Tag: Capitalism

By Richard Ebeling

Originally published on June 4, 2024 for the Liberty Fund Network

*The essay below is the lead essay to a longer conversation with Dr. Ebeling and other professors. Use the link above to read the full article.

It is now half a century since the first Austrian Economics conference was held during the week of June 15-22, 1974, at South Royalton, Vermont. No doubt it was a lifetime ago. But for some of us who were fortunate enough to attend the event in that small New England “rustic” hamlet, it seems like only yesterday. Sponsored by the Institute for Humane Studies, it brought together around 50 people most of whom had been identified as young economists and students interested in the ideas and legacy of the “Austrian” tradition.

During that week at South Royalton, three leading members of the, then, nearly non-existent Austrian School, Israel M. Kirzner (New York University), Ludwig M. Lachmann (University of Witwatersrand, South Africa), and Murray N. Rothbard (Polytechnic Institute of Brooklyn), delivered a series of lectures that later appeared in book form under the title, The Foundations of Modern Austrian Economics (Dolan, 1976). The presentations summarized the “Austrian” subjectivist approach to economic method, the theory of action (“praxeology”), the nature of the competitive market process and the role of the entrepreneur, the theory of capital and production, money and the monetary process, and critiques of mainstream equilibrium theory and Keynesian macroeconomics (Ebeling, 1974; Ebeling, 2019). This first Austrian conference was followed by two others, at the University of Hartford in June 1975, and then at Windsor Castle in the UK in September 1976 [Ebeling, 1975b; Blundell, 2014], with papers from the third conference published not long after [Spadaro, 1978].

Equally or, it might easily be claimed, more importantly in bringing about this revival of the Austrian School was that just four months later, Friedrich A. Hayek was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, commonly referred to as the Nobel Prize in Economics. (Ebeling, 1975). Hayek was supposed to have attended the conference and had been listed as a “distinguished guest” in the conference brochure but was unable to do so due to health problems. To the best of my recollection, no one at the South Royalton conference in June of 1974 anticipated Hayek being awarded the Nobel Prize a few months later. As a result of these two events, the South Royalton conference and Hayek’s Nobel Prize, the Austrian School was reborn.

Many of those who were among the attendees at South Royalton may have become well known in “Austrian” circles over the last half-century. But at the time, most of them were still in graduate school or even undergraduate programs with only a few already teaching and professionally writing.  Here, really, was the “remnant” of a famous economic school of thought that had been eclipsed in the post-World War II era (Ebeling, 2016, 15-23; 2023).

The Rise and the Eclipse of the Austrian School

Before the First World War, the Austrian Economists had been internationally recognized as among the pioneers of the transformative “marginalist” revolution. In the interwar period of the 1920s and 1930s, the Austrian Economists were among those at the center and even forefront of discussions surrounding money and the business cycle, the debates concerning comparative economic systems – capitalism, socialism and the interventionist state – and the nature, logic and implications of knowledge, equilibrium, market processes and the price system in economic analysis.

Hypothetically, the late 1940s should have served as the starting point for a postwar resurgence of the Austrian School. In 1948, Friedrich Hayek published Individualism and Economic Order, which brought together a series of his essays offering more than a decade of reflection and refinement of ideas relating to the nature of the social sciences, the features and functioning of a competitive market order and the price system, and the meaning of coordinative equilibrium given the inescapability of divided and dispersed knowledge in society, along with his critique of socialist central planning.

The next year, 1949, saw the publication of Ludwig von Mises’ treatise, Human Action, which integrated and synthesized four decades of his unique and original contributions in the “Austrian” tradition. This work offered a majestic vista of an alternative vision of purposeful, acting man as the methodological foundation for a dynamic market process theory that demonstrated the role of the entrepreneur as its central player. In addition, the work addressed  the essentiality of the calculative tool of the price system in an ever-changing world of uncertainty, expectations and forward-looking planning of time consuming methods of production for adaptive coordination in the complex system of associative division of labor. There were also Mises’s refined applications within his theoretical framework to the issues of the day: capitalism versus socialism versus the interventionist economy; the monetary system and the business cycle; and a multitude of other topics.

But, instead, during the three decades following the Second World War, the Austrian Economists and their ideas and approach to economic theory and policy fell by the wayside with the ascendency and near monopolistic dominance of mathematical general equilibrium theory in microeconomics and Keynesian Economics in macroeconomics. Almost the only references to the Austrian School were in history of economic thought textbooks, and in this setting, they were clearly classified as closed chapters in the earlier developments leading to economics as a positive and quantitative “science” in its modern garb.

As a personal indication of the Orwellian memory hole that Austrian Economics had fallen into, when Ludwig von Mises died in October 1973, I was an undergraduate at California State University, Sacramento. I wrote a short obituary piece about Mises for the campus student newspaper. One of my economics professors, a Veblenian Institutionalist who was also an editor of the Journal of Economic Issues, came up to me after reading it, and said, without jest, “Mises! Mises! I thought he died in the nineteenth century.”

As another instance, when Friedrich A. Hayek won the Nobel Prize in Economics in the autumn of 1974, several of my Keynesian and Marxist professors expressed their surprise and confusion. One asked what Hayek had ever contributed to economics other than his “polemical and politically extreme right-wing tract,” The Road to Serfdom.  Another asked, “Wasn’t Hayek that old business cycle theorist who assumed ‘full employment’ during the Great Depression?”

Now, I am not suggesting that such views about either Mises or Hayek reflected the knowledge, or lack thereof, of every mainstream economist in the 1970s. But I do think that my admittedly very small sample size about what was known or thought about two of the leading twentieth century members of the Austrian School was probably replicated in many departments of economics at universities around the United States and other parts of the world.

A New Generation’s Rediscovery of the Austrian School 

Hayek’s Nobel award served as a crucial catalyst for a renewed interest in his contributions and the school of thought he represented, both in scholarly and popular circles. This Hayekian revival was especially facilitated through the publication of works such as Gerald P. O’Driscoll’s Economics as a Coordination Problem: The Contributions of Friedrich A. Hayek (1977), who had attended the South Royalton conference, and Norman P. Barry’s Hayek’s Social and Economic Philosophy (1979). By the 1980s and 1990s, there was practically a cottage industry in books and articles analyzing and interpreting Hayek’s contributions to economics and social and political philosophy. The most notable of these were John Gray’s Hayek on Liberty(1984), G. R. Steele’s The Economics of Friedrich Hayek (1993), and Bruce Caldwell’s Hayek’s Challenge (2004). Not since before the Second World War had these ideas received such attention.

There soon was an explosion of works restating and explaining the evolution and core concepts of Austrian Economics, from the popular to the scholarly (e.g., Littlechild, 1978; Taylor, 1980; Reekie, 1984; Shand, 1984, 1990; Cubeddu, 1993; Vaughn, 1994, 2021; Foss, 1994; Gloria-Palermo, 1999; de Soto, 2008; Butler, 2010; Ebeling, 2003, 2010a, 2016; Schulak & Unterköfler, 2011; Holcombe, 2014; Horwitz, 2019). Anthologies appeared bringing together earlier writings by the Austrian Economists to make them more easily accessible to a new generation of readers (Ebeling, 1990; Littlechild, 1990; Kirzner, 1994; Greaves 1996; Gloria-Palermo, 2002). There was the founding of the Review of Austrian Economics, the Quarterly Journal of Austrian Economics, and Advances in Austrian Economics. These journals were specifically devoted to “Austrian” theory, its history, and its application to contemporary economic issues. There were soon places for the study of Austrian Economics at several universities and colleges around the United States.

During the 1980s and 1990s, observers within and outside the Austrian School expressed some disappointment and frustration that many then writing in the “Austrian” tradition seemed to be “merely” repeating what the earlier “masters” had written in the late nineteenth century or the first half of the twentieth century. Austrian Economists seemed stuck in the past and simply rewriting, over and over again, the history of long gone economic ideas.

But, I would argue that this phase in the revival of the Austrian tradition was in fact necessary and essential. Except for a small circle of scholars narrowly interested in the history of economic thought, the content, character, quality and texture of economic ideas before the Second World War were hardly known or understood by the generation of economists trained in the 1950s, 1960s and 1970s. And what was known or referenced about the economists in that earlier pre-World War II period was often caricatures of them and their ideas. The Austrians theoretical contributions and policy conclusions were either ignored or widely misrepresented.

This was the intellectual climate in which the Austrian School was experiencing a revival. While I may be accused, no doubt, of “romanticizing” it, for some of us the rediscovery of the Austrian School was like the archeologists who unearth a long-forgotten civilization. They must excavate the site, explore the buildings and passageways, and carefully study the artifacts extracted from the grounds to determine what kind of civilization it was. What types of lives did those ancient people live? What was their culture, technologies, values and belief systems? Then, we compare their achievements and accomplishments with our own. Sometimes, no doubt surprisingly, “modern man” finds out that that older civilization had made discoveries and advancements in knowledge and understanding that still bewilder those in contemporary society; such was realized about the Austrians of that earlier time (Dekker, 2016).

Intellectual History as a Gateway to New Understandings and Applications

Those who were experiencing an active interest in the Austrian School after the South Royalton conference and Hayek’s awarding of the Nobel Prize literally had to go back to the foundational origins of the school starting with Carl Menger, Eugen von Böhm-Bawerk and Friedrich von Wieser. A new generation needed to explore the buildings and passageways of the theoretical construction built up by the first generation of Austrians. They discovered  different and subtly more insightful ways of thinking about the meaning of “the margin,” and an understanding of many nuances concerning the meaning of “subjective value” that broadened into a subjectivism of meaning, purpose, intention, action, uncertainty, time and causality (Ebeling, 2010b).

The static equations of Walrasian and Paretian general equilibrium were seen to be outside of time and space, to be ignoring the limits to human knowledge by assuming that everyone began with knowing everything relevant to know. This new generation of Austrian Economists, like careful and methodical historians going through “original documents,” worked their way through the controversies of the interwar period. Having all the articles and books spread before them, they retraced the steps and stages of the controversies over economic calculation and socialist central planning. Through it they came to understand how Austrians like Mises and Hayek revised, refined, and enriched their own arguments concerning property, prices, competition and entrepreneurship, as the advocates of socialism and interventionism were challenging them.

With this historical hindsight this new generation better understood why many Austrian arguments failed to persuade during the 1930s and 1940s. But through this very hindsight they could also see how Mises and Hayek, for instance, came to redefine the notion of “equilibrium,” the conception of “coordination,” and the meaning of market processes through and in time with actors inescapably acting within a division of knowledge, and its relevance for social and economic policy (Lavoie, 1985a, 1985b; O’Driscoll and Rizzo, 1985; Barry, 1988; Cordato, 1992; Thomsen, 1992; Machovec, 1995; Ikeda, 1997; Aimar, 2009; de Soto, 2009, 2010; Boettke, 2012, 2021; Mitchell & Boettke, 2017)

The same applied to the controversies surrounding money and the business cycle. The Austrians were concerned with the meaning and nature of an intertemporal equilibrium that coordinates the choices of savers and investors through a network of interest rates and stages of production by which resources are applied over time to make finished consumer goods. All market transactions occur through the medium of money. However, with the supply of money in the banking system influenced by the money-creation powers of a central bank, there is the possibility of an illusion that there is a greater plentitude of available factors of production for investment purposes than may be the case. This can result in an imbalance between investment projects undertaken relative to the actual supply of savings to sustain them over time. At the same time, however, the apparent simplicity and clarity of the Hayekian triangles to explain and illustrate this savings-investment process were seen to be more complicated and confining than they had first appeared to be in the 1930s. Thus, there was the need for a richer conceptualization of capital and its structure. (Skousen, 1990; Lewin, 1999; Garrison, 2001; Horwitz, 2016; Lewin & Cachanosky, 2019; 2021).

The advantage of the historian is that he, at least partly, knows “how things turned out,” in a way that the human actors in the stream of those earlier events did not and could not imagine, including the evolution of their own ideas and actions through the lived experiences and sequences of their own time. Through this all, the new post-South Royalton generation of Austrians came to understand the strengths and shortcomings in the ways those earlier Austrians had laid out and defended their system of ideas, and why they seemingly “lost” the debates of that interwar period. This “defeat” left the field of economics open to the “victory” of the Walrasian and Marshallian mainstream of the profession in microeconomics and to the Keynesians in the “new economics” of macroeconomic theorizing.

At the heart of many of these controversies was the realization that a good part of it centered on alternative conceptions of the philosophy and methods of the social sciences. The dichotomy between a science of the logic of the human mind and purposeful actions, along with the unintended consequences emerging from social and economic processes, versus the mainstream economics primarily focused on quantitative relationships and equilibrium states. These differences in approach became starkly clearer from the perspective of more than a hundred and fifty years after the birth of the Austrian School in 1871.

This all required a retracing of the steps and stages of the evolution of the Austrian School, with all their triumphs and tragedies in those battles of ideas. A “doctrinal” focus of attention and emphasis was almost impossible to avoid for a fuller revival of the “lost civilization” of the Austrian School of Economics. Being an historian of Austrian Economic thought was found, to a greater or lesser extent, to be part of the reconstruction and then new advancements in the Austrian tradition.

From Doctrinal Studies to New and Significant Contributions

But already in the 1980s and 1990s the focus of some of these newer Austrians began to change. Having successfully finished the process of rediscovery, the Austrian tradition was taken up and applied in new ways. Two such areas that stand out, may I suggest, were monetary and banking theory and policy, and the theory of entrepreneurship and the firm. In 1942, the German economist, Gustav Stolper, could say, “There is today only one prominent liberal theorist consistent enough to advocate free, uncontrolled competition among banks in the creation of money.” That was Ludwig von Mises (Stolper, 1942, p. 59). But following Hayek’s Denationalization of Money in 1976, an entire Austrian-inspired new theoretical field emerged developing the possibilities of private, competitive free banking in place of central banking (White, 1984, 1998; 1999; 2023; Selgin, 1988, 1996; 2017; Dowd, 1988, 1989, 1993, 2001; Horwitz, 2000, 2019; Salerno, 2010; Ebeling, 2015, pp. 104-138).

The same can be said about entrepreneurship. Kirzner’s Competition and Entrepreneurship (1973) not only was followed over the next several decades by additional works by Kirzner, himself, but fostered new contributions concerning additional sides to the entrepreneurial role besides that of coordinating arbitrageur; including the entrepreneur in relationship to the existence, nature, and workings of decision-making within the business enterprise and its organization (Harper, 1996; Sautet, 2000; Foss & Klein, 2002, 2012, 2019, 2022; Pongracic, 2009; Klein, 2010). The “Austrian” contributions to these two areas of economic study are generally recognized within the economics profession as a whole, and no longer as simply “fringe” ideas of a bygone school of thought.

In addition, during the last thirty years, several “Handbooks” (Boettke, 1994; 2010; Boettke & Coyne, 2015) and collections of essays devoted to summarizing and clarifying Austrian themes have appeared. But unlike most of the earlier anthologies that I referred to, these were not meant to merely restate the body of older Austrian conceptions and ideas on various topics. No, their purpose was to explain the relevance of the Austrian tradition to contemporary economic theory and policy, with applications and examples, and complementary connections to other schools and fields in modern-day economics. (Rizzo, 1979; Backhaus, 2005; Aligica & Boettke, 2009; Boettke, Coyne, & Storr, 2017; Coyne, Hall & Norcross, 2024).

Those who have been drawn to this revived and revitalized post-South Royalton Austrian School have also applied its analytical framework to social problems such as community disasters and “spontaneous” responses by the institutions and participants of civil society (Storr & Haeffele-Balch, 2015; 2020) and to the importance of cultural and institutional factors within the social and market processes of the open society (Storr, 2015; Gruber & Storr, 2015; Storr & John, 2020), as well as critiques of behavioral economics (Rizzo & Whitman, 2019) and the hubris of the presumed expertise possessed by social engineers (Formaini, 1990; Koppl, 2015; 2018). This has also included areas of human life as wide and diverse as a Hayekian approach to the family and marriage (Horwitz, 2015) and the economics of war and peace (Coyne. 2007; 2013; 2022).

Conclusion: The Lasting Significance of the South Royalton Conference

The first day of the South Royalton conference began with a banquet dinner. Since Ludwig von Mises had passed away less than a year earlier, in October 1973, at the age of 92, some of the attendees who had known him were asked to make a few remarks.  Free market journalist Henry Hazlitt recalled how he had first met Mises in 1940, shortly after Mises had arrived in New York City from war-torn Europe. British economist William H. Hutt talked about what he considered to be some of Mises’s most important contributions to economics. Murray Rothbard recounted some of the amusing anecdotes that Mises would tell during the graduate seminar he taught at New York University from 1946 to 1969. Milton Friedman, who had a summer home in Vermont and who was invited to the dinner, was asked to say a few words. Friedman said that, of course, Mises had made a number of notable contributions. And while he hoped that we would have an enjoyable and fruitful conference over the coming week, it was important to remember that there was no such thing as “Austrian Economics,” just “good” economics and “bad” economics.

Friedman clearly thought that many of those at the conference were on a fool’s errand in pursuing an interest in something called “Austrian Economics.” Yet, for many of those attendees, Austrian Economics was good economics, and they wanted to know more about it from the lectures that were about to be given by Israel Kirzner, Ludwig Lachmann, and Murray Rothbard over the next several days.

During a walk, one day, with Ludwig Lachmann around the South Royalton town square with its statue of a Civil War Union soldier standing on a pedestal in the middle, Lachmann said to me that he had long feared that he might very well be “the last” of the Austrian Economists.

Those lectures at the South Royalton conference half a century ago this year, have resulted in a vibrant and productive rebirth of the Austrian School of Economics. It has seen the refinement and refashioning of the original ideas for which the Austrian Economists were internationally renowned in the late nineteenth and twentieth centuries, and which have now been taken into numerous new directions of theoretical and public policy significance.

The Austrian attention to imperfect knowledge, uncertainty, and the potential for frustrated expectations, reminds us that what the future holds in store can never be fully anticipated. But the revival and growth of the Austrian School over the last fifty years has made it clear that Ludwig Lachmann had nothing to fear in thinking he might have been the last of the Austrian Economists.

By Richard Ebeling

Originally published on October 1, 2004 for the Foundation for Economic Education

In the Nineteenth century, critics of socialism generally made two arguments against the establishment of a collectivist society. First, they warned that under a regime of comprehensive socialism the ordinary citizen would be confronted with the worst of all imaginable tyrannies. In a world in which all the means of production were concentrated in the hands of the government, the individual would be totally and inescapably dependent on the political authority for his very existence.

The socialist state would be the single monopoly provider of employment and all the essentials of life. Dissent from or disobedience to such an all-powerful state could mean material destitution for the critic of those in political authority. Furthermore, that same centralized control would mean the end to all independent intellectual and cultural pursuits. What would be printed and published, what forms of art and scientific research permitted, would be completely at the discretion of those with the power to determine the allocation of society’s resources. Man’s mind and material well-being would be enslaved to the control and caprice of the central planners of the socialist state.

Personal freedom and virtually all traditional civil liberties were crushed under the centralized power of the Total State. 

Second, these Nineteenth-century anti-socialists argued that the socialization of the means of production would undermine and fundamentally weaken the close connection between work and reward that necessarily exists under a system of private property. What incentive does a man have to clear the field, plant the seed, and tend the ground until harvest time if he knows or fears that the product to which he devotes his mental and physical labor may be stolen from him at any time?

Similarly, under socialism man would no longer see any direct benefit from greater effort, since what would be apportioned to him as his “fair share” by the state would not be related to his exertion, unlike the rewards in a market economy. Laziness and lack of interest would envelop the “new man” in the socialist society to come. Productivity, innovation, and creativity would be dramatically reduced in the future collectivist utopia.

The Twentieth-century experiences with socialism, beginning with the communist revolution in Russia in 1917, proved these critics right. Personal freedom and virtually all traditional civil liberties were crushed under the centralized power of the Total State. Furthermore, the work ethic of man under socialism was captured in a phrase that became notoriously common throughout the Soviet Union: “They pretend to pay us, and we pretend to work.”

The defenders of socialism responded by arguing that Lenin’s and Stalin’s Russia, Hitler’s National Socialist Germany, and Mao’s China were not “true” socialism. A true socialist society would mean more freedom, not less, so it was unfair to judge socialism by these supposedly twisted experiments in creating a workers’ paradise. Furthermore, under a true socialism, human nature would change, and men would no longer be motivated by self-interest but by a desire to selflessly advance the common good.

Without such a competitively generated system of market prices, there would be no method for rational economic calculation. 

In the 1920s, 1930s, and 1940s, the Austrian economists, most notably Ludwig von Mises and Friedrich A. Hayek, advanced a uniquely different argument against a socialist society. They, Mises, in particular, accepted for the sake of argument that the socialist society would be led by men who had no wish to abuse their power and crush or abrogate freedom, and further, that the same motives for work would prevail under socialism as under private property in the market economy.

Even with these assumptions, Mises and Hayek devastatingly demonstrated that comprehensive socialist central planning would create economic chaos. Well into the Twentieth century, socialism had always meant the abolition of private property in the means of production, the end of market competition by private entrepreneurs for land, capital, and labor, and, therefore, the elimination of market-generated prices for finished goods and the factors of production, including the wages of labor.

Yet, without such a competitively generated system of market prices, Mises argued, there would be no method for rational economic calculation to determine the least-cost methods of production or the relative profitability of producing alternative goods and services to best satisfy the wants of the consuming public. It may be possible to determine the technologically most efficient way to produce some good, but this does not tell us whether that particular method of production is the most economically efficient way to do it.

Mises explained this in many different ways, but we can imagine a plan to construct a railway through a mountain. Should the lining of the railway tunnel be constructed with platinum (a highly durable material) or with reinforced concrete? The answer to that question depends on the value of the two materials in their alternative uses. And this can be determined only through knowing what people would be willing to pay for these resources on the market, given competing demand and uses.

Prices Encapsulate People’s Valuations

On the free market, private entrepreneurs express their demand through the prices they are willing to pay for land, capital, resources, and labor. The entrepreneurs’ bidding is guided by their anticipation of the demand and prices consumers may be willing to pay for the goods and services that can be produced with those factors of production. The resulting market prices encapsulate the estimates of millions of consumers and producers concerning the value and opportunity costs of finished goods and the scarce resources, capital, and labor of the society.

A socialist planned economy would be left without the rudder of economic calculation. 

But under comprehensive socialist central planning, there would be no institutional mechanism to discover these values and opportunity costs. With the abolition of private ownership in the means of production, no resources could be purchased or hired. There would be no bids and offers expressing what the members of society thought the resources were worth in their alternative employments. And without bids and offers, there would be no exchanges, out of which emerges the market structure of relative prices. Thus socialist planning meant the end of all economic rationality, Mises said — if by rationality we mean an economically efficient use of the means of production to produce the goods and services desired by the members of society.

Given that nothing ever stands still — that consumer demand, the supply of resources and labor, and technological knowledge are continually changing — a socialist planned economy would be left without the rudder of economic calculation to determine whether what was being produced and how was most cost-effective and profitable.

Neither Mises nor Hayek ever denied that a socialist society could exist or even survive for an extended period of time. Indeed, Mises emphasized that in a world that was only partly socialist, the central planners would have a price system to rely on by proxy, that is, by copying the market prices in countries where competitive capitalism still prevailed. But even this would only be of approximate value since the supply-and-demand conditions in a socialist society would not be a one-to-one replica of the market conditions in a neighboring capitalist society.

Socialist and even some pro-market critics of Mises have sometimes ridiculed his supposed extreme language that socialism is “impossible.” But by “impossible,” Mises simply meant to refute the socialist claim in the Nineteenth and early Twentieth centuries that a comprehensive centrally-planned economy would not merely generate the same quantity and quality of goods and services as a competitive market economy, but would far exceed it. Socialism could not create the material paradise on earth the socialists had promised. The institutional means (central planning) that they proposed to achieve their stated ends (a greater material prosperity than under capitalism) would instead lead to an outcome radically opposite to what they said they wanted to achieve.

Without market prices, there can be neither economic calculation nor the social coordination of multitudes of individual consumers and producers. 

Mises emphasized that a socialist society also would lack the consumer-oriented activities of private entrepreneurs. In the market economy, profits can be earned only if the means of production are used to serve consumers. Thus in their own self-interest, private entrepreneurs are driven to apply their knowledge, ability, and “reading” of the market’s direction in the most effective way, in comparison to their rivals who are also trying to capture the business of the buying public.

Certainly, incentives motivate the private entrepreneur. If he fails to do better than his rivals, his income will diminish and he may eventually go out of business. But the private entrepreneur, as much as the central planner, would be “flying blind” if he could not function within a market order with its network of competitive prices.

Thus, for Austrian economists like Mises, economic calculation is the benchmark by which to judge whether socialist central planning is a viable alternative to the free-market economy. Without market prices, there can be neither economic calculation nor the social coordination of multitudes of individual consumers and producers with their diverse demands, localized knowledge, and appraisements of their individual circumstances.

Central Planning versus Rational Planning

The pricing system is what gives rationality — an efficient use of resources — and direction to society’s activities in the division of labor, so that the means at people’s disposal may be successfully applied to their various ends. Central planning means the end to rational planning by both the central planners and the members of society since the abolition of a market price system leaves them without the compass of economic calculation to guide them along their way.

The chaos of the Soviet economy was centered on the lack of a real price system and, therefore, a method of economic calculation. 

In the Soviet Union, for example, the older criticisms of collectivism were verified. The Total State did create a cruel, brutal, and murderous tyranny. And the abolition of private property resulted in weakened and often perverse incentives, in which individual access to wealth, position, and power came through membership in the Communist Party and status within the bureaucratic hierarchy.

In reality, the rulers of the communist countries had other ends than that of the material and cultural improvement of those over whom they ruled. They pursued personal power and privilege, as well as various ideologically motivated goals. They artificially set prices for both consumer goods and resources at levels that had no relationship to their actual demand or scarcity. As a consequence, the degree of misuse of resources was such that virtually all manufacturing or industrial projects in the Soviet Union used up far more raw materials and labor hours per unit of output than anything comparable in the more market-oriented Western economies.

The chaos of the Soviet economy was centered on the lack of a real price system and, therefore, a method of economic calculation. There could not be a real price system in the Soviet Union because it would have required the reversal of the very rationale for the socialist system on which the Soviet rulers’ power was based — government control and central planning of production. And they could not set their network of artificial prices at levels comparable to those in some Western countries because it would have made clear just how misguided their entire planning and distribution process actually was.

Thus, along with the inherent irrationality of the central planning system due to the lack of real prices were the weakened incentives for the ordinary Soviet citizen to be industrious and creative in the official economy, as well as the perverse incentives of the political system in which personal gain was achieved through a near-total disregard for the interests of the wider society. That the Soviet planners had agendas other than serving consumers only further distorted the system. Just how misdirected and inefficient the use of resources were under socialism only became clear after the Soviet Union collapsed and a limited market economy emerged in Russia.

The End of Civilization

In his arguments against socialist central planning, Mises often couched his reasoning in rhetoric that warned of the end of civilization as we know it if the collectivist road were followed. In the 1930s and 1940s, when Mises most forcefully raised these fears, he was far from being alone in this dire warning, given the brutality and violent tyranny then being experienced in Nazi Germany and Stalin’s Soviet Union.

If nothing else, the “priorities” of the “workers’ state” would be different from those under decentralized, profit-oriented decision-making. 

But Mises’s more fundamental point was that the very nature of a socialist system threatened the economic and cultural standard of well-being that Western man had come to take for granted over the preceding hundred years. With every passing day, a socialist system would be less like the market society that preceded it. The allocation of resources, the utilization of capital, and the employment of labor would have to be modified and shifted from previous uses to new ones. If nothing else, the “priorities” of the “workers’ state” would be different from those under decentralized, profit-oriented decision-making. Should a new public hospital be constructed in a particular location, or should the limited resources be assigned to building additional public-housing complexes in a different part of the country? Should a piece of land in a particular area be used for a new “people’s recreational facility” or should it become the site of a new industrial factory?

If a new housing complex is chosen for construction, should it be made mostly of brick and mortar, or of steel and glass? Should the efforts of some scientists be employed for additional cancer research or for possible development of a tastier and longer-lasting chewing gum? What represents the more highly valued use for various resources that can be employed making different types of machines, which could then be used either to produce more books on religion and faith or to increase the productivity of workers in agriculture? Would a new technological idea be worth the investment in time, resources, and labor, even though its payoff may be years away (assuming it worked as initially conceived)?

Without prices for finished goods and the factors of production to provide the information and signals to guide the decision-making, each passing day would mean more such decisions were made in the dark. It would be analogous to sea travelers in the ancient world before the invention of the sextant or the compass. Every movement out of sight of land — the known and the familiar — would be into uncharted waters with no way of knowing the direction or the consequences of the course chosen. Better to stay close to the shore than to explore unknown seas. And if the journey on the open sea under cloud-covered skies is undertaken, it is uncertain where it will lead or whether the shortest and best course has been selected.

The establishment of a comprehensive system of socialist central planning would be equivalent to going back in time. 

It is for reasons such as this that Mises referred to economic calculation as “the guiding star of action under a social system of division of labor. It is the compass of the man embarking upon production.” Thus, even if the rulers of a socialist state were completely benevolent and concerned only with the well-being of their fellow men, without economic calculation a collectivist society potentially faced what Mises titled one of his books, planned chaos.

Thus, the establishment of a comprehensive system of socialist central planning would be equivalent to going back in time, before the institutions of private property and market competition had enabled the utilization of prices for rational decision-making.

Luckily, the attempt to create socialism in the Twentieth century made enough of an impression that it seems unlikely that such a dramatic abolition of the fundamental institutions of the market economy will be tried again anytime soon. The dilemma of our own time is that governments, through regulation, intervention, redistribution, and numerous controls, prevent the market and the price system from functioning as they should and could in a free society.

By Richard Ebeling

Originally published on October 5, 2016 for the Foundation for Economic Education

In 449 B.C., the Roman government passed the Law of the Twelve Tables, regulating much of commercial, social, and family life. Some of these laws were reasonable and consistent with an economy of contract and commerce; others prescribed gruesome punishments and assigned cruel powers and privileges given to some. Other regulations fixed a maximum rate of interest on loans of approximately 8 percent. The Roman government also had the habit of periodically forgiving all interest owed in the society; that is, it legally freed private debtors from having to pay back interest due to private creditors. 

In 45 B.C., Julius Caesar discovered that almost one-third of the Roman citizenry was receiving their grain supply for free from the State. 

The Roman government also set price controls on wheat. In the fourth century, B.C., the Roman government would buy grain during periods of shortages and sell it at a price fixed far below the market price. In 58 B.C., this was improved upon; the government gave grain away to the citizens of Rome at a zero price, that is, for free. 

The result was inevitable: farmers left the land and flocked to Rome; this, of course, only made the problem worse, since with fewer farmers on the land in the territories surrounding Rome, less grain than before was being grown and brought to the market. Also, masters were freeing their slaves and placing the financial burden for feeding them on the Roman government at that zero price. 

In 45 B.C., Julius Caesar discovered that almost one-third of the Roman citizenry was receiving their grain supply for free from the State. 

To deal with the financial cost of these supplies of wheat, the Roman government resorted to debasement of the currency, that is, inflation. Pricing-fixing of grain, shortages of supply, rising budgetary problems for the Roman government, monetary debasement and resulting worsening price inflation were a continual occurrence through long periods of Roman history.

Spending, Inflation and Economic Controls Under Diocletian

The most famous episode of price controls in Roman history was during the reign of Emperor Diocletian (A.D. 244-312). He assumed the throne in Rome in A.D. 284. Almost immediately, Diocletian began to undertake huge and financially expensive government spending projects. 

There was a massive increase in the armed forces and military spending; a huge building project was started in the form of a planned new capital for the Roman Empire in Asia Minor (present-day Turkey) at the city of Nicomedia; he greatly expanded the Roman bureaucracy; and he instituted forced labor for completion of his public works projects.

The Roman government stopped accepting its own debased money as payment for taxes owed and required taxes to be paid in kind.

To finance all of these government activities, Diocletian dramatically raised taxes on all segments of the Roman population. These resulted in the expected disincentives against work, production, savings, and investment that have long been seen as the consequences of high levels and rates of taxation. It resulted in a decline in commerce and trade, as well. 

When taxation no longer generated enough revenue to finance all of these activities, Emperor Diocletian resorted to debasement of the currency. Gold and silver coinage would have their metal content reduced and reissued by the government with the claim that their metallic value was the same as before. The government passed legal tender laws requiring Roman citizens and subjects throughout the Empire to accept these debased coins at the higher value stamped on each of the coin’s faces.

The result of this was inevitable, too. Since in terms of the actual gold and silver contained in them, these legal tender coins had a lower value, traders would only accept them at a discount. That is, they were soon devalued in the market place. People began to hoard all the gold and silver coins that still contained the higher gold and silver content and using the debased coins in market trading. 

This, of course, meant that each of the debased coins would only buy a smaller quantity of goods on the market than before; or expressed the other way around, more of these debased coins now had to be given in exchange for the same amount of commodities as before. The price inflation became worse and worse as the Emperor issued more and more of these increasingly worthless forms of money.

The penalty imposed for violation of these price and wage controls was death.

Diocletian also instituted a tax-in-kind; that is, the Roman government would not accept its own worthless, debased money as payment for taxes owed. Since the Roman taxpayers had to meet their tax bills in actual goods, this immobilized the entire population. Many were now bound to the land or a given occupation, so as to assure that they had produced the products that the government demanded as due it at tax collection time.  An increasingly rigid economic structure, therefore, was imposed on the whole Roman economy.

Diocletian’s Edict Made Everything Worse

But the worst was still to come.  In A.D. 301, the famous Edict of Diocletian was passed. The Emperor fixed the prices of grain, beef, eggs, clothing, and other articles sold on the market. He also fixed the wages of those employed in the production of these goods. The penalty imposed for violation of these price and wage controls, that is, for any one caught selling any of these goods at higher than prescribed prices and wages, was death.

Realizing that once these controls were announced, many farmers and manufacturers would lose all incentive to bring their commodities to market at prices set far below what the traders would consider fair market values, Diocletian also prescribed in the Edict that all those who were found to be “hoarding” goods off the market would be severely punished; their goods would be confiscated and they would be put to death.  

In the Greek parts of the Roman Empire, archeologists have found the price tables listing the government-mandated prices. They list over 1,000 individual prices and wages set by the law and what the permitted price and wage was to be for each of the commodities, goods, and labor services.

A Roman of this period named Lactanius wrote during this time that Diocletian “ . . . then set himself to regulate the prices of all vendible things. There was much blood shed upon very slight and trifling accounts; and the people brought no more provisions to market, since they could not get a reasonable price for them and this increased the dearth [the scarcity] so much, that at last after many had died by it, the law was set aside.”

The Consequences and Lessons from Roman Economic Policy

Roland Kent, an economic historian of this period, has summarized the consequences of Diocletian’s Edict in the following way: 

“ . . . The price limits set in the Edict were not observed by the traders, in spite of the death penalty provided in the statute for its violation; would-be purchasers finding that the prices were above the legal limit, formed mobs and wrecked the offending traders’ establishments, incidentally killing the traders, though the goods were after all of trifling value; traders hoarded their goods against the day when the restrictions should be removed, and the resulting scarcity of wares actually offered for sale caused an even greater increase in prices, so that what trading went on was at illegal prices, therefore, performed clandestinely.”

The economic effects were so disastrous to the Roman economy that four years after putting the Edict into law, Diocletian abdicated, claiming “poor health” – a euphemism throughout history reflecting that if the political leader does not step down from power, others will remove him, often through assassination.  And while the Edict was never formally repealed, it soon became a dead letter shortly after Diocletian left the throne.

Michael Ivanovich Rostovtzeff, a leading historian on the ancient Roman economy, offered this summary in his Social and Economic History of the Roman Empire (1926):

“The same expedient [a system of price and wage controls] have often been tried before him [Diocletian] and was often tried after him. As a temporary measure in a critical time, it might be of some use. As a general measure intended to last, it was certain to do great harm and to cause terrible bloodshed, without bringing any relief. Diocletian shared the pernicious belief of the ancient world in the omnipotence of the state, a belief which many modern theorists continue to share with him and with it.”

Finally, as, again, Ludwig von Mises concluded, the Roman Empire began to weaken and decay because it lacked the ideas and ideology that are necessary to build upon and safeguard a free and prosperous society: a philosophy of individual rights and free markets. As Mises ended his own reflections on the civilizations of the ancient world: 

“The marvelous civilization of antiquity perished because it did not adjust its moral code and its legal system to the requirements of the market economy. A social order is doomed if the actions which its normal functioning requires are rejected by the standards of morality, are declared illegal by the laws of the country, and are prosecuted as criminal by the courts and the police. The Roman Empire crumbled to dust because it lacked the spirit of [classical] liberalism and free enterprise. The policy of interventionism and its political corollary, the Fuhrer principle, decomposed the mighty empire as they will by necessity always disintegrate and destroy any social entity.”

By Richard Ebeling

Originally published on April 5, 2018 for the Foundation for Economic Education

Why is the free enterprise or capitalist economic system so widely disliked, hated, and opposed? Given the success of the competitive market economy to “deliver the goods,” it presents something of a paradox. An economic system that has either radically reduced, or even in some instances, virtually eliminated poverty, that has created widely available opportunities for personal, social, and material improvement, and that has abolished traditional systems of political privilege, plunder, and power-lusting, is still considered by many to be an evil and unjust social system.

One would think that the market economy would be hailed as the most important social institution humanity had stumbled upon in all of human history. Let’s not forget that for most of that history, the condition of man was to use British philosopher, Thomas Hobbes’s famous phrase, “poor, nasty, brutish, and short.” 

The Transformation from Poverty to Freedom and Plenty

Humanity existed for thousands of years at a level of existence that was at or sometimes even below bare subsistence. The images still shown on our television screens of starving, diseased, and seemingly hopeless children in what used to be called “third world” countries, with appeals for charitable giving to save those young lives, was, in fact, the general condition for the vast majority of human beings everywhere around the globe just a few centuries ago. 

But such circumstances have been diminishing in a growing number of places in the world, first in Western Europe and North America starting in the nineteenth century, then in areas outside of “the West” in the twentieth century, and now in the twenty-first century in more and more parts of Asia and Africa and Latin America. It is not impossible to imagine that, before the end of the twenty-first century, abject poverty may very well be a thing of the past for practically all of humankind.

It is not impossible to imagine that, before the end of the twenty-first century, abject poverty may very well be a thing of the past for practically all of humankind. 

What has made this transformative process possible over the last two or three hundred years—a blink of the eye in terms of all the time that human beings have been on this planet—has been a political philosophy of individualism and an economic system based on market-based and -oriented relationships. The idea and spirit of individualism heralded a cultural shift that moved society away from a view that the individual human being was an object of control, manipulation, and sacrifice for a wider collective group or tribe. And that an individual had a right to peacefully live for himself, pursuing what he considered to be in his best interest for himself and those he cared about. Slavery and servitude were replaced with the belief that human association should be based on mutual benefit through voluntary exchange.

The new science of political economy, symbolized by the publication and growing impact of Adam Smith’s The Wealth of Nations (1776), drew attention to the fact that freedom, peace, and prosperity could be combined by harnessing personal self-interest to the simultaneous betterment of others through the institutions of the free market economy. As if by an “invisible hand,” advancing one’s own circumstance also brought with it an improvement in the conditions of those with whom one interacted in an arena of competitive supply and demand. 

In spite of the astonishing success of functioning market economies in enlarging freedom and prosperity for now billions of people on this blue ball revolving in space around the sun, capitalism stands criticized and condemned wherever it exists to one noticeable degree or another. Why? 

Anti-Capitalism Arising from Ignorance of Economics

I would like to highlight at least three of the reasons for the persistence of anti-capitalist attitudes and arguments. They are ignorance, arrogance, and envy. 

The first and most common one among a large number of people in society is ignorance of the nature, logic, and workings of a functioning and competitive market economy. Most people rarely reflect on the how and why of what brings about the material and cultural quality of everyday life, especially as experienced in North America and most of Europe. It is just taken for granted that all those goods and services appear everyday in the shops and stores regularly visited or that, now, they are simply ordered online and will then appear in a very short period of time at our doorsteps.

A minimum wage may price out of the market some of the very people such legislation was designed to help.

Nor do many people understand what can easily become the negative effects from various government policies. Why not a minimum wage law? Shouldn’t everyone have a “living wage,” a “fair” wage for a decent life? It takes some effort of following through several chains of logic to fully appreciate that artificially setting the hourly wage above where a competitive market had or would establish it may result in the unemployment of those whose labor skills in the workplace may be viewed as being worth less to an existing or prospective employer than what the government dictates must be paid to them. Thus, a minimum wage may price out of the market some of the very people such legislation was designed to help. Their standard of living and life opportunities, therefore, may be worsening, despite the “good intentions” of the minimum wage advocates.

Neither do people always understand that attempting to maintain domestic businesses and jobs through protectionist tariffs that raise the cost of importing various foreign-made goods may actually hurt the employment and profits of many more than supposedly are helped with these barriers to international trade. If foreign suppliers of goods earn fewer dollars from doing business in America, this reduces their financial ability to purchase American-made goods they might have wanted to buy, thus negatively impacting export sectors of the U.S. economy. Such import tariffs also mean that American consumers have fewer goods from which to choose and tend to pay higher prices for the same goods that they now end up purchasing from government-protected American producers and sellers. In the long run, everyone tends to be made worse off from government policies designed to give special benefits to some small segments of all those employed in the economy-wide social system of division of labor. 

Educating for Economic Literacy

While such ignorance makes it easy for far too many to fall prey to misguided and counter-productive economic policy ideas, in principle ignorance can be corrected with informed education about the workings of a free market system. People can be assisted to see both the direct and indirect effects resulting from different economic systems—capitalism, socialism, the interventionist-welfare state—and why and how it is that only open, competitive free market systems can supply both freedom and prosperity, especially when the market system is effectively bolstered by a philosophy of individual liberty and rights in an institutional setting of impartial rule of law that assures freedom for all and special favors or privileges for none. 

I know from personal experience in the college classroom that if presented in clear, relevant, interesting, and persuasive ways, the ideas and importance of free market capitalism for assuring a “good society,” is teachable and learnable. It does not mean that every student coming out of an economics class leaves a free marketeer at the end of the semester. But the limits and absurdities of many, if not most, government interventions can be understood by most, and many can appreciate the benefits of the competitive economic system. 

This is especially so, from my experience, when the case for capitalism is offered in an “Austrian” economic framework that emphasizes the limits of individual human knowledge, the role of the pricing system for coordinating the actions of multitudes for economic well-being through economic calculation, and the inescapable impossibilities of government planners and regulators to ever know enough of all the complex, dispersed, and decentralized knowledge of the world—which any modern society is dependent on, to ever successfully do better than the free market economy. 

Economic Education Begins with Self-Improvement

The other educational task is to share the philosophical and economic ideas of the free market society with others with whom we interact in our daily lives, when it seems appropriate. No one likes a pushy know-it-all, but over lunch or dinner, for instance, when political or economic policy ideas arise in conversation there are sometimes opportunities to offer one’s own “two cents” about freedom, the free market and the role of government in society.

Making the case for freedom to others begins with the self-education and self-improvement of ourselves. 

But as Leonard E. Read (1898-1983), the founder and longtime first president of the Foundation for Economic Education (FEE) always emphasized, changing the world only happens one person and one mind at a time. And the person and mind over whom we can have the most influence is ourselves. Therefore, making the case for freedom to others begins with the self-education and self-improvement of ourselves in knowing, understanding and learning to effectively articulate the principles of liberty and free market capitalism.

Anti-Capitalism from Intellectual and Ideological Arrogance

The second cause for much of the anti-capitalist sentiment in our society is human arrogance. We each are susceptible to hubris, the belief that we know better how others should live and act better than themselves. However, those who are most frequently guilty of such arrogance are the intellectuals of modern society. Many of the more classical liberal-oriented minds of the twentieth century have drawn attention to this, including Joseph A. Schumpeter and Friedrich A. Hayek. 

The peculiarity of successful free market capitalism is that it has generated enough prosperity that it enables to be sustained by an entire segment of the population, who are able to devote themselves simply to the pursuit and propagating of ideas. They include schoolteachers, college and university professors, authors of “serious” and “popular” journals, magazines and newspapers, and books.

Most intellectuals, if one is frank and direct, have lived in “ivory towers” of academia.

When a writer of a newspaper, or magazine article or editorial piece, says at some point that “‘critics’ or ‘experts’ say,” invariably among them are “the intellectuals” whose role in the division of labor is to interpret, analyze, and challenge the ways things are and how they might otherwise be for the better. Most such intellectuals, if one is frank and direct, have lived in “ivory towers” of academia and the general informational media a good part, or even all of their lives. They know little or nothing about the actual day-by-day working of a business, meeting a bottom line to meet an enterprise’s employee payroll, or the need to focus on the consumer satisfactions of others to avoid a loss and maybe earn a profit. 

Their knowledge of “capitalism” is usually derived, sometimes exclusively, from reading earlier and other contemporary critics of the market economy. Businessmen are “exploiters” of workers, “plunderers” of the planet, the greedy “cutthroats” who would sell their own mother for an extra margin of profit, and who reduce all of human life to a financial bottom line. They care nothing for “society,” and make their employment decisions based on racist and misogynist prejudices and biases.  

This cultivates an arrogance and hubris in many such intellectuals, the “social critics” of the human condition, that if only they were in charge or if their advice was followed by those holding the reins of political power and decision-making, how much better could the world be made. 

De Jouvenel on Three Reasons for Anti-Capitalism

The French social philosopher, Bertrand de Jouvenel (1903-1987), once discussed, “The Attitude of the Intellectuals to the Market Economy.” First, for them the market economy is “disorderly.” That is, they look at the outcomes of the market and assert how much better would be the patterns and relationships and results of society if only there was someone in charge—the government planner, regulator, redistributor—to generate the “socially just” and economically moral outcome that clearly the market does not and cannot provide when left to its own unfettered devices. 

The second criticism is that the market economy exalts and satisfies the wrong values. Surely, we don’t need another brand of toothpaste or a new and improved pair of sneakers when the society’s resources (through government control and redistribution) could be better applied to “feeding the hungry,” or subsidizing planned parenthood, or paying for more college classes on why genders are imaginary categories imposed by white, male capitalists to abuse the weak and “marginalized.” 

And, third, de Jouvenel, said, there is the implicit resentment by many intellectuals that the market economy places them at a disadvantage. What is that disadvantage? That the market rewards people for catering to the everyday, “lower” wants of the uninformed and manipulated consumers, rather than the intellectuals themselves, who devote their lives to the “big ideas”—the beautiful, the just, the good, the better—but who have little or none of the recognition or income of the billionaire businessman who has made his fortune by persuading easily manipulated homeowners that they really needed his “designer” bathroom sink faucet. How morally depraved that the man who could have been the world’s next great music composer has to lower himself to earn a living in the market economy writing catchy television commercial jingle songs. 

School Privatization to Reduce the Arrogance of the Intellectuals

Institutionally, one of the most important long-run remedies to the continuing cultivation and inculcation of such anti-capitalist attitudes and ideas into young minds is the privatization of education, from kindergarten through the university PhD. As long as these types of intellectuals can live on other people’s tax money in sequestered academic islands of educational socialism, they will never be ousted from their protected realms of near monopoly control over the minds of one generation of students after another. 

How many parents would want to directly pay for so many of the asinine college and university courses, especially in the social sciences and humanities, that have often become little more than ideological indoctrination camps in the ideas of “political correctness” and collectivist “social justice” fantasies? Market-based educational competition would soon test whether or not these are the ideas that parents and students want offered and experienced among the academic curriculum choices as stepping stones to future careers. Or whether such groupthink notions that pass for “postmodern” deepness, would be the cultural literacy that those paying for their own and their children’s educations would really desire.

Open market competition for teachers would offer different techniques for teaching and the content of what was taught.

The first step toward introducing real intellectual diversity into K-12 education would be the ending of teacher licensing in all private and current choice-based schools. Teachers’ unions and education degree mills presently have a monopoly on who gets to teach those young and impressionable minds long before some of them may go on to college. Open market competition for teachers would offer different techniques for teaching and the content of what was taught. 

The ultimate and essential step is the end of all mandatory government schooling. All primary and secondary schools should be privatized, either by handing the schools over to the existing teachers and employees and tell them they are now fully responsible for demonstrating to parents that their curriculum and teaching methods will, in fact, educate their children and prepare them for the future. Or the schools might be privatized through selling them off at public auction to single stand-alone companies wanting to buy them, or to private school chains wanting to offer a brand name of potential excellence and quality either regionally or nationally. 

The full privatization of schooling and education would offer the best long-term avenue for the creation and the cultivation of an alternative community of intellectuals and teachers more aware of, more oriented to, and more sympathetic towards the nature and workings of a market system. This will never occur as long as government monopoly-licensed teachers in taxpayer-funded schools can have such huge control over the ideas offered to the youth of the country.

Anti-Capitalism Arising from Socially Destructive Envy

Finally, the third cause for anti-capitalist attitudes and resentments is envy. The German sociologist, Helmut Schoeck (1922-1993), in his classic study on Envy: A Theory of Social Behavior (1966), made a point of distinguishing between jealousy and envy. Jealousy refers to a desire or wish that the success or good fortune of another had been yours, instead. You may consider that the other person’s success or good fortune was rightly or justly earned or not, but your reasoned and emotional response is that he has achieved or acquired something that you would like to have or that, in a fairer world, could or would have been yours.

“The envious man is perfectly prepared to injure himself if by so doing he can injure or hurt the object of his envy.”

Envy is something different, Schoeck said. In this instance, the envious person begrudges the success or achievement of another. It is a desire or wish not so much that the envier had obtained that success or achievement, but rather “that the best kind of world be one in which neither he, the subject, nor the object of his envy have them . . . One begrudges others their personal or material assets, being as a rule almost more intent on their destruction than on their acquisition.” Indeed, and perversely sometimes, “The envious man is perfectly prepared to injure himself if by so doing he can injure or hurt the object of his envy.”

Ayn Rand (1905-1982) offered a similar idea of envy in her essay on, “The Age of Envy” (1971) in which she argued that the envious person is one who hates “the good for being the good.” Or as she said in Atlas Shrugged(1957), the enviers “do not want to own your fortune, they want you to lose it; they do not want to succeed, they want you to fail; they do not want to live, they want you to die; they desire nothing, they hate existence.” 

Both Schoeck and Rand emphasized that the envious person senses or believes that he could never successfully do or achieve what the object of their envy has attained. He hates and resents the other precisely because the other’s success is a slap in the face pointing out or reminding the envier of his own more limited qualities or capabilities. If I cannot do it, then no one should have the ability to do it with the resulting rewards. 

Ludwig von Mises also offered a version of the same idea in his short book, The Anti-Capitalistic Mentality (1956). In the free market system, success or failure is more greatly determined by one’s own demonstrated ability. In the pre-capitalist systems of society, you were born into a social caste or class that was defined and enforced by law or rigid custom. Never rising to a higher station in life, or a higher income, could be said to not be your fault. You are a “victim of the system.” The serf was tied to the land and forced to follow in the footsteps and the same status that was imposed on his father before him. 

Under capitalism, there is always, of course, chance, or the bad luck of poorly choosing whom one’s parents turn out to be, or often just the bad timing of being in the wrong place at the wrong time. But far more than under other social systems known in human history, the free market system offers the individual far more latitude and liberty to determine his own fate. You have greater freedom to pursue an education, select a profession or occupation or line of work, to decide on trying to become a successful enterprising entrepreneur, to save out of income to start a business or partnering with others in doing so, and competing with more established firms if you think you can better satisfy consumers. 

But it also reminds a person, Mises observed, that any disappointments in life or failures to go as far professionally and financially as one had hoped falls mainly on oneself. Some find it hard to accept and deal with this. It is easier to say if not for greedy capitalists, or if not for the harsh coldness of the profit system, or if not for dog-eat-dog competition, I would have been more successful. 

From Resentment to Envy to Social Destruction

But the resentment and blame game, that Mises considered part of the anti-capitalist mentality, only becomes the destructive emotion of envy when, as Schoeck and Rand said, some people so resent the nature and the outcomes of the free market system that they would rather see others poor than themselves possibly better off or rich; they would rather undermine the opportunity for anyone to have a chance for success than live in a world in which they could try but clearly don’t believe they could succeed; and they would rather see the enslavement of all than deal with the burdens of being free themselves.   

During many periods of history, envy has been an emotion that social pressures have required the individual to repress.

Envy, as Helmut Schoeck also observed, is an ancient affliction that has always plagued the human psyche. During many periods of history, envy has been an emotion that social pressures have required the individual to repress or keep hidden away in his heart, being unbecoming of healthy human beings and destructive of society if let loose upon the world. 

But in our age of collectivism, paternalistic arrogance and the dark sickness of envy have been able to raise their ugly heads in the latest campaign against capitalism. From Obama’s insistence addressed to successful businessmen that they did not really “make it,” to the demand that the “injustice” of inequality must be undone by pulling down the “one percent,” or to the battle cry that “white privilege” dictates the radical reconstruction of all forms of human association and interaction to a lowest common denominator of group status defined by race and gender, “social critics” and social engineering elites demand to remake society in their own delusional images. While the envious would rather destroy human society as it exists than accept a reality inconsistent with their dreams of frustrated tribal justice. 

Only a renewed philosophy of individualism and free market economics can turn the world away from these three reasons behind the anti-capitalistic mentality of our time.

By Richard Ebeling

Originally published on November 13, 2017 for the Foundation for Economic Education

The free enterprise, or capitalist, system has done more to improve the material condition of humanity than any other economic arrangement in all of recorded history. Yet, “Capitalism” is constantly condemned and accused of being the cause of humanity’s woes, while in reality, nothing is further from the truth.

In a mere two hundred years, the economic condition of humankind has dramatically transformed. In 1820, the world population was barely one billion people and had only grown to 1.5 billion by 1900. Now, in 2017, the global population has increased to over 7.4 billion people.

Has this huge increase in world population led to abject material misery and human despair? Not at all; instead, it has been very much the opposite. In 1900, global Gross Domestic Product stood at around one billion dollars, while today it stands at nearly $80 trillion.

In 1820, world per capita GDP was estimated to have been about $1,000; by 1900 it doubled to $2,000 per person on average. By 2017, per capita GDP is approaching $16,000, an eight-fold increase in little over a century and with a world population seven times larger than a little over a hundred years ago.

The Escape from Poverty Due to Capitalism

Now, of course, this growth in material betterment based on the global per capita benchmark has not impacted on all people, everywhere, to the same degree or at the same time.

But this is because not all countries evolved or introduced many of the essential institutional ingredients that are necessary to foster such amazing economic improvements. 

It began in parts of Europe and then North America in the eighteenth and nineteenth centuries, and from there it spread to other corners of the globe in various degrees. Even today, capitalism has barely touched some parts of the world.

This is an improvement that carries within it the possibility for the end to human poverty before the close of the twenty-first century.

Yet, wherever the institutions of individual freedom, private property, the rule of law, and restrained government exist, the human engine of creativity and entrepreneurship has opened the way to a potential horn-of-plenty, replacing the poverty, disease, and cruelty of pre-capitalist political systems that were almost everywhere a few centuries ago.

As economic historian Deirdre McCloskey said, “The real sustenance of the poor has been economic growth, the Great Enrichment, which raised real incomes in the past two centuries by a factor of thirty. Look again at the figure: a factor of 30, or about 3,000 percent.”

This transformation of the human condition is slowly but surely enveloping the world. This is an improvement that carries within it the possibility for the end to human poverty in its most appalling forms before the close of the twenty-first century. Yet, Capitalism is blamed for whatever the critic finds intolerable on this planet.

One of the burning issues of our time is the challenge of income inequality and the fact that some are “rich” while others are “less well off” and still others are “poor.” The fact is, the competitive free market system has done more to rid humanity from “unnatural” inequalities than any other system.

Before Capitalism “the Few” Plundered “the Many”

Throughout most of human history, political power, economic privilege, and social status have been the result of the physical prowess of conquest and control. Plunder of the productions of others and the enslavement of them were the methods for possession of the means for wealth and luxury in those earlier times. It was truly the case that “the few” were able to rule over “the many” and live off what they produced through the threat of physical force.

Very few of us would be willing to trade places for the rough and short lifespans of noblemen of just a few hundred years ago.

Superstitions and crude ideologies served as the complementary rationales for systems of enslavements and compulsory servitude. Kings and princes, pharaohs and priests used psychological and cultural tools to manipulate the minds of others to accept the rule of the power-lusting few as pre-ordained and inescapable.

These were societies of a persistent “one percent” living and lionizing over the rest of the population. Of course, by our standards of living, the politically privileged and powerful lived lives of unimaginable material poverty; yet, their lives were better than most of their slaves and subjects. I would suggest that very few of us would be willing to trade places, no matter how humble our current economic position, for the rough and short lifespans of the monarchs and noblemen of just a few hundred years ago.

Such political and economic social orders were grounded in “unnatural” inequalities based on political power and privilege. Most individuals were coercively kept in a caste or class position in society that had nothing to do with innate characteristics that might have enabled them to attain a better circumstance for themselves if they had had the freedom to better their lives through peaceful and voluntary interaction with others.

Liberal Capitalism Brought Freedom and Betterment

This all began to change with the emergence of political and economic liberalism in the eighteenth and nineteenth centuries; government power was increasingly restrained. There emerged the idea of “the rights of man,” under which, those who held governmental positions were to be “servants” for protecting the individual rights of each human.

Each individual was now becoming freer to pursue his own interests and purposes, as he defined them.

A new ideal gained influence, that of equality before the law for all. This ideal was reflected in the words of the American Declaration of Independence. It implied that, when each individual stands with equal individual rights, with political privileges and favors for none, each person is at liberty to try to find his place in society. He or she may then rise to that unequal circumstance to which his inclinations guide him, in free and voluntary association with others who also all possess the same rights to their life, liberty, and property.

A growing number of people were increasingly liberated from the government controls that, up until that time, hindered freedom of commerce for the benefit of the elites.

Each individual was becoming freer to pursue his own interests and purposes as he defined them. However, the “rules of the game” are such that each person could only improve his circumstances by applying his unique talents and resources to serving others as the means of earning an income and bettering his life. As Adam Smith said, as if by an “invisible hand,” though each individual pursues his own interests, the institutional setting cumulatively results in the mutual and growing material and cultural betterment of all.

The Middle Class Emerges from “the Poor”

From the nineteenth century and into the twentieth, there emerged in modern Europe something that was very limited in the preceding centuries: a “middle class.”

From where did this emerging and growing middle class come? It came from the “lower classes,” from those who in earlier ages were the servants and slaves of kings, from the bottom of economic existence. With secure property rights, relatively low taxes, and reduced government regulation of commerce, those with an entrepreneurial spirit could take their chance by opening and running enterprises. The nineteenth century was a great period of innovation, industrial experimentation, and mass production.

Wages slowly but surely rose in the industrial centers, enabling a man or a woman to earn income they never imagined.

Free enterprise enabled savings to be put to work in industry. Capital investments in new and better forms of machinery needed more human hands to run them to produce the growing number and types of products that were flooding to the market. The demand for labor grew; workers were drawn to the cities where the new industries were taking root, away from the age-old forms of work in the countryside. Wages slowly but surely rose in the industrial centers, enabling a man or a woman to earn income never imagined in the rural areas under the eyes of the landed nobility that “lorded” over them.

As incomes rose for a growing number of people, the need for skills and education motivated these new industrial workers to improve their talents. Private institutions of learning arose, offering to teach both basic literacy and “mechanical” training in the form of, what today we call, vocational schools. Economic historian E. G. West, in his book, Education and the State (1965) estimated that, between 1790 and 1830, about two-thirds to three-quarters of the entire British population was made fully literate through for-profit and non-profit private schools.

This, in turn, generated the market demand for what became known in Great Britain as the “penny press,” inexpensive newspapers to quench the growing thirst for knowledge and information about world events, as well as the scientific and technological advances that were popping up in rapid succession like mushrooms under a gentle rain.

Gains from Investments in Physical and Human Capital

The demand for workers in the industrial and manufacturing enterprises in the nineteenth century raised wages from their stagnant, rural levels. The profits that these enterprises earned by supplying goods that this expanding workforce desired in their role as consumers created the financial means to increase investment in better machinery.

Investing in tools and equipment (the physical “capital” of the market) generated greater productivity that reinforced the upward movement of wages. Productivity increased per man hour – what the economist calls the “marginal product of labor,” the increment of additional output by one additional worker within a firm, increased.

This has been the cumulative outcome of the competitive process within the market economy.

Thus, capital formation that was raising labor productivity, as well as worker investments in “human capital” (the employee’s knowledge, skills, and abilities) combined to lift more people out of poverty as the worker’s productivity increased. A growing number of industrial workers were, indeed, competing for jobs with an increasing population; but capital formation in better equipment brought about an increase in labor productivity at a faster rate than the growth in the working-age labor force. The net effect was to raise wages and a reduce the “gap” between the living standards of the rich, the expanding middle class, and the poor.

Rather than poverty versus plenty separating “the many” from the “the few,” over the last two hundred years the distinction has increasingly been reduced to degrees of wealth, comfort, and luxuries among people in society. This has been the cumulative outcome of the competitive process within the market economy. The horn-of-plenty produced by private enterprise provides a vast and growing variety of goods and services available to all, a great equalization in the quality and standard of living.

The Past’s Material Inequality vs. Growing Equal Availability for All

Three or four hundred years ago, the housing accommodations that separated the nobility from the “commoner” were castles with servants versus thatched huts that the occupants usually shared with livestock. Queen Elizabeth I in the 1500s had a luxurious wardrobe that consisted of a small handful of dresses, while the multitude mostly wore rags handed down from the dead to the living that too frequently carried vermin that could spread plagues. 

The landed lords’ diets were limited to whatever was grown or raised on their estates, while the “tenants” who were tied to the land ate a much smaller amount of monotonous meals, often verging on starvation, depending upon the luck of the seasons. Both nobleman and commoner rarely traveled during their lives and certainly not much further than the narrow confines of the regions in which they had been born.

A huge majority of the world’s people have access to the Internet and cell phones.

Today, in the more market-based economies, the differences between the wealthy, the middle class, and “the poor” often lie in how many rooms are in one’s house or apartment, with usually more than one television around the home; household kitchen appliances all have the same basic qualities and features. Most households possess one or more cars to transport family members wherever they desire to go. 

Travelling is now a common practice, with over 3.6 billion people – a number equal to almost half of the world’s population – moving about the globe by commercial airliners in 2016. Also, a huge majority of the world’s people – rich or poor or those somewhere in the middle – have access to the Internet and cell phones (except where oppressive governments attempt to interfere).

A wide variety of food is available within a narrow range of prices for virtually everyone in widely market-based societies. The rich may be seen at supermarket-discount stores, and the middle class and the poor can be seen leaving the checkout counters with carts full of items at the higher-end food stores. All have the same items at fairly reasonable and reachable prices from suppliers encompassing the world, so seasonal availability of various perishable goods is almost a thing of the past.

Market Competition as the Great Positive Social Leveler

The British economist, William H. Hutt (1899-1988), pointed out in, Economists and the Public (1936), 

As a matter of fact, to the economist studying society, competition appears, prima facie, to be the great leveling force. One would have thought that the onus would have been on its opponents to show that this was not so.”

Over a few generations, competitive capitalism has raised a vast number of people into material and financial comfort, especially those who otherwise would have remained in the depths of the poverty that had prevailed for thousands of years. This has come about through rising incomes and the lowering of the real costs of goods and services brought to the doorstep of almost everyone in the West and increasingly more and more billions of people around the rest of the world.

The competitive market process places the talents, abilities, and the drive of each person at the service of everyone else.

This has been made possible to the extent that societies have been fairly free, so secure individual rights under equality before the law has allowed the “natural” inequalities among people to more fully emerge. Given these differences – heredity and circumstances of birth, inclinations, and motivations for self-improvement – every individual implicitly tries to do the best they can in the context of their comparative advantage in the division of labor.

The competitive market process places the talents, abilities, and the drive of each person at the service of everyone else. Those who end up in a more modest place in the market in terms of income, benefit from all the successes of their financial “betters” in the marketplace, since the latter’s  financial rewards are dependent upon the extent to which they have satisfied the wants and desires of others in society.

Private Charity and Assistance to Those Less Well Off

But must an individual’s potential go to waste or be less fulfilled because of the accidents of birth? If only that individual had been born into a different family and social setting, he or she might have been able to achieve so much more, both as a contributor and as a recipient of all a free market economy has to offer.

The ethics of a free society and a capitalist economic system are based on recognition and protection of individual rights to life, liberty, and honestly acquired property, all within a social order of voluntary association and mutual agreements. Compulsion and force in human relationships are reduced to a minimum consistent with a peaceful society of free men.

The “helping hand” to assist the needy must also be based on free choice and voluntary giving. 

This means that the “helping hand” to assist the needy must also be based on free choice and voluntary giving. Not only is this essential to the principles of a free society, but it also puts to work the same advantages of competition for “raising up” the less well-off.

Private, decentralized decision-making about charity opens the door to many different methods to be tried and experimented with to find the most desired results in helping others. Rather than delegating the task to a handful of minds in government-appointed positions that crowd out private-sector alternatives, many individual minds work to solve these “social problems.” 

Furthermore, in the voluntary arena, those organizing charitable and philanthropic endeavors are dependent upon the voluntary giving of benefactors. This means that the charitable organizers and administrators must demonstrate their successes with the voluntary dollars contributed to them, if the donations are to continue to be forthcoming in the months and years ahead.

In government bureaucracies, responsibility for failure is difficult to pinpoint and, in spite of which, tax-based revenues continue to flow in, maintaining a failed redistributive status quo. In a system of private sector charity and philanthropy, failure is easier to identify, and donors can demonstrate their disappoint by withdrawing support and transferring their voluntary dollars elsewhere, to ways of raising up those who are too far behind in society.

One of the benefits of a capitalist economic system is the great escape from poverty.

For a dramatically growing global population, one of the benefits of a capitalist economic system is the great escape from poverty. Equal individual rights for all enable each to apply their unequal skills to better themselves but result in material improvements for a growing number of people. The material differences among people, and the contrasts between wealth and poverty, are becoming less stark, with more comfort, convenience, and opportunity for all.

Market economies have successfully provided for the betterment of mankind. This stands as a rebuttal to all those who condemn the capitalist system based on a misconception of what a market-based society is really all about.

By Richard Ebeling

Originally published on December 13, 2017 for the Foundation for Economic Education

Capitalism is a wondrous human institution for the mutual betterment for all in society. Yet, critics often insist that market systems enable sellers to take advantage of buyers, because those on the demand-side often lack the specialized knowledge that suppliers possess, thus, enabling a misrepresentation of what is for sale. However, market competition generates the incentives and opportunities to earn profits precisely by not misinforming or cheating the buyer.

Individuals in the marketplace do not all possess the same degree of knowledge about goods and services.

A number of economists, among the most notable being the 2001 co-recipient of the Nobel Prize, Joseph Stiglitz, a professor of economics at Columbia University, have argued that market economies suffer from an inherent inefficiency and potential injustice due to the existence of “asymmetric information.” A core element in his theory is that individuals in the marketplace do not all possess the same type or degree of knowledge concerning the goods and services being bought and sold. 

Some people know things that others do not. This “privileged” information can enable some to “exploit” others. For instance, the producer and marketer is likely to know far more about a product’s qualities, features, and characteristics that he is offering on the market than most of the buyers possibly interested in purchasing it.

Coordinating Imperfect Knowledge

By withholding information from the potential buyer about all of the qualities of his good, the seller may succeed in creating a false impression that makes consumer demand greater and raises their willingness to pay a higher price than would otherwise be the case if that consumer knew as much about the good as the seller knows.

This argument is a partially reasonable response to the unrealistic assumptions of the “perfect competition” model of the typical mainstream economics textbook. One assumption is that each seller is too small of a supplier to a particular market to be able to influence the price at which he sells, and, thus takes that market’s price as “given,” and merely adjusts his output to the point at which his marginal costs are equal to his marginal revenues.

The purpose of competitive markets is to provide a way to coordinate dispersed and decentralized knowledge.

Another assumption is that every market participant in each market possesses a “perfect” or sufficient knowledge to never pay more or accept less than objective market conditions dictate. This also assures that all markets, all the time, are rapidly converging to a perfect long-run equilibrium with neither profits earned nor losses suffered.

There is no doubt that in a system of division of labor there is an accompanying division of knowledge and, therefore, an asymmetry of information about things bought and sold by those on the demand- and supply-sides of the market. This is a theme in theories of the market process long ago explained by economists in the Austrian tradition, most especially by Friedrich A. Hayek (1899-1992), who also received a Nobel Prize in Economics in 1974.

The Austrians have long emphasized that competition is a “discovery procedure” through which individuals find out things never imagined before. The peaceful rivalry of the marketplace creates the incentives for entrepreneurs to be unceasingly alert to profit opportunities and to see possibilities that others either have missed or not thought of before. The unknown or barely perceived become seen and understood, and then taken advantage of in the form of better and less expensive products offered to the consuming public.

The purpose of competitive markets and price systems is precisely to provide a way to coordinate the dispersed and decentralized knowledge in any complex society. This same competitive market has also found ways to reduce the asymmetry of consumer versus seller knowledge and thereby to reduce the possibility of exploitation.

Search Goods, Experience Goods, and Market Safeguards

In explaining how markets do this, economists sometimes distinguish between two types of market goods: search goods and experience goods. Search goods are those that can be examined by the potential buyer before a purchase is made. For instance, suppose that a supermarket advertises that perfectly ripened bananas are available and on sale in their store. A consumer can enter the supermarket and reasonably judge whether the quality of the good matches what has been promised before buying it.

If examination shows that the bananas are either inedible green or over-ripened brown, the consumer can walk away without spending a penny. By falsely advertising or even unreasonably exaggerating in its advertising, the business runs the risk of not only losing that sale but the loss of its brand name reputation, with that consumer never returning to that establishment again. Plus, that person can tell others, potentially leading to further loss of consumer trust.

This creates a self-interested incentive on the part of such sellers to practice “truth in advertising,” or suffer the loss of customers whose repeat business drives long-term profitability.

It is in the seller’s self-interest to make sure that the product matches what has been promised.

Experience goods are those goods whose qualities cannot be fully known without using the product in question for a period of time. Think of an automobile; you can go for a test drive, but your own best judgment of its safety, reliability, and handling cannot be really known without driving the car in various weather and traffic conditions over a period of time. Or think of a bed mattress; you sit down and bounce on it, or stretch out and lay down on it in the furniture showroom, but you cannot really know if it will provide a comfortable and restful sleep every night until you’ve gone to bed on it for a period of time. The same applies to many goods, such as household appliances, for instance.

The competitive market’s response to this imperfect knowledge on the part of potential buyers has been a system of product warranties that enables a buyer to return the product for his or her money back, or a replacement at no extra cost to the buyer.

It is in the seller’s self-interest to make sure that the product matches what has been promised and is reliable. Otherwise, the manufacturer runs the risk of losing their brand name reputation concerning quality and trustworthiness. Plus, if a warranty has to be fulfilled, it is the manufacturer or seller who is forced to eat the cost of replacing the unit, thus cutting into their own profit margin.

Market Uncertainty and Franchise Businesses

But what about those situations in which reputation and repeat business do not seem as relevant? For instance, suppose you are traveling on business or vacation and are passing through some town you are highly unlikely ever to see again.

You will likely eat and sleep away from home some time again in the future.

You’re hungry for a meal or a place to stay for the night. How can you know about the quality of the meal in the local “Joe’s Greasy Spoon,” or the promised bedbug-free mattress in any of the rooms in the local “Bates Motel?”

The market has provided consumer information about such products and services to overcome this imperfect knowledge in the form of chain stores and franchises. You may never eat or sleep again in that particular town, but you will likely eat and sleep away from home some time again in the future.

The sight of McDonald’s golden arches or the sign for an IHOP (International House of Pancakes) tells you the quality and variety of foods that you can have in any of their establishments, regardless of where its located in the United States or even the world. The same applies to seeing the sign for a Motel 6, or a Holiday Inn Express or an Embassy Suites, or a Hilton-family hotel. You may never again go to that particular MacDonald’s or Holiday Inn, but if you travel you may very well eat or spend the night at some other chain franchise of that company.

Another instance of this is Midas Mufflers. An automobile driver can stop in any Midas store in the country, and know that if there is a problem with the muffler or its installation, it can be returned to any Midas outlet for a replacement or reinstallation under the warranty. (And each Midas retail store has an incentive to get the installation “right,” because if another store has to correct their mistakes, the second store sends the bill to the first store for the cost of doing so, under the terms of the franchise.)

There are always people who will try to dishonestly get what others have.

Getting it right the first time and making sure that every franchise member meets the franchise requirements is important to the “mother company” to assure the repeat business and brand name reputation upon which its revenues are dependent. Thus, each chain store and franchise is required to meet standards of quality and variety that enables the consumer to have a high degree of confidence and reduced knowledge uncertainty of what he or she is getting when they enter any of these establishments, regardless of where it may be located.

What makes this market practice consistent and successfully relied upon? Market competition and the self-interested profit motive.

Free Markets Constrain Con Men

Are there con men, hucksters, and cheats? Of course, there are. They existed in ancient Athens just as they exist today. There are always people who will try to dishonestly get what others have when doing it that way seems easier and less costly than through honest production and trade.

The question is not whether human nature can be transformed to eliminate this aspect of human conduct. The question is, are there market institutions and incentives that can systemically reduce this type of behavior and, instead, generate more honest and properly informed human interactions?

And the answer is, yes. In fact, most of these positive incentive mechanisms have emerged and evolved out of the competitive market process itself. These market solutions to the social problem of asymmetric information were discovered by market participants themselves to be profitable ways of gaining consumer trust and business, without any government command or imposition. Plus, their discovery and their practiced institutional forms could never have been fully anticipated or imagined in their full detail before and separate from the competitive market processes that have generated them.

Government Failure and Asymmetric Information

Of course, what is rarely pointed out or emphasized by those who worry about the problem of asymmetric information in society is its far more likely danger and abuse in the arena of government intervention.

In the marketplace, a disgruntled consumer who finds that a seller has been less than truthful about a product can immediately stop doing business with that supplier. This is not so in the political arena.

In the marketplace, the individual disappointed with a seller can inform others about his experience.

If a voter finds that a politician or bureaucrat has failed to meet their promises or has seemingly deceived him after an election, he must continue to fund their activities in the form of the taxes that that voter is forced to pay, as well as to obey the rules and regulations they have imposed on him or others with whom he may desire to do business.

In the marketplace, the consumer may turn to other competing providers if a particular seller has appeared to deceive him with false, incomplete, or exaggerated information. He does not have this option in the political arena.

The government often monopolizes or narrows the availability of alternative providers. The frustrated voter cannot supply “negative feedback” in the same way he can by withdrawing his business and shifting to another supplier in a more freely competitive market. Indeed, he may have to continue to use the misrepresented or faulty government-supplied or regulated product rather than face doing without it.

In the marketplace, it is usually clear who the seller is who has misrepresented their product and aroused the ire of the buyer. The consumer can, more or less, easily pinpoint the seller who is responsible for the deceit. But with the government, layers of bureaucracy and indirect chains of responsibility in the labyrinth of the political structure enable those in political power to more easily hide those upon whom the charge of lies and fraud should fully fall.

And, finally, in the marketplace, the individual disappointed with presumed misrepresentation or less than sufficient information from a seller can inform others about his experience He does not need the approval or agreement of others to change his own pattern of buying things. He just stops doing business with the seller with whom he is dissatisfied and finds a more attractive trading partner.

The competitive market processes generate solutions to society’s knowledge problems.

But in the political arena, to change those holding political office and determining the government policies considered by that individual to be deceitful and undesirable requires him to persuade enough other voters in the society so that a change may be made in who holds political office and what policies may be implemented when, and only when, the next elector cycle comes around.

But in the political arena, an unsatisfied consumer must persuade enough other voters to make a change in who holds political office and what policies may be implemented when, and only when, the next elector cycle comes around.

It is capitalism and the competitive market process that generates solutions to the knowledge problems of the society, including the “informational asymmetry” that naturally follows from any developed social system of division of labor. All that is basically required, as has been known since the time of Adam Smith in the 1770s, is recognized and respected individual rights to life, liberty, and honestly-acquired property, enforcement of all voluntary contractual agreements, impartial and biased rule of law, and constitutionally limited government.

By Richard Ebeling

Originally published on December 18, 2023 for Capitalism Magazine

Over time, words sometimes change their meanings or connotations. Think of the words naughty and nice. Apparently, naughty originally meant to have or be nothing (naught or zero), but then it took on the extra sense of something being worth nothing, until finally a person who was considered worth nothing became a bad individual, or at least someone who is mischievous — as in, what a “naughty boy,” with an accompanying wink.

On the other hand, a nice person, it seems, early on meant someone who was ignorant, but then took on the added meanings of being a silly or foolish person. By the 1700s, it had its more current meanings of an agreeable or pleasant person. Though it can be used sarcastically — for instance, with the phrase “Oh, yeah, that’s ‘real nice’” meaning something said or done that is rude, disrespectful, or nasty toward another.

The same thing has happened with the word liberalism. Friends and foes have changed its meaning several times over the last couple of centuries, and in the eyes of some its content and connotation have been transformed beyond recognition.

American Liberalism as Meaning Big Government

Since at least the 1930s, during Franklin D. Roosevelt’s New Deal, liberalism in America has carried the meaning and content of public policy perspectives that insist that government should and must take on a wide and extensive paternalist role in society. Such political paternalism is presumed to encompass the need for government regulation of business in a wide variety of forms. Indeed, it’s reached the point where there is little that goes on in the production, the buying and selling, and the consumption of virtually any good or service offered on the market that does not entail oversight, approval, dictate, prohibition, or control by some branch and level of government in modern society.

Matching this has emerged a vast network of redistributive programs and activities through which government transfers income and wealth from one segment of society to another. Taxes are garnered from certain segments of society and redirected by government to other segments through either cash or in-kind benefits.

But as some critics of this modern liberalism have pointed out, it is not so much a taxing of income and wealth from Peter to give to Paul; instead, it is transfer of authority and decision-making from private individuals in the society about how best to spend their own honestly earned money to those in political power to then decide how the wealth is to be redirected for other purposes and to other people that those in government consider to be more deserving.

Conservative Criticisms of Liberalism

For those labeled as conservatives in the United States, modern American liberalism connotes disrespect for traditional beliefs and values, including certain religious faiths; it carries the notion of licentiousness and luridness, of “anything goes,” that threatens to undermine the cultural foundations of the country; and it entails a dangerous big government intruding everywhere and micromanaging everything.

Conservatives do not necessarily disapprove of government having a long arm with a certain degree of bigness. They would just like a government of a different size and reach to impose different types of restraints and commands than America’s “lefty liberals” want to see in place. They do not completely disapprove of government regulations or prohibitions in the marketplace when it concerns those forms of personal activities and social interactions of which they disapprove.

Progressivism’s Opposition to “Neoliberalism”

Liberalism has a different connotation for those farther along what is called the left side of the spectrum in the United States. In this permutation, liberalism is relabeled neoliberalism, the supposedly dominant form of liberalism around the world today. They assert that neoliberals run the world for an elite of global capitalists wishing to pursue international profits at the expense of the needs and wants of the local peoples living in different countries on the planet, and rationalizes this world order.

American progressives and democratic socialists increasingly reject any and all forms of liberalism, insisting that both modern neoliberals and conservatives in the United States have been apologists for and facilitators of racism, sexism, and oppression of social and ethnic minorities, and supporters of income inequality that benefits a wealthy few at the expense of far too many in society. They desire to see more of a consciously planned society with less tolerance or legal protections for words and actions that they consider harmful to the establishment of a more socially just humankind.

What is clear is that for both conservatives and progressives (and democratic socialists), liberalism, in many ways, epitomizes what they both dislike and strongly disapprove of. Liberalism, therefore, seems to be the common enemy of both many conservatives and a growing number of progressives and democratic socialists, though how they see the nature of the liberalism that each criticizes has notable points of difference.

An interesting ingredient in these interpretations of liberalism by conservatives, on the one side, and progressives and self-proclaimed socialists, on the other, is that what they label as liberalism has little to do with its original meaning and the policy views of many of its early and later adherents. Just like the words naughty and nice, the meaning of liberalism has changed significantly from where it began, with completely different connotations.

Liberalism as a Defense of Individual Liberty Against Tyranny

Through most of the 19th century, liberalism was strongly identified with the belief in and the defense of individual liberty in various spheres of life. Generally, a liberal was one who was open-minded, tolerant, and respectful of different ideas, faiths, and values that may be held by others in society. Such openness, tolerance, and respect did not necessarily mean an agreement with or sympathy for a particular idea, faith, or value; but it did mean that others holding them should not be legally persecuted or politically oppressed and discriminated against for holding them.

This liberal attitude and outlook on the ideas, faiths, and values of others perhaps was most persuasively defended in the 19th century by John Stuart Mill (1806-73) in his famous essay “On Liberty” (1859). Mill reminded his readers that no one of us can claim intellectual infallibility, and that it is only through discourse and debate that it may be found out whether the truth of some matter is on one side or the other, or somewhere in between. The eccentric or socially unacceptable idea, attitude, or belief of the past has sometimes become the accepted one of the present. And the same applies to the customs, traditions, values, and ideas of the present and the new ones that may become the commonplace of tomorrow.

This led Mill to warn therefore of the danger of the tyrannies of both minorities and majorities. In the past, he said, tyrannies of the minority often took the form of kings, princes, and their aristocratic circles that imposed their political rule as well as their social, religious, and other ideas on a majority of others over whom they had governmental control or ecclesiastical authority.

The tyranny of majorities, Mill said, could be both cultural and political. Mill was a strong defender of those some might consider to be the eccentric and the nonconformist; thus, he warned against the oppression of custom and tradition. The imagery may be of the small, closely knit village or town in which those who do not follow the widely accepted social customs and traditions are ridiculed, shunned, or otherwise psychologically tormented and abused by their neighbors because they go their own way.

The other tyranny of the majority, Mill warned, was from the new political ideal and institution of democracy. If, before, it was the few ruling and controlling the many through absolutist monarchy, in the new age of democratically elected government what threatened was a political majority using its power through those they elected to impose their will on social, economic, and cultural minorities within the nation.

Indeed, as one indication of this concern, in his later essay “Considerations on Representative Government” (1861), Mill suggested that all those who receive employment or redistributions from the government should be denied the right to vote for the time they do so; otherwise, the pickpocket is getting to vote on how much will be taken from his victim’s wallet. Surely, Mill said, this is a serious conflict of interest.

Eliminating denials of civil liberties and restrictions on equal treatment before the law was therefore the leading rallying cry of 19th-century liberals, and was identified with the reforming impulse of liberalism as a political movement. While those ruled by a government should have a much-wider participation in the process of electing those who hold political office, liberals were also conscious of the dangers from democracy unrestrained. The American Bill of Rights reflected this concern by protecting certain freedoms of the individual from even the largest of majorities that might wish to compel, plunder, and persecute people for their beliefs and ideas, their peaceful actions in pursuit of their own purposes, their honestly earned money, or their voluntary associations with others in the society.

Private Property as the Basis of Freedom and Prosperity

Matching these personal and political liberties, 19th-century liberalism championed economic liberty as well. And, indeed, the liberals of that time considered it foundational to and inseparable from any protection of these other types of human liberty. The cornerstone to the recognition and securing of economic liberty was the right to private property and wide latitude for its peaceful and voluntary use.

Property also serves as the stimulus in industry and innovation, and creates a setting of potential mutual gains from trade where each knows that what they own is theirs and may only be separated from them through a voluntary transaction in which they find something more desirable than what they trade away to get it. The British liberal and political economist John R. McCulloch (1789-1864) explained this most clearly and concisely in his Principles of Political Economy (1825):

Let us not, therefore, deceive ourselves by supposing that it is possible for any people to emerge from barbarism, or to become wealthy, prosperous, and civilized without the security of property.… The protection afforded to property by all civilized societies, though it has not made all men rich, has done more to increase their wealth than all their other institutions put together.…

The establishment of a right to property enables exertion, invention, and enterprise, forethought and economy to reap their due reward. But it does this without inflicting the smallest imaginable injury upon anything else.…

Its [property’s] effects are altogether beneficial. It is a rampart raised by society against its common enemies — against rapine, and violence, plunder and oppression. Without its protection, the rich would become poor, and the poor would be totally unable to become rich — all would sink to the same bottomless abyss of barbarism and poverty.

Natural Liberty and Market Order Without Central Planning

The most important insight from the liberal economists of that time was and, in my view, remains that there exists the potential for social order and betterment without planned political and economic design. Liberal economists such as Adam Smith called such an order a “system of natural liberty,” under which government would be limited to the provision of police, courts of law, national defense, and a small number of what today are usually called public goods.

But, for all other goods and services, each individual would be free to follow any profession, undertake any production, and peacefully compete with any rivals for the voluntary and mutually agreed-upon business of others in the marketplace as the means of earning their living.

For most of human history, it was taken for granted that a material and social gain for one human being often resulted in the worsening of another’s personal well-being. Conquest, plunder, and murder were primary means by which some in the world obtained and increased what they had through the use of violence and other coercion. Human interactions and institutionalized associations were very frequently zero- or even negative-sum games.

The great discovery of the second half of the 18th century, especially in the writings of the Scottish moral philosophers and the French physiocrats, was that when each individual was left to follow their own personal judgments about how to best apply their own efforts and industry to better their own life, the cumulative outcome was far superior to the vain attempts of those in governmental positions to determine and direct the economic affairs of humanity.

Non-interference Removes Privileges and Frees Enterprise

This was summarized by another British liberal economist of the early 19th century, Nassau W. Senior (1790-1864):

For centuries, the government has labored to fetter and misdirect the industry of people. Instead of confining itself to its true task of defending its subjects from foreign and domestic violence and fraud, it has taken on itself the task of rendering them, or of rendering certain classes of them, rich. It has dictated to them what they shall produce, and to whom they shall sell, and what they shall purchase, and to what markets they shall resort.

It has considered the whole body of consumers as a prey to be sacrificed to any class, or to any section of a class, that choose to ask for a monopoly. And when one class has complained of the privileges granted to another, it has bribed it into acquiescence by allowing it to inflict a further injustice on the public.…

The advocate of freedom dwells on the benefit of making full use of our own peculiar advantages of situation, wealth, skill, and availing ourselves to the utmost of those possessed by our neighbors.… He observes, in the words of Adam Smith, that it is the maxim of every prudent master of a family, never to make at home, what it will cost him more to make than to buy. The tailor does not make his own shoes, but buys them of the shoemaker. The shoemaker does not make his own cloths, but buys them of the tailor. The farmer attempts to make neither the one nor the other, but employs their whole industry in a way in which they have some advantage over their neighbors, and to purchase, with a part of its produce, whatever else they have occasion for.

The principle of free trade is non-interference: it is to suffer every man to employ his industry in the manner which he thinks more advantageous, without pretense of the part of the legislator to control or direct his operations.

The liberals of that time did not consider that people never made errors of judgment. This was as obvious to them as it surely is to us. But they did believe that each individual, all things considered and looking over the society as a whole, knows their own circumstances better than any other can, and most certainly better than some politician or bureaucrat situated far away with little or no knowledge of that particular person’s actual existence and surrounding opportunities.

Intervention Misdirects Production and Fosters Corruption

It was all too easy for those in political power to feign interest in, concern for, or knowledge of various people’s conditions and concerns as rationales for the pursuit of their own personal purposes in government, and to serve various special interests that further their own political ambitions. It is through government intervention, the 19th-century liberals argued, that political power is used to benefit some at the expense of others in society. This was explained by the French liberal economist Jean-Baptiste Say (1767-1832) in his Principles of Political Economy (1821):

Strictly speaking, there is no act of government but what has some influence on production.… When authority throws itself in the way of the natural course of things, and says, the product you are about to create, that which yields the greatest profit, and is consequently the most in request, is by no means the most suitable to your circumstances, you must undertake some other, it evidently directs a portion of the productive energies of the nation towards an object of less desire, at the expense of another more urgent desire.…

If one individual, or one class, can call in the aid of authority to ward off the effects of competition, it acquires a privilege to the prejudice and at the cost of the whole community; it can then make sure of profits not altogether due to the productive services rendered, but composed in part of an actual tax upon consumers for its private profit; which tax it commonly shares with the authority that thus unjustly lends its support.

The legislative body has great difficulty in resisting these importunate demands for this kind of privileges.… Moreover, arbitrary regulations are extremely flattering to the vanity of men in power, as giving them an air of wisdom and foresight, and confirming their authority, which seems to derive additional importance from the frequency of its exercise.

It would be a gross exaggeration to suggest that all the liberals of that earlier era were strict and unreserved proponents of laissez-faire. But, in general, the presumption was that all forms of government regulations and interventions not concerned with the clear and present threat of violence or fraud among private parties were undesirable and always carried the potential for numerous secondary negative effects. For instance, Jean-Baptiste Say, after discussing what he considered possible limited exceptions to total laissez-faire, emphasized to his readers:

I wish to empress upon my readers, that the mere interference [by government] is itself an evil, even where it is of use: first, because it harasses and distresses individuals; and, secondly, because it costs money, either to the nation, if it be defrayed by government, that is to say, upon the public purse, or to the consumer, if it be charged upon the specific article; in the latter case, the charge must of course enhance the price, thereby laying an additional tax upon the home consumer.

Classical Liberalism’s Successes and Social Ideal

This 19th-century liberalism, or classical liberalism, as it has more widely come to be called, therefore, was grounded in the idea and ideal of the individual and their right to personal, economic, and political liberty. The efforts made by the liberals of that earlier era were momentous in their impact, in that many of the freedoms that people have and continue to take for granted were the result of the liberal crusades of that time: ending slavery, widening civil liberties and impartial rule of law, increasing political participation, freeing industry and trade from the heavy hand of government regulation and control, and attempting to reduce the frequency and destructiveness of war among nations.

One of the other leading British liberals of that earlier time, Thomas Babington Macaulay (1800-59), summarized the core ideas and ideals of 19th-century liberalism as reflected in the Great Britain in which he then lived:

It is not by the intermeddling of … the omniscient and omnipotent State, but by the prudence and energy of the people, that England has hitherto been carried forward in civilization; and it is to the same prudence and the same energy that we now look with comfort and good hope. Our rulers will best promote the improvement of the nation by strictly confining themselves to their own legitimate duties, by leaving capital to find its most lucrative course, commodities their fair price, industry and intelligence their natural reward, idleness and folly their natural punishment, by maintaining peace, by defending property, by diminishing the price of law, and by observing strict economy in every department of the state. Let the Government do this: the People will assuredly do the rest.

Classical Liberalism’s Ideal of Free Minds and Open Debate

This earlier, classical liberalism has nothing to do with the changed and distorted meanings assigned to liberalism by both many conservatives and progressives (and democratic socialists). John Stuart Mill’s defense of open debate and discourse on the customs, traditions, and values and ideas upon which a social order rests is not a call for their destruction.

As Mill insisted, they are likely to have a sounder hold over people’s minds if they have been more consciously reflected upon and appreciated in terms of their origins and purposes for social stability and prosperity; if errors and weaknesses are found in them, then surely it is better to be aware of them than for society to find itself in some undesirable and possibly harmful institutional cul-de-sac.

Nor is the ideal of open and free deliberation a subterfuge or rationale to justify hurtful or oppressive ideas and institutions, as those on the political left increasingly insist. The opposite is closer to the truth. When ideas are suppressed, and when their expression or discussion is forbidden, they are more likely to fester in the darker corners of society. They remain unchallenged, unrefuted, and possibly perversely attractive as intellectually forbidden fruit, as well as left lingering in the hearts of some people.

If racist ideas are indeed harmful, how do concerned citizens ever know what exactly they are, why and how they came about, and what are the better or best responses to demonstrate the logical and factual errors in their rationales and justifications, if they cannot be publicly, dispassionately, and openly understood, discussed, and analyzed? Closed mouths and banned ideas can only lead to atrophied minds and arrested societies.

Free Market Liberalism as the Liberator of Humanity

Likewise, the liberal defense of private enterprise and free markets is the opposite of how their critics portray them. Changed meanings often can bring about blurred ideas. The 19th-century liberals defended economic liberty precisely because they opposed favoritism, privilege, and plunder in society. That was the social order that preceded the victories of political and economic liberalism in the 1800s.

Selected groups and individuals in society received special statuses from the government that hindered innovative and cost-reducing competitive enterprises wishing nothing more than the opportunity to produce and market better and less expensive goods to a widening circle of the consuming public. Freedom of enterprise and free trade meant more, better, and lower-priced goods for the mass market of the “common man,” the “working man” whose condition was improving through more job openings stemming from  the greater rivalry of employers looking for hands to hire, and through the growing quantity and variety of goods placed within the reach of those increasing numbers of people employed by those private enterprises.

Free market liberalism was the great liberator of humanity from material poverty, social stagnation, and political oppression. The original liberals and their intellectual heirs today see nothing of what they advocate in what is often nowadays referred to as crony capitalism. It has been the abandonment over the last hundred years of that freer-market liberalism that has returned government policy to a system of privilege and plunder benefiting special interest groups at the expense of market rivals and consumers.

One of the perversities in the changed meaning and understanding of political and economic liberalism is that it is now burdened with responsibility for the very type of government favoritism and corruption that it arose to oppose and abolish. In the eyes of too many, it is identified with the very interventionist and regulatory system that it fought against and partly succeeded in doing away with in the 19th century.

The ills in society will not be solved or cured by the politically compromised conservatism that still opposes a wide variety of civil liberties but has now also has turned its back on its earlier defenses of free trade and free enterprise. And society’s problems will most certainly not be overcome by the more radical turn by America’s progressives and new democratic socialists who would straitjacket all of the country’s economic activities under the type of tried-and-failed central-planning approaches that they hail as the policy path to a bright and beautiful future. If these socialists have their way, America will have neither freedom nor prosperity.

What is needed, therefore, is a return to the original meanings of the clearly articulated principles of political, economic, and social liberalism, properly understood. The classical liberalism of the 19th century needs to be the reborn new liberalism of the 21st century, to once more offer an ideal of individual freedom, free enterprise, impartial rule of law and equality before the law, and limited constitutional government. These are the keys to freedom and prosperity.

By Richard Ebeling

Originally published on August 19, 2014 for the Austrian Economics Center

Since the economic crisis of 2008-2009, the Federal Reserve – America’s central bank – has expanded the money supply in the banking system by over $4 trillion, and has manipulated key interest rates to keep them so artificially low that when adjusted for price inflation, several of them have been actually negative. We should not be surprised if this is setting the stage for another serious economic crisis down the road.

Back on December 16, 2009, the Federal Reserve Open Market Committee announced that it was planning to maintain the Federal Funds rate – the rate of interest at which banks lend to each other for short periods of time – between zero and a quarter of a percentage point. The Committee said that it would keep interest rates “exceptionally low” for an “extended period of time, which has continued up to the present.

Federal Reserve Policy and Monetary Expansion

Beginning in late 2012, the then Fed Chairman, Ben Bernanke, announced that the Federal Reserve would continue buying U.S government securities and mortgage-backed securities, but at the rate of an enlarged $85 billion per month, a policy that continued until early 2014. Since then, under the new Federal Reserve chair, Janet Yellen, the Federal Reserve has been “tapering” off its securities purchases until in July of 2014, it was reduced to a “mere” $35 billion a month.

In her recent statements, Yellen has insisted that she and the other members of the Federal Reserve Board of Governors, who serve as America’s monetary central planners, are watching carefully macro-economic indicators to know how to manage the money supply and interest rates to keep the slowing general economic recovery continuing without fear of price inflation.

Some of the significant economic gyrations on the stock markets over the past couple of months have reflected concerns and uncertainties about whether the Fed’s flood of paper money and near zero or negative real interest rates might be coming to an end. In other words, borrowing money to undertake investment projects or to fund stock purchases might actually cost something, rather than seeming to be free.

When the media has not been distracted with the barrage of overseas crises, all of which seem to presume the need for America to play global policeman and financial paymaster to the world at U.S. taxpayers’ expense, the resumption by news pundits and too many economic policy analysts is that Federal Reserve’s manipulation of interest rates is a good, desirable and necessary responsibility of the central bank.

As a result, virtually all commentaries about the Fed’s announced policies focus on whether it is too soon for the Federal Reserve to raise interest rates given the state of the economy, or whether the Fed should already be raising interest rates to prevent future price inflation.

What is being ignored is the more fundamental question of whether the Fed should be attempting to set or influence interest rates in the market. The presumption is that it is both legitimate and desirable for central banks to manipulate a market price, in this case the price of borrowing and lending. The only disagreements among the analysts and commentators are over whether the central banks should keep interest rates low or nudge them up and if so by how much.

Market-Based Interest Rates have Work to Do

In the free market, interest rates perform the same functions as all other prices: to provide information to market participants; to serve as an incentive mechanism for buyers and sellers; and to bring market supply and demand into balance. Market prices convey information about what goods consumers want and what it would cost for producers to bring those goods to the market. Market prices serve as an incentive for producers to supply more of a good when the price goes up and to supply less when the price goes down; similarly, a lower or higher price influences consumers to buy more or less of a good. And, finally, the movement of a market price, by stimulating more or less demand and supply, tends to bring the two sides of the market into balance.

Market rates of interest balance the actions and decisions of borrowers (investors) and lenders (savers) just as the prices of shoes, hats, or bananas balance the activities of the suppliers and demanders of those goods. This assures, on the one hand, that resources that are not being used to produce consumer goods are available for future-oriented investment, and, on the other, that investment doesn’t outrun the saved resources available to support it.

Interest rates higher than those that would balance saving with investment stimulate more saving than investors are willing to borrow, and interest rates below that balancing point stimulate more borrowing than savers are willing to supply.

There is one crucial difference, however, between the price of any other good that is pushed below that balancing point and interest rates being set below that point. If the price of hats, for example, is below the balancing point, the result is a shortage; that is, suppliers offer fewer hats than the number consumers are willing to buy at that price. Some consumers, therefore, will have to leave the market disappointed, without a hat in hand.

Central Bank-Caused Imbalances and Distortions

In contrast, in the market for borrowing and lending the Federal Reserve pushes interest rates below the point at which the market would have set them by increasing the supply of money on the loan market. Even though savers are not willing to supply more of their income for investors to borrow, the central bank provides the required funds by creating them out of thin air and making them available to banks for loans to investors. Investment spending now exceeds the amount of savings available to support the projects undertaken.

Investors who borrow the newly created money spend it to hire or purchase more resources, and their extra spending eventually starts putting upward pressure on prices. At the same time, more resources and workers are attracted to these new investment projects and away from other market activities.

The twin result of the Federal Reserve’s increase in the money supply, which pushes interest rates below that market-balancing point, is an emerging price inflation and an initial investment boom, both of which are unsustainable in the long run. Price inflation is unsustainable because it inescapably reduces the value of the money in everyone’s pockets, and threatens over time to undermine trust in the monetary system.

The boom is unsustainable because the imbalance between savings and investment will eventually necessitate a market correction when it is discovered that the resources available are not enough to produce all the consumer goods people want to buy, as well as all the investment projects borrowers have begun.
Central Bank Produces Booms and Busts

The unsustainability of such a monetary-induced investment boom was shown, once again, to be true in the latest business cycle. Between 2003 and 2008, the Federal Reserve increased the money supply by at least 50 percent. Key interest rates, including the Federal Funds rate and the one-year Treasury yield, were either zero or negative for much of this time when adjusted for inflation. The rate on conventional mortgages, when inflation adjusted, was between two and four percent during this same period.

It is no wonder that there emerged the now infamous housing, investment, and consumer credit bubbles that burst in 2008-2009. None of these would have been possible and sustainable for so long as they were if not for the Fed’s flood of money creation and the resulting zero or negative lending rates when adjusted for inflation.

The monetary expansion and the artificially low interest rates generated wide imbalances between investment and housing borrowing on the one hand and low levels of real savings in the economy on the other. It was inevitable that the reality of scarcity would finally catch up with all these mismatches between market supplies and demands.

This was, of course, exacerbated by the Federal government’s housing market creations, Fannie Mae and Freddie Mac. They opened their financial spigots through buying up or guaranteeing ever more home mortgages that were issued to a growing number of uncredit worthy borrowers. But the financial institutions that issued and then marketed those dubious mortgages were, themselves, only responding to the perverse incentives that had been created by the Federal Reserve and by Fannie Mae and Freddie Mac.

Why not extend more and more loans to questionable homebuyers when the money to fund them was virtually interest-free thanks to the Federal Reserve? And why not package them together and pass them on to others, when Fannie Mae and Freddie Mac were subsidizing the risk on the basis of the “full faith and credit” of the United State government?

More Monetary Mischief in the Post-Bubble Era

What was the Federal Reserve’s response in the face of the busted bubbles its own policies helped to create? Between September 2008 and June 2014, the monetary base (currency in circulation and reserves in the banking system) has been increased by over 440 percent, from $905 billion to more than $4 trillion. At the same time, M-2 (currency in circulation plus demand and a variety of savings and time deposits) grew by 35 percent during this time period.

Why haven’t banks lent out more of this huge amount of newly created money, and generated a much higher degree of price inflation than has been observed so far? Partly it is due to the fact that after the wild bubble years, many financial institutions returned to the more traditional credit worthy benchmarks for extending loans to potential borrowers. This has slowed down the approval rate for new loans.

But more importantly, those excess reserves not being lent out by banks are collecting interest from the Federal Reserve. With continuing market uncertainties about government policies concerning environmental regulations, national health care costs, the burden of the Federal debt and other government unfunded liabilities (Social Security and Medicare), as well as other possible political interferences in the marketplace, banks have found it more attractive to be paid interest by the Federal Reserve rather than to lend money to private borrowers. And considering how low Fed policies have pushed down key market lending rates, leaving those excess reserves idle with first Ben Bernanke and now Janet Yellen has seemed the more profitable way of using all that lending power.
Even under the heavy-handed intervention of the government, markets are fundamentally resilient institutions that have the capacity to bounce back unless that governmental hand really chokes the competitive and profit-making life out of capitalism. Any real recovery in the private sector will result in increased demands to borrow that would be satisfied by all of that Fed-created funny money currently sitting idle. Once those hundreds of billions of dollars of excess reserves come flooding into the market, price inflation may not be far behind.

Central Banking as the Problem, Not the Solution

At the heart of the problem is that fact that the Federal Reserve’s manipulation of the money supply prevents interest rates from telling the truth: How much are people really choosing to save out of income, and therefore how much of the society’s resources – land, labor, capital – are really available to support sustainable investment activities in the longer run? What is the real cost of borrowing, independent of Fed distortions of interest rates, so businessmen could make realistic and fair estimates about which investment projects might be truly profitable, without the unnecessary risk of being drawn into unsustainable bubble ventures?

Unfortunately, as long as there are central banks, we will be the victims of the monetary central planners who have the monopoly power to control the amount of money and credit in the economy; manipulate interest rates by expanding or contracting bank reserves used for lending purposes; threaten the rollercoaster of business cycle booms and busts; and undermine the soundness of the monetary system through debasement of the currency and price inflation.

Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from their interventions, regulations and manipulations is false signals and bad information. And all of us suffer from this abridgment of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way.

By Richard Ebeling

Originally published on October 12, 2017 for the Future of Freedom Foundation

One of the most accusatory and negative words currently in use in various politically “progressive” circles is that of “Neo-Liberalism.” To be called a “Neo-Liberal” is to stand condemned of being against “the poor,” an apologist for the “the rich” and a proponent of economic policies leading to greater income inequality.

The term is also used to condemn all those who consider the market economy to be the central institution of human society, at the expense of senses of “community” and shared caring and concern beyond supply and demand. A Neo-Liberal is one who reduces everything to market-based dollars and sense, and disregards the “humane” side of mankind, say the critics of Neo-Liberalism.

The opponents of Neo-Liberalism, so defined, claim that its proponents are rabid, “extremist” advocates of laissez-faire, that is, a market economy unrestrained and unrestricted by government regulations, controls or redistributive fiscal policies. It represents and calls for the worst features of the “bad old days” before socialism and the interventionist-welfare state, each in their respective “radical” or “moderate” ways, attempted to abolish or rein in unbridled, “anti-social” capitalism.

The Birth of Neo-Liberalism: Walter Lippmann and a Paris Conference

The historical fact is that these descriptions have little or nothing to do with the origin of Neo-Liberalism, or what it meant to those who formulated it and its policy agenda.  It all dates from about eighty years ago, with the publication in 1937 of a book by the American journalist and author, Walter Lippmann (1889-1974), entitled, An Inquiry into the Principles of the Good Society, and an international conference held in Paris, France in August of 1938 organized by the French philosopher and classical liberal economist, Louis Rougier, centered around the themes in Lippmann’s book. A transcript of the conference proceedings was published later in 1938 (in French) under the title, Colloquium Walter Lippmann.

During his lifetime, Walter Lippmann was one of the most famous American newspaper columnists and authors on the social order, democracy, the free society, and the role of government at home and in international affairs. Over his lifetime, his views on government and public policy were all over the political map, from pro-socialist, to “individualist” critic of Franklin Roosevelt’s New Deal, to then back again after World War II to a strong advocate of “activist” government, both domestically and globally.

But in 1937, his book on The Good Society was a forceful and lucid declaration of the dangers to a free society from the totalitarian collectivist systems – Soviet communism, Italian fascism and German Nazism – that were enveloping Europe in the 1930s.  In addition, he warned of the complementary danger from “creeping collectivism” in the form of the regulatory and interventionist policies then growing in the Western democracies, including in the United States under the New Deal.

Walter Lippmann’s Damning Criticism of the Collectivist State

Lippmann’s critique of political and economic collectivism, which makes up the first half of the nearly 400-page book, is still worth reading today by any friend of freedom. He eloquently explains how totalitarian collectivism is a counter-revolutionary revolt against centuries of efforts by humanity to throw off tyranny and poverty, and the ideological superstitions that rationalized rule by the few over the many. Whether in its fascist or communist variations, collectivism is a return to justifications for denying the uniqueness and dignity and liberty of the individual, as well as the abolition of the institutions of a free society that are meant to protect the ordinary human being from domination and control by the State.

As part of his critique of the centrally planned society that inescapably accompanies the Total State, Lippmann heavily drew upon the writings of the Austrian economists, Ludwig von Mises and Friedrich A. Hayek, on the unworkability of a fully planned economy. Also, in ways that anticipated Hayek’s later writings on the decentralized use of knowledge in a competitive market economy, Walter Lippmann explained how dispersed knowledge is conveyed and used by multitudes of people around the world, so the wants of all of us as consumers may be more fully satisfied. And how all of this is made possible through the price system of the market.

He is no less scathing against the danger from the piecemeal forms of planning that pervade modern democratic societies through regulatory restrictions, trade protections and production subsidies that artificially create monopolies, privileged industries and favored individuals. Government intervention corrupts and strangles the functioning of the market mechanism of a free society. To the extent that it does, power and decision-making is transferred from consumers and market-based entrepreneurs guided by the wants of the demanding public to politicians, bureaucrats and the special interest groups that all work together against the “good society” of free and prosperous people.

Walter Lippmann’s Rejection of Laissez-faire

But when Lippmann turns in the second half of the book to “The Reconstruction of Liberalism,” he clearly and loudly makes clear that he does not believe that any return to a laissez-faire market economy or that a highly limited government involvement in society is either possible or desirable. He says the reforms that he wishes to propose are meant to secure a free society from abuse and misuse by those in political power and special interests wishing to use government for their own personal purposes at other’s expense. And much of what he says here about restraints, transparency, and the consist preservation of the rule of law in democratic society to assure personal and civil liberties are often reasonable in a debate over the nature and role of government in human society.

But he argues that the classical economists and the classical liberals of the nineteenth and early twentieth centuries operated with a false and stylized conception of a mechanical “economic man” in a “perfectly” competitive market that does not match how the real world works. If “liberalism” is to be renewed and restored as a viable system acceptable to most in society, government must be more controlling and supervisory over corporations and their workings, since these forms of “big business” are dangerous to freedom. In other words, he questions the acceptance of limited liability companies and thinks that anti-trust laws need to be far better enforced.

“Power” is unjustly and unfairly distributed in an unregulated market economy, leading to abuses against consumers and employed workers by unbridled private enterprise. Government must regulate the size of businesses and how they use their decision-making power must be overseen by agencies of government. Taxes must be established and imposed to assure a more equitable distribution of wealth among the members of society. And the taxes collected more heavily on “the rich” must be spent on “public health, education, conservation, public works, [social] insurance” and other welfarist projects and programs.

In other words, the reformed and “new” liberalism that Walter Lippmann proposes as the alternative to the totalitarian collectivisms threatening to extinguish freedom and democracy around the world is: the interventionist-welfare state that simply recognizes and places much greater importance on the effectiveness of market competition to “deliver the goods” and supply important forms of personal liberty and choice than the more collectivist critics of capitalism.

The Colloquium Walter Lippmann in Paris in 1938

This agenda became, as I said, the basis for that 1938 conference in Paris devoted to Walter Lippmann’s book.  Among the participants at the conference were Raymond Aron, Louis Baudin, F. A. Hayek, Michael Heilperin, Etienne Mantoux, Ludwig von Mises, Michael Polanyi, Wilhelm Röpke, Jacque Rueff, Alexander Rüstow, and Alfred Schutz. In all, there were more than twenty-five attendees.

In his opening introductory remarks to the conference, Louis Rougier was clearly and deeply impressed and influenced by Lippmann’s arguments on a reformed new liberalism. He stated that the issue now facing “liberals” was not whether there should be government intervention in the market economy but what type of such interventions.

He referred to those interventions that were “conformable” with the market economy, and those that were not. A laissez-faire world was a thing of the past, It was necessary to “accept the world as it is,” especially because economic policy had to be consistent with “the social demands of the masses.” Thus, a “new” liberalism must recognize State involvement with “the regulation of property, of contracts, of patents, of the family, the status of professional organizations and commercial corporations,” and a variety of other active intrusions into the market system.

Following Walter Lippmann’s own opening remarks, in which he restated the major theses of his book, the discussion turned to what should be the name of this alternative to totalitarian collectivism? Back and forth several of the participants went about whether what they were talking about was still consistent with the “old liberalism,” or was it something different. Was it still consistent with the traditional understanding of “individualism”? Had not “liberalism” always stood for the widest liberty for the individual and a government strictly limited to protect that liberty?  Was what was offered in Lippmann’s book and what was to be the subject matter of the conference a “new” Liberalism”?

Later, near the end of the conference, French economist, Jacque Rueff, suggested, “Left Liberalism.” This did not sit well with many of the other participants. So, instead, other possibilities were offered: “positive liberalism,” or “social liberalism,” or “Neo-Liberalism.”

Ludwig von Mises on Monopoly and Cartels

The clash between the proponents of traditional, or laissez-fare, or “classical” liberalism and this emerging Neo-Liberalism soon showed itself in the conference sessions that followed. Austrian economist, Ludwig von Mises, argued that regulation of business to limit “bigness” was neither necessary nor desirable. He reminded the other attendees that monopolies and cartels among private enterprises invariably were historically due to the interventions of the State to protect privileged companies from market competition. And, indeed, governments had often had to use their compulsory powers to force private enterprises into politically created cartels that were not wanted or desired by many of the market competitors. Said Mises:

In many cases even this State intervention has not been enough by itself to being about the creation of cartels. The State has had to force the producers to group themselves into cartels by means of special laws . . . So it is impossible to maintain the thesis according to which the coming of cartels was the natural result of the action of economic forces. It is not the free play of these forces that has given rise to cartels but rather the intervention of the State. So it is a logical error to try to justify State intervention in the economy by the necessity of preventing the formation of cartels because it is precisely the State which has led to the creation of cartels by its intervention.

Similarly, Mises insisted any problems with anti-competitive monopolies in the market were not the result of normal market forces, but the interventions of the State, as well. “It is not the free play of economic forces but the anti-liberal policy of governments that has created conditions favorable to the establishment of monopolies,” Mises said. “It is legislation, it is politics that have created the tendency toward monopoly.”

Along related lines Mises also argued that it would be economically harmful for government to restrain the formation of limited liability corporations. They serve as a market means of combining large sums of investable funds that enable projects to be undertaken that serve market demands, that otherwise might very well be impossible.

Mises was met by other conference participants who, counter-wise, insisted that the market tended toward forms of unhealthy and undesirable concentrations of industry and economic power and influence, which only the State could contain, control and limit. Regulation of business had to be part of the new Neo-Liberal agenda. The famous German economist and sociologist, Alexander Rüstow, who was one of the intellectual influences on post-World War II German economic policy, went so far as to say that the problem was due to the State being too “weak” to prevent these corporate tendencies toward industrial concentration.

Social Safety Nets and the Role of the State

In another session, the issue was social welfare and the interventionist state. And here, again, the debate concerned the extent to which a free market economy could “satisfy” the demands of “the masses” for “social security.” In general, there was no principled resistance to certain minimal social “safety nets” on the part of the participants who addressed the issue in this part of the conference. Instead, the discussion surrounded the “limits” of the welfare state. How was it to be financed? What dangers could arise due to deficit spending to cover government redistributive spending? What incentives should not exist for people to find it attractive to be permanent wards of the State?

For instance, Austrian economist, Friedrich A. Hayek, argued that the social insurance benefits should not be equal to or greater than what an unemployed or displaced worker would receive if he were employed. Otherwise, he’d have not the incentive to relocate and find market-based gainful employment. And Jacque Rueff highlighted a theme he had already emphasized in the 1920s, a clear relationship between the generosity of unemployment insurance payments and the amount and length of general unemployment as experienced in a number of countries in the 1920s and during the Great Depression.

But the older classical liberal presumption that it should not be the duty of the State to subsidize or financially support those who found themselves temporarily unemployed was never discussed. The case that this is one of the tasks of the voluntary associations of civil society was never brought up.

However, Mises reminded the others that, “Unemployment, as a mass and lasting phenomenon, is the consequence of a policy [by governments and labor unions] that aims at maintaining salaries at a higher level that would result from the state of the [free] market.” In this Mises was seconded by a number of the other participants.

Spontaneous Social Order vs. State Direction of Society

A clear difference between the traditional classical liberals and these Neo-Liberals was whether society, in general, should be the product of the spontaneous interactions of the social and market participants, themselves, or might the unregulated patterns of social evolution take on forms requiring government intervention and “correction”?

In a session devoted to the “Sociological and Psychological, Political and Ideological Causes of the Decline of Liberalism,” Alexander Rüstow set the tone with an insistence that the evolution of markets had created outcomes that needed governmental correction and guidance. He argued that the task of government policy was not to assure the greatest material income, but “a living situation that was as satisfying as possible.”

Men need liberty, most certainly, Rüstow emphasized, but they also need “unity,” a sense of social “belonging,” similar to the family. Society needed to provide this in some way, and as far as he was concerned, this could not be left only to the free associations of the marketplace. The State had to devise ways of giving and providing people with this shared sense of collective belonging while also maintaining the freedom that people also clearly desired. This required social planning of various types along side the market economy, including urban and rural zoning and planning for a more balanced and harmonious life. Either a new, reformed and interventionist liberalism could offer the missed sense of collective belonging, Rüstow claimed, or fascism and Nazism would fill the void in men’s psychological being.

Ludwig von Mises countered Rüstow’s argument. Rüstow’s implicit presumption that the peasants of yester-years before the dawn of capitalism were happier than modern industrial workers in urban areas with all their available material and cultural amenities was highly dubious. Mises suggested that Rüstow had fallen into the misplaced “romantic” fantasies of those anti-market conservatives who conjured up images of an idyllic countryside of contented “commoners” and kind and gentle noblemen before commercialism undermined human bliss. “It is an undeniable fact,” Mises said, “that in the last hundred years millions of men have abandoned agricultural occupations for industrial work, which certainly cannot be considered a proof of the greater satisfaction that agricultural activity would have given them.”

For all the talk about group identity and unity in the totalitarian states, Mises went on, the fact is that the collectivist regimes in the Soviet Union, fascist Italy and Nazi Germany had all promised materially better circumstances and economic opportunities through planning and control to those over whom they ruled. Individuals do often suffer from psychological dissatisfactions with liberal society, but the task was to make it plain to people that liberty and market-based prosperity offer the greatest opportunities for each to find their own best answers to these wider needs and desires for human association.

Neo-Liberalism Concessions to the Collectivist Spirit of the Times

What, then, was the upshot of the conference? And what does it tell us about the meaning of Neo-Liberalism? Many of the classical liberals during the period between the two World Wars were despondent and despairing about the seeming twilight of the free society. Totalitarian variations on the collectivist theme were on the ascendency in Europe.

When the Walter Lippmann conference occurred in August 1938, Hitler had already annexed Austria in March of that year, and the crisis had begun that led to the Munich Conference in September that resulted in the dismembering of Czechoslovakia under the threat of Hitler invading that country. The fear of war was everywhere; this came with the accompanying concern that war would bring a final end to the last residues of the liberal epoch that had existed before the First World War. And, indeed, an entire session at the conference was devoted to this concern and how to respond to it.

Virtually all the conference participants were strongly market-oriented liberals who considered competitive capitalism essential to freedom and prosperity, and that all forms of socialist planning to be economically unworkable and threats to personal and civil liberty.

But except for a few of the participants such as Ludwig von Mises, all the attendees concluded that to “save” political and economic liberalism from total destruction, a “Neo-liberalism” had to be formulated, developed and offered to a world apparently mesmerized by the promises of Soviet communism and Italian and German fascism.

Either out of actual reflective conviction on the nature of the market or political expediency in the face of a general rejection of laissez-faire liberalism in Western society, many of those who commented, debated and argued during the three days of the conference concluded that to counteract the collectivist trends and preserve the essential institutions and working of a relatively free market system, it had to be combined with aspects of the interventionist-welfare state that would make it palatable to “the masses.”

Neo-Liberalism was not born as an attempt to rationalize and restore a laissez-faire unbridled capitalism, but as an idea to introduce a wide network of regulatory and redistributive programs that would enable the political salvaging of some of the essential elements of a competitive market order. The tricky task, in the eyes of most of the attendees, was to figure out how to do this without the interventionist system itself threatening to get out of control and degenerate into that type of piecemeal system of collectivist privilege, plunder and corruption that Walter Lippmann had, himself, said easily can be an incremental backdoor to a planned society.

Neo-Liberalism and the Rise of the Interventionist-Welfare State

In retrospect, the Neo-Liberalism agenda that was emerging out of the Colloquium Walter Lippmann was an attempt to square the hole: the combining of individual freedom and free market competitive association with political paternalism and governmental commands and controls over how people may interact and the outcomes to be allowed from their interactions.

By doing so, those sincere friends of freedom and the market order ended up conceding all the basic premises of their collectivist rivals: the market, when left alone, tends toward unhealthy corporate concentration with worker and consumer exploitation, thus requiring regulation of business size and practice; the market could not be trusted to assure stability, security or welfare, and hence “activist” government had to provide these things, within, hopefully, fiscally sound boundaries, of course; the free market is not enough for man and the human condition, so government has to regulate, guide and restrain social development to create “unity” and community beyond supply and demand.

Neo-Liberalism was born not as an “extremist” attempt to rationalize and implement unrestrained capitalism and an inhumane social system. It was conceived as creating a more humane and just society precisely by rejecting laissez-faire liberalism and its accompanying reliance upon the free associations of civil society to mitigate the uncertainties and problems of everyday life. And it was meant to be a system that would be acceptable and accepted by “the masses” in democratic society.

It is certainly true that the much of the Neo-Liberal agenda that was successfully implemented in a variety of post-World War II countries, such as West Germany, brought about an “economic miracle” of recovery from the war’s destruction by unleashing market forces and the entrepreneurial spirit.

However, the triumph of the interventionist-welfare state, beginning in the immediate post-World War II era and up to the present, therefore, is also partly due to the Neo-Liberal friends of freedom who offered their own justifications for many of the same policies that their opponents on “the left” also espoused. Only they hoped to keep them within more “manageable limits” so a vibrant market economy might still effectively function.

The modern day “progressives,” therefore, are rejecting and condemning just another variation of themselves that has wanted far more reliance on competitive markets and less regulation and redistribution than for which they have any desire; and all within the context of those “progressives” doing their best to deny any family resemblance.

Neo-Liberalism’s origins, agenda, and consequences all point toward the need for a new agenda for liberty: one that recognizes and restates the idea and ideal of that original and true liberalism of laissez-faire and voluntary civil society.

By Richard Ebeling

Originally published on November 7, 2018 for The American Institute for Economic Research

Nowadays, many along the political spectrum seem to agree that America increasingly has become a polarized society. Ideological and public policy discourse has been gravitating more toward the extremes: progressives and the Democratic Party with a more explicitly socialist rhetoric and proposed government agenda, and conservatives and Republicans who increasingly appear to be moving in the direction of populist, and especially economic, nationalism under the presidency of Donald Trump.

If such ideological extremism is politically tearing the country apart in the eyes of many, then what could and should be a “non-ideology” of compromise and moderation? This is a question that Jerry Taylor, president of the William Niskanen Center, asks and answers in a recent article, “The Alternative to Ideology,” in which he directly challenges the premises and policy perspective of many libertarians.

Mr. Taylor insists that those who espouse a political philosophy of individualism, free markets, and strictly limited constitutional government are out of touch with reality and make themselves irrelevant in contemporary political discourse. Having long been a proponent of libertarianism himself, Mr. Taylor believes that he understands its asserted weaknesses from the inside.

Doubting Market Solutions to Global Problems

His first doubts, he explains, emerged with his conclusion that libertarians have little or nothing to contribute to the leading problem of our time: global warming. In Mr. Taylor’s view, this demonstrated to him that there needed to be answers outside the mantra of individual liberty and free markets. How else could this threat to humanity be tackled other than through extensive and combined governmental intervention, regulation, taxation, and possibly organized planning?

Like a revelatory conversion on the road to Damascus, this led him to the conclusion that libertarianism, like other “dogmatic” and single-focused ideological perspectives, fails to admit that there are problems in the world that do not and cannot be dealt with through a strict following of a policy view of free market voluntarism based on an uncompromising attachment to individual liberty.

Furthermore, Mr. Taylor says he saw that too many libertarians ignored the reality that there are personal and social values in the world other than individual liberty. People also value “the pursuit of social justice, equity, community, virtue … pluralism, material well-being, or any number of concerns that animate people,” besides unrestrained personal freedom.

Jerry Taylor decided, therefore, that he had to give up his belief in and adherence to the ideology of libertarianism. Instead, he came to the awareness that what needed to be cultivated and advanced is a social philosophy of moderation and compromise. He explains:

Politics and policymaking without an ideological bible is incredibly demanding. It requires far more technocratic expertise and engagement than is required by ideologues, who already (they think) know the answers. It also requires difficult judgments, on a case-by-case basis, about which ethical considerations are of paramount concern for any given issue at hand, and what trade offs regarding those considerations are most warranted.

To embrace nonideological politics, then, is to embrace moderation, which requires humility, prudence, pragmatism, and a conservative temperament. No matter what principles we bring to the political table, remaking society in some ideologically-driven image is off the table given the need to respect pluralism. A sober appreciation of the limitations of knowledge (and the irresolvable problem of unintended consequences) further cautions against over-ambitious policy agendas.

Does this mean anything goes in a non-ideological politics, including ideas and policies that many might consider abhorrent? No, Mr. Taylor says; there are limits to what may be accepted as legitimate policy views in the common area of democratic decision-making: “Compromise, however, has limits,” he states. “Compromise with theft, murder, slavery, or gross infringements on human dignity is indefensible.… Firm positions and tough stances are sometimes required. And when necessary, moderates must have the stomach for a fight.”

The Meaning of Ideology and Its Social Relevance

Is Mr. Taylor right about the nature of ideology and moderation, and what does this imply about the classical liberal or libertarian views of man, society and government? First, what is an ideology? The Oxford Dictionary defines it as “a system of ideas and ideals, especially one which forms the basis of economic and political theory and policy,” and “the science of ideas, the study of their origin and nature.”

The term seems to have been first used in this way by the French classical liberal Destutt de Tracyin 1813 as an attempt to formulate a conception of the reality of the human condition and what it implied about the organization of a social order in response to the tyranny and terror during the French Revolution and then the dictatorship of Napoleon Bonaparte.

A starting premise to the classical liberal or libertarian ideology has been a focus on the uniqueness of the individual as a distinct thinking, feeling, valuing, and acting being. Different authors have expressed it differently, but in general there has been a common consensus that based on God or nature and man’s reasoning ability, it is possible to deduce an understanding of individual human beings as unique creations and conscious entities that both need and deserve to be seen as having an inherent right to life, liberty, and peacefully and honestly acquired property for their survival and betterment.

This classical liberal or libertarian conception of humankind has never presumed or posited that people are atomistic beings separate from other persons. Rather, its philosophy or ideology has been to ask what should be the institutional arrangements that can be most conducive to respecting each human being as a free agent yet ordering the social system in such a way that each individual in pursuing their own self-interest does so, in general, in a way that can further the betterment of others at the same time.

The key moral premise is that coercion and the threat or use of violence should be prohibited or at least minimized to the greatest extent possible still consistent with a keeping of the peace among human beings. An outgrowth of this is the argument that, therefore, human interactions should be based on free association and mutual, voluntary agreement; hence, the ideal of the free market in which people enter into exchanges with each other through agreed-upon terms of trade.

Social Contract and Social Evolution in Classical Liberal Ideas

From the time of John Locke, the imagery of a social contract has sometimes been posited as the basis for interpersonal agreement concerning the origin of society and the institution of government derived from each individual’s “natural right” to their life and liberty. However, this usually has been understood to be merely a form of a mental experiment to clarify the logic and meaning of individual liberty and the rationale and limits of government consistent with personal liberty and social peace.

The classical liberal tradition has generally appreciated that, in fact, the institutions of society and the ideas of personal freedom, private property and enterprise, the rule of law, and free trade are the results of a social evolutionary process, out of which the liberal order emerged over a long period of time. Human reflection and experience led to the articulated ideals and the codifying of the premises and practices of a free society.

Classical Liberalism as the Epitome of Moderation

For the classical liberal or libertarian, the free society is the epitome of human moderation and compromise. This view recognizes that the notion of the distinct and distinctive individual human being means that there is an inescapable diversity among people in terms of experiences, values, purposes, and abilities. To the friend of freedom, the philosophical extremist and political fanatic is the one who is revolted by and rebels against the fact that men and women differ in what they consider the most desirable ends to pursue and the best means of attaining them.

Such extremists and fanatics are those who ultimately represent an ideology of totalitarianism — that is, the attitude and insistence that all in society should and must conform to and be confined within their notion of a socially just or fair or good society. The method of imposing their collectivist ideal may be through dictatorship or democracy, but the underlying premise is that there is one way (or a narrowly defined set of ways) of living and associating.

Several years ago I wrote an article titled “Is the Case for Liberty Too Extreme?” I argued:

The free society tries to avoid extremes through the diversity of free men that it both permits and fosters. It restrains the practice of “extreme” personal behavior because it imposes costs and consequences upon everyone who practices them, in the form of lost economic opportunity, and possibly social ostracism by those who are repelled by it.

It also teaches the advantages of moderation — courtesy, good manners, tolerance, and “socially acceptable” conduct — in the competitive arena of intellectual pluralism where to win an argument the only medium of exchange is peaceful persuasion.

In other words, the free society nudges men toward better behavior and rational thought rather than tries to compel it. It teaches good and tolerant conduct through reason and example. It fosters compromise by demonstrating the personal costs of being too extreme in one’s words and actions. And it raises the ethical conduct of society by the discovered advantages of personal improvement through time.

Are the arguments for and the advocates of liberty too extreme? Quite to the contrary. Freedom is the epitome of moderation.

Civil Society and the Market as Arenas of Moderation and Diversity

Classical liberalism and libertarianism do not ask that people abandon their sincere devotion to notions of “the pursuit of social justice, equity, community, virtue, … pluralism, material well-being, or any number of concerns that animate people,” despite Mr. Taylor’s rhetorical question. What they do argue and, indeed, insist upon is that the social setting in which to advance these purposes be based on and guided by one fundamental and underlying principle: the forgoing of coercive means to attain them and the tolerance of diversity among men by utilizing peaceful and mutually agreed-upon avenues to achieve them.

For the classical liberal, the institutions of civil society are those that human beings participate in and through which they reach their chosen ends. Government necessarily imposes forms of “one-size-fits-all” once it goes beyond the “negative” though essential task of protecting each individual’s right to life, liberty, and honestly acquired property.

The libertarian recognizes that human beings do differ in terms of what they consider important and the best ways of advancing them. The pluralism of the free marketplace is precisely that it allows each individual to follow that peaceful path that they consider most attractive and opportune to improving their own life and that of others that they are concerned with.

Libertarian Solutions to Various Social Problems

Mr. Taylor suggests that libertarians propose a free society without detailing how many of the things that various people consider useful or desirable will be possible to attain. This has historically been very far from the case. Take the advocate of the welfare state. People may be honestly motivated by a desire to assist those who are less well off than themselves. But when friends of freedom respond that these matters should be left up to individuals and the market, they do not stop there.

Classical liberals and libertarians have explained the logic and social mechanisms that are open to bettering those who are in need or who have fallen upon hard times not of their own making. Indeed, the history of the 19th century, the era considered to be the heyday of laissez-faire, saw the emergence and success of a very large number of private charities and voluntary associations. For instance, the friendly societies provided the means through which the vast majority in Great Britain found ways of providing themselves with medical insurance, unemployment assistance, retirement pensions, and life insurance — all without government and covering the vast majority of, especially, the British “lower classes.”

The same may be said about education. Many if not most classical liberals and libertarians advocate private education and greater schooling choice. They have noted the historical successes of private education before compulsory government schooling and the means by which it would operate in our modern times. They have pointed out, likewise, the private sector means to assist during and after natural disasters.

The Tragedy of the Commons and Environmental Externalities

Mr. Taylor explained that his own doubts about the efficacy of free market solutions to social problems arose from his concerns about the reality of global warming, and not seeing any answers that did not involve encroaching upon the fundamental libertarian principle of non-intervention that precluded both regulation of business or taxing policies to reduce atmospheric pollution problems.

The impression, therefore, could easily be drawn that market-oriented economists have given little or no attention to the problem of externalities. At least since the 1960s — that is, for more than half a century — problems of externalities and the tragedy of the commons have been a major subject area for serious study concerning the role of private property rights to “internalize” such problems through extension, introduction, or greater enforcement of private property rights.

Some of the classic essays on this theme are by Harold Demsetz and Garrett Hardin, demonstrating the history and theory of the role of property rights in reducing overuse of scarce resources and the related role of efficient economizing decision-making when the costs and the benefits must be more fully weighed and borne by agents in the market both in the present and looking to the future.

Rivers and lakes have been privatized with resulting reductions in pollution or excessive harvesting of plant and animal life. The same applies to forests and wildlife. Proposals have been detailed on how the same might be extended to the oceans. And possibilities of similar enforceable private property rights in the atmosphere exist, with the technologies available to trace back pollutants to their points of origin for legal recourse as in many other property rights disputes presented to the courts.

Without getting into the pros and cons of the heated technical and scientific debates concerning human activities threatening significant global temperature increases through the use of fossil fuels, the issue does concern policy proposals involving a reduction in the liberty of individuals and enterprises in society and must be judged and weighed in this context. Mr. Taylor too easily brushes aside the potentials and possibilities of real free market responses to global warming, if it presents the danger that many in the media and the scientific community claim that it is.

Social Humility and Limited, Decentralized Knowledge

We saw earlier that Mr. Taylor called for a non-ideological public policy approach because “a sober appreciation of the limitations of knowledge (and the irresolvable problem of unintended consequences) further cautions against over-ambitious policy agendas.” But unlike those ideologues exposing interventionist, regulatory, fiscal, and direct planning policies to deal with environmental and other social and economic issues, the classical liberal and the libertarian take Mr. Taylor’s concerns completely to heart.

Classical liberal and Austrian-school economist Friedrich A. Hayek strongly emphasized not only that individual human knowledge is limited, but that the knowledge of the world is decentralized and diffused among all the members of the human society; it is made up of such characteristics that it is logically and practically impossible for even the most sincere and best of human minds in government and its bureaucracies to assemble, integrate, and utilize that knowledge better than the multitudes of market participants themselves.

How can we know whether some proposed governmental remedies for global warming, such as international taxes on fossil fuels or cap-and-trade licensing, are the most effective and efficient tools for dealing with rising temperatures, if the proponents of the hypothesis are correct?

How can we know what costs individuals may or may not be willing to bear to grapple with this problem, if government, instead, co-opts and preempts any possible answers by “nationalizing” the problem through preventing or limiting private property solutions (solutions internalizing the impacts from people’s energy-related actions)?

How can we know whether the particular “energy alternatives” currently proposed by advocates of government intervention and regulation are the ones that are the most cost-efficient or capable of producing positive payoffs, when government policies by necessity narrow or hinder or prohibit any private enterprise answers guided by real market-driven incentives and returns?

For all of his insistence on a new non-ideological politics of public policy moderation, Mr. Taylor’s proposals amount to merely more of the same. What classical liberals and libertarians are asked to compromise is the principle and ideal of a society with minimum use or threat of compulsion by the very government meant to secure people’s freedom. Compromise, in this instance, is acceptance of the introduction of political coercion and paternalism into human affairs, and far more so than is already the case. Classical liberals and libertarians have a far greater respect for and appreciation of real social diversity and pluralism than those with whom Mr. Taylor is asking them to compromise.

The Principled Case for Liberty Is Not a Vice

Finally, Mr. Taylor states that there are some things worth standing on principle to defend, without compromise. He states that “theft, murder, slavery, or gross infringements on human dignity” are not open to compromise. But in many cases acceptance of these ideals originally started with and even required a “dogmatic” and “ideological” outlook and fervor.

Between 200 and 300 years ago, those insisting upon the end to human slavery and its trade confronted a diversity of competing and institutionally entrenched views that claimed that African slaves were meant to be held in bondage according to a particular reading of the Bible; that slavery was a form of benevolent socialism that was good for those lucky enough to be the human property of other men; that it secured jobs and a certain way of life that justified its continuation in the American South; and that good money was paid for that human property and it would be unjust to the owners to take it away without just compensation.

It required a strong, uncompromising, principled dogmatism with a single focus and ideological determination to insist upon and fight for the full abolition of the slave system. No acceptance of value diversity was considered possible by the abolitionists. Moderation was not a politically acceptable stance in the face of this moral evil of holding human beings in perpetual servitude by others who were permitted to use fairly unrestricted force to maintain their plantation life. In calling for the end to slavery, the abolitionists declared (to echo a phrase) that political extremism in the defense of liberty was not a vice.

Classical liberals and libertarians consider that their defense and insistence upon a principled practice of individual liberty and competitive free markets is no less of a moral necessity and calling than earlier demands for ending infringements on personal and social freedom that were widely taken for granted.

What Mr. Taylor considers to be unacceptable dogmatism is for the classical liberal and libertarian the just fight against the century-long collectivist counter-revolution against human liberty and the peaceful society of voluntary association. His appeal to moderation is, in fact, an appeal to give up the fight for human freedom and prosperity that only the arena of voluntary association and trade can bring about.