Hayek's modern advocates might be surprised by his views on regulation. Source: Associated Press

As Republicans Hail Hayek, Their Plans Advance Friedman

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March 20 (Bloomberg) -- Friedrich Hayek’s book “The Road to Serfdom” has served as a beacon for American conservatives since its publication in 1944. Today’s Republicans often cite the book in their fight to limit federal power and regulation. Hayek’s views, however, were more complicated than they often assume.

As a shy and scholarly scion of an aristocratic Austrian family, Hayek hadn’t expected to find much of an audience for his wartime tract on political economy. He was shocked when opponents of the New Deal propelled it up the U.S. best-seller lists shortly after its release, and would have been equally astonished at its rise up the Amazon.com sales rankings following an endorsement from the former Fox News host Glenn Beck in 2010.

As he undertook an American lecture tour in 1944, Hayek expressed frustration that many of his most ardent acolytes seemed not to have read the book. Although “The Road to Serfdom” expressed deep anxieties about central planning, it was also explicit about the positive role that government could play. “Probably nothing has done so much harm to the liberal cause,” Hayek wrote, as a “wooden insistence” on “laissez-faire.”

Hayek was quick to point out a number of areas where regulations might be beneficial, including the restriction of excessive working hours, the maintenance of sanitary conditions and the control of poisonous substances. And he argued that the price system became “ineffective” when property owners weren’t charged for the damages they caused; hence the need to regulate deforestation, farming, and the smoke and noise produced by factories. “In such instances,” he wrote, “we must find some substitute for the regulation by the price mechanism.”

‘Social Action’

Hayek’s views were shared by many economists at the time. Frank Knight, of the University of Chicago, provided a classic statement of the justification for regulation in his essay “The Ethics of Competition”: “In a developed social order hardly any ‘free exchange’ between individuals is devoid of either good or bad results for outsiders,” he wrote. He argued that “social action” was necessary to promote exchanges that diffuse benefits and suppress exchanges that diffuse evils that aren’t reflected in market prices.

Economists such as Knight and Hayek worried deeply about the erosion of free markets, but saw their chief antagonist as “central planning” rather than “regulation.” Central planning, as Hayek explained it, involved “direction of all economic activity according to a single plan, laying down how the resources of society should be ‘consciously directed’ to serve particular ends in a definite way.”

Much of the contemporary animus against excessive regulation more closely resembles ideas first brought into general circulation by Milton Friedman. Where Hayek perceived a host of areas that might be improved by regulation, Friedman saw almost none.

In the 1960s, although very few among even his closest allies shared such views, Friedman advocated for the abolition of almost every regulatory arm of the federal government. He argued that the agencies with famous abbreviations -- the ICC, FCC, FDA -- should all be shuttered to grant greater discretion to consumers, whose actions Friedman viewed as the most reliable record of public opinion. If doctors and dentists would be allowed to practice without licensing requirements, he said, the cost of care would plunge, yielding benefits that far outweighed any dangers that uncertified practitioners might pose. (If one proved inept with a drill, Friedman reasoned, consumer preferences would soon take that into account.)

Friedman’s Adherents

In today’s conservative movement, Friedman’s ideas echo more loudly than his name. Republican Representative Paul Ryan, who assails government interference in the health care and financial industries in his latest budget proposal, is said to hand out copies of “The Road to Serfdom” to his staff. His arguments, however, show little of Hayek’s openness to robust regulatory structures or “a comprehensive system of social insurance.” Like many conservative politicians today, Ryan often cites Hayek as the major influence on his economic thought while advocating positions that align more closely with Friedman.

Near the end of his life, Friedman acknowledged that his views had become more popular, but emphasized that their influence on public policy had been limited. He and his wife, Rose, wrote in a shared autobiography that they may have been on the “winning side” of the war of ideas, but still found themselves on the “losing side” in regard to practice. Like many Republicans today, they concluded that their criticisms of government regulation had been remarkably effective at garnering adherents and attention, but less successful at generating the social changes they sought.

(Angus Burgin is an assistant professor of history at Johns Hopkins University and the author of “The Great Persuasion: Reinventing Free Markets since the Depression.” The opinions expressed are his own.)

To contact the writer of this post: Angus Burgin at burgin@jhu.edu.

To contact the editor responsible for this post: Timothy Lavin at tlavin1@bloomberg.net.