Chapter Three: Individualism and Collectivism

In this chapter Hayek explores the difference between getting things done using a free enterprise system and a central planning system.

He points out that there are a whole lot of people who support socialist goals, such as social justice, greater equality, and security, but who haven’t given much thought to the implications of achieving those through a centrally planned economy, and that’s what this chapter covers.

He points out that the socialist method – central planning – is a tool, which means it can be used for ill just as easily as it can for good. And in the real world ill is the usual use to which the tool is used. His example is that in central planning, government officials must decide who gets what, as in, compensation. And they must decide between many, many competing viewpoints about what is important, fair and just. In such an environment the government officials must choose one of the above from the many plans offered. It's not surprising that part of their choice is giving themselves their fair share of the community productivity.

Again the difference between letting the free market decide this issue of compensation and the government deciding is that the free market is going to be both more dynamic and will compensate faster for both one-of-a-kind changes such as technology changes and recurring surprises such as economic cycles and natural disasters.

He points out how important a good legal system is for the competitive system to work well at serving the community -- unrestricted laissez faire is not the answer. The government’s role is to provide a good legal framework -- it is there to keep competitors from benefiting from cheap shots, and to define how community costs, such as pollution, will be paid for. But, once that is done, then it should let competition do its thing, and roll with the surprises that competition comes up with.

He points out that rule of law can, but should not, support monopolist positions. And that, ironically, the workers in those monopolist industries will often heartily support the monopolist position because it lets them successfully demand higher wages. But, the end-point for this capitalists-and-workers sweetheart deal is nationalization of the monopoly. (Something the US has just experienced in the auto industry.) (And, personal observation, the stage after nationalization is irrelevance as the vigorous industry participatants move to other locations that remain competitive.)

Finally, he points out that planning and competition are like oil and water -- much as people would like them to, they won't mix well. The most that planning can do is lay a good legal framework, then it has to sit back and watch the exciting show just like the rest of us.