The Road to Recovery: As Hayek taught, freedom and the rule of law drive prosperity
Burdened by slow growth and high unemployment—especially long-term unemployment—the American economy faces an uncertain future. We have endured a painful financial crisis and recession, the recovery from which has been nearly nonexistent. Federal debt is exploding and threatening our children and grandchildren. In my view, the reason for this predicament is clear: we have deviated from the principles of economic freedom upon which America was founded.
Few thinkers of the past century understood the importance of economic freedom better than the Austrian economist Friedrich Hayek did. As we confront our current situation, Hayek’s work has much to tell us, especially about policy rules, the rule of law, and the importance of predictability—topics that he discussed in his classic The Road to Serfdom (1944) and in greater detail in The Constitution of Liberty (1960). But his work in these areas goes beyond economics into fundamental issues of freedom and the role of government. That’s why reading Hayek is more important than ever.
As Hayek would insist, we need to be careful about what we mean by economic freedom. The basic idea is that people are free to decide what to produce, what to buy, where to work, and how to help others. The American vision, as I explain in my book First Principles, held that people would make these choices within a policy framework that was predictable and based on the rule of law, with strong incentives emanating from a reliance on markets and a limited role for government. Historically, America adhered to these principles more than most countries did, a major reason why the nation prospered and so many people came to these shores.
But we haven’t always followed the principles consistently. Leading up to the Great Depression, the Federal Reserve cut money growth sharply, deviating from a predictable policy framework. The federal government then worsened the Depression by raising tax rates and tariffs and by passing the National Industrial Recovery Act, which overrode market principles and went well beyond sensible limits on government. From the mid-1960s through the 1970s, federal policy again deviated from the principles of economic freedom: the era saw unpredictable short-term stimulus packages, discretionary “go-stop” monetary policies, and wage and price controls—the antithesis of an incentive-based market system. The results: double-digit unemployment, a severe slowdown in economic growth, and the Great Inflation. Well before that time, Hayek had rightly lamented such short-term approaches: “I cannot help regarding the increasing concentration on short-run effects … not only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilization.”