State of the Union

How the Rich Rule

Illustration by Michael Hogue
Illustration by Michael Hogue

ERNEST HEMINGWAY: I am getting to know the rich.

MARY COLUM: I think you’ll find the only difference between the rich and other people is that the rich have more money.

Irish literary critic Mary Colum was mistaken. Greater net worth is not the only way the rich differ from the rest of us—at least not in a corporatist economy. More important is influence and access to power, the ability to subordinate regular people to larger-than-human-scale organizations, political and corporate, beyond their control.

To be sure, money can buy that access, but only in certain institutional settings. In a society where state and economy were separate (assuming that’s even conceptually possible), or better yet in a stateless society, wealth would not pose the sort of threat it poses in our corporatist (as opposed to a decentralized free-market) system.

Adam Smith famously wrote in The Wealth of Nations that “[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Much less famously, he continued: “It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty or justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”

The fact is, in the corporate state government indeed facilitates “conspiracies” against the public that could not otherwise take place. What’s more, because of this facilitation, it is reasonable to think the disparity in incomes that naturally arises by virtue of differences among human beings is dramatically exaggerated. We can identify several sources of this unnatural wealth accumulation.

A primary source is America’s financial system, which since 1914 has revolved around the government-sponsored central banking cartel, the Federal Reserve. To understand this, it must first be noted that in an advanced market economy with a well-developed division of labor, the capital market becomes the “locus for entrepreneurial decision-making,” as Walter E. Grinder and John Hagel III, writing within the perspective of the Austrian school of economics, put it in their 1977 paper, “Toward a Theory of State Capitalism: Ultimate Decision-Making and Class Structure.”

Grinder and Hagel, emphasizing the crucial role of entrepreneurship in discovering and disseminating knowledge and coordinating diverse production and consumption plans, write: “The evolution of market economies … suggests that entrepreneurial activity may become increasingly concentrated within the capital market as the functional specialization of the economy becomes more pronounced.”

That sounds ominous, but as long as the market is free of government interference, this “concentration” poses no threat. “None of this analysis should be construed as postulating an insidious process of monopolization of decision-making within the non-state market system,” they write.

Market factors [that is, free and open competition] preclude the possibility that entrepreneurial decision-making could ever be monopolized by financial institutions. … The decision-making within the capital market operates within the severe constraints imposed by the competitive market process and these constraints ensure that the decision-making process contributes to the optimum allocation of economic resources within the system.

All bets are off, however, when government intervenes. Then the central role of the banking system in an advanced economy is not only magnified but transformed through its “insulation … from the countervailing competitive pressures inherent in a free market.” Only government can erect barriers to competitive entry and provide other advantages to special interests that are unattainable in the marketplace.

The original theory of class formulated by early 19th-century French classical liberal economists is relevant here. It was these laissez faire radicals who pointed out that two more or less rigid classes arise as soon at the state starts distributing the fruits of labor through taxation: taxpayers and tax-consumers. Rent-seeking is born.

It takes little imagination to see that wealthier individuals—many of whom, in Anglo-American history, first got that way through the enclosure of commons, land grants, and mercantilist subsidies—will have an advantage over others in maintaining control of the state apparatus. (Economic theorist Kevin A. Carson calls the continuing benefit of this initial advantage “the subsidy of history.”) And indeed they have.

“It seems reasonable to assume that individuals [in the tax consuming class] sharing objective interests will tend toward an emerging and at least hazy common ‘class consciousness,’” Grinder and Hagel write. (Karl Marx acknowledged his debt to the French economists for his own, crucially different, class analysis.)

Unsurprisingly, in a money-based market economy the financial industry, with the central role already mentioned, will be of special interest to rulers and their associates in the “private” sector. “Historically, state intervention in the banking system has been one of the earliest forms of intervention in the market system,” Grinder and Hagel write. They emphasize how this intervention plays a key role in changing a population’s tacit ideology:

In the U.S., this intervention initially involved sporadic measures, both at the federal and state level, which generated inflationary distortion in the money 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.

In short, financial intervention on behalf of well-heeled, well-connected groups begets recessions, depressions, and long-term unemployment, which in turn beget vulnerable working and middle classes who, ignorant of economics, are willing to accept more powerful government, which begets more intervention on behalf of the wealthy, and so on—a vicious circle indeed.

Fiat money, central banking, and deficit spending foster and reinforce plutocracy in a variety of ways. Government debt offers opportunities for speculation by insiders and gives rise to an industry founded on profitable trafficking in Treasury securities. That industry will have a profit interest in bigger government and chronic deficit spending.

Government debt makes inflation of the money supply an attractive policy for the state and its central bank—not to mention major parts of the financial system. In the United States, the Treasury borrows money by selling interest-bearing bonds. When the Federal Reserve System wants to expand the money supply to, say, juice the economy, it buys those bonds from banks and security dealers with money created out of thin air. Now the Fed is the bondholder, but by law it must remit most of the interest to the Treasury, thus giving the government a virtually interest-free loan. With its interest costs reduced in this way, the government is in a position to borrow and spend still more money—on militarism and war, for example—and the process can begin again. (These days the Fed has a new role as central allocator of credit to specific firms and industries, as well.)

Meanwhile the banking system has the newly created money, and therein lies another way in which the well-off gain advantage at the expense of the rest of us. Money inflation under the right conditions produces price inflation, as banks pyramid loans on top of fiat reserves. (This can be offset, as it largely is today, if the Fed pays banks to keep the new money in their interest-bearing Fed accounts rather than lending it out.)

But the Austrian school of economics has long stressed two overlooked aspects of inflation. First, the new money enters the economy at specific points, rather than being distributed evenly through the textbook “helicopter effect.” Second, money is non-neutral.

Since Fed-created money reaches particular privileged interests before it filters through the economy, early recipients—banks, securities dealers, government contractors—have the benefit of increased purchasing power before prices rise. Most wage earners and people on fixed incomes, on the other hand, see higher prices before they receive higher nominal incomes or Social Security benefits. Pensioners without cost-of-living adjustments are out of luck.

The non-neutrality of money means that price inflation does not evenly raise the “general price level,” leaving the real economy unchanged. Rather, inflation changes relative prices in response to the spending by the earlier recipients, skewing production toward those privileged beneficiaries. Considering how essential prices in a free market are to coordinating production and consumption, inflation clearly makes the economic system less efficient at serving of the mass of consumers. Thus inflation, economist Murray Rothbard wrote, “changes the distribution of income and wealth.”

Price inflation, of course, is notorious for favoring debtors over creditors because loans are repaid in money with less purchasing power. This at first benefits lower income people as well as other debtors, at least until credit card interest rates rise. But big businesses are also big borrowers—especially in this day of highly leveraged activities—so they too benefit in this way from inflation. Though banks as creditors lose out in this respect, big banks more than make up for it by selling government securities at a premium and by pyramiding loans on top of security dealers’ deposits.

When people realize their purchasing power is falling because of the implicit inflation tax, they will want to undertake strategies to preserve their wealth. Who’s in a better position to hire consultants to guide them through esoteric strategies, the wealthy or people of modest means?

The result is “financialization,” in which financial markets and bankers play an ever larger role in people’s lives. For example, the Fed’s inflationary low-interest-rate policy makes the traditional savings account useless for preserving and increasing one’s wealth. Where once a person of modest means could put his or her money into a liquid account at a local bank at about 5 percent interest compounded, today that account earns about 1 percent while the consumer price index rises at about 2 percent. Savers thus are forced into less liquid certificates of deposit or less familiar money market mutual funds (which arose because in the inflationary 1970s government capped interest on savings accounts). Fed policy thus increases business for the financial industry.

Inflation is also the culprit in the business cycle, which is not a natural feature of the market economy. Fed policy aimed at lowering interest rates, a policy especially favored by capital-intensive businesses remote from the consumer-goods level, distorts the time structure of production. In a free market, low interest rates signal an increase in savings, that is, a shift from present to future consumption, and high rates do the reverse. Behold the coordinative function of the price system: deferred consumption lowers interest rates, making interest-rate-sensitive early stages of production—such as research and development, and extractive industries—more economical. Resources and labor may appropriately shift from consumer goods to capital goods.

But what if interest rates fall not because consumers’ time preferences have changed but because the Fed created credit? Investors will be misled into thinking resources are newly available for early-stage and other interest-rate-sensitive production, so they will divert resources and labor to those sectors. But consumers still want to consume now. Since resources can’t be put to both purposes, the situation can’t last. Bust follows boom. Think of all those unemployed construction workers and “idle resources” that were drawn to the housing industry.

While some rich people may be hurt by the recession, they are far better positioned to hedge and recover than workers who are laid off from their jobs. Moreover, even after the recovery, the knowledge that the threat of recession looms can make the workforce more docile. The business cycle thus undermines workers’ bargaining power, enabling bosses to keep more of the fruits of increased productivity.

Bottom line: inflation and the business cycle channel wealth from poorer to richer.

The financial system isn’t the only way that the rich benefit at the expense everyone else. The corporate elite have better access to the regulatory agencies and rule writers than the rest of us. (University of Chicago economist George Stigler dubbed this “regulatory capture.”) Wealth also gives the elite a clearer path to politicians and candidates for office, who will be amenable to policies that make wealthy contributors happy, such as subsidies, bailouts, and other measures that socialize costs and privatize extra-market profits. Campaign finance “reform” doesn’t change this, and even tax-funded campaigns would only drive the quid-pro-quo process underground.

Finally, a significant source of upward wealth distribution is intellectual property. By treating ideas and information as though they were objects to be owned, IP law encloses the intellectual commons and deprives the public of benefits that a competitive market would naturally socialize.

The conventional understanding of rich and poor, capitalism and socialism, is profoundly misleading. A corporatist, mixed economy institutionalizes financial privilege in ways that are overlooked in everyday political discourse—in part because of the ideological deformations created by the system itself. As Austrian-school macroeconomist Steven Horwitz put it in a lecture this year, one need not be a Marxist to see that the state is indeed the executive committee of the ruling class.

Sheldon Richman is vice president and editor at The Future of Freedom Foundation and author of Tethered Citizens: Time to Repeal the Welfare State.

Patent Nonsense

Staunch advocates of private property might be expected to support “intellectual property rights”—patents and copyrights—but these days that expectation is more than likely to be wrong. IP has come in for a thrashing from libertarians, among others, in the last few years, and it may be all over but the funeral.

The issue can be viewed from three vantage points: moral, economic, and political. The pro-IP lobby tends to conflate the first two, moving back and forth between assertions about justice and economic incentives. Their case is something of a moving target, so let’s break it down.

The moral claim is that an inventor has an exclusive, enforceable right to his useful, novel application of an idea, while an author or composer has such a right to his original work or expression. IP specialists insist that what is owned is not an idea per se, but it’s hard to make sense of that assertion since an application or expression of an idea is itself an idea. IP really is about the ownership of ideas, and therein lies the problem.

Why should an inventor or author have an exclusive right, whether in perpetuity or for a finite period? Ayn Rand, the late novelist-philosopher who vigorously defended intellectual property, replied, “Patents and copyrights are the legal implementation of the base of all property rights: a man’s right to the product of his mind. Every type of productive work involves a combination of mental and physical effort…” Patent and copyright laws “protect the mind’s contribution in its purest form.” In this view, all property is ultimately intellectual property. As the 19th-century free-market anarchist Lysander Spooner wrote, an individual’s “right of property, in ideas, is intrinsically the same as, and stands on identically the same grounds with his right of property in material things … no distinction of principle, exists between the two cases.” (Not all 19th- and 20th-century libertarians agreed—a notable counterexample being the individualist anarchist Benjamin Tucker, who thought patents were a pillar of plutocracy.)

But contrary to Rand and Spooner, there is a distinction between physical objects and ideas that is crucial to the property question. Two or more people cannot use the same pair of socks at the same time and in the same respect, but they can use the same idea—or if not the same idea, ideas with the same content. That tangible objects are scarce and finite accounts for the emergence of property rights in civilization. Considering the nature of human beings and the physical world they inhabit, if individuals are to flourish in society they need rules regarding thine and mine. But “ideal objects” are not bound by the same restrictions. Ideas can be multiplied infinitely and almost costlessly; they can be used nonrivalrously.

If I articulate an idea in front of other people, each now has his own “copy.” Yet I retain mine. However the others use their copies, it is hard to see how they have committed an injustice.

Contrary to Rand, ideas, while inherent in purposeful human action, have no role in establishing ownership. If I own the inputs of productive effort, that suffices to establish that I own the output. If I build a model airplane out of wood and glue, I own it not because of any idea in my head, but because I owned the wood, the glue, and myself. On the other hand, if Howard Roark’s evil twin trespasses on your land and, using your materials, builds the most original house ever imagined, he would not be the rightful owner. You would be, and—bad law notwithstanding—you would have the objective moral right to use the design.

In practical terms, when one acquires a copyright or a patent, what one really acquires is the power to ask the government stop other people from doing harmless things with their own property. IP is thus inconsistent with the right to property.

An IP advocate might challenge the proposition that two or more people can use the “same” idea at the same time by noting that the originator’s economic return from exploiting the idea will likely be smaller if unauthorized imitators are free to enter the market. That is true, but this confuses property with economic value. In traditional property-rights theory, one owns objects not economic values. If someone’s otherwise unobjectionable activities lower the market value of my property, my rights have not been violated.

This objection exposes what is at stake in IP: monopoly power granted by the state. In fact, patents originated as royal grants of privilege, while copyright originated in the power to censor. This in itself doesn’t prove these practices clash with liberty, but their pedigrees are indeed tainted.

Property rights arose to grapple with natural scarcity; “intellectual property” rights were invented to create scarcity where it does not naturally exist.

Don’t patents encourage innovation and therefore bestow incalculable benefits on all us? This crosses the boundary from justice to utilitarian considerations. The concern here is not with rewards to the innovator but with the good of society. What does the IP opponent say?

First, as libertarian legal theorist Stephan Kinsella points out, the implied cost-benefit analysis is a sham. Defenders tout IP’s hypothesized benefits while presuming the costs are virtually zero. Ignored are the costs in innovation never ventured for fear of legal reprisal, in resources consumed during litigation, in talent diverted to protecting IP rather than producing useful goods, and so on.

“Anyone who argues that patents yield a net gain is obliged to estimate the total cost (including suppressed innovation) as well as the value of any innovation thereby stimulated. But IP proponents never provide these estimates,” writes Kinsella, an IP lawyer himself. “They say we have more innovation at a low price. Yet virtually every empirical study I’ve seen on this matter is either inconclusive or finds a net cost and/or a suppression of innovation.”

Second, IP proponents are guilty of doing a priori history. Real history undermines the utilitarian case for patents and copyright. In their book, Against Intellectual Monopoly, pro-market economists Michele Boldrin and David K. Levine show that IP impedes innovation. For example, James Watt’s steam engine improved very little while his patents were in effect—he was too busy suing anyone he could for patent infringement. Only once the patents expired in 1800 did improvements in the steam engine accelerate.

The IP defender might counter that without patents there might not have been a steam engine at all. Boldrin and Levine’s historical analysis shows this to be implausible. People invented things long before patents. Innovators have understood the advantages of being first to market even without the prospect of monopoly privilege. (Shakespeare created without copyright, as did Charles Dickens in the U.S. market.) The first company to put wheels on luggage, Travelpro, had no patent, and the idea was soon copied. But the company is still a player in the industry.

Perhaps wheeled luggage is a bad example because it is so simple. What about products that require more substantial research and development—software, perhaps? Of course, we are in the midst of a booming open-source software industry in which complex programs are given away and open to modification and commercial exploitation. (See the Linux operating system, for example.) Are the programmers altruists who have renounced worldly goods for the purity of their craft? Hardly. Their free programs establish their reputations, which in turn yield handsome returns for consulting and other services. There are more business models than the one that depends on state-bestowed monopoly.

No less a personage than Bill Gates has acknowledged what IP would have meant at the dawn of the PC age: “If people had understood how patents would be granted when most of today’s ideas were invented, and had taken out patents, the industry would be at a complete standstill today.”

Boldrin and Levine devote an entire chapter to the toughest nut, pharmaceuticals, which we supposedly would have to do without but for the protection of intellectual property. The high fixed cost of research, development, and testing, and the low marginal cost of production are said to preclude any significant innovation without the monopoly protection afforded by patents. Who would sink so much money into a product only to face copycat competitors with no development costs? Here IP is thought to be literally a matter of life and death.

Things are not what they seem. Write Boldrin and Levine:

Historically, intellectual monopoly in pharmaceuticals has varied enormously over time and space. The summary story: the modern pharmaceutical industry developed faster in those countries where patents were fewer and weaker… .  [I]f patents were a necessary  requirement for pharmaceutical innovation, as claimed by their supporters,  the large historical and cross-country variations in the patent protection  of medical products should have had a dramatic impact on national pharmaceutical industries. In particular, at least between 1850 and 1980, most drugs and medical products should have been invented and produced in the United States and the United Kingdom, and very little if anything produced in continental Europe. Further, countries such as Italy, Switzerland, and, to a lesser extent, Germany, should have been the poor, sick laggards of the pharmaceutical industry until recently. Instead, the opposite was true for longer than a century.

There is clear value in being first to market with a product, especially a drug. Moreover, copying successes is not the low-cost piece of cake it’s assumed to be. For one thing, the imitator has to wait to see which product is worth copying, but all that time the originator will be reaping market-monopoly returns and securing his reputation for innovation and trustworthiness.

We mustn’t overlook the wasteful costs of the current system, in particular the incentive to tweak existing drugs whose patent terms are nearing expiration in order to extend the monopoly. What other drugs might have been invented in that socially wasted time?

Underlying the IP defense is the faulty assumption that imitation produces little value when in fact it is critical to competitive markets and progress, most of which comes through incremental improvements to existing ideas rather than big dramatic breakthroughs. Copying combined with product differentiation equals rising living standards. Had imitation been forbidden earlier in human history, stagnation would have been mankind’s lot. Attempts in that direction today concentrate economic power and increase the cost of living for the rest of us.

The IP regime helps entrenched interests prevent the competition made possible by the high-tech revolution. In the industrial age, physical capital was expensive and irreplaceable, while workers were interchangeable. Think of Henry Ford’s assembly line. Today in information-based industries, the reverse is true. The cost of physical capital—computers and software—is falling while the cost of human capital—know-how—is rising. In Ford’s day, there was little danger that a worker would quit and open a rival automaker. But today the chief assets of many firms aren’t on a factory floor but in the minds of the staff. The danger of competition from breakaway firms is omnipresent.

“In this environment,” social theorist Kevin A. Carson writes,

the only thing standing between the old information and media dinosaurs and their total collapse is their so-called intellectual property rights—at least to the extent they’re still enforceable. Ownership of intellectual property becomes the new basis for the power of institutional hierarchies and the primary buttress for corporate boundaries… . Without intellectual property, in any industry where the basic production equipment is widely affordable, and bottom-up networking renders management obsolete, it is likely that self-managed, cooperative production will replace the old managerial hierarchies.

Carson says the development of low-cost small-scale CNC—computer numerical control—machine tools promises to bring similar changes to more traditional manufacturing: “production as such has become far less capital-intensive over the past three decades, with the old mass-production core outsourcing increasing shares of total production to flexible manufacturing networks and job-shops.”

The powers that be won’t give up without a fight, which is why imposition of a strict IP regime is the centerpiece of every bilateral and multilateral “free trade” agreement with the developing world. Yet despite their best efforts, cheaper technology and the increasing unenforceability of IP may be ushering in a full-fledged economic revolution marked by smaller, flatter, even nonhierarchical worker-owned firms in a newly decentralized competitive marketplace. In other words, the postcapitalist world could look like a genuinely free market.

Sheldon Richman is the author of Tethered Citizens: Time to Repeal the Welfare State.

Libertarian Left

Ron Paul’s 2008 presidential campaign introduced many people to the word “libertarian.” Since Paul is a Republican and Republicans, like libertarians, use the rhetoric of free markets and private enterprise, people naturally assume that libertarians are some kind of quirky offshoot of the American right wing. To be sure, some libertarian positions fit uneasily with mainstream conservatism—complete drug decriminalization, legal same-sex marriage, and the critique of the national-security state alienate many on the right from libertarianism.

But the dominant strain of libertarianism still seems at home on that side of the political spectrum. Paeans to property rights and free enterprise—the mainstream libertarian conviction that the American capitalist system, despite government intervention, fundamentally embodies those values—appear to justify that conclusion.

But then one runs across passages like this: “Capitalism, arising as a new class society directly from the old class society of the Middle Ages, was founded on an act of robbery as massive as the earlier feudal conquest of the land. It has been sustained to the present by continual state intervention to protect its system of privilege without which its survival is unimaginable.” And this: “build worker solidarity. On the one hand, this means formal organisation, including unionization—but I’m not talking about the prevailing model of ‘business unions’ … but real unions, the old-fashioned kind, committed to the working class and not just union members, and interested in worker autonomy, not government patronage.”

These passages—the first by independent scholar Kevin Carson, the second by Auburn University philosophy professor Roderick Long—read as though they come not from libertarians but from radical leftists, even Marxists. That conclusion would be only half wrong: these words were written by pro-free-market left-libertarians. (The preferred term for their economic ideal is “freed market,” coined by William Gillis.)

These authors—and a growing group of colleagues—see themselves as both libertarians and leftists. They are standard libertarians in that they believe in the moral legitimacy of private ownership and free exchange and oppose all government interference in personal and economic affairs—a groundless, pernicious dichotomy. Yet they are leftists in that they share traditional left-wing concerns, about exploitation and inequality for example, that are largely ignored, if not dismissed, by other libertarians. Left-libertarians favor worker solidarity vis-à-vis bosses, support poor people’s squatting on government or abandoned property, and prefer that corporate privileges be repealed before the regulatory restrictions on how those privileges may be exercised. They see Walmart as a symbol of corporate favoritism—supported by highway subsidies and eminent domain—view the fictive personhood of the limited-liability corporation with suspicion, and doubt that Third World sweatshops would be the “best alternative” in the absence of government manipulation.

Left-libertarians tend to eschew electoral politics, having little confidence in strategies that work through the government. They prefer to develop alternative institutions and methods of working around the state. The Alliance of the Libertarian Left encourages the formation of local activist and mutual-aid organizations, while its website promotes kindred groups and posts articles elaborating its philosophy. The new Center for a Stateless Society (C4SS) encourages left-libertarians to bring their analysis of current events to the general public through op-eds.

These laissez-faire left-libertarians are not to be confused with other varieties of left-wing libertarians, such as Noam Chomsky or Hillel Steiner, who each in his own way objects to individualistic appropriation of unowned natural resources and the economic inequality that freed markets can produce. The left-libertarians under consideration here have been called “market-oriented left-libertarians” or “market anarchists,” though not everyone in this camp is an anarchist.

There are historical grounds for placing pro-market libertarianism on the left. In the first half of the 19th century, the laissez-faire liberal economist Frederic Bastiat sat on the left side of the French National Assembly with other radical opponents of the ancien régime, including a variety of socialists. The right side was reserved for reactionary defenders of absolute monarchy and plutocracy. For a long time “left” signified radical, even revolutionary, opposition to political authority, fired by hope and optimism, while “right” signified sympathy for a status quo of privilege or a return to an authoritarian order. These terms applied even in the United States well into the 20th century and only began to change during the New Deal, which prompted regrettable alliances of convenience that carried over into the Cold War era and beyond.

At the risk of oversimplifying, there are two wellsprings of modern pro-market left-libertarianism: the theory of political economy formulated by Murray N. Rothbard and the philosophy known as “Mutualism” associated with the pro-market anarchist Pierre-Joseph Proudhon—who sat with Bastiat on the left side of the assembly while arguing with him incessantly about economic theory—and the American individualist anarchist Benjamin R. Tucker.

Rothbard (1926-1995) was the leading theorist of radical Lockean libertarianism combined with Austrian economics, which demonstrates that free markets produce widespread prosperity, social cooperation, and economic coordination without monopoly, depression, or inflation—evils whose roots are to be found in government intervention. Rothbard, who called himself an “anarcho-capitalist,” first saw himself as a man of the “Old Right,” the loose collection of opponents of the New Deal and American Empire epitomized by Sen. Robert Taft, journalist John T. Flynn, and more radically, Albert Jay Nock. Yet Rothbard understood libertarianism’s left-wing roots.

In his 1965 classic and sweeping essay “Left and Right: The Prospects for Liberty,” Rothbard identified “liberalism”—what is today called libertarianism—with the left as “the party of hope, of radicalism, of liberty, of the Industrial Revolution, of progress, of humanity.” The other great ideology to emerge after the French revolution “was conservatism, the party of reaction, the party that longed to restore the hierarchy, statism, theocracy, serfdom, and class exploitation of the Old Order.”

When the New Left arose in the 1960s to oppose the Vietnam War, the military-industrial complex, and bureaucratic centralization, Rothbard easily made common cause with it. “The Left has changed greatly, and it is incumbent upon everyone interested in ideology to understand the change… . [T]he change marks a striking and splendid infusion of libertarianism into the ranks of the Left,”  he wrote in “Liberty and the New Left.” His left-radicalism was clear in his interest in decentralization and participatory democracy, pro-peasant land reform in the feudal Third World, “black power,” and worker “homesteading” of American corporations whose profits came mainly from government contracts.

But with the fading of New Left, Rothbard deemphasized these positions and moved strategically toward right-wing paleoconservatism. His left-libertarian colleague, the former Goldwater speechwriter Karl Hess (1923-1994), kept the torch burning. In Dear America Hess wrote, “On the far right, law and order means the law of the ruler and the order that serves the interest of that ruler, usually the orderliness of drone workers, submissive students, elders either totally cowed into loyalty or totally indoctrinated and trained into that loyalty,” while the left “has been the side of politics and economics that opposes the concentration of power and wealth and, instead, advocates and works toward the distribution of power into the maximum number of hands.”

Benjamin Tucker (1854-1939) was the editor of Liberty, the leading publication of American individualist anarchism. As a Mutualist, Tucker rigorously embraced free markets and voluntary exchange void of all government privilege and regulation. Indeed, he called himself a “consistent Manchester man,” a reference to the economic philosophy of the English free-traders Richard Cobden and John Bright. Tucker disdained defenders of the American status quo who, while favoring free competition among workers for jobs, supported capitalist suppression of competition among employers through government’s “four monopolies”: land, the tariff, patents, and money.

“What causes the inequitable distribution of wealth?” Tucker asked in 1892. “It is not competition, but monopoly, that deprives labor of its product. … Destroy the banking monopoly, establish freedom in finance, and down will go interest on money through the beneficent influence of competition. Capital will be set free, business will flourish, new enterprises will start, labor will be in demand, and gradually the wages of labor will rise to a level with its product.”

The Rothbardians and Mutualists have some disagreements over land ownership and theories of value, but their intellectual cross-pollination has brought the groups closer philosophically. What unites them, and distinguishes them from other market libertarians, is their embrace of traditional left-wing concerns, including the consequences of plutocratic corporate power for workers and other vulnerable groups. But left-libertarians differ from other leftists in identifying the culprit as the historical partnership between government and business—whether called the corporate state, state capitalism, or just plain capitalism—and in seeing the solution in radical laissez faire, the total separation of economy and state.

Thus behind the political-economic philosophy is a view of history that separates left-libertarians from both ordinary leftists and ordinary libertarians. The common varieties of both philosophies agree that essentially free markets reigned in England from the time of the Industrial Revolution, though they evaluate the outcome very differently. But left-libertarians are revisionists, insisting that the era of near laissez faire is a myth. Rather than a radical freeing of economic affairs, England saw the ruling elite rig the social system on behalf of propertied class interests. (Class analysis originated with French free-market economists predating Marx.)

Through enclosure, peasants were dispossessed of land they and their kin had worked for generations and were forcibly turned into rent-paying tenants or wage-earners in the new factories with their rights to organize and even to move restricted by laws of settlement, poor laws, combination laws, and more. In the American colonies and early republic, the system was similarly rigged through land grants and speculation (for and by railroads, for example), voting restrictions, tariffs, patents, and control of money and banking.

In other words, the twilight of feudalism and the dawn of capitalism did not find everyone poised at the starting line as equals—far from it. As the pro-market sociologist Franz Oppenheimer, who developed the conquest theory of the state, wrote in his book The State, it was not superior talent, ambition, thrift, or even luck that separated the property-holding minority from the propertyless proletarian majority—but legal plunder, to borrow Bastiat’s famous phrase.

Here is something Marx got right. Indeed, Kevin Carson seconds Marx’s “eloquent passage”: “these new freedmen became sellers of themselves only after they had been robbed of all their own means of production, and of all the guarantees afforded by the old feudal arrangements. And the history of this, their expropriation, is written in the annals of mankind in letters of blood and fire.”

This system of privilege and exploitation has had long-distorting effects that continue to afflict most people to this day, while benefiting the ruling elite; Carson calls it “the subsidy of history.” This is not to deny that living standards have generally risen in market-oriented mixed economies but rather to point out that living standards for average workers would be even higher—not to mention less debt-based—and wealth disparities less pronounced in a freed market.

The “free-market anti-capitalism” of left-libertarianism is no contradiction, nor is it a recent development. It permeated Tucker’s Liberty, and the identification of worker exploitation harked back at least to Thomas Hodgskin (1787-1869), a free-market radical who was one of the first to apply the term “capitalist” disparagingly to the beneficiaries of government favors bestowed on capital at the expense of labor. In the 19th and early 20th centuries, “socialism” did not exclusively mean collective or government ownership of the means or production but was an umbrella term for anyone who believed labor was cheated out of its natural product under historical capitalism.

Tucker sometimes called himself a socialist, but he denounced Marx as the representative of “the principle of authority which we live to combat.” He thought Proudhon the superior theorist and the real champion of freedom. “Marx would nationalize the productive and distributive forces; Proudhon would individualize and associate them.”

The term capitalism certainly suggests that capital is to be privileged over labor. As left-libertarian author Gary Chartier of La Sierra University writes, “[I]t makes sense for [left-libertarians] to name what they oppose ‘capitalism.’ Doing so … ensures that advocates of freedom aren’t confused with people who use market rhetoric to prop up an unjust status quo, and expresses solidarity between defenders of freed markets and workers—as well as ordinary people around the world who use ‘capitalism’ as a short-hand label for the world-system that constrains their freedom and stunts their lives.”

In contrast to nonleft-libertarians, who seem uninterested in, if not hostile to, labor concerns per se, left-libertarians naturally sympathize with workers’ efforts to improve their conditions. (Bastiat, like Tucker, supported worker associations.) However, there is little affinity for government-certified bureaucratic unions, which represent little more than a corporatist suppression of the pre-New Deal spontaneous and self-directed labor/mutual-aid movement, with its “unauthorized” sympathy strikes and boycotts. Before the New Deal Wagner Act, big business leaders like GE’s Gerard Swope had long supported labor legislation for this reason.

Moreover, left-libertarians tend to harbor a bias against wage employment and the often authoritarian corporate hierarchy to which it is subject. Workers today are handicapped by an array of regulations, taxes, intellectual-property laws, and business subsidies that on net impede entry to potential alternative employers and self-employment. As well, periodic economic crises set off by government borrowing and Federal Reserve management of money and banking threaten workers with unemployment, putting them further at the mercy of bosses.

Competition-inhibiting cartelization diminishes workers’ bargaining power, enabling employers to deprive them of a portion of the income they would receive in a freed and fully competitive economy, where employers would have to compete for workers—rather than vice versa—and self-employment free of licensing requirements would offer an escape from wage employment altogether. Of course, self-employment has its risks and wouldn’t be for everyone, but it would be more attractive to more people if government did not make the cost of living, and hence the cost of decent subsistence, artificially high in myriad ways—from building codes and land-use restrictions to product standards, highway subsidies, and government-managed medicine.

In a freed market left-libertarians expect to see less wage employment and more worker-owned enterprises, co-ops, partnerships, and single proprietorships. The low-cost desktop revolution, Internet, and inexpensive machine tools make this more feasible than ever. There would be no socialization of costs through transportation subsidies to favor nationwide over regional and local commerce. A spirit of independence can be expected to prompt a move toward these alternatives for the simple reason that employment to some extent entails subjecting oneself to someone else’s arbitrary will and the chance of abrupt dismissal. Because of the competition from self-employment, what wage employment remained would most likely take place in less-hierarchical, more-humane firms that, lacking political favors, could not socialize diseconomies of scale as large corporations do today.

Left-libertarians, drawing on the work of New Left historians, also dissent from the conservative and standard libertarian view that the economic regulations of the Progressive Era and New Deal were imposed by social democrats on an unwilling freedom-loving business community. On the contrary, as Gabriel Kolko and others have shown, the corporate elite—the House of Morgan, for example—turned to government intervention when it realized in the waning 19th century that competition was too unruly to guarantee market share.

Thus left-libertarians see post-Civil War America not as a golden era of laissez faire but rather as a largely corrupt business-ruled outgrowth of the war, which featured the usual military contracting and speculation in government-securities. As in all wars, government gained power and well-connected businessmen gained taxpayer-financed fortunes and hence unfair advantage in the allegedly free market of the Gilded Age. “War is the health of the state,” leftist intellectual Randolph Bourne wrote. Civil war too.

These conflicting historical views are well illustrated in the writings of the pro-capitalist novelist Ayn Rand (1905-1982) and Roy A. Childs Jr. (1949-1992), a libertarian writer-editor with definite leftist leanings. In the 1960s Rand wrote an essay with the self-explanatory title “America’s Persecuted Minority: Big Business,” which Childs answered with “Big Business and the Rise of American Statism.” “To a large degree it has been and remains big businessmen who are the fountainheads of American statism,” Childs wrote.

One way to view the separation of left-libertarians from other market libertarians is this: the others look at the American economy and see an essentially free market coated with a thin layer of Progressive and New Deal intervention that need only to be scraped away to restore liberty. Left-libertarians see an economy that is corporatist to its core, although with limited competitive free enterprise. The programs constituting the welfare state are regarded as secondary and ameliorative, that is, intended to avert potentially dangerous social discontent by succoring—and controlling—the people harmed by the system.

Left-libertarians clash with regular libertarians most frequently when the latter display what Carson calls “vulgar libertarianism” and what Roderick Long calls “Right-conflationism.” This consists of judging American business in today’s statist environment as though it were taking place in the freed market. Thus while nonleft-libertarians theoretically recognize that big business enjoys monopolistic privileges, they also defend corporations when they come under attack from the left on grounds that if they were not serving consumers, the competitive market would punish them. “Vulgar libertarian apologists for capitalism use the term ‘free market’ in an equivocal sense,” Carson writes, “[T]hey seem to have trouble remembering, from one moment to the next, whether they’re defending actually existing capitalism or free market principles.”

Signs of Right-conflationism can be seen in the common mainstream libertarian defensiveness at leftist criticism of income inequality, America’s corporate structure, high oil prices, or the healthcare system. If there’s no free market, why be defensive? You can usually make a nonleft-libertarian mad by comparing Western Europe favorably with the United States.  To this, Carson writes, “[I]f you call yourself a libertarian, don’t try to kid anybody that the American system is less statist than the German one just because more of the welfare queens wear three-piece suits… . [I]f we’re choosing between equal levels of statism, of course I’ll take the one that weighs less heavily on my own neck.”

True to their heritage, left-libertarians champion other historically oppressed groups: the poor, women, people of color, gays, and immigrants, documented or not. Left-libertarians see the poor not as lazy opportunists but rather as victims of the state’s myriad barriers to self-help, mutual aid, and decent education. Left-libertarians of course oppose government oppression of women and minorities, but they wish to combat nonviolent forms of social oppression such as racism and sexism as well. Since these are not carried out by force, the measures used to oppose them also may not entail force or the state. Thus, sex and racial discrimination are to be fought through boycotts, publicity, and demonstrations, not violence or antidiscrimination laws. For left-libertarians, southern lunch-counter racism was better battled through peaceful sit-ins than with legislation in Washington, which merely ratified what direct action had been accomplishing without help from the white elite.

Why do left-libertarians qua libertarians care about nonviolent, nonstate oppression? Because libertarianism is premised on the dignity and self-ownership of the individual, which sexism and racism deny. Thus all forms of collectivist hierarchy undermine the libertarian attitude and hence the prospects for a free society.

In a word, left-libertarians favor equality. Not material equality—that can’t be had without oppression and the stifling of initiative. Not mere equality under the law—for the law might be oppressive. And not just equal freedom—for an equal amount of a little freedom is intolerable. They favor what Roderick Long, drawing on John Locke, calls equality in authority: “Lockean equality involves not merely equality before legislators, judges, and police, but, far more crucially, equality with legislators, judges, and police.”

Finally, like most ordinary libertarians, left-libertarians adamantly oppose war and the American empire. They embrace an essentially economic analysis of imperialism: privileged firms seek access to resources, foreign markets for surplus goods, and ways to impose intellectual-property laws on emerging industrial societies to keep foreign manufacturers from driving down prices through competition. (This is not to say there aren’t additional, political factors behind the drive for empire.)

These days left-libertarians feel vindicated. American foreign policy has embroiled the country in endless overt and covert wars, with their high cost in blood and treasure, in the resource-rich Middle East and Central Asia—with torture, indefinite detention, and surveillance among other assaults on domestic civil liberties thrown in for good measure. Meanwhile, the historical Washington-Wall Street alliance—in which recklessness with other people’s money, fostered by guarantees, bailouts, and Federal Reserve liquidity masquerades as deregulation—has brought yet another financial crisis with its heavy toll for average Americans, additional job insecurity, and magnified Wall Street influence.

Such nefariousness can only hasten the day when people discover the left-libertarian alternative. Is that expectation realistic? Perhaps. Many Americans sense that something is deeply wrong with their country. They feel their lives are controlled by large government and corporate bureaucracies that consume their wealth and treat them like subjects. Yet they have little taste for European-style social democracy, much less full-blown state socialism. Left-libertarianism may be what they’re looking for. As the Mutualist Carson writes, “Because of our fondness for free markets, mutualists sometimes fall afoul of those who have an aesthetic affinity for collectivism, or those for whom ‘petty bourgeois’ is a swear word. But it is our petty bourgeois tendencies that put us in the mainstream of the American populist/radical tradition, and make us relevant to the needs of average working Americans.”

Carson believes ordinary citizens are coming to “distrust the bureaucratic organizations that control their communities and working lives, and want more control over the decisions that affect them. They are open to the possibility of decentralist, bottom-up alternatives to the present system.” Let’s hope he’s right.

Sheldon Richman blogs at Free Association.

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Civil Rights and the Libertarian Principle

My take on the Rand Paul flap in in the Christian Science Monitor.

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TGIF: The State of Obama’s Union

Despite what some popular right-wing talk-show hosts claim, Barack Obama is not pushing Marxism, revolutionary or otherwise. He’s pushing good old American progressive-corporate elitism.

Read TGIF here.

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Bad Medicine

Late at night on Saturday, Nov. 7, nationalized health insurance—and eventually a government takeover of healthcare—took a giant leap forward. Among the 177 Congressional Republicans, only one voted for the bill, but the party deserves more blame than it has received for the country’s drift toward socialized medicine.


Republicans had ten months to offer what they claim to want: a free-market alternative to ObamaCare. Instead, they introduced Obama-lite, clad in a free-market mantle. Only at the last minute, as House debate on Speaker Nancy Pelosi’s monstrosity was set to begin, did Minority Leader John Boehner introduce the first GOP bill. It had a few good ideas, but it was hardly a free-market proposal, much less a serious alternative.


At first, Republicans opted for caution, testing the public waters before moving at the last minute to put up a bill of their own—if only to give themselves something to talk about in next year’s congressional campaigns. GOP pollster David Winston called it “an intentional strategic shift toward not being just the opposition party but trying to be the alternative party.”

Or maybe the New York Times had it right:


The minority party had little interest in putting forward a comprehensive piece of legislation. …. [A] comprehensive bill would have highlighted disagreements among Republicans, and would have taken a huge amount of time and effort only to see the measure easily cast aside by the Democratic majority. And putting out a bill earlier would have subjected it to weeks of attack. … [T]he 219-page bill is less of a complete answer to the Democrats’ nearly 2,000-page bill and more of a political message aimed at highlighting the Republicans’ contention that the Democrats’ legislation is too costly and would dangerously expand the federal government’s role in health care.


The GOP strategy helped the Democrats portray the Republicans as the Party of No—not necessarily a bad thing to be when government is growing. But since so many problems in healthcare are attributable to current government interventions that should be eliminated, a mere “no” amounts to a defense of the corporatist status quo.


Since January, Republicans had talked a good game when attacking Democratic proposals. They criticized the so-called public option as a slow move to single-payer, and they raised the threat of rationing inherent in any government plan to control spending. They also opposed the Democrats’ insurance mandate for individuals and employers, a repudiation of the disaster Mitt Romney gave Massachusetts. They called for extending the employer-based insurance tax break to individually purchased coverage and for legalizing interstate commerce in health insurance. But these virtuous measures didn’t go far enough, and they were overwhelmed by many vices.


Before Nov. 3, the most ambitious GOP proposal belonged to Rep. Paul Ryan, a conservative with a reputation for being a health-policy expert and an entitlement hawk. In a speech at a Cato Institute healthcare conference, Ryan said, “This problem can be fixed, not by pushing the market out, but by bringing the market in. One of the reasons healthcare is not doing well right now, one of the reasons health inflation is so high, one of the reasons there are so many distortions in health care, one of the reasons millions of Americans don’t have access to affordable insurance, is because we’ve displaced the fundamental tenets of a free market.”


This sounds like a good start. He went on, “What are those tenets? Transparency on price, transparency on quality, and an incentive to act on both. Currently, you don’t know what services cost, or who’s good at providing them and who’s bad. Even if you know such things, you’re told by your insurance company, HMO, or the government where and who you have to go to to get your care.”


This is typical Washington talk presented as a defense of the free market. “Transparency” and “incentives” are popular political words, but they are not fundamental tenets of a free market. They arise as a result of individual economic freedom. When people have responsibility for their own well-being, spend their own money, and face the tradeoffs inevitable in a world of scarcity, they have incentives to demand clarity and simplicity from competing health insurers and medical providers, who in turn have to accommodate them to win their business. Competition is key, and what makes competition possible is freedom—specifically consumer sovereignty and the absence of legal barriers to entry. To have freedom, government must back off and permit people to engage in transactions as they see fit. This is precisely what is lacking today.


Nothing about Ryan’s prescription would preclude government efforts to create transparency without a free market—he mistakes an effect for a cause. Ryan further muddied the water by saying, “Healthcare is much more than having insurance and access to medical care. It is a moral issue. It is an issue about the role of the federal government and which trajectory America is going to take. Will we stick with the American ideal of equalizing opportunity, of protecting our individual rights, or are we going to replace that vision with a European one, where the goal of government is to equalize the results of people’s lives instead of equalizing access to opportunity?”


For generations Washington has intervened at the deepest levels of Americans’ economic lives. State and local governments began meddling well before that. Government is now so integrated with the economy that it escapes notice. Yet Ryan speaks of sticking with an ideal and protecting it against those who embrace the European vision. He’s a little late. He should read Garet Garrett’s “The Revolution Was.”


And what is this ideal that he wishes to stick with? Equalizing opportunity. Republicans and conservatives have long proffered equal opportunity as an alternative to the progressive idea of equal results, implicitly endorsing the egalitarian ethic. Egalitarians point out that someone born into a family with a low income hardly has the same opportunity as a wealthy person to obtain first-class medical coverage, therefore government assistance is needed to make equal opportunity a reality. We hear the same argument in education, where Republican conservatives like William Bennett defend tax-financed vouchers with the egalitarian appeal that low-income people should have the same opportunity to attend private schools as the wealthy. Why only in education and medical care? If equality of opportunity means only the absence of legal restrictions, that’s fine. But Republicans rarely make this distinction.


The Ryan proposal is typical of Republican efforts. Its centerpiece was to be “universal access to affordable health insurance … even for people with preexisting conditions…” That endorses the Democrats’ keystone myth that one can insure against an existing condition. It makes a mockery of the concept of insurance. Compelling companies to write policies for people who are already sick—an idea endorsed by leading Republicans like Sens. Charles Grassley and Tom Coburn, Louisiana Gov. Bobby Jindal, and until the end, John Boehner—can’t properly be regarded as “insurance.” Calling it “welfare” and openly financing it with taxes, rather than hiding the cost in everyone’s premiums, would be more honest.


Moreover, promising that this disguised welfare would be affordable creates expectations of a major role for government—specifically, subsidies from the taxpayers. But subsidies do not come without strings. Does Ryan seriously believe his approach would avoid heavy-handed regulation of the insurance and healthcare industries?


The incoherence of his approach could be seen in his very words when he vowed to create “a mechanism so that the uninsurable … can also get affordable health insurance.” He would accomplish this by instituting “state-based exchanges.” No one would be forced to join, but his proposal would “create incentives for states to participate,” and “Each of the exchanges must have at least a minimum benefit health plan, without the bells and whistles.” Of course, someone would have to define that “minimum benefit health plan,” and we know how lobbying and campaign contributions have already overloaded “basic” policies with coverage mandates, increasing the cost and pricing many people out of the market.


Since when is government needed to create markets? They are the most natural thing in the world. People “truck and barter,” to use Adam Smith’s phrase, whenever they get the chance. The Internet hosts vigorous markets in virtually everything—including life and auto insurance—so why wouldn’t competition in health insurance emerge the instant legal barriers were removed?


Ryan’s plan, which also included such Obama-lite ideas as expansion of Medicaid and Medicare and a “refundable tax credit” insurance subsidy, was typical of the Republican mentality that predominated until Pelosi’s bill finally loomed large. If the Democratic ideal was socialized medicine, the Republicans offered corporatist care, though in practice the two “alternatives” might converge.


Boehner’s 11th-hour bid to conjure a free-market aura renounced mandates, compulsory coverage for preexisting conditions, tax increases, and interference in the doctor-patient relationship. It created no power for the government to dictate the contents of insurance policies, and it endorsed the freedom to buy insurance across state lines and to form purchasing groups, albeit subject to lots of rules and conditions.


Yet his bill was no small-government showpiece. Although about a tenth as long as Pelosi’s bill, it was just as couched in impenetrable legalese and brimming with regulations. Its first section, “Ensuring Coverage for Individuals with Preexisting Conditions and Multiple Health Care Needs,” would require states to operate a “qualifying” reinsurance program or high-risk pool financed by “state premium assessments” with a federal contribution. This is the GOP answer to the Democrats, who would require insurance companies to cover people who come to them already sick.


The difference between the Republican and Democratic approaches is not clear. House Minority Whip Eric Cantor said, “[I]f individuals find themselves with a pre-existing condition … their insurance company will be required to go into a re-insurance pool set up in all the states, funded by the federal government, putting $25 billion into those pools. … We’ve got to have a safety net there for individuals with pre-existing conditions, and that is the mechanism.” Boehner’s bill included standards for what the pools may charge, among many other rules.


Moreover, Boehner borrowed a page from the Democrats by prohibiting private insurers from including annual or lifetime spending limits in their policies. Some individuals might wish to have lower premiums rather than limitless benefits. Boehner says they can’t. So much for freedom of contract. His bill would also have paid states to lower insurance premiums and reduce the number of uninsured. That sounds like an invitation to price controls and other interventions by hyperactive state insurance commissioners. While the Boehner bill would have been considerably cheaper than Pelosi’s—the CBO says “only” $61 billion gross, offset by $52 billion in new revenues, over a decade—it was still a spending program in an era of huge budget deficits.


Boehner also picked up a popular Republican theme: the need to change malpractice law. His bill would have capped non-economic jury awards at $250,000. Three problems with this are typically overlooked. First, as Shikha Dalmia of the Reason Foundation writes, “Big medicine has long blamed the unnecessary tests and procedures these awards encourage for rising health care costs. But several studies have shown that this so-called practice of defensive medicine is a smaller driver of costs than excess physician salaries.” Second, limiting malpractice awards is a blunt instrument that will harm victims of negligence; better to let patients and doctors contract around the tort law. And third, even putting the effects aside, on principle self-proclaimed federalists shouldn’t be advocating a national change in malpractice law. That has traditionally been a state matter—“laboratories of democracy” and all that. How eagerly Republicans throw over allegedly cherished principles whenever it’s expedient.


The GOP has, again, failed to draw a sharp line between itself and the openly statist opposition. Democrats promise to fund their healthcare overhaul by cutting hundreds of billions out of Medicare. (It is worth pointing out that, political reality being what it is, the Democrats will never deliver on this promise, and if they did, services—not waste—would be cut.) But the Republicans support Medicare with equal zeal: Boehner’s bill vowed no cuts in services. This put the GOP in the odd position of opposing “socialized medicine” by defending, well, socialized medicine. Knowing that the elderly vote in high numbers, it’s no surprise that Republicans were quick to campaign against the “death panels” implicit in the Democrats’ logic. But in doing so, did Republicans really mean to endorse the idea that the elderly should have all the medical care—at taxpayer expense—that they want without limit?


Medicare stands in the way of lowering the cost of medical care and insurance. Because the government chronically under-reimburses doctors and hospitals, they make up the shortfall by overcharging the rest of us. (We don’t care because we think insurance pays the bills.) But increasing reimbursement is not the answer because that would require more government borrowing, more inflation, higher taxes. There’s a third, real alternative to death panels and out-of-control Medicare: a privatization plan that would operate independent of government. But Republicans are too worried about elections to talk about that. So they defend Medicare while rejecting Medicare-for-all, a treacherous logical tightrope.


Aside from jettisoning Medicare and Medicaid, exempting individual insurance policies from taxation (a subject on which Boehner’s bill was strangely silent), expanding health-savings accounts, and legalizing interstate insurance sales, there’s little the national government can do to reform the healthcare market. Most of the change has to come at the state level, where medical and insurance cartels constrict competition and supply, denying consumers innovation and lower prices. But Republicans in Congress don’t want to confront these powerful interests. It’s easier to rail against socialized medicine on the horizon than address the corporatized medicine that has long been in place. 


__________________________________________

Sheldon Richman is the editor of The Freeman (www.fee.org).

The American Conservative welcomes letters to the editor.
Send letters to: letters@amconmag.com

Civil War President

Barack Obama’s intensification of the occupation of Afghanistan is nothing less than a full commitment to one side in the civil war raging there. What he calls a threat of a Taliban takeover is actually a Pashtun resistance to the U.S. occupation and the corrupt Karzai government it backs. Obama’s and Hillary Clinton’s spin cannot change those facts.

Obama’s story isn’t even coherent. Al-Qaeda is in Pakistan, he says, not Afghanistan. (Obama’s speech said nothing about the continuing “secret” drone assault that the U.S. military is conducting there.) Yet he insists that we must see Afghanistan through because that’s where the 9/11 attacks were planned. Well, not actually. You can just as easily say they were planned in Germany and Florida. Why are those terrorist sanctuaries not feeling the wrath of the U.S. military?

Obama vows to defeat al-Qaeda, but what does that mean in the case of a highly decentralized “organization” under whose banner anyone anywhere may claim to be operating? How do you defeat an idea?

Obama promises that U.S. forces will begin leaving in July 2011–maybe, depending on conditions on the ground.

Our only hope is that opposition will keep growing–where is that antiwar movement anyway?–and that the looming 2012 presidential election will prompt Obama to get out.

But in the meantime, Afghan people, expect more U.S.-sponsored violence, more maimed and dead babies and children, compliments of the 2009 Nobel Peace Prize winner.

I don’t know about you, but I don’t regard someone as my enemy merely because he refuses to recognize the legitimacy of Karzai’s gang.

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TGIF: The Mandated Health Insurance Outrage

Want to know how the politicians justify forcing us to buy health insurance? I discuss their screwball grounds in this week’s TGIF.

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Pelosi Health-Insurance Bill Summarized

Happily, you need not invest the next few weeks of your life reading the 1,990-page House overhaul of the health-insurance — and by implication, the healthcare — industry. A convenient summary has been provided, compliments of Pierre-Joseph Proudhon.

To provide affordable, quality health care for all Americans
and reduce the growth in health care spending, and
for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled that the American people shall henceforth be:

Watched, inspected, spied upon, directed, law-driven, numbered, regulated, enrolled, indoctrinated, preached at, controlled, checked, estimated, valued, censured, commanded, by creatures who have neither the right nor the wisdom nor the virtue to do so. … [A]t every operation, at every transaction noted, registered, counted, taxed, stamped, measured, numbered, assessed, licensed, authorized, admonished, prevented, forbidden, reformed, corrected, punished. … [U]nder pretext of public utility, and in the name of the general interest, … place[d] under contribution, drilled, fleeced, exploited, monopolized, extorted from, squeezed, hoaxed, robbed; then, at the slightest resistance, the first word of complaint, to be repressed, fined, vilified, harassed, hunted down, abused, clubbed, disarmed, bound, choked, imprisoned, judged, condemned, shot, deported, sacrificed, sold, betrayed; and to crown all, mocked, ridiculed, derided, outraged, dishonored.

All in favor say aye. The rest of you can go to hell.

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TGIF: The Market Doesn’t Ration Health Care

Healthcare reformers say they have two objectives: to enable the uninsured and under-insured to consume more medical services than they consume now, and to keep the price of those services from rising, as they have been, faster than the prices of other goods and services. Unfortunately, Economics 101 tells us that to accomplish those two things directly — increased consumption by one group and lower prices — the government would have to take a third step: rationing. The reformers are disingenuous about this last step, and for good reason. People don’t like rationing, especially of medical care.

The rest of my latest TGIF column is here.

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Obama, Medicare, and Socialized Medicine

At his AARP event yesterday, President Obama derided those who in the 1960s called Medicare “socialized medicine.” Yet later in the event he conceded the point. See for yourself:

I got a letter the other day from a woman; she said, I don’t want government-run health care, I don’t want socialized medicine, and don’t touch my Medicare.  And I wanted to say, well, I mean, that’s what Medicare is, is it’s a government-run health care plan that people are very happy with.

As he read this, he and the audience laughed condescendingly as if to say, “What a dolt. She hates socialized medicine but she loves medicare.  Doesn’t she realize they are the same thing?”

As for people being happy with Medicare, Obama might have pointed out that retirees receive far more in medical benefits than they ever paid into the system. At the moment they can basically have all they want for free or for low cost. Now they even have drug coverage. But that will change if Obama gets his way, because he’s decided “we” spend too much on m medical care and he is determined to do something about that. Part of that “something” will be to scale back Medicare, which Obama himself says is, along with Medicaid, the biggest source of the budget deficit. Anyone who thinks that “reform” won’t start denying options to retirees is dreaming. It’s already happening. Wait until the government inserts itself in to end-of-life decisions. I guess the earlier critics of Medicare weren’t wrong, they just had their timetable off.

If government were really interested in seeing a rational medical system, it would stop forcing the taxpayers to pick up the tab for other people’s medical care. How could that do anything but send costs through the roof and then “justify” government control?

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Why the Rush on Health Care?

Why is Obama so eager to have his healthcare “reform” voted on before members of Congress go home for their August recess? Because this advocate of “representative government,” like many others, is a big fraud. He wants the vote to occur before the members go home and get an earful from their “constituents” about how intrusive and costly the “reform” will be. In other words, he fears he will lose votes over the recess. This is not the first time this kind of thing has happened.

Wouldn’t a true democrat insist that congressmen consult with the people they allegedly represent back home before voting?

There are many reasons for agreeing with Joseph Schumpeter that representative democracy is a “sham.” Here is the latest proof that even its advocates don’t really believe in it. As historian Edmund Morgan argues the “sovereignty of the people” is a principle that developed as a mean of controlling not government but the people.

(For more on Morgan see this.)

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Sotomayor, Freedom, and the Law

The dreary Senate hearing on the nomination of Judge Sonia Sotomayor to the U.S. Supreme Court left me so in the doldrums that my only chance for solace was to dig out my copy of Freedom and the Law (1961) by Bruno Leoni.

My lastest TGIF column is here.

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Congress Declares Independence

What a difference a year can make. On July 6, 1775, the Second Continental Congress, meeting in Philadelphia, issued the Declaration of the Causes and Necessities of Taking Up Arms. Significantly, the document declared, “We have not raised armies with ambitious designs of separating from Great Britain establishing independent states.”

The rest of myTGIF column is here.

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The American Land Question

Readers of this blog may enjoy Joseph Stromberg’s latest Freeman article on the land question.

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The Misrepresentation of Healthcare Reform

Why should the people get something through government–that is, at the point of a gun–simply because they want it?

The rest of my weekly TGIF is here.

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A Palestinian State … If

Israeli Prime Minister Benjamin Netanyahu says the Palestinians can have their own country … if, if, if, and if. See details here.

Reminds me of the story philosopher Norman Malcolm told about Wittgenstein:

When in very good spirits he would jest in a delightful manner. This took the form of deliberately absurd or extravagant remarks uttered in a tone, and with the mien, of affected seriousness. On one walk he “gave” me each tree that we passed, with the reservation that I was not to cut it down or do anything to it, or prevent the previous owners from doing anything to it: with those reservations they were henceforth mine.

Cross-posted at Free Association.

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Regarding Intellectual “Property”

I highly recommend Kevin Carson’s “‘Intellectual Property’: A Libertarian Critique” (pdf), published by the Center for a Stateless Society. It is first-rate. So-called intellectual property is not just about rock bands “protecting” recordings. It’s about big dinosaur corporations attempting to subordinate people through the control of ideas. This big issue will only get bigger in the near future, and much is at stake. Whether one realizes it or not, defense of patents and copyrights puts one on the side of the opponents of liberty.

Cross-posted at Free Association.

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Keynesian Cons

Keynesian economics is back. Government spending to stimulate the economy is all the rage and has won the day in Congress. Of course, conservatives are uneasy. “It’s hardly a secret that Obama is a Keynesian and that he is staggeringly untroubled by the consistent failures of Keynesian policy before and since the New Deal,” David Limbaugh writes at Townhall.com. Dick Morris and Eileen McGann add, “There are very few economists who really buy into Keynesian theory anymore. Instead, the idea of ‘rational expectations’ has taken its place. The difference between the two approaches is essential to understanding why Obama’s stimulus package won’t work.”


Indeed, you would be hard-pressed to find a conservative who admits to being an orthodox Keynesian, conservatives having joined the Church of the Supply Side many years ago. But though Keynesianism tends to be associated with big-government “liberalism”—in its original form, liberalism stood for small government in all realms—many who take Keynes’s approach to economics are nevertheless self-identified conservatives. In practice, “conservative Keynesian” is not a contradiction in terms.


What is a conservative Keynesian? While there may not be a formal definition—mainstream Keynesianism has many nuanced variations—it is fair to say that a conservative Keynesian 1.) looks at the world in terms of macroeconomic aggregates, that is, total output, total employment, and most especially aggregate demand; 2.) sees government fiscal policy as a way to improve those aggregates; and 3.) embraces or at least tolerates deficit spending and inflation in the short run. That much is pretty close to standard Keynesianism. What makes one a Keynesian of the Right is a preference for tax cuts over government spending, although the intention is the same: to put money into the hands of consumers as a way to increase aggregate demand during recessions.


George W. Bush was a model conservative Keynesian. After 9/11, he urged us to shop to keep the economy from falling into a recession. He was also responsible for the 2008 tax rebate—remember those $300 stimulus checks? —which was based on the theory that putting money into people’s hands would boost consumer spending and nip recession in the bud. (It didn’t.)


An astonishing number of the Republicans’ most cherished economic thinkers can be called Keynesians. According to Austrian economist Murray Rothbard, former Fed chairman Alan Greenspan “is, like most other long-time Republican economists, a conservative Keynesian, which in these days is almost indistinguishable from the liberal Keynesians in the Democratic camp. In fact, his views are virtually the same as Paul Volcker, also a conservative Keynesian. Which means that he wants moderate deficits and tax increases, and will loudly worry about inflation as he pours on increases in the money supply.”

Another of these influential Republican economists is Martin Feldstein, a Harvard professor of economics who was President Reagan’s chairman of the Council of Economic Advisers. While Feldstein was a critic of the growing deficit in the Reagan years, today he supports government spending to promote economic recovery. Writing in the Washington Post in October 2008, Feldstein argued that falling home prices are “causing consumers to cut spending, leading to lower employment, lower incomes, and further cuts in consumer spending. Other components of aggregate demand are also falling. The decline in consumer spending will lead to less business investment in plants and equipment.”


Tax cuts wouldn’t work, he said: “The only way to prevent a deepening recession will be a temporary program of increased government spending. … A fiscal package of $100 billion is not likely to be large enough to revive the economy.” In true Keynesian fashion, he added, “While it would be good if some of the increased spending also contributed to long-term productivity, the key is to stimulate demand.” In other words, it really doesn’t matter how the government spends the money. (Keynes said the same: even building pyramids and digging holes would do.)

A few months later, Feldstein made it clear what kind of conservative Keynesian he is: a military Keynesian. (Anyone who thinks World War II ended the Great Depression is a military Keynesian.) In the Wall Street Journal, Feldstein wrote,


As President-elect Barack Obama and his economic advisers recognize, countering a deep economic recession requires an increase in government spending to offset the sharp decline in consumer outlays and business investment that is now under way. … A temporary rise in DOD spending on supplies, equipment and manpower should be a significant part of that increase in overall government outlays. The same applies to the Department of Homeland Security, to the FBI, and to other parts of the national intelligence community.


He even added a Keynesian protectionist twist: “Military procurement has the further advantage that almost all of the equipment and supplies that the military buys is made in the United States, creating demand and jobs here at home.” Feldstein’s plan was not only to help end the recession but to strengthen the American empire.

On the less sophisticated end of the conservative Keynesian spectrum is Michael Gerson, Washington Post columnist and former speechwriter and senior policy adviser to President George W. Bush. According to Gerson, while the stimulus bill that emerged from Congress was “deeply flawed,” it had a “hidden virtue”:


A good portion of the funding is channeled to the poor through programs such as food stamps, unemployment insurance, the child tax credit and the earned-income tax credit. This has a humanitarian justification—unskilled workers and minorities are hurt first and hardest by unemployment. But a focus on the poor has an additional economic justification. Dollars given to the middle class during uncertain economic times are likely to be saved—particularly when the middle class calculates (not unreasonably) that current government largess may require future tax increases. Assistance provided to the poor, in contrast, is used immediately for necessities.


Gerson thus shares the Keynesian animosity toward saving, not realizing that saving is in fact an alternative form of spending—on capital goods and labor, which makes possible the economic restructuring needed after a government-induced asset bubble has burst.

Perhaps the most interesting conservative who has embraced Keynes, albeit critically, is Bruce Bartlett, a Forbes columnist and author of Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. In his recent column “Does Stimulus Stimulate?” he revisited the Great Depression, especially the secondary depression that began in 1937, when Franklin Roosevelt raised taxes and cut spending and the Federal Reserve (again) contracted the money supply. “The result was an economic setback that didn’t really end until both monetary and fiscal policy became expansive with the onset of World War II,” he wrote. “At that point, no one worried any more about budget deficits, and the Fed pegged interest rates to ensure that they stayed low, increasing the money supply as necessary to achieve this goal. It was then and only then that the Great Depression truly ended.” In another article, Bartlett wrote, “[I]n terms of fiscal policy [before war spending kicked in], Roosevelt’s error wasn’t that he spent too much, but that he didn’t spend nearly enough.”

Through war spending, in other words, the Keynesian recipe got the economic cake to rise again. In Depression, War, and Cold War, however, economic historian Robert Higgs documents that in fact war spending did not end the Depression, if by that term we mean not merely a depressed GDP but depressed living standards. Nevertheless, Bartlett insists, “[E]conomists concluded that an expansive monetary and fiscal policy, which had been advocated by economist John Maynard Keynes throughout the 1930s, was the key to getting out of a depression. Keynes was right…”


The problem, Bartlett adds, was that Keynes’s followers thought this policy was appropriate outside of a depression. When it was tried in the 1960s and ’70s, we got inflation. That made economists shy away from countercyclical policies—another error. Bartlett now contends that since we are in a Keynesian “liquidity trap” (in which interest rates are already so low that monetary policy alone is impotent), we need fiscal stimulus. “In the short run, the case for stimulus is overwhelming. … The trick is to front-load the stimulus as much as possible while putting in place policies that will tighten both fiscal and monetary policy next year.” Because speed is of the essence and because government spending will be hard to curtail later, he prefers stimulus through tax policy.

In 2004, Bartlett declared in National Review Online, “Keynes developed his theories in the 1930s precisely in order to save capitalism.” He said this of the same man who wrote, “I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment,” who praised state socialism for its “courage [to engage in] bold experiments,” and who found the free market obnoxious because it is based on the “money-motive.”


We might dub Bartlett a supply-side Keynesian, and he would not be the only one. In 2008, conservative economics commentator Lawrence Kudlow recalled that when he went to work for President Ronald Reagan in 1981,


One of the architects of supply-side economics, Columbia University’s Robert Mundell, [said] that during periods of crisis, sometimes you have to be a supply-sider (tax rates), sometimes a monetarist (Fed money supply), and sometimes a Keynesian (federal deficits). I’ve never forgotten that advice. Mundell was saying: Choose the best policies as put forth by the great economic philosophers without being too rigid.


Perhaps the first supply-side Keynesian was Lord Keynes himself. According to Bartlett, Keynes wrote, “Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.”


This shouldn’t surprise us too much. Keynes, according to New York University economist Mario Rizzo, lost confidence in countercyclical government spending in the late 1930s. The Keynesians have yet to catch up with their master.


That supply-siders can also be Keynesians may seem paradoxical: in the 1970s and ’80s, supply-side economics arose in rebellion against Keynesianism. Keynesians tended to be concerned with demand and its effect on employment. If the economy was in recession, the solution was to increase demand through government spending. This, it was said, would stimulate investment and employment.

The supply-siders responded by invoking the great classical economist J.B. Say, who argued in effect that if the supply side of the economy is thriving, demand takes care of itself. This is because supply is demand. When someone produces a good in a modern economy, it’s because he wants to trade it—through the medium of money—for something else. Ultimately goods trade for goods. The more that’s produced, the more that’s demanded. Say’s critics who render his law as “supply creates its own demand” set up a straw man. As James Gwartney writes in The Concise Encyclopedia of Economics, “Virtually all economists accept this proposition and therefore are ‘supply siders.’”


A second, more prominent aspect of supply-side economics is the belief that high marginal tax rates reduce the incentive to work and encourage tax avoidance. The flipside is that cutting marginal rates produces higher revenues for the government (as Keynes seems to have believed, too).


Despite their differences, conservative Keynesians and supply-siders can resemble each other. In a recession a conservative Keynesian could favor a cut in marginal tax rates to stimulate demand and, thereby, investment, while a supply-sider would favor a cut in marginal tax rates to stimulate investment and thereby demand. The policies look the same from the outside.


Another overlap between Keynesians and supply-siders is their nonchalance about deficit spending and the inflation it prompts. This attitude is revealed in the supply-siders’ gusto for tax cuts even without offsetting spending cuts. Supply-siders tout the revenue-enhancing effects of slashing marginal tax rates, but the extent of those effects is disputed. As the monetarist Milton Friedman used to point out, the level of government spending, not taxation alone, is the better measure of the burden of government, since one way or another the money is extracted from the private economy.


The trouble with Keynesianism is not only that its focus on macroeconomic aggregates to the neglect of microeconomic human action on the ground “conceal[s] the most fundamental mechanisms of change,” as F.A. Hayek noted. It is also that Keynesianism sanctions politicians in doing what they wish to do already: spend the people’s money, debauch the currency, and engineer society in their own image—all in order to stay in power. All too often, the Right’s economic program has amounted, in practice, to a variation on Keynesian themes—stimulating demand through tax cuts without spending cuts or military spending rather than the public works favored by the Left. The result, either way, is bigger government, ballooning deficits, inflation, and recession.

It’s not true that “we’re all Keynesians now.” But enough of us are to justify concern about the future. 

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Sheldon Richman is the editor of The Freeman (www.fee.org).

The American Conservative welcomes letters to the editor.|
Send letters to: letters@amconmag.com

Bad Deal

Never has the phrase “the worst economic crisis since the Great Depression” been uttered so often. Reporters and commentators routinely discuss our current financial woes as though it were 1930 again. Pundits and even economists urge President-elect Barack Obama to launch a “new New Deal” as soon as he takes office. Thus it might be useful to revisit the original Great Depression and New Deal to see what actually happened and what lessons we might draw for the present crisis.


The first thing to understand is that these events did not occur in an environment of laissez faire. Contrary to popular accounts, government intervention in the U.S. economy did not begin in 1933 with the inauguration of Franklin Roosevelt. Before that America was no land of unregulated markets. Far from it. Government had intervened in the economy from the very beginning: the first economic act of the first Congress—on July 4, 1789—was a comprehensive protective tariff. Before long, the banking industry, in particular, faced detailed federal and state regulation. Significantly, branch and interstate banking were forbidden. Free-market banking did not exist, and the gold standard was limited.


In 1913, the political class, which included big bankers, decided that a more systematic regulatory regime was needed to keep the economy on an even keel. Hence, the Federal Reserve System—in essence a government-sponsored banking cartel—was born.


The chronology is important because the worst U.S. depression occurred 15 years after the Fed opened. Someone ignorant of history and economics might guess the Fed was set up to prevent a repeat of the Great Depression, but he would be wrong.

As for the events of 1929 and onward, we may start with a remark by Fed Chairman Ben Bernanke. Speaking at a celebration of Milton Friedman’s 90th birthday, Bernanke, at the time a member—but not yet chairman—of the Fed’s Board of Governors, said, “I would like to say to Milton and Anna [Schwartz, coauthor with Friedman of A Monetary History of the United States]: ‘Regarding the Great Depression, you’re right. We did it. We’re very sorry.’”

How did they do it? According to economist Murray Rothbard’s history of the period, America’s Great Depression, the 1920s were marred by the Federal Reserve’s inflation of credit in 1921-22, 1924 (a presidential election year), and 1927. The Fed’s policy, backed by the pro-business Republican administration of Calvin Coolidge and Treasury Secretary Andrew Mellon, began as a way to end the 1920-21 depression. Other motives were at work, however, such as facilitating exports through easy loans to foreign governments and helping Great Britain cope with its wartime inflation by re-establishing its prewar gold-to-sterling ratio.


According to Rothbard, the money supply grew by nearly 62 percent, or 7.7 percent a year on average. “The inflation of the 1920s was actually over by the end of 1928. … And therefore, from that time onward, a depression to adjust the economy was inevitable,” he added.


Why inevitable? To answer this we must understand the role of interest rates in a free market. Other things being equal, people prefer goods in the present to goods in the future. If they are to defer consumption, they typically must be compensated. That rate of compensation is an interest rate. This “time preference” can vary in intensity. One person might be willing to lend money at 5 percent, while another might insist on 10 percent. The market interest rate emerges from competition among lenders and borrowers. Changes in the rate, absent government intervention, signal real changes in people’s time preferences. Interest rates rise when people reduce savings and consume more; interest rates fall when people decide to defer consumption and save more.


These signals guide entrepreneurs in their decisions about how to invest scarce resources in a structure of production with many stages and time periods. High rates signal that scarce capital should go toward consumer goods and producer goods that are close to the consumer-goods stage. Low rates signal more abundant savings and deferred consumption, telling producers that they can invest in longer-term projects at stages of production further removed from the consumer-goods stage.


It is this critical time-signaling function that is damaged when the government’s central bank expands the money supply. The Fed inflated in the 1920s precisely to lower the interest rate below the free-market level. Since the signals created by the Fed were false in the sense that they were not aligned with consumers’ true time preferences, producers and investors behaved differently than they would have in a free market, that is, in ways they would regard as erroneous later. That behavior changed relative prices and distorted the structure of production. Thus the 1920s boom—built as it was on false expectations induced by the Fed’s easy credit—was unsustainable. An end to the inflation would reveal malinvestment and necessitate correction—the depression phase of the government-created business cycle.


With the Fed’s inflation over by the end of 1928, the bust was just a matter of time. The stock market crash in October 1929 left banks with unpaid loans, and their shaky condition eroded confidence and set off bank runs. Companies failed, and unemployment rose. All of this was the market’s way of reasserting itself and attempting to correct for past errors created by the government’s signal-tampering.


This might have been a one- or two-year depression, like those of the past, but the Fed’s blunders did not end with the inflation. Once stock prices plummeted and banks lost reserves to worried depositors, the money supply contracted, something the Fed permitted and even facilitated. The central bank had been established as lender of last resort to the banking system, obviating the market’s own solution to illiquidity. But the central bank abdicated its role at a critical time. The Fed’s deflation was fatal to the economy. The Austrian economist Ludwig von Mises analogized about deflation in 1938, “If a man has been hurt by being run over by an automobile, it is no remedy to let the car go back over him in the opposition [sic] direction.” Friedman and Schwartz showed that the money supply shrank 27 percent from 1929 to 1933. With banks failing, people held on to their money and reduced consumption, which in turn left businesses without customers. So they laid off workers, who cut back on consumption. Hence the eventual secondary depression.


The government made things worse by aggressively interfering with the market correction. Contrary to common misconception, interference did not begin with Roosevelt’s New Deal but rather with Herbert Hoover, who took office in March 1929. As one historian put it, Hoover, an engineer by profession and part of the Republican Party’s progressive wing, was not the last of the old presidents but the first of the new. In previous depressions, the federal government typically cut spending and taxes and let the market liquidate bad investments. As a result, the depressions were relatively brief. This time around Hoover moved quickly to raise government spending and taxes of all kinds (the top marginal income-tax rate went from 24 to 63 percent); subsidize banks, railroads, industries, homeowners with mortgages, local governments, and farmers; and sign the infamous Smoot-Hawley Tariff. Even with the tax increases, the budget deficit ballooned to record levels. Hoover urged the nation’s governors to increase public-works spending substantially and had the federal government join the effort. He favored new rounds of inflation, but the Fed’s efforts were offset by factors beyond its control. Egregiously, Hoover personally pressured major corporations not to cut wages. (As commerce secretary, he had long been an advocate of government-business-labor “partnership,” i.e., cartelization.) When wages are rigid while all other prices are falling, unemployment goes up.


The result of Hoover’s program? Unemployment went from 3.2 percent in 1929 to over 25 percent in 1933. It remained in double digits until 1941, a year after the military draft started. GNP shrank 44 percent from 1929 to 1932.


“[W]e might have done nothing,” Hoover said. “That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic.” This was the “Hoover New Deal,” as economist Benjamin Anderson called it at the time. If interventionist economic theory were correct, Hoover’s program should have been a smashing success and he should have been re-elected handily in 1932. But the economy deteriorated, and Roosevelt ignominiously defeated Hoover.


FDR ran on a program of balanced budgets, reduced government spending, and sound money, but once in office he raised taxes and spending to new heights and confiscated the people’s gold. His list of New Deal programs is familiar, beginning with the fascistic National Recovery Administration, which cartelized industry; the Agricultural Adjustment Administration, which brought central planning to farming; banking and securities regulation; and the make-work Civilian Conservation Corps and Works Progress Administration. The massive public-works spending helped Roosevelt politically, but did little to employ those most desperately in need. Journalist Walter Lippmann called the WPA “worse than a failure.” After the Supreme Court declared the NRA and AAA unconstitutional in 1935 and 1936, Roosevelt began the Second New Deal, which included Social Security, the National Labor Relations Act, and other impediments to free and competitive economic activity.

Yet with all this government activism, the U.S. economy, despite halting attempts at recovery, could not shake the Depression. In 1937 and 1938, the financial system went into an unprecedented secondary depression, with a new stock-market crash and unemployment climbing back to over 20 percent. Jim Powell notes in FDR’s Folly that the New Deal further eroded the banking system; raised taxes; made hiring workers, particularly unskilled blacks, prohibitively expensive; increased the price of most goods, including food; and discouraged investment. This is hardly the New Deal we’re taught in school. As historian David Kennedy put it, “Whatever it was, [the New Deal] was not a recovery program, or at any rate not an effective one.”

Roosevelt did not come into office with a detailed program based on a firm ideological foundation. Rather, he saw himself as a pragmatist ready to try anything, an approach that engendered stultifying uncertainty. First, he mandated anticompetitive cartels; then he brought antitrust prosecutions against firms for monopolistic activity. Businesses were afraid to make long-term investment plans under such circumstances. Economic historian Robert Higgs writes in Depression, War, and Cold War, “Taken together, the many menacing New Deal measures, especially those from 1935 onward, gave business people and investors good reason to fear that the market economy might not survive in anything like its traditional form and that even more drastic developments, perhaps even some kind of collectivist dictatorship, could not be ruled out entirely.”


The New Deal did not, therefore, end the Depression. Yet as Higgs shows, neither did World War II. If by “depression” we mean falling living standards as a result of economic inactivity, we can hardly count the war years, with their rationing and shortages of consumer goods, as years of prosperity. The draft is a bogus way to reduce unemployment. The Depression ended after the war, when labor and industry could turn to satisfying consumers, not government.


What can we learn from all this? That money is too important to be left to the state. One way or another, government mismanagement of the monetary system wrecked the U.S. economy. It’s happening again now. The only permanent way to avoid a repetition is to place the system where it belongs: in the free market.


Second, efforts to prevent liquidation of malinvestment caused by inflation bankrupt companies and only prolong economic agony. Bailouts are counterproductive. Assets must be revalued and rearranged in the light of reality.


Third, government stimulus spending, borrowing, taxation, and public works commandeer scarce private resources and prevent entrepreneurs from shifting them to investments aligned with consumer, not political, preferences. As Price Fishback of the University of Arizona points out, even FDR didn’t try to stimulate the economy with extraordinary budget deficits, something for which Keynes criticized him.


Fourth, individual liberty is the first casualty when bureaucracy expands to manage the economy.


President-elect Obama would do well to take note, but we hardly have grounds for optimism. Obama has declared his intention to spend, New Deal-style, hundreds of billions of dollars—perhaps a trillion—to rebuild infrastructure, modernize schools, retrofit public buildings for energy efficiency, and expand the broadband network. No matter how meritorious these projects, they do not constitute a genuine recovery program. Government cannot escape the fact that it cannot create wealth. It can only transfer wealth from the private sector or create the illusion of wealth through inflation. Jobs created under inherently politicized programs will displace jobs the private sector would create if the burden of government were lifted and investor confidence restored.


It’s about time we learned something from the New Deal. 
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Sheldon Richman is the editor of The Freeman (www.fee.org). 

The American Conservative welcomes letters to the editor.
Send letters to: letters@amconmag.com

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