Market Economy as “The Road out of Serfdom”

From: Contending with Hayek

On Liberalism, Spontaneous Order and the Post-Communist Societies in Transition

Christoph Frei / Robert Nef (eds.)

Market Economy as “The Road out of Serfdom”

150 years ago Switzerland was one of the poorest countries in Europe, without raw materials, without access to the sea, without powerful friends; an emigration country with occasional famines. Today it is one of the richest countries in the world. Above all in the 19th century, during which the foundations for this success were laid, the liberal economic order combined with a willingness to work and the propensity to save brought about a sort of “economic miracle”. In the 20th century Switzedand owes its prosperity to the further development of these qualities and the fact that Switzerland remained untouched by two world wars.

Success always has at least three components: background conditions, efficiency, and luck. The first two can be influenced; one has to hope for the last, recognise the favourable moment and grasp it. Liberals should have enough intellectual honesty to admit to the importance of luck in the sense of a happy constellation and its influence in a spontaneous set-up. The prosperity of nations depends on the quality of their people – but not just on that.

This glance at the economic history of Switzerland allows us to draw one optimistic and one pessimistic conclusion about the present. We tend to be optimistic because it is clear that a liberal economy can be a success. Experience shows us that it works precisely because it is a developing phenomenon which can overcome setbacks and losses. At the same time, we should beware of excessive optimism, because the creation of an economy based on liberal principles as a road out of serfdom is never the work of a single generation. It requires much time and patience’ And precisely these two resources are especially scarce today in the former eastern bloc.

When Moses led the children of Israel out of the bondage of Egypt and into the promised land, the passage through the desert also took an entire generation. The important elements were not just the character of Moses as a leader but also the Ten Commandments and patience – tried and tested but renewed again and again by Hope. We can only hope that the most important of these prerequisites can be fulfilled in today’s eastern bloc.

There are too many intellectuals who travel to central and eastern Europe nowadays to distribute good economic advice, which they themselves do not practise at home or with regard to others. We do not wish to lend our voice to this chorus. Economics is always a shared learning experience in the course of which – for example – customs duties and import restrictions are dismantled. The same applies to the exchange of ideas.

Diversity, envy and need

One of the most difficult hurdles in the current transformation process lies in the area of social psychology, namely in the transition from equality in serfdom to inequality in diversity, which of necessity brings with its substantial differences in income and wealth. Diversity is one necessary factor in the survival of freedom, but every liberal system rests on a minimal basic consensus – on the majority acceptance of inequality. Envy must not be allowed to undermine the basis of trust for exchange and competition and the commitment to diversity must be permanently supported.

One emphatic symbol of diversity was not invented by a classical liberal but by a mathematician; it is the famous Gaussian distribution curve. For liberals it also has a political aspect, because it expresses the fact that good and bad characteristics in a society always occur in a normal distribution. If one wants to do away with the negative aspects, one is in immediate danger of destroying the positive aspects. That which is ‘well meant’ is very often the opposite of good. The Gauss curve also plays a part in social politics. It is impossible for everyone to help everyone else – indeed it is not even desirable for everyone to help everyone else – instead one must ensure that the needy – perhaps 5% – but certainly no more than 10 % are not left in the lurch. A society which goes beyond this upper limit of collective help, overreaches itself and eventually loses the ability to survive.

Evolution and revolution

Under socialist rule the idea of socialist progress was propagated for decades. The population was to do without freedom and prosperity in the present in order to achieve it in the future. Today’s scepticism about the idea of progress is understandable against this background, but it should not degenerate into cynicism. We are not in fact simply going round in circles. There is evolution, but it is slow. People are not easily educated, but they do not entirely lack educatability. Progress is evolution and innovation, continuity mixed with spontaneity. The idea of evolution may bring some relief to the current problem in the former eastern bloc. The contrast between the principle of gradual evolution and spasmodic revolution is rather a matter of speed than of principle. It is well known that evolution consists of a multitude of small revolutions. The idea of evolution connects with the past, but does not subordinate the present to an uncertain future. To this extent it is different from utopian concepts, which always sacrifice the present for a desired future – a future which does not take place anyway. These methods suffocate in continual disappointments the grudging but necessary readiness to make sensible sacrifices for common progress.

Less state

Classical liberals are anti-state. The postulate “less state” is aimed at the welfare state and not at the constitutional state. A strong constitutional state is desirable from a liberal point of view. lt is responsible in the first place f or the f ~amework and should respect the Iimits of the redistributing soc1al state as well as populist interventionist democracy. Although a certain need f or state assistance and intervention du ring the process of transf ormation from one system to another is understandable, social intervention and activities should be regarded as a necessary evil.

State-run economies are like a drug addiction which must be broken. In the period during which this habit is to be broken one may have recourse to other equally damaging medicines, but the final goal should be to come off these as soon as possible. We in Switzerland have also gone beyond the acceptable limits of the welfare state -i.e. everyone looks after everyone eise and no-one looks after the tax-payer or the really needy. The state cannot be social; people must be social and the more social the state, the more asocial the people can be. We too are confronted by the task of finding a way back or out of the welfare state. The responsibility which each individual must bear is a key concept in this context and the process of transformation is a vitally important habit-breaking and learning process, which is worthy of world-wide respect.

Mutual trust and negative freedom

In my opinion the worst consequence of the socialist economies in the former eastern bloc is not the economic crisis, but the crisis of mutual trust and good faith, which has come about because of totalitarian structures. In the future mutual trust and fidelity will have to be restored and allowed to grow. I am reminded in this context of a sentence by Joseph Conrad. In his autobiography Some Reminiscences on Myself he writes the following about the fundamental importance of fidelity:

Those who read me know my conviction that the world, the temporal world, rests on a few very simple 1deas; so simple that they must be as old as the hills. lt rests notably, amongst others on the idea of Fidelity.

The market is a good means of engendering confidence or letting confidence grow. In diverse exchanges – especially in the field of credit – people learn best how to deal with trust and mistrust. Viable networks of reliance are rewarded with economic success, and eventually form a common economic and social root system, which rests on the idea of contractual probity and personal responsibility. Bearing the responsibility for the consequences of one’s actions and behaviour (liability) makes possible the mutually produced reliability, which binds one’s own personal freedom to that of one’s fellow human beings.

The idea of ‘negative freedom’ – like most negations – is not very meaningful, but there are no positive alternatives. Perhaps it is in the nature of freedom that it can best be recognised and described from “the other side”. Hayek postulates that freedom consists of three components: firstly, the idea of peace (the negation of violence and war, force only used defensively), secondly, the idea of justice (the negation of arbitrariness – no more and no less) and thirdly, the idea of freedom (the negation of coercion – as little coercion as possible).

Adam Smith provided the classical definition of a prospering society, and in doing so defined the positive i.e. methodical importance of freedom from a political viewpoint. His three prerequisites are: peace, easy taxes, tolerable justice. lt would be an interesting task for historians and economists to investigate which states really did flourish as a result of these prerequisites – and which did not. In Switzerland at least, one would arrive at comparatively positive findings. The importance of the prerequisite of easy taxes is often underestimated. The third prerequisite 1s pragmatically formulated: tolerable justice, and 1t dehberately aspires neither to perfection nor to exaggerated ethical demands on the political system.

The market economy as a goal

The market economy is not a system; rather it is what happens when we do not stand in the way of people as they follow their own goals, while at the same time respecting the welfare of others. The market economy has nowhere been perfectly implemented – neither in Switzerland nor in the USA. lt is being continuously extended and renewed, a process which is occurring today in an especially dramatic – and therefore especially instructive – way in the former eastern bloc. The success of this renewal depends among other things on whether envy can be overcome. (This is also the important message of the Tenth Commandment.) In this context one can cite Ludwig von Mises:

The idea that there is a third system – between socialism and capitalism, as its supporters say – a system as far removed from socialism as it is from capitalism but retaining the advantages and avoiding the disadvantages of each – is pure nonsense. People who believe there is such a mythical system can become really poetic when they praise the glories of interventionism. One can only say they are mistaken. The government interference which they praise brings about conditions which they themselves do not like. (Mises 1979: 51f.)

In attempting to describe the market economy – as in attempting to describe liberalism – we should use as few adjectives as possible. Only so is it possible to create a broad enough consensus. In my opinion the ecological and social components are already part of consistent radical-liberal practice. What is not ecologically sound cannot be economically sound, and what is economically unsound cannot – in the medium and especially in the long term – be socially sound.

People are neither good nor bad. They have a positive drive to self-preservation and the negative urge to self-destruction. The adherents of liberalism approve of egoism as an intelligent form of self-preservation. They must reckon with the egoist, but they count on and hope for the altruist and his sense of responsibility; and they know that in the final analysis altruism is not the opposite of egoism, but a successful variant which practises brotherly love by the yardstick of self-love.

Spontaneous order

According to Hayek’s idea of spontaneous order, societies and states in which nothing but egoism is practised will not survive. On the contrary, there will be a selection which favours those who spontaneously and successfully re-establish a balance between individualism and social behaviour. In this sense “the survival of the fittest” means nothing more than “the survival of the best adapted”, and “the best adapted” is the person who uses his individuality in the best way – for himself and for others. The most social society is that which consists of intelligent egoists. This is not a popular point of view. As a publicist, however, one should not be primarily concerned to be popular, but rather open and honest. The same applies to good politics. Openness and honesty are not merely moral postulates, but viable political strategies. Truth wins against lies because in the end the continuous maintenance of a facade of false promises and lies is too expensive in every respect. The victims of socialist experiments have gained a good deal of experience in this regard.

In the long term, liberalism’s trump card is its openness and its readiness for self-criticism. In a communications society liberalism is proof against the creation and maintenance of a very expensive and finally impossible “system of lies”. Its vulnerability lies in the area of balance between rich and poor. Liberalism cannot and will not eradicate inequalities; consequently it will always have the ever-present mass of “levellers” against it, both those who are socially and politically engaged on behalf of the weaker members of society and those whose motive is mere envy – two groups which can hardly ever be clearly separated.

For a great many people the goal of freedom is of secondary importance to the goal of social security. That this goal can best be reached in the long term in a liberal society is often wrongly doubted. In a democracy liberal ideas must survive in the face of the resistance of politicians, whose only policy consists in distributing and redistributing the bounty of state, in order to ensure their own re-election or to remain in power, thus sacrificing the long-term general to the short-term particular.

lt is true that freed prisoners at first share the feelings of all “well-fed slaves”: They miss the free bed and the free soup. Freedom is strenuous and the longing for it is often more attractive than its attainment and its protection. Freedom is not attainable without hard work, a willingness to take risks, and voluntary commitment.- This experience has been expressed in a sentence by Milton Friedman, which sounds cynical but which is nonetheless true. (lt could express the experience of a dish-washer who has not become a millionaire.) “There ain’t no such thing as a free lunch”.

Eastern Europe under liberalism can look forward to an interesting phase of probation and breakthrough. If the elite in those countries pass the test, they will become an example to be followed in the west. In the short and medium term the somewhat bloated and sluggish liberalism in Western Europe can expect to receiye fresh impulses from the east. Western liberalism has slid further and further into the cul-de-sac of the “Swedish Model” through decades of compromise, and has slid farther than is generally perceived; the “escape into bigger units” is a welcome opportunity for ignoring the actual problem.

Popper versus Hayek

In his Reflections on the Revolution in Europe, Ralf Dahrendorf deals with the post-communist societies in transition. Should they proceed gradually, or should they risk the big leap by bringing about a quick, radical change of the economic system? Arguing in favour of gradualism, Dahrendorf recalls Sir Karl Popper’s insights into the open society and its piecemeal evolution. At the same time, he warns of adopting F.A. Hayek’s views on one’s “road out of serfdom”. Hayek, Dahrendorf claims, had “too little patience for the disorder of reality”, and, furthermore, a fatal tendency to contrast socialism with yet another system.

Popper has emphasised on many occasions that there are no substantial differences between himself and Hayek. Hayek for his part has denied in many publications the accusation of “thinking in terms of systems “. Dahrendorf’s reproach that Hayek, like Marx, “knows all the answers is met and refuted in the very readable Nobel Prize lecture The Pretence of Knowledge.

It contains some decisive passages, which demonstrate how little justification Dahrendorf’s reproaches about a so-called pure Hayekism actually have.

The scepticism with regard to the feasibility of all things (constructivism) stands in the centre of Hayek’s later work. This scepticism is the expression of a Socratic intellectual humility which questions the spirit of scientific presumptuousness. lt is for precisely this reason that reading Hayek’s later work can be important and beneficial in the former eastern bloc. lt prevents one from leaping directly from the socialist delusion of feasibility to an equally harmful democratic-technocratic delusion of feasibility. Rather, it makes possible that blend of persistence, patience and optimism which is vital in the current process of liberalisation.

Hayek argues against the background of a very long-term view of history, in which it is not political ,events which are imponant, but anthropological development processes. His work is more a cultural macro-theory of homo sapiens than a collection of recipes for day-to-day political and economic occurrences.

Is Hayek really the resigned fatalist who only wants to create the “order of the unknown” by “causing it to order itself” (Dahrendorf [1990], p. 32)? His entire opus refutes this interpretation. If there really is an “invisible hand” which “turns all things to their best”, then all intellectual and social engagement would be superfluous. Popper and Hayek both agree that mankind is hard to educate, but it needs wise people who can help it recognise and avoid errors – in the knowledge that the pretence of knowledge can always be a fatal conceit.

Hayek has by no means capitulated in the face of this enormous challenge, and thanks to his radicalism he belongs to the group of social scientists who have contributed significantly to the history and the constitution of human freedom and to the opening of closed systems. Hayek’s thinking is radical and uncompromising, but this radicalism must not be confused with totalitarianism. Compromise is always necessary in poltt1cs, in the economy, and in society. Compromise, however, is requ1red in action, not in concepts. Must not many liberals in the west. ask themselves the question if they were radical enough in the intellectual conflict with totalitarian socialism between 1945 and 1989? Have we not spent too much effort looking for concessions and compromises, when clear delineation in the best sense was, and indeed is, necessary?

Both Popper and Hayek – each in his own way – have uncompromisingly set the intellectual signposts which point the way out of serfdom and lead to an open society.

The horse and the rider

The transition from a bankrupt centrally administered economy to a market economy is – especially in the first phase – necessarily associated with great social and economic inequalities. So-called speculative gains encourage envy and delay or prevent the making of peace on the basis of mutual trust. In addition, many results of mismanagement which appear in the form of “burdens from the past” are attributed to the new regime. So we must certainly reckon with populist-interventionist relapses into the old socialist centrally administered economies and into nationalistic socialism, even if words like ‘socialism’ and ‘national’ are not used in this context. By national socialism I mean the economic and social doctrine that was inherent in historic national socialism and fascism a doctrine which might weil be revived in a less belligerent but no less dangerous form in the coming decades. The trickling down of new wealth and a general economic improvement for all call for time, patience, and tolerance, and these can only arise in a climate of mutual trust and soc1al goodwill. The New Testament also links “peace on earth” with “glory to God” and “benevolence among men” et in terra pax hominibus bonae voluntatis. It is one of the tragedies and paradoxes of the history of ideas that the ideology which claimed to be making man a more social creature has left behind the greatest “social desert”, the greatest mutual distrust, and the crassest examples of individual egoism.

How, and indeed if, trust can be rebuilt in this “desert” and what the prerequisites for this rebuilding are, is an open question. lt must be formulated differently for different political and economic contexts. Above all the reciprocal necessity of constitutional order, private property, contract, and market is central.

The process of transition resembles a ride into territories unknown. The horse {the spontaneous order on which we all “ride”) is often cleverer than the rider, but perhaps one must also bridle the horse, so that both horse and rider have a chance of reaching their goal…