Market Radicalism Cornered

In the 1930s, as a result of the capitalist crisis, mass strikes, and the bourgeoisie’s fear of communism, there was an attempt in the United States to get to grips with the glaring inequality and make the distribution of wealth and income more egalitarian again by strengthening trade union rights, introducing and expanding wealth and progressive income taxation, and expanding the public sector of the economy. President Franklin Delano Roosevelt was confronted with the failure of his predecessor Herbert Hoover’s liberal austerity policy, which had caused mass unemployment to swell to 25 percent. He now radically skimmed off all annual income over $1 million at 75 percent taxation, later reaching 91 percent.

This was successfully invested in public employment programs (Works Progress Administration, Civilian Conservation Corps), the expansion of infrastructure (electrification, highways, bridges, subways, dams, and irrigation systems, etc.), nature conservation (establishment and expansion of national parks), the development of welfare state structures, and also the promotion of cultural life. If he had got his way, the tax rate would have been 100 percent. In 1936, the economist John Maynard Keynes, in his major work The General Theory of Employment, Interest and Money — on which the demand-oriented economic policy in Fordist capitalism (1933–75) was essentially based — anticipated the “euthanasia of the rentier” who lives exclusively from merit-less capital income.

However, the Keynesian paradigm was replaced by Hayek’s neoliberal ideas during the crisis of Fordism in the 1970s. The fact that Keynes himself had helped Hayek to obtain a position at King’s College in London may be regarded as a staircase joke of history. Since then, the rentiers have been celebrating once again. According to the Federal Statistical Office, 1 percent of the German population now lives exclusively from capital income, i.e. from other people’s (surplus) labor, the value of which is appropriated through profits and dividends from shares in stock exchange–listed companies. Some sociologists once accused Occupy’s distinction between the bottom 99 percent and the top 1 percent of society of simplifying its concept of class. However, this distinction was actually quite close to real class relations.

Either way, this is how the gigantic billion-dollar fortunes of today were created, which contrast with the relative and increasingly also absolute poverty of the population and the collapse of public infrastructure like schools, bridges, and public transit. As Piketty has shown, inequality reached the highs of 1929 again in 2007, on the eve of the global financial crisis. This was no coincidence: financial market capitalism constantly leads to financial crises because the gigantic piles of capital in search of profitable investment opportunities constantly produce new speculative bubbles. And they also cause societal crises, where politics has created new investments by privatizing public housing, health care, pension systems, education, etc.

Hayek had already learned to hate politics like Roosevelt’s in social democratic “Red Vienna,” up through his early 1920s university years. In 1921, one of his professors connected him with the Austrian economist Ludwig von Mises, the author of a radical refutation of socialism called Die Gemeinwirtschaft (1922), who then became his mentor. In his 1944 work The Road to Serfdom, addressed to an Anglo-American audience in the midst of World War II, Hayek placed Roosevelt in close proximity to Hitler: one had to “state the unpalatable truth that it is Germany whose fate we are in some danger of repeating.” Certainly “the conditions in England and the United States” were different, he conceded. Perhaps he wanted to preempt skepticism as to whether the extension of the right to strike for US workers was really so similar to the annihilation of the German labor movement in the Nazi concentration camps, or if public employment programs for workers of all ethnicities were an American Auschwitz. But, according to Hayek, these differences should not obscure the realization “that we are moving in the same direction.”

Hayek rightly saw market radicalism on the defensive in the 1940s. Although US big business financed the mass distribution of The Road to Serfdom, there was a tendency toward greater regulation of capitalism and more economic planning. Liberal capitalism had led to the Great Depression, the Depression to fascism and fascism to world war. Only the Soviet Union had come through the crisis well thanks to economic planning and, although it had emerged from a dependent and backward developing country, was now in the process of liberating Europe from German fascism almost single-handedly. In the United States, Roosevelt successfully pursued left-wing policies. After the war, Soviet-style socialism was extended to Eastern Europe, while a seriously left-wing Labour government came to power in Britain, and the Communists gained massive strength in France and Italy. In Germany, too, immediately after 1945, millions of people in all occupation zones flocked to the labor movement, and even backed the socialization of large-scale industry in a referendum in Hesse, which the US occupying forces blocked. Even the Christian Democratic Union (CDU) acknowledged in its Ahlen Program that the “capitalist economic system has not served the . . . interests of the German people,” which is why a “socialist economic order” beyond the “capitalist pursuit of profit and power” was needed.

Counterrevolutionary

In this moment, Hayek saw himself as a counterrevolutionary. His utopia lay in the past. “Manchesterian capitalism” with child labor and sixteen-hour working days was his “Paradise Lost.” Reagan once said that, if he had the chance, he would turn the wheel of history back to the nineteenth century. When he said these words, Hayek was speaking. However, paradise was lost because, as Hayek’s theoretical opponent Karl Polanyi described in his The Great Transformation, also published in 1944, the imposition of a liberal market order forces society to defend itself against the market, faced with the exploitation of nature and the “fictitious commodity” of labor. According to Polanyi, such an order could “not exist over extended periods of time without annihilating the human and natural substance of society.”

Hayek observed the “Great Transformation” that took place after 1870. Its ideological reflection was the migration of the hegemony of thought from the Anglo-Saxon to the German-speaking world, which he observed and regretted: away from John Locke and Adam Smith and toward Karl Marx and Max Weber. Hayek sought a new “Great Transformation” back to the future. His work is a declaration of war on socialism. For him, however, this begins with corporate liberalism, which, out of fear of the workers’ movement, tried to curb at least the most blatant excesses of capitalism with measures such as factory inspections and the legal maximum working day. In The Road to Serfdom, Hayek called this the “slippery slope” to socialism. He dedicated his book “To the socialists of all parties.”

Still, for all his nostalgia, Hayek also saw the need to modernize classical liberalism. He wanted a return to a “free economy,” as he called it, through a political system in which, according to his biographer Bruce Caldwell, “any legislation that has a specific redistribution of income as its goal would be forbidden.” He was confronted with a basic problem: how to prevent the masses from using the universal suffrage they had won to reclaim at least part of the surplus value siphoned off by capital — or even to abolish the capitalist private ownership of the means of production on which the rule of capital is based.

Hayek used a sleight of hand for this. He negated the existence of classes and conceived of an abstract individual, whose — exclusively negative — freedom is based on not being controlled by the state. He thereby defined every tax policy as a deprivation of freedom. For some — because there are still calves that choose their own butchers — this negative concept of freedom still resonates today. It is the address to the adult who has remained a child, who rails against the parental expectation to wash their hands before eating so that they don’t get sick, or to help tidy their own room so that they don’t sink into chaos. At the same time, this infantile approach connects with the alienation of those isolated in capitalist competition and transfers it into the social Darwinist attitude of “every man for himself.” “Libertarians” are, according to a tweet that went viral in 2023, “like house cats: absolutely convinced of their fierce independence while utterly dependent on a system they don’t appreciate or understand.”

Natural Order?

In The Constitution of Liberty, Hayek propagated the “rule of law.” Unlike Marx, he does not see capital born “dripping from head to foot, from every pore, with blood and dirt.” For him, capitalism is not part of a general gradual process of revolutionarily created and transformed production relations, a transitional society that creates the conditions for a developed socialist society. Rather, he considers it a “natural” market economy. Basically, the dispute between Marxists and Polanyi on the one hand and neoliberals like Hayek on the other is also about which order is actually “unnatural”: socialism or the “free market.” Often Hayek and his disciples contradict themselves when they sometimes, as Friedman does in the introduction to the new English edition of The Road to Serfdom, describe the market as “common sense,” and at other times socialism as the natural emotional reaction to capitalism and market radicalism as highly intellectual reasoning.

According to Hayek, (market) civilization has emerged from “unconscious habits” that have been transformed into “explicit and articulated statements” and have thus become increasingly “abstract and general.” Referring to Smith’s thesis of the “invisible hand,” he writes that “the spontaneous and uncontrolled efforts of individuals were capable of producing a complex order of economic activities.” A constitution should limit the state to supervising the rules of the market and protecting capitalist private property. Democracy and decisions by majorities are intrinsically disruptive in this system. Since the market tends toward a stable equilibrium — the optimal allocation of resources and self-regulation of the economy — there is no market failure. Rather, the state is the cause of all and any problems.

Hayek countered the argument that the neoliberals’ utopia had been disproved by the dystopia of Manchester capitalism with the argument that nineteenth-century destitution was not in fact a consequence of liberal economic policies. It was not even genuine misery. Rather, the increased “wealth of nations” brought about by the market merely increased the prosperity expectations of the “big lout” and led to the discovery of “very dark spots in society.” In truth, however, there was “no class that did not substantially benefit from the general advance.” He explains away the contradiction of a strong labor movement emerging in reaction to the impositions of liberal capitalism by saying that the implementation of the “free market” was not radical enough and its advance too “slow.”

His argument is fundamentally antidemocratic. Basically, societies appear to him — not coincidentally — like ungrateful children who demand more and more. It was their “boundless ambition” which, “seemingly justified by the material improvements already achieved,” in his view caused a shift that “toward the turn of the century the belief in the basic tenets of liberalism was more and more relinquished.” Moreover, socialism is also the fault of intellectuals who seduce workers into something alien to their nature — collectivism, rather than individualism. Socialism and the “Communistic” (Michael Brie), which has its roots in Christianity and all world religions and has shaped human history, is in truth a rejection of “the spontaneously generated moral traditions underlying the competitive market order,” writes Hayek in The Fatal Conceit (1988). Socialism is “a rationally designed moral system . . . whose appeal depends on the instinctual appeal of its promised consequences.” And he complained that “the higher we climb up the ladder of intelligence, the more we talk with intellectuals, the more likely we are to encounter socialist convictions.”

Ultimately, market radicalism owes its survival to the fact that, destructive as it is, it inevitably provokes a countermovement that reregulates capitalism. It means that the neoliberals may cling to their view of the humanity-enhancing effect of “free” markets. They can always claim that their utopia has not yet been fully realized anywhere.

But back to the “constitution of freedom”: the rules to be monitored by it should only be “abstract, general and impersonal.” For Hayek, the “rule of law” is fundamentally incompatible with redistribution policies in favor of “social justice.” Tax and regulation policies already appear in The Road to Serfdom as arbitrary rule, the welfare state as totalitarianism. Hayek’s historical counterfactual attempt to portray fascism and communism not as mutual mortal enemies, but as siblings of one and the same family of “collectivism,” is also based on this. Whenever right-wing libertarians today emphasize that Adolf Hitler was, after all, a “national socialist,” we are dealing with a Hayek-inspired bullshit bingo.

Authoritarian Liberalism

As a classical liberal, Hayek followed the theory of Locke, who defended the interests of the propertied classes with the argument that every person should be allowed to take possession of all the wealth of the natural environment that he is able to appropriate. The early socialist Pierre-Joseph Proudhon once stated: “Property is theft.” Hayek argues against this: not only socialization, but even taxation is theft.

Actually-existing capitalism remained Hayek’s Achilles’s heel. The inequality that he has to justify is not solely the result of performance. He acknowledged “accidents of environment” — meaning, that anyone who inherits millions or billions as a child and “makes it work for them” does not have to be a new Einstein. But “natural talent and innate abilities” are also “unfair advantages.” The “desire to eliminate the effects of accident, which lies at the root of the demand for ‘social justice’ can be satisfied . . . only by eliminating all those possibilities which are not subject to deliberate control. But the growth of civilization rests largely on the individuals’ making the best use of whatever accidents they encounter.” Hayek calls this “freedom under the law,” which he calls his “central concern.” Any equality other than the “equality of the general rules of law and conduct” would be equivalent to “destroying liberty.”

Preserving the “order” (of capitalism) and its (market) “rules” was sacrosanct for Hayek. It does not matter what the “demos” wants. On the contrary, for Hayek the people’s efforts to determine their own destiny were mere tyranny. Hayek, his teacher Ludwig von Mises, and his students such as Friedman and James Buchanan — in short, the masterminds of neoliberalism — faced the same problem as Carl Schmitt and fascism. The fact that they observed a historical connection between the growth of mass democracy and the overcoming of economic liberalism meant that the antidemocratic legacy of classical liberalism was continued in their thinking — and that the real history of neoliberalism is also closely linked to authoritarianism.

Neoliberalism and fascism are forms of bourgeois thinking in reaction to mass democracy and socialism. Both face the problem: under the conditions of universal suffrage, how to prevent the masses from suddenly devising the idea of countering the housing shortage and rent madness with social housing; providing basic foodstuffs, health, education, and mobility as free or subsidized public goods in line with basic human rights rather than as commodities; or even transforming the capitalist private ownership of land, industry, and banks in their own interest, so that a socialized economy serves the people and not the other way around. Fascist thinkers like Schmitt sought to abolish universal suffrage in favor of an outright (presidential) dictatorship. Hayek, writing for the Anglo-American bourgeoisie of the anti-Hitler coalition, knew all too well that this battle was lost. He instead concentrated on neutralizing the democratic process. Hayek is the chief theorist of “post-democracy” (in Colin Crouch’s apt term). His theoretical work boils down to the search for the means to establish the dictatorship of capital without permanent political dictatorship. He thus focuses on fundamentally restricting the scope for elected governments. His theory systematically removes their sovereignty over financial and economic policy. Compared to Schmitt, this ultimately makes Hayek the smarter bourgeois counterrevolutionary. Still, he too remained open to outright dictatorship in order to win the war against democracy, the masses, and welfare.

Hayek found what he was looking for in the liberal theoretical tradition — Montesquieu, Benjamin Constant, and Locke — and in US history. In the US Constitution of 1776, he found the ultimate solution to the problem of the bourgeoisie, even as a social minority, determining the politics of the state. As historians Charles Beard and Terry Bouton have shown, the US Constitution emerged in the same spirit as a product of the counterrevolution against the “democratic moment” of the revolutionary anti-colonial war of the time, which made universal suffrage unchallengeable.

One of the earliest observers of how constitutions can erode democracy was Polanyi, when he wrote that the United States “isolated the economic sphere entirely from the jurisdiction of the Constitution, thereby placing private property under the greatest conceivable protection and creating the only legally established [capitalist] market society in the world. Despite universal suffrage, American voters were powerless against the propertied classes.” As early as 1939, Hayek had argued in Freedom and the Economic System that “we can ‘plan’ a system of general rules that apply equally to all and are designed to remain permanent.” What should apply to individuals should now also be binding for parliamentary democracies.

Economic Constitution

Hayek and his students used two mechanisms to establish market-driven social development: firstly, through legally binding (economic) constitutions and, secondly, the systematic weakening of the nation state’s economic and financial policy competences through a policy of federalization. Both centralization and decentralization therefore had a role to play: on the one hand, centralization of decision-making powers in antidemocratic bodies such as the central banks, which have been declared “independent,” i.e. not democratically accountable and controlled, and in international treaties with a constitutional status that is legally binding on states; and on the other, decentralization in favor of local state apparatuses with few fiscal etc. powers of direction and control.

Historically, the “internationalization of the state” (Robert W. Cox) would become the essential tool of the “new constitutionalism” (Stephen Gill) based on Hayek. This amounted to the restriction of nation-states through legally binding constitutions for world capitalism such as the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO), investment protection agreements, the EU economic constitution with its neoliberal convergence criteria (“balanced budget amendments” to constitutions, etc.), and bodies beyond the influence of national parliaments such as the G7 and European Commission.

The new constitutionalism thus strengthened the structural power of capital, i.e. its mobility, which serves to force subsidies from states and wage policy concessions from trade unions in a perpetual cycle, and to enable capital flight and, as a result, the fall of governments if they plan redistribution or socialization. It also strengthened the ministries (especially finance) closest to this system, at the expense of economic, labor, and social portfolios.

Hayek thus created the essential foundations for a market system with no alternative, with rules that governments should only question on pain of their downfall. It is in Hayek’s spirit that the WTO rules on the equal treatment of national and international capital were created, making it impossible for dependent states to strive for independence. He created the basis for the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement on the protection of “intellectual property rights,” allowing pharmaceutical companies to monopolize even plants and seeds, no matter how many several hundred thousands of Indian farmers commit suicide as a result. Hayek can ultimately be credited for investment-protection agreements such as the Comprehensive Economic and Trade Agreement (CETA) and Transatlantic Trade and Investment Partnership (TTIP), based on which transnational corporations can sue states for horrendous compensation payments for future loss of capital profits if they make democratic decisions such as banning smoking or phasing out nuclear energy.

In addition to this de-democratization, Hayek also developed another means of making the dictatorship of capital complete. This was federalization. Based on the assumption that “the creation of a [democratic] world state is probably a greater danger to the future of civilization than war,” Hayek and, in his wake, Buchanan pursued the systematic decentralization of government functions, a “political economy of open federalism” (Adam Harmes) and “competition between local governments.” Hayek writes:

We have yet to learn how to limit the powers of all government effectively and how to divide these powers between the tiers of authority. . . . The creation of a world state probably would be a greater danger to the future of civilization than even war. . . . While it has always been characteristic of those favoring an increase in governmental powers to support maximum concentration of these powers, those mainly concerned with individual liberty have generally advocated decentralization.

Hayek recognized the potential for budgetary discipline of local governments when they compete with each other for capital and its direct investments, which are no longer restrained by capital controls.

The same principle of decentralization also proved useful in terms of drying up the hated welfare state, because local authorities are usually unable to satisfy social pressure for social housing, better schools, housing for people with the right to asylum, etc. — pointing to their hands being tied by fiscal policy. During the global financial crisis, the individual US states were forced by regional debt brakes to choose between tax increases or social cuts. Social cuts are thus structurally embedded in the constitutions.

Freedom of the Few

Hayek thus proved to be the sharpest weapon of bourgeois hostility to democracy. The “market-compliant democracy” demanded by German chancellor Angela Merkel in the wake of the eurozone crisis, which submits to the international financial markets, is based on his thinking.

Theorizing the dictatorship of capital in a system of universal suffrage and thus finding a hearing among the bourgeoisie during the 1970s crisis of Fordism was Hayek’s historical triumph — making him the most powerful propagandist for the freedom of the few at the expense of the freedom of the many. Today, liberalism claims the concept of freedom for itself. Hayek was still aware of its controversial nature. There is “no doubt that the promise of greater freedom has become one of the most effective weapons of socialist propaganda.” This wider freedom does indeed only come about through socialism: as freedom from exploitation and unfree time, which is the prerequisite for a self-determined life for all those who have to live from their wage labor.

Hayek’s elitist hostility to democracy suggests that market radicalism cannot be in the interests of the wage-earning class majority. Even if he did not reach fascist conclusions — Mises had still in 1927 welcomed fascism as the “salvation of European civilization” — he nevertheless assumed that the counterrevolution against the welfare state would probably have to be dictatorial because, according to his and Buchanan’s “overload” theory, the masses would never vote against welfarism. Hayek therefore demanded in the 1970s that the “net transfer recipients,” i.e. all public sector employees, all retired and all unemployed workers, be deprived of the right to vote.

The neoliberals therefore also directly supported the coup against democratic socialism in Chile in 1973 and the military dictatorship of Augusto Pinochet. Only Thatcher and her “authoritarian populism,” which combined the dismantling of the welfare state with nationalist appeals and war and thus basically Hayek with Schmitt, showed six years later that neoliberalism was possible even if universal suffrage was retained. But as late as 1981, Hayek declared in an interview that he would always prefer a market dictatorship to a welfare-state democracy. “Competition,” Hayek said, “is, after all, always a process in which a small number makes it necessary for larger numbers to do what they do not like, be it to work harder, to change habits, or to devote a degree of attention, continuous application, or regularity to their work which without competition would not be needed.”

Hayek doubted “whether a functioning market has ever newly arisen under an unlimited democracy.” In this regard, he was surely right.