Justifying economic freedom

The Great Depression that began with the stock market crash of 1929 eroded whatever faith the West’s articulate classes had in free enterprise.  Capitalism was seen to be an immoral failure:  greedy, exploitive, and wasteful.  The application of reason and justice to economics called for government control.  The debate was between democratic socialism and Marxist-Leninist planned economies.  Individual choice appeared indistinguisheable from selfishness.

The best minds of the twentieth century succumbed to the illusion that governments could organize the creation of wealth and distribute it fairly.  This wasn’t an academic proposition.  Political elites around the world converted to socialism, and two generations of the human race paid a terrible material cost.

India’s “license raj” strangled at birth the entrepeneurial class of that country, freezing poverty in place.  Newly independent African countries fell under one-party regimes, which ranged from the paternalistic to the vicious but, in economic terms, coincided in the manufacture of ruin.  Ghana had a higher per capita income than South Korea in 1962; by 2000, Ghana’s income had tumbled to 4 percent of South Korea’s.

The swinish government flu subsided in the 1980’s, but never completely lost its infectious power.  Today the fighting faith of Hugo Chavez in Venezuela, Evo Morales in Bolivia, and the Kirchners in Argentina — all democratically elected — is that wealth must be snatched back from the rich, who are thieves, by masterful governments, which are rational and just.

The current recession born of the collapse of the financial markets has reignited the chattering classes’ contempt for economic freedom.  If, for this group, Iraq was Vietnam, the recession has become a throwback to the 1930’s:  the last nail in the coffin of capitalism, an empirical refutation of the “American model.”  Examples are everywhere, but I will cite only this rambling New Yorker article, which proclaims that while the full story of the decline and fall of the American economy deserves a modern Gibbon, “a few familiar words will do:  debt, greed, hubris.”

Why those words?  Why not “ignorance, error, mistaken hope”?  Such hair-trigger moralizing will emerge as the theme of this post.

We know where the articulate classes stand.  They share a beatific vision, and believe that only government power can impose it on the economy.  My question concerns the other side of the argument.  Who has taken up the cause of economic freedom today, and on what grounds?

When I read this review of Richard Posner’s new book on the financial crisis, I was struck by the characterization of the pro- and anti-interventionist schools in economics.  (The book itself is titled A Failure of Capitalism — and in case we somehow miss the point, subtitled The Crisis of ’08 and the Descent Into Depression.)

According to the reviewer, the contending schools base their arguments on radically different models of human behavior.  The rational-action theorists, as their name implies, believe individuals on the whole make correct economic choices, and should be left undisturbed.  The behaviorists, on the other hand, finds the individual to be hopelessly and self-destructively irrational, in need of protection from his own hard-wired behavior by government-mandated regulations and limits on freedom of action.

Both arguments feel like a wrong turn has been taken somewhere:  my son the aspiring economist calls them “theology.”  I think it’s important to see them clearly, to discern that neither is what, on the surface, they appear to be.

Are human beings rational?  Not by any meaning usually ascribed to this word.  I’m astonished anyone, at this late date, would seriously argue otherwise.

Rational-action economists, it turns out, identify rationality with the maximization of wealth.  That is not an observable fact, or even an agreed-upon description.  It’s a value judgment.  A moral choice.  People often wish to maximize family time, or spiritual experiences, or encounters with the opposite sex:  such economic decisions are rejected by these theorists for no reason other than they don’t fit the theory.

On the flip side of the debate, behaviorists rest their conclusions on experiments (expounded here) which ignore the influence of context, culture, and family on our actions.  That human behavior is driven by emotions rather than mathematical cost-benefit calculations appears indisputable.  Such irrationality, on the evidence, might well be an adaptation to a world of real-time decisions, in which getting it roughly right fast is far more practical than engaging in a Socratic dialogue to identify the perfect action.

But let’s grant the point.  Assume that subjectivity — our private cravings and loathings — fatally warps the individual’s economic judgment.  How do those individuals in government, who design and implement regulations, escape this tragic flaw?  Increasing government power over the economy would multiply and magnify the irrational effects observed by the behaviorists.

Of course, one could argue that some group or class — the educated elite, say — is in fact rational, and that members of this group should therefore be awarded regulatory power.  Yet even if such magnificent beings existed, it’s hard to see how a community of irrational individuals, fatally flawed in decision-making, can identify and empower the rational minority in its midst.  The Leninist “vanguard of the proletariat,” which tried the trick, once in power degenerated into a typically self-righteous and self-serving oligarchy.

Again, government intervention might be justified if irrational economic behavior was shown to be a brute fact in the world, like a slipped disk between vertebras or a malfuctioning valve in the heart.  But by heading down this path, the behaviorists wander into the same moralizing bog which swallowed their oponents whole.

They can claim, if they wish, that foreclosures are the consequence of predatory lending practices, or that credit card debt results from fraudulent manipulations by the credit card companies.  Others can reasonably reach different conclusions:  that the blame lies with irresponsible borrowing and spending, for example.  In either case, we are discussing value judgments, moral propositions — not indisputable facts.

We don’t know enough about cause and effect in complex systems to regulate the economy with predictable results.  Those, like the behaviorists, who insist on regulation, merely have visions about what ought to be.  Moral passion simplifies the intellectual landscape, and failure to achieve the ought — the beatific vision — justifies, to the theological mind, ever greater applications of the lash of government to the back of an unruly economy.

Here we approach the world described in Hayek’s Road to Serfdom.  There’s an infinite number of good things, which are possible to achieve yet left unfulfilled.  That is a source of discontent:  in the vision, all the good is realized.  Against the chaos and conflict of the marketplace, the interventionists demand the best of all possible worlds.  Government planners, however, soon discover that their aims are mutually exclusive:  they can get low costs or high wages, productivity or equality, freedom or obedience — but never both.

If choices are to be made, arbitrary power must be granted to one set of values to trump all others.  Everyone else must bend a knee or pay the price.  The moralistic attempt to achieve all the good in the world, if pursued without compromise, must lead to moral inquisitions and political despotism.

Human irrationality doesn’t justify government regulation.  Moral arrogance does.  Nor can a naive faith in our ability to work cost-benefit calculations somehow make the case for economic freedom.  This too is a form of arrogance, a blanket moral judgment used to conceal the way the world actually works.

Economic freedom springs from the humility of collective power in the face of individual decision-making, a fundamental principle of liberal democracy.  In his economic choices, the individual may appear irrational or even self-destructive, but he must be allowed, within broad margins, his own path to salvation.  It happens that, when individual aspirations are unleashed on the marketplace, great prosperity has resulted.  That is not an argument for freedom, just a side effect.

The justification of economic freedom rests entirely on moral grounds.  These grounds, however, lie at the antipodes of the rarefied debate between rational-action and behaviorist economists.  The morality of freedom rejects the top-down, categorical commandments of specialists, and celebrates the triumph of the ordinary person, who is a specialist only in the content of his own life.

The web of individual choices sometimes achieves the wisdom of crowds, and sometimes, in the words of the New Yorker, appears like a carnival of “debt, greed, hubris.”  We are imperfect creatures.  But this is true of everyone:  the President, congressmen, Warren Buffett, the guy who runs the corner wine and beer shop, the single mother on welfare, you, and me.  For this reason, the alternative to freedom isn’t rationality, but infantilism in the citizen and a tyrannical arrogance in the use of government power.



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