 Much of John's work has been focused on the practical consequences of the last 25 years of the mixed but ever more socialist economy of Britain and I think it's therefore particularly apposite that he should address us today on the subject of the failure of the middle way. Ladies and gentlemen, I must apologize for being somewhat late arriving here this morning but I live in the same block of apartments as Chris Tame and I'm deputed with the responsibility of feeding his cat while he is running vast intellectual events down here and this morning I forgot to feed it and I had to go back from Waterloo Station realizing that if I let his cat die then I might not be getting my lunch here as well. Well the entire session of this morning is really about the issue of 1984 and the road to serfdom and of course this is the 40th anniversary of the publication of Hayek's book on the road to serfdom and as a small plug for our Institute I would like to point out that an especially important book is being published by us very soon called Hayek's Serfdom Revisited, examining from a variety of angles economics, politics, philosophy what a number of modern thinkers and scholars think about our situation now whether we're still on the road to serfdom or not or whether we're on a different road to that which Hayek envisaged and how we get off it and so forth and my talk today partly comes from one of the essays in that volume which will appear under the name of Norman Barry at Al and I think you had Professor Barry speaking to you very recently. Well as I read Hayek's book The Road to Serfdom it is not really primarily about the concept of the mixed economy or the so-called middle way. As I read Hayek's book the majority of it is a warning about the consequences of comprehensive central planning. The main theme of the book is the argument that a comprehensively socialised economy involving central planning must become totalitarian and a totalitarian society inevitably has certain other consequences. It cannot be democratic and also the worst tend to get on top that I think in a nutshell if you like is one of the main themes in the road to serfdom. Well what is the relevance of that to our own situation because if we take Britain we have not had comprehensive central planning apart from the war years when we had central planning that was even more extensive than in Germany at the time and we had central planning for some years after the war but by and large we've had a different sort of economic system in Britain over the post-war years which we can call the mixed economy or the welfare state and this is generally being true as it not absolutely all so-called advanced Western countries. It is complete folly as so many people do to call the Western economies capitalist or free market economies. Any country in which the state takes somewhere between 25% and over 50% of national income as is true of all the Western economies cannot possibly be called capitalist they might be called a mixed economy but they cannot be called a capitalist economy. So we have in a sense in the Western world followed a different path to the particular road to serfdom about which Hayek was speaking. Nevertheless Hayek did have something to say about the middle way in the road to serfdom and he said this he warned that it probably would not work very well the mixed economy would not work well and it might prove to be worse than the alternatives this is what he actually said he said the idea of complete centralization of the direction of economic activity still appalls most people not only because of the stupendous difficulty of the task but even more because of the horror inspired by the idea of everything directed from a single center. If we are nevertheless rapidly moving towards such a state this is largely because most people still believe that it must be possible to find some middle way between the atomistic competition of the free society and central direction. Nothing indeed seems more plausible or is more likely to appeal to reasonable people than the idea that our goal must be neither the extreme decentralization of free competition nor the complete centralization of a single plan but some judicious mixture of the two methods. I think that insight of Hayek still provides us with an understanding of much of the thinking that is going on today. It seems to so many people common sensical that there must be a judicious balance between central direction and the free society and I think that is why we have had a reigning economic philosophy and practice of the middle way and the mixed economy throughout the post war period in general. In fact I might go on from that to say that the very idea of the middle way was not coined by some social democrat. The very term the middle way was coined by a conservative politician, Mr. Harold MacMillan subsequently become the Prime Minister of Britain for a lengthy stretch of years in the post war period and now Lord Stockton and he wrote a book published in 1938 entitled the middle way and to give you some idea of the flavor of his views of what a middle way constituted let me just give you a quotation from his book on the middle way. He says the weaknesses of partial planning seem to me to arise from the incomplete and limited application of the principles of planning. The lessons of these errors that is of partial planning of the economy which I regard as errors of limitation is not that we should retreat on the contrary we must advance more rapidly and still further upon the road of conscious regulation. Now that is the idea of the middle way as expressed by Harold MacMillan who was in a subsequent position to put that program into effect for many many years. Now what I want to do in this talk is not to argue normatively about whether we ought to have a free society or a so called middle way or complete control of economic life by some supreme in quotes authority. I want to analyze as an economist how the mixed economy works and I want to suggest that firstly we have a situation in which we've lived under a regime of a mixed economy now for let's say roughly 40 years yet we've got no decent economic theory about how the mixed economy operates overall. The fact of the matter is that most economists are proponents of the middle way but they don't in fact analyze how it works and the second point that I want to make is that according to the analysis which I'm going to suggest to you the middle way or the mixed economy is a greatly unstable and indeed chaotic economic system I think it more should be better expressed as the mixed up economy rather than the mixed economy. Now the grounds on which I'm going to argue this are not going to be great new theorems in economic analysis I'm going to take the three most basic microeconomic laws of political economy and I'm going to say because of those three laws and all of the evidence we have are that these three processes do exist in economic life in whatever context we're looking at and they cannot be but the there now I'm saying because of those three basic economic laws this system is going to prove to be unstable those three principles are firstly that when there is a negative sum game between a number of contestants and there are a very large number of participants in the game a situation known as a prisoner's dilemma emerges the group can find no way of getting itself out of the negative sum game which depresses everyone's standard of living now we know from very many studies in politics and economics that the where there are large numbers of people involved in that situation they tend to be unstoppable and the other two principles of economics which I'm going to rely upon are the first law of demand the higher the price of a good the lower the quantity demanded and the so-called second law of demand that is the great the length of time that people have to adjust to a price rise or price fall the more flexibility they will have in their arrangements and the better they will be able to adjust to it now that that's the simple basis of why I think the mixed economy will prove to be unstable now let me start off by defining more carefully what I think the middle way or the mixed economy is and I think the the best typification of it the best description of it was given not in fact by Huyck but by his mentor and colleague Ludwig von Mises who pointed out in a number of his writings including human action the book human action and his book on socialism and various other writings that really the mixed economy was a system of what he called interventionism he pointed out that the French had long had a term for this type of economic system and they called it interventionism now interventionism is an economic system in which although voluntary arrangements between individuals remain extensive state regulation and intervention in the economy permeates virtually everywhere that is the economic system of interventionism now Huyck in volume 3 of his law legislation and liberty has analyzed how and why this system of interventionism comes about and I largely support his analysis of that he points out that we're widely adopted in Western countries the notion that democratic governments need be subject to absolutely no constraint in the exercise of unlimited powers except the right of the electorate to vote the body of representatives and it has been widely believed that this singular constraint the power of general election is sufficient to discipline the possibly discretionary power of representative governments and it's possible to dispense with all other limitations or constitutional constraints on the behavior of government except for this one principle that the electorate has the right at some period of time to get rid of the elected government and replace it with another now the problem as Huyck points out with that philosophy is that if government has unlimited power to intervene then it creates an incentive for groups to lobby for government to use that unlimited power on their own behalf and so a system of incentives has been created within a political economy whereby all groups are given an incentive to lobby for government to use unlimited power on its own behalf in a sense as professor Jensen has put it in effect a market in police powers has been created by the fact that government has unlimited power and groups can lobby for the use of that unlimited power well in other words the mixed economy is a system of interventionism now we can save something very simple about absolutely all types of government intervention and every type is subject to this observation all acts of government intervention create a body of gainers and a body of losers there are some people who gain from the intervention they are net beneficiaries and there is another group who are the losers from the intervention just to give some very obvious examples government regulation of air flights in Western Europe today aid state-owned industries state-owned airlines and their staffs it harms consumers and tends to harm independent airlines minimum wage laws help those people who retain employment at the higher wage it damages the interests typically of those people who become unemployed as a result of the minimum wage set above market levels and it also damages the interest typically of youths who cannot substitute lower wages from the job training some people will also argue that it tends to have particularly concentrated effects upon the ethnic composition of the work force but again there are gainers and losers again any inflation which is a form of government intervention under a fiat money system such as we have any inflation creates gainers and losers the gainers of the people who are net monetary debtors the course the monetary value of their debt is reduced the losers of the net monetary creditors and this of course is why government likes inflation so much government is always the largest net monetary debtor but there are other groups in society we're also net monetary debtors so to point out any type of government intervention of which we think even including the provision of public goods is going to create gainers and losers the losers from the provision of public goods for example in the case of let's say defense of pacifists the losers from the provision of public goods in a form of law and order people like the mafia although they sometimes come to agreements with the state police powers to use them things for themselves but in general every gap act of government intervention means that there are set of gainers and losers now the point is that the two groups the gainers and the losers are going to react differently to the government intervention the gainers from any intervention are on the whole going to rather like it it's adding to their pockets or their utility or their security and on the whole they are going to enjoy that experience the losers quite obviously also if they are aware of the burdens imposed upon them are going to resent the imposition of that burden and would prefer to be without it and would rather like to escape it now this is all very very common sense stuff every act of intervention creates gainers and losers and gainers and losers will react differently now as a result of these very common sense and absolutely undeniable matters I would argue that we are now witnessing the generation and have witnessed the generation of the unleashing of two very powerful economic processes within the system of interventionism and I'm going to label these two processes as follows the first one I'm going to call the new Hobbesian process and the second one I'm going to call the process of intervention entropy or intervention decay have you like to call it let me speak briefly about the new Hobbesian process well of course it was the English political philosopher Thomas Hobbes in his famous treatise published in 1651 entitled Leviathan who pointed out that selfish individuals acting in a state of nature that is where behavior is unconstrained by custom or framework of enforced law and custom such individuals would be led to steal and plunder from each other leading to what he called a war of all against all and from these considerations Hobbes derived the case for an absolute sovereign power the state to enforce laws against coerced redistribution of goods and resources in order to end the war of all against all and to the general benefit now I would argue that under the system of interventionism or the middle way or the mixed economy we are witnessing a very powerful Hobbesian process of war of all against all at work but it's a new type of Hobbesian process which has three distinguishing features from the process which Thomas Hobbes himself diagnosed so many centuries ago first the new Hobbesian process involves redistributionary struggles not between individuals as in the original Hobbesian analysis primarily this struggle is are between highly organized groups and it the groups involved include things such as the farmers protectionist lobbies trade unions the NUM executive would be a fairly clear example of the sort of thing I'm talking about but also professional associations such as doctors and lawyers lobbies such as the education lobby the health care industry in this country we also have other groups who are not necessarily highly organized but which are so large in number that from a voting point of view it they constitute such important fiscal interest groups that government wants to carry their favor now all of these groups under interventionism are seeking to redistribute income or security towards themselves and away from other groups and in other words they're looking for the gains from intervention they are rent seeking as the economist puts it they are trying to get these special privileges and protection which only the state can give by imposing harm upon others but there are very very large numbers of groups involved and it constitutes a sort of Hobbesian struggle of group economic warfare which even sometimes becomes military warfare as we can see in the Midlands of Britain today there is a form of civil war going on and it is partly a Hobbesian struggle now the second major difference of this new Hobbesian process is that it does not typically take place as a direct confrontation between the groups involved the health care workers don't go out and beat up the teachers the farmers don't go out and steal from the urbanites and the city boys typically the way this process this new Hobbesian process takes place is through the political arena and it takes place not as a diet direct coercive struggle as Hobbes envisaged it takes place as the presentation of pressure upon government and bureaucrats and their agencies in order that government and will then use its coercive powers in order to redistribute income to the group in question and it's only in particular cases as when British miners or French farmers surround ports and power stations in order to block blockade them or to cause public mayhem that we see this Hobbesian process becoming an actual matter of physical confrontation now the third feature of this Hobbesian process is that it cannot be cured by the Hobbesian device of an absolute power the state the reason is that the whole process is taking place within the state the state is the arena in which the struggle is taking place so therefore the state cannot act as an outside body in order to suppress this Hobbesian struggle as the state is the vehicle for it and that leads on to something I'm going to be saying later about how to cure it the answer of course is that the state must have its unlimited powers taken away from it by constitutional constraint the way to stop it is to have something above the state that prevents it from getting out of line on behalf of all these vested interest groups now the Virginia School of Public Choice Economists have pointed out that this Hobbesian struggle between all of these groups is likely to be a negative some game it is likely to be a game a game which depresses the ability of the economy and society to produce productive goods and resources simply put more and more resources are devoted in this Hobbesian struggle towards redistributing income and if you're trying to redistribute income you're not adding to it struggles that are simply of a redistribution nature always tend to become negative some as people invest more and more resources in trying to make sure the redistribution regain doesn't go against them now having said that the political philosopher professor Norman Barry has recently appointed has argued in an article in the journal government and opposition he argues that this Hobbesian process is likely to reach what he calls a sort of like a high-level equilibrium well there are many groups struggling against each other but it doesn't topple over into a road to serfdom of complete totalitarianism and one dominant group and the basis of his argument as follows he argues that it's not going to pay the public sector goose as it were to destroy the golden egg of the private sector it always pays to stop exploitation at some optimal rate of exploitation he argues that the public sector will come to its senses before it destroys the private sector in the free market entirely and it will stop at some stable rate of exploitation of the private sector now I have to tell you that I think that is optimistic both optimistic and wrong it is wrong for the following reasons and these are very basic and fundamental economic reasons why the hypothesis is not correct firstly this vast squabble of interest groups which hike by the way calls the para government of modern times this vast squabble of interest groups does not constitute one homogenous and undifferentiated unitary public sector the fact of the matter is that there are very many groups squabbling with each other if there was just one group mainly the public sector which was trying to exploit the private sector then yes it is true it would stop at some point which maximized its own interest but even within the public sector we have very large numbers of organized interests all operating entirely according to their own group interests for example the national union of mine workers executive in Britain is not taking too much of a damn piece of notice of the non-striking miners it's set to send troops against them in order to beat them up and things like that they are acting in their own selfish interest they're not saying oh what will maximize the rate of return for the public sector as a whole their interest in their own interests so again not all groups which are involved in this redistributionary process in the public sector there are large numbers of groups such as private sector unions trade associations claimants unions and lobbying consultants all of which are operating nominally in the private sector but are trying to use the powers of state to redistribute income towards their own clients now another reason why the Barry hypothesis is correct is that it would be impossible for all of these various groups in the power of government to come to some sort of contract together to stop squabbling in the way that they are they would never be able to enforce a stable and a police a contract of that sort just to imagine a contract to stop doing these things that would have to cover employers associations farmers bureaucracies quangos trade unions is to realize it would be impossible for such a contract to be formed so even if people can realize that they're in a negative some game it's impossible for them to come to a binding contract between themselves to stop the playing at a game now it is that which makes it a prisoner's dilemma that is it's a situation of strategic interaction between the diverse elements of the power of government which means that all could be made better off if they stop playing the game but in which no particular contestant has got any interest in doing so and therefore it is a situation where there is a dilemma it's impossible to stop the process from going on so I cannot agree with Norman Barry that this is a process that will automatically stop at some point before we reach serfdom under one dominant coalition now it seems to me this conclusion lies throw some light on a number of contemporary developments seems to me that over the past couple of decades the Hobbesian struggle has been hotting up trade unions in Britain quite clearly have been moving towards more and more vicious forms of seeking to obtain that which they want and this is particularly been so in the public sector particularly in the white collar part of the public sector notions of professional ethics and professional norms have been thrown out of the window and typically today have been replaced by notions of very militant forms of trade union activity another point that I think some light can be thrown on is what has happened to the so-called Thatcher and Reagan revolutions and the attempt to roll back the state while this Hobbesian struggle is going on the problem really that Mrs Thatcher and President Reagan face is not simply that they are not 100% libertarians I'm quite sure they would like to go part of the way towards rolling back the state I think they probably have some degree of commitment in that direction but they face a profound political problem with this new Hobbesian struggle the problem is that if any government which is of a reformist nature were to offend too many of the elements of the Para government would harm too many sectional squabbling interests then it would be possible for another party to offer to restore the status quo ante in the next election and to buy the swing votes of other groups sufficient to give them an electoral majority so the problem is that if you try to go too fast often in the face of reform you could find that your ability to do so would be undermined by the ability of the elements of the Para government to elect a different sort of government more conducive to their own interests right well I talked about one of these processes let me briefly turn to the other side of the coin which I called the process of intervention entropy well just as the potential gainers from any act of government intervention have got an incentive to employ lobbying to get the intervention and to get it reinforced so losers have got the incentive to try to avoid the burden of any intervention now in principle losers could do that by themselves forming a lobby to counteract in the political market the weight and the pressure of the gainers from intervention but the problem is that interventionist governments have got very very coming about stopping this counter coalition formation of losers the typical way that governments intervene is that they have an intervention which concentrates benefits narrowly on a section of the population like farmers or miners whereas the costs are spread by general taxation over everyone as a whole now when the coalition of potential losers is so very very large indeed covering vast continent where he is such as the size of the United States or Western Europe in the case of let's say the case of farming for example and the redistribution going on that it's very difficult for the losers to form an effective coalition to counter the force of the gainers in the political market but what losers may in fact do is try to escape the burden of the intervention instead of trying to lobby against it politically they might try to reduce the cost of the burden imposed upon them now here we come to the laws of demand and just as the laws of demand apply to positively valued goods the laws of demand also apply to bad negatively valued goods now the first law of demand applied to a bad life having a loss imposed upon you by government is that the greater the cost imposed by any government intervention the more that people will be willing to pay in order to avoid it the greater the cost imposed the more that people will be willing to pay in order to avoid it so for example the greater the tax burden imposed upon an individual then other things equal the greater the effort that the individual will expand expand to try and avoid or evade the tax burden the gate the greater the problems posed by an incomes policy wage and prices controls the greater the incentive given for any firm or individual to try and get around the effects of the incomes policy now secondly over the longer run as the result of the operation of the second law of demand we should expect that individuals become better at avoiding and evading burdens they don't want than they would be in the short run this is so for a number of reasons firstly in the short run situation when a burden is imposed upon anyone they are subject to certain fixities in their stocks of capital so for example if a tax is suddenly put on housing and people have housing they might not necessarily be able to reduce their housing stock immediately without great cost but over the longer run they can reduce the number of fixities in their consumption patterns and try to move away from the burdens imposed upon them secondly in the longer run people have learning by doing as the economist calls it that is put put the matter simply the more that you evade taxes the better that you get at doing it other things equal the more that you avoid taxes the more that you're used to fooling some government regulatory officer the better other things equal you tend to be at it a third reason why this process occurs is that actually incentives are created for entrepreneurs to find ways of getting around government burdens and offering these things as packages to individuals who want to escape it is partly an entrepreneurial process every day in the city of London not so far away from here very large sums of people are employed simply devising packages of tax avoidance and tax evasion which they sell to interested parties so there is an entrepreneurial process going on as well which is underwriting this this matter now why I call it the process of intervention entropy or decay is I'm saying the operation of losers which conforms to the first and second laws of demand has an effect rather like the second law of thermodynamics the second law of thermodynamics says that all matter is subject to increasing entropy and decay now as a result of the attempts of people to escape the burdens of intervention I think it's becoming increasingly apparent that intervention is subject to a process of decay and decline now I'm not suggesting that this occurs at the same pace in absolutely all spheres of intervention and I'm not suggesting that it means that escaping the burdens of intervention is costless typically if you want to go to a tax consultant he's want to go he's going to want to break off from the profits that you make from from escaping certain taxes nor would I suggest that this process occurs instantaneously it takes a long time for people to find ways from escaping many types of intervention but clearly for example this is happening in the areas of monetary policy I would say at the entire history of the past 40 years is the slow realization that intervention entropy occurs in monetary policy that is you can try to intervene through creating inflation in the economy but inflation is a tax and once people find that inflation is a tax tax on the holdings of money balances the this process of trying to escape it will start to take place and therefore the intervention will start to decay in effectiveness that effectively is the natural right hypothesis of unemployment in economics but of course this process also occurs in the incomes policy and the whole area of the black economy in the attempt to evade and avoid taxes and I would also argue it occurs right across the whole burden of government regulation and intervention well let me come to my conclusion let me start to talk about the future of the middle way I've argued that we have two major processes at work in the interventionist order the middle way the process of intervention entropy and the new Hobbesian process what can we say about how these two processes will react or interact in the future and what will come out of it well one thing I think we can immediately say is going to be most unlikely the likelihood that the middle way will prove to be a stable economic order in the presence of these two economic processes could only that that could only be a fluke there is no automatic stabilization mechanism in the mixed economy which will return it to a stable and self-repeating order if we define a stability the situation that the system when disturbed will return to the same equilibrium then I cannot see that the middle way is a stable economic order there is absolutely no reason why the new Hobbesian process should exactly counterbalance and at every sector of the economy the process of intervention entropy there is no device which brings them into equilibrium so the idea that the middle way is a stable economic order must be argued on the basis of the most simple and most general of economic propositions how by economic science to be a delusion well if that is so if the idea of a stable middle way is a fluke what are the other possibilities it seems to me that there are two main possibilities in the absence of some major world cataclysm or some vast change in the sets of ideas of people living in such systems the first one is that the new Hobbesian process will prove to be the more stronger than the process of intervention entropy in this case governments will be led to weave ever more complex tangles of regulations subsidies special favors leading to outpacing if you like the erosive force of the process of intervention entropy and eventually leading to such a morass of restrictions that there will be severe economic side consequences of that sort of order now it seems likely to me in that event if the new Hobbesian process is the stronger of the two it seems like unlikely to me that majoritarian democracy would survive I think the basis the problem was put by Henry C. Simons also 40 years ago in his famous essay some reflections on syndicalism he pointed out that organized economic warfare is like organized banditry and if allowed to spread must lead to total revolution which will on very hard terms restore some economic order and enable us to maintain some real income instead of fighting interminably over its division amongst minorities so yes if this process intensifies and outweighs intervention entropy it would seem likely to me that a dominant coalition will emerge in the process in order to damp the process down so we could be on a road to surf them through or via group economic warfare the other possibility is that the process of intervention entropy will prove to be stronger than the process that I've described as the new Hobbesian process now in this alternative scenario although the government would perhaps keep on trying to regulate the economy and would perhaps even look as if it was extensive it would in fact have reduced capacity to run the economy because people had found so many ways around the controls that government control in fact was rather weak now it seems to me that this in fact has already come about in large part in both Italy and Peru studies suggest that in Italy for example about 30% of Italian national income is in the form income earned through the economy of some measure the submerged economy the black economy about 15% of Italian employees are existed are sorry estimated to be in jobs that do not officially exist the situation in Peru is even more indicative of the sort of scenario that I'm talking about a recent study by Hernando de Soto discovered that two out of three workers in Peru are in the black economy two out of three that include it 90% of workers in the clothing business in Lima 70% of the 75% of the furniture business 60% of construction and 95% of public of public transportation now so we are not necessarily talking about lunacy when we talk about intervention entropy and the black economy outpacing the new Hobbesian process evidently in some places it has become very very extensive indeed however having said that I think there is one a couple of worries about this rather more forthcoming Italian scenario even though I do notice that Italy by the way now leads the world in champagne and whiskey imports and it's top of the league in second home ownership in Europe and in holidays and it also puts more money into savings than any other country in Europe doesn't sound too bad in a way but on the other hand if one is going to exist in the black economy and most of the economy is going to be in the black economy productive activity has probably to be in rather small units anything that was too obvious like if you bought a black market automobile plant involving 10,000 workers you know it's difficult to hide and anything that was obviously too illegal and too offensive that you couldn't bribe your way out of it it might be difficult to sort of cover up so what worries me about this Italian scenario is that although there would be extensive capitalistic and market economic endeavor it would tend to be rather small scale and large capitalistic endeavor might migrate from such areas to more happier bodes in say the on the Pacifica Rim of Southeast Asia and the countries of the middle way will have extensive black and gray markets and extensive public sector but no large-scale capitalist enterprise earning large economies of scale well I think there is myself a fourth way and that is that we all change our ideas and become more concerned with the survival of liberty and also I believe it would be necessary to have fundamental constitutional reform of government to prevent either of these two scenarios from coming about but I think as things stands at the moment given the economic and political order we've got we can summarize the situation as saying that the middle way will prove to be a delusion and it will either become under the propulsive forces now embedded within it a road to surf them through group economic warfare or it will become a largely extensive black economy with no guarantee that this will provide a happy home for large-scale capitalist endeavor or that that could ever remain stable because remember that the Italian Communist Party is the second largest political party in Italy