POL2107Government, Law

& Economy

POL 7
210
Week 13 Class Workshop – On Economy
Debates & Challenges – Friedrich A.V. Hayek
Announcement
The views and opinions expressed in lectures &
discussions of this course is for teaching, learning &
academic purpose only. Such views do not necessarily
reflect the official policy or position of the Department of
Public Policy and/or individual teachers/students.
Students are forbidden to record (video and/or audio) any
part of the lectures and/or discussions without explicit
permission of the teacher and other students of the class.
Materials of the course shall not be shared/used publicly
without explicit permission of the teachers.
Announcement
The views and opinions expressed in lectures &
discussions of this course is for teaching, learning &
academic purpose only. Such views do not necessarily
reflect the official policy or position of the Department of
Public PolicyViolations areteachers/students.
and/or individual subject
Students are to disciplinary
forbidden actions.
to record (video and/or audio) any
part of the lectures and/or discussions without explicit
permission of the teacher and other students of the class.
Materials of the course shall not be shared/used publicly
without explicit permission of the teachers.
Official video & audio recording
of the class will be posted
on Canvas for revision purpose.
Essay 3 (Drop-box close at midnight 4/12/2021)
Intended Learning Outcomes
1. Appreciate Hayek’s ideas on economy
2. Apply Hayek’s ideas to discuss public affairs
Rundown
1. Lecture
2. Video reviews
3. Case studies
4. Student contributions
 ILO1 Appreciate
Hayek’sideas on
economy

POL 7
The Road to Serfdom, 1944
210
 POL
Student
contribution

2107
How did Socialism &
Keynesianism contribute/relate

GLS
to Hayek’s ideas on economy?

In-class 50-word verbal (not

chatroom) contribution, 1 mark

No mark for written submission

Friedrich A.V. Hayek (1899-1992)
Austrian-British economist & philosopher, noted for his
criticism on Keynesian welfare state & totalitarian
socialism
Well-educated, ViennaU law & political science PhDs
Served in WWI, determined to avoid similar war mistakes
Mild socialist before age 23, then classical liberalism
Professor of LSE on business cycles, capital theory,
monetary theory supporting price system & free markets,
then ChicagoU on libertarian ideas/theories
Shared the 1974 Nobel Prize in Economic Sciences for his
theory of money & economic fluctuations, & analysis of
the interdependence of economic, social &
institutional phenomena
The Road to Serfdom, 1944
A classic in the history of liberal ideas, widely popular among
those advocating individualism & classical liberalism
Arose from concern about British socialists advocating
government control/planning policies/programs
Warned the dangers of socialism, argued that government
control of people's economic lives (central economic planning &
empowering the state) amount to totalitarianism
Socialist planning could not work (because the data required for
planning could not exist for planners), make society less liveable,
more brutal, more despotic
Capitalism is compatible with human dignity, prosperity, &
liberty; government can provide a safety net
The Road to Serfdom, 1944
1 The Abandoned Road
2 The Great Utopia
3 Individualism and Collectivism
4 The “Inevitability” of Planning
5 Planning and Democracy
6 Planning and the Rule of Law
7 Economic Control and Totalitarianism
8 Who, Whom?
9 Security and Freedom
10 Why the Worst Get on Top
11 The End of Truth
12 The Socialist Roots of Nazism
13 The Totalitarians in our Midst
14 Material Conditions and Ideal Ends
15 The Prospects of International Order
 POL
Hayek’s Ideas

2107
– individualism & collectivism

GLS
– planning & democracy

– security & freedom

Individualism & Collectivism (1 of 5)
Confusion with the concept of socialism: its ideals/ends
(social justice, greater equality & security) vs particular
methods/means (abolition of private enterprise & private ownership
of means of production, creation of a system of “planned economy”
where entrepreneur working for profit replaced by central planning
body); many socialists care only the ideals & not the means,
others reject the means due to related dangers (to other
values)
Confusion with the purposes/values of socialist means: e.g.
social justice (in distribution of income) & production for use
(not production for profit) by economic planning; many do not
see the bad consequences (make governments oppressive &
tyrannical)
Individualism & Collectivism (2 of 5)
Ambiguity with the notion of (economic) planning: desirable
(rational foresight) & normal (every political act is an act of planning
or ought to be) in general sense, but socialism refers to
planning in a particular sense (not just rational permanent
framework but a central direction of all economic activity according to
a single plan for resources consciously directed to serve particular ends
in a definite way)
Dispute on best way of planning: socialism is consciously
constructed blueprint (by the state) to centrally direct &
organise all activities, liberalism is holder of coercive power
confined to creating conditions (e.g. best possible use of the
forces of competition) for individuals to plan most successfully
(different from a laissez-faire policy)
Individualism & Collectivism (3 of 5)
Economic liberalism: ① effective competition is a better way
of guiding individual efforts (than any other), ② a carefully
thought-out legal framework is required (to support
competition), ③ other methods of guiding economic activity
are needed (when effective competition cannot be created)
Economic liberalism opposes: competition supplanted by
inferior methods of coordinating individual efforts
(competition ① is the only method by which people’s activities can be
adjusted to each other without coercive or arbitrary intervention of
authority, ② is in most circumstances the most efficient method known, ③
dispenses with the need for “conscious social control”, ④ give
individuals a chance to decide on the costs & benefits of particular
occupation)
Individualism & Collectivism (4 of 5)
Successful use of competition (as the principle of social
organisation) precludes coercive interference with economic
life (negative requirements: ① parties in the market should be free to
produce, sell & buy, ② entry into different trades should be open to all on
equal terms, ③ the law won’t tolerate attempts to restrict entry by
open/concealed force, ④ no attempt to deprive competition of its power
of bringing about an effective co-ordination of individual efforts by
controlling prices or quantities of particular commodities)
Measures merely restricting allowed methods of production
(affecting all potential producers equally, not controlling prices &
quantities) & social services may be worthwhile (benefits greater
than costs, e.g. restriction on poisonous substances) & fully
compatible with the preservation of competition
Individualism & Collectivism (5 of 5)
Positive requirements for functioning of competition: ①
adequate organisation of certain institutions (like money,
markets, channels of information), ② existence of appropriate
legal system (to preserve competition & to make it operate as
beneficially as possible), ③ the owner benefits from all the useful
services rendered by his property & suffers for all the
damages caused to others by its use, ④ substitute for the
regulation by the price mechanism (when there is a divergence
between the items which enter into private calculation & those which
affect social welfare, i.e. benefits & costs dislocated)
State activity: an intelligently designed & continuously
adjusted legal framework, preventing fraud & deception,
public works/institutions as per Adam Smith
 ILO2 Apply Hayek’s
ideasto discuss public
affairs

POL 7
210
What is China's 14th Five-Year Plan all about?
 POL
Case Video

2107
This footage
What is China's 14th
dated 12
Five-Year Plan all about?
months plus!

GLS
You need to use CGTN, YouTube
current issues 7/11/2020, 6 minutes English,
dated after bilingual subtitles
4/12/2020 for
Essay 3. Apply Hayek’s ideas to
discuss/analyse the case…
Student
Contribution
Apply Hayek’s ideas to
discuss/analyse the case…

In-class 50-word verbal (not

chatroom) contribution, 1 mark

Email written submission to me

before end of today:
saarthur@cityu.edu.hk
 ILO1 Appreciate
Hayek’sideas on
economy

POL 7
The Road to Serfdom, 1944
210
Hayek’s Ideas

– individualism & collectivism

– planning & democracy

– security & freedom

Planning & Democracy (1 of 7)
Using economic planning (deliberate/conscious organisation/
direction of all resources/labours of society for a definite/unitary social
goal/end), collectivism, communism, fascism are totalitarian
in the true sense (though they differ between themselves in the nature
of the goal/end), contrary to liberalism & individualism
(recognising autonomous spheres in which the ends of the individuals
are supreme)
Collectivist “social goal”/“common purpose”: ① vaguely
described (common good, general welfare, general interest), ②
without sufficiently definite meaning to determine a
particular course of action, ③ cannot be measured,
④ cannot adequately express individual interests (infinite
variety of combinations, a hierarchy of ends, a comprehensive scale
of values)
Planning & Democracy (2 of 7)
Collectivist goal/end (a single end replacing a hierarchy of ends & a
comprehensive scale of values) presupposes the existence of a
complete ethical code in which all the different human
values are allotted their due place, contrary to liberalism
(choosing between different values without a social code) & the
growth of civilisation (steady diminution of the sphere in which
individual actions are bound by fixed rules)

Essential point: no such complete ethical code exists but is

required to guide economic planning on what ought to be
done, ending in innumerable questions unanswered
(liberalism in a democracy does not presuppose such complete ethical
code & hence does not have those problems)
Planning & Democracy (3 of 7)
Basic fact: impossible for any mind to ① comprehend the
infinite variety of different needs of different people, & ②
attach a definite weight to each (impossible for any man to survey
more than a limited field, to know the urgency of more than a limited
number of needs, but only an infinitesimal fraction)
Individualism: ① it is impossible to include in our scale of
values more than a sector of the needs of the whole society
(due to limits of our powers of imagination, not that man ought to be
egoistic or selfish), ② only partial, different & inconsistent
scales of values exist (in individual minds), ③ individuals
should be allowed to follow their own values & preferences
(rather than somebody else’s), ④ individual’s system
of ends should be supreme & not subject to any dictation by
others
Planning & Democracy (4of 7)
Individualism does not exclude the recognition of social
ends or coincidence of individual ends (hence advisable for
men to combine for their pursuit) but common action is limited
to instances where individual views coincide
“Social ends” in individualism: ① merely identical ends of
many individuals, ② the individuals are willing to
contribute (in return for the assistance they receive in the
satisfaction of their own desires), ③ the individuals agree on
those common ends, ④ the common ends may not be
ultimate ends to the individuals but means (which different
persons can use for different purposes)
Planning & Democracy (5 of 7)
Organisations/state (under individualism) are ① formed for
individuals to pursue common action, ② given their own
system of ends & their own means, ③ remains one “person”
among others (though more powerful but with its separate & limited
sphere, cannot impose on others), ④ its limits are determined (by the
extent to which the individuals agree on particular ends), less
agreement as scope of its action extends
But ① direct controls of the state (in fields not guided by voluntary
agreement of individuals) will suppress individual freedom, & ②
once the communal sector (in which the state controls all the
means) exceeds a certain proportion of the whole, effects of
its actions will dominate the whole system (the “social scale of
values” will embrace practically all individual ends)
Planning & Democracy (6 of 7)
People may agree on directed economy for goals/ends (great
prosperity, common welfare) that only conceals absence of real
agreement on the ends of planning, agreement will exist
only on the mechanism (directed economy). When execution of
planning requires more agreement than in fact exists, people
are forced to produce agreement on everything (in order that
any action can be taken at all)

Democratic system of majority decision is not suited for

producing agreement (on everything – the whole direction of
resources of the nation), hence parliaments are ineffective for
detailed administration of economic affairs of a nation (not
due to individual representatives or parliamentary institutions)
Planning & Democracy (7 of 7)
Democratic assembly voting & amending comprehensive
economic plan clause by clause makes nonsense because a
coherent/complex plan cannot be achieved by breaking it up
into parts nor through compromise between conflicting
views (especially when the goals are unclear & the means are
unlimited)

Making economic plan involve choice between conflicting

or competing ends, planners will inevitably impose their
scale of preferences on the community when deciding
which of the different ends are to be given preference but
not knowing ① different needs of different people & ② which
to be sacrificed or reconciled
Hayek’s Ideas

– individualism & collectivism

– planning & democracy

– security & freedom

Security & Freedom (1 of 6)
Economic security (vague & ambiguous) often represented as
an indispensable condition of real liberty but the general
approval given to the demand for security may become a
danger to liberty (especially in case of absolute security)
Limited security (against severe physical privation, minimum
sustenance/income) can be achieved for all, not as a privilege
(legitimate object of desire) ① outside of & ② supplementary to
the market system
Absolute security (of a given standard of life, particular income
thought to deserve) cannot be achieved for all, ought not be
given as a privilege (except in a few special instances – judges),
can be provided only for some & only by controlling or
abolishing the market
Security & Freedom (2 of 6)
After reaching a general level of wealth, limited economic
security (minimum food, shelter, clothing to preserve health &
capacity to work) should be guaranteed to all without
endangering general freedom though still some difficult
questions (the precise standard, time limit, political ramifications)
Assistance should be provided (by the state) to individuals for
common hazards of life (against which few individuals can make
adequate provision because of the hazards’ uncertainty) & a
comprehensive system of social insurance (for genuinely
insurable risks – sickness & accident, or natural disasters – earthquakes
& floods) may be justified (not weakening the desire to avoid such
calamities nor the efforts to overcome their consequences) though
disagreement on details & possible harm to competition but
individual freedom preserved
Security & Freedom (3 of 6)
Combating ① general fluctuations of economic activity & ②
recurrent waves of large-scale unemployment are necessary
efforts; planning (monetary policy remedy, large scale public works)
in state effort is an option but may seriously restrict
competition & make all economic activity progressively
more dependent on the direction & volume of government
expenditure; more importantly there are better options
(freedom not threatened, market not replaced)
Security & Freedom (4 of 6)
Planning designed to protect individuals/groups against
diminutions of their income (security of a just remuneration) will
affect the competitive system (remuneration not commensurate
with objective results of one’s efforts, despite one’s subjective merit, is
irreconcilable with freedom to choose one’s employment, despite
unforeseen changes) & harm liberty
Income certainty (an ideal of legitimate expectation) cannot be
given to all (if any freedom in the choice of one’s occupation is to be
allowed); if provided for some it becomes a privilege (of
increasing demand, even at the expense of liberty) at the expense of
others (whose security is necessarily diminished & insecurity
constantly increased); if provided for all, all freedom in choice
of one’s employment will be abolished
Security & Freedom (5 of 6)
When remuneration cease to have any relation to actual
usefulness, it would depend on the authority’s views &
arbitrary decisions about what a person ought to have done,
ought to have foreseen, his intentions (good or bad), resulting
in ① people doing the same work receiving different
remuneration, ② removing people’s incentive to make
socially desirable changes or related judgement (advantages to
individuals & usefulness to society unrelated)
When income is guaranteed, changes in the distribution of
men (between different employments) cannot be brought about by
pecuniary “rewards” & “penalties” (one can neither be allowed
to stay in his job merely because he likes it, nor to choose what other
work he would like to do, gain & loss dislocated)
Security & Freedom (6 of 6)
Economic security by restrictive measures will produce a
progressive transformation of society like deliberate
disparagement of all activities involving economic risk
(spirit of commercial enterprise represented as disreputable) & moral
opprobrium on gains which make risks worth taking (making
of profit represented as immoral); values (in UK) already altered
far in advance of change in institutions (extolling security at the
expense of freedom)
Some security is essential if freedom is to be preserved, but
security must be provided outside the market & competition
be left to function unobstructed so as to avoid destroying
individual freedom (which require paying a price & making
material sacrifices like security)
 ILO2 Apply Hayek’s
ideasto discuss public
affairs

From Cradle to Grave

POL 7
210
Democrats Move to Expand Social Safety Net
 POL
Case Video

2107
This footage
From Cradle to Grave
gives limited
Democrats Move to Expand
details. A full

GLS
Social Safety Net
research is
needed if the News Leader, YouTube
case is to be 7/9/2021, 3 minutes English,
used for English subtitle
Essay 3. Apply Hayek’s ideas to
discuss/analyse the case…
Student
Contribution
Apply Hayek’s ideas to
discuss/analyse the case…

In-class 50-word verbal (not

chatroom) contribution, 1 mark

Email written submission to me

before end of today:
saarthur@cityu.edu.hk
POL2107Government, Law
& Economy

POL 7
Thank you for your attention!
210
Class workshops finished. Best wishes to you all!