, economic reform, 105–9

296 Index Goethe, Johann Wolfgang von, 12–13 Goldwater, Barry, 117–18 Gollancz, Victor, 170 Good Society, The (Lippmann), 83, 84, 89 Gorbachev, Mikhail, 216, 223, 224, 226 Graaff, Johannes de Villiers, 207 Gramsci, Antonio, 75 Great Depression, 4, 46, 52, 53, 73, 75, 78, 81–3, 86, 88, 105, 285 Great Leap Forward, 31, 216, 218 Great Reform Act (1832), 9 Great War, 1, 12, 15, 60 Haber, William, 22 Haberler, Gottfried, 32, 55, 77, 139n91, 141n103, 142n108, 206 Habsburg Empire, 2, 8, 30, 32, 33 Hamowy, Ronald, 11, 64n9 Hansen, Alvin, 82, 206 Harris, A., 48–50 Harris, Ralph, 5, 112, 125, 139n90 Harris, Seymour, 202 Harrod, Roy, 202 Hatton, Judith, 48 Hawke, Bob, 61, 234 Hayek, Friedrich von, 2, 62, 105, 282 Hayek’s triangles fashionable opinion, 23–30 trickle-down-the-triangle, 42–3 trickle-up-the-triangle, 43–7 Hazlett, Thomas, 38 Hazlitt, Henry, 97, 116, 135n48 Heath, Edward, 114, 115, 121, 124, 140n93–5 Hegghammer, Thomas, 281–2 Heller, Walter, 116 Henry II (King), 32 Henry VII (King), 30 Henry VIII (King), 30, 32 Heritage Foundation, 123 Hicks, John, 52, 78, 203 Higgs, Robert, 115, 127 Hitler, Adolf, 6–9, 37, 40–2, 51–2, 54–5, 64n7, 155, 220, 287 Hobsbawm, Eric, 105 Hobson, Oscar, 25, 139n91 Hollinger, David, 22

Holy Roman Empire, 13, 26, 32 homo economicus, 283 Hoover Institution, 123, 128n2 Howe, Sir Geoffrey, 114, 115, 125 human rights, 3, 28–9, 219, 225 Hungary, 2, 55, 228, 254, 255, 268 Hunold, Albert, 49, 92, 93, 99, 100, 103–4, 108–9, 128n2, 134n42, 136n70–1, 137n73, 137n75, 141n99 Hutt, W. W., 78, 139n91 Hyde, John, 235 IEA (Institute of Economic Affairs), 5, 25, 48–50, 104, 112–15, 123–5, 127, 139n89, 139n91–2, 142n109, 252 IHS (Institute for Humane Studies), 122 Illarionov, Andrei, 256, 261, 262 income redistribution, 190, 191 individualism, 11, 20, 87, 129n6, 130n11, 237, 283 Industrial Fluctuations (Pigou), 193, 196, 200, 201–2 intellectual counter-revolution, liberalism, 121–6 International Monetary Fund, 124 IPA (Institute of Public Affairs), 234, 235, 237, 239, 240, 241 Isaacs, George, 163, 164, 167, 169, 178n62–3, 180n84, 181n93 Isabella Queen, 30 Italy, neoliberals, 109–11 Iversen, Carl, 97, 99 Jarvie, Ian, 246n1 Jewkes, John, 97–9, 112, 135n51, 139n91 Johnson, Harry, 140n95, 206 Johnson, Lyndon B., 118 Joseph, Sir Keith, 114, 115, 124, 125, 140n93 Jouvenel, Bertrand de, 93 Kahn, Richard F., 188 Kaldor, Nicholas, 203 Kalecki, Michal, 205 Kamitz, Reinhard, 43, 104

Index Kasper, Wolfgang, 236, 243–4 Keating, Paul, 234 Kemp, Betty, 238–9 Kemp, C. D., 235, 238, 239, 241, 245 Kerensky, Alexander, 215 Kerr, Sir John, 61, 233 Keynes, John Maynard, 5, 21, 24, 27, 46, 73–5, 78, 82–3, 90, 102, 133n30, 139n87, 181n106, 187–9, 196, 198, 202, 209n5, 235 Keynes, John Neville, 186 Keynesian challenge and applied economics, 196–200 economic policy, 82, 88, 110, 122–4, 127, 184, 189 economic theory, 208, 235, 252–3 fiscal revolution, 115–16 macroeconomics, 133n30 welfare consensus in Britain, 111–15, 139n87, 149n93 Keynesian avalanche, 75 Keynesianism, 46, 75, 88, 99, 122, 173n15, 232n33 Keyserling, Leon, 116 Kim Jong-un, 222 Kimpton, Lawrence A., 20–1, 64n25 Kirk, Russell, 117, 140n98 Kitching, Ronald, 233, 239, 244–6 Klein, Lawrence, 21, 88 Klein, Naomi, 284 Knight, Frank, 76, 80, 91, 201 Koestler, Arthur, 15, 174n26 Korean War, 108 Kossuth, Lajos, 9 Kresge, Stephen, 36 Kuehneilt-Leddihn, Erik ‘Ritter von’, 26, 140n98 Kuhn, Thomas, 88 Laar, Mart, 60, 229 laissez faire, 15, 19, 47, 73, 75, 76, 78, 80–1, 83–6, 89, 91, 119–21, 129n2, 129n6, 129n9, 130n11, 131n18, 131n21, 132n23, 134n39, 138n80–81, 154–6, 171, 177n46, 266, 282–3, 287 Lakatos, Imre, 75, 88 Lall, Deepak, 46

297

Landa, Ishay, 286, 287, 289 Lapses from Full Employment (Pigou), 183, 200, 203–4 Laski, Harold, 41 Latvia, 228, 268 Lehman Brothers, 44, 66n65 Lenin, Vladimir, 7, 18, 214–16, 220–2 Lerner, Abba, 170, 203 Leube, Kurt, 32 Lewis, Wyndham, 5 Leyonhjelm, David, 235 liberalism, 35, 40, 87, 96, 103, 117, 140n97 beginning of revival of, 99–101 Chicago, 80–1 economic, 8, 59, 74, 76–7, 88–9, 91, 104, 117, 121, 133n30, 286–8, 286–90 Freiburg, 78–80 Germany, 105–9 Great Depression and stimulus policies, 81–3 intellectual counter-revolution, 121–6 London, 77–8 Vienna, 76–7 Liberalism in the Classical Tradition (Mises), 6, 8 Liberal Utopia, 9, 26, 50, 51, 61, 101–5 liberty, personal, 1, 40, 43, 48, 60, 286 Lindsay, Greg, 236 Lippmann, Walter, 50, 75, 83–86, 88, 92–93, 97, 125, 131n19, 133n28–9 Lithuania, 228, 253, 268 London School of Economics, 13, 41, 50, 57, 77, 139n90, 159, 244 Ludendorff, Erich, 6, 7 Ludwig von Mises Institute, 26, 51, 226 Luhnow, Harold, 56, 91 Lutz, Friedrich A., 91, 101 McCarthy, Joseph, 18, 19, 22, 64n16 McCracken, Paul, 118, 126, 142n108 Machlup, Fritz, 16, 26, 59, 77, 135n48, 141n103 McLure, Michael, 208n1 Macmillan, Harold, 112, 114 Magic Mountain (Mann), 13, 14, 16

298

Index

Maltsev, Yuri, 60, 214, 231n4 Manhattan Institute, 32, 123 Mann, Thomas, 13, 14, 16 Mao Zedong, 31, 218, 219, 220, 222, 231n10 Marlio, Louis, 87, 133n29 Marshall, Alfred, 185, 189, 208n1, 208n2 Marxism, 217, 282 Marxists, 127, 137n72, 215–18, 220, 222, 281–3, 285 mea culpa, 4, 46, 52–3, 55 Mein Kampf (Hitler), 8 Menzies, Robert, 235 Merton, Robert, 44 Meyer, Frank A., 140n98 Miksch, Leonhard, 104, 106, 107, 108 Mill, John Stuart, 25, 142n112 Mises, Ludwig von, 6, 11, 26, 51, 61, 73, 76, 221, 225–6, 253, 282 Mises, Margit, 11, 14, 18 Mont Pèlerin Society, 5, 10, 17, 20–1, 26, 43, 46–9, 60, 61, 74, 75, 86, 94, 95, 98, 113, 119, 127, 128n2, 154–6, 170, 172n1, 175n30, 234, 252, 285–286 Moore, Robert, 238, 245 Morris, Dorothy, 56 Morris, Walter, 56 Morris Foundation, 56 Müller-Armack, Alfred, 94, 104, 107, 136n59, 137n77 Murdoch, Rupert, 32, 60 Murray, Philip, 4 Mussolini, Benito, 6, 62, 110, 156, 220, 287 Myrdal, Gunnar, 236, 240 Naishul, Vitaly, 255, 256, 258, 259 Nash, George, 117 National Socialism, 9, 74, 78, 83, 92, 105, 129n8, 220 Nazi Germany, 50, 135n50, 221 neoliberalism, 50, 80, 95, 96, 104, 252, 288 Breivik, and democracy, 284–6 history of, 128n2 Italy and France, 109–11 manifesto of German, 79

metamorphosis of liberalism into, 96–7 new research programme, 87–9 Paris as birthplace of, 83–7 re-orientation towards laissez faire, 119–21 Neurath, Otto, 225, 232n24 New Deal, 74, 80, 81, 83, 84, 106, 109, 115–19, 131n19, 135n57, 141n102, 156 New Economic Policy (NEP), 216 Nicholas II, 214, 215, 216 Nineteen Eighty-Four (Orwell), 59, 153–4, 156–7, 174–5n30, 175n31 Nixon, Richard, 16, 22, 118–19, 121, 126 Noel-Baker, Philip, 186 Norman, Sir Robert, 245 Nutter, G. Warren, 118, 120, 142n108 Nymeyer, Frederick, 20–1 oil prices, Soviet Union, 260–4 Olson, Mancur, 79 Opium Wars, 31, 32 Orwell, George, 8, 42–3, 153, 172, 173n19, 175n30 ‘other’, 56–9 Pareto, Vilfredo, 205 Paris, neoliberalism, 83–7 Patinkin, Don, 54, 206 Paton, William A., 21–2, 65n27 Paton, William A., Jr., 22 Peltzman, Sam, 120 perestroika, 216, 254, 261 personal liberty, 1, 40, 43, 48, 60, 286 Persons, Warren, 201 Pigou, Arthur Cecil, 53, 60, 62, 80, 183–4, 207–8, 208n2–3, 209n10, 209n4–8, 209–10n13, 210n14, 210n16 biographical sketch, 184–9 contemporary reception of work by, 200–204 contributions to economics, 189–200 The Economics of Welfare, 201 economic welfare, 189–92 Employment and Equilibrium, 202–3

Index Pigou, Arthur Cecil – continued Industrial Fluctuations, 201–2 industrial fluctuations and employment, 192–6 Keynesian challenge and applied economics, 196–200 Lapses from Full Employment, 203–4 legacy of, 204–7 The Theory of Unemployment, 202 Wealth and Welfare, 183, 201 Pigou, Clarence George Scott, 184 Pigou effect, 198, 202, 205, 206, 207 Pilgrim Mountain, 2, 10–16, 50–2 Plickert, Philip, 59, 73 Poland, 7, 220, 228, 254, 255, 266, 268 Polanyi, Michael, 99, 135n51, 154, 155 Popper, Karl, 20, 59, 93, 98, 135n49, 170, 181n96, 246n1 Posner, Richard, 120 post-Socialist economic transformation, 249–50 emergence of transnationalized capitalism in Central and Eastern Europe, 264–70 from socialism to transformation in Russia, 258–64 intellectual origins of transformation strategies, 241–8 mutations between plan and market, 270–4 transition experience, 274–5 Powell, Enoch, 113–15 power Hayek, and sovereignty, 47–50 of ideas in politics, 126–8 Prior, Jim, 125 Progress Party, 235 property, privatization of, 249–50 Public Choice theory, 116, 121 Qing dynasty, 31 Rand, Ayn, 231n5, 234 Randerson, Roger, 233, 240, 241–2, 244 Rappard, William, 84, 92, 93, 98, 134n41

299

Read, Leonard, 90, 133n34, 141n107 Reagan, Ronald, 118, 119, 123, 142n111, 252, 261, 288 regulation of traffic, 86 Republican Interregnum, 34 Republican Party, 22, 119, 123 Rifkin, Jeremy, 9 Road to Serfdom, The (Hayek), 9, 10, 36–38, 41, 42, 47, 56, 60–2, 81, 89, 91, 111, 139n89, 152–155, 157–9, 166–72, 176n36, 218, 223, 226, 227, 229–30, 236, 239, 285 Chinese translation, 219 Reader’s Digest version, 55, 59, 139n89 Roback, Jennifer, 153, 156 Robbins, Lionel, 13, 15, 53, 78, 93, 97, 104, 107, 137n75, 139n90–1, 204 Roberts, Paul Craig, 126 Robertson, Dennis Holme, 209n7, 210n14 Robinson, Austin, 187, 206 Rockwell, Llewellyn, Jr., 26 Romania, 268 Röpke, Wilhelm, 76, 78, 79, 82, 84, 85, 87, 89, 92–3, 97, 100, 103–4, 106–8, 110, 117, 128n2, 130n11, 132–3n27, 133n32, 134n39, 134n41, 135n49, 136n59, 141n99 Rosten, Leo, 4, 38, 41 Rothbard, Murray, 10, 63, 140n98, 226, 232n28 Rougier, Louis, 51, 84–7, 131–2n22, 133n28 Rueff, Jacque, 84, 86, 87, 101, 110–11, 135n50 Rummel, R. J., 218, 231n6 Russell, Bertrand, 170, 174n26 Russia, 215 transformation from socialism, 258–64 voucher privatization, 262–4 Rüstow, Alexander, 78–9, 84–6, 92, 97, 103, 128n2, 130n10–11, 132–3n27, 134n39, 135n50, 136n59, 136n71 Saatchi, Charles and Maurice, 5 Sachs, Jeffrey, 253

300 Index Samuelson, Paul, 55, 116, 141n105, 202 Schlesinger, Arthur, Jr., 174n28 Schmitt, Carl, 39 Scholes, Myron, 44 Schumpeter, Joseph, 59, 74, 99, 129n3, 206 Schutz, Alfred, 59 Second World War, see World War II Seldon, Arthur, 5, 48, 112, 113, 115, 127, 139n90–1, 140n93 Sharma, Ruchir, 46 Shehadi, Nadim, 21 Shenfield, Arthur, 115 Sherman, Alfred, 124 Shleifer, Andrei, 253 Shultz, George, 118, 126 Simons, Henry, 47, 76, 80, 116, 121 Simons, William E., 126 Slovakia, 255, 268 Slovenia, 228, 268 Smith, Adam, 49, 77 social Darwinism, 236 Social Democratic Party, 214 Social Democrats, 215 socialism, 17, 23–4, 42, 62, 65n40, 73–5, 124, 131n20, 170–1, 214–15 Attlee government, 153, 158–61 Australia, 234, 236, 240 Britain, 112, 114, 176n35–6, 176n39 demise of system, 214–30 economies, 77, 106, 224, 250–1, 253–4, 257–60, 269 Germany, 105–8 Orwell, 153–8, 173n19, 175n31, 176n35 see also National Socialism; postSocialist economic transformation social justice, 34, 36, 40, 228, 236, 242 Solidarity, 251 sovereignty, Hayek, power and, 47–50 Soviet Union, 50, 55, 58, 166, 214, 217–18, 223–4, 228–9, 252, 255, 259–61, 271–2 Sowell, Thomas, 123 Stalin, Josef, 18, 42, 60, 216, 217, 220, 222 Stein, Herbert, 115, 118 Sternhell, Zeev, 288

Stigler, George, 2, 76, 81, 203, 250, 256 Sweezy, Paul, 202 Taft, Robert, 116 Talmon, J. L., 36 Tanaka, Seigen, 43 Taylor, A. J. P., 65n40 Thatcher, Margaret, 5, 32, 55, 104, 114–15, 123–5, 127, 140n94, 142n110–11, 192n4, 246, 251–2, 288 Theory of Unemployment, The (Pigou), 183, 187, 188, 194–7, 200, 202 Thirty Years War, 92 Tier, Mark, 244 Tobin, James, 116 Tory Party, 42, 50 totalitarianism, 36, 86, 153–4, 156, 158, 171, 172, 174n26, 174n28 totalitarian planning, Attlee government and, 158–62 Trevelyan, George M., 186 triangle, fashion industry model, 27 Trilling, Lionel, 116 Trotsky, Leon, 7, 216 Truman, Harry S., 19, 64n16 Tullock, Gordon, 116 unemployment, Keynesian challenge and applied economics, 196–200 United Automobile Workers (UAW), 157, 158 USSR (Union of Soviet Socialist Republics), 100, 155, 157, 218, 224, 229, 232n22, 253–6, 258–60 Utopia (More), 61 van Horn, Rob, 91, 134n38, 141n102 Vaughn, Karen, 43 Vienna, liberalism, 76–7 Viner, Jacob, 80, 82 virtual economy, 271, 272 Volker Fund, 2, 56, 91, 93, 122, 134n38 wage policy, 195, 196, 202 Wagner, Robert, 82 Walgreen, Charles, 17

Index Walter, J., 234, 235 Warren, Elizabeth, 9 Wealth and Welfare (Pigou), 183, 186, 189, 197, 199, 200, 201, 205, 206, 208 Wealth of Nations, The (Smith), 77 Weimar Republic, 13, 31, 130n10 Weizao Teng, 61 Whitlam, Gough, 61, 233, 243 Wicksell, Knut, 53 Wincott, Harold, 25 Without Capitalists (Efimov), 257

301

Woods, Tom, 229 Wootton, Barbara, 170 World War I, 11, 73, 186, 198, 214, 215, 219 World War II, 31, 74, 124, 205 Yeltsin, Boris, 256, 263 Young, Allyn, 201 Zheng He, 30, 31 Zhou Enlai, 219

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