The Road from Serfdom: Forseeing the Fall [Archive]

teh lag

March 15th, 2009, 11:40 AM

I think we're all a bit overwhelmed by the size of the thing. Probably a lot of people are also too lazy to click the link.

Spoiler'd for said lazy people.

F. A. Hayek must have sensed something in the wind at about the time I interviewed him in Los Angeles in May 1977. In the 1930s and 40s, Hayek had been the second most famous economist on the planet, best known as John Maynard Keynes's intellectual sparring partner. On the fundamental questions of economic policy, the debate pitting Professor Hayek of the London School of Economics against Professor Keynes of Cambridge University sparked a memorable confrontation between classical economics and the new-fangled "macroeconomics" of Lord Keynes's 1936 General Theory.

The Keynesians swept academic arguments in a virtual shut-out. With Keynes's death in 1945, in fact, Hayek (and the classical trade cycle theory) quickly faded from public view. Economic policy entered a golden age of "demand management" in which the business cycle was rendered obsolete, and Hayek moved out of economic theory altogether. In 1950 he went to the University of Chicago, where he chaired the Committee on Social Thought, finishing his career at the University of Freiberg (1962-68) and the University of Salzburg (1968-77). He embarked upon major contributions in such new fields as psychology (The Sensory Order, 1952), political theory (The Constitution of Liberty, 1960), and law (Law, Legislation & Liberty, Volumes l-lll, 1973-79).

He was wise to steer clear of economics. For his quibble with Keynes was not the only humiliation he had suffered in rarified theoretical discourse. The famous Socialist Calculation Controversy was prompted by the Austrian critique of central planning. From the 1920s until the '40s, Hayek and his countryman Ludwig von Mises argued that socialism was bound to fail as an economic system because only free markets--powered by individuals wheeling and dealing in their own interest--could generate the information necessary to intelligently coordinate social behavior. In other words, freedom is a necessary input into a prosperous economy. But even as Hayek's elegant essay extolling market prices as the signals of a rational economy was hailed as a seminal contribution upon its publication in the American Economic Review in 1945, shrewd socialist theorists proved to the satisfaction of their peers that central planning could be streamlined so as to solve, with really big computers, the very information problem that F. A. Hagek had so courteously exposed.

Losing a scholarly debate or two is not the worst that can befall a buman being of talent, and Hayek was not destroyed. He went on to publish brilliant work in subsequent years. But within the economics profession it is no secret that Hayek was an academic outcast, a throwback, a marginal character whose ideas had been neatly disproven to all reasonable men in the scientific journals of his day.

But then something bizarre happened. The late 20th century decided to provide a reality check on the academic scribblers. The 1960s and '70s saw post-war prosperity ignite into an inflationary spiral in the very countries that had embraced Keynesianism (mainly the United States and the U.K.). Shocking to the peer-review process, which had rigorously proven otherwise on many occasions, full employment could not be maintained via off-the-shelf Keynesian bromides. The traditional therapy-stimulate consumption and penalize savings with a healthy infusion of government deficit spending-was now being refereed by the real world, and the results were found "nonrobust." The macro models of Cambridge, Harvard, Berkeley, and MIT fell apart, and by the 1980s the very solutions that Keynes had hustled were being painfully thwacked as precisely the root of our troubles. Suddenly the old classical medicine-savings, investment, balanced budgets, competition, and productivity growth-were popularly claimed to be the economic-policy goal of good government. Even the politicians, so bubbly to receive Keynes's prescription for government spending as the magical elixir with which to treat an ailing economy, had publicly abandoned Keynesianism.

And the possibility of rational economic planning under socialism? Yes, we ran that experiment as well. The Third World tried it and promptly dropped to income levels last recorded in the Pleistocene Epoch. The Second (Communist) World tried it in massive police-state doses and...well...dissolved.

The trends away from Keynesianism in the West and from socialism everywhere else were just beginning to assert themselves when Hayek-out of the economics profession for, essentially, 30 years-was surprisingly awarded a Nobel Prize in Economics in 1974. Quickly, he was transformed from goofball to guru. And not without justification. By the late 1970s-with the Labor, Democratic, and Social Democratic parties (oh come on, you remember them: Think, now think!)still in power in London, Washington, and Bonn-Hayek's vision had already spotted global political movements on the horizon. The glacial worldwide policy shifts of the 1 980s were cautiously anticipated by Hayek in this (never before published) interview. He seemed to sense that soon it would not be a sign of disrespect to be dubbed the greatest philosopher of capitalism since Adam Smith.

Sometimes you have to live a long time just to be proved right. When Friedrich August von Hayek, born in 1899, died March 23 in Freiberg, Germany, he had outlived both Keynes and Marx. Happily for the human race, so have his ideas.

[Contributing Editor Thomas W. Hazlett interviewed Hayek in 1977, shortly before starting graduate school in economics at the University of California, Los Angeles.]

Reason: Of your bestselling The Road to Serfdom, John Maynard Keynes wrote: "In my opinion it is a grand book.... Morally and philosophically I find myself in agree- ment with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement." Why would Keynes say this about a volume that was deeply critical of the Keynesian viewpoint?

Hayek: Because he believed that he was fundamentally still a classical English liberal and wasn't quite aware of how far he had moved away from it. His basic ideas were still those of individual freedom. He did not think systematically enough to see the conflicts. He was, in a sense, corrupted by political necessity. His famous phrase about, "in the long run we're all dead," is a verv good illustration of being constrained by what is now politicallv possible. He stopped thinking about what, in the long run, is desirable. For that reason, I think it will turn out that he will not be a maker of long-run opinion, and his ideas were of a fashion which, fortunately, is now passing away.

Reason: Did Keynes turn around in his later years, as has frequently been rumored?

Hayek: Nothing as drastic as that. He was fluctuating all the time. He was in a sort of middle line and he was always concerned with expediency for the moment. In the last conver- sation I had with him (about three weeks before his death in 1945). I asked him if he wasn't getting alarmed about what some of his pupils were doing with his ideas. And he said," Oh, they're just fools. These ideas were frightfully impor- tant in the 1930s, but if these ideas ever become dangerous. you can trust me--I'm going to turn public opinion around like this." And he would have done it. I'm sure that in the post-war period Keynes would have become one of the great fighters against inflation.

Reason: Was the Keynes thesis that govemment spending is needed to bolster aggregate demand in times of unemployment correct at one time?

Hayek: No. Certainly not. But, of course. I go much further than this. I believe that if it were not for govemment interference with the monetary system, we would have no industrial fluctuations and no periods of depression.

Reason: So trade cycles are caused solely by government monetary authorities?

Hayek: Not that directly. As you put it, it would seem that it results from deliberate mistakes made by government policies. The mistake is the creation of a semi-monopoly where the basic money is controlled by govemment. Since all the banks issue secondarv money, which is redeemable in the basic money, you have a system which nobody can really control. So it's really the monopoly of government over the issue of money which is ultimately responsible. Nobody in charge of such a monopoly could act reasonably.

Reason: You have written that the period from about 1950 to 1975 will go down in history as the Great Prosperity. If the Keynes thesis is incorrect, why the tremendous economic success? Why, for instance,haven't we experienced a hyperinflation on the order of Germany in 1922?

Hayek: Because the inflation in Germany was not for the purpose of maintaining prosperity but was forced upon them due to financial difficulties. If you inflate for the purpose of maintaining prosperity you can do so at a much more moderate rate.

The prosperity did last longer than I anticipated. I always expected its breakdown, but I thought it would come much sooner. I was thinking in terms of the collapse of the inflationary booms during past trade cycles.

But those collapses were due to the gold standard, which put a brake on those expansions after a few years. We never had a time where a policy of deliberate expansion was unlimited by any framework of monetary order. We've come to an end only when has been seen we cannot accelerate inflation so fast that we can still maintain prosperity.

Reason: The United States has cut inflation from 12 percent to 4.8 percent, Britain from 30 percent to 13 percent--both without Depression-type setbacks. Doesn't this offer hope that economic adjustments can be made without massive unemployment?

Hayek: I don't know why you suggest this. It has been accomplished, very much, through extensive unemployment. I think it is certainly true that ending an inflation need not lead to that long-lasting period of unemployment like the 1930s,because then the monetary policy was not only wrong during the boom but equally wrong during the Depression. First, they prolonged the boom and caused a worse depression, and then they allowed a deflation to go on andprolonged the Depression. After a period of inflation like the past 25 years, we can't get out of it without substantial unemployment.

Reason: How does inflation cause unemployment?

Hayek: By drawing people into jobs which exist only because the relative demand for the particular things is temporarily increased, and these employments must disappear as soon as the increase in the quantity of money ceases.

Reason: Yet, if the United States, for example, went through a period of temporarily high unemployment--say we have double the current rate of unemployment for one to two years--wouldn't all the automatic income-maintenance programs, such as unemployment insurance, welfare, etc., run up such an enormous bill as to bankrupt the federal government, which already runs a deficit of S50 billion or $60 billion in a so-called recovery period?

Hayek: Yes, they probably would. There would be an enormous political struggle on the question of whether social-security benefits ought to be adapted to inflation or cut down. I don't think that you can effect a permanent cure without a substantial alteration of the social-security system.

Reason:Will the horror of financing this colossal welfare bureaucracy prove the stimulus to "shock" us into a more rational government framework?

Hayek: No. My only hope really is that some minor country or countries which for different reasons will have to construct a new constitution will do so along sensible lines and will be so successful that the others find it in their interest to imitate it. I do not think that countries that are rather proud of their constitutions will ever really need to experiment with changes in it. The reform may come from, say, Spain, which has to choose a new constitution. It might be prepared to adopt a sensible one. I don't think its really likely in Spain, but it's an example. And they may prove so successful that after all it is seen that there are better ways of organizing government than we have.

Reason: To avoid inflation, your prescription has been to advocate that monetary policy be pursued with the goal of maintaining stability in the value of money. Is it necessary to trust the politicians to regulate the money supply? Can't market forces adjust to correct for a gradual deflation?

Hayek: Yes, they do occasionallv. The trouble is, in the mechanical system what forces politicians is the gold standard. The gold standard, even if it were nominally adopted now, would never work because people are not willing to play by the rules of the game. The rules of the game that the gold standard requires [say] that if you have an unfavorable balance of trade, you contract your currency. That's what no government can do--they'd rather go off the gold standard. In fact, I'm con- vinced that if we restored the gold standard now, within six months the first country would be off it and, within three years. it would completely disappear.

The gold standard was based on what was essentially an irrational superstition. As long as people believed there was no salvation but the gold standard, the thing could work. That illusion or superstition has been lost. We now can never successfully run a gold standard. I wish we could. Its largely as a result of this that I have been thinking of alternatives.

Reason: You have, at various times, championed a commodity-reserve monetary system and competition in the money supply. Are these practical alternatives to a govemment con- trolled central banking system?

Hayek: Yes. I have been convinced that while the idea of the commodity-reserve system is a good one, practically it is unmanageable. The idea of accumulating actual stocks of com- modities as reserves is so complex and impractical that it just cannot be done.

Then I came to the conclusion that the necessity of actual redemption of the real commodities is only necessary if you have to place a discipline on an authority which otherwise has no interest in keeping its currency stable. If you place the issue of money in the hands of firms whose business depends upon their success in keeping the money they issue stable, the situation changes completely. In that case, there is no necessity of depending upon their obligation to redeem in commoditei: it depends on the fact that they must so regulate the supply of their money that the public will accept the money for its stability. This is better than anything else.

Reason: The Keynesian economic formula seeks out a nearly perfect symbiotic relationship with the political forces of the modem welfare state. At what point can this marriage be broken? How can the Keynesians be politically defeated?

Hayek: I really should begin with Keynes himself. Keynes despaired in the 1920s of the possibility of again making wages flexible. He came to the conclusion that we must accept wages as they are and adjust monetary policy to the existing wage structure. That, of course, forced him to say "I don't want any restriction on monetary policy because I have to adjust monetary policy to a given situation."

But he overlooked tha, at that very moment, the trade unions knew that the government was under an obligation to correct the effect of the trade-union policy, and so we get a hopeless spiral. The unions push up wages, and government has to provide enough money to keep employment at these wages, and this leads into the inflationary spiral. This came out of the practical considerations of Keynes in the short run--that we can't do anything about the rigidity of wages.

In fact, the British in the 1920s were very near success. The very painful, and silly, process of deflation was very nearly successful at the end of the 2Os. Then they got frightened by the long period of unemployment. I think if they had lasted a year or two longer they probably would have succeeded.

Reason: Gunnar Myrdal, your co-winner for the Nobel Prize in 1974, recently published an article advocating the abolition of the Nobel Prize for economics, apparently as a reaction to the awarding of the prize to Milton Friedman and yourself. His most remarkable statement is his reference to you regarding your lack of concern. Specifically, that you have "certainly never been much troubled by epistemological worries."

Not only does the statement summon shock on the basis of your numerous writings on the very question of epistemology (in economics as well as in other fields), but your Nobel speech, delivered into Myrdal's own ears, centered on the subject of the methodology of economics. Is Myrdal's misstatement prompted by ignorance or malice? And is this a fair sampling of the general academic environment throughout Europe?

Havek: No, it is certainly a rather extreme case combined with an intellectual arrogance that, even among economists, is rare. Myrdal has been in opposition on these issues even before Keynes came out. His book on monetary doctrines and values and so on dates from the late 1920s. He has his own peculiar view on this subject which I think is wrong. His book couldn't even be reproduced now. I don't think he has ever been a good economist.

Reason: So Myrdal is not typical? The intellectual and academic environment is, on the whole, much more hospitable to your ideas?

Hayek: Oh, much more than Myrdal, yes. And, of course, the younger generation is coming around to my sort of view. In a sense, I would say that the great problem is still a methodo- logical one but not the one Myrdal has in mind. I believe that economics and the sciences of complex phenomena in general, which include biology, psychology, and so on, cannot be mod- eled after the sciences that deal with essentially simple phe- nomena like physics.

Don't be shocked when I call physics essentially simple phenomena. What I mean is that the theories which you need to explain physics need to contain very few variables. You can easily verify this if you look into the formula appendix to any textbook on phvsics, where you will find that none of the formulas which state the general laws of physics contain more than two or three variables.

You can't explain anything of social life with a theory which refers to only two or three variables. The result is that we can never achieve theories which we can use for effective prediction of particular phenomena, because you would have to insert into the blanks of the formula so many particular data that you never know them all. In that sense, our possibility both of explaining and predicting social phenomena is very much more limited than it is in physics.

Now, this dissatisfies the more-ambitious young men. They want to achieve a science which both gives the same exactness of prediction and the same power of control as you achieve in the physical sciences. Even if they know they won't do it, they say, "We must try. We ultimately will discover it." When we embark on this process, we want to achieve a command of social events which is analogous to our command of physical affairs. If they really created a society which was guided by the collective will of the group, that would just stop the process of intellectual progress. Because it would stop this utilization of widely dispersed opinion upon which our society rests and which can only exist in this very complex process which you cannot intellectually master.

Reason: In 1947 you founded the Mont Pelerin Society, an international group of free-market scholars. Has its progress pleased you?

Hayek: Oh yes. I mean its main purpose has been wholly achieved. I became very much aware that each of us was discovering the functioning of real freedom only in a very small field and accepting the conventional doctrines almost everywhere else. So I brought people together from different interests. Any time one of us said, "Oh yes--but in the field of cartels you need government regulation," someone else would say, "Oh no, I've studied that." That was how we developed a consistent doctrine and some international circles of communication.

Reason: U.S. News & World Report did a special cover story last year in which they interviewed eight leading social scientists from around the world, including yourself, on the question: "Is Democracy Dying?" What I found most interesting was that several of the other thinkers seemed to be reciting passages out of The Road to Serfdom in identifying the current crisis as a result of the involvement of the welfare state in vast areas of our formerly private lives. Do you see this thesis gaining academic adherents? Are more intellectuals beginning to un- derstand the fundamental conflict between liberty and bureau- cracy, so to speak?

Hayek: No doubt, yes. That the ideas are spreading, there is no doubt. What I cannot judge is what part of the intelligent- sia has yet been reached. Compared with what the situation was 25 years ago, instead of a single person in a few centers of the world, there are now dozens wherever I go. But that is still a very small fraction of the people who make opinion, and sometimes I have very depressing experiences. I was quite depressed two weeks ago when I spent an afternoon at Brentano's Bookshop in New York and was looking at the kind of books most people read. That seems to be hopeless; once you see that you lose all hope.

Reason: You currently carry the torch for the Austrian school of economics, representing a great tradition from Carl Menger to Bohm-Bawerk to Ludwig von Mises to yourself. What is the most important way in which the Austrians differ with Milton Friedman and the Chicago School?

Hayek: The Chicago School thinks essentially in "macro-economic" terms. They try to analyze in terms of aggregates and averages, total quantity of money, total price level, total employment--all these statistical magnitudes which, I think, is a very useful approach and even quite impressive.

Take Friedman's "quantity theory." I wrote 40 years ago that I have strong objections against the quantity theory because it is a very crude approach that leaves out a great many things, but I pray to God that the general public will never cease to believe in it. Because it is a simple formula which it under- stands. I regret that a man of the sophistication of Milton Friedman does not use it as a first approach but believes it is the whole thing. So it is really on methodological issues, ultimately, that we differ.

Friedman is an arch-positivist who believes nothing must enter scientific argument except what is empirically proven. My argument is that we know so much detail about economics, our task is to put our knowledge in order. We hardly need any new information. Our great difficulty is digesting what we already know. We don 't get much wiser by statistic information except in gaining information about the specific situation at the moment. But theoretically I don't think statistical studies get us anywhere.

Reason: You have written that the main reason that the Keynesian explanation of unemployment was accepted over the classical explanation was that the former could be statistically tested while the latter could not.

Hayek: From that point of view, Milton's monetarism and Keynesianism have more in common with each other than I have with either.

Reason: You met Alexandr Solzhenitsyn at the Nobel ceremonies in Stockholm. How did you find him?

Hayek: I was strongly confirmed in my very high opinion of the man. He is a very impressive figure in addition to his works. But I had no chance to argue with him because he had just come out of Russia and his capacity for communicating orally was very limited.

Reason: What validity is there in his thesis concerning the collapse of the West?

Havek: I think he is unduly impressed by certain superficial features of Western politics. If he believes, as he does believe, that what our politicians do is a necessary consequence of opinions generally held in the West, he really must come to that conclusion. Fortunately, I think, what the politicians do is not an expression of the profound belief of the more intelligent people in the West, and I hope Solzhenitsyn will soon discover that there are people who can see further than seems to be shown by the policies of the West.

Reason: Your teacher, Ludwig von Mises, wrote Socialism in 1920. It became the opening round in a controversy that is still brewing over whether a socialist economy was even logi- cally possible. Socialist economists, particularly in Eastern Europe, have thanked Mises for his thoughtful criticisms and have generally engaged in a thought-provoking discourse with Mises, Lord Robbins, and yourself for the past half-century. What is the present state of the debate?

Hayek: I've always doubted that the socialists had a leg to stand on intellectually. They have improved their argument somehow, but once you begin to understand that prices are an instrument of communication and guidance which embody more information than we directly have, the whole idea that you can bring about the same order based on the division of labor by simple direction falls to the ground. Similarly, the idea [that] you can arrange for distributions of incomes which correspond to some conception of merit or need. If you need prices, including the prices of labor, to direct people to go where they are needed, you cannot have another distribution except the one from the market principle. I think that intellectually there is just nothing left of socialism.

Reason: Could socialist economies exist without the tech- nology, innovations, and price information they can borrow from Western capitalism and domestic black markets?

Hayek: I think they could exist as some sort of medieval system. They could exist in that form with a great deal of starvation removing excess population. It's all a question of why should an economy not continue to exist. But whatever economic advance Russia has achieved was, of course, achieved by using the technology developed by the West. I know that the Russians would be the last ones to deny it.

Reason: A very interesting part of your social philosophy is that value and merit are and ought to be two distinct qualities. In other words, individuals should not be remunerated in ac- cordance with any concept of justice, whether it be the Puritan ethic or egalitarianism. Do you find many free-market advo- cates falling into this thinking, that value and merit should be equated in a "truly moral society"?

Hayek: I think there is a little shift recently as a result of my outright attack on the concept of social justice. It is now turning on the problem of whether social justice has any meaning at all and, of course, social justice is essentially based on some concept of merit. I'm afraid I have shocked my closest friends by denying that the concept of social justice has any meaning whatever. But I haven't been persuaded that I was wrong.

Reason: Well, then, why isn't there any such thing as social justice?

Hayek: Because justice refers to rules of individual conduct. And no rules of the conduct of individuals can have the effect that the good things of life are distributed in a particular manner. No state of affairs as such is just or unjust: it is only when we assume that somebody is responsible for having brought it about.

Now, we do complain that God has been unjust when one family has suffered many deaths and another family has all of its children grow up safely. But we know we can't take that seriously. We don't mean that anybody has been unjust.

In the same sense, a spontaneously working market, where prices act as guides to action, cannot take account of what people in any sense need or deserve, because it creates a distribution which nobody has designed, and something which has not been designed, a mere state of affairs as such, cannot be just or unjust. And the idea that things ought to be designed in a 'just' manner means, in effect, that we must abandon the market and turn to a planned economy in which somebody decides how much each ought to have, and that means, of course, that we can only have it at the price of the complete abolition of personal liberty.

Reason: Is Britain irrevocably on the road to serfdom?

Hayek: No, not irrevocably. That's one of the misunderstandings. The Road to Selfdom was meant to be a warning: "Unless you mend your ways, you ll go to the devil." And you can always mend your ways.

Reason: What policy measures are currently possible to reverse the trend in Britain?

Hayek: So long as you give one body of organized interests, namely the trade unions, specific powers to use force to get a larger share of the market, then the market will not function. And this is supported by the public because of the historic belief that in past the trade unions have done so much to raise the standard of living of the poor that you must be kind to them. So long as this view is prevalent, I don't believe there is any hope. But you can induce change. We must now put our hope in a change of attitude.

I'm afraid many of my British friends still believe, as Keynes believed, that the existing moral convictions of the English would protect them against such a fate. This is non- sense. The character of a people is as much made by the institutions as the institutions are made by the character of the people. The present British institutions contribute everything to change the British character. You cannot rely on an inherent "British character" saving the British people from their fate. But you must create institutions in which the old kinds of attitudes will be revived which are rapidly disappearing under the present system.

Reason: So there is really nothing the government can do prior to a change in public opinion?

Hayek: You can distinguish between positive and negative moves. The government should certainly cease doing a great many things it does now. In that sense it depends upon the government ceasing to do things, and then that would open the possibility for other developments which you cannot guide and direct. Take the general complaint about British entrepreneurs being inefficient, lazy , and so on. All of this is a result of institutions. You would soon drive out the inefficient entrepreneur if there was more competition. And you would soon find that they would work hard if it was in their interest to do so. It is the set of institutions which now prevails which creates the new attitudes which are so inimitable to prosperity.

Reason: If big government is really the culprit, why do Sweden and many Scandinavian welfare states seem to be prospering?

Hayek: Well, we mustn't generalize. Sweden and Switzerland are the two countries which have escaped the damages of two wars and have become repositories of a large part of the capital of Europe. In Switzerland, there is still some traditional instinct against government interference. Switzerland is a marvelous example where, when the politicians become too progressive, the people hold a referendum and promptly say, "No!"

Reason: Yet Sweden is reasonably successful...

Hayek: Yes. But there is perhaps more social discontent in Sweden than in almost any other country I have been. The standard feeling that life is really not worth living is very strong in Sweden. Although they can hardly conceive of things being different than what they're used to, I think the doubt about their past doctrines is quite strong.

Reason: From 1948 until about a decade ago. West Germany pursued pointedly free-market policies and experienced an economic recovery so vital as to be judged a "German Miracle." Yet, the Social Democrats are firmly in power today, and some American analysts have suggested that this indicates a basic flaw in the philosophy or strategy of the so-called Freiburg School, the group of free-market economists that led the "German Miracle." What mistakes did they make and what can we learn from their example?

Hayek: First, the idea that the Germans are now governed by a socialist government is just wrong. The present German chancellor admits--perhaps not publicly, but in conversation--that he is not a socialist. Secondly, until recently, the German trade unions were led by people who really knew what a major inflation is. And, until recently, all you needed to tell German trade unionists when they made excessive wage claims is that "this will lead to inflation," and they would collapse.

The German prosperity is due, to a very high degree, to the reasonableness of the German trade-union leaders which, in turn, was due to their experience with inflation.

Reason: A fellow Austrian great, the late Joseph Schumpeter, wrote Capitalism, Socialism and Democracy in 1942. In that book, Schumpeter predicted the collapse of capitalism due,not to its weakness (as Marx had predicted), but due to its strengths. Specifically, the tremendous economic abundance that would flower from the capitalist seed would produce an age of bureaucrats and administrators, displacing the innovators and entrepreneurs that had made it all possible. This, in turn, would undermine the social fabric upon which capitalism rested: a widespread acceptance and respect of private property. How does Schmpeter's thesis concerning the inherent political instability of capitalism fit in with your own theories on our road to serfdom?

Hayek: Well, there is some similarity in the nature of the prediction. But Schumpeter was really enjoying a paradox. He wanted to shock people by saying that capitalism was certainly much better but it will not be allowed to last, while socialism is very bad but it is bound to come. That was the sort of paradox he just loved.

Underlying this is the idea that certain trends of opinion-- which he correctly observed--were irreversible. Although he claimed the opposite, he had, in the last resort, really no belief in the power of argument. He took it for granted that the state of affairs forces people to think in a particular manner.

This is fundarnentally false. There is no simple under- standing of what makes it necessarv for people under certain conditions to believe certain things. The evolution of ideas has its own laws and depends very largelv on developments which we cannot predict. I mean, I'm trying to move opinion in a certain direction, but I wouldn't dare to predict what direction it will really move. I'm hoping that I can just divert it mod- erately. But Schumpeter's attitude was one of complete despair and disillusionment over the power of reason.

Reason: Are you optimistic about the future of freedom?

Hayek: Yes. A qualified optimism. I think there is an intellectual reversion on the way, and there is a good chance it may come in time before the movement in the opposite direction becomes irreversible. I am more optimistic than I was 20 years ago, when nearly all the leaders of opinion wanted to move in the socialist direction. This has particularly changed in the younger generation. So, if the change comes in time, there still is hope.