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May 6, 2009
Obama, Hayek, Central Planning and Despotism
"A claim for equality of material position can be met only by a government with totalitarian powers." F. A. Hayek (1899-1992)
President Obama’s attempt to circumvent the Rule of Law in the bankruptcy deliberations concerning the disposition of Chrysler is the act of a despot.
A harsh and audacious claim, for sure. But so are Obama’s effort to use the power of his office, supplemented by alleged intimidation of those representing some Chrysler bond holders by one or more persons in his administration. All of it as part of an orchestrated move to give to the United Auto Workers (UAW) privileged consideration in the Chrysler bankruptcy disposition over against the claims of some bond holders.
If F.A. Hayek was alive, he might support this accusation against the President based on what he wrote in The Road To Serfdom (University of Chicago, 1944). In 1974, Hayek was awarded the Nobel Memorial Prize in Economic Science. Largely forgotten today, his works are capturing renewed interest because of their timely relevance.
Here are excerpts, with comments in italics, from Chapter 6: Planning and the Rule of Law in The Road To Serfdom:
While every law restricts individual freedom to some extent by altering the means which people may use in the pursuit of their aims, under the Rule of Law the government is prevented from stultifying individual efforts by ad hoc action. (p. 112)
President Obama’s efforts, on and off camera, to advance the interests of the UAW in the restructuring of Chrysler subvert the Rule of Law and are ad hoc. That is, they are formed, arranged, or done for a particular purpose only, to advance his political supporters - the UAW.
The distinction we have drawn…between the creation of a permanent framework of laws within which the productive activity is guided by individual decision and the direction of economic activity by a central authority is thus really a particular case of the more general distinction between the Rule of Law and arbitrary government. Under the first the government confines itself to fixing rules determining the conditions [e.g., as stipulated in contract and bankruptcy law] under which the available resources may be used, leaving to the individuals the decision for what ends they are to be used. Under the second the government directs the use of the means of production [Chrysler’s future production] to particular ends. [Namely, the shift to green automobiles.]
Hayek describes central planning as reflecting a collectivist mindset - be it labeled socialism, fascism, or communism. The collectivist mentality is the common denominator.
The planning authority cannot confine itself to providing opportunities for unknown people to make whatever use of them [the means of production] they like. It cannot tie itself down in advance to general and formal rules [like contract law] which prevent arbitrariness. It must provide for the actual needs of people as they arise and then choose deliberately between them. (p. 113)
The demands of economic chaos create a wartime-like atmosphere when freedoms face their greatest threats, not only from outside a nation, but from inside.
Obama favors the UAW over those he calls “speculators” and their representatives who, on their clients’ behalf, are claiming compliance with agreements under which they invested in Chrysler. Those investors want 50 cents on the dollar, but have been offered 29, and they’re pushing back on the low-ball offer. To advance his political and economic agenda, Obama has implicitly characterized them as greedy and immoral.
[A]s planning becomes more and more extensive, it becomes regularly necessary to qualify legal provisions increasingly by reference to what is ‘fair’ or ‘reasonable’; this means that it becomes necessary to leave the decision of the concrete case more and more to the discretion of the judge or authority in question. (p. 116)
This leaving “to the discretion of the judge” is now underway with regard to the future of Chrysler.
The important question is whether the individual can foresee the action of the state [the application of business law must be predictable] and make use of this knowledge as a datum in forming his own plans, with the result that the state cannot control the use made of its machinery and that the individual knows precisely how far he will be protected against interference from others, or whether the state is in a position to frustrate individual efforts. (p. 118)
If the UAW ends up owning a significant percentage of Chrysler and the bond holders are forced to settle for less than the 50 cents on the dollar for which there were willing to settle (a possible outcome), then how can that not have a chilling effort on all corporate bond holders? Going forward, what good are such agreements if the federal government can subvert their conditions ad hoc?
To say that in a planned society the Rule of Law cannot hold is…not to say that the actions of the government will not be legal or that such a society will necessarily be lawless. It means only that the use of the government’s coercive powers will no longer be limited and determined by pre-established rules. The law can, and to make a central direction of economic activity possible must, legalize what to all intents and purposes remains arbitrary action. If the law says that such a board or authority may do what it pleases, anything that a board or authority does is legal – but its actions are certainly not subject to the Rule of Law. By giving the government unlimited powers, the most arbitrary rule can be made legal, and in this way a democracy may set up the most complete despotism imaginable. (p. 119)
There are degrees of despotism. In his lifetime, Hayek witnessed the extremes in Germany, Russia, Japan, and, to a lesser extent, Italy. But in every case, the journey into tyranny through central planning began with a single act.