The Home of American Intellectual Conservatism — First Principles

January 20, 2019

Economic Policy and the Road to Serfdom: The Watershed of 1913; Chapter 1 from "Back on the Road to Serfdom" by Thomas E. Woods Jr.

We are perhaps apt to forget that during the Cold War, it was generally conceded that the Soviet Union had a higher rate of economic growth than the United States. Given that the United States accounted for nearly half of world output in 1945, the logic held that it did not have room to grow like the other nations of the world, which collectively accounted for the other half. Starting from a much lower base—and having gained an empire—the USSR surely could expect greater economic expansion than the United States.

There was no more confident advocate of this position than the postwar world's premier economist, Paul A. Samuelson. Samuelson touted the growth record of the USSR in his book Economics: An Introductory Analysis, the leading economics textbook of the era, and he said the same thing as adviser to those in power. When John F. Kennedy was running for president in 1960, Samuelson wrote to the Democratic candidate, "America has definitely been falling behind not only with respect to the USSR, but with respect to most of the other advanced countries of the world. For years, our production has been growing more slowly than that of Russia, Western Germany, Japan, [and a host of other countries]" (emphasis in the original).1

JFK offered no resistance to this point, and few others in Washington did either. By the 1980s, the CIA's national estimates held that the USSR's economy, which had been at mass famine levels four decades prior, was now half the size of that of the United States. The Soviet Union's rates of growth had been so much higher than those of the United States, according to U.S. intelligence, that the two economies were possibly on a path of convergence.2

Then, in 1989, an official in the USSR's national accounts bureau named Yuri Maltsev defected to the United States and revealed that by good standards of measurement, the Soviet economy stood at only 4 percent of the U.S. total. After the Soviet state collapsed two years later, investigations by the World Bank, the International Monetary Fund, and the Organization for Economic Cooperation and Development concluded that the Soviet economy had been only half as big as the CIA reckoning, reaching about a fourth or a fifth the size of the U.S. economy. Maltsev stuck with his number, and soon he was joined by dissenters from within the Western statistical bureaucracies, such as William Easterly at the World Bank. An old rule of thumb in the face of two clusters of professional estimates is to split the difference. Applying the rule in this case, we can say that the Soviet economy peaked at about one-eighth the size of the American economy.3

Although the economic failures of the centrally planned Soviet state are now well documented, no less a champion of the free market than F. A. Hayek expressed doubts that free-market capitalism was superior to planning when it came to total output and standards of living. In The Road to Serfdom Hayek wrote:

Which kind of values figure less prominently in the picture of the future held out to us by the popular writers and speakers . . . ? It is certainly not material comfort, certainly not a rise in our standard of living or the assurance of a certain status in society which ranks lower. Is there a popular writer or speaker who dares to suggest to the masses that they might have to make sacrifices of their material prospects for the enhancement of an ideal end? Is it not, in fact, entirely the other way round?4

The Road to Serfdom was a warning that collectivism is a temptation of the most serious sort, in that it had the ring of a good trade. In exchange for civil liberties, which is to say a high degree of personal, familial, and community autonomy, submission to a centralized state stood both to eliminate social inequality and to bring material well-being if not affluence.

This is one of the great overlooked aspects of The Road to Serfdom: Hayek is careful to argue for the market not on the grounds of what it may produce in terms of standards of living. Rather, he urges that yielding to the market will make us better persons, though it may make us economically poorer. Under "individualism," we will develop good values and habits "which are less esteemed and practiced now—independence, self-reliance, and the willingness to bear risks, the readiness to back one's own conviction against a majority, and the willingness to voluntary cooperation with one's neighbors."5

This defense of individualist over collectivist values is the book's strongest suit. But history has shown that the actual road to serfdom not only leads to the uncivilized value structure of which Hayek wrote so eloquently. It also debilitates living standards, despite Hayek's fears that there were legitimate reasons to be tempted by collectivism.

We should be careful not to fall into the common trap holding that economics is inevitably the science of trade-offs—a trap that snared even Hayek. He felt compelled to write The Road to Serfdom "to the socialists of all parties" because he believed that material well-being and social equality were plausible results of collectivism. Hayek's conclusion was perhaps not unreasonable at the time, given that the ascendant Nazi Germany was achieving a higher rate of economic growth than the less collectivist Britain to which he had fled. But in fact, such benefits are not plausible. More importantly, preparing the ground for collectivism at all may well introduce the slippery slope toward impoverishment more quickly than we think.6

Today, more than sixty-five years after the publication of The Road to Serfdom, the United States seems to be taking alarming steps in the collectivist direction. To understand where this path leads, we need not look at something so manifestly disastrous as the Soviet economy, whose history is one of privation, supply-demand disconnect, constant rescues by foreign capital, and unsustainability tantamount to simple preposterousness. America's own history, while blessedly bereft of analogues to the Soviet experience, is itself quite clear about what happens when nods are made in the collectivist direction. For an investigation of the course of American economic history since the Civil War reveals a remarkable truth: all periods of prosperity in the United States have coincided with decided efforts to keep collectivist inclinations at bay, and all periods of economic weakness have occurred in the context of dalliances with collectivism—that is, with efforts to impose governmental management on the economy.

The frightening truth is that if America's leaders do not understand this history, our government may only double down on economic policies that have caused trouble in the past.

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