Seventy-five years ago, there occurred an important event in the post–World War II revival of free-market liberal ideas. Over the first ten days of April 1947, 39 people from Europe and the United States met in a hotel in Switzerland at a mountain place known as Mont Pelerin. They came together to discuss the future of economic, social, and political liberty in the face of the rise and growing influence of collectivist ideas, especially in the various forms of government central planning.
It was less than two years since the war had ended in Europe, leaving tens of millions of dead, wounded, and starving. Many parts of the continent were in ruins, including some of central Europe’s most important and architecturally beautiful cities. Germany and Austria were under the four-power occupation of the United States, Great Britain, France, and the Soviet Union. The Cold War was already dividing Europe, with communist governments being imposed in eastern Europe wherever Stalin’s Soviet armies had advanced in the conflict to defeat Nazi Germany.
In the Western European democracies, including Great Britain and France, the political presumptions and government policies all implied that the postwar world would be one of socialist planning, heavy regulation of whatever remained of private enterprise, and the redistributive welfare state. In the United States, by late 1946 practically all the wartime price and production controls over the American economy had been lifted. But the political arena was full of the increasingly triumphant Keynesian ideas of fiscal and monetary “activism.” At the University of Chicago, a prominent political science professor, Charles E. Marriam, insisted that, “Planning is coming. Of this there can be no doubt. The only question is whether it will be democratic planning of a free society or totalitarian in character … whether Fascist or Communist.”
Two world wars undermined classical liberalism
The classical-liberal idea and ideal of strictly limited government with impartial rule of law, accompanied by clearly recognized and respected individual rights to life, liberty, and honestly acquired private property in an arena of peaceful and voluntary association and exchange, had been drastically weakened with the beginning of the First World War in the summer of 1914. Centralized social control, forms of detailed economic planning, and reduced personal freedom in the name of the war effort among all the belligerent nations, including the United States after America’s entry into the war in April 1917, undermined the spirit and practice of individual liberty.
This had only worsened in the years between the two world wars, with communism in Soviet Russia, fascism in Mussolini’s Italy, National Socialism (Nazism) in Hitler’s Germany, along with FDR’s New Deal experiments in America with fascist-like planning and deficit-spending-funded “make-work” projects. The Second World War had only reinforced the trends in the collectivist direction. Total government planning accompanied total war.
A. Hayek and the first Mont Pelerin Society meeting
However, there continued to be a handful of determined and articulate voices for freedom and the free-enterprise system in Europe and the United States. One of the most successful was Austrian economist Friedrich A. Hayek, who was a professor at the London School of Economics and had attained international recognition with The Road to Serfdom (1944). It was written as a warning that economic planning, regardless of the well-intentioned motives of its proponents, invariably carried with it the danger of the loss of personal and social freedom due to the fact that, especially, comprehensive central planning required all of human life to be made subservient to “the Plan” in the attempt to bring “the Plan” to a successful conclusion. Thus, even a “democratic” socialism could and would lead society down a road to serfdom that ends with some form of a totalitarian state.
Having developed a wide network of like-minded friends and acquaintances in Europe and America, both before and after the publication of The Road to Serfdom, Hayek went about arranging a conference with some of them. The culmination of his efforts was this first meeting of what became the Mont Pelerin Society in April 1947.
To mark the conference’s 75th anniversary, the Hoover Institution has published Mont Pelerin, 1947: Transcripts of the Founding Meeting of the Mont Pelerin Society. The volume is edited by Bruce Caldwell, a professor at Duke University and one of the preeminent Hayek scholars, who serves as the editor of the multi-volume Collected Works of F. A. Hayek.
Among the 39 participants at this first Mont Pelerin Society meeting were some of the leading figures at the time in the cause for personal and economic freedom. They included: F. A. Hayek, Ludwig von Mises, Wilhelm Röpke, William E. Rappard, Milton Friedman, George Stigler, Fritz Machlup, Frank H. Knight, Frank Graham, Lionel Robbins, Aaron Director, John Jewkes, John Davenport, Henry Hazlitt, Leonard E. Read, F. A. “Baldy” Harper, V. Orval Watts, Felix Morley, Michael Polanyi, Karl Popper, and Bertrand de Jouvenel.
All opposed socialism, but most were not for laissez-faire
Virtually all the attendees were deeply concerned about a postwar world in which government planning and political control would threaten to extinguish the autonomy and dignity of the individual. They also all shared an agreement about the vital importance of a decentralized and competitive price system for guiding the marketplace interactions of supply and demand. In their eyes, this made practically all of them intellectual heirs to the older classical liberalism of the nineteenth and early twentieth centuries. Most, however, were not proponents of that earlier, more laissez-faire classical liberalism. I am almost hesitant to express it in the following way, since it sounds so rhetorically exaggerated, but at one level the discussions, debates, and disagreements throughout many of the conference’s 19 sessions over those ten days might easily be read as: Ludwig von Mises versus all the rest.
What unified a sizeable majority of the participants, and which clearly emerged from the presentations and discussions at these sessions, was a general rejection of laissez-faire liberalism, the classical liberalism of, say, Frédéric Bastiat or Herbert Spencer or … Ludwig von Mises. In their joint memoirs, Two Lucky People (1998), Milton and Rose Friedman, recount that at one of the sessions, Mises “stood up, announced to the assembly, ‘You’re all a bunch of socialists,’ and stomped out of the room.” It is clearly told by the Friedmans to demonstrate Mises’s presumed dogmatic intransigence and extreme presumption of what free-market liberalism can or should mean.
Except for a few of the other American attendees, such as Leonard E. Read, Henry Hazlitt, or Baldy Harper, almost nary-a-one of the others, including Hayek, would have shared the view that liberalism meant, basically, laissez-faire — that is, a political and economic system under which government’s role would not extend much farther than protection of life, liberty, private property, and freedom of exchange.
Mises and the meaning of laissez-faire
It is true that in the detail of the law, the understanding and defining of such liberty are sometimes difficult matters of institutional implementation. Nonetheless, the paramount purpose of any organized social and political liberal order should be the recognition and protection of each individual’s right to freely live as he peacefully chooses, as long as he does not violate or infringe upon the equal rights of any other person. The social and psychological attitude of a free man in a free society was explained by Ludwig von Mises in his 1927 book on Liberalism:
A free man must be able to endure it when his fellow men act and live otherwise than he considers proper. He must free himself from the habit, just as soon as something does not please him, of calling for the police.
If one take Mises’s dictum seriously, it means that an individual may read, watch, consume, and act upon any desire he has or belief he holds, without molestation by either a fellow citizen or by the government, as long as his conduct is peaceful and honest. He may enter into any association and exchange, based upon mutually agreed-upon terms with any and all others, as long as they are not based on fraud or force. And he may keep all that he has peacefully and honestly earned and spend it any way he considers beneficial to himself, without being taxed or regulated to fund activities or redistributions to others for which he does not give his voluntary consent. It is the philosophy on the basis of which Leonard E. Read once entitled one of his books, Anything That’s Peaceful (1964).
The competitive order and government regulation
At the first and second sessions of the meeting, Hayek distinguished between “free enterprise” and a “competitive order.” While free enterprise is essential to a free society, he argued, it was only truly workable in an institutionally competitive system. While emphasizing that “monopoly” and other “imperfections” were often due to various types of government intervention, he argued government may also have to “intervene” to set rules concerning the size of corporate enterprises and the content of “freedom of contract.” Also, there was a “considerable number of services which are needed” in modern society that only government could provide.
This was followed by a presentation by Aaron Director, who was Milton Friedman’s brother-in-law. “We must repair the damage caused by 19th-century liberalism in failing to define the scope of voluntary associations.” This did not simply mean determining more precisely the meaning of, say, a coerced act. “The excessive size” of corporations had to be regulated by government, with limits set on “the scope of corporate activity.”
Also, “A private enterprise cannot provide the appropriate amount of investment in human beings,” Director said. Government, clearly, needed to “invest” in educating and training people for employment opportunities. If this required significant increases in taxation, even if it reduced growth in output due to “the impairment of incentives,” well, Director said, “We should be prepared to pay the price.”
This was followed by an insightful presentation by Walter Eucken, a German market-oriented economist who remained in Germany during the war. He had forthrightly refused to collaborate with the Nazi regime. Eucken was one of those whose “clandestine” preservation of a liberal-market outlook served as the theoretical and policy basis for the German “economic miracle” in the years after the war.
Eucken explained the disaster created by government central planning under the Nazi regime and how it was being continued by the Allied powers in their occupation policies. Nonetheless, he insisted that while state intervention and control are always a danger to liberty and a functioning economy, “In the competitive order, the state is very interested in the order of the market, but the economic process is free.” In other words, markets and prices function, but within the regulatory and fiscal parameters that a right-thinking “liberal” government would consider necessary.
Mises under attack for opposing business regulation
The next session, on the theme of monopoly, became extremely heated. Ludwig von Mises’s name must have come up in untranscribed comments by some of the participants, because Mises responded by insisting that if there are concerns about monopolies in society, its origin and persistence arises from government policies “fostering monopoly.” Frank Graham, a well-known economist who taught at Princeton University, replied that “Professor Mises is 100 percent wrong” on the monopoly and related questions. “I think if we carry out the [laissez-faire] suggestions of Professor Mises we shall be in the jungle. We are here to find the middle road between the jungle [of laissez-faire] and the jail [of a fully planned society].” The government had to have “the active role” of regulating the structure of markets, under the presumption that if companies are too big, they can “coerce” people in society.
This was followed by comments by Michael Polanyi, a prominent philosopher of science, who had strongly criticized Marxist and Soviet ideology in his various writings. He interjected, “Certain collective needs are satisfied by the state, and individuals have to pay. Are there any principles of the market by which principles of taxation are to be determined?”
Mises then said:
Should society be based on public ownership, or private? There is nothing between them which is possible for a permanent society. I am in favor of private enterprise. If consumers buy something, so that a firm increases in size, I don’t want someone to come along and prevent them from enjoying the results from this…. There is only one privilege possessed by the corporation — the right of the creditors is limited. Corporations are at the root of a great deal of progress, so why should we be against them?… Taxes: In a capitalist country where state expenditures are low, it doesn’t matter very much about the principles of taxation.
Aaron Director stated, “Professor Mises seems to think that past [laissez-faire] rules are good rules. I should like to know, ‘How far back?'”
Mises at another point in this session replies, “If it is true as has been suggested, that I am defending the [laissez-faire] orthodoxy of the 18th century, then it is true that I am defending it against the [Mercantilist-regulatory] orthodoxy of the 17th century.”
Disagreements over a European federation
Two sessions were devoted to the problems and possibilities of a European federation to remove economic tensions and minimize the likelihood of wars, especially in the face of Soviet expansionism in eastern Europe. There was little agreement, other than on the general idea of reducing trade barriers. Were member countries to retain their individual sovereignties? If national sovereignty was to be reduced, then, by how much? And what method would exist for federation-wide decision-making? French social philosopher Bertrand de Jouvenel expressed his “distrusted [of] political power.”
Hayek said that a “Federation may be a practical solution in a liberal society, but once the liberal society has disappeared, I don’t see how the thing is practicable at all unless as a movement towards liberalism again.” Reinforcing an aspect of Hayek’s remarks, Mises said that there was a, “Tendency in our age to overestimate [the] importance of offices and institutions, and to underestimate [the] importance of ideologies. If many people believe that wars can improve their position, an office in Geneva will not prevent wars.” In other words, a successful revival of liberal ideas was essential to removing barriers to trade and preventing wars.
Calls for government monetary and fiscal policies
Divisions existed on monetary and fiscal policy issues, as well. George Stigler began the discussion by saying that while the gold standard had been a tool to “combat major inflation” in their current postwar circumstances, “our problem is much more one of deflation, on which the gold standard has very little to say. Should we all agree that the first step should be to bring all money-making institutions under the control of the state?”
The debate became one of what rules should be followed by governments and their central banks in controlling, planning, and manipulating their monetary systems. Frank Graham even spoke of an “international monetary authority [that] would be able to issue [a] currency money. This system would seem to be an energizer of the economy, as well as a stabilizer.” Milton Friedman spoke in favor of what is now his famous advocacy of monetary “rules” for controlling the money supply and government spending, rather than Keynesian-style discretion.
Wage policy and redistributive taxation
Concerning wage policies, the participants were divided between those who were convinced that trade union power was here to stay, with its non-market-based determination of wages kept in check
by government intervention, and those interested in finding some way back to restore and maintain market-based wage flexibility to ensure full employment.
On taxation and income distribution, Milton Friedman said that “no democratic society is going to tolerate people starving to death, if there is food with which to feed them.” Progressive income taxation had been found as one way to raise the needed government revenues, which helped reduce too great an income inequality.
Friedman then proposed his now equally famous “negative” income tax, that is, the poorer a person or a household, the greater the redistributive share someone would receive from the government. When asked who would decide how much of a “tolerable” minimum, Friedman answered, “The elected representatives of the people would decide.” There would be “costs” born by all in society in the form of “some fall in production.” When further asked if he was offering this as a policy proposal out of political expediency, Friedman replied, “No, merely as a policy which is in accordance with the liberal society.”
Mises wondered that if this was to be taken as a premise of a “liberal” policy agenda, then why limit it to matters of wealth and poverty within richer, Western countries like the United States? Could not the citizens in far poorer countries around the world demand that global poverty also be alleviated through an international redistribution of income from the West to the rest? How open were the advocates of this policy to having it extended to the whole world? And on what premise could the richer countries refuse such an international welfare statism once the redistributive principle had been accepted?
Guaranteed incomes for special groups
When it came to farming and agricultural policy, several discussants strongly felt that government needed to offer and guarantee certain financial “floors” to the farming community due to the peculiarities of their corner of the market. Wilhelm Röpke added that government should also plan and determine the right size and mix of “town and country.” It would be desirable “to have [farming] units smaller than would otherwise be rational for normal business standards…. [The] liberal wants to do justice to the ‘social way of life’ of the farmer, without it becoming too ‘reactionary’ of a policy.” Indeed, Röpke said that government should make “the farmer largely independent of money income,” adding that, “I believe profoundly in peasant agriculture as an end,” clearly deserving of special government interventionist treatment.
Loren Miller, one of the American free-market think-tank participants responded to Röpke by asking, “How do you determine tolerable standards, and minimum standards?… And why shouldn’t everyone be insured against the vicissitudes of the market, if the farmers can be insured? What would be the sum of all the interventions which had been suggested during the conference? Wouldn’t that be a planned economy?”
Frank Graham’s response was to call Miller’s view “simplistic.” Did we really want to make liberalism our “unique aim?” “Would we want freedom above everything, if it meant freedom for us all to be miserable?” asked Graham. “Freedom isn’t the only value on which we lay importance. We are not ready to concede that all who are sub-marginal, on a free basis, should be allowed to die.”
Economist Karl Brandt insisted that it is “not the essence of a liberal economy to construct a 100 percent logical machine purely because the Nazis had a 100 percent logical machine.” In other words, a mixing of free-market and interventionist policies was desirable and necessary. In the midst of all this, Lionel Robbins tried to calm the contentious waters by saying, “There is no need for the liberal economists to turn sulky, just because they don’t agree on the aims of government.”
Given the recent events in Ukraine, it is perhaps interesting to note that at one of the last sessions of the meeting, philosopher of science Karl Popper said in reference to the emerging Cold War tensions in Europe, “I’m quite sure that Russia understands only the language of threats.” Lionel Robbins added, “You only get further with the Russians if you treat them as though they are not human beings.” Michael Polanyi concurred by saying, “Professor Robbins has said what I was going to say, but he’s said it very much better.”
Wanting liberalism, but not Mises’s laissez-faire
Reading over what I have written, I fear that I have not given a sufficient appreciation of how much really all the participants rejected socialist central planning and spoke insistently on the core essentiality of a functioning and competitive market and price system. Or how very much they expressed their deep concern that with socialism or any widely implemented collectivist system, the hard-won liberal principles and practices of personal freedom, civil liberties, impartial rule of law, dignity for the unique person, and the vitality of an unplanned social order would be threatened and then lost.
But it is nonetheless the case that for the large majority of the attendees at the first Mont Pelerin Society meeting, the task was to find a way to make a relatively free and competitive market economy compatible with degrees and forms of government regulation and redistribution. In a real sense, the whole meeting was about if it was possible to introduce a limited and restrained interventionist state within a market economy without seriously undermining the ability of the market to effectively operate.
There was no presumption that the entire trend toward political paternalism had been a mistake to be reversed and removed. As Karl Popper inserted in a discussion at one of the other sessions devoted to the relationship between liberalism and religion, the “Economic liberalism of Mises is I think perhaps not quite enough.”
If we were to think of the debates as an ideological playing field, the goalpost at one end would be the totalitarian planned society. But the goalpost at the other end was not the laissez-faire economy with a strictly limited minimalist state, as Mises advocated. No, instead, the goalpost was set at a market economy with a minimal or moderate interventionist welfare state interwoven into it.
In this sense, it did become Ludwig von Mises versus all the rest, not because any of the other attendees desired or endorsed the socialist centrally planned society. It was because most of them wanted the “liberal” goalpost closer to the center of the ideological playing field rather than the laissez-faire goalpost proposed by that intransigent “old liberal,” Ludwig von Mises, who had the audacity to point out that their desired good society was one that accepted many of the anti-liberal premises of the socialist critics of the market economy.
The transcripts of the first meeting of the Mont Pelerin Society provide an extremely valuable and useful record for understanding the beginnings of the post–World War II movement to reestablish a meaningful market liberalism. But they also show why the laissez-faire variation on the liberal theme never really had a chance, because except for a small handful like Ludwig von Mises, it had few champions, even in the market-oriented liberal camp.
First published at Future of Freedom Foundation.