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False economic security and the road to serfdom Chapter 6

But the policies which are now followed everywhere, which hand out the privilege of [economic] security, now to this group and now to that, are nevertheless rapidly creating conditions in which the striving for security tends to become stronger than the love of freedom. The reason for this is that with every grant of complete security to one group the insecurity of the rest necessarily increases.

Friedrich Hayek (1944). The Road to Serfdom.
In Bruce Caldwell (ed.), The Road to Serfdom, II
(Liberty Fund Library, 2007): 153.

Indispensable to the creation, maintenance, and growth of widespread prosperity is an economic system that uses scarce resources as efficiently as possible to create goods and services that satisfy as many consumer demands as possible. To the extent that the economic system encourages, or even permits, productive resources to be wasted, that system fails to achieve maximum possible prosperity. If, say, large deposits of petroleum beneath the earth’s surface remain undetected because the economic system doesn’t adequately reward the human effort required to find and extract such deposits, then people will go without the fuel, lubricants, plastics, medicines, and other useful products that could have been—but are not—produced from this petroleum.

The system that best ensures that resources are used as efficiently as possible is free-market capitalism—an economic system based on transferrable private property rights, freedom of contract, the rule of law, and consumer sovereignty. This last feature of free-market capitalism is the right of each consumer to spend her money as she sees fit. She can spend as little or as much of her income as she chooses (in order to save whatever she doesn’t spend), and she can change her spending patterns whenever and in whatever ways she likes.

In short, consumer sovereignty means that the economy is geared toward satisfying consumers, not producers. This aspect of a market economy is important to emphasize because we are often told otherwise, namely, that a market economy is geared to benefit mainly producers. Yet in well- functioning economies producers—including entrepreneurs, investors, businesses, and workers—are not ends in themselves. Their activities, as valuable as these are, are means rather than ends. These activities are justified and valuable only if, only because, and only insofar as these produce outputs that consumers choose to buy. If consumers change their spending patterns (as they frequently do), producers must change to accommodate the new ways that consumers spend.

The freedom of producers to respond to, and even to anticipate, consumer demands is so vitally important for the success of the market economy that people often regard the case for economic freedom to be chiefly a case for the freedom of business. This is a mistake. At root, the case for economic freedom is a case for the freedom of consumers.

Of course, because maximum possible consumer freedom entails the freedom of entrepreneurs and businesses to compete vigorously for consumers’ patronage, the defense of free markets often requires the defense of profits as well as of business’s freedom to experiment with different ways of earning profits. Oil companies not allowed to earn sufficient profits from finding new oil deposits won’t invest the resources required to find those deposits. Upstart entrepreneurs prevented by licensing restrictions from entering a profession will be unable to offer their services to consumers who might find those services appealing. The defense of profits and business freedom, though, is a defense primarily of the chief means that the market uses to ensure that consumers are served as well as possible.

The fact that each person’s livelihood is tied disproportionately to what he or she produces rather than to what he or she consumes creates a practical problem, however. Each person, as a producer, works only at one or two occupations; each person earns an income only from one or two sources. Yet each person, as a consumer, buys thousands of different items.

False economic security and the road to serfdom