The Decline of Socialism and the
         Rise of the Welfare State1
            Friedrich A. Hayek
 
                                                             Experience should teach us to be most on our
                                                             guard to protect liberty when the Government's
                                                            purposes are beneficent.  Men born to freedom
                                                            are naturally alert to repel invasion of their liberty
                                                            by evil-minded rulers.  The greatest dangers to
                                                            liberty lurk in  insidious encroachment by men
                                                            of zeal, well meaning  but without understanding.
                                                            L. BRANDEIS
 
 

1. Efforts toward social reform, for something like a century, have been inspired mainly by the ideals of socialism-during part of this period even in countries like the United States which never has had a socialist party of importance.  Over the course of these hundred years socialism captured a large part of the intellectual leaders and came to be widely regarded as the ultimate goal toward which society was inevitably moving.  This development reached its peak after the second World War, when Britain plunged into her socialist experiment.  This seems to have marked the high tide of the socialist advance.  Future historians will probably regard the period from the revolution of 1848, to about 1948 as the century of European socialism.
 
During this period socialism had a fairly precise meaning and a definite program.  The common aim of all socialist movements was the nationalization of the "means of production, distribution, and exchange," so that all economic activity might be directed according to a comprehensive plan toward some ideal of social justice.  The various socialist schools differed mainly in the political methods by which they intended to bring about the reorganization of society.  Marxism and Fabianism differed in that the former was revolutionary and the latter gradualist; but their conceptions of the new society they hoped to create were basically the same. Socialism meant the common ownership of the means of production and their "employment for use, not for profit."

The great change that has occurred during the last decade is that socialism in this strict sense of a particular method of achieving social justice has collapsed.  It his not merely lost its intellectual appeal; it has also been abandoned by the masses so unmistakably that socialist parties everywhere arc searching for a  new program that will insure the active support of their followers. They have not abandoned their ultimate aim, their ideal of social justice.  But the methods by which they had hoped to achieve  this and for which the name "socialism" had been coined have been discredited.  No doubt the name will be transferred to whatever new program the existing socialist parties will adopt.  But socialism in the old definite sense is now dead in the Western world.

Though such a sweeping statement will still cause some surprise, a survey of the stream of disillusionist literature from socialist sources in all countries and the discussions inside the socialist parties amply confirm it.' To those who watch merely the developments inside a single country, the decline of socialism may still seem no more than a temporary setback, the reaction to political defeat.  But the international character and the similarity of the developments in the different countries leave no doubt that  it is more than that.  If, fifteen years ago, doctrinaire socialism appeared as the main danger to liberty, today it would be tilting at windmills to direct one's argument against it.  Most of the arguments that were directed at socialism proper can now be heard  from within the socialist movements as arguments for a change of program.

2. The   reasons for this change are manifold. So far as the socialist school which at one time was most influential is concerned, the example of the "greatest social experiment" of our time was decisive: Marxism was killed in the Western world by the example of Russia.  But for a long time comparatively few intellectuals comprehended that what had happened in Russia was the necessary outcome of the systematic application of the traditional socialist program.  Today, however, it is an effective argument, even within socialist circles, to ask: "If you want one hundred per cent socialism, what's wrong with the Soviet Union?"' But the experience of that country has in general discredited only the Marxist brand of socialism.  The widespread disillusionment with the basic methods of socialism is due to more direct experiences.

The chief factors contributing to the disillusionment were probably three: the increasing recognition that a socialist organization of production would be not more but much less productive than private enterprise; an even clearer recognition that, instead of leading to what had been conceived as greater social justice, it would mean a new arbitrary and more inescapable order of rank than ever before; and the realization that, instead of the promised greater freedom, it would mean the appearance of a new despotism.

The first to be disappointed were those labor unions which found that, when they had to deal with the state instead of a private employer, their power was greatly reduced.  But the individuals also soon discovered that to be confronted everywhere by the authority of the state was no improvement upon their position in a competitive society.  This happened at a time when the gen-    eral rise in the standard of living of the working class (especially of the manual workers) destroyed the conception of a distinct proletarian class and, with it, the class-consciousness of the workers creating in most of Europe a situation similar to that which in the United States had always prevented the growth of an organized socialist movement.  In the countries that had experienced a totalitarian regime there also took place a strong individualist reaction among the younger generation, who became deeply distrustful of all collective activities and suspicious of all authority.'

Perhaps the most important factor in the disillusionment of socialist intellectuals has been the growing apprehension among  them that socialism would mean the extinction of individual  liberty.  Though the contention that socialism and individual liberty were mutually  exclusive had been indignantly rejected by them when advanced by an opponent,' it made a deep impression when stated in powerful literary form by one from their own midst.  More recently the Situation has been very frankly described by one of the leading intellectuals of the British Labour Party.  Mr. R. H. S. Crossman, in a pamphlet entitled Socialism and the New Despotism, records how "more and more serious-minded people are having second thoughts about what once seemed to them the obvious advantages of central planning and the extension of State ownership"; and he continues to explain that "the discovery that the Labour Government's 'Socialism  meant the establishment of vast bureaucratic corporations," of “a vast centralized State bureaucracy [which] constitutes a grave potential threat to democracy,"" had created a situation in which “the main task of socialists today is to convince the nation that its liberties are threatened by this new feudalism."

3.   But, though the characteristic methods of collectivist socialism have few defenders left in the West  its ultimate aims have lost little of their attraction.  While the socialists no longer have a clear-cut plan as to how their goals are to be achieved, they still wish to manipulate the economy so that the distribution of incomes will be made to conform to their conception of social justice.  The most important outcome of the socialist epoch, however, has been the destruction of the traditional limitations upon the powers of the state.  So long as socialism aimed at a complete reorganization of society on new principles, it treated the principles of the existing system as mere encumbrances to be swept away.  But now that it no longer has any distinctive principles of its own, it can only present its new ambitions without any clear picture of the means.  As a result, we approach the new tasks set by the ambition of modern man as unprincipled, in the original meaning of this word, as never before.

What is significant is that, in consequence, though socialism has been generally abandoned as a goal to be deliberately striven for, it is by no means certain that we shall not still establish it, albeit unintentionally.  The reformers who confine themselves to whatever methods appear to be the most effective for their particular purposes and pay no attention to what is necessary to preserve an effective market mechanism are likely to be led to impose more and more central control over economic decisions (though private property may be preserved in name) until we get that very system of central planning which few now consciously wish to see established.  Furthermore, many of the old socialists have discovered that we have already drifted so far in the direction of a redistributive state that it now appears much easier to push further in that direction than to press for the somewhat discredited socialization of the means of production.  They seem to have recognized that by increasing governmental control of what nominally remains private industry, they can more easily achieve that redistribution of incomes that had been the real aim of the more spectacular policy of expropriation.

It is sometimes regarded as unfair, as blind conservative prejudice, to criticize those socialist leaders who have so frankly abandoned the more obviously totalitarian forms of "hot" socialism, for having now turned to a "cold" socialism which in effect may not be very different from the former.  We are in danger, however, unless we succeed in distinguishing those of the new ambitions which can be achieved in a free society from those which require for their realization the methods of totalitarian collectivism.

4. Unlike socialism, the conception of the welfare state  has no precise meaning.  The phrase is sometimes used to describe any state that "concerns" itself in any manner with problems other than those of the maintenance of law and order.  But, though a few theorists have demanded that the activities of government should be limited to the maintenance of law and order, such a stand cannot be justified by the principle of liberty.  Only the coercive measures of government need be strictly limited.  We have already seen (in chap. xv) that there is undeniably a wide field for non-coercive activities of government and that there is a clear need for financing them by taxation.

Indeed, no government in modern times has ever confined itself to the "individualist minimum" which has occasionally been described," nor has such confinement of governmental activity been advocated by the "orthodox" classical economists.  All modern governments have made provision for the indigent, unfortunate,  and disabled and have concerned themselves with questions of health and the dissemination of knowledge.  There is no reason why  the volume of these pure service activities should not increase with the general growth of wealth.  There are common needs that can be satisfied only by collective action and which can be thus provided for without restricting individual liberty.  It can hardly be denied that, as we grow richer, that minimum of sustenance which the community has always provided for those not able to look after themselves, and which can be provided outside the market, will gradually rise, or that government may, usefully and without doing any harm, assist or even lead in such endeavors. There is little reason why the government should not also play some role, or even take the initiative, in such areas as social insur-
ance and education, or temporarily subsidize certain experimental developments.  Our problem here is not so much the aims as the  methods of government action.

References are often made to those modest and innocent aims of governmental activity to show how unreasonable is any opposition  to the welfare state as such.  But, once the rigid position that government should not concern itself at all with such matters is abandoned-a position which is defensible but has little to do with freedom-the defenders of liberty commonly discover that the program of the welfare state comprises a great deal more that is represented as equally legitimate and unobjectionable.  If, for instance, they admit that they have no objection to pure-food laws, this is taken to imply that they should not object to any government activity directed toward a desirable end.  Those who attempt to delimit the functions of government in terms of aims rather than methods thus regularly find themselves in the position of having to oppose state action which appears to have only desirable consequences or of having to admit that they have no general rule on which to base their objections to measures which, though effective for particular purposes, would in their aggregate  effect destroy a free society.  Though the position that the state should have nothing to do with matters not related to the maintenance of law and order may seem logical so long as we think of the state solely as a coercive apparatus, we must recognize that, as a service agency, it may assist without harm in the achievement of desirable aims which perhaps could not be achieved otherwise.  The reason why many of the new welfare activities of government are a threat to freedom, then, is that, though they are presented as mere service activities, they really constitute an exercise of the coercive powers of government and rest on its claiming exclusive rights in certain fields.

5. The current situation has greatly altered the task of the defender of liberty and made it much more difficult.  So long as the danger came from socialism of the frankly collectivist kind, it was possible to argue that the tenets of the socialists were simply  false: that socialism would not achieve what the socialists wanted and that it would produce other consequences which they would  not like.  We cannot argue similarly against the welfare state, for this term does not designate a definite system.  What goes under that name is a conglomerate of so many diverse and even contradictory elements that, while some of them may make a free society more attractive, others are incompatible with it or may at least  constitute potential threats to its existence.

We shall see that some of the aims of the welfare state can be realized without detriment to individual liberty, though not necessarily by the methods which seem the most obvious and are therefore most popular; that others can be similarly achieved to a certain extent, though only at a cost much greater than people imagine or would be willing to bear, or only slowly and gradually as wealth increases; and that, finally, there are others-and they are those particularly dear to the hearts of the socialists-that cannot be realized in a society that wants to preserve personal freedom.  There are all kinds of public amenities which it may be in the interest of all members of the community to provide by common effort, such as parks and museums, theaters and facilities for sports-though there are strong reasons why they should be provided by local rather than national authorities.  There is then the important issue of security, of protection against risks common to all, where government can often either reduce these risks or assist people to provide against them.  Here, however, an important distinction has to be drawn between two conceptions of security: a limited security which can be achieved for all and which is, therefore, no privilege, and absolute security, which in a free society cannot be achieved for all.  The first of these is security against severe physical privation, the assurance of a given minimum of sustenance for all; and the second is the assurance of a given standard of life, which is determined by comparing the standard enjoyed by a person or a group with that of others.  The distinction, then, is that between the security of an equal minimum income for all and the security of a particular income that a person is thought to deserve.  The latter is closely related to the third  main ambition that inspires the welfare state: the desire to use the powers of government to insure a more even or more just distribution of goods.  Insofar as this means that the coercive powers of government are to be used to insure that particular people get particular things, it requires a kind of discrimination between, and  an unequal treatment of, different people which is irreconcilable with a free society.  This is the kind of welfare state that aims at “social justice" and becomes "primarily a redistributor of income."  It is bound to lead back to socialism and its coercive and  essentially arbitrary methods.

6. Though some of the aims of the welfare state can be achieved only by methods inimical to liberty, all its aims may be pursued by  such methods.  The chief danger today is that, once an aim of  government is accepted as legitimate, it is then assumed that even means contrary to the principles of freedom may be legitimately employed.  The unfortunate fact is that, in the majority of fields,  the most effective, certain, and speedy way of reaching a given end will seem to be to direct all available resources toward the now visible solution.  To the ambitious and impatient reformer, filled  with indignation at a particular evil, nothing short of the complete abolition of that evil by the quickest and most direct means will  seem adequate.  If every person now suffering from unemployment, ill health, or inadequate provision for his old age is at once  to be relieved of his cares, nothing short of an all-comprehensive and compulsory scheme will suffice.  But if, in our impatience to solve such problems immediately, we give government exclusive and monopolistic powers, we may find that we have been shortsighted.  If the quickest way to a now visible solution becomes the only permissible one and all alternative experimentation is precluded, and if what now seems the best method of satisfying a need  is made the sole starting point for all future development, we may perhaps reach our present goal sooner, but we shall probably at the same time prevent the emergence of more effective alternative solutions.  It is often those who are most anxious to use our existing knowledge and powers to the full that do most to impair the future growth of knowledge by the methods they use.  The controlled single-channel development toward which impatience and administrative convenience have frequently inclined the reformer and which, especially in the field of social insurance, has become characteristic of the modern welfare state may well become the chief obstacle to future improvement.

If government wants not merely to facilitate the attainment of certain standards by the individuals but to make certain that everybody attains them it can do so only by depriving individuals of any choice in the matter.  Thus the welfare state becomes a household state in which a paternalistic power controls most of the income of the community and allocates it to individuals in the forms and quantities which it thinks they need or deserve.

In many fields persuasive arguments based on considerations of efficiency and economy can be advanced in favor of the state's taking sole charge of a particular service; but when the state does so, the result is usually not only that those advantages soon prove illusory but that the character of the services becomes entirely different from that which they would have had if they had  been provided by competing agencies.  If, instead of administering limited resources put under its control for a specific service, government uses its coercive powers to insure that men are given what some expert thinks they need; if people thus can no longer exercise any choice in some of the most important matters of their lives, such as health, employment, housing, and provision for old age, but must accept the decisions made for them by appointed authority on the basis of its evaluation of their need; if certain services become the exclusive domain of the state, and whole professions-be it medicine, education, or insurance-come to exist only as unitary bureaucratic hierarchies, it will no longer be competitive experimentation but solely the decisions of authority that will determine what men shall get.

The same reasons that generally make the impatient reformer wish to organize such services in the form of government monopolies lead him also to believe that the authorities in charge should be given wide discretionary powers over the individual.  If the objective were merely to improve opportunities for all by supplying certain specific services according to a rule, this could be attained on essentially business lines.  But we could then never be sure that the results for all individuals would be precisely what we wanted.  If each individual is to be affected in some particular way, nothing short of the individualizing, paternalistic treatment by a discretionary authority with powers of discriminating between persons will do.

It is sheer illusion to think that when certain needs of the citizen  have become the exclusive concern of a single bureaucratic machine, democratic control of that machine can then effectively guard the liberty of the citizen.  So far as the preservation of personal liberty is concerned, the division of labor between a legislature which merely says that this or that should be done"' and an administrative apparatus which is given exclusive power to carry out these instructions is the most dangerous arrangement possible. All experience confirms what is "clear enough from American as well as from English experience, that the zeal of the administrative agencies to achieve the immediate ends they see before them leads them to see their function out of focus and to assume that constitutional limitations  and guaranteed individual rights must  give way before their zealous efforts to achieve what they see as a paramount purpose of government.

It would scarcely be an exaggeration to say that the greatest danger to liberty today comes from the men who are most needed and most powerful in modern government, namely, the efficient expert administrators exclusively concerned with what they regard as the public good.  Though theorists may still talk about the democratic control of these activities, all who have direct
experience in this matter agree that (as one recent English writer put it) "if the Minister's control ... has become a myth, the control of Parliament is and always has been the merest fairy tale."   It is inevitable that this sort of administration of the welfare of the people should become a self-willed and uncontrollable apparatus before which the individual is helpless, and which becomes increasingly invested with all the mystique of sovereign authority- the Hoheitsverwaltung or Herrschaftstaat of the German tradition  that used to be so unfamiliar to Anglo-Saxons that the strangeterm "hegemonic had to be coined to render its meaning.

7. It is not the aim of the following chapters to expound a complete program of economic policy for a free society.  We shall be concerned mainly with those comparatively new aspirations whose place in a free society is still uncertain, concerning which our various positions are still floundering between extremes, and where the need for principles which will help us to sort out the good from the bad is most urgent.  The problems we shall select are chiefly those which seem particularly important if we are to rescue some of the more modest and legitimate aims from the discredit which over-ambitious attempts may well bring to all actions of the welfare state.

There are many parts of government activity which are of the highest importance for the preservation of a free society but which we cannot examine satisfactorily here.  First of all, we shall have to leave aside the whole complex of problems which arise from international relations-not only because any serious attempt to consider these issues would unduly expand this book but also because an adequate treatment would require philosophical foundations other than those we have been able to provide.  Satisfactory solutions to these problem  will probably not be found as long as we have to accept as the ultimate units of international order the historically  given entities known as sovereign nations.  And to what groups we should entrust the various powers of government if we had the choice is far too difficult a question to answer briefly.  The moral foundations for a rule of law on an international scale seem to be completely lacking still, and we should probably lose whatever advantages it brings within the nation if today we were to entrust any of the new powers of government to supra-national agencies.  I will merely say that only makeshift solutions to problems of international relations seem possible so long as 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.  It should also be said that modern developments in national policies have made the international problems very much more difficult than they would have been in the nineteenth century.  I wish to add here my opinion that, until the protection of individual freedom is much more firmly secured than it is now, the creation of a world state probably would be a greater danger to the future of civilization than even war.

Hardly less important than the problems of international relations is that of centralization versus decentralization of governmental functions.  In spite of its traditional connection with most  of the problems we shall be discussing, we shall not be able to consider it systematically.  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.  There are strong reasons why action by local authorities generally offers the next-best solution where private initiative cannot be relied upon to provide certain services and where some sort of collective action is therefore needed; for it has many of the advantages of private enterprise and fewer of the dangers of the coercive action of government.  Competition between local authorities or between larger units within an area where there is freedom of movement provides in a large measure that opportunity for experimentation with alternative methods which will secure most of the advantages of free growth.  Though the majority of individuals may never contemplate a change of residence, there will usually be  enough people, especially among the young and more enterprising, to make it necessary for the local authorities to provide as good services at as reasonable costs as their competitors."' It is usually the authoritarian planner who, in the interest of uniformity, governmental efficiency, and administrative convenience, supports  the centralist tendencies and in this receives the strong support of the poorer majorities, who wish to be able to tap the resources of the wealthier regions.

8. There are several other important problems of economic policy that we can mention only in passing.  Nobody will deny that economic stability and the prevention of major depressions depends in part on government action.  We shall have to consider  this problem under the subjects of employment and monetary policy.  But a systematic survey would lead us into highly tech-
nical and controversial issues of economic theory, where the position I should have to take as the result of my specialized work in this field would be largely independent of the principles discussed in the present book.

Similarly, the subsidization of particular efforts out of funds raised by taxation, which we shall have to consider in connection with housing, agriculture, and education, raises problems of a more general nature.  We cannot dismiss them simply by maintaining that no government subsidies should ever be given, since in  some unquestioned fields of government activity, such as defense, it is probably often the best and least dangerous method of stimulating necessary developments and is often to be preferred to the government's taking over completely.  Probably the only general principle that can be laid down with respect to subsidies is that they can never be justified in terms of the interest of the immediate beneficiary (whether it be the provider of the subsidized service or its consumer) but only in terms of the general benefits which may be enjoyed by all citizens-i.e., the general welfare in the true sense.  Subsidies are a legitimate tool of policy, not as a means of income redistribution, but only as a means of using the market to provide services which cannot be confined to those who individually pay for them.
 
The most conspicuous gap in the following survey is probably the omission of any systematic discussion of enterprise monopoly.  The subject was excluded after careful consideration mainly because it seemed not to possess the importance commonly attached to it. For liberals anti- monopoly policy has usually been the main object of their reformatory zeal.  I believe I have myself in the past used the tactical argument that we cannot hope to curb the coercive powers of labor unions unless we at the same time attack enterprise monopoly.  I have, however, become convinced that it would be disingenuous to represent the existing monopolies in the field of labor and those in the field of enterprise as being of the same kind.  This does not mean that I share the position of some authors" who hold that enterprise monopoly is in some respects beneficial and desirable.  I still feel, as I did fifteen years ago  that it may be a good thing if the monopolist is treated as a sort of whipping boy of economic policy; and I recognize that, in the United States, legislation has succeeded in creating a climate of opinion unfavorable to monopoly.  So far as the enforcement of general rules (such as that of non-discrimination) can curb monopolistic powers, such action is all to the good.  But what can be done effectively in this field must take the form of that gradual improvement of our law of corporations, patents, and taxation, on which little that is useful can be said briefly.  I have become increasingly skeptical, however, about the beneficial character of any discretionary action of government against particular monopolies, and I am seriously alarmed at the arbitrary nature of all policy aimed at limiting the size of individual enterprises.  And  when policy creates a state of affairs in which, as is true of some enterprises in the United States, large firms are afraid to compete by lowering prices because this may expose them to antitrust action, it becomes an absurdity.

Current policy fails to recognize that it is not monopoly as such, or bigness, but only obstacles to entry into an industry or trade and certain other monopolistic practices that are harmful. Monopoly is certainly undesirable, but only in the same sense in which scarcity is undesirable; in neither case does this mean that we can avoid it. It is one of the unpleasant facts of life that cer-
tain capacities (and also certain advantages and traditions of particular organizations) cannot be duplicated, as it is a fact that certain goods are scarce.  It does not make sense to disregard this fact and to attempt to create conditions "as if" competition were effective.  The law cannot effectively prohibit states of affairs but only kinds of action.  All we can hope for is that, whenever the possibility of competition again appears, nobody will be prevented from taking advantage of it.  Where monopoly rests on man-made obstacles to entry into a market, there is every case for removing them.  There is also a strong case for prohibiting price discrimination so far as is possible by the application of general rules.  But the record of governments in this field is so deplorable that it is astounding that anyone should still expect that giving governments discretionary powers will do anything but increase those obstacles.  It has been the experience of all countries that discretionary powers in the treatment of monopoly are soon used to distinguish between "good" and "bad" monopolies and that authority soon becomes  more concerned with protecting the supposedly good than with preventing the bad.  I doubt whether there are any "good" monopolies that deserve protection.  But there will always be inevitable monopolies whose transitory and temporary character is often turned into a permanent one by the solicitude of government.

 But, though very little is to be hoped for from any specific government action against enterprise monopoly, the situation is different where governments have deliberately fostered the growth of monopoly and even failed to perform the primary function of government-the prevention of coercion, by granting exceptions from the general rules of law-as they have been doing  for a long time in the field of labor.  It is unfortunate that in a democracy, after a period in which measures in favor of a particular group have been popular, the argument against privilege becomes an argument against the groups that in recent times have enjoyed the special favor of the public because they were thought to need and deserve special help.  There can be no question, however, that the basic principles of the rule of law have nowhere in recent times been so generally violated and with such serious consequences as in the case of labor unions.  Policy with respect to them will therefore be the first major problem that we shall consider.
 

1. Hayek, F. A.  The Constitution of Liberty.  University of Chicago Press, 1960 pp 253-266

 Home page

 email address