An excellent example of this tunnel-vision punditry is E. J. Dionne Jr.’s New York Times column of July 11. Dionne argues that a variety of problems facing the economy in 2008 has led to “the collapse of assumptions that have dominated our economic debate for three decades.” The assumptions he refers to are that “Regulation is the problem and deregulation is the solution. The distribution of income and wealth doesn’t matter . . . [and] free trade produces well-distributed economic growth,” among others. In Dionne’s view, these ideas are “failing” and “even conservatives recognize that capitalism is ailing.”

Unfortunately for Dionne, it just ain’t so.

Dionne spends much of the column arguing that the current housing crisis and its spillover effects on the financial industry are the result of, in Rep. Barney Frank’s words, “excessive deregulation.” There has been some deregulation of the financial markets in the last couple of decades, and much of that deregulation has actually produced incredible benefits for the American public. Aside from the customer-service gains that have come from the legalization of interstate banking and the ability of banks to offer an array of products under one roof, the expanded range of investments that banks can take on enables them to diversify and lower their exposure to risk.
Yes, a number of banks have had problems in the last year (more below), but the number of bank failures since the 1999 deregulation has been exceptionally low.

Between 1999 and 2007 only 40 U.S. banks failed, which is substantially lower than the same nine-year periods starting in 1969, 1979, and 1989. Only two years since 1934 have had no bank failures: 2005 and 2006. If the 1999 overturning of the Depression-era Glass-Steagall regulations is such a problem, why were the eight years to follow among the healthiest in U.S. banking history? Assuming deregulation did not have a built-in time delay, this year’s banking problems must have some other source.

Those problems are almost all linked to the troubles in the housing market. Here too, blaming deregulation is at odds with some important facts. True, financial firms have developed many new tools during the last 25 years. Some of those, such as the adjustable-rate mortgages at the center of the difficulties, were necessitated by previous government intervention in markets—in this case, the Fed-generated inflation of the 1960s and ’70s.

More important, though, is the role played by institutions such as Freddie Mac and Fannie Mae, both of which are not the products of laissez-faire capitalism
or any sort of “deregulation.” Those government-sponsored enterprises have artificially supported elements of the housing market that might not have been economically justified. Other government regulations, such as the Community Reinvestment Act, which requires that banks make a certain proportion of loans to low-income customers in their communities, have forced banks to take on excessively risky investments in housing. Finally, meddling politicians can cause banks to fail by spreading unwarranted concern about their balance sheets, as some have argued Senator Charles Schumer did in the case of the now-failed IndyMac Bank.

In sum, nothing in the current housing and banking troubles indicates some sort of systematic failure of capitalism that can be laid at the feet of deregulation.

Problematic Claim

Dionne also makes a passing comment about the way in which “The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era.” This claim is problematic in three ways. First, the 1920s were hardly “laissez-faire,” especially in the financial markets. The United States had a government-run central bank along with a host of banking regulations, not to mention all the other economic regulations born out of the Progressive Era and World War I. Second, the Great Depression itself resulted not from the failures of capitalism, but the Fed’s monetary mismanagement in the 1920s and 1930s, and its length and depth were caused by the protectionism and interventionism of the Hoover and Roosevelt administrations. The New Deal and World War II did not get us out of trouble; only the explosive growth generated by the freer postwar economy did so. Third, many of the very regulations that emerged from the Great Depression, such as federal deposit insurance, enabled banks to do exactly what Dionne wrongly blames on the market: profiting when they lent well, but shifting losses to others when they messed up.

Finally, Dionne’s claim, echoed by Frank, that free trade and capitalism more generally have benefited the wealthy at the expense of the poor also does not hold up to scrutiny. Frank’s concern for the “most vulnerable people in the country” is admirable, but free trade, by making cheaper imports available to lower-income Americans and by creating jobs in export industries, has done more for “the most vulnerable” than any government program.

It is also ironic that a man of the left would focus only on the vulnerable in the United States and ignore the massive increase in well-being that free trade has produced for the most vulnerable people in the rest of the world. The billions of Chinese and Indians who have risen out of abject poverty in the last decade or so are a major accomplishment of free trade, and that increase in wealth has benefited American citizens as well. The living standards of poor Americans today, measured by what they are capable of consuming, exceeds that of the average American 35 years ago. If free trade is so awful for the poor, Dionne and Frank need to explain how an era of expanding free trade has also produced these increases in the well-being of poor Americans and billions of others across the world whom they seem to think do not matter.

Once again, the pundits grab onto any bit of bad news to declare the death of capitalism, all the while ignoring the ways in which our larger-than-ever government has intervened in the market, producing the very problems they try to blame on the free market. Their misguided analysis is matched only by their continued promulgation of the idea that American living standards are declining, despite abundant data to the contrary. Even with all the government intervention, the (hampered) market continues to improve the lives of everyone, especially the poor. Imagine if the politicians and pundits stopped trying to prevent it from doing so.

Indeed, it was Charles’s execution that put the fear of chaos into Thomas Hobbes, inciting him to write his 1651 classic, Leviathan. Hobbes was so sure that only an all-powerful monarch could create the law and order necessary for civilization that he famously predicted that lives in a world without such a monarch would be “solitary, poor, nasty, brutish, and short.” Hobbes, I’m sure, thought of himself as a clear-headed realist who was immune to silly bourgeois notions of individual rights.

While few people today share Hobbes’s commitment to monarchy, most modern folks accept uncritically his deeper premise that law and order can be produced only by government.

This neo-Hobbesianism normally is accepted quietly, as a matter of course. But recently it has been boldly trumpeted. Just last year Oxford University Press published Liam Murphy and Thomas Nagel’s The Myth of Ownership, and in 1999 Norton published Stephen Holmes and Cass Sunstein’s The Cost of Rights. Both books argue that government is the necessary provider of law, order, and infrastructure; therefore, taxes are the price citizens must pay for civilization. In fact, both books go further—especially Murphy and Nagel’s—arguing that rights don’t exist without the state.

The Washington Post‘s E. J. Dionne is smitten with neo-Hobbesianism. He used the dismal occasion of April 15 to instruct readers on the necessity of government and of the taxation that fuels it. “Absent a government committed to the protection of rights, there are no rights,” Dionne insisted in his op-ed “The Price of Liberty.” Utterly convinced of the truth of this claim, he is “tempted to pick out the two dozen loudest anti-tax propagandists and send them a copy of one of the most important volumes of the last decade. . . [Holmes and Sunstein's] ‘The Cost of Rights.’”

Although it appears to Dionne and many others to be indisputably correct, neo-Hobbesianism suffers from at least two flaws: it is mistaken in its facts and defective in its logic.

Factually Mistaken

Contrary to the belief of neo-Hobbesians, law, rights, and the security they beget can be, and often are, provided privately.

A well-documented example is the Lex Mercatoria (law merchant). This is the extensive body of commercial law that began growing a thousand years ago in the Mediterranean region as trade expanded. Medieval merchants scattered around the Mediterranean—from Turkey to Morocco, from Egypt to Spain—had no common sovereign power to whom disputes could be referred. Nevertheless, an impartial, effective, efficient, and surprisingly nuanced body of law developed out of merchants’ practices and the expectations generated by these practices. Merchant courts—manned by merchants—became part of this law-discovery and law-enforcement process.

If, for example, a merchant court ruled that a Turkish rug maker owed ten pounds of gold to a Sicilian ship owner, the Turkish merchant would pay. He would pay even though no royal sheriff, no police force, no sovereign power of any sort was available to force him to do so. He obeyed the law because he wished to protect his reputation.

Despite the fact that it emerged unplanned over the years from the competitive practices of private merchants, and despite the fact that the courts which enunciated the rules of the Lex Mercatoria and handed down judgments were not arms of a sovereign power, this body of law serves today as the foundation for the Uniform Commercial Code in the United States.

It is simply untrue that the state is the sole source and sole enforcer of law.

A Non Sequitur

But let’s suppose, contrary to fact but for the sake of argument, that Dionne and other neo-Hobbesians are correct that the state is the only possible source of law and law enforcement. Given that law is absolutely necessary for order to exist and for rights to be protected, would it then be correct to insist that without the state “there are no rights”?

No. Even if government were necessary, it does not follow that individual rights are not antecedent to, and logically independent of, government.

Fundamental to civilization is the enormous dependence that each of us has on countless others. I’m able to spend my days teaching students, writing papers, and giving talks only because each of millions of other people regularly performs his own small task: growing food, assembling automobiles, stocking supermarket shelves, weaving cloth, drilling for oil, piloting commercial jetliners, making laundry detergent, conducting philharmonic orchestras, writing computer programs, negotiating and drawing up contracts, researching and developing medicines, and on and on and on.

Some of these tasks might be more important, on some scale, than others. But no one task alone can properly be identified as the key task; many individual tasks are indispensable for civilization. Only together do they make civilization possible.

Neo-Hobbesians commit a non sequitur when they erroneously conclude that, because civilization would crumble without law enforcement, civilization ultimately owes itself to law enforcement.

There are any number of sets of tasks whose absence would cause civilization to crumble. Most obviously, if no one grew food, civilization would cease; if no one worked to supply clothing, civilization would cease; if no one built human dwellings, civilization would cease. These tasks are surely no less important than that of the police officer who patrols the neighborhood or of the naval officer who steers a destroyer.

And yet no one argues that horticulturists or haberdashers or homebuilders provide the foundational input for civilization—an input so fundamental that rights themselves owe their existence to it. (After all, what “rights” would I have if all farmers stopped working? I’d starve to death.) Why the special regard for law enforcement?

It’s time to quit regarding the state and law enforcement as something special. At its best, the state is an efficient supplier of law and order. At its worst—and at its worst it’s a monster too terrible to describe—it is the single greatest enemy of civilization and individual rights.