The Road to Serfdom was Hayek’s contribution to the Allied war effort. He called it “a duty I must not evade.”9 For a few short weeks after war was declared, he had high hopes and expected an assignment in the propaganda ministry. He peppered Lord Macmillan, head of the ministry, with memoranda suggesting possible strategies for German broadcasts—“I am free and anxious to put my capacities to the best use which, after very careful consideration, I believe would be in connection with propaganda work.”10 But it soon became obvious that, because he was foreign-born, he would be shut out of war work. Bitterly, he resigned himself to running the LSE’s shrinking economics department, more or less by himself.
Hurt and frustrated, he toyed with the idea of joining his friends in America. “I . . . resent this complete seclusion,”11 he wrote to Machlup. Still, when Machlup echoed his thought in a subsequent letter, he bristled at any suggestion of jumping ship. “I have given up all thought of going . . . while I am wanted here in any way. It is after all my duty.”12 When the New School offered him a temporary professorship in 1940, he cabled terse, almost haughty regrets.13 Later, he wrote to another friend, “I envy you a little your chance of doing something connected with the war—when it is all over I shall probably be the only economist who has no such opportunity whatever and shall, nolens, volens, have been the purest of pure theoreticians.”14 As always, when faced with disappointment, he shifted his focus to the future. “I seem very early to have lost the capacity quietly to enjoy the present, and what made life interesting to me were my plans for the future—satisfaction consisted largely in having done what I had planned to do, and mortification mainly that I had not carried out my plans.”15
Paradoxically, the next three years became some of the most productive of his life. “I have . . . done more work this summer than ever before in a similar period.”16 At one point—while the bombs were falling—he was working on no fewer than three different books. Pretty soon he was also filling the pages of Economica, LSE’s journal, practically single-handedly. “So far the bombing attack is an abject failure,” he wrote when he arrived in Cambridge. “What drove me out of London was simply the discomfort of an empty house and of frequent journeys.”17 Still, as a precaution, he mailed chapters of his new book to friends in America for “safekeeping.”
In January 1941, Hayek alluded explicitly for the first time to his ambition to write a book aimed, like Keynes’s The Economic Consequences of the Peace, at a mass audience: “I am mainly concerned with an enlarged and somewhat more popular exposition of the themes of my Freedom and the Economic System which, if I finish it, may come out as a sixpenny Penguin volume.”18 He owed the book to his fellow man: “Since I can do nothing to help winning the war my concern is largely for the more distant future, and although my views in this respect are as pessimistic as can be—much more so than about the war itself—I am doing what little I can to open peoples’ eyes.”19
He worked on The Road to Serfdom for two and a half years, from New Year’s 1941 to June 1943. “I am a frightfully slow worker,” he complained at one point, “and with my interests, as they are at the moment, divided between so many different fields, I shall have to live very long to carry out what I should like to do at the moment.”20
Hayek began The Road to Serfdom by invoking history—its relevance to the present—and his own history of living in two cultures:
While history runs its course, it is not history to us. It leads us into an unknown land . . . It would be different if it were given to us to live a second time . . . Yet although history never quite repeats itself, and just because no development is inevitable, we can in a measure learn from the past to avoid a repetition of the same process.
Addressing the reader directly, Hayek describes a powerful sense of déjà vu. The drift toward collectivism in England reminded him of Vienna in the aftermath of World War I. “The following pages are the product of an experience as near as possible to twice living through the same period—or at least twice watching a very similar evolution of ideas.” He expressed the conviction shared by earlier European observers of English society, from Engels and Marx to Schumpeter, that
by moving from one country to another, one may sometimes twice watch similar phases of intellectual development. The senses have then become particularly acute. When one hears for a second time opinions expressed or measures advocated which one has first met twenty or twenty-five years ago, they assume a new meaning . . . They suggest, if not the necessity, at least the probability, that developments will take a similar course.21
What opinions, what measures, what works did he have in mind? Of recent books, one was surely Adolf Hitler’s Mein Kampf, which appeared in an unabridged English edition for the first time in 1939. Another was doubtless the Webbs’ 1936 paean to central planning, Soviet Communism: a New Civilization, which Hayek reviewed for the Sunday Times. Although it was politically far removed from either, he was doubtless also thinking of Keynes’s General Theory.
Hayek’s book was a defense of markets and competition couched in terms of the modern information economy:
We must look at the price system as such a mechanism for communicating information if we want to understand its real function . . . The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action.22
It was also a warning. Herbert Spencer had been the first to caution that infringements of economic freedom would lead to infringements of political freedom. Hayek’s mentor, Ludwig von Mises, had identified the welfare state as a Trojan horse, “merely a method for transforming the market economy step by step into socialism . . . What emerges is the system of all-round planning, that is, socialism of the type which the German Hindenburg plan was aiming at in the First World War.” But Hayek was by no means advocating laissez-faire. In fact, he repudiated benign economic neglect quite explicitly:
There is, finally, the supremely important problem of combating general fluctuations of economic activity and the recurrent waves of large-scale unemployment which accompany them. This is, of course, one of the gravest and most pressing problems of our time. But, though its solution will require much planning in the good sense, it does not—or at least need not—require that special kind of planning which according to its advocates is to replace the market. Many economists hope, indeed, that the ultimate remedy may be found in the field of monetary policy, which would involve nothing incompatible even with nineteenth-century liberalism. Others, it is true, believe that real success can be expected only from the skilled timing of public works undertaken on a very large scale. This might lead to much more serious restrictions of the competitive sphere, and, in experimenting in this direction, we shall have carefully to watch our step if we are to avoid making all economic activity progressively more dependent on the direction and volume of government expenditure.23
Later he would tell American audiences in a speech that “You must cease to argue for and against government activity as such . . . We cannot seriously argue that the government ought to do nothing.”24
Early in 1943, Machlup sent around several chapters to American publishers. The first responses were not encouraging:
Frankly we are doubtful of the sale which we could secure for it, and I personally cannot but feel that Professor Hayek is a little outside the stream of much of present day thought, both here and in England . . . If, however, the book is published by someone else and becomes a bestseller in the non-fiction field, just put it down to one of those mistakes in judgment which we all make.25
Harper’s dismissed it as “labored” and “overwritten.”26
In June 1943, Hayek finally signed a contract with Routledge for publication in the UK. It was not until February 1944, shortly before the book was to appear in England, that Hayek heard that the University of Chicago Press had decided to accept it.
Act III
CONFIDENCE
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Prologue
Nothing to Fear
On January 11, 1944, FDR had been in bed for days with the flu. Exhausted from meetings of the Big Three in Cairo and Tehran, suffering from hypertension, hypertensive heart disease, cardiac failure (left ventricle), and acute bronchitis, any of which could kill him, he was too weak to make his customary trip to Capitol Hill to deliver his annual State of the Union message.1 Knowing that the newspapers couldn’t print the full text of his speech, which he had sent by messenger to Congress, he insisted on speaking directly to the American people in a “fireside chat” over the radio. The D-day landing in Normandy was months away and the United States was locked in a life-and-death struggle in the Pacific, but the president urged the country to look beyond the war: “It is our duty now to lay the plans and determine the strategy for the winning of a lasting peace.”2
Again and again, the president hammered home his theme that the foundation for a lasting peace was not the defeat of gangster regimes alone but also rising living standards. Economic security was the supreme responsibility of democratic governments. He was determined not to repeat the mistakes made by the Allies after World War I that he believed had helped lead to the current war. Maintaining that the welfare state and individual liberty went hand in hand, he warned, “People who are hungry and out of a job are the stuff of which dictatorships are made.” Roosevelt called on Congress to support postwar economic recovery at home and abroad. His major domestic proposal was for an “economic Bill of Rights”—namely, government guarantees of jobs, health care, and old age pensions.3
The most radical speech of FDR’s presidency, says his biographer James MacGregor Burns, “fell with a dull thud into the half-empty chamber.”4 Congress had a Republican majority, and the president’s references to joblessness and hunger did not seem to resonate with millions of Americans gathered around the radio. When Keynes arrived in Washington a few months later, he found that “on this continent the war is a time of immense prosperity for everyone.”5 Not only had the war years shaped up as the best of times, but 60 percent of the population told pollsters that they were “satisfied with the way things were before the war.”6
The war itself was responsible. Even before 1939, intensifying fears of war had resulted in a huge influx of gold into the United States as investors in Europe and Asia sought a safe haven for their savings. As a result, American banks were flush and interest rates remained near zero. And, since 1939, spending by the federal government had soared from 5 percent of GDP to nearly 50 percent, much faster than tax revenues, despite the dramatic increases in income and profits taxes and the imposition of the new Social Security payroll tax. This was deficit spending on a scale that dwarfed the anti-Depression fiscal policies of the first Roosevelt administration.
The combination of massive deficit spending and the accidental monetary stimulus from abroad sparked a boom. With 11 million men and women in uniform, and factories, mines, and farms operating flat out, the official jobless rate had plunged from 15 percent at the end of 1939—11 percent counting “temporary” government workers—to well below 2 percent at the end of 1943. Thanks to the tight labor market, factory pay was up 30 percent after inflation. And after four years of war, the average American household was consuming more, not less, than in 1939.
The United States was supplying planes, ships, and tanks by cranking up production, not by tightening belts. The economy’s annual output, or GDP, was growing at a nearly 14 percent annual rate, three times as fast as in the “wild twenties,” when, the president said sourly, “this Nation went for a joy ride on a roller coaster which ended in a tragic crash.”7 To be sure, Americans couldn’t have new cars, refrigerators, or houses, but they were so confident the dollar would retain its prewar value that they were willing to save nearly one-quarter of their pay to buy them after the war. Nor could they go on their beloved road trips. But they could buy more clothes, food, alcohol, cigarettes, and magazines, listen to more radio and records, and see more movies and ball games. The contrast with Britain, where per capita consumption was down by 20 percent, was extraordinary. As readers of Elizabeth Jane Howard’s Cazelet Chronicles novels know, the life of English citizens was complicated for years by shortages of housing, clothes, coal, gasoline, and many foodstuffs. Nor did austerity end with V-E Day. As late as 1946, the Labour government was forced to consider, in secret, whether to impose bread rationing. The last of the controls wasn’t lifted until 1954.
Although it was clear that the American economic system was hardly on its last legs, the president and his advisors feared that wartime prosperity couldn’t last. Among the “economic truths that have become accepted as self-evident,” FDR implied in his speech, was that a new New Deal would be needed to prevent the Great Depression from roaring back when the troops came home. “A return to the so-called normalcy of the 1920s” after the war would mean that “we shall have yielded to the spirit of Fascism here at home,”8 he warned melodramatically.
The president’s position reflected only one side of a hot debate between Keynesians and anti-Keynesians. The more upbeat the public and businessmen became about postwar prospects, the more American disciples of Keynes worried that the economy would sink into another slump. Public spending would plunge with demobilization. Alvin Hansen, an advisor to the Federal Reserve who was sometimes called “the American Keynes,” foresaw “a postwar collapse: demobilization of armies, shutdowns in defense industries, unemployment, deflation, bankruptcy, hard times.”9 Paul Samuelson, a consultant for the main postwar planning agency, warned the administration not to become complacent about unemployment. “Before the war we had not solved it, and nothing that has happened since assures that it will not rise again.” They had little faith that business and consumers would pick up the slack. As Samuelson put it, “If a man goes without an automobile for 6 years, he does not then have a demand for six automobiles.”10 Having concluded from the 1930s that business was too timid to invest and that monetary policy was a poor weapon with which to fight recessions, the Keynesians were convinced that the only solution was to slow the cuts in public spending by slowing demobilization and by beefing up spending on infrastructure.
Anti-Keynesians were also worried about stagnation, but of a different type and coming from a different quarter. Schumpeter was worried about the prospects for economic growth—in the longer run. He feared that the economy would no longer produce gains in productivity and living standards—not because of inadequate demand but because of government policy. In an article published in 1943, he agreed that “everybody is afraid of a postwar slump” but argued that the popular fears were overblown: “Viewed as a purely economic problem, the task [of reconstruction] might well turn out to be much easier than most people believe . . . But in any case, the wants of impoverished households will be so urgent and so calculable that any postwar slump that may be unavoidable would speedily give way to a reconstruction boom. Capitalist methods have proved equal to much more difficult tasks.”11
The real threat to postwar growth, he believed, came from antibusiness policies enshrined in the New Deal. He and Hayek feared that governments would continue their wartime management of production and distribution—including price and wage controls, deficit financing, and high taxes—after the war was won. Such efforts, intended to avert stagnation, might well produce that very result. Schumpeter called it “capitalism in the oxygen tent.”12 Hayek was less concerned about the possible loss of dynamism than he was about the loss of freedom. While the president cautioned that a “return to normalcy” would be tantamount to a victory for Fascism, Hayek warned that continuing wartime management of production and distribution would ultimately result in a radical restriction of economic and political rights as well. Their fears proved more realistic for the UK and Europe than for the United States, where virtually all the wartime agencies were dismantled starting in 1945.
• • •
Apart from military victory, FDR’s top priority was not to r
epeat the mistakes made by the Allies after World War I that he believed had helped lead to the current war. He pointed to the talks among the Big Three about postwar financial, trade, and political arrangements that were already underway by January 1944 as an example of doing better than last time. Attacking the “ostrich isolationism” of “unseeing moles” who regarded the parleys with suspicion, he lashed out at those who viewed prosperity in the rest of the world as a threat to American economic interests. In Tehran he had extracted Stalin’s commitment to a new League of Nations. The “one supreme objective of the future” was collective security, the president insisted, including “economic security, social security, moral security” for the “family of Nations.” After bringing the aggressors under military control, “a decent standard of living for all individual men and women and children in all Nations” was essential for peace. “Freedom from fear is eternally linked with freedom from want.”13
There was no disagreement between Keynesians and anti-Keynesians on the need for international cooperation. On this issue, they had seen eye to eye since 1919. Few believed that a favorable global economic environment would arise spontaneously. The bilateral trading blocs of the interwar era were designed to allow the Soviet Union and Nazi Germany to break away from the world economy. Even Hayek, who by virtue of experience and temperament was more skeptical of the potential for positive government intervention, was convinced that democracies were capable of more competence than they had shown a generation before. That governments had to actively plan and cooperate to ensure the revival of world trade, the resolution of war debts, and the stabilization of currencies this time reflected a consensus.