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Are we back on the road to serfdom?

The coronavirus crisis has led to levels of state intervention unprecedented in peace time. The Austrian School reminds us of the challenges, say Dan Greenwood and Stuart Watkins.

Winston Churchill © George Rinhart/Corbis via Getty Images
Winston Churchill was worried then; we should be too

By Dan Greenwood and Stuart Watkins

This year marks the centenary of the publication of “Economic Calculation in the Socialist Commonwealth”, an essay by Ludwig von Mises that began the so-called “socialist calculation debate”, a fundamentally important, long-standing argument among scholars of economics and politics about whether socialism is possible. 

That might sound rather arcane and indeed the debate remains barely known outside of academia and political circles of the radical left and libertarian right. Given that the debate was especially concerned with the feasibility of a global communist system that had abolished trade and money, you may wonder what relevance it can possibly have given that few advocates of socialism or social democracy these days envisage the kind of centrally planned, entirely non-market communism sought by the Bolsheviks and stringently critiqued by Mises and his fellow Austrian School economist Friedrich Hayek. A closer look at Mises’ arguments, however, reveals that they remain pertinent. In the 1945 election, Winston Churchill famously paraphrased Hayek’s The Road to Serfdom and worried about the consequences of electing a Labour government committed to socialising the economy. Today in the wake of the coronavirus crisis, which has seen a massively expanded role for the state, we would do well to remind ourselves of these arguments.

Why socialism doesn’t work

Mises and Hayek were classical liberals who believed that the state should have a strictly circumscribed role – primarily that of enforcing private property rights, supplying a minimal range of public goods, as well as minimal welfare provision only for those in most severe need – in a broader context of private ownership and free markets. Socialists and social democrats today, while not necessarily advocating full communism instead, would see the last 100 years as providing strong grounds for challenging the wisdom of this. 

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Inequalities of wealth and income, severe economic crises and ecological destruction would seem to challenge the idea that such a system inevitably leads to the best of all possible worlds. The profundity of market failures and the vital importance of public goods that cannot be provided through the market alone is widely recognised, not least in the current public-health crisis. The rapidity with which the state had to step in and take control of everything from the railways to paying workers’ wages in the wake of the spread of the coronavirus would seem to have placed the Austrian case for markets under significant strain. 

Yet as the economic calculation debate of 100 years ago highlighted, the case for classical liberalism is based upon some deep and compelling arguments, the force of which has been underestimated by the left. They need to be kept in mind even at a time when there is a strong imperative for state intervention and planning in the heat of a crisis. 

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Mises and Hayek saw their scholarly role in terms of developing ideas that would percolate through society. Their ideas, which evolved in the course of the calculation debate, did indeed pass into our everyday understanding of markets as indispensable drivers of economic efficiency and innovation. We are used to hearing these arguments rehearsed when politicians pursue the privatisation of industries, for example, or hear them deployed against those who seek nationalisation. Alongside this more familiar case for markets, the Austrians developed a stringent critique of central planning and more generally of state intervention to achieve social goals.

Perhaps the more familiar aspect of that critique has to do with incentives – that only market processes can reliably establish the incentives required for achieving economic efficiency. We can rely on entrepreneurs to solve problems for us as they are motivated to act by the prospect of profit and are spurred on to greater heights by competition. We can rely on the world’s workers getting out of bed on time if the monetary reward is sufficient. A non-market, planned economy would lack such incentives, the argument goes. 

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This idea gained prominence with the rise of “public choice theory”, which assumes that political actors, like economic ones, are self-interested individuals acting rationally to maximise satisfaction. This model seemed to explain well at least some of the failures we have come to associate with government control, such as corruption and inefficiencies. Mises and Hayek, however, writing at a time of large-scale socialist movements and indeed revolution, recognised the need to avoid relying entirely upon this argument. What if people with non-monetary incentives and impeccable intentions were in charge, say? Mises and Hayek’s claim was stronger – that attempts to plan an economy without markets, however well-intentioned and motivated the planners might be, would inevitably fail due to the complexity of modern economies. 

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Dr Dan Greenwood is Reader in Politics at the University of Westminster. His book, Effective Governance: Complexity, Coordination and Discovery, is published by Palgrave early next year

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