I’m inclined to think of George Orwell and F. A. Hayek at the same time. Both showed great courage in writing the truth, undaunted by the consequences. Both valued freedom, though they understood it differently.

Orwell, a man of the “left,” could not remain silent in the face of the horrors of Stalinism. Twice—during the Spanish Civil War and again at the dawn of the Cold War—he refused to permit his comrades to blind themselves to where their collectivism had led and could lead again. For his favor he was called a conscious tool of fascism, a stinging accusation considering he had gone to Spain to fight fascism. (But for a few inches, the bullet that penetrated Orwell’s neck in Spain would have denied us the latter warnings, Animal Farm and Nineteen Eighty-Four.)

Hayek, a man of the “right,” risked ostracism and worse in 1944 by publishing The Road to Serfdom. Writing in England at the height of World War II, this Austrian-turned-Briton warned that central economic planning would, if pursued seriously, end in a totalitarianism indistinguishable from the Nazi enemy. That couldn’t have been easy to write at that time and place—central planning was much in vogue among the intelligentsia. While a good deal of the reception was serious and respectful, a good deal of it was not. Herbert Finer, in Road to Reaction, called Hayek’s book “the most sinister offensive against democracy to emerge from a democratic country for many decades”; it expressed “the thoroughly Hitlerian contempt for the democratic man.”

Not surprisingly, The Road to Serfdom brought Orwell and Hayek together in print. Orwell briefly reviewed the book along with Konni Zilliacus’s The Mirror of the Past in the April 9, 1944, issue of The Observer. The man who would publish Animal Farm a year later and Nineteen Eighty-Four five years later found much to agree with in Hayek’s work: “In the negative part of Professor Hayek’s thesis there is a great deal of truth. It cannot be said too often—at any rate, it is not being said nearly often enough—that collectivism is not inherently democratic, but, on the contrary, gives to a tyrannical minority such powers as the Spanish Inquisitors never dreamed of.”

But true to his left state-socialism, Orwell could not endorse Hayek’s positive program:

[H]e does not see, or will not admit, that a return to ‘free’ competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State. The trouble with competitions is that somebody wins them. Professor Hayek denies that free capitalism necessarily leads to monopoly, but in practice that is where it has led, and since the vast majority of people would far rather have State regimentation than slumps and unemployment, the drift towards collectivism is bound to continue if popular opinion has any say in the matter.

It’s disappointing to see Orwell give such short shrift to Hayek’s positive thesis. He is glib and dogmatic, which is unbecoming a serious intellectual such as Orwell. His ignorance of economics leaps from the page.

“[A] return to ‘free’ competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State.” It’s hard to believe that someone so familiar with Stalinism could have written that. Even without knowing much economics, could he really have thought that what goes on in market-oriented societies, even during depressions, could be worse than the famine Stalin inflicted on the Ukrainians, the show trials and executions, or the labor camps in Siberia?

“The trouble with competitions is that somebody wins them.” In a market producers compete to better serve consumers. The losers in that competition are not exiled or executed. They find other ways to serve consumers, just as producers are trying to serve them.

“Professor Hayek denies that free capitalism necessarily leads to monopoly, but in practice that is where it has led. . . .” Where has monopoly arisen without the aid of the State? We find no market-generated monopoly in England or the United States. There, major business interests actively promoted protectionism and other interventions precisely to tamp down competition and protect their market shares.

“[T]he vast majority of people would far rather have State regimentation than slumps and unemployment. . . .” But that’s a false choice. Slumps and unemployment, as Hayek and his mentor Ludwig von Mises taught, are products of central-bank manipulation of money and interest rates—that is, of government, not of the free market.

I must pause here to focus on Orwell’s disgraceful use of the word “regimentation.” I say “disgraceful” because he committed the sin he himself so eloquently condemned in his justly famous essay “Politics and the English Language”: the sin of euphemism. Regimentation is the least of the State’s crimes.

One wonders how Orwell avoided despair. He misidentified the free market with state capitalism and rejected it, and he saw the totalitarian tendencies of socialism up close. Yet he could write, “There is no way out of this unless a planned economy can somehow be combined with the freedom of the intellect, which can only happen if the concept of right and wrong is restored to politics” (emphasis added).

Hadn’t he just read chapter 11 of The Road to Serfdom, “The End of Truth,” in which Hayek described how a serious commitment to central planning must produce “contempt for intellectual liberty”?

“The word ‘truth,’” Hayek wrote, “itself ceases to have its old meaning. It describes no longer something to be found, with the individual conscience as the sole arbiter of whether in any particular instance the evidence (or the standing of those proclaiming it) warrants a belief; it becomes something to be laid down by authority, which has to be believed in the interest of unity of the organized effort and which may have to be altered as the exigencies of this organized effort require it.

“The general intellectual climate which this produces, the spirit of complete cynicism as regards truth which it engenders, the loss of the sense of even the meaning of truth, the disappearance of the spirit of independent inquiry and of the belief in the power of rational conviction, the way in which differences of opinion in every branch of knowledge become political issues to be decided by authority, are all things which one must personally experience—no short description can convey their extent.”

But of course Orwell had experienced those things in Spain and knew how it was in Russia. He certainly put a heavy burden on that word “somehow.” How restoring the concept of right and wrong to politics would make central planning either decent or practical is a mystery no one has solved. Mises had shown long before that socialism could not be practical because without prices arising out of the exchange of privately owned means of production, the socialist planner could not make rational calculations with respect to what should be produced, in what manner, and in what quantities. As for decency, Hayek addressed that in chapter 10, “Why the Worst Get on Top.”

Related posts:

1. Bretton Woods: 1944-1971
2. Nineteen Neglected Consequences of Income Redistribution

The government of the United States spent the year debating major new undertakings, ranging from health care to climate change to energy development to tax reform. Yet a far more fundamental shift, in the form of a rapid and pervasive expansion of government power over the private sector of the economy, has been going on in stealth. Shifting economic power from individual decision-makers to the national government characterizes virtually every policy proposal being debated in Congress.

Take tax policy. A 131-page document issued by the Treasury goes way beyond recommending the extension of some of the expiring Bush administration tax cuts. For example, the fine print contains more than a dozen ways of discouraging American firms from doing business and investing overseas. Supposedly minor technical changes also would have a severe impact.

For example, eliminating LIFO (last in-first out) inventory accounting would raise business taxes over $60 billion in one decade. The Treasury also wants to revive four corporate environmental taxes that were eliminated in 1969. There’s no relation between the tax burden these four taxes would impose on a company and the pollution that company generates. This bears an uneasy resemblance to Willie Sutton, who robbed banks because that was where the money was.

Inevitably a variety of technical tax provisions will increase the paperwork burden on business. The penalties for failing to file information returns (such as Form 1099) promptly and accurately, for example, will rise in a very complicated, three-tiered fashion.

On the expenditure side, the typical stimulus project increases the power of government in private business decision-making. The bailout of the automobile industry is really an inefficient method of financing union pension and health plans. The stockholders got zapped and the bondholders poorly treated. The taxpayers are left holding the bag, especially considering the restrictions on importing the really fuel-efficient cars General Motors produces overseas. Apparently, the new General Motors factory for building compact cars was chosen on the basis of “carbon footprint” and “community impact.”

It is hard to keep a straight face when analyzing the Cash for Clunkers program. For example, owners of the biggest old “clunkers” got a $3,500 credit for trading in an old vehicle for a new one with an improvement of just one mile per gallon. Surely, it would have saved energy if the Treasury had just mailed the $3,500 checks directly to Detroit!

Of course, the Obama administration is making some reductions in federal spending. It is reportedly imposing a 9 percent reduction in the budget for the division in the Labor Department that polices fraud and other illegalities on the part of labor unions. As noted below, a simultaneous expansion of business-oriented antitrust enforcement is taking place.

The Business of America is Government

Turning to regulation, one of Ralph Nader’s biggest disappointments during his heyday as a “consumer advocate” was the failure of his proposal for a new Consumer Protection Agency. He should be a bit happier now: The administration’s financial regulatory plan creates a powerful new Consumer Financial Protection Agency (CFPA).

This new free-wheeling agency would take authority now divided between the Securities and Exchange Commission (SEC) and the Federal Reserve System. In a change guaranteed to cause confusion, the CFPA would share authority with the Federal Trade Commission. The new regulatory agency would also have a mandate to give consumers more economic education. Educators find that especially scary.

Moreover, the agency will have its own money pot, independent of the normal congressional appropriations process. It will be financed directly by fees assessed on “entities and transactions” across the financial sector.

The Treasury’s financial plan contains many other expansions of government power over business. The Federal Reserve System would have new authority to oversee any large financial entity whose failure the Fed thinks could generate “systemic risk.” The Treasury would head a new Financial Services Oversight Council to “resolve” the inevitable jurisdictional disputes among federal agencies. A new Office of National Insurance is to be established in the Treasury to monitor “all aspects of the insurance industry,” a sector of the economy traditionally under the province of state governments.

The SEC will require the registration of all advisers to hedge funds and other private pools of capital with assets over a given threshold. It also will have the power to inspect the books of the advisers and to ensure compliance by their clients. In addition, the power of the SEC will be expanded by legislative proposals to give it a more active role in guiding the compensation committees of all public companies.

Further, the Federal Deposit Insurance Corporation will have new authority to take over and shut down financial institutions (not just banks) whose failure is deemed to pose “systemic risk.”

Viewed in their totality, these technical financial changes would represent a historic expansion of government. Sadly, there is little comfort in the Treasury’s warning in its 88 pages of detailed proposals: “More can and should be done in the future.” Comparisons with the New Deal of the 1930s are too timid. Shades of Alexander Hamilton!

Business-Climate Change

The complicated climate change bill that recently passed the House of Representatives would dramatically expand government power over the economy. Again, the fine print deserves far more attention than it has received. For example, buried in the 1,201 pages of detail is a provision authorizing the Department of Transportation to require automotive manufacturers to produce vehicles that can run on methanol (wood alcohol), a fuel not widely available.

Other provisions, as expected, have little to do with the subject of global warming. For example, contractors on some energy projects must pay employees at least the locally “prevailing wage.” This well-known code means, in practice, paying higher union wage scales, thus letting unions set wages even for non-union firms.

Many federal departments are trying to climb aboard the economic stimulus bandwagon. The Department of Justice wants to help out by showing that antitrust should be a “frontline issue” in the response to the problems facing the economy. Apparently, business is not getting sued often enough. Incredibly, one new assistant attorney general views antitrust enforcers as “key members of the government’s economic recovery team.”

When we step back and try to add up all the tax, spending, and regulatory actions and proposals of the new Obama administration, the result is clear: a cumulative squeeze on private decision-making and a more slowly growing economy in the years ahead.

In the process, private businesses will be discouraged by a host of government policies from making major new investments, especially long-term investments with payoffs far in the future. The likelihood of higher taxes and greater inflation resulting from the huge budget deficits that are likely to arise in the next several decades, abetted by lax monetary policies, are the key negative factors. The American public is likely to have a long wait until the national unemployment rate gets back down to the 7.6 percent that was reported when President Obama took office in January 2009.

One fundamental point deserves to be stressed. For the next several years, in the inevitable tension in public policymaking between economic prosperity and income redistribution, the American people can expect income equalization to get the government’s priority over improvements in people’s living standards. The average American, at best, will receive a more equal slice of an income pie that will be far smaller than the public expects.

Related posts:

1. Limits to Monetary Expansion
2. Union Power and Government Aid
3. A Number, Not a Name: Big Brother by Stealth

When Austrian-school theorists have examined the dynamics of market exchange, they have stressed the importance not only of the larger political context within which such exchanges take place, but also the ways in which politics influences and molds the shape and character of those exchanges. Indeed, with regard to financial institutions in particular, they have placed the state at the center of their economic theories on money and credit.

Throughout the modern history of the system that most people call “capitalism,” banking institutions have had such a profoundly intimate relationship to the state that one can only refer to it as a “state-banking nexus.” As I point out in Total Freedom: Toward a Dialectical Libertarianism:

A nexus is, by definition, a dialectical unity of mutual implication. Aristotle . . . stresses that “the nexus must be reciprocal . . . [T]he necessary occurrence of this involves the necessary occurrence of something prior; and conversely . . . given the prior, it is also necessary for the posterior to come-to-be.” For Aristotle, this constitutes a symbiotic “circular movement.” As such, the benefits that are absorbed by the state-banking nexus are mutually reinforcing. Each institution becomes both a precondition and effect of the other.

The current state and the current banking sector require each other. They are so reciprocally intertwined that each is an extension of the other.

Remember this the next time somebody tells you, as New York Times columnist Bob Herbert did, that “free market madmen” caused the current financial crisis that is threatening to undermine the global economy. There is no free market. There is no “laissez-faire capitalism.” The government has been deeply involved in setting the parameters for market relations for eons; in fact, genuine “laissez-faire capitalism” has never existed. Yes, trade may have been less regulated in the nineteenth century, but not even the so-called Gilded Age featured “unfettered” markets.

One reason I have come to dislike the term “capitalism” is that, historically, it has never manifested fully its so-called “unknown ideals.” Real, actual, historically specific “capitalism” has always entailed the intervention of the state. And that intervention has always had a class character; that is, the actions of the state have always benefited and must always benefit some groups at the expense of others.

No Neutral Government Action

Mises understood this when he constructed his theory of money and credit. For Mises, there is no such thing as a “neutral” government action, just as surely as there is no such thing as “neutral” money. As he pointed out in The Theory of Money and Credit and other works, “Changes in the quantity of money and in the demand for money . . . never occur for all individuals at the same time and to the same degree and they therefore never affect their judgments of value to the same extent and at the same time.” He traced how, with the erosion of a gold standard, an inflation of the money supply would diffuse slowly throughout the economy, benefiting those, such as banks and certain capital-intensive industries, who were among the early recipients of the new money.

One reason the gold standard was abandoned is its incompatibility with a structural policy of inflation and with a system heavily dependent on government intervention. (It should be pointed out that a free-banking system need not necessarily entail a 100 percent reserve gold standard, but I leave this discussion for another day.) The profiteers of systematic inflation are not difficult to pinpoint. Taking their lead from Mises, Hayek, and Rothbard and such New Left revisionist historians as Gabriel Kolko and James Weistein, Walter Grinder and John Hagel III point out:

Historically, state intervention in the banking system has been one of the earliest forms of intervention in the market system. In the U.S., this intervention initially involved sporadic measures, both at the federal and state level, which generated inflationary distortion in the monetary supply and cyclical disruptions of economic activity. The disruptions which accompanied the business cycle were a major factor in the transformation of the dominant ideology in the U.S. from a general adherence to laissez-faire doctrines to an ideology of political capitalism which viewed the state as a necessary instrument for the rationalization and stabilization of an inherently unstable economic order. This transformation in ideology paved the way for the full-scale cartellization [sic] of the banking sector through the Federal Reserve System. The pressure for systematic state intervention in the banking sector originated both among the banks themselves and from certain industries which, because of capital intensive production processes and long lead-times, sought the stability necessary for the long-term planning of their investment strategies. The historical evidence confirms that the Federal Reserve legislation and other forms of state intervention in the banking sector during the first decades of the twentieth century received active support from influential banking and industrial interests. . . . [“Toward a Theory of State Capitalism: Ultimate Decision-Making and Class Structure,” Journal of Libertarian Studies, 1977.]

As Grinder and Hagel explain, “[C]artellization [sic] of banking activity permits banks to inflate their asset base systematically.” This has the effect of strengthening the “ultimate decision-making authority” of banking institutions over “the activities of industrial corporations,” and, by extension, “the capital market.” These banking institutions serve as a key “intermediary between the leading economic interests and the state.”

Thus one of the major consequences of inflation is a shift of wealth and income toward banks and their beneficiaries. But this financial interventionism also sets off a process that Hayek would have dubbed a “road to serfdom,” for inflation introduces a host of distortions into the delicate structure of investment and production, setting off boom and bust and, in Grinder and Hagel’s words, “a process of retrogression from a relatively free market to a system characterized by an increasingly fascistic set of economic relationships.”

Just as the institution of central banking generates a “process of retrogression” at home, engendering additional domestic interventions that try to “correct” for the very distortions, conflicts, and contradictions it creates, so too does it make possible a structure of foreign interventions. In fact, it can be said that the very institution of central banking was born, as Rothbard argues in The Mystery of Banking, “as a crooked deal between a near bankrupt government and a corrupt clique of financial promoters” in an effort to sustain British colonialism. The reality is not much different today, but it is a bit more complex in terms of the insidious means by which government funds wars, and thereby undermines a productive economy.

So where does this leave us today?

Much has already been said about the most recent financial crisis, viewed from a radical libertarian and Austrian perspective, which helps to clarify its interventionist roots. (See, for example, Steven Horwitz’s “An Open Letter to My Friends on the Left,” and Sheldon Richman’s “Bailing Out Statism“). The seeds for this particular crisis were planted some years ago. The origins of the housing bubble can be traced to the creation of Fannie Mae and Freddie Mac, government-sponsored enterprises that extended risky loans to low-income borrowers in the hopes of expanding the “ownership society.” But the larger crisis must be understood within the wider political-economic context shaped by inflationary government and Federal Reserve policies that fueled a binge of reckless borrowing. Horwitz explains:

All of these interventions into the market created the incentive and the means for banks to profit by originating loans that never would have taken place in a genuinely free market. It is worth noting that these regulations, policies, and interventions were often gladly supported by the private interests involved. Fannie and Freddie made billions while home prices rose, and their CEOs got paid lavishly. The same was true of the various banks and other mortgage market intermediaries who helped spread and price the risk that was in play, including those who developed all kinds of fancy new financial instruments all designed to deal with the heightened risk of default the intervention brought with it. This was a wonderful game they were playing and the financial markets were happy to have Fannie and Freddie as voracious buyers of their risky loans, knowing that US taxpayer dollars were always there if needed. The history of business regulation in the US is the history of firms using regulation for their own purposes, regardless of the public interest patina over the top of them. This is precisely what happened in the housing market. And it’s also why calls for more regulation and more intervention are so misguided: they have failed before and will fail again because those with the profits on the line are the ones who have the resources and access to power to ensure that the game is rigged in their favor.

This is precisely correct; indeed, there are those of a certain political bent who might seek to place blame for the current financial crisis on the recipients of subprime mortgages, particularly those in minority communities. But if elements of the current housing bubble can be traced to Clinton administration attempts to appeal to traditional Democratic voting blocs, it’s not as if the banks were dragged kicking and screaming into lending those mortgages. This is, in a nutshell, the whole problem, the whole history, of government intervention, as Horwitz argues. Even if a case can be made that the road to this particular “housing bubble” hell was paved with the “good intentions” of those who wanted to nourish the “ownership society,” their actions necessarily generated deleterious unintended consequences. When governments have the power to set off such a feeding frenzy, government power becomes the only power worth having, as Hayek observed so long ago.

We heard a lot about “change” during the last presidential campaign, and about the necessity to end the influence of Washington lobbyists on public policy. But that influence exists because Washington has the power to dispense privilege. And privileges will always be dispensed in ways that benefit “ultimate decision-makers.” That’s the way the system is rigged. It is not simply that intervention breeds corruption; it’s that corruption is inherent in the process itself.

It is therefore no surprise that the loudest advocates for the effective nationalization of the finance industry are to be found on Wall Street; at this point, failing financiers welcome any government actions that will socialize their risks. But such actions that socialize losses while keeping profits private are a hallmark of fascist and neofascist economies. They are just another manifestation of “Horwitz’s First Law of Political Economy” (“Capitalists, Capitalism, and the Siren’s Song of Stability”): “No one hates capitalism more than capitalists.”

It is the government’s monetary, fiscal, and global policies that have created insurmountable debt and record budget deficits, speculative booms and bubble bursts. What is needed is genuine structural change. But the primary battle is an intellectual and cultural one. It requires that we question the fundamental basis of the current statist system.

Related posts:

1. How Much Money Does an Economy Need?
2. The Political Economy of John Taylor of Caroline
3. Austrian Economics and the Political Economy of Freedom

But tu quoque is the least of the logical errors informing this book’s misguided policy conclusions. Once we get beyond the silly comparison of an infant industry with his six-year-old son, we see the real shortcoming of his attack on free trade: his attenuated understanding of entrepreneurship. Entrepreneurs use resources for which they are responsible (either their own or those they have borrowed and must repay) based on their appraisals, in the face of uncertainty, of consumer demand and resource availability in the future. The infant-industry argument central to this book implicitly assumes that the only investments that can contribute to economic growth are those that compete with imports. But of all the import-competing industries in any developing country, which ones should be fostered through protectionism? Also, there’s no reason to presume that government leaders making those choices would do so on the basis of objective appraisal of their profitability. Favoritism towards relatives and cronies is far more likely.

Rather than let real entrepreneurs bear the risk and reap the rewards, infant industry protectionism is little more than a socialization of risk. While it may yield more investment, the investment to be protected is likely to be misdirected and thus less conducive to growth than investment that must meet a harsher market test.

The author rails against “neo-liberal” ideologues (the bad Samaritans of his title), blissfully unaware of his own ideological biases—namely, a touching faith in the ability of government leaders to make the right choices more often than private entrepreneurs risking their own capital. Entrepreneurs are not necessary in this view, since the government can do their job at least as well. The government can determine pragmatically which industries to protect, how much inflation will maximize growth, which foreign investments to permit, and which enterprises it should own.

Not only does Chang get the big picture wrong, he commits a lot of smaller errors along the way. He misplaces Jean-Baptiste Colbert’s tenure as France’s finance minister by 200 years (1865–1883 instead of 1665–1683). He cites the “failure of electricity deregulation in California, which resulted in the infamous blackout in 2001,” oblivious to the continued price controls that made “deregulation” a terrible mischaracterization of what really went on. He avers that “[s]trengthening of the welfare state . . . will also help reduce political corruption by making the poor less vulnerable to vote buying,”—as if the welfare state were much more than vote-buying on a wholesale basis. Another howler is his description of the late socialist John Kenneth Galbraith as a non-leftist. I guess he was just another non-ideological pragmatic centrist like Chang himself.

He also sneaks some subtle premises into his work, which helps explain why he supports so many bad policies. His tacit approval of Britain’s ban on the migration of skilled workers in the 1700s could only come from someone who believes the state owns its residents. Much of his discussion of less-developed countries’ lack of respect for intellectual property rights seems to be based on the premise that if you need something you can’t afford you have the right to steal it. Throughout the book he cites the existence of specific policies as prima facie evidence that they are justified. For example, “When they were backwards themselves in terms of knowledge, all of today’s rich countries blithely violated other people’s patents, trademarks and copyrights.”

Even when Chang raises interesting points his statist views put him on the wrong side of the issue. For example, he is critical of what he calls the unholy trinity of the IMF, World Bank, and WTO, but for the wrong reasons—downplaying the high taxes and additional regulations they impose in exchange for the putative “benefits” they provide.

Overall, Bad Samaritans gives us a good picture of what we champions of freedom are up against. The author J. Wallace Day once said, “Always keep your friends close, but your enemies keep closer.” That is the best rationale I can come up with to recommend that supporters of economic liberty read this book—to know what enemies of free trade are saying today.

Related posts:

1. Book Review: Against the Tide: An Intellectual History of Free Trade by Douglas A. Irwin
2. Free Trade: Key to Peace and Prosperity
3. Our Economic Past ~ Free Trade: History and Perception

Make no mistake: The collapse of Fannie and Freddie is government social engineering predictably gone bad.

In a free society supply and demand would govern markets. The demand for houses would be determined by people’s preferences and the resources at their disposal. Supply would be determined by relative profit expectations—which is to say, by the demand for housing and the competing demand for the necessary inputs.

A distortion occurs when government planners and rent-seeking corporate allies, under cover of humanitarian social policy, engineer a deviation from natural market outcomes. Dressed up as promotion of the American Dream through home ownership, the planners used political means—ultimately, the threat to imprison uncooperative taxpayers—to channel wealth to the construction, real-estate, and financial industries. The primary instruments of this social engineering were Fannie Mae, created as a government agency during the New Deal and—cough—“privatized” in 1968 to get it off budget, and Freddie Mac, created as a “private” GSE in 1970.

The GSEs don’t make mortgage loans. Rather, using borrowed money, they buy mortgages from original lenders, encouraging banks to make more loans. Pooling lots of mortgages together, the GSEs create mortgage-backed securities (MBS). In fact, Freddie and Fannie created the secondary mortgage market that has come in for criticism since the subprime problem developed.

As economist Arnold Kling writes, “Whether it retains or sells the security, the GSE bears the default risk of the mortgages, which is the source of the recent crisis.”

Freddie’s and Fannie’s activities were designed to channel money to mortgage lenders so that they could loan widely, especially to people who might have been priced out of a fully private mortgage market. The system inevitably lowered lending standards and interest rates.

If these activities had been performed not by GSEs but by real private companies, they would have been subject to market checks. But they were not. They’re not called government-sponsored enterprises for nothing. As such they have special advantages over private companies, permitting them to do things on a scale larger than would have occurred in a free market.

They don’t pay local and state taxes like other companies do, and they can get government loans. Moreover, as Kling puts it, “In both the mortgage insurance business and the portfolio lending business, the GSEs have two important advantages . . . [:] a lower risk premium and lower capital requirements.” In brief, Fan and Fred could borrow money for less than private companies could because “investors believed that the GSEs would not be allowed to fail,” Kling writes. This is the “implicit guarantee.” (With the wink of an eye, the GSEs say their paper is not guaranteed. So why not hold their creditors to the letter of the contract?)

As for the lower capital requirements, Kling writes, “When banks engage in the mortgage insurance business or the portfolio lending business, they are required by their regulators to put more of their shareholders’ funds at risk than the GSEs are. This makes it difficult for banks to compete with GSEs.”

The result was a far more concentrated lending market and hence greater vulnerability to adverse changing conditions. Fan and Fred hold or insure $5.4 trillion in mortgage debt—half the national total—making the taxpayers ultimately responsible now that the GSEs are under federal conservatorship. Three-quarters of mortgages written these days are GSE-backed. So the government has just become the country’s major mortgagee. It’s ironic that after making the GSEs dominant, the government now wants to shrink their role in the mortgage industry beginning in 2010.

Not Greed But Incentives

We can see, then, that the GSEs’ privileged status, which was intended to distort the housing and mortgage markets, did exactly that. The whole shaky structure was vulnerable to a deterioration in home values, to which the GSE system itself contributed. (Other things contributed to the run-up and collapse of home values in particular parts of the country, such as a broad social policy of encouraging banks to lend to un-creditworthy borrowers.) As of September, the GSEs had lost well over $10 billion since the mortgage meltdown occurred, and they were getting close to being unable to borrow enough money to roll over their debt. This and fear of a more general economic meltdown are what prompted the government to step in, exposing the taxpayers dramatically. The bailout was to begin with a billion-dollar infusion. Up to $200 billion has been promised. It will no doubt be more. Of course, the treasury secretary now has the authority to buy $700 billion worth of dubious mortgage-backed securities from struggling banks. Rev up those printing presses.

It’s really an anticlimactic chapter in this story of putrid rent-seeking and political opportunism. The bailout of the GSEs’ creditors creates a new round of the same moral hazard—encouraging recklessness by insuring it—that brought on the calamity in the first place. No one believed it would be the last bailout of those who are “too big to fail.”
The current problems are commonly attributed to greed and irresponsibility. But this won’t do. As Lawrence H. White notes, “Greed is a constant.” Why did the consequences take so long to show up?

There was irresponsibility—but only because the government for decades has pursued a policy of relieving big companies of the responsibility that otherwise would have been imposed by market discipline and competition. Any promise to bail out companies, and any regulatory, tax, or trade policy that raises the barriers to entry for new competitors, sews the seeds of crisis.

Focusing on greed and irresponsibility misses the most basic point: incentives. In a truly free market—when business people know they must face the consequences of their actions—“greed” (whatever that may be) tends to create general benefits. (“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”) In a government-regulated and government-guaranteed environment, “greed” can inflict harm on innocents. Institutions determine whether self-serving action benefits or damages others. Institutions that respect freedom, property, and self-responsibility promote the general welfare. Institutions that forcibly transfer risk to the taxpayers, punish responsibility, and reward irresponsibility promote social and economic catastrophe.

The New York Times was wrong. This was not “an extraordinary federal intervention in private enterprise.” It is the state bailing out statism. As Oliver Hardy might have said, “Well, government, this is another fine mess you’ve gotten us into.” Let’s hear no more about the “laissez-faire” Republicans. That myth serves only to protect advocates of state intervention regardless of party.

Related posts:

1. Bailing Out Statism
2. Nationalization of the Mortgage Market
3. What Happened to Market Discipline?

They were created—intentionally—to distort the housing and mortgage markets. That is, government planners were not content to let voluntary exchange and spontaneous market forces configure those industries unmolested. So—holding the taxpayers hostage—they intervened.

Make no mistake: The collapse of Fannie and Freddie is government social engineering predictably gone bad.

In a free society supply and demand would govern markets. The demand for houses would be determined by people’s preferences and the wealth and income at their disposal. Supply would be determined by relative profit expectations, which is to say, by the demand for housing and the competing demand for the required inputs.

A distortion occurs when government planners and rent-seeking corporate allies, under cover of humanitarian social policy, engineer a deviation from natural market outcomes. (Rent-seeking here refers to the quest for politically derived as opposed to market-derived profits.) Dressed up as promotion of the American Dream through homeownership, the planners used the political means—ultimately, the threat to imprison uncooperative taxpayers—to channel wealth to the construction, real-estate, and financial industries. The primary instruments of this social engineering were Fannie Mae, created as a government agency during the New Deal and—cough—“privatized” in 1968 to get it off-budget, and Freddie Mac, created as a “private” GSE in 1970.

The GSEs don’t make mortgage loans. Rather, using borrowed money, they buy mortgages from original lenders, encouraging banks to make more loans and immediately pass them on to others. Pooling lots of mortgages together, the GSEs create mortgage-backed securities (MBS) and either sell them or (more frequently) keep them, assuming the risk of default. In fact Freddie and Fannie created the secondary mortgage market that has come in for criticism since the subprime problem developed.

Freddie’s and Fannie’s activities were designed to channel money to mortgage lenders so that they could loan widely, especially to people who might have been priced out of a fully private mortgage market. The system inevitably lowered lending standards and interest rates. If these activities had been performed not by GSEs but by real private companies, they would have been subject to market checks. But they were not. They’re not called government-sponsored enterprises for nothing. As such they have special advantages over real private companies, permitting them to do things on a scale larger than would have occurred in a free market. The advantages include tax exemption, government loans, an implicit bailout promise, and lower capital requirements.

The result was a far more concentrated lending market and hence greater vulnerability to changing conditions. Fan and Fred hold or insure $5.4 trillion in mortgage debt—half the national total—making the taxpayers ultimately responsible now that the GSEs are under federal conservatorship. Three-quarters of new mortgages are GSE-backed. So the government has just become the country’s major mortgagee.

The GSEs have lost well over $10 billion since the mortgage meltdown occurred, and they were getting close to being unable to borrow enough money to roll over their debt. This and fear of a more general economic meltdown are what prompted the government to step in, exposing the taxpayers dramatically. The bailout will begin with a billion-dollar infusion. Then the government will start buying shaky Freddie- or Fannie-backed mortgage securities in the marketplace. A $5 billion purchase will get things going, but up to $200 billion has been promised. It will no doubt be more.

Where will this money come from: taxation, borrowing, or the printing press? What will that do to our economic well-being?

The New York Times is wrong. This is not “an extraordinary federal intervention in private enterprise.” It is the state bailing out statism. Let’s hear no more about the “laissez-faire” Republicans. That myth serves only to protect advocates of state intervention regardless of party.

It is with deep sadness that I note the death in October of our long-time contributing editor Norman Barry after a long illness. Over the years Norman kept Freeman readers informed about free-market and statist developments in Europe and elsewhere, always with optimism about the future of liberty. He was a professor of social and political theory at the University in Buckingham, which, he proudly noted, is the United Kingdom’s only private university. Among his many Freeman articles, my favorite is “Freedom and Morality in the Plays of Tom Stoppard” (August 1999, http://tinyurl.com/6h9s5s). He was a gentleman, a prolific scholar, and a pure pleasure to work with.

A standard argument for the patent system is that without it innovation would shrivel. But what if it’s patents, not their absence, that impede innovation? Michele Boldrin, David Levine, and Alessandro Nuvolari tell the story of the steam engine that couldn’t . . . until the patents expired.

The right to earn a living in one’s own way is increasingly under assault by special interests successfully lobbying for licensing and other protectionist restrictions. Bob Ewing says people are fighting back.

Centralization of power always threatens liberty. So Pierre Bessard is justifiably nervous about the tax “harmonization” taking place in the European Union.

The poet E.E. Cummings alienated himself from his left-wing friends when he wrote a book in 1931 on how the Soviet Union crushed individuality. Bruce Walker has the details.

Our hard-working columnists have delivered once again. Lawrence Reed teaches the politicians about Adam Smith. Thomas Szasz sees the therapeutic state as an escape from and threat to self-responsibility. Burton Folsom examines the record of Andrew Mellon. John Stossel wonders if we need all those stop signs. Walter Williams picks through fuzzy thinking. And Steven Horwitz, encountering the claim that the free market has failed, replies, “It Just Ain’t So!”
Books coming under review this issue are about the welfare state, Milton Friedman, abundance, and three influential economists.

Since it’s December, the issue concludes with the year-end index, prepared by Managing Editor Beth Hoffman.

Related posts:

1. Bailing Out Statism
2. Nationalization of the Mortgage Market
3. Who Watches Our Guardians?

One reason this effort is difficult is that the retrospective view we have of historical figures is not fixed. They shift with time, as increasing chronological distance brings greater perspective and as current issues and debates lead to reassessments of past figures.

One result is that people who were once thought of as prominent figures can sink into obscurity. Less commonly the reverse happens, and individuals who have languished in obscurity suddenly rise to retrospective prominence. Another well-known phenomenon is the reassessment of a person’s quality and reputation as he comes to be viewed in a different light. Some, who during their lifetime and shortly afterwards enjoyed a glowing historical reputation, have the gloss come off their name and are increasingly viewed in a critical light. Others, unpopular and maligned in their own times, are presented in an ever more positive fashion and find their stock rising. This is particularly true of political figures.

Thus John F. Kennedy is now regarded much less highly by the majority of historians than he was in his own lifetime or the aftermath of his death. Harry Truman, one of the most unpopular presidents in U.S. history when he left office, is now given high marks by most historians. Eisenhower, seen for many years as an ineffectual and lightweight president, is another whose reputation is steadily rising.

The Present Influences Our View of the Past

The opinion you have of a past political figure tends to be influenced by the view you take of contemporary political events or of particular public-policy issues. This will lead you to regard past figures with a positive or critical perspective depending on how their career and actions can be interpreted in the light of current controversy. Thus if you favor an expansionist and interventionist foreign policy, you will tend to have a higher opinion of Theodore Roosevelt than you would if you opposed such a policy. As public opinion about policy shifts, so do the reputations of past politicians.

In other words, the historical reputations of political figures such as former U.S. presidents have a strong ideological component. The political reputations of past presidents and other politicians, then, are an important indicator of attitudes and worldviews among both the wider public and intellectuals. With this in mind, the many surveys into the historical standing of U.S. presidents have a revealing, and depressing, quality. As noted, the reputations of several have changed over time, with Eisenhower showing the most impressive gain, from 22nd position to eighth among professional historians between 1962 and 2005. Ronald Reagan is another “riser,” from 16th in 1982 to sixth in 2005, while Lyndon Johnson shows a steady decline, from tenth in 1982 to 18th. There are also some notable differences between the opinions of historians and those of the general public, with the latter having a consistently higher view of Kennedy than the former does.

However, alongside all this change there is also some notable consistency. Certain presidents are always in the top ten, and the top three or four remains impressively consistent. George Washington, Abraham Lincoln, and Franklin Roosevelt are consistently in the top four, while Theodore Roosevelt, Truman, Andrew Jackson, and Woodrow Wilson are consistent top-ten rankers. Washington’s role in founding the United States partly accounts for his position, while Lincoln and FDR are both seen as leaders who confronted an existential crisis.

But the list also suggests a number of other things that reveal an underlying set of ideological presumptions. Presidents who expanded the functions of government receive high marks. Preserving or establishing the modern state is also seen as creditworthy. It helps to have been a wartime leader (unless the war is regarded as unsuccessful) and to have had an interventionist or expansionist foreign policy.

Cleveland and Coolidge

This is made even clearer by the contrast between the posthumous reputation of these individuals and that of others. There are several presidents who consistently rank low, although a different set of criteria would rank them much higher. Two of the most notable are Grover Cleveland and Calvin Coolidge, both of whom have ratings that would put them in mid-table to lower. Yet an examination of their records both suggests that they should have a higher rating by some criteria and indicates why this is not so far the case.

Cleveland, a man of great personal integrity and independence, was a consistent advocate of limited government, fiscal and monetary responsibility, a laissez-faire economy and free trade, individual responsibility, a pacific foreign policy, and opposition to government corruption and political patronage. Among other things, he blocked the annexation of Hawaii and regularly vetoed bills to give public funds to special interests.

Coolidge reformed the public finances, reduced taxation, and presided over an unprecedented economic boom. He also (along with his predecessor Harding) reversed the major assault on civil liberties that had taken place under Wilson. Yet each of these presidents gets a C or B- rather than an A.

What surveys and the historiography reveal is a deep-seated set of ideas among both self-defined “liberals” and “conservatives.” The core idea is that the central, most important aspect of history is the growth and maintenance of the modern, territorial state, rather than economic development, scientific and technological innovation, or the well-being of the people. These are seen as important but secondary. There is a fascination with power, and politicians who employ it are viewed as more significant or successful than those who try rather to reduce its application. From this point of view the division between “liberals” and “conservatives” is over how power should be used, rather than whether political power is a good thing.

There is, however, a different way of thinking about both dead politicians and living ones. This would apply the test not of what they managed to achieve by using power or of how they preserved or extended the state, but rather of how far they avoided the use of power or limited it and of how far they put their trust in the good sense and ingenuity of ordinary people and voluntary interactions—as well as that of how far they relied on peace and trade rather than war and armaments. If these standards were applied, Cleveland would rank as one of the greatest American presidents and Coolidge as one of the “near-greats.”

That this is not the case shows how deep the worship of power runs today. However, this should not stop us from trying to escape from the consensus and look at things from a truly different angle. One cheering point is that slowly but surely Cleveland and Coolidge are rising up the league of reputation. Maybe one day they will receive their proper evaluation. If so, this will reflect a profound change in thinking more generally.

Related posts:

1. The Constitutional Crisis: An Historical Perspective
2. The Leaders We Deserved (and a Few We Didn’t): Rethinking the Presidential Rating Game
3. Our Economic Past : Why Grover Cleveland Vetoed the Texas Seed Bill

Objectivist scholar Chris Sciabarra, in his brilliant book Total Freedom, called for a “dialectical libertarianism.” By dialectical analysis, Sciabarra means to “grasp the nature of a part by viewing it systemically—that is, as an extension of the system within which it is embedded.” Individual parts receive their character from the whole of which they are a part, and from their function within that whole.

This means it is a mistake to consider any particular form of state intervention in isolation, without regard to the role it plays in the overall system. (See Sciabarra’s “Dialectics and Liberty, The Freeman, September 2005, http://tinyurl.com/6pa6pg.)

Another libertarian, blogger Arthur Silber, contrasts dialectical libertarianism with what he calls “atomistic libertarianism,” whose approach is to “focus on the basic principles involved, but with scant (or no) attention paid to the overall context in which the principles are being analyzed. In this manner, this approach treats principles like Plato’s Forms. . . .” Atomistic libertarians argue “as if the society in which one lives is completely irrelevant to an analysis of any problem at all.”

To determine the function a particular form of state intervention serves in the structure of state power, we must first ask what has been the historical objective of the state. This is where libertarian class analysis comes in.

The single greatest work I’m aware of on libertarian class theory is Roderick Long’s article, “Toward a Libertarian Theory of Class” (Social Philosophy & Policy, Summer 1998). Long categorizes ruling-class theories as either “statocratic” or “plutocratic,” based on the respective emphasis they place on the state apparatus and the plutocracy (the wealthy “private-sector” beneficiaries of government intervention) as components of the ruling class.

The default tendency in mainstream libertarianism is a high degree of statocracy, to the point not only of (quite properly) emphasizing the necessary role of state coercion in enabling “legal plunder” (Frédéric Bastiat’s term) by the plutocracy, but of downplaying the significance of the plutocracy even as beneficiaries of statism. This means treating the class interests associated with the state as ad hoc and fortuitous. Although statocratic theory treats the state (in Franz Oppenheimer’s phrase) as the organized political means to wealth, it still tends to view government as merely serving the exploitative interests of whatever assortment of political factions happens to control it at any given time. This picture of how the state works does not require any organic relation between the various interest groups controlling it at any time, or between them and the state. It might be controlled by a disparate array of interest groups, including licensed professionals, rent-seeking corporations, farmers, regulated utilities, and big labor; the only thing they have in common is that they happen to be currently the best at latching onto the state.

Murray Rothbard’s position was far different. Rothbard, Long argues, saw the state as controlled by “a primary group that has achieved a position of structural hegemony, a group central to class consolidation and crisis in contemporary political economy. Rothbard’s approach to this problem is, in fact, highly dialectical in its comprehension of the historical, political, economic, and social dynamics of class.”

I have argued in the past that the corporate economy is so closely bound up with the power of the state, that it makes more sense to think of the corporate ruling class as a component of the state, in the same way that landlords were a component of the state under the Old Regime. Blogger Brad Spangler used the analogy of a gunman and bagman to illustrate the relationship:

Let’s postulate two sorts of robbery scenarios.

In one, a lone robber points a gun at you and takes your cash. All libertarians would recognize this as a micro-example of any kind of government at work, resembling most closely State Socialism.

In the second, depicting State Capitalism, one robber (the literal apparatus of government) keeps you covered with a pistol while the second (representing State allied corporations) just holds the bag that you have to drop your wristwatch, wallet and car keys in. To say that your interaction with the bagman was a “voluntary transaction” is an absurdity. Such nonsense should be condemned by all libertarians. Both gunman and bagman together are the true State.

Given this perspective, it doesn’t make much sense to consider particular proposals for deregulating or cutting taxes without regard to the role the taxes and regulations play in the overall structure of state capitalism. That’s especially true considering that most mainstream proposals for “free market reform” are generated by the very class interests that benefit from the corporate state.

No politico-economic system has ever approximated total statism, in the sense that “everything not forbidden is compulsory.” In every system there is a mixture of compulsory and discretionary behavior. The ruling class allows some amount of voluntary market exchange within the interstices of a system whose overall structure is defined by coercive state intervention. The choice of what areas to leave to voluntary exchange, just as much as of what to subject to compulsory regulation, reflects the overall strategic picture of the ruling class. The total mixture of statism and market activity will be chosen as most likely, in the estimation of the ruling class, to maximize net exploitation by the political means.

Primary and Secondary Interventions

Some forms of state intervention are primary. They involve the privileges, subsidies, and other structural bases of economic exploitation through the political system. This has been the primary purpose of the state: the organized political means to wealth, exercised by and for a particular class of people. Some forms of intervention, however, are secondary. Their purpose is stabilizing, or ameliorative. They include welfare-state measures, Keynesian demand management, and the like, whose purpose is to limit the most destabilizing side-effects of privilege and to secure the long-term survival of the system.

Unfortunately, the typical “free market reform” issuing from corporate interests involves eliminating only the ameliorative or regulatory forms of intervention, while leaving intact the primary structure of privilege and exploitation.

The strategic priorities of principled libertarians should be just the opposite: first to dismantle the fundamental, structural forms of state intervention, whose primary effect is to enable exploitation, and only then to dismantle the secondary, ameliorative forms of intervention that serve to make life bearable for the average person living under a system of state-enabled exploitation. As blogger Jim Henley put it, remove the shackles before the crutches.

To welcome the typical “free market” proposals as “steps in the right direction,” without regard to their effect on the overall functioning of the system, is comparable to the Romans welcoming the withdrawal of the Punic center at Cannae as “a step in the right direction.” Hannibal’s battle formation was not the first step in a general Carthaginian withdrawal from Italy, and you can be sure the piecemeal “privatizations,” “deregulations,” and “tax cuts” proposed are not intended to reduce the amount of wealth extracted by the political means.

Regulations and Increasing Statism

Moreover, regulations that limit and constrain the exercise of privilege do not involve, properly speaking, a net increase in statism at all. They are simply the corporate state’s stabilizing restrictions on its own more fundamental forms of intervention.

Silber illustrated the dialectical nature of such restrictions with reference to the question of whether pharmacists ought to be able to refuse to sell items (such as “morning after” pills) that violate their conscience. The atomistic-libertarian response is, “Of course. The right to sell, or not sell, is a fundamental free-market liberty.” The implicit assumption here, as Silber pointed out, is “that this dispute arises in a society which is essentially free.” But pharmacists are in fact direct beneficiaries of compulsory occupational licensing, a statist racket whose central purpose is to restrict competition and enable them to charge a monopoly price for their services. Silber wrote:

The major point is a very simple one: the pharmacy profession is a state-enforced monopoly. In other words: the consumer and the pharmacist are not equal competitors on the playing field. The state has placed its thumb firmly on the scales—and on one side only. That is the crucial point, from which all further analysis must flow. . . .

. . . [T]he state has created a government-enforced monopoly for licensed pharmacists. Given that central fact, the least the state can do is ensure that everyone has access to the drugs they require—and whether a particular pill is of life and death importance is for the individual who wants it to decide, not the pharmacist and most certainly not the government.

When the state confers a special privilege on an occupation, a business firm, or an industry, and then sets regulatory limits on the use of that privilege, the regulation is not a new intrusion of statism into a free market. It is, rather, the state’s limitation and qualification of its own underlying statism. The secondary regulation is not a net increase, but a net reduction in statism.

On the other hand, repeal of the secondary regulation, without an accompanying repeal of the primary privilege, would be a net increase in statism. Since the beneficiaries of privilege are a de facto branch of the state, the elimination of regulatory constraints on their abuse of privilege has the same practical effect as repealing a constitutional restriction on the state’s exercise of its own powers.

To expand Spangler’s bagman analogy, a great deal of alleged statism amounts to the gunman telling the bagman, after the victim has handed his wallet over at gunpoint, to give the victim back enough money for cab fare so he can get safely back home and keep on earning money to be robbed of.

When the state is controlled by “legal plunderers” and every decision for or against state intervention in a particular circumstance reflects their strategic assessment of the ideal mixture of intervention and non-intervention, it’s a mistake for a genuine anti-state movement to allow the priorities for “free market reform” to be set by the plunderers’ estimation of what forms of intervention no longer serve their purpose. If the corporate representatives in government are proposing a particular “free market reform,” you can bet your bottom dollar it’s because they believe it will increase the net political extraction of wealth.

The corporate ruling class’s approach to “free market reform” is a sort of mirror-image of “lemon socialism.” Under lemon socialism, the political capitalists (acting through the state) choose to nationalize those industries that corporate capital will most benefit from having taken off its hands, and to socialize those functions the cost of which capital would most prefer the state to bear. They shift functions from the private to the state sector when they are perceived as necessary for the functioning of the system, but not sufficiently profitable to justify the bother of running them under “private sector” auspices. Under “lemon market reform,” on the other hand, the political capitalists liquidate interventionist policies after they have squeezed all the benefit out of state action.

A good example: British industrialists felt it was safe to adopt “free trade” in the mid-nineteenth century, after mercantilism had served its purpose. Half the world had been hammered into a unified market by British force of arms and was held together by a British merchant fleet. Britain had stamped out competing industry in the colonial world. It had reenacted the Enclosures on a global scale, stealing enormous amounts of land from native populations and converting it to cash crops for the imperial market. The commanding position of British capital was the direct result of past mercantilism; having established this commanding position, it could afford “free trade.”

The so-called “free trade” movement in the contemporary United States follows the same pattern. A century ago, high tariff barriers served the interests of American political capitalists. Today, when the dominant corporate interests in America are transnational, tariffs are no longer useful to them. They actually impede the transfer of goods and partially finished products between the national subdivisions of a single global corporation.

On the other hand, so-called “intellectual property” today serves exactly the same protectionist function for transnational corporations that tariffs used to serve for the old national corporations a century ago. So the political capitalists promote a version of “free trade” that involves doing away with outmoded tariff barriers while greatly strengthening the new protectionism of “intellectual property” law.

We must remember that the measure of statism inheres in the functioning of the overall system, not in the formal statism of its separate parts. A reduction in the formal statism of some separate parts, chosen in accordance with the strategic priorities of the statists, may actually result in a net increase in the overall level of statism. Our strategic agenda as libertarians, in dismantling the state, must reflect our understanding of the overall nature of the system.

Related posts:

1. Statism and The Free Market
2. Market Reforms Score Big in Soccer
3. Book Review ~ China in the New Millennium: Market Reforms and Social Development edited by James A. Dorn

Why do left-leaning media such as the New York Times and CNN devote so much ink and airtime alleging that middle-class Americans have made little or no economic progress over the past 35 years and that the planet continues to spiral into imminent catastrophe?

Why, whenever the New York Times’s Paul Krugman and the Washington Post’s Harold Meyerson write (as they do, almost weekly) that ordinary Americans are trapped in a no-growth economic situation by “the rich” and powerful, do market-oriented bloggers respond with data showing that this claim is false?

And why, whenever the Los Angeles Times or The New Yorker publishes yet another “report” allegedly documenting continuing environmental degradation, do so many market-oriented scholars frequently expose these reports as being factually wrong or poorly reasoned, or both?

This pattern is so familiar that it eludes our attention. And yet reflection on it is fascinating. There’s no obvious reason why persons on the left should be biased into perceiving the state of the current world to be especially dire, and no obvious reason why market-friendly people should be biased into perceiving roses where there is really only rot.

 As documented often in this publication (and in several others) over the past few years, Americans’ living standards are today at an all-time high. Data on what ordinary, and even poor, American households regularly consume make clear that our prosperity is immense and growing. Likewise, the real value of workers’ total compensation (wages plus fringe benefits) continues to rise. Leisure time—leisure both from our jobs and from tedious household chores—continues to increase, as do our real expenditures on recreational equipment and activities. Life expectancy in the United States is at an all-time high.

In addition, the planet is neither running out of resources nor heading for environmental Armageddon. The works of the late Julian Simon and, more recently, of Bjørn Lomborg and Indur Goklany are important sources of careful documentation of these facts.

We’re living longer and healthier, working less, playing more, and consuming more, all on a planet that is resource-rich and vibrant.

 If I were a champion of big government, rather than deny these facts, I’d trumpet them as evidence that the interventionist policies pursued since the New Deal work wonders. Real household incomes are higher (I’d allege) because of Social Security, minimum-wage legislation, and several anti-discrimination statutes. We’re healthier and living longer (I’d allege) because of Medicare and Medicaid, a variety of product- and workplace-safety regulations, the efforts of the Environmental Protection Agency, and government’s crackdown on tobacco use.

And the natural environment is in fine health (I’d allege) because of the EPA and the plethora of national, state, and local regulations aimed at protecting it.

Yet if we are to believe the factual claims issued   by the modern left about the state of the world, it   is quite plausible to conclude that not one of their cherished programs works very well. Ordinary Americans and the earth stand on the brink of the abyss despite generations of government growth and increasing intervention.

Seems an odd claim, coming as it does chiefly from the left.

Perhaps equally odd is the consistent optimism about the state of the world by market-friendly scholars. It would hardly be surprising if, the moment someone asserted that the living standards of ordinary Americans have stagnated now for nearly two generations, students of Milton Friedman and scholars inspired by Mises and Hayek would accept such claims at face value and pronounce, “See! We told you so. First came the expansion of Uncle Sam’s power under Woodrow Wilson, and then came the explosion of such power under Herbert Hoover and Franklin Roosevelt, followed by increases in power ever since. The stagnation of incomes and the degradation of the environment surely are the result of the growth of the state during the twentieth and very early 21st centuries—or, at the very least, the growth of the state has done nothing to prevent these problems.”

But the typical free-market advocate resists this temptation. He or she examines the facts and correctly concludes that living standards and the state of the environment are much better today than they were 30 or 40 years ago.

Of course, it remains possible for the free-market advocate still to make a strong case against the many government interventions that today crowd our lives. But much, if not all, of that case is in the form of a counterfactual: If government were less intrusive, the economy and the environment would be even better than they currently are. However strong such a case is, the truth remains that the intrusive, grasping, and powerful government of the past   few generations has not absolutely reduced our living standards.

So why do free-market advocates consistently proclaim that living standards and the state of the world are generally improving?

Call me biased, but I’m pretty sure that free-market advocates look at the facts straight on and (although it would further strengthen the case against government) refuse to massage the data in ways that make reality appear to be worse than it is.

The more interesting question is why do statists—by repeatedly alleging that the economy is horrific and the environment a cauldron of toxins—effectively (if unconsciously) insist that their cherished programs have failed. Given the overwhelming evidence that our material lives are today better along most dimensions, I’m frankly astonished that so few statists accept this evidence.

Problem-Mongering

Or, more precisely, I used to be astonished. I am no longer, because I believe that I now understand why opponents of liberty constantly bemoan the current state of the world. Quite simply, problem-mongering is the surest path to power. No matter how good things are, we humans can always imagine them being even better. No matter how clearly the data show progress, data can be cherry-picked and interpreted to make matters appear grim.

And no matter how much freedom government has stripped from us, as long as some economic freedoms remain, those on the left will see such freedoms as the source not only of real imperfections, but also of failures to attain what can be achieved only in the fantasies of those with ample faith in the power of the state.

Friends of liberty are under no delusions that even maximum liberty governed by the best-possible rule of law will create heaven on earth. Opponents of liberty, in contrast, are convinced that the impossible becomes possible by giving the state more resources and power. And as long as there are still more resources and power for the state to acquire, the real world’s inability to live up to our fondest imaginations will be described by those on the left as “failure” and serve as an excuse for further limitations on liberty.

Related posts:

1. World in the Grip of an Idea: 16. Sweden: The Paternal State
2. World in the Grip of an Idea: 8. Russia – Impotent Populace and Massive State
3. Book Review ~ Money and the Nation State: The Financial Revolution, Government and the World Monetary System Edited by Kevin Dowd and Richard H. Timberlake

Thus far the typical libertarian response to the growing clamor has been to challenge the science behind it. Now it really is the scientific consensus that global warming occurred during the twentieth century. What is not so obvious is that (1) humans caused this warming and (2) this warming is necessarily bad.

Although it is interesting to explore the question of whether science has been perverted in the cause of environmentalism, there is a danger for libertarians in pinning their entire case on this strategy. After all, every serious student of science knows that when it comes to empirical claims, we never achieve certainty. For example, even if today one thinks that there are insurmountable problems facing the theory of manmade global warming, one still must accept the possibility that new evidence or theoretical advances could indicate that the environmentalists are perfectly right. Another possibility is that there is some other, similar disaster lurking unsuspected.

For these reasons, I believe it is crucial to accept provisionally, for the sake of argument, the scientific claims behind the case for manmade global warming. In the present article I will demonstrate that it still would not follow that the taxes and other regulations typically proposed by greens are the best way to address the problem. Just as the free market is still the optimal economic arrangement, regardless of how many citizens are angels or devils, so too does the free market outperform government intervention, regardless of the fragility of Earth’s ecosystems.

When trying to determine if the free market is to blame for possibly dangerous carbon emissions, a logical starting point is to list the numerous ways that government policies encourage the very activities that Al Gore and his friends want us to curtail.

The U.S. government has subsidized many activities that burn carbon: it has seized land through eminent domain to build highways, funded rural electrification projects, and fought wars to ensure Americans’ access to oil. After World War II it played a key role in the mass exodus of the middle class from urban centers to the suburbs, chiefly through encouraging mortgage lending.

Every American schoolchild has heard of the bold transcontinental railroad (finished with great ceremony at Promontory Summit, Utah) promoted by the federal government. Historian Burt Folsom explains that due to the construction contracts, the incentive was to lay as much track as possible between points A and B—hardly an approach to economize on carbon emissions from the wood- and coal-burning locomotives. For a more recent example, consider John F. Kennedy’s visionary moon shot. I’m no engineer, but I’ve seen the takeoffs of the Apollo spacecraft and think it’s quite likely that the free market’s use of those resources would have involved far lower CO2 emissions. While myriad government policies have thus encouraged carbon emissions, at the same time the government has restricted activities that would have reduced them. For example, there would probably be far more reliance on nuclear power were it not for the overblown regulations of this energy source. For a different example, imagine the reduction in emissions if the government would merely allow market-clearing pricing for the nation’s major roads, thereby eliminating traffic jams! The pollution from vehicles in major urban areas could be drastically cut overnight if the government set tolls to whatever the market could bear—or better yet, sold bridges and highways to private owners.

Of course, there is no way to determine just what the energy landscape in America would look like if these interventions had not occurred. Yet it is entirely possible that on net, with a freer market economy, in the past we would have burned less fossil fuel and today we would be more energy efficient.

Even if it were true that reliance on the free-enterprise system makes it difficult to curtail activities that contribute to global warming, still the undeniable advantages of unfettered markets would allow humans to deal with climate change more easily. For example, the financial industry, by creating new securities and derivative markets, could crystallize the “dispersed knowledge” that many different experts held in order to coordinate and mobilize mankind’s total response to global warming. For instance, weather futures can serve to spread the risk of bad weather beyond the local area affected. Perhaps there could arise a market betting on the areas most likely to be permanently flooded. That may seem ghoulish, but by betting on their own area, inhabitants could offset the cost of relocating should the flooding occur. Creative entrepreneurs, left free to innovate, will generate a wealth of alternative energy sources. (State intervention, of course, tends to stifle innovations that threaten the continued dominance of currently powerful special interests, such as oil companies—for example, the state of North Carolina recently fined Bob Teixeira for running his car on soybean oil.)

Private insurers have a strong incentive to assess the potential effects of global warming without bias in order to price their policies optimally—if they overestimate the risk, they will lose business to lower-priced rivals; if they are too sanguine about the dangers, they will lose money once the claims start rolling in. Individuals finding their homes or businesses threatened by rising sea levels will find it easier to relocate to the extent that unfettered markets have made them wealthier. Industrial manufacturers, as long as they are held liable for the negative environmental effects of their production processes—a traditional common-law liability from which state policies intended to “promote industry” have often sought to shield manufacturers—will strive to develop technologies that minimize the environmental impact of their activities without sacrificing efficiency. Government interventions and “five-year plans,” even when they are sincere attempts to protect the environment rather than disguised schemes to benefit some powerful lobby, lack the profit incentive and are protected from the competitive pressures that drive private actors to seek an optimal cost-benefit tradeoff.

If the situation truly becomes dire, it will be free-market capitalism that allows humans to develop techniques for sucking massive amounts of carbon out of the atmosphere, and to colonize the oceans and outer space. Beyond these futuristic possibilities, the obvious responses to global warming—such as more houses with AC, sturdier sea walls, and better equipment to evacuate flooded regions—are again only feasible when the free market is unleashed.

It is the poorest people and nations that stand to suffer the most if the worst-case scenario for global warming is realized, and the only reliable way to alleviate their poverty, and thus help protect them from those effects, is the free market.

Can the Market Meet the Threat Head-On?

In the first section I summarized some of the ways governments inadvertently contribute to the very activities that allegedly cause dangerous global warming; in the second I sketched some of the ways that free markets allow humans to better adapt to climate change. However, I haven’t really tackled the problem directly. Am I conceding that with a worldwide problem the market—which is just dandy for one-on-one interactions—can’t match the concerted “will of the people” working through their elected representatives for a common solution?

Of course not. Even when economic transactions generate so-called negative externalities (activities that shower harms on third parties), I still contend that the free market is the best institution for identifying and reducing the problems.

One way negative externalities can be addressed without turning to state coercion is public censure of individuals or groups widely perceived to be flouting core moral principles or trampling the common good, even if their actions are not technically illegal. Large, private companies and prominent, wealthy individuals are generally quite sensitive to public pressure campaigns.

To cite just one recent, significant example, Temple Grandin, a notable advocate for the humane treatment of livestock, asserts that McDonald’s is the world leader in improving slaughterhouse conditions. While many executives at the fast-food giant genuinely may be concerned with the welfare of cattle, pigs, and chickens, undoubtedly a strong element of self-interest is also at work here, as the company realizes that corporate image affects consumers’ buying decisions.

But that self-interest does not negate the laudable outcome of the pressure McDonald’s has applied to its suppliers to meet the stringent standards it has set for animal-handling facilities. Similarly, to the degree that the broad public regards manmade global warming as a serious problem, companies will strive to be seen as “good corporate citizens” that are addressing the matter. And this isn’t ivory-tower speculation on my part—I can see the “green friendly” ads already.

Critics of libertarianism sometimes denigrate it as a political program of “market fundamentalism” that, if put into practice, would reduce all human values to the price they can fetch as mere commodities. But that is a caricature of the social arrangements advocated by any sensible libertarian. The great figures of classical-liberal and libertarian thought have always recognized the vital contributions that nonmarket institutions, such as churches, families, charities, social clubs, communities of scholars and their students, art foundations, conservation groups, neighborhood associations, and youth athletic leagues, make to the healthy functioning of a free society. What libertarians offer as an alternative to statism is not a social order that judges every human interaction solely on a miserly calculation of profit or loss, but a society in which every desirable form of voluntary association is allowed to flourish, free from coercive interference by the state.

Customary Law

Besides the samples listed above, most libertarians recognize private or customary law as another important, nonmarket source of social order. A historical case in point is the Anglo-American common-law tradition in which legal norms evolved spontaneously from the customs of the people to whom it applied, rather than through legislation and state planning deliberately aimed at achieving some “public good.” The many centuries during which the common law sustained civic order in the face of inevitable divergences between individual citizens’ own interests demonstrate that a successful legal order does not inevitably require state sponsorship. The common law has shown itself to be fully capable of dealing with a number of issues that, while not exhibiting the worldwide scope of global warming, are still similar to our present concern in arising from the cumulative effects of many individual actions, each of which, regarded in isolation, appears to be unproblematic and not subject to legal sanction. For instance, the salmon-fishing streams of Scotland are a valuable natural resource, and the communities along them have developed quite successful institutions for ensuring the value of the streams is maintained, including private policing and legal penalties for overfishing and for polluting the water.

The many cases in which voluntary solutions to problems of collective choice have worked pose an empirical embarrassment for those who argue that “public goods” must be provided by the government. Most advocates of compulsory solutions to pollution abatement, for example, would assert that voluntary efforts will be vitiated by “free riding.” If individuals are not forced to contribute their fair share toward addressing these problems, this argument runs, each person rationally will hold back and hope others will pay for the proposed solution, since any free riders would gain the benefits (such as clean air) anyway. Since almost no one likes to be “the sucker,” it follows that the amount of resources devoted to the provision of the public good will fall woefully shy of the total that would be available if each person gave the amount he’d be willing to give if only he could count on everyone else pitching in equally. The sole solution that can be imagined is for the members of a society to create a “social contract” by which they are forced to pay for pollution abatement.

However, Anthony de Jasay notes in his book The State that this argument is severely flawed. If people cannot solve public-goods problems through voluntary cooperation, how can they rely on politicians’ promises to do so? There is no external authority to enforce those promises. There is only public opinion, the same thing that would enforce voluntary solutions. Moreover, government is itself a “public good” in the sense that free riders benefit from the efforts of those who try to get the government to produce public goods such as clean air.

Is Temperature a Public Good?

Another consideration is that the earth’s temperature isn’t such a public good after all. That is, certain people really do have more at stake, particularly if the warming is moderate. For example, if Manhattan became submerged because of rising sea levels, that calamity would not affect every human being equally. The residents of Manhattan and the owners of its skyscrapers would be hurt far more than people living in inland China. Because all the various potential dangers of global warming affect particular people more intensively than others, it is these groups that (in a free market) would have the incentive to reduce CO2 concentrations. For example, if rising sea levels would cause $10 trillion in damage to a comparatively small group of wealthy individuals, that’s a huge “pie” that the wealthy can offer others to motivate them to reduce emissions.

Despite my optimism about the potential to deal with environmental problems through voluntary means, I don’t wish to be misunderstood: If the official global-warming story is true, it presents a serious problem that humanity will find difficult to solve through voluntary means. But this isn’t a strike against voluntarism—of course a difficult problem will be difficult to solve! By the very same token, the government doesn’t do a terrible job at collecting stray dogs, because that’s a very simple task. When it comes to harder assignments, such as stopping terrorism or reducing teen pregnancy, the government’s record is quite a bit worse.

The very features of the official global-warming scenario that hamper purely private solutions would apply equally to government efforts. For example, even if the U.S. government passed draconian measures at home, that alone wouldn’t be enough if China and Indiadon’t follow suit. And just as private companies in a free market may have an incentive to pollute if they can get away with it, so the state, under the influence of special-interest groups and run by leaders always tempted to ignore the public good in favor of increasing their own power and wealth, can have incentives to allow more pollution than is optimal. (It should be clear the “best” amount of pollution is not zero, because even using fire to cook generates some pollutants, and I doubt that anyone but the most misanthropic, fanatical nature worshippers want to reverse all of the last 40,000 years of human progress.)

As in all debates over public versus private choice, it’s inappropriate to measure a realistic free-market response to global warming against an idealized government program. We must try to envision what real people would do if their property rights were respected and compare that scenario with the probable outcome of actual politicians in today’s world being given a blank check in the name of saving the earth.

Government programs don’t ameliorate world poverty or sickness, and no libertarian would deny that these are serious problems. So even if manmade global warming is a real threat, why should we expect governments to get it right on this issue?

Related posts:

1. Global Warming Revisited
2. Higher CO2, More Global Warming, and Less Extinction?
3. Global Warming and the Layman