The Alan Furth blog

I recently re-read Friedrich Von Hayek’s Road to Serfdom, which I read for the first time ages ago, with high expectations as to its relevance for understanding the current trend towards authoritarianism sweeping most of the Western world.

I found that the book provided lots of powerful insights about how a democracy can turn into a dictatorship by virtue of its own dynamics. Hayek’s primary attack is on the soviet-style central planning policies advocated by left-wing intellectuals after World War II.

But I was pleased to learn that Hayek also acknowledged that large corporations and corrupt economic elites can be a fundamental part in the process by which the state becomes a totalitarian monster instrumental to those corporations and elites at the expense of the people at large, which is perhaps the most striking feature of the new world order that we seem to be drifting towards:

“A conservative movement, by its very nature, is bound to be a defender of established privilege and to lean on the power of government for the protection of privilege.”

“The essence of the liberal position, is the denial of all privileges, if privilege is understood in its proper and original meaning of the state granting and protecting rights to some which are not available on equal terms to others.”

“This movement [towards totalitarianism] is, of course, deliberately planned by the capitalist organizers of monopolies, and they are of thus one of the main sources of this danger. Their responsibility is not altered by the fact that their aim is not a totalitarian system but rather a sort of corporative society in which the organized industries would appear as semi-independent and self-governing ‘estates.’”

But after reading the book, and to my total dismay, I found that Hayek’s actions spoke much louder than his words. I should have known better. I had long been disillusioned by most luminaries of the Chicago School of Economics, mainly for their support of IMF-led “austerity programs” implemented in Latin America and elsewhere in the developing world. Yet, because a significant part of his work refutes the text-book views of economists as to how markets work, I somehow thought he would not fall for his colleagues’ hypocritical tendencies when it came to policy recommendations.

I couldn’t have been more naive.

After 5 minutes of online research I found that Hayek endorsed Pinochet’s murderous regime in Chile. According to Wikipedia:

Hayek visited Chile a handful of times in the 1970s and 1980s during the reign of dictator Augusto Pinochet. Asked about liberal, non-democratic rule by a Chilean interviewer, Hayek is translated from German to Spanish to English as having said: “Personally I prefer a liberal dictator to democratic government lacking liberalism. My personal impression — and this is valid for South America – is that in Chile, for example, we will witness a transition from a dictatorial government to a liberal government. (Friedrich von Hayek, Leader and Master of Liberalism Renée Sallas, “El Mercurio” (p. D8–D9), 12 April 1981, Santiago de Chile)

Hayek’s comments about Chile have drawn criticism from NYU historian Greg Grandin, who brings attention to a letter Hayek published in the London Times in which Hayek reported that he had ‘not been able to find a single person in much-maligned Chile who did not agree that personal freedom was much greater under Pinochet than it had been under Allende.’ “of course,” writes Grandin, “the thousands executed and tens of thousands tortured by Pinochet’s regime weren’t talking.” (Grandin, Greg. Empire’s Workshop: Latin America, The United States, and the Rise of the New Imperialism, pp.172,173, Metropolitan,2006).

In my opinion, the most fundamental contradiction of Hayek, Milton Friedman and other prominent economists who intellectually sponsored the Washington Consensus policies implemented by multilateral institutions in much of the developing world, was that while in theory they fiercely advocated the rule of law as the bedrock of well-functioning markets, in practice, their notion of “free market” meant curtailing the role of the state in the economy to the point that it was impossible to enforce any law-abiding behavior from market participants — or worse still, enabling market participants to capture the state via revolving doors and lobby machines to a degree that “market friendly” laws became the euphemism for legalized fraudulent behavior.

This had particularly perverse consequences in financial markets, which are rife with information asymmetries, leading to the predator behavior at the heart of most financial crises during this century, and that reappeared with a vengeance by the end of 2007. And to the massive state interventions for bailing out the very same people that advocated for “free markets” in the first place. The case of Chile during the Pinochet regime is illustrative of how Chicago School “free market” economics is nothing else than a propaganda tool for state-sponsored wealth transfer to the benefit of entrenched plutocrats. Yves Smith does a fabulous job of deconstructing the myth of the “Chilean economic miracle” in her book ECONned. You can read the few pages she dedicates to Chile here. The book is crucial for understanding the current global financial mega-crisis, combining tons of devilish detail and data analysis with insightful, big-picture reflections that call things for what they really are:

This brings us to a final outcome of this debacle. A radical campaign to reshape popular opinion recognized the seductive appeal of the appealing phrase “free markets.” Powerful business interests, largely captive regulators and officials, and a lapdog media took up this amorphous, malleable idea and made it a Trojan horse for a three-decade-long campaign to tear down the rules that constrained the finance sector. The result has been a massive transfer of wealth, with its centerpiece the greatest theft from the public purse in history. This campaign has been far too consistent and calculated to brand it with the traditional label, “spin.” This manipulation of public perception can only be called propaganda. Only when we, the public, are able to call the underlying realities by their proper names–extortion, capture, looting, propagnda–can we begin to root them out.

I realize now that the first time I read it, I failed to grasp the irony in this quote by Michael Hudson:

Government power on behalf for the people is being dismantled (but not “socialism for the rich”), living standards have stagnated and wealth is concentrating at the top of the economic pyramid. Economic planning and resource allocation has passed into the hands of Wall Street, whose alternative to Hayek’s “road to serfdom” is debt peonage for the economy at large. There does need to be a strong state, to be sure, to keep the financial and real estate rentier power in place. But the West’s alternative to the old Soviet bureaucracy is financial planning. In place of dysfunctional bureaucratic overhead, we have a highly sophisticated financial and real estate overhead (all of which is counted as part of GNP as if it were output, not a charge against production).

Additional reading:

• In this oldish post (under the subhead “More on Hayek and the Generals”), Tim Dunlop and John Quiggin argue that Hayek’s support for Pinochet is a natural consequence of his system of thought, not a contradiction.
• More recently, in the aftermath of Pinochet’s passing, Glenn Greenwald comments on several right-wing pundits’ rationalizations of the Bush administration’s authoritarian abuses as a natural consequence of the same “free markets” ideology that has always justified their support for dictators abroad.
• Writing at the Von Mises Institute, George Reisman rationalizes Pinochet’s mass murdering by stating that he’s absolutely sure that most of those who died were potential terrorist stalinists who would have committed mass murder on a much larger scale if allowed to stay in power. In other words, a “preemptive attack to preserve freedom and democracy.” Sound familiar?