TCS Daily

Are We Serfs?

By Bob Formaini - March 23, 2004 12:00 AM

This year is the 60th anniversary of the publication of one of the 20th century's most influential books, Friedrich Hayek's The Road to Serfdom (hereafter, TRTS). Milton Friedman, speaking at a recent conference held at the Dallas Federal Reserve Bank, said that at the time that Hayek wrote his book, most political policy rhetoric was pro-socialist, not only in England where Hayek then lived, but in America as well. Yet actual policy was very free market oriented. Today, Friedman noted, the rhetoric is more often pro-free market even though the policy reality in both America and Europe is overtly socialist. So Hayek was right? Not quite so fast.

The late George Stigler, a University of Chicago economist of impeccable free market pedigree, disputed Hayek's prediction 44 years after it was written in his own 1988 book Memoirs of an Unregulated Economist. Stigler pointed out that he had lost faith in Hayek's main prediction -- that regulation would continue to increase until total centralization of the economy occurred along with the complete loss of personal and political freedom -- ever coming true. Stigler finished his demurral by stating that "Hayek's orderly mind could not comprehend the survivability of our disorderly world." It's a fair appraisal, and one that seems to suggest an economic paradox: regulations placed on the market can grow in number and complexity, yet people can remain relatively free, and a market-based economy can continue to perform quite well despite such regulations. Following Ludwig von Mises, Hayek denied that such piecemeal regulation could exist in the long run without becoming totalitarian and yet, it clearly does; and not just in the United States. How is this outcome possible? If we really are in a car with Hayek, traveling along the road to serfdom then, like the child in the back seat, we are compelled to ask: why aren't we there yet?

One answer can always be given: "We aren't there yet but, in time, we assuredly will be, so you there in the back seat -- shut-up." Like Marx's proletarian utopia, our own complete serfdom lies always somewhere ahead of us. But how far ahead? No one seems really to know, although many have claimed such knowledge. But false predictions so litter the intellectual landscape that one or two more are unlikely to be much noticed. The claim can be made, and has been made, that mixed economies, while inherently unstable, are not necessarily transitory. Economist Sanford Ikeda has called this the "Misesian paradox," and clearly, it also applies to Hayek's claims in TRTS. But is this view correct? And, even if it is, how useful is such a model for the myopic business of choosing among current public policy proposals all of which, tautologically, can be called "interventions?"

Another possibility is that Americans have learned how to regulate better, doing less damage to the market process and maintaining sufficient economic incentives and continuing competitive pressures so that regulation does not become so burdensome as to shut off good economic results. Many people would like to believe this, regardless of their ideological predilections. Alternatively, we might now regulate things that we didn't before -- so-called "social regulation" -- while economic regulation -- especially price controls -- has diminished over time and become a less important fraction in the regulatory mix.

There are even other possibilities. Economists and other social thinkers may have underestimated the market's ability to adapt to, and to avoid, regulation.1 Many regulations, although they might well continue to do long-run economic harm, become obsolete -- often quickly -- as technology and markets adapt and/or avoid their impact. Many regulations are not enforced, and many are only slightly enforced. Markets are very dynamic and capable of dodging regulation as easily and as often as good halfbacks shed even the most determined tacklers. In other words, as Stigler also pointed out, regulation on paper and regulation in practice are two very different things. If this is not true, then how has our economy been able to absorb, with relative ease, the tens of thousands of regulations passed in just the past decade or so?

Let's look at some numbers -- usually publicized by those who accept TRTS's central theme -- to get some perspective. According to such sources as the Weidenbaum Center at Washington University, the Mercatus Center at George Mason University, the Cato Institute, the National Center for Policy Analysis, the Heritage Foundation and many other antiregulation venues, TRTS's leitmotif certainly does not lack current supporting publicity. In graphs, pie charts and summaries of data, readers are informed that the number of regulations has been rising steadily for decades, the costs are approaching one-tenth of GDP, and there seems to be no end to the growth of the future large slice of our incomes that such rules are going to take from us. To the extent these numbers are true, personal freedom is indeed diminished, specifically: the freedom of one to spend 100 % of his wealth and/or income in any manner he wishes.

One gauge often cited by researchers of regulatory growth is pages in the Federal Register. This is a mandatory listing of proposed -- as opposed to ultimately adopted -- rules for regulatory agencies. In 1970, the Register had 20 thousand pages. Today, it has almost 80 thousand, or an overall growth of almost 300%. Direct federal expenditures on social and economic regulation have also soared. In 1980, they amounted to just $6 billion. Today, the figure is close to $30 billion for a general increase of almost 400%. There are 35 thousand persons at the federal level working in regulation jobs and that does not include the people working to monitor and oversee the regulators themselves, nor does it include the courts whose time is consumed with regulation cases. Private sector employment specifically designed to cope with regulations of all kinds has also soared, but accurate data on this phenomenon are hard to acquire.

The costs of regulation are, for economists anyway, the opportunities forgone in order to support the current regulation package. They are very hard to measure accurately and their size, especially relative to their benefits, generally depends a great deal on who is doing the counting. The government claims that regulation costs between several billion and a trillion or so dollars, but the benefits received for these outlays are several trillions dollars. The sources mentioned above disagree and place the costs at a trillion dollars (give or take a few billion), while benefits are decidedly lower than the federal estimate. If benefit-cost analysis were an exact science, perhaps these disputes could be authoritatively solved. But it's not, so they won't be.

Both sides in this debate -- those who like regulation and want more versus those who don't and want less or even none -- do agree on one point: there has been a large amount of growth in economic and social regulation and in its cost. American firms do not have only to cope with an increasing regulatory burden, however; there is also the continuous threat of civil litigation and the potential loss of a very large jury award, as well as the threat of government litigation in lieu of regulation.2 Such an environment definitely has effects on firm behavior, redistributing resources, sometimes globally. It does not seem to have the much-touted effect (health care and education are two exceptions) of making all regulated products (there are exceptions, of course) costlier as firms pass along regulatory costs to their consumers. How can this be?

Apparently, firms have the capacity to avoid, or to deflect many regulations even as they continually cut their costs and squeeze out ongoing productivity increases. This avoidance technique can involve many behaviors, but the most common seem to be technological advances (or apparent advances) that change market definitions just enough to enable firms to evade existing regulation, the outsourcing of capital and/or jobs to cut overall production costs, and the inventive use of existing technologies to improve the efficiency of firms' supply chains. More drastically, firms can sometimes move their operations altogether to avoid taxes and regulations. The world is now, whether it wants to be or not, a set of competing nations much as America is a set of competing states and localities; the major competition is for capital. The tools used are the same as well: tax cuts and subsidies, cheap resources, and cheap labor. Despite the recent attempts at "harmonization" -- which is demanded by advocates so this competition cannot work -- it seems unlikely that all nations will ever agree to stop attempting to lure capital to their jurisdictions. As Walter Wriston once said, "Capital goes where it's needed and stays where it's well-treated." That is not likely to change in the near future despite the continuing efforts of all those international busybodies located in Brussels, although it is disheartening to see American courts beginning to look to other nation's laws and legal precedents as they formulate our own and the IRS beginning to report foreign income to other nations' tax collectors. These are very bad trends.

So where does all this leave us on Hayek's road? Perhaps it depends on one's definition of serfdom? Even though there is not total central planned control of the American economy, there is enough piecemeal control to make most of us think twice about not obeying the state. For some libertarians, this is more than enough to vindicate Hayek's argument. We Americans have become but timid shadows of our individualist forerunners, always ready to bow down and comply, not even rhetorically willing to challenge, most of the time, the status quo our governments have arranged for us. This is no small, trivial development for it is the people themselves who, ultimately, are going to reverse -- or not -- this endless march into total government.

But the glass may well be half full rather than half empty. Americans have not, and never will, abandon their beliefs about property and freedom, despite decades of propaganda in government-funded and controlled schools and all the free reeducation any ideologue could hope for in the media's daily anti-business drumbeat. A significant -- and growing -- number of people do not accept the status quo as being the most desirable economic arrangement. It is especially heartening that, due to access to new and varied information sources, it is the young in America who have rediscovered our earlier political tradition and who, despite the state's best efforts, somehow have managed to resist believing in the statist tide that has swept the nation since World War II. (I have been unable to find, after several years of asking, a single student in any of my classes who claims to believe in manmade global warming!) If it's true, as all the blithering candidates from all parties routinely claim, that "Our children are our future," then perhaps we will turn out all right after all. We will never exit from it, but we will also probably never reach the end of Hayek's road.

Then again...

Robert L. Formaini is President of Quantecon, a Dallas based political economy research firm.

1 Robert Formaini (1999) "Evolution of the Regulatory State." Journal of Private Enterprise, Volume 15, Number 1, 67-97.

2 Bruce Yandle, Andrew P. Morriss and Lea-Rachel Kosnik (2002) "Regulation by Litigation." Perc Policy Series, Issue Ps-25, September.


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