Back On The Road To Serfdom: The Resurgence Of Statism

Back On The Road To Serfdom: The Resurgence Of Statism

by Thomas Woods

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In 1944 economist F. A. Hayek published his groundbreaking warning about the dangers of statism, The Road to Serfdom.

Now, with the statist menace reemerging in force, bestselling author Thomas E. Woods Jr. and ten other writers sound the alarm for a new generation. This brilliantly argued book reveals the insidious threats to prosperity, opportunity, individual


In 1944 economist F. A. Hayek published his groundbreaking warning about the dangers of statism, The Road to Serfdom.

Now, with the statist menace reemerging in force, bestselling author Thomas E. Woods Jr. and ten other writers sound the alarm for a new generation. This brilliantly argued book reveals the insidious threats to prosperity, opportunity, individual liberty, and civil society.

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Back on the Road to Serfdom

The Resurgence of Statism


Copyright © 2010 Thomas E. Woods Jr.
All right reserved.

ISBN: 978-1-935191-90-2

Chapter One

Economic Policy and the Road to Serfdom: The Watershed of 1913

Brian Domitrovic

We are perhaps apt to forget that during the Cold War, it was generally conceded that the Soviet Union had a higher rate f 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).

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.

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.

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 flee-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?

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."

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.

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.

The American Economy: Potency and Act

The most significant fact about the past century and a half, treated as a statistical run, is that it had an inflection point. This was the one-third mark, 1913. Before that year, the macroeconomic performance of the United States, by the main measurements, was regular and strong. After that point, however, extended contractions and bouts of new, unfamiliar negative side effects—namely, unemployment and inflation—emerged rather out of the ether.

The most impressive half century in American—arguably world— economic history was that which followed the Civil War: the nearly fifty years from 1865 to 1913. The American economy expanded at a yearly rate of 3.62 percent from 1865 to 1913. By way of comparison, from 1913 to 2008 (also a peak-to-peak period), the American economy grew at 3.26 percent per year. The difference of about four-tenths of a percent per year proved enormous. Had the United States maintained the trend that held in the half century after the Civil War, it would now be about half again richer than it is now, in the second decade of the twenty-first century.

Macroeconomic performance is generally judged on two criteria: growth and "variation." Variation refers to the degree of steadiness of growth and of macroeconomic ill-effects, above all unemployment and price instability. Here again, the era of the Robber Barons is the shining one. The greatest decades of economic growth in American history were the 1870s and 1880s, when the economy expanded by two-thirds each time. There was one significant recession in this period, in 1873. It was overwhelmed so soon and so comprehensively that the 70 percent real growth gained in the 1870s amounts to the largest of any decade in the peacetime history of the United States.

As for the "panic of 1873" of textbook lore, that year brought a big drop in output, with people thrown out of work. The episode was a function of the incredible depreciation of the dollar that had been undertaken in the Civil War, when (following decades of price stability) the Union government printed greenbacks so quickly that the dollar suddenly lost half its value. After 1865, the U.S. government pledged to restore the value of the dollar against gold (and consumer prices), but doubts about this led to speculative investments to hedge the uncertainty and ultimately produced the asset crash of 1873.

In the wake of the 1873 bust, however, the dollar slowly reclaimed its value, just as the U.S. government had pledged. The price level declined by 1.4 percent per year on average for the next two decades, such that by the 1890s, a dollar saved before 1860 achieved its original purchasing power. As for unemployment, the term was not coined until the tail end of the century for a reason. The United States was importing tens of millions of immigrant workers on account of labor shortages given the growth boom.

President Barack Obama's first chair of the Council of Economic Advisers, Christina Romer, owes her professional reputation to her bringing to light these realities in her doctoral dissertation at MIT in the 1980s. Romer found that the era of the American industrial revolution (and by her analysis the trend held until 1930) was so superior in terms of growth and variation—growth was high; recessions were rare, shallow, and short; prices changed little as employment boomed—that it effectively defined the kind of results that governmental macroeconomic management should aspire to. The irony was that there was precious little macroeconomic management at all for most of this era. We can say with statistical precision that there has never been a golden era in American macroeconomic history like the 1870s and 1880s.

There were two other significant recessions in the half century after the Civil War. These occurred in 1893 and 1907. Both cases correlated to governmental overtures to introduce macroeconomic policy. In 1890, the United States signaled that, despite having attained the very price level that had held for decades before the Civil War, as well as having watched growth cruise at more than 5 percent per year for the long term, it was now going to monetize a new asset, silver. The prospect was of too much currency in the economy (1873 redux), and the markets quickly swelled and crashed. The recovery from 1893 stayed tepid while President Grover Cleveland spent his term trying to end the silver lark. Aggregate output was flat from 1892 until the next election year, 1896; in the latter year, free-silverite William Jennings Bryan succeeded Cleveland as Democratic nominee for president. The strong recovery began only when, with the election of Republican William McKinley in 1896, the United States committed to dropping the program for the extra silver money. Overall, growth was slower in the 1890s than it had been in preceding decades—33 percent for the decade, a typical twentieth-century number. But from the year McKinley was elected until 1907, growth came in at 4.6 percent per year, approaching the 1870s–1880s standard of 5.2 percent annually. This is tantamount to saying that the real trend of yearly growth in the post–Civil War period was not 3.62 percent, but something like 5 percent per year—because 5 percent held as long as the government stayed out of the way.

In 1907, there was another market crash and recession, only this time a strong and sustained recovery did not follow. The recovery, such as it was (3.3 percent growth per year until the 1913 peak), was haunted by a new prospect: that comprehensive new tools allowing governmental intervention into the economy would be put in place. Immediately in the wake of J. P. Morgan's famous settling of the markets in the fall of 1907, measures were introduced in Congress to create a federal reserve (or central banking) system that would be the first line of defense in any future crisis. In addition, the push for a federal income tax, which had died in the courts in recent years, gained renewed momentum.

Both of these massive means of governmental intrusion in the economy, the Federal Reserve and the income tax, were finally established in the same year: 1913—our inflection point.

Even though the mild recovery after 1907 occurred before 1913, its characteristics actually may have owed themselves to 1913. Capital is known for looking to the future to take a gander at prospective returns. Had there been no prospect of the Fed and the income tax in the wake of the economic events of the fall of 1907, there may not have been a recession at all, let alone a weak recovery. For if 1908 had brought a recovery on the order of nearly 5 percent annual growth as had been initiated in 1896, we would not even call the 1907 event a recession. There were episodes in the 1880s where growth dipped and assets were sold, but the recoveries were so quick and so big that the down periods do not register to the naked eye. It is not out of the question that this fate was in store for the economy had the 1907 crash not been met with calls for a Fed and an income tax.

This, of course, is a hypothetical point, but there is no shortage of historical evidence that is consistent with it. Christina Romer calculated that the recovery in industrial production from the 1907 event proceeded according to recent precedent until 1912. As for anecdotal evidence, there is one delicious piece: J. P. Morgan's will. When Morgan died in 1913, the moneyed class expressed shock that his declared assets amounted to only $118 million. Andrew Carnegie—whom Morgan had bought out in 1901 and who was worth some $400 million—felt tricked, feeling that Morgan had posed as one of the top set's own all those years. Yet in view of the major macroeconomic reforms proposed in the wake of 1907 (which included an estate tax that would be made law in 1916), it is possible, even likely, that the aging Morgan rearranged his assets such that only a fraction was manifested in his estate—in which case he would have displayed the talent at which "trusts" came to be so proficient in later decades, as the estate tax hit 55 percent. This story is but one indication that high-powered capital was gamely rearranging itself as the nation's economy braced itself for the onset of 1913.


Excerpted from Back on the Road to Serfdom Copyright © 2010 by Thomas E. Woods Jr.. Excerpted by permission of ISI BOOKS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Meet the Author

Thomas E. Woods Jr., Ph.D., is the New York Times bestselling author of Meltdown and The Politically Incorrect Guide to American History, among other books. He holds a bachelor’s degree in history from Harvard and a Ph.D. in history from Columbia University. A recipient of the Templeton Enterprise Award and the O. P. Alford III Prize for Libertarian Scholarship, he is a senior fellow at the Ludwig von Mises Institute.

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