Hayek’s concern was that comprehensive economic planning of the economy by the state was incompatible with individual liberty and the rule of law over the long run…Hayek’s argument in The Road to Serfdom is straightforward. There is a reality of existence that can be called the “economic problem” (my term, not his). And anyone who has taken Economics 101 knows what it is–the reality of scarce resources in the world and unlimited wants. “Scarce” in the economic sense–that everything has an opportunity cost attached to it. Right now I can either be writing this blog post or shoveling my walkway, but I can’t be doing both. Unlimited wants in the sense that people generally prefer more to less of most goods.
So why does that matter? Hayek’s point is that given this reality–scarce resources and unlimited wants–there are fundamentally only two ways to allocate scarce resources among unlimited wants. The first is through impersonal processes such as the market process, or more accurately, the market process consists of billions of individuals making billions of decisions every single day on how to spend their time and other resources. In the market process, the guiding principle is the price system–prices are fundamentally amoral in the sense that they simply provide information about what these billions of people believe is the most important allocation of scarce resources. It may be that this means it is children’s vaccines or it may mean Honey Boo Boo marathons.
In this sense, the price system is completely bottom-up–it is the aggregation of all these marginal and constantly-changing expressions of preferences of people deciding how to allocate their resources and a signal of how resources are valued by other people. Which individual ends are satisfied and at what cost is thus fundamentally driven by billions of individual decisions. You may wish for a career as a Knight of the Roundtable, but in the modern economy it will be prohibitively expensive to pursue that career. In this world, then, Hayek says the role of the government is provide the rules of the road, i.e., should be organized around the rule of law, which is a set of purpose-independent rules that tell people how to go about pursuing their own freely-chosen ends, but doesn’t tell them what ends they must choose. To put it another way, the rule of law provides traffic rules, but doesn’t tell you which exit you have to get off when you are on the highway.
So why is central planning not only unwise, but dangerous to liberty?…Hayek’s great insight was that moving economic decision-making from individual decision-making through the market to collective decision-making through the state does not eliminate the economic problem. The reality of economics is still present: scarce resources and unlimited wants. The only question is “Who decides?” Do you decide for yourself (through markets) or does someone else decide for you (through politics)?
Hayek observes that the socialists of the time essentially thought that they could have it both ways: that they could simply control the means of production (such as by nationalization of large industry or central planning of prices and wages) but that they could leave unaffected the ends of production. In other words, socialists thought that we could simply respect consumer preferences–i.e., we could continue to respect the preference for Honey Boo Boo instead of children’s vaccines–and then just come up with more efficient ways of meeting those needs by planning the economy, without messy business cycles and the discoordinations of the market process.
What Hayek pointed out though is that this is impossible–you cannot control the means of production without also controlling the ends. In the end, someone has to decide between Honey Boo Boo and children’s vaccines, or more realistically, manufacturing Priuses or Ram trucks. You can’t just say we will manufacture “cars” (well I guess you could, but most people didn’t like that system). So this means that in the end the central planner has to decide who will have their ends met and who will have their ends disappointed. Once you throw out the price system (which basically says that individuals decide according to impersonal market processes) then you have to decide who gets what
At this point Hayek says there are only two choices. The first is to essentially try to reeducate everyone in society to be truly selfless and to weigh the preferences of others as heavily as themselves–i.e., for me to say even though I really want a new Prius I recognize that you have a greater need for a new Ram truck and so I voluntarily allow the importance of my ends to yield to your preferences. In short, we create a uniform system of value for all of society where we all agree to an overall ranking of the importance of all the ways in which social ends could be met. (This leaves aside, of course, the economic calculation problem which is an entirely different, and unsolvable problem, and focuses only on the ethical/social point). This world essentially is more or less the dream of Mao’s cultural revolution or 1984–to basically subordinate every individual to the collective and have us all live in one great comradeship.