Monday, September 27, 2010

Economophobia: A Critical Analysis of Hayek and the Road to Serfdom

Here is an article written by my friend Christos Makridis. This can be view at
Economophobia: A Critical Analysis of Hayek and the Road to Serfdom

Unequivocal evidence indicates that the economy is suffering from what is characterized as the most catastrophic economic contraction since the Great Depression. Although these types of challenges are inevitable, policymakers can choose to react in productive or unproductive ways. History is plagued with decisions that have brought civilizations to their knees; however, history also is littered with success stories where nations have transcended their challenges towards more prosperous times. The United States is at the crossroads between two polar opposite worlds; in one world, the United States embarks on a failed path, traveled by the Weimar Republic, while in the other, the United States returns to its traditional roots. The choices that are made in the next year will determine the success or failure of the United States.

A Brief History of Germany Pre-World War I

The aftermath of World War I created a power vacuum; not only was Germany’s economy in a severe contraction as a result of debt payments and reparations, but also Germany’s political class was in chaos. In the aim to appeal to the public, a wide array of national associations formed, each promising their own version of prosperity and reconstruction. Yet, these parties were unable to retain their constituents in the face of ongoing economic, political, and social turmoil during the 1920s. Although the political class was organized, it remained vertically fragmented; its structure, from the top down, was unable to articulate and implement a cogent strategy with concrete results (Berman). Political incompetency, fused with severe circumstances, led to a significant deterioration of events.

Faced with the herculean challenge of restoring Germany’s previous economic might, the nation decided that the only way to catalyze their economy would be to start printing money at an accelerated rate. Because of Germany’s economic obligations, as per their agreement post-World War I, to the victor countries, Germany had approximately £6,600 million to pay in debt (HON). Despite Germany’s efforts to regain economic control, hyperinflation resulted due to the massive printing of national currency, plunging their economy into further debt. Specifically, Germany’s economic collapse eroded the distinction between the middle and lower classes, transforming everyone into a consumer with functionally zero bargaining power. As a result, the public became extremely susceptible to revolutionary goals and began to follow suit National Socialism, due to its temporary success in stabilizing the domestic currency (the National Socialist party replaced the Reichsbank with the Rentenmark). Soon, Adolf Hitler began arguing for a resurgence of German nationalism, appealing to populist and violent sentiments, eventually receiving massive decision-making power in the German government (Berman).

Wiemar and the United States: Similarities

Students of history understand that human nature follows a predictable pattern. Although we, as Christians, continually seek to improve, civilizations nonetheless make reoccurring errors in judgment. It is not enough to merely be cautious – we must also be proactive in our historical analysis and be ready to shift courses if necessary. Now, the danger is that the United States will follow the same path that the Weimar Republic took, guaranteeing an era of unprecedented tribulation and suffering.

Unfortunately, there are a variety of signs that signal impending danger in domestic and foreign policy decision-making. Yet, perhaps the most distressing signal in American politics lies in the nation’s ability to meet its economic debt obligations. Aside from the recent year’s accelerated rate of deficit spending, the United States has nearly $202 trillion in unfunded liabilities, including programs such as: Social Security, Medicare, Medicaid, and government sponsored pension plans (Kotlikoff). As Laurence Kotlikoff, an esteemed economist[1] at Boston University, remarks, “Most likely we will see a combination of all three responses [massive benefit cuts for baby boomers, astronomical tax increases, and inflation] with dramatic increases in poverty, tax, interest rates and consumer prices.” Already, we see Laurence’s argument being falsified: poverty levels in the U.S. have increased by 3.8 million in the past year, price controls will limit the quality of care in the healthcare industry, and tax rates will skyrocket (PR Newswire; Taylor, et al).

With such distressing economic evidence, the chair of the Federal Reserve, Ben Bernanke, as well as other Federal Reserve members, has decided to begin what is known as “quantitative easing,” or monetizing the debt by printing money. Although Ben Bernanke said, on June 3, 2009, that he would not monetize the debt, policymakers are once again contradicting their past statements (Faler). That said, most of the economic policymakers never imagined that the federal government would accelerate this economic quagmire at such a quick rate, necessitating drastic economic measures to be taken, like quantitative easing. Although the United States has “the best and the brightest” working to resolve the economic contraction, Germany also had “the best and the brightest” during its economic collapse. No civilization is immune to poor decision-making.

Another dangerous sign of trouble, that parallels the Weimar Republic, is the acceleration of transfer payments and entitlement reform. With increasing calls to action by the Left, the federal government has dramatically increased the growth of the “welfare state.” As noted above, the poverty levels have increased in the past year more than any other year in U.S. history, apart from the Great Depression. Regardless of whether or not there is merit to legislation that expands transfer payments (Social Security, unemployment benefits, etc), there is unequivocal evidence that the federal government has been expanding its authority at an unprecedented rate. One should see this not merely as an ordinary expansion of power, but instead as a relationship sourced in the dependency of American citizens to its government – identical to the atmosphere of dependence that was prevalent in Germany post-World War I.

On the Precipice

Is there a moment in history where scholars can point to and conclude ‘this was when the country culminated its deviation from honor and the free market’? The most dangerous attribute of centrally planned economies is that they subtly “nudge” society in a certain direction. Policymakers do not create overtly totalitarian legislation. Instead, central planners slowly change the structural framework of a given society. If there is a “first step” in the process, it is the delegation of particular technical tasks to separate bodies (Hayek). It is interesting to note that the nation’s regulatory czar, Cass Sunstein, strongly favors this approach. While at the Harvard Law School, Sunstein published a paper in 2008 (in text at: that argues for the creation of “independent experts” that are tied with the government to “dispel” views that are contrary to public opinion (Greenwald). (Sunstein also coauthored the book “Nudge” that argues for slight nudges in a particular direction). In this sense, the federal government would be hiring individuals to “filter” conspiracy theories, albeit what constitutes a conspiracy will be purely subjective by nature.

That said, the purpose of this article is not to argue that the United States has already – or will become – socialist. Rather, these facts must serve as a warning to individuals that the country may repeat dangerous steps of the past. Of course, the United States – and every modernized economy – has used regulatory agencies to help facilitate the growth of the economy and check dangerous imbalances of power. Yet, students of history must pay close attention to recent developments because we have witnessed a dramatic increase in government and regulatory oversight. The danger is this: once a state takes it upon itself the task of planning economic life, serfdom and totalitarianism become inevitable.

Individualism v. Collectivism: The Dangers of Central Planning

But what does it mean to have a centrally planned economy? We hear celebrities and well known individuals, like Michael Moore and to a large extent Paul Krugman, derail capitalism as an irrational system that perpetuates oppression. Indeed, the goal of private industries is profit maximization, but that is not incompatible with charity, honesty, and righteousness. The central tenet that is rarely addressed lies in a deeper philosophical debate between individualism and collectivism.

Where do our rights come from? It is no surprise that the essential features of individualism are sourced in elements of Christianity and classical antiquity, which were implemented and revered the most during the Renaissance (Hayek). In this sense, respect for man and his innate ability to achieve is rooted in the desire for individual liberty and freedom. These freedoms must come from God only – not other individuals or entities. On the other hand, collectivism argues that an individual’s rights are derived from the government and relevant authorities. The United States’ founding fathers legitimately opposed this philosophy because they were divinely inspired. Individuals, such as Benjamin Franklin and Thomas Jefferson, knew that the government authority to control life would inevitably result in propaganda, suppression of knowledge, and hedonism. In the words of F. A. Hayek, a political economist who witnessed the rise of socialism in Nazi Germany:

Individualist ethics are general and absolute; they prescribe or prohibit a general type of action irrespective of whether in the particular instance the ultimate purpose is good or bad. To cheat or steal, to torture or betray a confidence, is held to be bad, irrespective of whether or not in the particular instance any harm follows from it… The principle that the end justifies the means in individualist ethics is regarded as the denial of all morals. In collectivist ethics, it becomes necessarily the supreme rule; there is literally nothing which the consistent collectivist must not be prepared to do if it serves “the good of the whole,” because “the good of the whole” is the only criterion of what ought to be done.

The essence of collectivism necessitates that one will inevitably pursue what is “good for the whole” – a motto which is pliable depending on the authority figure in power. More importantly, morality and personal responsibility are eliminated. Collectivism prohibits the opportunity for moral merit and the chance to prove one’s conviction by coercing individuals into a predetermined behavior. Because there is no truly autonomous choice under collectivism, repentance and personal responsibility is impossible. Economic and political arguments aside, the road to serfdom undermines the potential for living a moral and/or Christian life.

Virtue and Honor: The Road to Prosperity

As the founding fathers properly understood, decentralization and private enterprise is the only path towards individualism and personal responsibility. In a competitive society characterized by private enterprise, there is no single entity that can exercise even a fraction of the power that a social planning board would possess; to decentralize power is to necessarily reduce the amount of absolute power. The virtue of competition and a free market economy is its blindness; the forces of supply and demand do not subjectively isolate certain groups of individuals, prohibiting their success and/or worldviews. Instead, competition provides an atmosphere conducive to hard work and merit. In this sense, individuals are rewarded for the constant honing of their talents. As Christians, this is the only type of society that allows for the worship and glorification of God. Any alternative to individualism and the pursuit of excellence will result in coercion and forced choice – the antitheses of autonomy and moral choice.

Although individuals continue to debate the merits between national policy issues, like healthcare and financial reform, the basic tenets of individualism have proven to be the only path towards God. The classical understanding of individualism does not involve selfishness and greed, but rather a desire to perfect oneself into a more God-like individual, for we are all created in God’s image. As such, our duty is to behave like Christ in our journey to exemplify God’s love for humanity. For this reason, each of us must be aware of our environment and understand developments such that we can adapt our behavior to better fit the challenge. A resurgence in collectivism and central planning will not only make the international community worse off, but also result in hedonism and vice. As Christians, we must carefully scrutinize history, learning from the lessons of the past, so that we do not repeat our mistakes.

Sources Cited

Berman, Sheri. “Civil Society and the Collapse of the Weimar Republic.” World Politics 49.3 (1997): 401-429. JSTOR. Web. 18 Aug. 2010. .

Faler, Brian. “Bernanke Warns Deficits Threaten Financial Stability.” Bloomberg. N.p., 3 June 2009. Web. 18 Aug. 2010. .

Greenwald, Glenn. “Obama confidant’s spine-chilling proposal.” Salon. N.p., Jan. 2010. Web. 18 Aug.

Hayek, F. A. The Road to Serfdom. Ed. Bruce Caldwell. Chicago: University of Chicago Press, 1944.

Kotlikoff, Laurence. “U.S. Is Bankrupt and We Don’t Even Know It.” Bloomberg. N.p., 10 Aug. 2010. Web. 17 Sept. 2010. .

“Nation’s Largest Hunger Relief Organization Responds to New Poverty Numbers.” PR Newswire. N.p., 16 Sept. 2010. Web. 17 Sept. 2010. .

“Study Finds Continued Growth in Federal Regulatory Spending & Staffing.” Murray Weidenbaum Center.

Taylor, John, et al. “Principles for Economic Revival.” Wall Street Journal. N.p., 16 Sept. 2010. Web. 17 Sept. 2010. .

“World War One – The Treaty of Versailles.” History on the Net. N.p., 2010. Web. 17 Sept. 2010. . [abbreviated HON]

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