Written in 1944 by Friedrich Hayek, the central argument is that comprehensive socialist planning (of the kind that replaces, instead of supplements competition), is incompatible with classical liberalism and inevitably leads to the oppression of the individual and the establishment of a totalitarian state.
Classical liberalism was responsible for the rise of Western Civilization to prominence; where it was abandoned, totalitarianism took its place. The heart of classical liberalism is Individualism: a man's own views and tastes are supreme in his own sphere and that he should develop his own individual gifts and bents at his discretion. Classical liberalism transformed a of society from a rigid hierarchical system to one where men could attempt to shape their own life. Where classical liberalism took root, so too did the rise of science, commerce and the development of complex economies.
The material improvements to Western society enabled its members to take notice of long-existing imperfections in their society. Their demand to resolve them conflicted with the slow development of liberalism and resulted in a movement to completely abandon the existing liberal regime in favor of a socialist one. Where the question under the liberal regime was how best to make use of spontaneous forces in an individualist society, the question under a socialist one was how best to collectively and consciously direct all social forces to deliberately chosen goals.
Though socialist ideas did not originate in Germany, they were perfected there and then spread to the rest of Western Civilization.
Socialism was openly authoritarian at its founding: Socialism was a reaction against the liberalism of the French revolution. To the French writers who laid its foundations, socialism attempted to terminate the revolution by a deliberately reorganizing society along hierarchical lines and by imposing a coercive spiritual power. Freedom, to them, was the root-evil of nineteenth century society.
Socialism adopts only the name of freedom; it redefines the rest. In classical liberalism, freedom meant freedom from coercion, from the arbitrary power of other men and a release from the ties which left the individual no choice but to obey the orders from a superior to which he was attached. Under socialism, freedom meant freedom from necessity, or more specifically, freedom from the fact that some people are more needy than others. Under the socialist definition, freedom was another name for eliminating the disparities of power or wealth among people; it was nothing more than a demand for equal distribution of wealth.
Proponents of socialism as a form of liberity have observed it actually conflict with it. Max Eastman, Lenin's old friend: "instead of being better, Stalinism is worse than fascism, more ruthless, barbarous, unjust, immoral, anti-democratic, unredeemed by any hope or scruple." W. H. Chaimerlin, American correspondent in Russia: "socialism is certain to prove, in the beginning at least, the road NOT to freedom, but to dictatorship and counter-dictatorships, to civil war of the fiercest kind. Socialism acheived and maintained by democratic means seems definitely to belong to the world of utopias." F.A. Voit: "Marxism has led to Fascism and National Socialism, because, in all essentials, it is Fascism and National Socialism." Walter Lippmann, "the generation to which we belong is now learning from experience what happens when men retreat from freedom to a coercive organization of their affairs. Though they promise themselves a more abundant life, they must in practice reounce it; as the organized direction increases, the variety of ends must give way to uniformity. That is the nemesis of the planned society and the authoritarian principal in human affairs."
Socialism, Nazism and Fascism are related in their opposition to classical liberalism:
"While to the Nazi the communist, and to the communist the Nazi, and to both the socialist, are potential recruits who are made of the right timber, although they have listened to false prophests, they both know that there can be no compromise between them and those who really believe in individual freedom."
Socialism is defined not by its goals but by its methods: the execution of a single plan that directs all economic activity toward a particular end in a definite way. It requires the abolition of private enterprise, private ownership of the means of production and the replacement of the entrepreneur working for profit by the central planning body.
Planning of different sort is compatible, even necessary, under liberalism. The premises of liberalism are that parties should be free to sell and buy at any price for which they can find a partner, that anybody should be free to produce, buy and sell anything that can be produced, entry into trades should be open to all on equal terms and that individual are free to act unless they disadvantage another. Absent coercion, the competition and price system is the best system for satisfying these premises. Attempts to control prices or quantities deprives competition of its power to bring about an effective coordination because price changes cease to register all the relevant changes in circumstances and can no longer provide a reliable guide for the individual’s actions.
In order for competition to be effective, some amount of government coercion or planning is necessary. This includes the establishment of a legal framework. There are also situations where no effective competition is possible.
The differences in planning between socialism and liberalism is that socialism plans against competition while liberalism plans for it.
The intermediate stage between liberal competition and socialist planning is a syndicalist or corporative organization of industry. It produces a worse result than socialism because competition is suppressed but planning is left in the hands of monopolies in each industry. It is a short step away from this stage to state control of the industry.
Technical progress does not necessarily reduce competition; The growth of large corporations with their savings from economies of size does not necessarily render competition ineffective: Not demonstrated by recent studies nor historical data: In the US, monopolies existed when technology was less developed; as technology matured, fewer monopolies came about. In Germany the growth of cartels (monopolies) corresponded with government policies designed to support it.
Economic complexity doesn't give rise to problems which can only be solved by planning. It is impossible to get a comprehensive picture of a complex economic system. Planning would not be able to take into account all relevant facts necessary to make efficient decisions; a planning authority can only take in so many facts. Once overwhelmed, they would need to decentralize - delegating their responsibility to sub-boards. With delegation comes the need to coordinate and a decentralized planning board will not be able to gather, digest and disseminate relevant economic data fast enough.
The adoption of new, cheaper technology does not necessarily need coercion to take root. While it may be true in some cases that new technology will be more expensive than existing technology, this is a short term price to pay for liberty.
Technical experts are overrepresented in planning advocates because their goals, as specialists, may be acheived if the entirety of society's resources were directed their way.