Ill Fares the Land (10 page)

Where conservatives
could
point to a contrast between themselves and the old Left was precisely in the matter of the state and its uses. Even here, it was not until the mid-1970s that a new generation of conservatives felt emboldened to challenge the ‘statism’ of their predecessors and offer radical prescriptions for dealing with what they described as the ‘sclerosis’ of over-ambitious governments and their deadening impact upon private initiative.

Margaret Thatcher, Ronald Reagan and—far more tentatively—Valéry Giscard d’Estaing in France were the first mainstream right-of-center politicians to risk such a break with the postwar consensus. True, Barry Goldwater in the 1964 presidential election had made an early foray in that direction: but with disastrous consequences. Six years later, Edward Heath—the future Conservative prime minister—experimented with proposals for freer markets and a more restrained state; but he was violently and unfairly castigated for his ‘anachronistic’ resort to defunct economic ideas and beat a hasty retreat.

As Heath’s misstep suggests, while many people were irritated at over-mighty trade unions or insensitive bureaucrats, they were unwilling to countenance a wholesale retreat. The social democratic consensus and its institutional incarnations might be boring and even paternalist; but they worked and people knew it. So long as it was widely believed that the ‘Keynesian revolution’ had wrought irreversible change, conservatives were stymied. They might win cultural battles over ‘values’ and ‘morals’; but unless they could force public policy debate onto a very different terrain, they were doomed to lose the economic and political war.

The victory of conservatism and the profound transformation brought about over the course of the next three decades was thus far from inevitable: it took an intellectual revolution. In the course of little more than a decade, the dominant ‘paradigm’ of public conversation shifted from interventionary enthusiasms and the pursuit of public goods to a view of the world best summed up in Margaret Thatcher’s notorious
bon mot
: “there is no such thing as society, there are only individuals and families”. In the United States, at almost exactly the same moment, Ronald Reagan achieved lasting popularity for his claim that it was “morning in America”. Government was no longer the solution—it was the problem.

If government is the problem and society does not exist, then the role of the state is reduced once again to that of facilitator. The task of the politician is to ascertain what is best for the individual, and then afford him the conditions in which to pursue it with minimal interference. The contrast with the Keynesian consensus could not be more glaring: Keynes himself had taken the view that capitalism would not survive if its workings were reduced to merely furnishing the wealthy with the means to get wealthier.

It was precisely such a blinkered understanding of the operations of a market economy which had led, in his view, to the abyss. Why, then, did we in our own times revert to a similar confusion, reducing public conversation to a debate cast in narrowly economic terms? For the Keynesian consensus to be overthrown with such consummate ease and apparent unanimity, the counter-arguments must have been forceful indeed. They were, and they did not come out of nowhere.

We are the involuntary heirs to a debate with which most people are altogether unfamiliar. When asked what lies behind the new (old) economic thinking, we can reply that it was the work of Anglo-American economists associated overwhelmingly with the University of Chicago. But if we ask where the ‘Chicago boys’ got their ideas, we shall find that the greatest influence was exercised by a handful of foreigners, all of them immigrants from central Europe: Ludwig von Mises, Friedrich Hayek, Joseph Schumpeter, Karl Popper, and Peter Drucker.

Von Mises and Hayek were the outstanding ‘grandfathers’ of the Chicago school of free-market economics. Schumpeter is best known for his enthusiastic description of the “creative, destructive” powers of capitalism, Popper for his defense of the “open society” and his writings on totalitarianism. As for Drucker, his publications on management exercised enormous influence over the theory and practice of business in the prosperous decades of the postwar boom. Three of these men were born in Vienna, a fourth (von Mises) in Austrian Lemberg (now Lvov), the fifth (Schumpeter) in Moravia, a few dozen miles north of the imperial capital. All five were profoundly shaken by the interwar catastrophe that struck their native Austria.

Following the cataclysm of World War I and a brief socialist municipal experiment in Vienna (where Hayek and Schumpeter joined the debates over economic socialization), the country fell to a reactionary coup in 1934 and then, four years later, to the Nazi invasion and occupation. Like so many others, the young Austrian economists were forced into exile by these events and all—Hayek in particular—were to cast their writings and teachings in the shadow of what became the central question of their lifetime: Why had liberal Austria collapsed and given way to fascism?

Their answer: the unsuccessful attempts of the (Marxist) Left to introduce into post-1918 Austria state-directed planning, municipally owned services, and collectivized economic activity had not only failed; they had led directly to a counter-reaction. Thus Popper, to take the best-known case, argued that the indecision of his socialist contemporaries—paralyzed by their faith in ‘historical laws’—was no match for the radical energies of fascists, who
acted
.
¹²
The problem was that socialists had too much faith in both the logic of history and the reason of men. Fascists, being uninterested in both, were supremely well-placed to step in.

In the eyes of Hayek and his contemporaries, the European tragedy had thus been brought about by the shortcomings of the
Left
: first through its inability to achieve its objectives and then thanks to its failure to withstand the challenge from the Right. Each of them, albeit in different ways, arrived at the same conclusion: the best—indeed the only—way to defend liberalism and an open society was to keep the state out of economic life. If authority was held at a safe distance, if politi-cians—however well-intentioned—were barred from planning, manipulating, or directing the affairs of their fellow citizens, then extremists of Right and Left alike would be kept at bay.

The same dilemma—how to understand what had happened between the wars and prevent its recurrence—was confronted by Keynes, as we have seen. Indeed, the English economist asked essentially the same questions as Hayek and his Austrian colleagues. However, for Keynes it had become self-evident that the best defense against political extremism and economic collapse was an
increased
role for the state, including but not confined to countercyclical economic intervention.

Hayek proposed the opposite. In his 1944 classic,
The Road to Serfdom
, he wrote:

In other words, Hayek—by now living in England and teaching at the London School of Economics—was explicitly projecting (on the basis of Austrian precedent) a fascist outcome should Labour, with its loudly proclaimed welfare and social service objectives, win power in Britain. As we know, Labour did indeed win. But far from paving the way for a revival of fascism, its victory helped stabilize postwar Britain.

In the years following 1945 it seemed to most intelligent observers as though the Austrians had made a simple category error. Like so many of their fellow refugees, they had assumed that the conditions which brought about the collapse of liberal capitalism in interwar Europe were permanent and infinitely reproducible. Thus in Hayek’s eyes, Sweden was another country doomed to follow Germany’s path into the abyss thanks to the political successes of its Social Democratic governing majority and their ambitious legislative program.

Mis-learning the lessons of Nazism—or assiduously applying a highly selective handful of them—the intellectual refugees from central Europe marginalized themselves in the prosperous postwar West. In the words of Anthony Crosland, writing in 1956 at the height of postwar social democratic confidence, “no one of any standing now believes the once-popular Hayek thesis that any interference with the market mechanism must start us down the slippery slope that leads to totalitarianism.”
¹⁴

The intellectual refugees—and especially the economists among them—lived in a condition of endemic resentment toward their uncomprehending hosts. All non-individualist social thought—any argument that rested upon collective categories, common objectives or the notion of social goods, justice, etc.—aroused in them troubling recollections of past upheavals. But even in Austria and Germany circumstances had changed radically: their memories were of little practical application. Men like Hayek or von Mises seemed doomed to professional and cultural marginality. Only when the welfare states whose failure they had so sedulously predicted began to run into difficulties did they once again find an audience for their views: high taxation inhibits growth and efficiency, governmental regulation stifles initiative and entrepreneurship, the smaller the state the healthier the society and so forth.

Thus when we recapitulate conventional clichés about free markets and western liberties, we are in effect echoing—like light from a fading star—a debate inspired and conducted seventy years ago by men born for the most part in the late 19th century. To be sure, the economic terms in which we are en-couraged to think today are not usually associated with these far-off political disagreements and experiences. Most students in graduate business schools have never heard of some of these exotic foreign thinkers and are not encouraged to read them. And yet without an understanding of the Austrian origins of their (and our) way of thinking, it is as though we speak a language we do not fully comprehend.

It is perhaps worth noting here that even Hayek cannot be held responsible for the ideological simplifications of his acolytes. Like Keynes, he regarded economics as an interpretive science, not amenable to prediction or precision. If planning was wrong for Hayek, this was because it was obliged to base itself on calculations and predictions which were essentially meaningless and thus irrational. Planning was
not
a moral misstep, much less undesirable on some general principle. It was simply unworkable—and, had he been consistent, Hayek would have acknowledged that much the same applied to ‘scientific’ theories of the market mechanism.

The difference, of course, was that planning required enforcement if it was to work as intended, and thus led directly to dictatorship—Hayek’s real target. The efficient market might be a myth, but at least it did not entail coercion from above. All the same, Hayek’s dogmatic rejection of all central control invited the charge of . . . dogmatism. It was Michael Oakeshott who observed that ‘Hayekism’ was itself a doctrine: “A plan to resist all planning may be better than its opposite, but it belongs to the same style of politics.”
¹⁵

In the United States, among a younger generation of self-confident econometricians (a sub-discipline of whose boastful scientificity both Hayek and Keynes would have had much to say), the belief that democratic socialism is unachievable and has perverse consequences has become something close to a theology. This creed has attached itself to popular condemnation of every effort to increase the role of the state—or the public sector—in the daily lives of American citizens.

In the UK this particular extension of the Austrian lesson has not gained comparable traction. The reasons are obvious—the popularity of free medical care or subsidized higher education to take the best-known examples. But in the course of the Thatcher-Blair-Brown era the sanctification of bankers, brokers, traders, the new rich and anyone with access to large sums of money has led to unstinting admiration for a minimally-regulated ‘financial services industry’—and a consequential faith in the naturally benevolent workings of the global market for financial products.

What precisely Hayek or even Schumpeter, the prophet of capitalist destruction, would have made of this crass worship of money and those who have it is another question. But there can be no doubt that what passes for justification of the vast and growing wealth gap in modern Britain derives directly from the apologetics for limited regulation, minimal interference and the virtues of the private sector to which Austrian economic writing contributed so directly.

The British case, even more than the American, points up the practical consequences of this retro-transformation of modern economic language: although the sad story of Icelandic enthusiasms for the wilder shores of bandit banking is more illustrative still. Beginning with a handful of outstanding intellectual refugees from interwar Europe, we pass through two generations of academic economists intent on re-configuring their discipline . . . and arrive at the banking, mortgage, private finance and hedge fund scandals of recent years.

Behind every cynical (or merely incompetent) banking executive and trader sits an economist, assuring them (and us) from a position of unchallenged intellectual authority that their actions are publicly useful and should in any case not be subject to collective oversight. Behind that economist and his gullible readers there stand in turn participants in long-dead debates. The etiolated condition of our present public language—our inability to think our way beyond the categories and clichés that shape and distort policy-making in Washington and London alike—thus pays homage to one of Keynes’s greatest insights: