Considering the housing and financial debacle that began in 2008, the continuing hardship it unleashed, the fortunes made in the run-up to the bust, and the tax-financed bailouts that followed, what’s wrong with feeling that “the system” has done a number on most Americans? It’s perfectly reasonable to think that some radical changes are needed. Our lives and well-being are subject to the moves of large organizations over which we have no control. But to know what should change, one has to understand what happened.

Note that in the young man’s statement above, one word is glaringly absent: government. (He does use the word “military,” but many people across the political spectrum seem to think the Pentagon is not part of the government.) Unfortunately, the protesters most likely fail to appreciate that everything associated with the Great Recession is a product of a longstanding and deep-seated partnership between big influential business/financial interests and government—the corporate state. Through most of American history, banks and other financial institutions have operated in league with government, especially since the Federal Reserve opened its doors nearly a century ago, and this money-manipulating cartel has facilitated war, cheap credit to favored interests, and bailouts.

So why aren’t the protesters also outside the Fed, the Treasury, and the Capitol?

Most if not all of them likely favor a big expansion of government, but in light of our political-economic history, that would be precisely the wrong way to go because it would further empower the same coercive bureaucracy that gave us this crisis. Putting new people in charge won’t alter that fact that the bureaucracy wields powers that should not exist.

What the protesters miss is that corporate power is derived from government power—it’s the most dangerous derivative. Without State power no bank (or collection of them) could set the economy on a balsawood platform of inflated currency and cheap credit, creating the conditions for recession and long-term unemployment, nor could it stick taxpayers with the cost of bad investments. Such mischief requires a central bank and congressional power to compel the taxpayers. Washington and Wall Street need each other. They don’t agree on everything, but their public feuds should not mislead anyone into thinking they are adversaries. They are in cahoots, dependent on a system that constrains regular people’s honest economic activities and benefits an exploitative elite.

I will not rehearse here how corporate-state policies created the housing and financial bubble that burst and plunged the country into the Great Recession. Instead, I want to indicate that the corporate state is not new in America. It has been more the rule than the exception.

There’s no better illustration than the New Deal, particularly the National Industrial Recovery Act (NRA), which cartelized business through industry-generated and -enforced codes that suppressed competition, restricted production, and kept prices high during the Great Depression. John T. Flynn, the muckraking reporter who despised government-business collusion, bureaucratic control, and militarism, told the story in “Whose Child Is the NRA?,” which appeared in Harper’s Magazine, September 1934.

Flynn notes that the NRA is commonly regarded as the “Charter of Labor” or the product of President Roosevelt’s Brain Trust, the collection of Progressive academics who informally advised FDR. In fact the NRA’s roots lie elsewhere:

The actual business of putting together the NRA began in March, 1933, after Roosevelt took office. But one must look far beyond the throb and pother of those feverish days to understand the swift succession of moves and the cast of characters behind them. . . . Regimentation of business means, in the minds of those who use the term, forming businessmen into regiments, bringing business under regulation, controlling production, prices, trade practices, the rules of the game. For seventy years at least business men have been, in varying degrees, in favor of this. . . . Later on the Chamber of Commerce of the United States raised the slogan of “Self-Rule in Industry.” This was not a struggle to shift the control of industry from the government to industry itself. Industry wanted not freedom from regulation but the right to enjoy regulation.

Self-rule meant the power to penalize code violators who wished to compete freely. (Without enforcement, cartels fall apart as members “cheat.”) As the Chamber and prominent businessmen such as General Electric president Gerard Swope, along with Wall Street lawyers, pushed for government-backed industry cartels, members of the House and Senate were advancing bills, which Roosevelt opposed, to set maximum hours for workers. An alternative bill emerged from discussions that included Hugh S. Johnson, who had worked for Bernard Baruch on Wall Street; John Dickinson, a Wall Street lawyer; and Chicago labor lawyer Donald Richberg.

“When, therefore, the NRA act was brought forward, it was to defeat the [Sen. Hugo] Black and [Rep. William] Connery bills, to turn the subject over to employers and to give them, besides, something they had wanted for years but dared not now insist on—the modification of the antitrust laws and the privilege of self-rule in industry,” Flynn wrote. (Note: The freed market was not among the alternatives.) He concluded that big business made out well with the NRA:

If now we keep all this in mind it will be easy to understand all that has happened since NRA became a law. I am reliably informed that [Chamber President H. I.] Harriman told his directors that it was a complete victory for the Chamber. They got more than they hoped—modification of the antitrust laws, self-rule in industry, defeat of the Black and Connery bills, the right to regulate hours and minimum wages transferred to the trade associations under NRA supervision instead of by statute. In short, with the exception of the collective bargaining provision—which as we have seen was subsequently robbed of much of its original strength—the NRA plan represented almost entirely the influence and ideal of Big Business Men. The share of the Brain Trust in its paternity was microscopic; the share of the Chamber of Commerce and other business interests was predominant. [Emphasis added.]

This was no anomaly. Government power ultimately will be influenced and controlled by those whom the occupiers despise. So, protesters, rail against Wall Street. But rail, too, against its indispensable partner—government, with its unique legal power to wield aggressive force—and realize that the genuine antipode of the system you oppose is the freed market.

Mises was no maverick in this regard. Interest in social cooperation pervades the best classical-liberal and libertarian thought. Paradoxical as it sounds, it is at the heart of the philosophy of individualism. If opponents of the freedom philosophy base their criticism on an atomistic model of the individual, it’s largely because too many libertarians overlook their heritage and emphasize that side of the coin to the neglect of the social side.

Leading thinkers in the liberal tradition have sought a synthesis of individual and society. In Social Statics (1850), Herbert Spencer discussed the “tendency to individuation,” which is most pronounced in the human race:

[The person] is self-conscious; that is, he recognizes his own individuality. . . . [W]hat we call the moral law—the law of equal freedom—is the law under which individuation becomes perfect, and that ability to act up to this law is the final endowment of humanity. . . . The increasing assertion of personal rights is an increasing demand that the external conditions needful to a complete unfolding of the individuality shall be respected. Not only is there now a consciousness of individuality and an intelligence whereby individuality may be preserved, but there is a perception that the sphere of action requisite for due development of the individuality may be claimed, and a correlative desire to claim it. And when the change at present going on is complete—when each possesses an active instinct of freedom, together with an active sympathy—then will all the still existing limitations to individuality, be they governmental restraints or be they the aggressions of men on one another, cease. Then none will be hindered from duly unfolding their natures.

But in the next section Spencer wrote:

Yet must this higher individuation be joined with the greatest mutual dependence. Paradoxical though the assertion looks, the progress is at once toward complete separateness and complete union. But the separateness is of a kind consistent with the most complex combinations for fulfilling social wants; and the union is of a kind that does not hinder entire development of each personality. Civilization is evolving a state of things and a kind of character in which two apparently conflicting requirements are reconciled.

Thus Spencer foresaw “at once perfect individuation and perfect mutual dependence.”

Just that kind of individuality will be acquired which finds in the most highly organized community the fittest sphere for its manifestation, which finds in each social arrangement a condition answering to some faculty in itself, which could not, in fact, expand at all if otherwise circumstanced. The ultimate man will be one whose private requirements coincide with public ones. He will be that manner of man who, in spontaneously fulfilling his own nature, incidentally performs the functions of a social unit, and yet is only enabled so to fulfill his own nature by all others doing the like.

For Spencer, to violate the law of equal freedom—“that vital law of the social organism”—is to assault society itself. It sounds as though Spencer is saying that we need society not only for economic exchange and security but something more—because our very nature requires it.

Aristotle

Despite some differences this reminds me of Aristotle. (Fred D. Miller, Jr., finds classical-liberal themes in Aristotle.) In Politics Aristotle states that a polis is not merely a collection of individuals seeking gains from trade and safety. It “is a community of families and aggregations of families in well-being, for the sake of a perfect and self-sufficing life. . . . The end of the state [polis] is the good life. . . .”

Aristotle famously identified the human being as a social/political animal, a concept inseparable from the capacity to reason, use language, and discourse. In Aristotle’s view a human being can live like a human being only in society. We need other people to be fully human because we can’t know what we need to know or do what we need to do except through interaction in a community. “For each individual among the many has a share of virtue and prudence,” Aristotle writes.

Likewise in the Nicomachean Ethics he writes, “For the final and perfect good seems to be self-sufficient. However, we define something as self-sufficient not by reference to the ‘self’ alone. We do not mean a man who lives his life in isolation, but a man who also lives with parents, children, a wife, and friends and fellow citizens generally, since man is by nature a social and political animal.”

Endoxa

Auburn University philosopher Roderick T. Long (to whom I am indebted for his discussion of Aristotle in Reason and Value: Aristotle versus Ayn Rand) emphasizes Aristotle’s view that we can’t know very much without help from society. Discussing Aristotle’s theory of knowledge and belief, Long notes that for the Greek philosopher endoxa, or “reputable beliefs,” are critical to the individual. No one builds up her knowledge from scratch on a bedrock foundation. We are born into a particular context and are taught many things, some true and some false. It would be impossible to start over, and fortunately there is no need to. We can begin with the beliefs we have and move forward making adjustments as we find inconsistencies and learn new information. This is necessarily a social process. Long writes: “But Aristotle thinks I will have good reasons for including the endoxa of others—the collective wisdom of mankind, as it were—among my endoxa or phainomena. The pursuit of knowledge is a cooperative endeavor, and will be more successful if everyone is allowed to make a contribution.”

Aristotle says, “For each man has something personal to contribute toward the truth. . . .” For him, society is not just a bridge to the good life, it is constitutive of the good life.

I could also invoke Ludwig Wittgenstein (no classical liberal), who drew attention to the intrinsically public nature of language (and hence thought) itself. Wittgenstein, like F. A. Hayek, underscored the communality of rules. “The word ‘agreement’ and the word ‘rule,’” Wittgenstein wrote, “are related to one another, they are cousins [like Wittgenstein and Hayek]. If I teach anyone the use of the one word, he learns the use of the other with it.”

Only individuals value, choose, and act, of course, but in an important sense the resulting social whole is greater than the sum of its individual parts. Thus the defense of personal liberty is the defense of society. Let’s hear liberalism’s opponents criticize that.

I’ve heard that story before, but this time it got me thinking: Would the free-market movement have been perceived differently by the outside world if Mises had used the other title? With the question phrased so narrowly, the answer is probably no. So let’s broaden it: Would the free-market movement be perceived differently if its dominant theme was social cooperation rather than (rugged) individualism, self-reliance, independence, and other synonyms we’re so fond of?

Maybe.

There’s no mystery why that other title occurred to Mises. I haven’t tried to make a count, but I would guess that “social cooperation” (or “human cooperation”) is the second most-used phrase in the book. The first is probably “division of labor,” which is another way of saying “social cooperation.” Human Action is about social cooperation or it isn’t about anything at all. The first matter Mises takes up after his opening disquisition on the nature of action itself is . . . cooperation. He begins, “Society is concerted action, cooperation. . . . It substitutes collaboration for the—at least conceivable—isolated life of individuals. Society is division of labor and combination of labor. In his capacity as an acting animal man becomes a social animal.”

It is through cooperation and the division of labor that we all can live better lives. Naturally, Mises laid great stress on the need for peace, since the absence of peace is the breakdown of that vital cooperation. This put Mises squarely in the pacifistic classical-liberal tradition as exemplified by Richard Cobden, John Bright, Frédéric Bastiat, Herbert Spencer, and William Graham Sumner. Mises wrote in Liberalism:

The liberal critique of the argument in favor of war is fundamentally different from that of the humanitarians. It starts from the premise that not war, but peace, is the father of all things. . . . War only destroys; it cannot create. . . . The liberal abhors war, not, like the humanitarian, in spite of the fact that it has beneficial consequences, but because it has only harmful ones.

Given Mises’s orientation it is unsurprising to see him attach so much importance to what he calls the Ricardian Law of Association. This is known as the law of comparative advantage (or cost), which states that two parties can gain from trade even if one is more efficient at making every product they both want.

The key is opportunity cost. A $500-an-hour lawyer who is also the fastest, most accurate typist in the world will likely find it advantageous to hire a typist. Why? Because every hour the lawyer spends typing instead of practicing law costs him $500 minus what he would have paid a typist. The typist faces no such opportunity cost. So lawyer and typist both benefit by cooperating. This is true of groups (countries) too. People will discover the benefits of concentrating on what, comparatively, they make most efficiently (or least inefficiently) and trading with others. As a result more total goods will be produced.

This law is an important part of the argument for free international trade because it answers the objection that a national group that can’t make anything as efficiently (absolutely) as others will be left out of the world economy. But Mises understood that the law of comparative advantage was merely an application of the broader law of association. As he wrote in Human Action:

The law of association makes us comprehend the tendencies which resulted in the progressive intensification of human cooperation. We conceive what incentive induced people not to consider themselves simply as rivals in a struggle for the appropriation of the limited supply of means of subsistence made available by nature. We realize what has impelled them and permanently impels them to consort with one another for the sake of cooperation. Every step forward on the way to a more developed mode of the division of labor serves the interests of all participants. . . . The factor that brought about primitive society and daily works toward its progressive intensification is human action that is animated by the insight into the higher productivity of labor achieved under the division of labor.

This seemingly simple idea leads to counterintuitive conclusions. As a result of expanding cooperation, human beings compete to produce, not to consume. Mises expressed this with my favorite sentence in Human Action: “The fact that my fellow man wants to acquire shoes as I do, does not make it harder for me to get shoes, but easier.” The expansion of cooperation also means dealing with strangers at great distance—a further incentive for peace.

Unfortunately the emphasis on cooperation is not what nonlibertarians are likely to “know” about free-market economics and the normative freedom philosophy. They are more apt to associate these with “rugged individualism” than “social cooperation.” I have no doubt that a major reason for this is that our opponents who know better want the public to have a distorted sense of the genuinely liberal worldview. When President Bill Clinton declared (disingenuously) in his 1996 state of the union address, “The era of big government is over,” he followed up that sentence with this: “But we can’t go back to the era of fending for yourself.” But human beings have always been social/political animals. There was no era when men and women fended for themselves individually. The choice is between free and forced association.

Of course libertarians and free-market advocates do emphasize the importance of the division of labor. Nevertheless we are partly responsible for the public misperception. Our rhetoric too often implies atomism, however inadvertently. (The appropriate individualism is molecular individualism.) I understand the value of the terms “individualism,” “self-reliance,” and “independence,” but we should realize that they can easily lead to undesirable caricatures. Let’s not encourage anyone to think that the libertarian ideal is Ted Kaczynski minus the mail bombs.

We’re all grappling with an uncertain future. Social cooperation unquestionably makes that task easier than if we attempted to go it alone. That’s why individuals formed mutual-aid (fraternal) organizations. Besides camaraderie, these groups provided what the welfare state feebly and coercively supposes to provide today: islands of relative security in a sea of uncertainty.

If people support the welfare state, don’t be puzzled. It’s because they cannot see a better voluntarist alternative. That’s where libertarians come in.

We libertarians might have an easier time persuading others if we emphasized that freedom produces ever-more innovative ways to cooperate for mutual benefit and that when government dominates life, social cooperation is imperiled.

Right from the top you could tell that Stephen Metcalf’s blast in Slate would be no different. “Liberty Scam” featured this teaser: “Why even Robert Nozick, the philosophical father of libertarianism, gave up on the movement he inspired.” That sentence contains two assertions—both wrong. I mean to take nothing away from Nozick when I point out that he was not the philosophical father of libertarianism. We can debate who might deserve that title, but I can say firsthand that he, she, or they helped give birth to libertarianism before 1974, when Nozick published Anarchy, State, and Utopia.

As for the second half of that sentence, Nozick never gave up on libertarianism. Metcalf makes much of Nozick’s writing, “The libertarian position I once propounded now seems to me seriously inadequate. . .” and “There are some things we choose to do together through government in solemn marking of our human solidarity, served by the fact that we do them together in this official fashion”—but is this a renunciation of libertarianism?

Those in fact were not Nozick’s last words on the matter before his premature death in January 2002 at age 63. In an interview with Julian Sanchez six months earlier, Nozick said, “. . . I never stopped self-applying [the libertarian label]. What I was really saying in The Examined Life was that I was no longer as hardcore a libertarian as I had been before. But the rumors of my deviation (or apostasy!) from libertarianism were much exaggerated.”

It gets worse for Metcalf. He spends most of his article on Nozick’s famous Wilt Chamberlain thought experiment but misses the point. In critiquing “patterned,” or “end-state,” principles of justice, Nozick imagines that everyone has the amount of wealth necessary to satisfy some posited ideal pattern. It so happens that the people in this society love basketball and one of their members, Chamberlain, is a great player whom many are eager to watch. They each pay him a sum of money every time they attend a game. As a result of this series of exchanges Chamberlain has more money than the others. This raises a question: Is the initial “distributional” pattern to be preserved by force, or is free exchange to be allowed to change the pattern? As Nozick stated: “The general point . . . is that no end-state principle or distributional patterned principle of justice can be continuously realized without continuous interference with people’s lives.”

For Nozick, if constant interference with free exchange—let’s call it what it is: violence or the threat thereof—is required to preserve a given pattern, perhaps justice cannot lie in any preconceived pattern at all, for without liberty what becomes of autonomy and the moral injunction against treating others merely as means? He opted instead for an “entitlement theory of justice in distribution,” which poses a historical test: “whether a distribution is just depends upon how it came about.”

Metcalf is in a panic: If Wilt Chamberlain is entitled to a bigger income than his fellow human beings when it results from voluntary exchange, it must follow that others are too. Metcalf doesn’t want to face that issue, so he creates a distraction: “Anarchy[, State, and Utopia] not only purports to be a defense of capitalism, but a proud defense of capitalism. And yet if Anarchy would defend capitalism unashamedly, why does its most famous argument include almost none of the defining features of capitalism—i.e., no risk capital, no capital markets, no financier? Why does it feature a basketball player and not, say, a captain of industry, a CEO, a visionary entrepreneur?”

It’s true that Nozick ultimately wants to defend free exchange (which he called “capitalist acts between consenting adults”), but to set the foundation, he needed to show that accepting a patterned conception of justice means giving up freedom.

Metcalf prefers to have a different argument: How do we know the price Chamberlain receives is appropriate? “To a libertarian,” he says mockingly, “price is, in effect, the conscience of society finding its highest expression in every swipe of the debit card. . . . [A]ssuming a world in which labor and management arrive at gentleman’s agreements—and in which those agreements capture the precise value, down to the penny, of labor’s marginal product—tells us very little about justice.”

But what Nozick established with his Chamberlain story need not assume those things without additional theoretical argument. It is surely reasonable to ask if historical capitalism has faithfully mirrored the principle of free, voluntary exchange. In fact it has not. But this is no objection to Nozick, who was doing political philosophy, not economic history.

Metcalf gets a little carried away in searching for points to score on Nozick. Consider this:

The connivance is thus hidden in plain sight. “Wilt Chamberlain” is an African-American whose talents are unique, scarce, perspicuous (points, rebounds, assists), and in high demand. We feel powerfully the man should be paid, and not to do so—to expect a black athlete to perform for (largely) white audiences without adequate compensation—raises the specter of the plantation. But being a star athlete isn’t the only way to make money. In addition to earning a wage, one can garnish a wage, collect a fee, levy a toll, cash in a dividend, take a kickback, collect a monopoly rent, hit the superfecta, inherit Tara, insider trade, or stumble on Texas tea. For each way of conceiving wealth, there is at least one way of moralizing its distribution. The Wilt Chamberlain example is designed to corner us—quite cynically, in my view [!]—into moralizing all of them as if they were recompense for a unique talent that gives pleasure; and to tax each of them, and regulate each of them, according to the same principle of radical noninterference suggested by a black ballplayer finally getting his due.

Nozick’s Chamberlain principle obligates no one to defend the garnishing of wages and the collecting of tolls and monopoly rents, which require government privilege, or the profits of crooks like Bernie Madoff. It refers only to nonviolent, nonfraudulent, unprivileged sources of wealth. Metcalf implies that Nozick’s book is an apology for the corporate state, but in fact Nozick’s principles—consistently adhered to—rule out the statist devices that produce much “supernormal compensation.” Corporate power flows from the State—it’s the most dangerous derivative.

Metcalf ends on a naive note: “[T]he ‘libertarian’ right [sic] moves to take the risks of unemployment, disease, and, yes, accidents of birth, and devolve them entirely onto the responsibility of the individual. It is not just sad; it is repugnant.”

As if the welfare state historically has been much more than a cover for the corporatist privilege that harms the most vulnerable; and as if free individuals, looking out for one another in peaceful ways such as mutual-aid associations would be incapable of hedging against the risks of life.

The IMF has 187 member governments, which together this year have provided $340 billion to the agency. Each country is assigned a contribution quota and a vote count weighted roughly according to its quota. The U.S. government’s financial quota is over 17 percent of the total, almost three times that of the second-largest contributor, Japan. It controls 16.74 percent of the votes. Treasury Secretary Timothy Geithner is the U.S. member of the board of governors, with Federal Reserve Chairman Ben Bernanke as alternate governor. This should be enough to establish that the IMF’s agenda is not free markets.

All IMF money comes from the taxpayers and central bank printing presses. So there’s the first charge against it: It’s financed through compulsion. That should shape our expectations about the agency.

What does the IMF do? Here’s how it describes its mission:

• Surveillance: “oversees the international monetary system and monitors the financial and economic policies of its members”;

• Technical assistance: “assist[s] mainly low- and middle-income countries in effectively managing their economies”; and

• Lending: “provides loans to countries that have trouble meeting their international payments and cannot otherwise find sufficient financing on affordable terms.”

Regarding the first, the IMF has been notoriously bad at foreseeing crises. But that should not be surprising. Why would bureaucrats living rather well off the taxpayers, with no personal capital at risk, be expected to be competent at spotting economic trouble?

The promise of “technical assistance” is dubious and even risible because the dominant governments of the world can hardly be said to have “effectively” managed their own economies. The IMF often advises distressed countries to raise taxes and to cut government spending to reduce budget deficits, upsetting both Keynesians and supply-siders. This is regarded as market-oriented, or “neoliberal,” advice, but to the extent that externally imposed measures engender public resentment, they give real market reform a bad name and set back the cause of genuine liberalism.

For example, the IMF may advise a government to remove price controls on food, which in itself would be a pro-market measure if accompanied by other reforms. However, if corresponding government-created scarcities—through licensing, franchises, patents, and so on—remain in place, average people will suffer and blame “the free market.” Food riots occurred some years ago in Egypt under just such circumstances, and as a result market reforms are widely distrusted there.

IMF loans constitute a double bailout. First, they save kleptocratic politicians from the consequences of their exploitative schemes, sparing them the necessity of radical reform—including land reform and free banking.

Second, IMF loans rescue the failing country’s creditors—Wall Street banks, typically—from a government default. In addition U.S. agricultural interests have come out in favor of increased support for the IMF to stimulate American farm exports. In 2009 the debate over increased U.S. funding was framed in the context of pushing an export-led American economic recovery.

This is surely doing well by doing good—with the taxpayers’ money.

Who pays? Aside from the taxpayers who supply the IMF with money, the tab is eventually paid by the working people of the subject countries through the higher taxes prescribed by the IMF.

The likelihood of the IMF’s compounding problems is immense. In The White Man’s Burden, former World Bank economist William Easterly writes: The IMF’s “core function of enforcing financial discipline is flawed by an intrusive Planner’s mentality that sets arbitrary numerical targets for key indicators of government behavior. Like all Planners, the IMF fits the complex reality of economic systems into a Procrustean bed of numerical targets that have little to do with that complexity.”

The IMF emphasizes that loans always come with “conditionality,” but for reasons already alluded to, that should offer little reassurance to advocates of free markets. The agency notes that it uses the principle of “parsimony” when writing conditions: “program-related conditions should be limited to the minimum necessary to achieve the goals of the Fund-supported program . . . .” Thus the deepest violations of individual liberty and market principles—feudal land distribution, for example—will be left untouched. Real markets don’t exist when large tracts of land are controlled by a privileged elite, leaving most people little choice but to take whatever is given. Their acceptance may represent the “best available option,” but if their choice set has been artificially constricted, that’s not saying much. (Fortunately the informal economy offers some hope.)

IMF loans of course channel resources to central governments, reinforcing their power and further politicizing the “aided” countries. As P. T. Bauer wrote,

Foreign aid has thus done much to politicize life in the Third World. And when social and economic life is extensively politicized, who has the power becomes supremely important, sometimes a matter of life and death. . . . People divert their resources and attention from productive activity into other areas, such as trying to forecast political developments, placating or bribing politicians and civil servants, operating or evading controls.

In the end the IMF has fostered long-term dependency, perpetual indebtedness, moral hazard, and politicization, while discrediting market reform and forestalling revolutionary liberal change. The solution is not for the IMF to impose free markets, even if it could. That would smack of imperialism and, writes Easterly, would have “patronizing echoes of the White Man’s Burden.”

The IMF should be scrapped and the people suffering under kleptocracy left to discover the requirements for improving their own conditions. How much more “help” can they stand?

In the April 17 ABC News-Washington Post poll, 59 percent said that the deficit should be reduced through a combination of unspecified spending cuts and tax increases. But 69 percent opposed cutting Medicaid, 78 percent opposed cutting Medicare, and 56 percent opposed cutting the military. Fifty-three percent said they would oppose a plan to reduce the debt significantly by “raising taxes on all Americans by a small percentage and making small reductions in Medicare and Social Security benefits.” Fifty-four percent said Medicare “should remain as it is today.”

In other words, cut spending but stay away from where the money is. Medicare, Medicaid (plus the State Children’s Health Insurance Program), and the military represent nearly 40 percent of the budget. Social Security is about 20 percent more. (Interest on the debt is 4.6 percent.)

In the poll 72 percent supported raising taxes on people making more than $250,000—54 percent “strongly.” There’s far more sympathy for raising taxes than cutting spending—not a good sign for libertarians.

A McClatchy-Marist poll had similar results. It found that a clear majority, 64 percent, thinks the country is “going in the wrong direction.” Of those who identified themselves as conservatives, 78 percent agreed. Moreover, 57 percent of all respondents said reducing the deficit is the priority, with 68 percent of conservatives agreeing. No other objective came close.

I point this out because in the same poll, when asked if Medicare and Medicaid should be cut, 80 percent said no, with 68 percent of conservatives agreeing. How about reducing military spending? Fifty-four percent overall said no, including 72 percent of conservatives. (“Liberals” and moderates approved, 60 and 54 percent, respectively.)

Sixty-nine percent said they were against raising the debt ceiling, right after saying that they would not cut the biggest items in the budget.

I note for the record that of the conservative respondents, 48 percent said they support or “strongly” support the Tea Party, while 44 percent said they do not.

So what does all this mean? It seems to mean that despite the prominence of the Tea Party and despite the fact that the word libertarian is spoken in the news media more than ever before, the prospects for a major reduction in the size of government in the immediate future are dim—this at a time when there is also near-panic about the debt and the deficit. If big cuts aren’t going to happen now, then when?

Sources of Resistance

The political system does not reward budget cutters. There is too much to gain politically by purchasing votes through promises of largess, while hiding or deferring the costs, if they can’t be pushed onto to some unpopular group. I don’t think this means Americans are a bunch of self-conscious freeloaders. Rather they likely (and erroneously) see any benefits they collect as a return on their forced tax “investment.” Social Security and Medicare have certainly been misrepresented as such. Why wouldn’t people be upset at the thought of reduced benefits? Even Medicaid, the medical program for low-income people, affects the middle class. Medicare, the medical program for all retirees, does not cover nursing-home care, but Medicaid does—if a person meets the means test. It’s an open secret that if a nursing-home resident has too much money to qualify for Medicaid, the staff will advise the family on what to do to become eligible. This usually involves a lot of gift-giving and other activities to reduce the resident’s assets to the acceptable level.

The upshot is that even middle-class younger people may well oppose cuts in Medicaid if it means they will have to pay directly for nursing-home care for an elderly parent or perhaps have him or her live in their homes. This is part of a more general consideration. Most people already on Social Security and Medicare would understandably oppose cuts in those programs. Less obvious is that their grown children are likely to take the same position, and not just because they expect to be beneficiaries someday. If those programs were to end, or even be cut substantially, the children would have to help pay their parents’ living expenses out of their own pockets. Yes, they pay today through taxes, but there are differences: First they don’t pay 100 percent, since other taxpayers also kick in, and second there’s a bureaucracy between them and their parents. I suspect most people would rather support their parents through the government rather than directly, and most retired people would probably prefer that too. Face-to-face dependence of aging parents on grown children who are trying to raise their own families can be a source of tension if not outright conflict.

Intervention Begets Intervention

Government interventions are not isolated phenomena; rather they are part of a political-economic-social-cultural system, with one part often intended to ameliorate the effects of some other part. (Remember Ludwig von Mises’s “critique of interventionism.”) Thus we should not discuss any particular part in a vacuum—not if we want to say something constructive.

For example, it is an eminently libertarian prescription to call for the abolition of Medicare on grounds that transferring wealth by force is immoral. But left at that, the argument will persuade no one and might even discredit the speaker. Why? Because it fails to acknowledge that many current beneficiaries would be left in dire straits if the program suddenly ended. Nor would it suffice to say that once the program was gone, “the free market” would handle things satisfactorily. What free market? American medicine consists of a government-insurance-doctor-hospital protectionist cartel that suppresses competition and innovation in the provision of services through licensing and myriad other interventions. High prices and callous bureaucracies are the rule for many people, and that didn’t begin with Obamacare. Surely libertarians don’t wish to be understood as proposing—in the name of human freedom—that a vulnerable portion of the population be subjected to that gauntlet.

None of this means that these programs are legitimate or should not be abolished. They require force (taxes) and induce dependence on the political class. What I’m suggesting is that libertarians need to bear these considerations in mind when making their case against such government intervention. They need to be cognizant of the wider issues and combine their critique of Medicare with a critique of the entire government-medical-insurance complex.

If we are to expand the sphere of freedom while shrinking the sphere of force, we first need to be understood. We won’t be understood if we are oblivious to people’s concerns and to how they currently see the government’s role, however fallaciously, in addressing those concerns.

As a student of Austrian economics I know I cannot foresee what the domestic energy market would look like or what the relative prices would be if all U.S. regulations, taxes, and privileges were abolished. But I submit that those who think the United States would be energy self-sufficient have the same knowledge limitations. It seems highly unlikely that Americans would import no oil from the Middle East or elsewhere. (More on this below.)

Unwise and Unnecessary

But even if things should work out that way, it is not something to be sought. Making self-sufficiency a goal would only promote protectionism—to the benefit of privileged interests—and encourage interventionists. Let’s not give them a helping hand.

What if freeing the domestic market did not produce energy independence? Should the government give it a nudge? Do banning imports, subsidizing alternative forms of energy, and mandating conservation sound like good ideas? Have we forgotten all that we know about bureaucratic ignorance, perverse incentives, and naked corruption? When one considers how pervasive energy is economically, one realizes that a serious comprehensive energy policy would require squaring or cubing the current corporate state. No thank you.

Concerns about Middle East oil—which persist although only 24 percent of U.S. crude-oil imports come from that region—center largely on fears that an unfriendly ruler might cut off shipments. But these concerns are baseless. Any oil-producing country will want to sell to someone. What else is there to do with crude oil? The opportunity cost of leaving it all in the ground would be enormous (unless prices were expected to rise dramatically). And even if a ruler tried to embargo the United States, the additional oil he sold to other countries (at necessarily lower prices) would find its way here. Economic interest and the market process—despite all the impediments—guarantee it.

I’ve previously discussed the misconceptions about the 1970s OPEC oil embargo. I pointed out that the hardship of that period was strictly the result of the U.S. government’s price controls and other interventions in the oil and gasoline industries, which discouraged producers from bringing supply to market. Even so, “[d]espite the embargo,” economist Donald Losman wrote, “U.S. oil stockpiles fell only slightly, and, by March 1974, they were growing again.” (“Trading for Security,” December 2010)

In other words, the embargo failed. As the Saudi oil minister put it later, “[T]he embargo was more symbolic than anything else. . . . [T]he world is really just one market.” Bingo.

Another fear is that Middle Eastern turmoil could disrupt oil shipments, and this is surely possible. The answer to that is diversification, which a freed entrepreneurial market would encourage and permit. We need not refuse oil from the region because someday it might not be available. That’s Karl Pilkington logic.

That should dispel the fears of energy dependence. Indeed, as Freeman columnist David Henderson points out (“Let’s Not Be Energy Independent,” October 2008), the case for the market is all about dependence. We gain from exchange through lower costs thanks to the division of labor and comparative advantage, which deliver the benefits of specialization. Self-sufficiency would be expensive and thus reduce our standard of living, harming the least well-off among us. How in the world can we account for apparently pro-market people looking to the government to “reduce our dependence on foreign oil”?

Let It Take Its Course

I don’t wish to underestimate the distortions government intervention has wrought in the energy market or how it encourages consumption of Middle Eastern oil. Imagine that the oil companies could not count on the U.S. departments of defense and state or the CIA to protect their access to and transport of that oil—at hidden taxpayer expense. Imagine that they had to foot that cost themselves and charge prices for their products that reflected those costs in competition with alternatives that did not have to recoup those expenses. Consumers would then make choices with their eyes wide open. Maybe oil from halfway around the world wouldn’t look so attractive. As I said at the outset, I don’t know what a freed energy market would look like. But nothing in this uncertainty supports a policy of energy self-sufficiency. Free the market of all impediments and privileges—and let it take its course.

Whether there are many years remaining of low-cost oil underground or not, the case for freeing the market is the same. As that Saudi oil minister also said, the Stone Age ended, but not because mankind ran out of stones. Likewise, the Oil Age will end, but not because mankind has run out of oil. I would only add: if the market is really freed.

Events in Egypt and neighboring countries are only the beginning of a spreading resistance to dictatorship throughout the region. As inhabitants of a land born in rebellion against tyranny, we should view this with hope. Freedom will enable us to weather any turmoil as best as can be expected. There is no reason to wish for the unnatural state of self-sufficiency.

A final point: One way to help eliminate the need for uprisings such as we saw in Egypt would be for the U.S. government to stop supporting dictators.

Bastiat loved the market economy, and badly wanted it to blossom in full—in France and everywhere else. When he described the blessings of freedom, his benevolence shined forth. Free markets can raise living standards and enable everyone to have better lives; therefore stifling freedom is unjust and tragic. The reverse of Bastiat’s benevolence is his indignation at the deprivation that results from interference with the market process.

He begins his book Economic Harmonies by pointing out the economic benefits of living in society:

It is impossible not to be struck by the disproportion, truly incommensurable, that exists between the satisfactions [a] man derives from society and the satisfactions that he could provide for himself if he were reduced to his own resources. I make bold to say that in one day he consumes more things than he could produce himself in ten centuries.

What makes the phenomenon stranger still is that the same thing holds true for all other men. Every one of the members of society has consumed a million times more than he could have produced; yet no one has robbed anyone else.

Bastiat was not naive. He knew he was not in a fully free market. He was well aware of the existence of privilege: “Privilege implies someone to profit from it and someone to pay for it,” he wrote. Those who pay are worse off than they would be in the free market. “I trust that the reader will not conclude from the preceding remarks that we are insensible to the social suffering of our fellow men. Although the suffering is less in the present imperfect state of our society than in the state of isolation, it does not follow that we do not seek wholeheartedly for further progress to make it less and less.”

He wished to emphasize the importance of free exchange for human flourishing. In chapter four he wrote:

Exchange is political economy. It is society itself, for it is impossible to conceive of society without exchange, or exchange without society. . . . For man, isolation means death. . . .

By means of exchange, men attain the same satisfaction with less effort, because the mutual services they render one another yield them a larger proportion of gratuitous utility.

Therefore, the fewer obstacles an exchange encounters, the less effort it requires, the more readily men exchange.

How does trade deliver its benefits?

Exchange produces two phenomena: the joining of men’s forces and the diversification of their occupations, or the division of labor.

It is very clear that in many cases the combined force of several men is superior to the sum of their individual separate forces. . . .

Now, the joining of men’s forces implies exchange. To gain their co-operation, they must have good reason to anticipate sharing in the satisfaction to be obtained. Each one by his efforts benefits the others and in turn benefits by their efforts according to the terms of the bargain, which is exchange.

But isn’t something missing from this account?

Indeed, there is: the subjectivist Austrian insight that individuals gain from trade per se. For an exchange to take place, the two parties must assess the items traded differently, with each party valuing what he is to receive more than what he is to give up. If that condition did not hold, no exchange would occur. There must be what Murray Rothbard called a double inequality of value. It’s in the logic of human action—the discipline Ludwig von Mises christened praxeology. Bastiat, like his classical forebears Smith and Ricardo, erroneously believed (at least explicitly) that people trade equal values and that something is wrong when unequal values are exchanged.

Perhaps I am too hard on Bastiat. After all, he was writing before 1850. Carl Menger did not publish Principles of Economics until 1871. Yet the Austrians were not the first to look at exchange strictly through subjectivist spectacles—that is, from the economic actors’ points of view. The French philosopher Étienne Bonnot de Condillac (1715–1780) did so a hundred years before Bastiat wrote: “The very fact that an exchange takes place is proof that there must necessarily be profit in it for both the contracting parties; otherwise it would not be made. Hence, every exchange represents two gains for humanity.”

Well, perhaps Bastiat was unaware of Condillac’s argument. That is not the case. He reprints the quote above in his book and responds:

The explanation we owe to Condillac seems to me entirely insufficient and empirical, or rather it fails to explain anything at all. . . .

The exchange represents two gains, you say. The question is: Why and how? It results from the very fact that it takes place. But why does it take place? What motives have induced the two men to make it take place? Does the exchange have in it a mysterious virtue, inherently beneficial and incapable of explanation?

We see how exchange . . . adds to our satisfactions. . . . [T]here is no trace of . . . the double and empirical profit alleged by Condillac.

This is perplexing. Clearly, the necessary double inequality of value is not empirical or contingent. Contra Bastiat, the double inequality explains quite a lot, and his questions all have easy answers.

Yet more perplexing still is Bastiat’s statement in the same chapter: “The profit of the one is the profit of the other.” This seems to imply what he just denied.

Bastiat’s failure to grasp this point had consequences for his debates with other economists. For example, he and his fellow “left-free-market” advocate Pierre-Joseph Proudhon engaged in a lengthy debate over whether interest on loans would exist in the free market or whether it was a privilege bestowed when government suppresses competition. Unfortunately, the debate suffers because neither Bastiat nor Proudhon fully and explicitly grasped the Condillac/Austrian point about the double inequality of value. As Roderick Long explains in his priceless commentary on the exchange:

[E]ach one trips up his defense of his own position through an inconsistent grasp of the Austrian principle of the “double inequality of value”; Proudhon embraces it, but fails to apply it consistently, while Bastiat implicitly relies on it, but explicitly rejects it. . . .

Proudhon’s case against interest seems to depend crucially on his claim that all exchange must be of equivalent values; so pointing out the incoherence of this notion would be a telling reply. But Bastiat cannot officially give this reply (though he comes tantalisingly close over and over throughout the debate) because elsewhere—in his Economic Harmonies—Bastiat explicitly rejects the doctrine of double inequality of value.

How frustrating! Bastiat has so much to teach. But here is one blind spot that kept him from being even better.

The report card comes in the form of a working paper from the Cato Institute: “Has the Fed Been a Failure?” by George A. Selgin, William D. Lastrapes, and Lawrence H. White.

The authors state in their abstract:

As the one-hundredth anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation’s experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed’s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment. (2) While the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.

In light of the Fed’s defined mission—monetary support for economic growth, stable prices, maximum employment—the authors use the following criteria to assess its record: “the relative extent of pre- and post-Federal Reserve Act price level changes, pre- and post-Federal Reserve Act output fluctuations and business recessions, and pre- and post-Federal Reserve Act financial crises.” The Fed has done poorly on every count. No one familiar with the Mises-Hayek critique of central planning will be surprised. Central banking is not equivalent to comprehensive planning of the economy, but money is the most pervasive good and monetary engineers suffer the same insurmountable ignorance as any central planner.

I can only hit the paper’s highlights here.

Inflation

Selgin et al. pronounce the Fed a dismal failure in controlling inflation. “[F]ar from achieving long-run price stability, it has allowed the purchasing power of the U.S. dollar, which was hardly different on the eve of the Fed’s creation from what it had been at the time of the dollar’s establishment as the official U.S. monetary unit, to fall dramatically.”

The value of the dollar was essentially stable from the late eighteenth century to the second decade of the twentieth century! “A consumer basket selling for $100 in 1790,” they write, “cost only slightly more, at $108, than its (admittedly very rough) equivalent in 1913.”

And since that time? “[T]hereafter the price soared, reaching $2,422 in 2008. . . . [M]ost of the decline in the dollar’s purchasing power has taken place since 1970, when the gold standard no longer placed any limits on the Fed’s powers of monetary control.”

The dollar has lost 95 percent of its value since the Fed came into existence.

Deflation

The authors say that since the Great Depression the Fed has rid the economy of deflation (defined as falling prices), which was a feature of the late nineteenth-century economic landscape. Economists, including Fed chairman Ben Bernanke, generally deem deflation as something to be avoided at almost all costs, so they would give the Fed kudos in this respect. But Selgin et al. point out (as have others, such as Steven Horwitz, in the January/February 2010 Freeman) that what matters is not deflation per se but the kind of deflation:

Harmful deflation—the sort that goes hand-in-hand with depression—results from a contraction in overall spending or aggregate demand for goods in a world of sticky prices. As people try to rebuild their money balances they spend less of their income on goods. Slack demand gives rise to unsold inventories, discouraging production as it depresses equilibrium prices. Benign deflation, by contrast, is driven by improvements in aggregate supply—that is, by general reductions in unit production costs—which allow more goods to be produced from any given quantity of factor and which are therefore much more likely to be quickly and fully reflected in corresponding adjustments to actual (and not just equilibrium) prices.

Historically, benign deflation has been the far more common type.

During roughly the last quarter of the nineteenth century, prices in the United States declined 37 percent—1.2 percent a year on average. That’s what the Fed has saved us from, thank you very much.

Frequency and Duration of Recessions

Again, the pre-Fed record is better than the Fed’s performance. Drawing on the latest research, the authors conclude:

[A]lthough contractions were indeed somewhat more frequent before the Fed’s establishment than after World War II (though not, it bears noting, more frequent than in the full Federal Reserve sample period), they were also almost three months shorter on average, and no more severe. Recoveries were also faster, with an average time from trough to previous peak of 7.7 months, as compared to 10.6 months. Allowing for the recent, 18-month-long contraction further strengthens these conclusions.

Moreover, the Fed has violated traditional standards by bailing out insolvent banks. Selgin et al. reject the “too big to fail” doctrine, arguing that the fear-mongering about “systemic risk” is unsubstantiated. Bailing out the creditors of insolvent institutions, as the Fed did during the current financial crisis, has increased the future exposure of the public by reinforcing moral hazard—encouraging excessively risky behavior by creating the expectation of government rescue. In the process the Fed has gone from lender of last resort to allocator of capital—an ominous move toward central planning.

The authors do not endorse the pre-Fed system, which was heavily regulated by the national and state governments. Indeed, for most of American history interstate and intrastate branch banking was illegal, producing an industry of uncompetitive and undiversified banks.

Nor do they explore the free-banking alternative, though Selgin and White are well-known advocates of it. Instead they confine their analysis to various rules that would take away the Fed’s discretionary power over the money supply. These would be improvements but a far distant second to free banking.

The authors leave no doubt that “the Fed’s poor record calls for seriously contemplating a genuine change of regime.”

D’Souza needs to get out more. Specifically he should have a talk with Timothy Carney and Charlie Gasparino, whose books demonstrate beyond question that the best phrase to sum up Obama’s presidency is not “African anticolonial socialist” but “American Progressive corporatist.” Carney’s 2009 book is titled Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses (it was reviewed in the June 2010 Freeman). Gasparino’s recently published book is called Bought and Paid For: The Unholy Alliance Between Barack Obama and Wall Street. Neither writer could be mistaken for a left-winger.

The political establishment, helped by the mass media and intelligentsia, has long played a game in this country. It consists in depicting the competition for power as between two blocs: one hostile to business in the name of social justice, the other friendly to business in the name of “the free market.” Each bloc’s talking points and pet projects are calculated in superficial ways to reinforce its signature theme. Whenever the blocs need to rally their respective bases, they accentuate their surface differences. The “antibusiness” bloc accuses its opponents of being, say, Wall Street lackeys, while the “pro-free-enterprise” bloc accuses its opponents of being, say, socialists.

It’s all a sham that serves each side’s interests. The rivals actually want two variations of the same thing: the corporate state, a system of economic privilege that transfers wealth via government from market entrepreneurs, workers, and consumers to well-connected business interests.

What we have are two factions of a single establishment. Differences in rhetoric notwithstanding, both are friends of and beholden to big entrenched manufacturers (military contractors lead the way) and big financial institutions. Neither faction wishes to do anything to undermine the interests of these businesses. And for their part, the business people have no desire to antagonize either side. They need one another: The politicians need the campaign funds and economic cooperation; the businesses need the subsidies, guarantees, low interest rates, and impediments to competition. The banks in particular need friendly relations with politicians (federal, state, and local) who float debt that brings big fees for bond underwriters. It’s one close and lucrative alliance (which is not to say the various parties agree on every detail). Thus it has been throughout American history. (Doubters should consult Arthur A. Ekirch, Jr.’s classic, The Decline of American Liberalism.)

Obama to the Rescue

Enter Barack Obama. “For the most part, Obama had been good to the banks—really good. They’d gotten everything they wanted in terms of bailouts and handouts and reaped enormous profits because of it,” Gasparino writes. “. . . The fact of the matter is, when you strip away the name-calling and class warfare coming from the Obama administration, and when you ignore Wall Street’s gripes about the new financial reform legislation that will put a crimp in some of its profits, these two entities are far more aligned than meets the casual eye. They coexist to help each other—in an unholy alliance against the American taxpayer.”

Gasparino points out that Obama signaled his eagerness to be Wall Street’s friend at a meeting with the big players during his presidential campaign, and they came through with the money. Wall Street had no reason for remorse when they saw his economic appointments and advisers: Timothy Geithner (formerly of the New York Fed), Lawrence Summers (Treasury secretary under Bill Clinton and former World Bank president), Paul Volcker (former Fed chairman), Robert Rubin (formerly of Goldman Sachs, later of Citigroup), Ben Bernanke (reappointed as Fed chairman), Rahm Emanuel (formerly of Goldman Sachs), and Greg Craig (a political insider who has gone on to represent Goldman Sachs from one of the nation’s top law firms). Many other Wall Street insiders, whose names are not so well known, have the President’s ear.

Gasparino’s thesis is confirmed by the essential continuity between the Bush and Obama administrations. Wall Street got first consideration beginning when the rotten fruit of bipartisan housing and monetary policies became apparent. If anything, the Obama team has substantively treated Wall Street better than the Bush team did. The Fed has gone into the business of allocating capital selectively, buying up mortgage-based and other “assets” of dubious value from institutions deemed too big to fail. One must guard against being deceived by political rituals. The Dodd-Frank financial “reform” is portrayed as the long-overdue taming of Wall Street, but no one who pays close attention believes that. The usual players will help write the myriad rules the new law calls for, and they are not likely to harm the insiders’ interests.

Sure, Obama bashed Wall Street last fall. No surprise: There was a campaign on and his party was in deep trouble; unemployment was stuck above 9.5 percent; and the disillusioned base needed rallying or it might not have shown up at the polls. The bigwigs at Goldman and the other firms may not be happy about the rhetorical roughing-up. They may even be concerned that a desperate Obama will do something in the short run that could reduce the growth of profits and executive pay. Such uncertainty is surely one reason for the reluctance to invest and slow recovery. But it’s unlikely that any big player fears that the future holds a radical anti-capitalist revolution.

The daily talk-radio and cable-news alarms about this being the most radical left-wing administration in U.S. history should be chalked up to base-rallying on the other side. As I suggested at the outset, the American political system capitalizes on the division in public opinion over the role of government by propagating the myth that there is a grand war raging between the advocates of Big Government and the advocates of Free Markets. In fact, it’s an intramural competition between two rival factions that favor government management of the economy—with a few differences in detail—on behalf of special interests.

Why the charade? All the better to exploit the productive classes, those that would be prospering in a freed market.