Wednesday, December 14, 2011

Open Societies and Spontaneous Orders by Richard M. Ebeling

[The following is a review of Popper, Hayek and the Open Society by Calvin Hayes (London/New York: Routledge, 2009) 284 pp. $150. It originally appeared in Freedom Daily (January 2012) published by The Future of Freedom Foundation in Fairfax, Virginia.]


Friedrich A. Hayek and Karl Popper were two of the most influential and internationally recognized critics of totalitarian collectivism in the twentieth century. Hayek's The Road to Serfdom (1944) and Popper's The Open Society and Its Enemies (1945) helped change the intellectual climate at a time when it was presumed that various forms of socialism soon would completely triumph over limited government, free markets, and individual freedom.


Both Hayek and Popper were Austrians by birth, almost the same age, and graduated with doctoral degrees from the University of Vienna in the 1920s. But they never knew each other, even in the relatively small and interconnected intellectual circles of interwar Vienna.


Hayek left Austria in 1931 for a teaching position at the London School of Economics, and only heard about Popper when his fellow Austrian economist, Gottfried Haberler, suggested in 1935 that he read Popper’s recently published book, The Logic of Scientific Discovery. With the darkening clouds of Nazism over Central Europe, Popper left Austria in 1937 for a teaching position in New Zealand. After corresponding during the Second World War, Hayek helped arrange a teaching position for Popper at the London School of Economics, as well.


In The Road to Serfdom, Hayek tried to show how the rise of socialist ideas in late nineteenth and early twentieth centuries Germany had prepared the political and economic foundations for the Nazi rise to power in the 1930s; and how similar socialist trends in Great Britain and the United States might, likewise, threaten those countries with political and economic tyranny.


Popper’s Open Society and Its Enemies traced the origins of collectivist despotism to its ancient philosophical roots in the writings of Plato, who Popper considered to be the intellectual father of both communism and fascism. He also argued that Marx’s materialistic determinism closed the door to any political system of freedom.


Calvin Hayes’ recent book, Popper, Hayek and the Open Society analyzes what he sees as the strengths and weaknesses of their respective defenses of human freedom. Popper and Hayek, each in his own way, made a case for liberty on the basis of the limits of man’s knowledge.



Karl Popper and the Fallibility of Human Knowledge

In the immediate aftermath of the First World War, Hayes explains, Popper became disillusioned with his earlier attraction to Marxism. What bothered him was the fact that no matter what happened, the cleaver Marxist theoretician always seemed to be able to show that it “confirmed” and “proved” Marx ‘s predictions of the coming collapse of capitalism to be correct.


He also was bothered by some of the, then, current trends in the philosophy of science that argued that the truth of a hypothesis was corroborated by the method of verification. That is, the more times a hypothesis passes the rigor of scientific testing, the more we can be confident that it is correct.


In The Logic of Scientific Discovery (1934) and Conjectures and Refutations (1963) Popper reasoned that no matter how many white swans one may search for and see, this in itself does not prove the hypothesis that all swans are white. The discovery of one black swan would prove the hypothesis to be wrong. Hence, the proper scientific method should be based on the construction of conjectures that are open to refutation and falsification.This, he said, should be considered the benchmark of intellectual integrity and honesty.


Such a view, by necessity, must result in us accepting the fact that all of our knowledge and beliefs are tentative and, in principle, open to being proven wrong or less than fully correct at some point in the future. Indeed, in his essays on The Poverty of Historicism, Popper had argued that predicting the future was logically impossible.


If we make one reasonable assumption, that human knowledge grows over time, then there is no way for any human being to successfully predict the future, since that would require him to know "today" that which he will only learn, discover, and know "tomorrow." You cannot already have "tomorrow's" knowledge "today," (otherwise it would already be part of "today's" knowledge). Hence, you cannot fully know what you or others may do that ends up shaping the future, because that will partly depend upon knowledge that is only acquired over the process of time.


The “open society,” Popper reasoned, must be one that allows for error, reconsideration, and a multitude of minds at work in the pursuit of always potentially fallible knowledge. The collectivist social engineers, Popper insisted, suffered from an arrogance of presuming to know the truth required to reconstruct society “according to plan,” with little thought that their conceptions of a “good,” or “just,” or “perfect” society might be flawed or incorrect.


Friedrich Hayek and the Decentralized Knowledge of Society

Hayek’s focus in essays collected in Individualism and Economic Order (1948) and The Counter-Counter Revolution of Science (1955), and in his two master political works, The Constitution of Liberty (1960) and Law, Legislation, and Liberty, 3 vols. (1976-1979), was the fact that matching society’s division of labor is an inescapable division of knowledge. Hayes summarizes Hayek’s argument that human knowledge is multi-layered, often difficult to measure or fully articulate, and dispersed among the members of humanity in a way that cannot be collected, integrated or coordinated even by “the best and the brightest” of human minds.


Hayek concluded the only successful manner in which all this knowledge can be brought to bear so all in society might benefit and take advantage of all that other human beings know and can effectively apply in productive ways is to coordinate their actions through the competitive price system of an open, and functioning market economy. This, Hayek insisted, is why socialist central planning is inherently unworkable.


The Role of Tradition in Science and Society

Hayes also emphasizes that both Popper and Hayek considered that it is impossible to understand or analyze either natural or social phenomena without taking some aspects of the existing order as “given.” These serve as the starting points for studying nature or society. Thus, both of them argued that science and the study of society could not do without some sense of intellectual and cultural “tradition.” In the study of nature, this is the “taken-for-granted” theories and hypotheses of science that form the starting points for critical investigations, including any new conjectures and attempted refutations challenging parts of the existing body of scientific knowledge.


Societal traditions Hayek argued, represent the cumulative experience and wisdom of countless generations, out of which have evolved the “rules” and patterns of human association. They incorporate more knowledge than any one man or one generation could ever know or understand. They form the basis of the foundational elements of the “spontaneous order” of society, in the context of which each new generation lives, acts, thinks and innovatively changes things in incremental ways that transform those human institutions, but often in a manner that only will be appreciated or fully understood long after those changes have been at work.


The Limits of Human Knowledge and the Case for Freedom

A central element to Calvin Hayes’ analysis of Popper and Hayek is to ask how a “positive” case can be made for limits on government control, intervention, or redistribution on what are primarily “negative” arguments about the limits of human knowledge, in the way that both Popper and Hayek basically presented their defenses of freedom.


Hayes suggests that if it can be shown that these limits on human knowledge and knowing are inescapable to the human condition, then it might be justifiable to reason from an “is” to an “ought.” If, as Popper insisted, it is a fact that man cannot be certain of what he may learn tomorrow that might falsify what he believes today, then it would be wrong to replace an “open society” with a “closed” one that imposed a single totalitarian plan on society, under the presumption that some can know enough today to centrally direct everyone’s lives into the future.


And if, as Hayek strongly argued, society is a “spontaneous order” that no one with their inescapably limited, individual knowledge, can ever fully understand or successfully redesign without leaving out much of the knowledge possessed by others that the planner can never hope to know or appreciate, then it would wrong to impose economic central plans or try to redistribute wealth according to some presumed God-like wisdom and knowledge of what would be “fair” in terms of some standard of each receiving their “just rewards” from a paternalistic government.


Thus, Hayes concludes, “negative” insights into the inherent limits of man and his mind, may provide a “positive” case for political and constitutional restrictions on the powers, duties and responsibilities of governments. And it may show, even more strongly, how insightful and important Popper and Hayek have been in the modern battle of ideas over freedom versus force in society.

Wednesday, December 7, 2011

Game Theory and the Dark Side of Envy by Richard M. Ebeling

[The following is a review of Robert Leonard, Von Neumann, Morgenstern and the Creation of Game Theory (New York: Cambridge University Press, 2010) 469 pp. $55. It originally appeared in Freedom Daily (October 2011), published by The Future of Freedom Foundation in Fairfax, Virginia.]


Economist Oskar Morgenstern is best known as the co-developer, with mathematician John von Neumann, of game theory. Game theory emerged out of curiosities about the logic and strategies of games such as chess, where each player must take into consideration the plans and possible moves of an opponent if he is to have any success in winning the game. It culminated in the 1944 publication of Morgenstern and von Neumann’s book, The Theory of Games and Economic Behavior.


It has been applied to the planning of military strategy, as well as for attempting to design or anticipate competitive moves by rivals in the marketplace. Its most famous construction is what is called “the prisoner’s dilemma,” in which two suspected criminals are offered, separately, a lower sentence if one of them confesses and “rats out” the other first. Neither could be convicted if both of them kept their mouth shut, but since neither one can be sure that the other won’t take the deal, they both end up confessing.


It has also been used to explain the logic of cooperative behavior in the marketplace of exchange. In his 1984 book, The Evolution of Cooperation, for example, Robert Axelrod, explained that when people participate in or anticipate multiple trading opportunities with others, there emerge incentives to neither cheat nor deceive. Game theory experiments showed that most people implicitly operate in terms of a psychology of “tit-for tat.” That is, each trader will be honest and reliable in his dealings as long as his trading partner acts the same way. If “Sam” cheats or is in any way dishonest, then “Bob” will “retaliate” in kind. But if “Sam” learns his lesson and starts acting honestly again, then “Bob” will reciprocate, and mutually beneficial and honest trade will be restored.


The logic is that when individuals realize that there are long-run gains from “repeat business” with the same trading partners, it becomes costly to try to obtain short-run gains by acting dishonestly against them. Thus, in the long run, market interactions reinforce and teach the value of honest behavior and good manners.


Robert Leonard’s book, Von Neumann, Morgenstern and the Creation of Game Theory, is an outstanding example of scholarship, matched by an easy flowing writing style that explains often difficult and complex mathematical and logical problems that led up to the development of game theory. It is told in terms of the separate biographies of Von Neumann and Morgenstern who, in fact, had virtually no contact with each other until they were both at Princeton University starting in the late 1930s.


But what I would like to focus on in the remainder of this review is the evolution of Oskar Morgenstern’s ideas in this process, because what is less well known is that Morgenstern was a prominent member of the Austrian School of Economics before the Second World War.


His first book was on Economic Forecasting (1928), which unfortunately has never been translated into English. He presented a biting and insightful analysis as to why quantitative models would never be able to successfully predict the economic future. His three fundamental arguments were (1) that historical events are too unique and interdependently complex to be reducible to statistical probability analysis; (2) any public forecast easily will result in people taking the forecast into consideration, and therefore acting in ways different than what the forecast presumed; and (3) how individuals act is dependent on their expectations of how they expect others to act, and understanding and interpreting people’s subjective meanings and intentions is not readily reducible to strictly quantitative categories and classifications for statistical study.


Leonard traces out the development of Morgenstern’s thinking in the 1920s and 1930a under the influence of Austrian Economists such as Ludwig von Mises and Hans Mayer, and his friendship with Karl Menger, Jr., the son of the founder of the Austrian School.


But what he also brings out is how Morgenstern increasingly turned against his “Austrian” roots, ridiculing in print Mises’s views on economic theory and policy, and telling his various economist friends that he considered F. A. Hayek’s work on money and business cycles to be “worthless” – some of the very contributions that resulted in Hayek being awarded the Nobel Prize in Economics in 1974!


Even worse, after 1934, with Hayek now a professor at the London School of Economics, and Mises teaching in Geneva, Switzerland, Morgenstern attempted to portray himself as the “leader” of the Austrian School in an Austria that was now a fascist-type authoritarian dictatorship. He worked as a senior advisor to the Austrian government, often offering policy advice far removed from a free market perspective. And in his 1934 book, The Limits of Economic Policy, he expressed impatience with democratic government compared to an authoritarian system. (When the book appeared in English in 1937, he deleted its anti-democratic passages.)


In addition, Leonard points out that Morgenstern’s diary from this period is sprinkled with often heavily anti-Semitic sentiments, in spite of the fact that many of the members of the Austrian School at this time were Jewish (including Mises), and who had been among those encouraging and supportive of his own work and professional advancement.


Finally, while during his life-time Morgenstern was hailed as the co-developer of game theory, Leonard makes it clear that in fact virtually all of its theoretical formulations and strategy constructs in their 1944 book was the work of von Neumann (also of Jewish ancestry). Morgenstern’s contribution was mostly a couple of chapters showing the possible applications of game theory to economics. Leonard quotes Morgenstern’s diary that he often could barely keep up with von Neumann’s mathematical expositions.


I had the privilege of having Oskar Morgenstern as a professor at New York University just before his death in 1977. He was an excellent lecturer, and very generous with his time to share his ideas and memories of the “old Vienna days,” with someone interested in the history of the Austrian School.


This is what made Leonard’s book so much of a shock. It shows an unflattering, dark side of a fascinating man. A man who, at least during that earlier period between the two World Wars, too frequently demonstrated envy, arrogance, and prejudice against some of the very people who helped make his own professional success possible.

Wednesday, September 28, 2011

Government Controlled Money or Choice in Currency? by Richard M. Ebeling

(This talk was delivered at the Utah Monetary Summit on the campus of the University of Utah in Salt Lake City on September 26, 2011, which was organized by the American Principles Project headquartered in Washington, D.C. The summit was devoted to discussing the significance of the Utah Legal Tender Act of March 2011, giving citizens of the state the legal right to use U.S. gold and silver coins in market transactions in place of Federal Reserve Notes.)


For more than two hundred years, practically all of even the most free market advocates have assumed that money and banking were different from other types of goods and markets. From Adam Smith to Milton Friedman, the presumption has been competitive markets and free consumer choice are far better than government control and planning – except in the realm of money and financial intermediation.


This belief has been taken to the extreme over the last one hundred years, during which governments have claimed virtually absolute and unlimited authority over national monetary systems through the institution of paper money.


At least before the First World War the general consensus among economists, many political leaders, and the vast majority of the citizenry was that governments could not be completely trusted with management of the monetary system. Abuse of the monetary printing press would always be too tempting for demagogues, special interest groups, and shortsighted politicians looking for easy ways to fund their way to power, privilege, and political advantage.


The Gold Standard and the Monetary “Rules of the Game”

Thus, before 1914 the national currencies of practically all the major countries of what used to be called the “civilized world” were anchored to market-based commodities, either gold or silver. This was meant to place money outside the immediate and arbitrary manipulation of governments. Any increase in gold or silver money required private individuals to find it profitable to prospect for it in various parts of the world; mine it out of the ground and transport it to where it might be refined into usable forms; and then mint part of any new supplies into coins and bullion, with the rest made into various commercial and industrial products demanded on the market.


The paper currencies controlled by governments and their central banks were supposed to be issued only as claims to – as money substitutes for – quantities of the real gold or silver money deposited by members of the society in banks for safekeeping and the convenience of everyday business in the marketplace.


Government central banks were meant to see that the society’s medium of exchange was properly assayed and minted, and to monitor and police private banks and itself to make sure that the “rules” of the gold (or silver) standard were properly followed.


Bank notes were to be issued or deposit accounts increased in the banking system as a whole only when there had been net additions to the quantity of the commodity money within the economy. Any withdrawals of the commodity money from the banking system was to be matched by a decrease in the total quantity of bank notes in circulation and in deposit accounts payable in money.


Did government’s always play by these “rules”? Unfortunately, the answer is, “No.” But, by and large, in the half-century or so before the beginning of the First World War, governments and their central banks managed their national currencies with surprising restraint.


If we look for a reason for this restraint, a leading one was that for a good part of this earlier era the predominant set of ideas was that of political and economic liberalism. But we need to remember that at that time “liberalism” meant an advocacy and defense of individual liberty, secure private property rights, free markets, free trade, and limited government constitutional under impartial rule of law.


But, nonetheless, these national currencies were government-managed paper monies linked to gold or silver by history and tradition, and more or less left fairly free of direct and abusive political manipulation, due to the prevailing political philosophy of the time that considered governments as protectors of individuals’ rights to their lives, liberty and honestly acquired property.


Political Paternalism and Monetary Central Planning

However, in the decades leading up to the First World War the political trends began to change. New ideals and ideologies started to appear and gained increasing hold over people’s minds. The core conception was a growing belief in the necessity for and the good that could come from political paternalism. Government’s were not simply to be impartial “umpires” who enforced the rule of law and protected people and their property from violence and fraud. No, government was to intervene into the social and economic affairs of men, to regulate markets, redistribute wealth, and pursue visions of national greatness and collective welfare.


This meant a change in the political philosophy behind the government’s control of the monetary system, as well. In the decades after the First World War, in the 1920s, 1930s, and 1940s, the government monetary managers increasingly became monetary central planners. The central bankers were to manipulate the supply of money and credit in the economy to achieve various goals: stabilize the price level; maintain full employment; peg or change foreign exchange rates; lower or raise interest rates to influence the amount and the types of investments undertaken by private borrowers and investors; and, whenever and however necessary, increase the quantity of money to fund government deficits needed by politicians and interest groups to feed their insatiable appetite for power, privilege and political plunder.


The triumph of Keynesian Economics in the post-World War II period resulted in a near monopoly of academic and public policy advocates who argued that private enterprise was inherently unstable and frequently unfair, and could only be allowed to exist and function in a wider environment of dominating government control. The consequence was a government constantly increasing in size, scope, and pervasive supervision and intrusion into every corner of personal, social, and economic life.


Big Government, Big Spending and the Monetary Printing Press

But big governments cost big sums of money. About a hundred years ago in America, in 1913, all levels of government combined – Federal, state, and local – absorbed only around seven percent of the nation’s income and output. Today, all level of government seize nearly fifty percent of all that is earned and produced in the United States. That cost of government is even more if we add the financial burdens imposed on private enterprise to comply with the strangling spider’s web of regulations and controls imposed on businessmen going about their business.


Just in the last two and half years under the Obama Administration, the Federal government has accumulated nearly three trillion dollars in additional debt. About at the same time, during the last three years, the Federal Reserve – America’s central bank – had created at least two trillion dollars of new money. In other words, the Federal Reserve has, in fact, already produced out of thin air a sum of new money equal to two out of every three dollars the Federal government has borrowed during this period.


The economics textbooks usually sanitize this type of process with a sterile terminology that calls it, “monetizing the debt.” An earlier generation of economists and critics of political paternalism used to call this process paper money inflation and debauchery of the currency: the diluting of the value of the money in people’s pockets through monetary depreciation and currency devaluation.


Political Demagogy, Fiscal Burdens and the Danger of Inflation

As a result of the growth of the modern welfare state, America and the other major Western countries of the world have become, in the words of Nobel Prize-winning economist, James Buchanan, perpetual democracies in deficit, funded in total or in good part by, now, trillions of dollars created by government monetary monopolies – the central banks.


Today, we are reaping the whirlwind of decades of political paternalism and monetary central planning. Nations like Greece are at the edge of financial bankruptcy and debt default. And countries like the United States, which are woven tightly with networks of special interest groups living off the redistributed plunder of other more productive members of society, seem to lurch from one fiscal crisis to another, apparently on a monthly basis now. The current politics of redistributive paternalism seems to offer little way to stop the worsening avalanche of massive annual deficits and mounting national debt.


The demagogues and political tricksters harangue about “soaking the rich” to fund the unfunded “entitlements” of social security and Medicare through the rest of the 21st century. They demand that “big business” pay for the government “jobs to nowhere” that is promised to end the unemployment that earlier and current misguided economic policies have created and prolong.


The politicians of plunder have also taken recourse to that last refuge of every political scoundrel: a call to “patriotism.” It is your duty as a “good citizen” to pay an increasingly higher and higher “fair share” in taxes; to cooperatively be subservient and obedient to the demands and needs of government; and to sacrifice your freedom and the fruits of your own hard-earned honest labor for “the national interest” and “the common good.”


It is worth remembering that those in the political arena who claim to know what is in “the national interest” and for “the common good” are the same ones who also assert the right to compel you to conform to their vision of a “just” and “fair” America, regardless of much you may honestly disagree or desire to peacefully go your own way.


A central tool for governments to maintain their authority in society and their control over people’s lives is the ability to make the citizenry accept and use their monopoly medium of exchange. This is a lynchpin in the government’s ability to transfer the people’s wealth and privately produced output to satisfy the “needs” of government spending.


It makes each and every citizen an existing and potential victim of government abuse of the monetary printing press, since paper currencies are no longer in anyway linked to or limited by a market-based supply of a real commodity such as gold or silver. We should not presume that runaway hyperinflations and the accompanying destruction of a society’s medium of exchange only occur in places like 1920s Germany or contemporary African nations like Zimbabwe. That, “it can’t happen here.” It can happen anywhere.


The Bankruptcy of the Welfare State and Redistributive Dependency

The fact is, the modern welfare state is bankrupt. It is bankrupt ideologically; no one really any longer believes that the Interventionist- Redistributive State will bring mankind material happiness or social harmony. Everyone knows that it is nothing more than a vast and corrupt political machine through which, as Frederic Bastiat said long ago, everyone tries to live at everyone else’s expense.


In the process, the productive capacity of the society slowly grinds to a halt, as more and more people turn from productive self-responsibility to redistributive dependency. It also generates a mental attitude and a political presumption of legitimacy to that redistributive dependence that pervades each and every income group and social category throughout the nation.


Most opinion polls show that a fairly sizable majority of the American people think that government is too big, spends too much, and taxes far too excessively. But once the questions turn to “specifics” of cutting particular government programs, it is soon seen how the tentacles of the welfare state reach into virtually everyone’s pocket.


It is not only that government taxes people in varying amounts to feed the redistributive process. It is also the case that there are few people in the land who do not have some type of money, program, or benefit put into their pockets by government. Most people cannot imagine living without their government redistributive “fix.” And, admittedly, breaking people’s addiction to their government benefits, subsidies, protections, and special favors would and will involve serious withdrawal pains.


This also means that the welfare state is rapidly reaching financial bankruptcy, as well. Neither taxation nor borrowing of private savings can or will be able to cover all the costs of current and future government spending under existing interventionist and redistributive legislation and regulation.


The government may very well, therefore, use its most important financial resource to keep moving the wheels of political spending. Those in political power may more and more turn the handle of the monetary printing press, and they may turn it faster and faster.


Hyperinflations and Opting Out of Government Monopoly Money

Time after time, history has demonstrated that when serious price inflations move into disastrous hyperinflations, people first discount and then abandon the government’s monopoly money. They shift into alternative currencies of choice that they consider more stable, more predictable, and more wealth and income preserving that the increasingly worthless pieces of paper money that their own government spews out in increasing quantities.


Now such a monetary disaster is not preordained. It is not written in some “big book” in the sky. Governments and societies have in the past pulled back and stopped short of following a path leading to social and economic ruin. America, too, may yet slow down or bring to a halt the political course it is currently traveling. The future is unpredictable and trends have changed many times in the past.


But . . . forewarned is forearmed. So how might any of us be able to shelter ourselves from the possible coming fiscal and monetary storm? Central to such precautionary actions is to hedge against the possible radical depreciation and or even destruction of the government’s currency.


To the extent that one sees such a danger and has the financial wherewithal to “plan ahead,” individuals should be legally allowed to opt-out of the government’s monopoly money. In other words, every American should be free from the government’s power to compel its citizens to use and accept in trade and in settlement of debts its own monopoly money.


Utah’s Lead on the Road to Choice in Currency

Everyone should be free to choose the currency or commodity they wish to hold and use as a medium of exchange without legal restriction, penalty, or political prejudice. This is what makes the Utah Legal Tender Act of March 2011 so profoundly important. By making the use of gold and silver coins issued by the United States government lawful money in market transactions and the settling of debt, the State of Utah has begun a process the logical conclusion of which should be monetary freedom for the people of the United States.


Why should only gold or silver coins issued by the U.S. government be considered as lawful money? Why not currencies and gold and silver coins issues by other governments that Americans chose to hold and use. And why not currencies and gold and silver coins issued by private banks and financial institutions that individuals choose to accept, hold, and use?


Monetary freedom would not only give every citizen a legal right to protect and secure his income, wealth and market transactions from abusive mismanagement of the government’s monopoly monetary printing press. It could also serve as a check on the degree of such government abuse.


More than thirty-five years ago, in September 1975, Austrian economist and Nobel Laureate, Friedrich A. Hayek, delivered a lecture on, Choice in Currency: A Way to Stop Inflation, in Lausanne, Switzerland, and said:


“There could be no more effective check against the abuse of money by the government than if people were free to refuse any money they distrusted and to prefer money in which they had confidence. Nor could there be a stronger inducement to governments to ensure the stability of their money than the knowledge that, so long as they kept the supply below the demand for it, that demand would tend to grow. Therefore, let us deprive governments (or their monetary authorities) of all power to protect their money against competition: if they can no longer conceal that their money is becoming bad, they will have to restrict the issue.


“Make it merely legal and people will be very quick indeed to refuse to use the national currency once it depreciates noticeably, and they will make their dealings in a currency they trust.


“The upshot would probably be that the currencies of those countries trusted to pursue a responsible monetary policy would tend to displace gradually those of a less reliable character. The reputation of financial righteousness would become a jealously guarded asset of all issuers of money, since they would know that even the slightest deviation from the path of honesty would reduce the demand for their product.”


Taking away from the government its power of compelling the citizenry to accept money that it monopolistically controls and abuses may serve as an important legal and economic change to force the government and those who live at its spending trough to face the reality of the welfare state’s ideological and fiscal bankruptcy before it is too late to avert a complete collapse of the society.


Choice in currency may be a valuable avenue for helping to restore the American tradition and practice of individual rights, free markets, and limited government under the rule of law. And it can be an important legacy for us to leave to our children and grandchildren, so they may, hopefully, live out their lives in liberty for the remainder of the twenty-first century.

Thursday, August 18, 2011

When Soviet Power Crumbled: The Failed Hard-Line Coup Attempt of August 1991 by Richard M. Ebeling

Twenty years ago, on August 22, 1991, I stood amid a vast cheering crowd of tens of thousands of people outside the Russian parliament building in Moscow, the capital of the Soviet Union. They were celebrating the failure by diehard Soviet leaders to undertake a political and military coup d’├ętat meant to maintain dictatorial communist rule in the Union of Soviet Socialist Republics.


Four days earlier, on August 19th, a band of hard-line Soviet political and military leaders had initiated the coup attempt against the leadership of Mikhail Gorbachev, the General Secretary of the Communist Party of the U.S.S.R, and Boris Yeltsin, president of the Russian Soviet Federated Socialist Republic, the largest of the constituent republics of the Soviet Union.


Fearful that the political and economic reforms that had been introduced by Gorbachev shortly after his ascendency to the top leadership position in the Soviet Communist Party in 1986 was now threatening to bring about the disintegration of the Soviet Union, the hard-line conspirators were determined to preserve intact what remained of Soviet power in their own country.


Gorbachev's Attempt to Save Socialism

Gorbachev believed that the Soviet Union had taken several serious wrong turns in the past. But he was not an opponent of socialism or its Marxist-Leninist foundations. He wanted a new “socialism-with-a-human-face.” His goal was a “kinder and gentler” communist ideology, so to speak. He truly believed that the Soviet Union could be saved, and with it a more humane collectivist alternative to Western capitalism.


To achieve this end, Gorbachev had introduced to two reform agendas: First, perestroika, a series of economic changes meant to admit the mistakes of heavy handed central planning. State enterprise managers were to be more accountable, small private businesses would be permitted and fostered, and Soviet companies would be allowed to form joint ventures with selected Western corporations. Flexibility and adaptability would create a new and better socialist economy.


Second, glasnost, political “openness” under which the political follies of the past would be admitted and the formerly “blank pages” of Soviet history – especially about the “crimes of Stalin” – would be filled in. Greater historical and political honesty, it was said, would revive the moribund Soviet ideology and renew the Soviet people’s enthusiastic support for the redesigned bright socialist future.


The more hard-line and “conservative” members of the Soviet leadership considered all such reforms as opening a Pandora’s Box of uncontrollable forces that would undermine the Soviet system. They had already seen this happen in the outer ring of the Soviet Empire in Eastern Europe.


The Beginning of the End in Eastern Europe

In 1989 Gorbachev had stood by as the Berlin Wall, the symbol of Soviet imperial power in the heart of Europe, had come tumbling down, and the Soviet “captive nations” of Eastern Europe – East Germany, Poland, Czechoslovakia, Hungary, Romania and Bulgaria – that Stalin had claimed as conquered booty at the end of the Second World War, began to free themselves from communist control and Soviet domination.


The Soviet hard-liners were now convinced that a new political treaty that Gorbachev was planning to sign with Russian president Yeltsin and Nursultan Nazarbayev, president of the Soviet republic of Kazakhstan, would mean the end of the Soviet Union, itself.


Already, the small Baltic republics of Estonia, Latvia, and Lithuania were reasserting the national independence they had lost in 1939-1940, as a result of Stalin’s and Hitler’s division of Eastern Europe. Violent, and murderous Soviet military crackdowns in Lithuania and in Latvia in January 1991 had failed to crush the budding democratic movements in those countries. Military methods had also been employed, to no avail, to keep in line the Soviet republics of Georgia and Azerbaijan.


Communist Conspirators for Soviet Power

On August 18th, the hard-line conspirators tried to persuade Gorbachev to reverse his planned political arrangements with the Russian Federation and Soviet Kazakhstan. When he refused he was held by force in a summer home he was vacationing at in the Crimea on the Black Sea.


Early on the morning of August 19th, the conspirators issued a declaration announcing their takeover of the Soviet government. A plan to capture and possibly kill Boris Yeltsin failed. Yeltsin eluded the kidnappers and made his way to the Russian parliament building from his home outside Moscow. Military units loyal to the conspirators ringed the city with tanks on every bridge leading into the city and along every main thoroughfare in the center of Moscow. Tank units had surrounded the Russian parliament, as well.


But Yeltsin soon was rallying the people of Moscow and the Russian population in general to defend Russia’s own emerging democracy. People all around the world saw Yeltsin stand atop an army tank outside the parliament building asking Muscovites to resist this attempt to return to the dark days of communist rule.


The Western media made much at the time of the apparent poor planning during the seventy-two hour coup attempt during August 19th to the 21st. The world press focused on and mocked the nervousness and confusion shown by some of the coup leaders during a press conference. The conspirators were ridiculed for their Keystone cop-like behavior in missing their chance to kidnap Yeltsin or delaying their seizure of the Russian parliament building; or leaving international telephone lines open and not even jamming foreign news broadcasts that were reporting the events as they happened to the entire Soviet Union.


The Dangers If the Hard-liners had Won

Regardless of the poor planning on the part of the coup leaders, however, the fact remains that if they had succeeded the consequences might have been catastrophic. I have a photocopy of the arrest warrant form that had been prepared for the Moscow region and signed by the Moscow military commander, Marshal Kalinin.


It gave the military and the KGB, the Soviet secret police, the authority to arrest anyone. It had a “fill-in-the-blank,” where the victim’s name would be written in. Almost 500,000 of these arrest warrant forms had been prepared. In other words, upwards of a half-million people might have been imprisoned in Moscow, alone. The day before the coup began, the KGB had received a consignment of 250,000 pairs of handcuffs. And the Russian press later reported that some of the prison camps in Siberia had been clandestinely reopened. If the coup had succeeded possibly as many as three to four million people in the Soviet Union would have been sent to the GULAG, the notorious Soviet labor camp system.


Another document published in the Russian press after the coup failed had the instructions for the military authorities in various regions around the country. They were to begin tighter surveillance of the people in the areas under their jurisdiction. They were to keep watch on the words and actions of everyone. Foreigners were to be even more carefully followed and watched. And their reports to the coup leaders in Moscow were to be filed every four hours. Indeed, when the coup was in progress, the KGB began to close down commercial joint ventures with Western companies in Moscow, accusing them of being “nests of spies,” and arrested some of the Russian participants in these enterprises.


Fear Underneath the Surrealism of Calm

During the coup attempt Moscow had a surrealistic quality. On the streets around the city it seemed as if nothing were happening – except for the clusters of Soviet tank units strategically positioned at central intersections and at the bridges crossing the Moscow River. Taxi cabs patrolled the avenues looking for passengers; the population seemed to go about its business walking to and from work, or waiting in long lines for the meager supplies of everyday essentials at the government retail stores; and motorists were as usual also lined up at the government owned gasoline stations. Even with the clearly marked foreign license plates on my rented car, I was never stopped as I drove around the center of Moscow.


The only signs that these were extraordinary days were the grimmer than usual looks on the faces of many; and that in the food stores many people would silently huddle around radios after completing their purchases. However, the appearance of near normality could not hide the fact that the future of the country was hanging in the balance.


Russians Run the Risk for Freedom

During the three days of that fateful week, Russians of various walks of life had to ask themselves what price they put on freedom. And thousands concluded that risking their lives to prevent a return to communist despotism was price they were willing to pay. Those thousands appeared at the Russian parliament in response to Boris Yeltsin’s appeal to the people. They built makeshift barricades, and prepared to offer themselves as unarmed human shields against Soviet tanks and troops, if they had attacked. My future wife, Anna, and I were among those friends of freedom who stood vigil during most of those three days facing the barrels of Soviet tanks.


Among those thousands, three groups were most noticeable in having chosen to fight for freedom: First, young people in their teens and twenties who had been living in a freer environment during the previous six years since Gorbachev had come to power, and who did not want to live under the terror and tyranny their parents had known in the past. Second, new Russian businessmen, who realized that without a free political order their emerging economic liberties would be crushed. And, third, veterans of the Soviet war in Afghanistan, who had been conscripted into the service of Soviet imperialism and were now determined to prevent its return.


The bankruptcy of the Soviet system was demonstrated not only by the courage of those thousands defending the Russian parliament, but also by the unwillingness of the Soviet military to obey the orders of the coup leaders. It is true that only a handful of military units actually went over immediately to Yeltsin’s side in Moscow. But hundreds of Russian babushkas – grandmothers – went up to the young soldiers and officers manning the Soviet tanks, and asked them, “Are you going to shoot their mother, your father, your grandmother? We are your own people.” The final act of the coup came when these military units refused to obey orders and seize the Russian parliament building, at the possible cost of hundreds or thousands of lives.


Freedom! Freedom! Freedom!

On that clear, warm Thursday of August 22th, that huge mass of humanity that had assembled in a large plaza behind the Russian parliament stood and listened as Boris Yeltsin told them that that area would now be known as the Square of Russian Freedom. The multitude replied in unison: Svaboda! Svaboda! Svaboda! – “Freedom! Freedom, Freedom!”


A huge flag of pre-communist Russia, with its colors of white, blue and red, draped the entire length of the parliament building. The crowd looked up and watched as the Soviet red flag, with its yellow hammer and sickle in the upper left corner, was lowered from the flagpole atop the parliament, and the Russian colors were raised for the first time in its place. And again the people chanted: “Freedom! Freedom! Freedom!”


Not too far away from the parliament building in Moscow, that same day, a large crowd had formed at Lubyanka Square at the headquarters of the KGB. With the help of a crane, these Muscovites pulled down a large statue of Felix Dzerzhinsky, the founder of the Soviet secret police that stood near the entrance to the KGB building. In a small park across from the KGB headquarters, in a corner of which rests a small monument to the victims of the Soviet prison and labor camps, an anti-communist rally was held. A young man in an old Czarist Russian military uniform burned a Soviet flag, while the crowd cheered him on.


The seventy-five-year nightmare of communist tyranny and terror was coming to an end. The people of Russia were hoping for freedom, and they were basking in the imagined joy of it.


Freedom’s Hope and Post-Communist Reality

The demise of the Communist Party and the Soviet system was one of the momentous events in modern history. That it came about with a relatively small amount of bloodshed during those seventy-two hours of the hard-line coup attempt was nothing short of miraculous – only a handful of people lost their lives.


The last twenty years have not turned out how many of the friends of freedom in Russia had hoped. Indeed, post-communist Russia saw a contradictory, poorly organized, and corrupted privatization of Soviet industry, plus a high and damaging inflation in 1992-1994; a severe financial crisis in 1998; a return to authoritarian political rule following Vladimir Putin’s rise to power in 1999; two bloody and destructive wars in the attempted breakaway region of Chechnya; wide spread and pervasive corruption at all levels of government; state controlled and manipulated markets, investment, and commerce; assassinations and imprisonments of political opponents of the regime; and significant nostalgia among too many in the country for “great power” status and the “firm hand” of the infamous Stalinist era.


Nonetheless, for those of us who were fortunate enough to be in Moscow in August 1991, it remains in our minds as an unforgettable historical moment when the first and longest-lived of the 20th century’s totalitarian states was brought to the doorstep of its end.

Tuesday, August 2, 2011

Debt Reduction Delusions and the Menace of Big Government by Richard M. Ebeling

In spite of the rhetoric in the media about a national debt crisis having been averted through a rise in the government’s debt limit on Tuesday, August 2nd, the fact is the United States remains very much in the midst of a fiscal disaster.


The Congress has approved and the president has signed a bill raising the debt limit by an additional $2.4 trillion over the next year and a half. In other words, at the end of 2012, the government’s debt will have reached a total of over $ 16.5 trillion from its current $14.3 trillion.


When a Spending Reduction Still Equals More Government Debt

The debt ceiling deal requires a matching $2.4 trillion to be cut from projected government spending over the next ten years. In other words, this is not an absolute cut in government spending, as if government would be spending less in the next year compared to the current year. Instead, the deficit reductions represent a decrease from the amount of increasing government spending that would have occurred if no reduction had been agreed to.


So instead of the government’s projected total debt over the next decade increasing by around $10 trillion, it will only go up by about $7 trillion. Ten years from now the U.S. government’s debt will reach a level, therefore, of nearly $22 trillion dollars, or almost 55 percent higher than it is today.


Understanding this more clearly has been confused by the emphasis given to the fact that the $2.4 trillion debt ceiling increase has been “matched” by that $2.4 trillion decrease in projected government spending. The impression has been easily created in people’s mind that these two amounts are in some way cancelling each other out.


The U.S. Treasury is being given the authority to borrow and spend an additional $2.4 trillion dollars over the next 18 months. But the $2.4 trillion spending reduction over ten years represents, on average, a “savings” of $240 billion a year. Another way of thinking about this is that the government now has the authority to spend, on average, an additional $133 billion per month of borrowed money over the next year and a half. “Matching” this, the government is supposed to spend $20 billion less every month over the next ten years.


So, assuming what has been agreed to by the Congress and the president is actually adhered to, it will take ten years of that mere decrease in the rate of increase in government spending to just equal the increase in the government’s debt between now and the end of 2012.


Clearly this entire process has been one of smoke and mirrors by both political parties. New Congressional fiscal committees to deal with the government’s debt; supposed “trigger mechanisms” to impose “automatic” across-the-board cuts in government spending if deficit reduction goals are not agreed to; and appeals for Washington’s swarm of spending frenzied politicians to act like responsible adults instead of immature children do not grapple with the fundamental problem facing America.


Taming the Fiscal Leviathan to Save America

The United States government is a fiscal leviathan with an insatiable appetite for the wealth and income of those working in the productive private sector. But the government is not a disembodied monster with a will of its own.


Government is made up of the individual politicians desiring election and reelection to political office; the bureaucrats manning the departments, bureaus and agencies wanting larger budgets to justify more promotions, higher salaries, and greater authority over other people’s lives; and special interest groups wanting to use the taxing, spending, and regulating powers of government to redistribute wealth in their direction, acquire more revenues and higher profits on the basis of political connections than they could earn in the competitive marketplace, and impose their ideological desires and dreams on others who would prefer to live their own lives.


It is this “iron triangle” of politicians, bureaucrats, and special interest groups, as free market economist, Milton Friedman, call them, that make up what government does and for whose benefit, and at a cost to those remaining in society who make up the net taxpayers and burden-bearers of the modern interventionist-welfare state.


The problem we face is that those who benefit from some form of government largess make up a slight majority of the citizenry, according to the latest estimates. It now seems to be the case that the costs of government are born by a minority of the taxpayers of the country. A minority of the working population labors to support and pay for government-supplied incomes, transfers or related benefits enjoyed by a privileged majority.


And what Washington’s “iron triangle” wants to spend that it cannot collect in taxes it has been paying for with borrowed dollars that will push the government's debt to $16.5 trillion by the end of next year – thanks to the Congressional and presidential “solution” to the debt ceiling crisis of August 2011.


The only real solution to our government’s debt dilemma is to challenge the rationales and justifications for the size and scope of Washington’s reach over the lives and the peaceful and productive market activities of the American people. We must work to persuade our fellow Americans not only that we can no longer afford the taxing, spending, and regulatory burdens of government without threatening the society’s productive capabilities, but also that it is inconsistent and opposite to the principles of liberty upon which the country was founded.


If we don’t succeed in this endeavor we run the risk of destroying the very political and economic foundations upon which America’s freedom and prosperity have been based.

Monday, July 25, 2011

The Debt Crisis and the Fiscal Leviathan State by Richard M. Ebeling

The current fiscal crisis that fills the pages of the newspapers and the news shows on television has all been revolving around the issue of raising the government debt limit.


In fact, the present Congressional-approved debt limit of around $14.3 trillion dollars was passed through in June of this year. The U.S. Treasury Department has been merely juggling the books to shift funds and keep spending money. The government has been using tax revenues that it is legally obligated to set aside for federal employee retirement accounts – and which it is supposed to be “put back” at some point when the government formally has the authority to borrow more and get further into debt. It is the type of thing that if done by a private employer to cover his current business expenses would be labeled misappropriation of funds.


Huge numbers are bandied about in the media and among the politicians concerning how much will be cut from future spending as part of a deal to raise the debt limit. Trillions of dollars are to be eliminated from the government’s budgets in the years to come. Of course, most of those spending reductions are to occur later rather than sooner, with little or no specification of exactly what programs would be cut or precisely when.


Furthermore, when both the Democrats and the Republicans propose anywhere from $1.5 trillion to $9 trillion in less spending in future years and decades they never specify what “baseline” is being used to estimate the spending reductions. What really is being proposed in virtually all these alternative plans is a projected decrease in the rate of increase in total government spending. That is, hardly anyone is suggesting that the “slice” of the national economic pie consumed by government through taxing, spending and borrowing actually should be reduced.


“Entitlements” Mean Plunder

Both Democrats and Republicans take it from granted that “Big Government” is here to stay. Even most of those Republicans who emphasize the need for “reforms” in the “entitlement” programs such as Social Security or Medicare do not challenge the idea that these programs are permanently part of the American political landscape. They merely wish to make them more “financially sound,” or “cost efficient,” or managed in ways that would give those eligible for these programs some “choice” in managing their Social Security accounts or in selecting among doctors and medical treatment.


This is, perhaps, most easily appreciated by the fact that scarcely anyone in the Washington political arena challenges the idea and the use of the word “entitlement.” The Merriam-Webster dictionary defines entitlement as “the state or condition of being entitled.” A “right to benefits specified by law or contract” as in “a government program providing benefits to members of a specified group.” It is based upon the idea, the dictionary tells us, of “a belief that one is deserving of or entitled to certain privileges.”


According to the Merriam-Webster dictionary definition, therefore, in the political arena an “entitlement” is a program of benefits that the government provides to a privileged group, a group that comes to believe that it deserves those benefits, and even comes to consider such benefits as their “right.”


The government, however, cannot provide benefits to any privileged group in the society that does not reciprocally obligate others to supply the required resources, goods, or financial means to cover what has been promised. Since government has no supply of resources, goods or sums of money that it does not first tax or borrow from others, any such entitlement compels some other people in society to provide the means necessary for the government to meet its promises to the privileged groups.


That is, one group’s privilege entails a compulsory obligation on others that is imposed and enforced through the government’s police power to tax and garnish the income and wealth of any and all members of society. Thus, society becomes divided into two groups: taxpayers and tax receivers; the unprivileged and the privileged; those who are forced to give up a portion of the production, income and wealth they have honestly earned in the peaceful transactions of the market place and those who have that production, income and wealth transferred to them through the power of the state.


This is, of course, what the famous 19th century French free market economist, Frederic Bastiat, referred to as legalized plunder. The government, instead of acting as a protector and guardian of each individual’s right to his life, liberty and honestly acquired property, becomes the most powerful and intrusive violator of people’s liberty.


The government’s concentrated, monopoly power over the use of physical force is far greater and far more dangerous than even the worst of any private individual or private group that attempts to plunder and abuse innocent individuals in society. But equally important, government is the only user of force in society that widely succeeds in indoctrinating and persuading the large majority of the people under its jurisdictional control that it is “just” and “right” that it plunder one part of the population for the privileged benefit of another portion of society.


Political Rule vs. Individual Self-Rule

In earlier times, governments acquired legitimacy and acquiesce of its subjects by insisting on the divine right of kings. It took many centuries to overthrow the belief that monarchs ruled, regulated, and taxed because of an ordination from God. With the end or weakening of monarchy in the 18th and 19th centuries, a new ruler was ordained with a nearly equally divine political authority to demand obedience from the citizenry – the divine right of “the people.”


Democracy replaced monarchy as the legitimized basis of political power. If “the people” ruled by their own democratic vote, how could they ever tyrannize and plunder themselves? How can a man abuse himself, when his actions are dictated by his own will?


In the United States, the idea of “self rule” originally had a different meaning. It did not primarily or exclusively mean political self-rule through a voting process. It meant the right of each individual to have the freedom to rule over himself. When the American Declaration of Independence spoke of “unalienable rights” possessed by the individual to his life, liberty and pursuit of happiness, the Founding Fathers were saying that each man owns himself, and had the right to live his life as he chooses, as long as he peacefully goes about his chosen business, and respects the equal rights of others to do the same.


The role of government in this uniquely American conception of individual rights and personal self-rule was that of protector and securer of each person’s liberty. The political authority was to be a servant of each sovereign individual, who chooses his own goals and purposes in life and who pursues them with his own mental and physical energies. When he needs the assistance and association of others to attain some of his purposes the method is freedom of choice and voluntary exchange.


Socialism and the Anti-Capitalist Mentality

How, then, did America move away from the idea of sovereign and self-ruling individuals with government limited to a small though essential number of rights-protecting functions, to the notion of the government as itself the sovereign in the name of “the people,” with the individual reduced to the servant who is required and expected to pay any tax and bear any regulation in the name of a “common good” or “national interest,” or “general welfare”?


In a word, the answer is socialism. This year marks the 20th anniversary of the end of the Soviet Union. After the reality of almost 75 years of socialism-in-practice in the Soviet Union and elsewhere around the world, very few people any longer believe in and yearn for dictatorial rule by a Communist Party claiming to know the “inescapable” laws of history; few want to live under a system of comprehensive and all-encompassing socialist central planning. Experience has persuaded enough people around the world that such a system leads to nothing but brutal tyranny, along with economic stagnation and poverty.


While the ideal of Soviet-style socialism and central planning has been rejected and has few explicit adherents nowadays, what does continue to endure and influence general attitudes about political power, economic policy and the role of government in society, both in the United States and around the world, is the socialist critique of capitalism and the free market society.


The rationale for the vast network of government welfare programs as well as regulation and control over private enterprise is based on the socialist analysis of the market economy. When private enterprise is left free, the socialists claimed, the selfish profit motive guides businessmen to act in ways that harm the common good or general welfare. Workers searching for employment will be exploited and abused by greedy employers unless government protects them with workplace rules and regulations, including the establishment of a “fair” wage.


The state must take on the role of paternalistic provider of health care, old age pensions, unemployment insurance, public housing, education, and a wide variety of other social services. Why? First, under unrestrained capitalism workers will not earn enough to provide these necessities for themselves. Second, private enterprises driven by mere self-interest will inevitably fail to supply these goods and services in sufficient quantity and quality.


Individuals, in other words, cannot be trusted to rule over their own lives, to make their own choices, and to interact freely with their fellow men in a society of liberty. Collective control, under the cover of the democratic process, needs to restrain and restrict the individual’s sovereignty in the arena of his own affairs.


In the name of protecting people from such unrestrained capitalism, governments everywhere, including n the United States, have created ever-expanding bureaucracies that regulate nearly every aspect of our lives. As a consequence, our world today is in the grip of a continuing ideology of anti-capitalism. State bureaucracies ruling through anti-market policies have grown into ideological and political elites who arrogantly presume to know and dictate how we should all live and work. Those holding political power may be compared to the nobility of old, before whom the commoners had to grovel so they might live and prosper.


Capitalism as the Liberator of Man

Are these accusations against capitalism and the free society justified? Absolutely not. Indeed, never has an historical record been more twisted and distorted that this socialist critique of the free market society.


Beginning in the 18th century and throughout the 19th century, capitalism and the political philosophy of classical liberalism that accompanied it insisted on the freedom and dignity of the individual. The classical liberals campaigned against and brought about an end to human slavery, first in Europe and then around the rest of the world. These free market liberals called for ending the rule of kings and princes or at least restraining their powers through constitutional government and peaceful elections. It called for impartial rule of law, and the end to torture and other cruel punishments.


The classical liberal and free market agenda included the abolition of all privileges, favors, and subsidies that benefited the aristocracy, as well as the end to all monopolies created by government regulation and protection. It called for free enterprise, freedom of trade and occupation, and freedom of movement. In other words, classical liberalism and capitalism have been an ideology for the liberation of man from political oppression and economic poverty. It has been the foundation for human freedom and material prosperity in the modern world. It has served as the foundation of the American Republic.


Capitalism in the 19th century did not doom the worker to a life of perpetual poverty. Instead, the expanding market economy kept creating new and better-paying employments as the decades went by. It produced the wealth and rising income that resulted in the emergence of a phenomenon completely new to human history: a self-supporting and educated middle class that grew more and more as the lower classes bettered their economic well-being.


Through private investment, capitalism kept raising the productivity of labor to new heights. Parents were able to earn enough so their offspring did not have to join the work force at an early age. This produced something unique in history: childhood, a time when the young could experience the innocence of play and the opportunity of schooling before entering the world of work.


Classical liberalism and the market order fostered the private associations and charitable organizations that enabled the working poor to provide medical care, pensions, and education for their families. Famines disappeared; poverty was dramatically and continuously reduced; and hard and long hours of work were slowly but surely eased and shortened to a degree never before experienced. Capitalism has been the liberator of mankind. The great history and glorious achievements of that earlier free market capitalist epoch must be relearned once again in a society that knows little of the system that has provided the comfort and standard of living that too many of our fellow countrymen take for granted.


The Dangerous Growth of Government

For more than a hundred years, now, the anti-capitalist mentality has undermined the original American political philosophy of individual rights and economic liberty. In its place has grown a politics of paternalism and dependency. This has easily played into the hands of those who have desired political power under the umbrella of democracy, and by those who have desired and now believe that they have an entitlement – a “right” – to redistributive largess because they cannot imagine life without those government “safety nets” and who believe that a free market, limited government world would be cruel, uncaring, and inhumane to them and others.


In 1902, government spending in the United States as a percentage of Gross Domestic Product (GDP) was only slightly more than 7 percent. In 1930, before the massive growth in the size and reach of government during the Great Depression and Franklin Roosevelt’s New Deal, government spending as a percentage of GDP was only a bit more than 10 percent. In other words, just 75 years ago, 90 percent of the valued production of the U.S. economy was used and spent in the private sector.


Today, government in America spends over 40 percent of the country’s GDP, the private sector uses and consumes only 60 percent of the economy’s valued output. The government’s share over this 75-year period has increased four-fold, and the private sector’s use of its own produced and valued output has decreased by 30 percent over this period.


Federal government spending in 2010 was $3.4 trillion. In 1930, the Federal government spent $156.7 billion (in 2010 dollars). Thus, government spending today is 22 times more than it was 75 years ago. In 2010, Federal government tax revenues were $2.16 trillion. In 1930, the Federal government collected $176 billion in taxes (in 2010 dollars). Government taxes collected is 12 times larger today than in 1930.


What explains the difference in the growth in government spending versus the growth in taxes collected by the U.S. government: the Federal government’s deficit spending. In 1980, the accumulated Federal debt (in 2010 dollars) was around $3 trillion. In 2001, it had increased to around $7 trillion (in 2010 dollars). Today, Uncle Sam’s debt is over $14.4 trillion, more than double what it was ten years ago. In 1980, the government’s debt amounted to less than 30 percent of GDP; today, it is rapidly approaching 100 percent of U.S. gross domestic product.


America’s Unwritten Fiscal Constitution

Through most of the first 150 years of U.S. history, the federal government abided by what Nobel Economist, James Buchanan, called America’s “unwritten fiscal constitution.” There is nothing in the U.S. Constitution that requires the government to balance its budget. But during that first century and half the fiscal rule was that the government should limit its spending to the narrow functions spelled out in the Constitution, and should not burden current and future generations with a debt due to deficit expenditures in the past. If an emergency, such as war, were to make it necessary for the government to borrow to cover unexpected and immediate higher spending, that government should run budget surpluses when the emergency had passed to pay off that debt. It should then return to the balanced budget rule.


The free market economists of the 19th century understood that when any government expenditure must have a matching tax attached to it, the citizenry knows directly and in full what any proposed government program will and must cost. Any extravagant proposals for more and bigger government spending, carries with it, under a balanced budget, clear and explicit information for the citizens and the voters about what and whose taxes will have to be raised and by how much.


Voters may still support such an increase in government spending, but there is no way to hide from them what the cost will be in terms of less money and wealth in their pockets because taxes will have to be raised to cover the expenses of the expanded government largess. The unwritten fiscal constitution of a balanced budget rule served as an imperfect, but nonetheless effective constraint on growth in government for a good part of American history.


Keynesian Economics and Deficit Spending

The balanced budget rule was thrown to the wind beginning in the 1930s. A major influence in bringing this about was the Keynesian Revolution in economic theory and policy. Named after John Maynard Keynes who first formulated this new theory in his 1936 book, The General Theory of Employment, Interest, and Money, it was argued that a market economy is inherently unstable and susceptible to wide and prolonged fluctuations in employment and production. The remedy was for government to run budget deficits during times of recession or depression to boost spending and recovery in the economy, and run budget surpluses during boom times to dampen inflationary tendencies and pay off or reduce any accumulated debt.


Rather than balance the budget annually, the Keynesians said the budget should be balanced over the business cycle, with wise and far-sighted government policy makers using their theories to manage and manipulate government spending, taxing and borrowing to maintain full employment, economic stability, and long-term economic growth. There was a high degree of arrogance and pretense among these Keynesian economists that they had discovered and could successfully implement a “holy grail” of economic salvation against the uncertainties and vicissitudes of much of everyday economic life.


But while the Keynesians dreamed dreams of mastering and manipulating the market economy through the miracles of “activist” monetary and fiscal policy, ordinary politicians looking for ways to get elected and reelected, found in the Keynesian Revolution their own miracle.


Here was a way to offer their constituents something for nothing. In the name of “creating jobs,” fostering economic growth, and supporting a business cycle-free economy, they could offer seemingly unending spending with no need to attach a tax bill for what was being promised to voters.


More welfare redistribution; more public housing; bigger spending on public education; increased funds for the arts or scientific research for the lucky recipients of government grants; larger subsidies for selected groups of producers in the political candidate’s electoral district; expanded government bureaucracies to regulate and control various aspects of commercial and business life to benefit various special interest groups trying to manipulate the market more to their own advantage through government power.


The possibilities seemed endless, and all with a taxpayer price tag far smaller than the actual cost for all the wondrous spending that was offered to growing segments of the society. Indeed, those politicians could not have done it, if the constraint had not been lifted on government’s ability to borrow and spend.


Government deficit spending has opened a Pandora’s box of political pandering and plundering. Those who are promised government expenditures, programs, and various other benefits receive them in the present and over a period of time leading up to the next election that the politicians who have supplied these political goodies are hoping to win.


The Costs of Borrowed Money

The full cost of funding them only emerges over many years or decades, as the annual deficits add to the accumulating debt, with the resulting interest and periodic principle payments coming due. Currently, the United States government is borrowing around 40 cents of every dollar that it is spending. Taxpayers do not feel the direct and immediate impact of the deficits, since they are not being taxed enough to cover that 40 percent of those government’s expenditures.


It should be pointed out and not forgotten, however, that the citizenry does pay a price in the present for the deficits that the government is running. The government may not tax the full amount needed to cover its total outlays but to have the funds to cover the remainder of its expenditures it must borrow the difference. That deficit-funding gap recently has equaled a trillion dollars or more a year.


Every dollar borrowed by government, and the real resources that sum of money represents in buying power in the marketplace, are part of the society’s scarce means of production not available for private sector use. There is one dollar less of real resources available for private sector investment and capital formation, private sector technological research and development, or private sector expansion of output and job creation.


The costs of funding the deficits and the accumulated debt are costs not only on future taxpayers. They are costs on the current population who are that much poorer and who leave that much less wealth and productive capability to the next generation, because it has been taken out of the hands of private enterprise to instead cover the government’s present-day giveaways.


From Limited to Big Government

What enabled America’s earlier unwritten fiscal constitution to work in the 19th and early 20th centuries clearly was not because it was written in stone – because it was not. It was followed because it was generally considered to be the “right thing to do.” And it was considered the right thing to do, because it was part of a set of political and economic ideas based on the belief that governments were not supposed to give various special interest groups financial and regulatory favors and privileges at the expense of other members of society.


The practice of limited government meant limited government spending. There was no need to try to hide what government was costing, when what the government spent money on was, for the most part, the few enumerated functions assigned to the Federal government under the Constitution.


When the World Almanac was first published in 1869, all of the offices and activities of the Federal government literally fit on one page; and half of that single page was filled with the names of U.S. ambassadors to foreign countries. Today, if you pick up a copy of the World Almanac, you will find that the offices, bureaus, departments, and agencies of the Federal government take up several pages with hundreds of entries in very small print.


Big Government has brought with it a big and growing debt because the entitlement society, the redistributive society, the political plundering society has no limit once government is viewed as paternalistic provider rather than an essential but more modest protector of each individual’s life, liberty and property.


No deals in Washington, D.C. among the political culprits, whose interactions with special interest groups have created and maintain the Fiscal Leviathan State, will solve America’s debt and deficits problem. What we need is a change in the ideas and beliefs among many of our fellow citizens. As long as too many of our fellow Americans believe they are “entitled” to the income, wealth and productions of others, and as long as so many of our fellow Americans accept either through ignorance or guilt that they have an obligation to be taxed, regulated and plundered to fulfill those entitlements little change can or will happen to radically shift the direction we are moving in.


Making the Moral Case for Liberty

Another way of saying this is that we must reawaken the moral case for liberty. The starting point for such a moral reawakening is the rejection of the collectivist conception of man and society. Collectivists of all types—socialists, communists, fascists, interventionists, and welfare statists—presume that the group, the tribe, the “nation,” or the social “class” takes precedence over the individual. He is to serve and if necessary sacrificed for the “common good” or “general welfare,” since the individual has neither existence nor “rights” separate from the collective to which he belongs.


Compare this with the unique and starkly different philosophy of man and society captured in the American Declaration of Independence: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are Life, Liberty, and the Pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.”


Rights precede government, and are not something given to man by any political authority. Each of us possesses rights that may not be taken away or undermined by those in political power. We all possess an inalienable right to our life, liberty, and property. We own ourselves, and by extension we have a property right to what our creative minds and efforts have peacefully produced. We may not be enslaved, sacrificed, or plundered by others, whether they are private individuals or organized governments.


The individual, not some mythical collective, is the center and starting point of society. The free market is the arena in which people form relationships for mutual benefit on the basis of voluntary exchange. The free man finds his own meaning for life, guided by the philosophy or faith of his choice. He refuses to coercively impose his will on others, just as others may not use force against him. He persuades others to live and act differently through reason and example, and not with the bullet or the bayonet. And no political authority can make claims against his life, liberty, and honestly acquired property, because the function of a limited government is to secure his freedom from predators and plunder.


This is the philosophy of individualism and capitalism that must be reawakened in our fellow men if we are to free our society from the stranglehold of Big Government and its ocean of debt. It requires a confident belief that we are right, that both reason and history have demonstrated the value and benevolent results of what Adam Smith once called “the system of natural liberty.”


The Importance of the Battle of Ideas

Such an appeal to a battle of political and economic ideas may seem unrealistic or irrelevant given the urgency of our political and fiscal problems. But the social political and economic crises of our time are the outcome of an earlier battle of ideas that the enemies of freedom and capitalism succeeded in winning to a great extent. They indicted the society of liberty; they distorted the reality of capitalism and its brilliant triumphs in freeing man from poverty; and they imbedded in the minds of many the conception of political entitlements that serve the power ends of political paternalists and which requires the plundering of the peaceful and productive members of society.


There is fiscal crisis – the Western world in reaching the limits of how far it can live on borrowed money, and based on unrealistic promises and immoral premises. Our society is living under a paternalistic and plundering political system that threatens to bring its productive potentials to a halt. And in the extreme, it could lead to a situation of capital consumption, under which the government’s taxing, spending, and borrowing policies take so much away from the private sector that it becomes impossible for private enterprises to maintain the productive capacity upon which our standard of living is dependent. Civilizations have regressed in the past. And it can happen again.


Whether the final phase of the fiscal crisis of the government’s redistributive and entitlement system is reached next year, or in two years, or in five years, the question then will be, what will follow the failure and collapse of the Fiscal Leviathan State? Our society will stand at a crossroads. And when that time comes it is essential that there are enough people who understand, can explain, and are willing to defend the ideas and ideals of individual rights, economic liberty, and the free market system. If not, the future may see a tragic return to a less civilized and much poorer past.