The Cave and the Light

by Arthur Herman

  The time had come, Croly argued, to move away from Thomas Jefferson’s version of America with its concept of “democracy as tantamount to extreme individualism” and of society as a collection of individuals “fundamentally alike in their abilities and deserts.” Such a vision might have worked in the early days of the American Republic, Croly said. However, the advent of industrial capitalism and its large concentration of wealth in the hands of men like Morgan, Rockefeller, and Carnegie, along with masses of foreign immigrants and an industrial working class, meant that such a simple vision of agrarian individualism could no longer work.18

  Croly’s solution was to use the power of the federal government to revivify and reshape American democracy. The “intellectual lethargy, superficiality, and insincerity” of American political thinking, he declared, must be swept aside. A new leadership class was needed to remake American institutions based on “the formative idea” that modern democracy must benefit every citizen, not just the rich or economically privileged, and that all citizens loving one another and loving their country forms the true core of a national interest.19

  “There is no reason why a democracy cannot trust its interests absolutely to the care of the national interest,” Croly concluded, “and … every reason why the American democracy should become … frankly, unscrupulously, and loyally nationalist.” In this new arrangement, old-fashioned Jeffersonian individualism would fade into history. The power of the individual states, the other half of Madison’s constitutional system, would have to give way, too. The days of Madisonian gridlock would be over. However, “popular interests have nothing to fear from a measure of Federal centralization.”20 Instead, this shift would constitute a new Declaration of Independence: essentially, a new kind of America.21

  To be sure, any increase in the power of central government would spell the end of certain aspects of traditional American democracy, in its freewheeling economic life, for example, and its creed of self-reliance. However, “the fault in that case lies with the democratic tradition; and the erroneous and misleading tradition must yield before the march of a constructive national democracy”—a Hegelian turn of phrase if ever there was one. Indeed, Croly even quoted Otto von Bismarck on the need for a nation to see its destiny as a single collective purpose. If such a view seemed a heresy in the eyes of a Jefferson or Madison, it was this heresy “whereby alone the American people can obtain political salvation.”22

  That word is significant. Just as Hegel saw the nation-state as our better and higher self, a sublunary version of Augustine’s City of God, so Croly saw the new America in almost evangelical terms. His own choice for its Moses was Theodore Roosevelt, a kind of elected Philosopher Ruler who would embody the New Nationalism and use his presidential powers to concentrate economic power and responsibility in Washington, “for the ultimate purpose of its more efficient exercise and the better distribution of its fruits.”23 In 1912, President Woodrow Wilson would assume the same Hegelian mantle, and exercise his expanded powers in both peace and war with an appropriately messianic fervor.

  As a lawyer and then professor of political science, Wilson was so bowled over by reading Hegel that, as he wrote to his future wife, “Hegel used to search for—and in most cases found seems to me—the fundamental psychological facts of society.”24 Wilson’s own work, especially his massive Constitutional Government, was not much more than an iteration of Hegel’s philosophy of the nation-state, in an American guise. Wielding the power of government to mold human nature, and to reform or strip away those institutions that stood in the way of the forward march of history—including even Madison’s delicate system of checks and balances—became Wilson’s central mission as president.

  Prohibition and the Volstead Act (1920), and the establishment of the Federal Reserve Board and the Federal Trade Commission (1914), were all extensions of Wilson’s progressive vision of using the power of government to enhance individual liberty “rightly understood”—that is to say, within the confines of America’s larger historic mission.§ “These are American principles,” Wilson declared in 1915, “American policies. We stand for no others. They are the principles of mankind and must prevail.”25

  It’s historically inaccurate, and intellectually misleading, to brand Wilson’s version of Progressivism as “liberal fascism.” Still, Wilson’s America looks a lot like Hegel’s Germany: a nation whose historical evolution embodies the universal values of the Absolute. “Here is a great people,” he once told an audience, “great with every force that has ever beaten in the lifeblood of mankind.… The United States has the distinction of carrying certain lights for the world that the world has never so distinctly seen before … of liberty, principle, and justice.”

  Wilson was speaking in the summer of 1914, just as war was breaking out in Europe. He wanted no part of it; indeed two years later he campaigned for reelection on the slogan, “He Kept Us Out of War.” Yet once the United States did become embroiled in that great cataclysm, it was all too easy for Wilson to see “the war to end all wars” as an opportunity to bring America’s universalizing mission to the rest of humankind.

  He got his chance at the peace table at Versailles in 1919.

  Fighting World War I cost America almost 117,000 lives and left it the most powerful nation in the world, with the second greatest naval force after Britain. Wilson found himself leader of an industrial power second to none, whose financial and food aid kept the rest of the civilized world alive, including Lenin’s Soviet Union. When he arrived in Paris for the peace conference, adoring crowds treated him almost as their messiah. “Never,” wrote a member of the British delegation, economist John Maynard Keynes, “had a philosopher had such weapons whereupon to bond the Princes of the world.”26

  Yet Wilson squandered it all. Another member of the British delegation, Harold Nicolson, started out as an enthusiastic Wilson fan and admirer of the president’s vision of a world government freeing men forever from war and oppression: the League of Nations. “I shared with him a hatred of violence in any form,” Nicolson later wrote, “and a loathing of despotism in any form.” But Nicolson soon realized the college professor’s approach to peacemaking was both “simple” and “mystical”—and completely out of touch with the realities of postwar Europe. Someone gave him a book by Wilson, in which he read, “The new things of the world are the things divorced from force. They are the moral compulsions of the human conscience. No man can turn away from these things without turning away from the hope of all the world.”27

  But men did turn away—first at the Versailles Conference and then in his own country, where the Senate rejected joining the new world order of the League of Nations. Wilson’s nationwide campaign to reverse its decision broke his health, his presidency, and ultimately the dream of America as the defender of universal values and last best hope of the Absolute.

  Far from being a Philosopher Ruler, Wilson had proved to be a muddled and broken prophet. For two decades his dream was driven from the stage. Meanwhile, a new, violent postdemocratic order took root in Russia and Italy, then began its march across the heart of the continent. It would be made worse, ironically, by another decision Wilson had made back in 1914—and it would take another Viennese philosopher, a few years older than Karl Popper, to point the way out.

  In 1914, Herbert Croly and his friend Walter Lippman set up the magazine that would become Progressivism’s mouthpiece, The New Republic. That same year, President Wilson set up the centerpiece of the Hegelianization of the American economy, the Federal Reserve Board.

  From now on, it was believed, the federal government would be able to exercise the same kind of farsighted direction over the economy that central banks enjoyed in England, France, and Germany. That egregious product of self-interested capitalism, the business cycle, with its unpredictable investment booms followed by collapse and unemployment, could be coaxed and prodded “secretly, without legislative enactment or control, and without the public knowing and caring”—and
without resorting to the iron surgery of full-blown communism or socialism. Indeed, membership in the Federal Reserve Bank system would be voluntary.28

  The planned economy was about to become the idée fixe of Western political systems. The searing experience of World War I only speeded up the process, especially in Europe. The electoral successes of Mussolini and Hitler were built on that promise. In the twenties and thirties, John Maynard Keynes and his disciples offered to show the Anglo-Saxon democracies how to do the same thing. Later, economic planners under Franklin Delano Roosevelt would be pleased and delighted that so many of their expert policies geared toward taming the business cycle and bringing “full employment” were actually implemented first by Adolf Hitler in Germany in the thirties, with apparent success.29

  There was only one problem. What if the experts guessed wrong? What if the Philosopher Rulers’ assumptions proved fallible, as Peirce and William James had predicted they might?

  This was what worried Friedrich August von Hayek. On any given day in 1929, he could be found at his desk or in a Vienna coffeehouse, reading the newspaper with a growing sense of foreboding. It was not the news from Germany or Russia or Italy that disturbed him. It was the news from America.

  America’s economy was booming, and had been booming at a growth rate of more than 5 percent for nearly five years. Classical economists since Adam Smith had taught that this would inevitably mean a growing rate of inflation of wages and prices, which in turn would trigger a rise in interest rates and a slowdown in investment and in growth. Boom must inevitably slide into bust.

  However, the bankers at the Federal Reserve had kept the money flowing into the American economy at a pitch that held interest rates low and kept expanding business and consumer credit, especially in the stock market. Yet in defiance of all classical economic doctrine, there was no rise in prices.

  The business cycle, the dreaded beast of capitalist economies, had finally been tamed—or so it seemed. Economists around the world praised the Federal Reserve. Some even predicted that a “new era” in economics had begun, of continuous prosperity and growth with no threat of crisis or depression.30 Economic growth without growing pains: it seemed a transformative moment worthy of a Georg Friedrich Hegel or even a Saint Augustine.

  Hayek, however, was not sure. Born in Vienna in 1899, he had grown up in a family of natural scientists. Like Karl Popper, he had a keen interest in the philosophy of science along the lines of the Vienna Circle. When he first began studying at the University of Vienna, he was as fascinated by the ideas of Ernst Mach as everyone else.31 But he was dismayed when they talked about organizing the economy “scientifically,” as if people were mere counters in a physics experiment instead of real-life human beings.

  Although they detested communism, the Logical Positivists, like most liberals of their day, endorsed some form of centralized planning: many were even socialists. Hayek was drawn instead to another Austrian named Carl Menger, an economist and admirer of John Stuart Mill but also the long-forgotten original founder of economics, Aristotle himself.

  Menger stood at the opposite pole from the centralized planning school. He and his students had spent their lives trying to break classical economists free from rigid, a priori “models.” Menger insisted that the best place to start understanding economics was not David Ricardo’s Principles of Political Economy or even Adam Smith’s Wealth of Nations, but Aristotle’s Ethics, in which the basis of economic life is defined as a process of exchange.32 By going back to Aristotle, Menger said, economists would begin to think again about how real people behaved, and why they bought and sold things in the first place.

  This wasn’t easy. Most economists preferred studying reams of statistics and output data, rather than how a store or farmer’s market actually worked. However, Menger argued that a nation’s economy, like Aristotle’s polis or any local farmer’s market, was the product of individual human action, not collective human design. People buy eggs because they want eggs, not (as David Ricardo would have said) to support land rents in the agricultural sector. They get jobs to feed their family, not to redress the balance between capital and labor.

  And as Hayek immediately saw in the twenties, the vaunted experts at America’s Federal Reserve Board had somehow forgotten this fact in their understanding of the boom of the Roaring Twenties. By keeping their eye fixed on national prices, the experts had missed the real consequences of injecting huge amounts of money into the economy while keeping interest rates below their natural business level. People had responded by grossly expanding their use of credit to buy things they needed, from farms and office buildings to stocks on Wall Street. Hayek was sure this growing overinvestment would collapse once people realized that paper credit was only that, paper. When that happened and the bottom fell out of the credit market, Hayek said, the result would be a panic and severe depression across America.

  Hayek published his first paper criticizing the artificial American boom in 1925. Then in February 1929, he published another paper predicting a coming crisis that would start in the stock and credit markets.33 The experts scoffed. Eight months later, Hayek was proved right. Within a year, the American Depression spread across the Atlantic to Europe. In Germany, France, Great Britain, even Austria, the economies based on centralized expert planning collapsed, one by one.

  The failure of the experts was more than just an economic failure; it had catastrophic political consequences. Men and women lost faith in democratic governments that had promised to protect them from disaster. In Germany and Austria, it would clear the way for totalitarian solutions to problems the dictators blamed on “capitalism” but which, as Hayek had shown, were the results of the democratic experts’ own mistakes. In the end, the Federal Reserve Board’s bad policies in one decade had set the stage for the Anschluss in the next.

  What had gone wrong? Hayek pointed out, the problem had little to do with production or labor or capital or the other big abstractions economists liked to debate and describe. It had primarily to do with information. The real puzzle about economic decision making was figuring out why “the spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affairs … which could [only] be brought about by deliberate direction by someone who possessed the combined knowledge of all these individuals”—something that was clearly impossible.34 And yet, Hayek pointed out, this is exactly what happens in the economic marketplace.

  Economists and politicians had been wrong about how markets work. They are not places where people pursue their self-interest, rational or otherwise, by buying and selling commodities. They are clearinghouses of information, where individuals discover what is useful or valuable to them and then make their preferences known to others by buying them or, alternately, selling those things that are of lesser value to them but hopefully not to others.

  The result is an endless succession of individual transactions, random and meaningless to those who are obsessed with the Big Picture (why would anyone need thirty brands of toothpaste or want fourteen different colors for the same automobile?) but out of which gradually emerges a rational economic order. However, it is an order put together not from the top down, but from the bottom up, purchase by purchase, car by car, egg by egg.

  Friedrich von Hayek had given the Aristotelian insight that knowledge is power a new meaning. It now meant the empowerment of individuals through the exchange of knowledge in the marketplace. In short, the market is an enormous grid for distributing information as well as goods and services. Every individual in the process “possesses unique information of which beneficial use might be made,” Hayek would write, based on what they want or need. Prices are one mechanism for communicating that information; the value of money is another. Governments choosing to mess around with one or the other—whether it’s wage and price controls or inflating the money supply—will distort the flow of that information as effectively as scrambling a broadcast signal or crossing out every othe
r word in a letter or e-mail.

  This is because “central planning … cannot take direct account of these circumstances of time and place” in which genuine economic decisions are made.35 Hegel had argued that historical change ensures that there is no cumulative fund of information available to the individual. Hayek answered, Yes, there is. It’s called the marketplace. And the freer the markets, the more people have access to that fund. Thus, “we need decentralization because only thus can we ensure that the knowledge of the particular circumstances [of a given transaction] will be promptly” and efficiently used—and human beings will benefit materially from that freedom.

  Hayek’s conclusion was that a centrally planned economic policy was bound to fail. Its organizers, no matter how bright or well trained, can never keep up with the innumerable bits of information that go into actual economic decisions. Like Achilles in his race with the tortoise, no matter how fast the central planner runs or how much data he collects, people in the marketplace will have always crept a step further, rendering the data useless the moment they are collected.‖

  The danger is that when the central planners fail, as they must inevitably do, their reaction is bound to be extreme. Instead of admitting their failure or ignorance, Hayek predicted, their impulse will be to exercise even more control, to become more coercive in their use of government power in order to force the economy to behave in the ways in which they, as opposed to real-life consumers, want it to behave. “Predominant concern with the visible short-run effects,” he would later write, “leads to a dirigiste organization of the whole society. Indeed, what will certainly be dead in the long run, if we concentrate on immediate results,” since they are the only ones immediately foreseeable, “is freedom.”36

  At this crucial point, Hayek’s analysis and Popper’s converged. The rise of the totalitarian state was revealed to be the direct consequence of the failure of liberalism in its Platonized form. Progressive heirs of Hegel, in trying to forestall the Marxists and Fascists by guiding society to supposedly higher and more just ends, had simply opened the door for them. They had fallen into the same trap of assuming that the more people are alike, that is, in sharing the same ends and needs, the happier they will be. In fact, the pursuit of equality only generates more conflict, much as Aristotle had predicted in the Politics—which requires more direct government action to maintain order. “The passion for ‘the collective satisfaction of our needs,’ ” Hayek wrote, was how “the socialists [meaning believers in a strong centralized state] have so well prepared the way for totalitarianism.” They have done this, Hayek asserted, by “depriving us of [economic] choice, in order to give us what fits best into the plan and at a time determined by the plan.”