This is a critical chapter in Hayek’s 1944 classic, The Road to Serfdom.  The books is a deeply thoughtful examination of why planned economies lead to despotic rule.   In several different parts of the book Hayek explains that the motivation to improve an economy by elitist planning runs counter to a democratic society that respects individual virtues and rights.  Such planning requires an agreement of ends and priorities that conflicts with individual rights. The quest for a planned economy inevitably creates a need for power to enforce common ends that is often reluctantly embraced for the common good. Thus those who valued freedom and democracy start on the “road to serfdom”.

In the pursuit of a common end this path draws on the worst elements of society.  The higher the education and intellect that individuals achieve the more their view become differentiated and the less likely  they are to agree on a single hierarchy of values.  In order to find a high degree of uniformity one must descend into the more common and less educated masses; “the lowest common denominator which unites the largest number of people.”

The “docile and gullible” with no strong convictions will be swayed with a simplistic ready-made system that appeals to this common denominator. The final ingredient is that tendency to focus more on a negative program than any positive task. The “us and them” mentality flourishes in this planned environment.  At its worst it created the virulent anti-Semitism that Hayek was viewing; but its far less virulent exhibition is the class warfare mentality we currently witness.

Perhaps this explains how some of the intellectually vacuous have risen into national leadership positions. But Hayek’s analysis should be fair warning to the many intelligent who think “they” can plan a better economy or a better “health care system” than the market.  The eventual need for raw power to enforce the common ends that such planning requires will betray the very democratic principles many planners hold so dear.

When our economy hit the wall in the last quarter of 2008 we, like so many businesses, reacted normally; we reduced the number of payroll employees and hours as much as possible,  eliminated some of the days we used the cleaning service, had other services requote to reduce prices, eliminated vehicles, and such marginally productive outlays such as freebie pens and calendars to hand out to customers.

After cutting the most obvious costs, the next step was to examine prices and find points where we could expand margins. In a competitive world where everyone is desperate to make a sale  and some competitors even sell below cost in order to generate cash to pay off loans, this is not easy, but if you look carefully and segment your market wisely you will find opportunities.

There are some expenses you find difficulty cutting. When business was good you felt comfortable signing a 6 year lease for 8 trucks, but now with reduced volume you only need 6 trucks and the truck leasing company will not let you out of the lease.  But in two years those leases come due and you may re-examine your leases- either staggering them or reducing them.

You start to realize how much time and money it takes to collect a four hundred dollar receivable that is over ninety days old and you eliminate slow paying accounts, and  you eliminate bounced checks with check verification systems. You get smarter, able to transfer wasted time from blood sucking, slow paying business to solid customers who respect commitments and the terms of the credit agreement.

You shed the marginal mentality of taking business that in isolation covers its marginal cost but not its share of fixed cost. If you accumulate too many of these orders you will lose money, You learn to just say no.

And when you buy 8,000 gallons of diesel a month you will become very conscience of how you buy your fuel and what the expense is for delivering small orders. Delivery charges and fuel surcharges become acceptable.

When the price of your products declines you rapidly realize the other side of the inventory profits you booked during  the price increases a year before.  When you have to sell your product for less than you paid for it you cannot  lay off enough workers or cut enough expenses to avoid losing money.

Everybody in your business faced the same realities and made the same adjustments.  The biggest difference was often the amount of debt incurred at the time business headed south.  Those with too much debt are either closed or sold.  I was raised in a culture to avoid debt and it served us well in this economy.

Eventually the prices stop dropping and you have cut enough expenses that the bleeding stops and you become profitable on a much smaller volume. Afterwards you wish you had made the cuts faster and earlier, but you did not realize how long the bad economy would last. But just as my dad spoke about the Great Depression for the rest of his life, we will remember this economy for a long time. We will be reluctant to add expenses, rely on rosy forecasts, and commit to long term contracts without protection clauses.  The cost cutting ( those truck leases renew in a few years) will continue even after we are profitable.  We will continue to simplify, consolidate, and reduce paper work.  We will not return to rationalizing crappy business and bad habits.

I reminisce on the last two years for two reasons: it may explain why a recovery from such a severe economic blow will be slow, and this experience and reaction stands in distinct contrast to much of the behavior in the government sector.   We in private business are unable to ignore reality and survive; those in government, with the power to tax and print money, can ignore reality for a considerable period of time…….  but not forever.

I cannot avoid coming to this conclusion- that there are too many great men in the world; there are too many legislators, organizers, institutors of society, conductors of the people, fathers of nations, etc., etc.  Too many persons place themselves above mankind, to rule and patronize it; too many people make a trade of looking after it.

I am acting with regard to it in the spirit that animated a celebrated traveler. He found himself in the midst of a savage tribe.  A child had just been born, and a crowd of soothsayers, magicians, and quacks were around it, armed with rings, hooks, and bandages.  One said- “This child will never smell the perfume of a calumet, unless I stretch his nostrils.” Another said- “He will be without the sense of hearing, unless I draw his ears down to his shoulders.” A third said- “He will never see the light of the sun, unless I give his eyes an oblique direction.”  A fourth said- “He will never be upright, unless I bend his legs.”  A fifth said- “He will not be able to think, unless I press his brain.”  “stop!” said the traveler.  “Whatever God does, is well done; do not pretend to know more than He; and as He has given organs to this frail creature, allow those organs to develop themselves, to strengthen themselves by exercise, use, experience, and liberty.”

God has implanted in mankind also all that is necessary to enable it to accomplish its destinies. There is a providential social physiology, as well as a providential human physiology.  The social organs are constituted so as to enable them to develop harmoniously in the grand air of liberty.  Away, then, with quacks and organizers! Away with their  rings, and their chains, and their hooks and their pincers! Away with their artificial methods! Away with their social laboratories, their governmental whims, their centralization, their tariffs, their universities, their State religions, their inflationary or monopolizing banks, their limitations, their restrictions, their moralizations, and their equalization by taxation! And now, after having vainly inflicted upon the social body so many systems, let them end where they ought to have begun- reject all systems and try liberty- which is an act of faith in God and His work.”

From the concluding page of Frederic Bastiat’s The Law, first published in 1850.

One of the early signs of the pending economic collapse in 2007 and 2008 was a sharp drop in truck rental rates. As a result of the severe economic downturn the domestic truck fleet shrunk about 9%.  New trucking regulations reduced the number of hours the drivers are allowed to drive and increased the requirements to become a driver.  The result of fewer trucks with fewer drivers driving fewer hours is a squeeze on available freight hauling capability to serve an economy that is starting to show signs of a recovery.

This will drive up freight costs even before you factor in the inflation effects of higher fuel costs. And freight costs drive up the costs of almost everything, from food to steel.

And while we now want to blame the price of fuel on the unrest in the middle east, we cannot help but notice that steel prices have risen almost 25% in the last few months.  Silver, gold, copper, ferrous scrap and a host of other industrial commodities have risen sharply, even before the trigger actions in Tunisia and Egypt.

Part of this is due to the demands of a recovering economy,  but much of this is likely due to the  weakness of the dollar.   The official inflation rate means little to those who estimated a construction job in September and now must buy steel at February prices.  Without escalation clauses, which few small contractors are able to negotiate, these higher steel prices come out of their profits.

The government can provide any program or benefit. It must only decide how to pay for it:  higher taxes, higher debt, or inflation.

Under this administration we are subject to all three.

Looking back for the last few years it is stunning to see how the Democrats squandered their power from the 2006-2008 victories.  They misread their mandate and governed poorly; passing unpopular legislation using the most partisan means.  The damage is far beyond the loss of the House.

The Republicans, dead in the water just a few years ago, swept state positions. These are  the breeding grounds of the party’s future leaders and they are quickly rising to prominence.  Chris Christie of New Jersey, Mitch Daniels of Indiana, Rick Scott of Florida, and Scott Walker of Wisconsin are showing the kind of leadership the public is craving. They are refusing to kick the problems to the next election, and they hold their own party accountable.

Freshman Congressmen Alan West, Marco Rubio, and others show a depth of understanding and a commitment to governing principles long forgotten.  Minnesota Governor Tim Pawlenty and South Carolina Governor Nikki Haley show great promise.

These rising starts are eclipsing the older icons such as Newt Gingrich and Mitt Romney.

The Republicans are building an incredibly strong bench of new leaders on the back of those largely ignored state level victories.  While there are other names that will surely grow from those victories, note the  names I omitted.  This is an incredibly strong bench without Sarah Palin, and I omitted Michelle Bachman.  Palin is the face of the Republicans that the opposition would prefer.  To them she lacks intellectual heft and experience.  To me Nancy Pelosi makes Sarah Palin look like a Rhodes Scholar.

Michelle Bachman is a great voice, but she is also associated with the perception of Tea Party simplicity (a misperception in my opinion).

With or without Palin or Bachman, the Republican are rapidly building leaders with intelligence, depth and experience.  The Democrats, by comparison seem to have nobody in the wings.  Looking past Obama and the Clintons, few capable leaders  seem to be emerging.  This is an incredible reversal in just two years.  Their defeat in 2010 has deep long term implications for their party, depending on how the Republicans use their power this time.