Sixty years ago tomorrow Friedrich Hayek published a book that inspired Ronald Reagan and Margaret Thatcher. Alex Moffat reports.

In 1989, on his 90th birthday, Friedrich Hayek received a letter from Margaret Thatcher. She wrote of what her government had achieved over the previous 10 years and concluded: "The leadership and inspiration that your work provided were absolutely crucial; and we owe you a great debt." Later that year he watched on television as the Berlin Wall came down. His son later recalled that Hayek beamed and said: "I told you so."

For a neoliberal theorist who had been regarded as a right-wing crank for much of his career, his sudden acceptance into the mainstream in his later years was astonishing. Hayek, an Austrian who spent much of his professional life in Britain and the US, had made the case for individual freedom tirelessly. His first, landmark work of political theory was written in Britain toward the end of the second World War and first published 60 years ago tomorrow.

The Road To Serfdom was a savage assault on socialism and central planning, written at a time when there was a growing conviction that industrial society could flourish only under a command economy. The misery of the Great Depression had convinced many that capitalism was prone to disaster. Central planning promised to create more humane living conditions and a more compassionate society.

Hayek begged to differ. He sought to show that manipulating the economy to achieve worthy ends could produce a slow drift toward totalitarianism. He regarded socialism and fascism as two sides of the same coin.

Hayek was not suggesting that socialists were evil, just that their policies would have terrible, unforeseen consequences. Liberalism depends on equality before the law. It leaves men free to act as they choose provided they obey certain rules that apply equally to all. Inevitably, some will prove more successful than others, due to talent, intelligence, hard work or simply good luck.

Socialists deplore the resulting material inequality and focus on securing particular results, primarily a more even distribution of wealth. Hayek sought to show that once desired results were decided in advance, men could no longer be allowed to act freely.

Free markets thrive because they make use of the dispersed knowledge of millions of participants, all pursuing their own interests. The laws of supply and demand ensure that workers and money go where they are most needed.

But in a socialist society it is the planners who decide what is in everyone's best interests. Hayek argued that the planners would soon find that individuals would not always perform essential tasks in the absence of a profit motive, and the state would be obliged to force men to perform particular tasks. If unchecked, the socialist state would become increasingly totalitarian.

It would also be an economic disaster, because no planner could hope to master even a fraction of the knowledge that makes the free market so efficient. He recognised, however, that the free market could not provide all essential services and that the state would need to step in where the market failed. (This compromise led the radical libertarian Ayn Rand to condemn him as "our most pernicious enemy".)

The Road To Serfdom was written for non-academic readers and proved an instant success. In the US it was so popular that Reader's Digest published a condensed edition. This sold more than 600,000 copies. The Austrian scholar became an international celebrity almost overnight. That success, however, was brief.

The post-war years saw a steady growth in the welfare state. It was only in the 1970s that this began to unravel. By then unemployment and inflation had begun to spiral out of control. Suddenly, Hayek's long-neglected views took on a new relevance. He was awarded the Nobel Prize in economics in 1974 and his ideas were adopted by Thatcher and Ronald Reagan.

His growing importance was evident in Britain well before Thatcher came to power. A headline in the Daily Mirror in 1976 asked: "Who the heck is Hayek?"

At the same time Hayek's writings were proving increasingly popular behind the Iron Curtain. The Road To Serfdom was translated and widely circulated in black-market editions. In Czechoslovakia Václav Klaus, a government economist, was given the job of reading Hayek and other theorists so as to "know the enemy".

Klaus was won over and began to promote free-market ideas. After the fall of the Berlin Wall he was able to put those ideas into practice as prime minister of the new Czech Republic.

Hayek's influence reached its peak in the 1980s, and his critique of central planning was vindicated by the fall of communism. But now communism has largely vanished, and few socialists would advocate the nationalisation of industry. Does this mean that The Road To Serfdom has lost its relevance?

John Gray, of the London School of Economics, believes that it has and that the book was fundamentally mistaken. "The essence of the original argument was that social-democratic policies and the development of the welfare state would lead to totalitarianism on a kind of communist or Nazi model. To my knowledge that hasn't happened anywhere. The book is irrelevant because it was wrong."

Hayek acknowledged as early as the 1950s that the political climate had changed and that "hot socialism" was "nearly dead in the western world". Hayek's many advocates maintain, however, that The Road To Serfdom has by no means passed its sell-by date. Edward Feser, of Loyola Marymount University, in California, argues: "Hayek was not wrong. It is a dangerous mistake to think that totalitarianism must mean jackboots and concentration camps. There is also 'soft totalitarianism' - less explicit and less violent but, for that reason, harder to see until it is too late.

"I speak of the development across the western world of a vast and suffocating regime of paternalistic regulation governing every aspect of life. The socialists have simply changed their tactics: rather than the outright nationalisation of the economy they are now content formally to leave these things in private hands but to weave a network of regulation so all-encompassing that the effect is that everyone must do what the egalitarian regulators want them to do."

Hayek, who died in 1992, concluded The Road To Serfdom by arguing: "The guiding principle that a policy of freedom for the individual is the only truly progressive policy remains as true today as it was in the 19th century." The book remains an eloquent defence of liberty.