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Why We are Not on the Road to Serfdom

Gary North
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May 24, 2012

F. A. Hayek wrote The Road to Serfdom in 1943. It was published in 1944. Americans who read the 1945 Readers Digest version liked it. University professors didn't. This is one more bit of evidence that American voters have more sense than university professors. Are you surprised?

When Hayek wrote The Road to Serfdom, he had a marketing problem. The book's title was absurd. He knew that. He knew the difference between Western serfdom, which had limited but defined property rights and the rule of law, and socialism, which in theory had neither. Serfdom was a system of liberty compared to Communism, Fascism, and National Socialism. But he was trying to sell the book to educated Leftists, who were favorable to socialism. He could not very well have sold copies in 1944 based on a title like The Road to Fascism, which was in fact the road the West was on in 1944.

We have been on the road out of "serfdom" ever since 1947, the year after Truman removed wartime price and wage controls. Anyone who doubts this development has no awareness of the lack of influence that free market ideas had in 1945. It was worse on campus, but it was bad in general. Henry Hazlitt's Economics in One Lesson was a breath of fresh intellectual air in 1946. He was alone among financial journalists in 1946.

He would not be alone today.


I ran a chart on federal tax revenues as a percentage of GDP. Go back and refresh your memory.

There was a reason why I ran it. I wanted to drive home a point: the federal government is no deeper into our pockets than it was in 1947.

Think about this.

I got into the conservative movement in 1956. That was the year that Dwight Eisenhower was reelected President. I think most people like to think of those days as the good old days. Certainly, the popular television show Happy Days was premised on nostalgia for that era. But the reality is this: in terms of taxes collected by the federal government, the good old days were no better than today. With the top tax income rate at 91%, it was a lot worse. It was confiscatory.

What we forget is the enormous increase of productivity that the world has lived through since 1947. The output of American workers has risen steadily because of innovation, capital formation, and the greater wealth of our trading partners. As the rest of the world has gotten rich in the postwar era, everyone has prospered. When our neighbors get richer, we get richer. This includes our neighbors who live 10,000 miles away. This tremendous increase of productivity has enabled us to pay our taxes to the federal government and still enjoy an enormously increased standard of living.

When we think of the automobiles that Americans drove in 1946, or when I think of the 1952 automobile that I drove in 1958, there is no comparison. The cars today are safer, get far better mileage, are more stylish, handle better, and last longer. While a man my age looks back nostalgically at a 1955 Chevy hardtop convertible, he would not want to have to drive one on a regular basis.

The dream cars of 1955 had more to do with fantasies about the dream girls of 1955 than they did with transportation.

The federal government is intrusive in ways that we would not have imagined in 1955. The extent of bureaucratic tyranny in specific cases is considerable today. But when we consider how often we have been personally abused by some federal bureaucrat, most of us cannot say that we have suffered to any worse degree than citizens who were out of step in 1955. There was political correctness in 1955, too.

We no longer face the Soviet Union. We no longer face the threat of nuclear war. We deal with a Pentagon that is bloated, but it's far better to have a bloated Pentagon than a world war. American troops have died in Iraq and Afghanistan, but those troops were volunteers. There is no military draft today. There was in 1955.

The federal government has expanded beyond what it was in 1955, but it has done so over the last decade by means of borrowed money. That ability is going to be curtailed at some point. When that curtailment takes place, the federal government is going to be put on a diet. There will be a contraction of government control over the economy.

Americans will not tolerate total taxation to exceed about 20% of GDP. The politicians can promise all kinds of benefits, but the reality is this: if the government cannot borrow the money, it is not going to be able to fund the projects. American taxpayers will not put up with extensive taxation. Our nation is a low-tax country. Compared to Europe, it is a very low-tax country. Any politician who thinks he can get the voters to approve a major tax increase is going to find himself an unemployed former politician soon enough. Even if he is in a safe political district, his fellow Congressmen are not.


This is one of the reasons why I get tired of hearing from old-time conservatives that the country is going to hell in a handbasket. We have lost freedoms, but we have also gained freedoms. If we think of freedom in terms of the availability of choices that we can afford, we are the beneficiaries of an enormous increase of freedom over the last half-century. The government has grown, and it has grown arrogant, but the ability of any given bureaucracy to affect the American economy, other than the Federal Reserve System, is minimal. The Federal Reserve System was an inflationary monster in World War II, and it remained an inflationary monster during the Korean War. We should not be naïve about how lawless the Federal Reserve system was. It was in the hip pocket of the President to a far greater degree under Franklin Roosevelt and Harry Truman than it is under President Obama.

We have seen the defeat of the liberal Establishment again and again. This is not because we are well-organized politically. It is because the economy is growing, and technology is moving at an ever-increasing rate toward decentralization. The federal government cannot regulate the Internet. Therefore, it cannot regulate public opinion.

In 1963, there were only three television networks. The liberals controlled all three. Today, there are hundreds of alternatives to the status quo. If we count Internet options, there are millions of alternatives. In November 1963, there were three television network news services. They were all liberal. They dominated American information distribution. Not today.

There has been extensive moral decline since 1955, but the federal government is not the primary agency of that decline. I have no doubt that federal policies have reinforced this decline, but morality is mostly individual, and people have made their own choices morally without checking with the federal government. Where life really counts, in our day-to-day moral decisions, the federal government is a minor player.

We attribute far too much power and far too much influence to the tenured bureaucrats who staff the agencies of the federal government. These people are not innovative, not driven by some sense of messianic mission, not communists, not socialists, not much of anything. They are what bureaucrats are around the world: timeservers. They fill out forms. Why should we expect anything different? Why should we think American bureaucrats are exceptional? Why should we think that the vast expansion of bureaucratic power has not been accompanied by a vast expansion of paralysis, incompetence, and petty tyranny?


The expansion of the federal government is completely dependent today on the availability of investors who are willing to turn over their money to the Department of the Treasury. They're willing to do this at almost a zero rate of interest. This is what has kept the system growing. This will not continue indefinitely. It cannot be maintained at the rate of increase which we have seen over the last 10 years at the same low rates of interest.

This means, beyond any shadow of a doubt, that the federal government is going to hit a fiscal brick wall. Where will Congress get the money when the Treasury can no longer not roll over the debt? There will be political resistance if the politicians attempt to replace borrowed money with tax increases. That isn't going to happen. If Congress goes to the Federal Reserve, as seems likely, there will be mass inflation (20% range). For a time, there may even be hyperinflation, although I doubt it. But there is not going to be some huge increase of taxes imposed on the rich or anybody else.

If we think that the Establishment really controls Congress, which I think it does, the Establishment is not going to tax itself to pay for the goodies that middle-class voters think they are entitled to. Consider the Social Security tax on salaries. It is not imposed on salary income above $110,000. Why not? Because that would not be in the interests of members of the Establishment. There is little chance that the Congress of the United States is ever going to pass a piece of legislation that imposes the Social Security tax on all salary income. The Establishment that runs this country is made up of people who have salaries a lot higher than $110,000. They are not going to provide the PAC funds to re-elect Congressmen who are dedicated to the proposition that rich people should pay the same percentage of Social Security taxes on all of their salary income the way that the vast majority of American workers pay on their salaries.

Either we live in a high school civics textbook democracy or we don't. Either you believe that the system is really controlled by the American voters, or else you believe that the American voters are manipulated, and the system is really run by a relatively small number of people who work together to control what Congress does. I think it is the latter. I think most conservatives believe that it is the latter. Voters get an echo, not a choice. The choices have been vetted before voters get an opportunity to vote.


This is why I do not understand why conservatives believe that there is going to be a massive increase of socialism in the United States. There will be a lot of regulation. There will be a lot of special-interest legislation that benefits the Good Old Boys back home and the Old Boy Network that has its headquarters in New York City. There will be a lot of corruption. There will be a lot of Congressmen running around with their secretaries. There has been all this since 1788. What there isn't going to be is socialism. The idea of socialism is dead in the water. It has almost no supporters any more, outside of universities. It has no legitimacy any more. There is no drift into socialism, because, since at least December 31, 1991, there has been a drift out of socialism. The USSR went belly-up.

It astounds me that there are still conspiratorial conservatives who tell us that the collapse of the Soviet Union was a deception. It also astounds me that anybody could believe this. I think it is a hangover of the outlook of the 1950s and 1960s, in which American conservatives really did think that the West might lose the Cold War. If we had stumbled into a nuclear war, as we almost did on several occasions -- thank God for Stanislav Petrov -- the West would have lost the war, but not the Cold War. In any case, we did not go to nuclear war, and we did not lose the Cold War. We won it. Our opponent disappeared in late 1991.

The simplest proof of this is to look at a map of Russia. The Soviet names of cities, which had been substituted for czarist names, have been changed back to the czarist names. Leningrad is back to St. Petersburg. It had been re-named Petrograd in mid-August 1914, a few days after Russia entered World War I, then Leningrad in 1924, three days after Lenin died. It was re-named St. Petersburg in September 1991, a few weeks after the failed coup by the Communists to regain control (August 19-21), but before the Soviet Union was officially disbanded -- getting the czarist name back for the nation (December 31): Russia. Anyone who does not think name changes are significant has no understanding of how societies operate. What we call our cities reflects who we are as a people. Lenin was not St. Lenin, for there were no saints in Marxism. There were, however, pseudonyms: Lenin (Ulyanov), Stalin (Dzhugashvili), Trotsky (Bronstein).

I don't care if Obama is a socialist, if he really is. Obama does not run the country. The entrenched Civil Service-protected bureaucracies run the country. They write 83,000 pages a year of three-column, fine print regulations that run the country. The people who implement the Federal Register run the country. The President and Congress have very little say in the details of running the country. The only major piece of legislation that Obama got through, other than a Keynesian stimulus package, which was no worse than George Bush's Keynesian stimulus package, was Obamacare. The Supreme Court may throw it out next month. The man has almost nothing else to show for the first four years of his administration. He is not Franklin Roosevelt or Lyndon Johnson.

The system rolls along. For as long as investors turn their money over to the federal government in exchange for IOUs, the system is going to continue to roll along. When they stop turning their money over to the federal government, the Federal Reserve will begin to buy up the IOUs in order to make up the difference. But, at some point, the Federal Reserve will stop. The Federal Reserve will not go to hyperinflation unless Congress mandates it and threatens to take over the Federal Reserve. There will be time under those circumstances to hedge our bets. In any case, times of hyperinflation do not last very long. At the end of the period of hyperinflation, the government goes back to a stable money system, and the economy recovers. A lot of people will lose their wealth in the interim, and a few people will get very rich. If they sell their gold and silver and get into something like cash, they will do very well in the aftermath. But the bottom line is this: hyperinflation does not last very long. It is no solution, and central bankers know this. That is why I don't think we are going to get hyperinflation.


So, why all the weeping and wailing? Why all the despair? Why do people think that the juggernaut of the modern Keynesian state is not going to go off the tracks? Why do we think that the bureaucrats in Washington have any insight into how anything works? Why do we think the Establishment, which has to rule by way of bureaucrats in Washington, is in a position to direct the American economy? Has any Establishment-crafted decree matched the culture-changing influence that Bill Gates and Mark Zuckerberg have had -- a pair of Harvard dropouts?

Bureaucrats on the one hand and the free market on the other hand decide how the politicians' laws are implemented. The Establishment, including Congress, can nudge the direction society takes. The Establishment does not run the show. In world wars, generals take over. Politicians are there mostly for show in wartime.

If the federal government cannot increase the percentage of taxes that it collects from the American people, which it has not been able to do since 1947, then there are distinct limits on the expansion of the federal government. We are not moving into a comprehensive tyranny. We are moving into a time in which the federal government is going to go bankrupt, and when it does, it will lose more power than it has ever lost since 1788. Bankrupt means bankrupt. Washington's checks will bounce or else not buy much. Bankruptcy means the federal government will not be able to pay the bureaucrats. Bankruptcy means the federal government is going to shrink in its ability to interfere with our lives. This is the meaning of the Great Default.

We are surrounded by people who have little understanding of history. This includes spokesmen on the Right and on the Left. It surely includes the vast majority of voters in the middle. Yet I am astounded at the extent to which the resurgent Right wing is filled with people who tell us that we are inevitably marching on the road to serfdom. These people do not seem to understand that Hayek won the Nobel Prize in 1974. They do not understand that he is far better known today than he was in 1974. Even on campus, he is more respected today than he was in 1974, let alone in 1944. As he told Mark Skousen and me when we interviewed him in 1985, awarding a man the Nobel Prize keeps him from getting much work done. The number of interviews increases.

We are not on the road to serfdom. We are on the road out of the mythology of Soviet economic planning. Anyone who got behind the idea of Soviet economic planning has lost his reputation after 1991. The Soviet economy was a sham. It was a statistical Potemkin village designed to impress Western intellectuals, which it did. The USSR was, in the words of Richard Grenier in the 1980s, "Bangladesh with missiles." Professor Samuelson was completely taken in. Grenier wasn't.

The capitalistic West won the Cold War. It won the intellectual battle against the idea of Marxist Communism. It also won the intellectual battle against the idea of socialism. We have not yet won the intellectual battle against Keynesianism, but Keynesianism is close to the hearts of most people, most of the time. People want the state to bail them out when they get in trouble. Keynesianism is an inherently incoherent system, with arcane formulas offered by tenured bureaucrats, who tell money-seeking voters and power-seeking politicians what they want to hear. The problem with Keynesianism is not the supposed methodological rigor of Keynesianism. The problem with Keynesianism is that it offers voters endless bailouts. Voters like bailouts in recessions. They don't like socialism. They just like bailouts.

When the government goes bankrupt, as it is going to do, the bailouts will cease. Then Keynesianism is going to suffer a reversal. I have proposed an academic plan to help speed it along into well-deserved ridicule, but it is going to wind up in the ash can of history with or without prodding from inside academia.


The rotten economic policies of the Federal Reserve are going to push the economy through the wringer. I have no doubt about that. This does not mean that the country is going in the direction of socialism, and it does not mean that there is any systematic effort to impose tyranny. There are a lot of bureaucrats who want to expand their jurisdiction, because that is the way bureaucrats get promotions and raises.

The fact that there are individual examples of petty tyrannical behavior, meaning arrogant bureaucratic behavior, is not proof of a systematic policy to take us down the road to serfdom. It means that we find out about these incidents through the Internet. That was harder to do in 1963 or even 1993. When Matt Drudge blew the digital whistle in 1998 on Newsweek for having suppressed a story on Bill Clinton and an intern, the road out of serfdom got smoother. Drudge still is a dominant news site. It gets about 3,000,000 hits a day. In contrast, Newsweek was sold for one dollar in 2010.

Ludwig von Mises wrote in 1920 that socialist planning is irrational. Central planners are blind without capital markets. He was right. Socialist tyrants are blind. Their bureaucratic enforcers are blind. They can impoverish millions of people for a time. They can create terror for a time. A few have killed millions. But then their economic systems always implode. Communism is dead. Socialism is on a catheter. We are not on the road to serfdom.

Leningrad is St. Petersberg. It is not going back to Leningrad.

The immense size of Washington's bureaucracy means that there are a lot of bureaucrats around who are going to lose their jobs after the Great Default.

As Gabriel Heatter used to say in his 1940s news broadcasts, "There's good news tonight!"

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