The recent triumph of republican Donald Trump and the exit of Britain from the European Union mark important events that showcase a resistance to the increasing support of socialist ideals that have developed since the recent recession; something Fredrick Hayek must be happy to see. Hayek was an avid advocate of the free market and raved about the markets power to coordinate people’s decision making. Seeing increasing support for socialist and Keynesian theories in England and the United States following the Great Depression, Hayek felt compelled to warn against the underlying logic of the collectivism and what that implies to individual freedom. In his book, “The Road to Serfdom”, Hayek states that by definition, the concept of collectivism cannot be confined to a limited sphere and may serve as a gateway to a totalitarian dictatorship. He goes on to argue that empowering a government with increasing economic control would lead to a society reminiscent of Nazi Germany and fascist Italy, saying “economic control is not merely control of a sector of human life which can be separated from the rest[…] it is the control of the means for all our ends”. While a path towards a totalitarian regime seems unlikely, it is important to note that basic liberal ideals of equality shaped much of the western worlds’ social and political spectrum after the 2007 recession.
Usually one doesn’t equate the meaning of liberalism with the theory of socialism, but they, in fact, have a fundamental thing in common. By definition, both ideologies are predicated on the fundamental belief of fighting for equality and freedom but are different in the way they represent that. The rise of communism and fascism have been the closest representation to pure socialist regimes and supported Hayek’s fear of the inevitable transition towards a totalitarian state. However, a new but moderate form of socialism that draws from core liberal ideals has been slowly implemented into Western capitalism that has manifested itself as some sort of market socialism where governments have the power to shape markets and control the means of production. Its impact can be seen in the rise of social welfare programs, income redistribution policies, and the power of central planning to shape an industry. This idea of central planning by the government was of particular concern to Hayek.
He asserts that the source of fluctuations in the business cycle stemmed from ineffective fiscal and monetary policies that shaped industrial capitalism. The ability for the financial system to dictate interest rates and the supply of money encourages a behavior of over-investment in periods of low-interest rates and economic boom, and under-investment during economic hardships that lead to changes in prices and unemployment. Decreasing the interest rates may lead to an excess of investments in long-term projects whose profitability are more susceptible to changes in the interest rate. Furthermore, centralized planning can be inefficient as well because data gathering is unreliable and can be misinterpreted easily. Unlike a centralized government, free markets, Hayek argued, have a sort of natural order that is remarkably efficient at coordinating people’s plans, revolving slowly as a result of human action. Markets are too spontaneous to wait for the effects of fiscal policy to kick in, which may lead to further strains and distortions on the market by misallocating resources that may lead to bubbles and further economic downturn. In a world where the National Bureau of Economic Research can officially determine whether the economy was in a recession or not only after the fact, a centralized government cannot seriously be expected to know what the appropriate response is to changing economic environments.
The idea of centralized planning has never been more prevalent in the European Union and the United States than it is today. As a result of the Great Recession and the ensuing euro crisis that developed in large part due to public over-expenditure, both the United States and the EU have implemented strict regulations regarding monetary and fiscal policies on what states and member countries can and cannot do. The EU forced some of its failing members into austerity that limited what national governments could spend their fiscal budget on, and, just like the United States did with the Dodd-Frank legislation, implemented strict monetary restrictions on the entire European financial market. This type of centralized planning where the government has the power to shape industries and determines where to allocates resources, Hayek argued, is what triggers economic recessions. It is especially inefficient in democratic societies because politicians differ on many policies. When countries are polarized in their ideologies and ideal policies, countries with larger GDP, like Germany and France, usually determine and adopt fiscal and monetary policies they think are best and apply for the rest of the union. The problem lies in the diverse economies of members of the union, and the possibility that the policies put in place may not be economically practical for certain members yet are forced to comply. The ability of the United States and the European Union to impose strict fiscal and monetary policies that limit and directs our choices, regardless of its practicality, is reminiscent of socialism and shows a slippery slope towards serfdom that Hayek warned us about so long ago.