The economics of freedom

Besides the natural urge to place blame, the financial crisis has inspired an unnatural amount of nonsense about the marketplace.  One hears it shouted from the rooftops that capitalism is dead.  (Nicolas Sarkozy, in a typically French beau geste, has offered to resurrect it.)  Or maybe only the American version of capitalism is dead, what Europeans sometimes call “neoliberalism” and sometimes the “Anglo-Saxon model.”  Certainly, America is finished as an economic power.

The President’s gargantuan “stabilization plan” appears to some as the end of an argument.  At the very least, John Maynard Keynes is back, together with the belief in the government’s ability to master economic crises.  Cries for regulation of the markets  compete with condemnations of “greed” in the utterances of politicians and the chatter of the media.

Something must be done.  Only the government can do it.  Those are the universal assumptions.  The only question seems to be the extent to which our economy should be swallowed by our government:  a little or a lot?

I propose to examine all this newly received wisdom from an old perspective:  that of human freedom, one of the enduring themes of this blog.

Has capitalism failed?  Surely, it has failed the expectations of many people who have lost their investments and become poorer practically overnight.

Is capitalism dead?  That supposes a better alternative exists.  The only alternative to the “invisible hand” of individual outcomes aggregated in the marketplace is the highly visible hand of outcomes mandated by state power.  The question is whether a government-run economy works better than capitalism.

Since only a value structure can define “better,” the answer depends entirely on the moral traditions of the community.  Medieval societies, embued with a Christian contempt of material advancement, allowed rulers to criminalize profit-seeking and regulate production, distribution, and pricing.  It was thus impossible to gain “windfall profits” in the Middle Ages — but equally impossible for better or cheaper products to be sold, or innovators to be rewarded, or for those who wished to work harder to find an incentive to do so.  Equality was imposed by means of economic stagnation.

In the twentieth century, the Soviet Union revived the medieval economic model, with similar results.  Communism’s appeal lay in its claim to superior righteousness — but it also promised material bounty, and this, relative to capitalism, it utterly failed to deliver.  The Soviet experiment revealed a fork in the road of human organization:  either control the population for moralistic ends, or accelerate economic growth and technological innovation.

To achieve both appears impossible.  Gorbachev once complained to Maggie Thatcher that he, a head of government, was responsible for pantyhose production targets; but when he separated state power from pantyhose, the Soviet state imploded.

Most of the chatter to which I have been exposed assumes the purpose of an economic system to be the generation of wealth.  The charge lodged against capitalism is precisely that, in the current crisis, it has dissipated wealth instead.  The pretense of unregulated markets is in fact an invitation to corruption:  capitalism works to the profit of “Wall Street” but the ruination of “Main Street.”

The government, in the role of honest broker, must intervene on behalf of the little guy.  That’s what the President believes he has done.  Others would go further, and propose, in the rationalist style, any number of abstract formulas that the government should apply:  economics as high art, with the state as artist-tyrant.

Let’s consider the merits of this argument.

A favorite relative of mine — a brilliant man who has made a fortune as an inventor and entrepeneur — delights in saying that there’s no such thing as the free market.  If we are looking for absolutes, then he is of course correct:  the Platonic ideal of laissez faire doesn’t exist, never has.  But relative differences matter.  Communities make choices about levels of taxation and degrees of regulation, and the choices have consequences.

Over the last 20 years, Americans have taxed and regulated less than the Germans and the French.  This choice had consequences:  we have grown wealthier relative to them.  In 1991, West German GDP per capita was 91 percent of ours; by 2007, it had fallen to 75 percent.  Similarly, in 1982 French GDP per capita reached 82 percent of ours, only to decline to 71 percent in 2007.  This ratio won’t be affected by the financial crisis, any more than it was by the fallout from the Internet bubble, because the German and French economies, though risk-averse and state-protected, are more fragile than our own.  They will suffer no less than the US from the current mess.

Since 1959, Cuba’s political and economic life have been ruthlessly controlled by the Castro regime.  This, too, has had consequences.  The year before Castro’s takeover, Cuba’s GDP per capita was $3,170 — three times greater than that of South Korea ($1,112 in 1958) and about the same as Japan’s ($3,290).  Today, the relatively freer economies of Japan and Korea have grown to $31,696 and $23,399 per capita in 2007, respectively, while Cuba’s stagnant GDP has become a state secret, variously estimated at between $3,900 and $4,500.

To the degree that people are free, they generate wealth.  To the degree that people are compelled by state power to act according to religious or rationalist formulas, the economy flat-lines.  These principles have absolute validity, even if the evidence must come from muddled, historical, and thus relative conditions.  Necessary and sufficient reasons can be given why the industrial revolution began in liberal England, rather than tsarist Russia or imperial China.

In a sense, none of this matters.  The chatterers and the politicians, unsurprisingly, have got things wrong-side up.  The “purpose” of our economic system is not to generate wealth.  That’s a byproduct, what philosophers call an epiphenomenon.  By world standards, Americans are exceedingly wealthy, but few of us live for money.  We live to attain our private and public ends within the moral traditions of the community.

I can be an actor or a stockbroker, a preacher or a lawyer, a housewife or a hippie, a millionaire in a mansion or a day laborer in a trailer park:  in all these guises, according to my dreams and my skills, I can be a productive, fully integrated part of the American economy.

Our economic system isn’t about wealth but about freedom:  the American dream isn’t necessarily a house in the suburbs, but an untrammeled moral space in which to seek salvation after my own lights.  The system sometimes sputters badly.  It has done so twice over the last 10 years.  But no better alternative exists — for economic growth no less than for individual freedom.  Those who, in the present difficulties, favor regulation and control, should consider likelihood that we will grow wealthier because of the wisdom of politicians.

Only advocates of control for its own sake — descendants of medieval churchmen and Soviet ideologues — can offer a coherent argument for the overthrow of capitalism.

Ultimately, then, the question of freedom must be answered in moral rather than financial terms.  That answer will given by the American people in the way we conduct our lives, rather than by the President or his successors and the policies they promote.  Being a matter of morality, the choice is ours, and can’t be foisted on scapegoats.

What answer will be returned?  I’m no prophet, but I am an optimist.  I believe we are wiser in the aggregate than in our choice of political representatives.  Americans are a curious mix of ornery individualism and strong community-mindedness:  we often get accused of being cowboys and conformists in the same breath.

To the frustration of the world, in the face of far more painful disruptions than the present financial troubles, we have stolidly defended personal freedom while enforcing the rules of morality.  That is our history.  I don’t imagine it will change in this generation.

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