Economic Theories of The Great Depression and the Return to Serfdom
Friedrich Hayek's (1899-1992) vision of individual liberty is deeply connected to the principle of economic freedom. In his work The Road to Serfdom, Hayek argues that central planning and government intervention in the economy threaten individual liberty. Can we equate the loss of personal financial liberty to the far-reaching government measures to ensure federal dependence taken after the Great Depression? Hayek believed economic freedom was essential for preserving personal autonomy and individuals' right to freedom of choice. In The Road to Serfdom (1944), Hayek describes his belief that economic control contributes to the further regulations of personal freedom, arguing that “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. And whoever has sole control of the means must also determine which ends are to be served, which values are to be rated higher and which lower, in short, what men should believe and strive for.”[1] Similarly, in The Constitution of Liberty (1960), he discusses how individual freedom is intertwined with economic freedom, suggesting that limitations in the economic sector can lead to restrictions in other areas of life. He addresses the foundations of liberty in this quote, “This development of a theory of liberty took place mainly in the eighteenth century. It began in two countries, England and France. The first of these knew liberty, the second did not.”[2] Hayek’s ideas on liberty, spontaneous order, and economic freedom were shaped by classical liberalism, Austrian economics, and his strong opposition to socialism. His contributions continue to shape economic and political policy in modern times.
Hayek’s central argument about freedom and order is that economic and social order are not easily designed or centrally controlled, they emerge spontaneously. “Hayek firmly believed that a free-market economy would let the market, consumers and producers to decide how resources should be used without intervention from the state.”[3] Hayek believed that even well-meaning attempts by governments to order society or manage the economy led to unintended consequences that threatened individual freedoms. Biographer Alan Ebstein contends that despite these sentiments, “Hayek was not opposed to government. He emphasized that rules create society, and that without coercive law, no civil society is possible. The essence of his political philosophy may be summarized in the statement that liberty is the supremacy of law, and idea that he explored most fully in Law, Legislation, and Liberty. [4] As noted by author Bejakovic Luburic, “Hayek firmly believed that a free market economy would let the market, consumers, and producers decide how resources should be used without intervention from the state. Hayek categorized liberty as a consisting part of the Western civilization. The terms liberty or freedom which he uses interchangeably are the product of the Western experience, and the West thrived by adhering to them.”[5]
For historical context, the intellectual and political climate during Hayek’s time included the impact of World War I, the Great Depression, and the rise of socialism and collectivism. In addition to these major events in world history, the growing popularity of Keynesian economics and government intervention was becoming mainstream in thought and practice. In his book The Genius of American Politics, author Daniel Boorstin argues that policies were put in place over theory. “In the crisis which followed the great depression, when Franklin D. Roosevelt announced his program for saving the American economy, he did not promise to implement a theory. Rather, he declared frankly that he would try one thing after another and would keep trying.”[6]
Key intellectual influences on Hayek included Adam Smith and his ideas of free markets and the “invisible hand,” David Hume regarding empirical skepticism and the limits of government power, and John Stuart Mill on the concepts of liberty and limited government. “The spread of commerce and the accumulation of capital in turn create support for a particular form of social and political life that emphasizes tolerance and individual autonomy. Although the sociological assertion seems rather mono-causal, it is not incorrect to assert a correlation between the development of European commercial centers and the expansion of individual freedoms in the late seventeenth and eighteenth centuries. To this extent, Hayek reiterates Adam Smith’s stadial theory of European history.”[7] In almost anticipation of forthcoming libertarians, Daniel Hamann uses this quote from Richard Overton in Against All Tyrants to indicate the influence upon both Mill and Hayek, “To every individual is given an individual property by nature not to be invaded or usurped by any. For every one, as he is himself, so he has a self-property, else he could not be himself. Mine and thine cannot be, except this be. No man has power over my rights and liberties, and I over no man’s. I may enjoy myself and my property but presume no further; if I do so, I am an encroacher and an invader upon another man’s rights-to which I have no right.” [8]In addition to these influences, scholars of Austrian economic policy also heavily influenced Hayek, including Carl Menger on subjective value theory and methodological individualism and Ludwig Von Mises on the economic calculation and fellow critiques of socialism. “As a young man, Hayek saw his native Austria drift toward socialism. And again in England during World War II he witnessed Britain drift in that direction. The Road to Serfdom portrayed German Nazism and Soviet Socialism as essentially the same. Socialism and liberty were incompatible, he maintained. The most effective way to assure freedom and individual rights was not central planning, but market competition within a carefully thought-out legal framework. A policy of freedom for the individual is the only truly progressive policy.” [9] Author Peter Boettke notes, “From Carl Menger to Mises and Hayek, Austrian law and economics study the evolution of legal rules as a prime example of spontaneous order analysis. “How can it be,” Menger (emphasis original, [1883] 1996, 146) famously asked, “that institutions which serve the common welfare and are extremely significant for its development come into being without a common will directed toward establishing them?” Hayek ([1952] 1979, 69) went further and argued that to the extent that the social institutions are a result of deliberate design, there would be no necessity for theoretical inquiry in the sciences of man and society.”[10]
In An Enquiry Concerning the Principles of Morals (1751), David Hume explores the foundation of moral principles and their role in human behavior, his emphasis on the role of natural individual roles in society is particularly relevant to Friedrich Hayek’s work, as Hayek also stresses the importance of spontaneous order and the designated nature of social institutions. “Men are necessarily born in a family society, at least, and are trained up by their parents with some form of conduct and behavior.”[11] This stresses that individuals are competent enough to be the solver of their own problems, without any assistance from the government, as the family has provided the necessary instruction. Furthermore, Hume’s views on justice, social cooperation, and the role of government align with Hayek’s concerns about the dangers of central planning and the need for a system of laws that respect individual freedom. Hume and Hayek are considered contemporaries, as both thinkers emphasize practical and grounded approaches to moral and political life.
In the early days of America, the founding fathers attempted to fashion a government that protected individual liberty while avoiding tyranny and promoting economic freedom. As Madison said in Federalist no 51, "If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary."[12] However, they didn’t fully anticipate the challenges of managing a young nation where markets, individuals, and government were in constant change. The Founding Fathers and Friedrich Hayek shared a belief in economic freedom, individual liberty, and limited government intervention. Had the United States stayed true to these principles in the years following its founding, it could have deterred the centralization of power and economic tyranny that have led to many of the problems facing the country today. As Hayek remarked in his essay titled The Decline of Freedom, "A society that has gained freedom through a system of limited government can only preserve its freedoms if it is guided by a belief in the value of freedom itself and the necessity of protecting individual liberty from encroachment by both private and government power."[13] The political philosophy of Friedrich Hayek shares significant similarities with the principles outlined in the Declaration of Independence and the Constitution of the United States, particularly regarding individual liberty, limited government, and the rule of law. Hayek’s advocacy for a restricted state that respects personal freedoms align with the Declaration’s affirmation of inherent rights and the necessity of government consent. Both Hayek and the framers of the Constitution emphasized the importance of checks and balances to prevent tyranny and protect individual rights. Now more than ever, these tenets are in dire need of protection. Author Daniel Hannan says, “Friedrich Hayek warned that government planning leads inexorably to servitude. His great work, The Road to Serfdom, was written in 1944 as a warning to the English-speaking peoples not to drift toward the centralized bureaucracies of continental Europe. Today, his warning is more relevant than ever, and, paradoxically, it is America that is in greatest danger of ignoring it."[14]This passage highlights Hannan’s concern that the U.S. is moving toward the very kind of government expansion that Hayek cautioned against, reinforcing their shared belief in the importance of limited government and individual liberty. In support of this, Hayek said, "We must make the building of a free society once more an intellectual adventure, a deed of courage. Unless we can make the philosophical foundations of a free society once more a living intellectual issue, and its implementation a task which challenges the ingenuity and imagination of our liveliest minds, the prospects of freedom are indeed dark." – Friedrich Hayek, The Road to Serfdom. [15]
[1] Friedrich Hayek, The Road to Serfdom, 68.
[2] Friedrich Hayek, The Constitution of Liberty, 140.
[3] Predrag Bejaković, Lukša Lulić, and Goran Luburić, “Friedrich Hayek on Taxation and Income Redistribution,” Revija za socijalnu politiku 30, no. 1 (2023): 48.
[4] Alan O. Ebstein, Friedrich Hayek: A Biography, (2001), 84.
[5] Bejaković, Lulić, and Luburić, “Friedrich Hayek on Taxation and Income Redistribution,” 48.
[6] Daniel Boorstin, The Genius of American Politics (Chicago: University of Chicago Press, 1953), 20.
[7] Vikash Yadav, Liberalism’s Last Man: Hayek in the Age of Political Capitalism (Chicago: University of Chicago Press, 2023), 50.
[8] Daniel Hannan, Inventing Freedom: How the English-Speaking Peoples Made the Modern World (New York: HarperCollins, 2013), 149.
[9] Bettina Bien Greaves, “Friedrich Hayek,” Ideas on Liberty, April 2002, 58.
[10] Peter Boettke, The Political Economy of Hayekian Economics (New York: Palgrave Macmillan, 2007), 201.
[11] David Hume, An Enquiry Concerning the Principles of Morals, ed. Tom L. Beauchamp (Oxford: Oxford University Press, 1998), 44.
[12] Alexander Hamilton, James Madison, and John Jay, The Federalist Papers (New York: J. and A. McLean, 1788), no. 51.
[13] Friedrich Hayek, Essays on Liberalism and the Economy, ed. Paul Lewis (Chicago: University of Chicago Press, 2022), 49.
[14] Daniel Hannan, The New Road to Serfdom: A Letter of Warning to America (New York: Harper, 2010), 32.
[15] Hayek, The Road to Serfdom, 432.
- Thomas L. Hogan, Lawrence H. White, "Hayek, Cassel, and the Origins of the Great Depression",
- Journal of Economic Behavior & Organization,Volume 181,2021,Pages 241-251,ISSN 0167-2681,
- https://doi.org/10.1016/j.jebo.2020.12.005.
- (https://www.sciencedirect.com/science/article/pii/S0167268120304601)
- Hayek, F. A., and Paul Lewis. Essays on Liberalism and the Economy, Volume 18, edited by Lewis, Paul. 1st ed. Vol. 18. Chicago: The University of Chicago Press, 2022.
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