Addressing Liberty: Hayek, Gibraltar and The Road to Serfdom

Lecturer in Management and Economic History at the School, Chris Grocott, outlines a little known escapade of a largely known economist    

Friedrich Hayek’s ideas on how economies should be organised, or on how state power should be restrained, have affected us all. Daniel Stedman Jones’s Masters of the Universe selected Hayek, alongside Milton Friedman, as a main influence on the government policies of Ronald Reagan and Margaret Thatcher while Nicholas Wapshott, Thatcher’s biographer, characterised the rift between followers of Hayek and John Maynard Keynes as one which ‘defined modern economics’. Hayek was awarded the Nobel Prize for Economics in 1972 and further awards followed: in 1984 he received the UK’s Order of Merit (one of the highest civilian honours the UK can bestow), whilst in 1991 he received the Presidential Medal of Freedom in the United States (likewise, a rare and highly prized honour). Such acclaim, while widely known, was a long time in coming.

In an article recently published in Economy and Society, I examine events which occurred almost half a century before Hayek died. In 1944, he was invited by the British Colonial Office to write a report on how, after the war, the economy of Gibraltar should be organised. What was to become his most famous work – The Road to Serfdom – had just been finished in March 1944. There he famously argued that state economic intervention often led to the sort of totalitarianism experienced in Nazi Germany. It wasn’t that advocacy of state planning was indistinguishable from totalitarianism but that the outcome of excessive economic intervention on the part of the state was an oppressive situation. Hayek was due to go to the United States to promote his book, and its views, in early 1945. A six week paid trip to Gibraltar in August, followed by a period of writing up his findings, therefore fit his plans very nicely.

Having recently outlined the dire consequences of the Weimar Republic’s control of over half of Germany’s economic activities, Hayek’s discovery that, in 1940’s Gibraltar, the state generated over fifty per cent of the jobs available cannot have comforted him. Faced with a population of around 20,000 Gibraltarians and a garrison of 10,000 troops to be accommodated in the space of two and half square miles, the cost of living, with particular reference to rents, was also very high. So greatly had rents increased in the inter-war period that 3,000 or so Gibraltarians lived across the frontier in neighbouring Spain, where rents were cheaper. The Gibraltar government, in an attempt to prevent a further exodus, capped rents via a Rent Restriction Ordinance (an ordinance then being Gibraltar’s equivalent of a UK government Act). Massive state economic presence was therefore compounded by significant political economic rulings: were these not precisely the green shoots of totalitarianism The Road to Serfdom had earlier identified?

There were several strands to Hayek’s report on the Gibraltar economy, which aimed at reversing its route towards serfdom. Instead of rent restriction making the cost of living cheaper for Gibraltarians, Hayek argued that it encouraged people to house themselves in Gibraltar, albeit at considerable – but just about affordable – expense, when they could find cheaper accommodations across the frontier in the neighbouring Spanish city of La Línea. Hayek’s free market solution to this problem was to lift rent restriction and allow rental prices to rise. In such circumstances, the majority of Gibraltar’s population would be forced to relocate across the frontier where they could enjoy cheaper rents; undertake market gardening in the larger homes to be found in La Línea; and migrate more easily into the Andalucía region should work dry-up in Gibraltar. Seen as a ‘Greater Gibraltar’, the economy of the region would be re-imagined with Gibraltar as an industrial centre and La Línea as its suburb. For landlords, increased rents would mean happier bank balances and, so Hayek supposed, additional funds for renovating Gibraltar’s dilapidated housing stock.

Hayek rarely undertook work for governments and felt that those who did, such as his one-time colleague at the London School of Economics (LSE) Lionel Robbins, were tarnished by the experience. This makes his Gibraltar report particularly interesting. The report is also interesting in its own right to the extent that it stands testament to the Nobel Laureate in the making’s political naivety. His determination to create a free market in the Gibraltar housing sector would have resulted in thousands of Gibraltarians being force to relocate into a Spain which was, until 1975, governed under the dictatorship of General Franco. Dictatorship, as we came to know from Hayek’s later support of Chile’s General Pinochet, wasn’t necessarily incompatible with Hayek’s worldview. Nevertheless, the Franco government’s economic strategy was explicitly autarkic: he understood Adam Smith’s political economy to be a wheeze via which Britain had secured informal imperial power in Spain. And so, by contrast, Franco propelled Spain into a disastrous policy of self-sufficiency and economic isolation. Rather than delivering Gibraltarians into the vision of liberty which Hayek outlined in The Road to Serfdom his policies, had they been implemented, would have seen Gibraltarians living in exactly the conditions which Hayek had bemoaned as being totalitarian.

My paper tells the story of the contrast between Hayek’s philosophy, as outlined in The Road to Serfdom, and his practical political economic recommendations, as evidenced in his Gibraltar report. There is more to be said on the matter, not least of all the negative reaction it received, both from the Colonial Office and from the government in Gibraltar. It seems odd that Hayek was not savvy enough to recognise that the colonial authorities in Gibraltar would find the idea of removing the local population into a foreign country unacceptable. It also seems odd that Hayek should have proposed such radical free-market solutions to Gibraltar’s problems, given the degree to which both the government of Gibraltar and the Colonial Office were committed to economic planning. That Hayek’s proposals were so squarely dismissed may well have played a role in his decision to move to the United States in 1950 where his Road to Serfdom book tour, thankfully for him, met with many receptive audiences. Were it not for that tour, and the Cold War politics it spoke to, perhaps Hayek would have been as little known as his report.