Special Report

Detroit: Hayek’s Nightmare

The "fatal conceit" of a new crew of central planners.

By 4.5.05

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F. A. Hayek, in his book The Fatal Conceit, makes the basic argument for capitalism and free market economics, and the case against the "fatal conceit" of central planners in socialism:

"To understand our civilization, one must appreciate that the extended order resulted not from human design or intention but spontaneously; it arose from unintentionally conforming to certain traditional and largely moral practices, many of which men tend to dislike, whose significance they usually fail to understand, whose validity they cannot prove, and which have nonetheless fairly rapidly spread the means of an evolutionary selection -- the comparative increase of population and wealth -- of those groups that happened to follow them."

Said another way, the unruliness and mayhem of West Germany's spontaneous economic order outperformed the centrally designed and less changeable economy of East Germany. Or as Hayek put it, "Order generated without design can far outstrip plans men consciously contrive."

The problem with giving a central authority the power to direct the operation of an economy, explained Hayek, is that the economic order is "so extended as to transcend the comprehension and possible guidance of any single mind," or any single committee.

In contrast, capitalism works because "the extended order arises out of a competitive process in which success decides, not the approval of a great mind, a committee, or a God, or conformity with some understood principle of individual merit." The basic economic process in capitalism, "natural, spontaneous, and self-ordering," runs itself by automatically collecting, organizing, and acting upon "a greater number of particular facts than any one mind can perceive or even conceive."

The validity of Hayek's analysis, on a global scale, has been demonstrated by the collapse of an endless string of centrally planned "utopias" -- from Cuba to the economic failures of Eastern Europe, from Tanzania to Nicaragua.

In each case, the "fatal conceit" was that central planning could create something more efficient than the self-ordering process of a free economy, something more orderly, more equal -- and a system where intellectuals and government planners would have a greater hand in calling the shots in order to keep things shipshape.

Hayek stated it uncompromisingly: "There can be no deliberately planned substitutes for such a self-ordering process to the unknown," i.e., no satisfactory substitute for capitalism. "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. "

Worldwide, Hayek's message is one that is no longer disregarded. Except, it seems, in Detroit, where a new welfare scheme for a non-spontaneous "Africa Town" is on the front burner.

"THE IDEA IS TO BUILD an 'AfricaTown,' similar to Little Italy and Chinatown," explained Charles Oliver in a recent issue of Reason magazine, referring to a vote by Detroit City Council to spend $30 million a year in public money to develop a blacks-only, race-based district of entrepreneurship in downtown Detroit.

The concept of this black version of Little Italy originated in a $112,000 report commissioned by the council: "A Powernomics Economic Development Plan for Detroit's Under-Served Majority Population." The problem is that Detroit's population is poor, shrinking, and overwhelmingly black. By official count, Detroit is 83 percent black and 26 percent of the city's populace is living below the poverty line, more than double the national rate.

As for blame, the "Powernomics" report contends that the city's "under-served majority population" is being passed up economically by a mixed bag of nonblack newcomers. More specifically, the complaint is that entrepreneurial immigrants from Latin America and the Middle East are opening up too many stores and selling too much of everything to blacks. In doing so, it's alleged that these money-grubbing greenhorns are stealing jobs and business opportunities from blacks.

The solution, according to the politicians on council, is more welfare and more central planning, the creation of a black Little Italy, dubbed "AfricaTown," funded in large part by taxpayers' dollars and made up of black-owned businesses catering to a black clientele. "By a 7-2 vote," reported Oliver, "the council has decreed that only black businessmen and investors can qualify for the money."

The analogy to Little Italy, of course, doesn't work. There's nothing about the proposed development of "AfricaTown" that bears the least resemblance to how Little Italy happened.

The Italian immigrants first settled in the Lower East Side of Manhattan in the 1850s, eight decades before the U.S. even had a minimum-wage law (i.e., 25 cents an hour in 1938) and long before the federal government got in the business of safety nets. The Italians, in short, came to Mulberry Street for an opportunity, not a handout.

A 1901 study by Dr. Kate Holladay Claghorn, "The Foreign Immigrant in New York," describes the beginning days of Little Italy: "The little handful of Italians that made up the immigration from Italy in the early decades were mainly a vagabond but harmless class of organ grinders, ragpickers, bear laders and the like."

Reported Claghorn: "There was little pauperism among these people, if we may judge from the relative infrequency of Italian cases appearing in the reports of private charitable societies. They were a class of people who worked and paid their rent. They were strict in keeping their agreements. They are considered very desirable tenants."

The "handful," in short order, grew to "a great army of barbers, bootblacks, fruiterers and shoemakers," along with "about 400 persons employed in macaroni factories" and "many Italian watchmakers, bakers, confectioners, keepers of cafes and ice cream saloons, wine dealers, grocers, dry-goods dealers, and many in other businesses."

WHAT WORKED WAS hard work. Again, as Claghorn recounted: "The Italian fruit peddler bestows a considerable amount of his inherited racial art sense in 'composing' his wares to form an attractive picture; the Italian barber pays considerable attention to the attractiveness of his place; the Italian bootblack is not the little ragged urchin of yesterday with battered box and a shrill velocity of motion, but a well-kept looking individual anywhere from 15 to 30 years of age, with a regularly established place of business ranging from the throne-like arm chair and umbrella to the regular shop as well-kept as the barber's."

Across the board, reported Claghorn, rich or poor in Little Italy, "all classes are highly industrious, thrifty, and saving" -- the exact formula for upward mobility and business expansion. "The tradespeople prosper rapidly," she reported. "The Italian barber enlarges his shop, perhaps finally sells out and becomes a banker; the fruit peddler buys a little shop, then a bigger one and may finally become a wealthy importer; and in like manner with other shopkeepers. The more ambitious and successful move to the suburbs and become property owners in Long Island City, Flushing, Corona, Astoria, etc."

That's how Italians got rich. It's how America got rich. Or as historian John Steele Gordon explained it: "If America is famous for its get-up-and-go, it's because we have ancestors who got up and came."

Little Italy, in short, was successful because of the spontaneity, because good spaghetti and meat balls attracted throngs of customers, not because someone got a handout from city council.

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About the Author
Ralph R. Reiland is the B. Kenneth Simon professor of free enterprise and an associate professor of economics at Robert Morris University in Pittsburgh.