Wednesday, March 30, 2011

The Gold Standard and Monetary Freedom by Richard M. Ebeling

(This talk was delivered at a debate on whether “American Should Adopt the Gold Standard,” sponsored by the Atlas Economic Research Foundation and the Forum for Citizenship and Enterprise, held at Northwood University on March 29, 2011)

The severity of the current economic crisis has been serving as a catalyst for reconsideration of some fundamental questions about economic policy. This has included the size and role of government in society, the national debt burden and the unsustainability of various entitlement programs, and the relevancy of fiscal “stimulus” for economic recovery.

It has also thrown up into sharp relief some crucial flaws in the nature and workings of the prevailing monetary system. The central question, I would argue, is whether or not we should continue to leave monetary and banking policy in the discretionary hands of central banks and the monetary central planners who manage them.

Central Banking as Monetary Central Planning

And make no mistake about it. Central banking is monetary central planning. The United States and, indeed, virtually the entire world operate under a regime of monetary socialism. Historically, socialism has meant an economic system in which the government owned, managed, and planned the use of the factors of production.

Modern central banking is a system in which the government, either directly or through some appointed agency such as the Federal Reserve in the United States, has monopoly ownership and control of the medium of exchange. Through this control the government and its agency has predominant influence over the value, or purchasing power, of the monetary unit, and can significantly influence a variety of market relationships. These include the rates of interest as which borrowing and lending goes on in the banking and financial sectors of the economy, and therefore the patterns of savings and investment in the market.

If there is one lesson to be learned from the history of the last one hundred years – during which the world and the United States moved off the gold standard and onto a government-managed fiat, or paper, money system – is the fundamental disaster of placing control of the money supply in the hands of governments.

Government Abuse of Money and the Benefits of the Gold Standard

If is worth recalling that money did not originate in the laws or decrees of kings and princes. Money, as the most widely used and generally accepted medium of exchange emerged out of the market transactions of a growing number of buyers and sellers in an expanding arena of trade. Commodities such as gold and silver were selected over generations of market participants as the monies of free choice, due to their useful characteristics to better facilitate the exchange of goods in the market place.

And for almost all of recorded history, governments have attempted to gain control of the production and manipulation of money to serve their seemingly insatiable appetite to extract more and more of the wealth produced by the ordinary members of society. Ancient rulers would clip and debase the gold and silver coins of their subjects. More modern rulers – whether despotically self-appointed through force or democratically elected by voting majorities – have taken advantage of the monetary printing press to churn out paper money to fund their expenditures and redistributive largess in excess of the taxes they impose on the citizenry. Today the process has become even easier through the mere click of a “mouse” on a computer screen, which in the blink of an eye can create tens of billions of dollars out of thin air.

Thus, monetary debasement and the price inflation that normally accompanies it have served as a method for imposing a “hidden taxation” on the wealth of the citizenry. As John Maynard Keynes insightfully observed in 1919:

By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.

It is the corrosive, distortive, and destructive effects from monetary manipulation by governments that led virtually all of the leading economists of the nineteenth century to endorse the “anchoring” of the monetary system in a commodity such as gold, to prevent governments from using their powers over the creation of paper monies to cover their budgetary extravagance. John Stuart Mill’s words from the middle of the nineteenth century are worth recalling:

No doctrine in political economy rests on more obvious grounds than the mischief of a paper currency not maintained at the same value with a metallic, either by convertibility, or by some principle of limitation equivalent to it . . . All variations in the value of the circulating medium are mischievous; they disturb existing contracts and expectations, and the liability to such changes renders every pecuniary engagement of long date entirely precarious . . .

Great as this evil would be if it [the supply of money] depended on [the] accident [of gold production], it is still greater when placed at the arbitrary disposal of an individual or a body of individuals; who may have any kind or degree of interest to be served by an artificial fluctuation in fortunes; and who have at any rate a strong interest in issuing as much [inconvertible paper money] as possible, each issue being itself a source of profit. Not to add, that the issuers have, and in the case of government paper, always have, a direct interest in lowering the value of the currency because it is the medium in which their own debts are computed . . . Such power, in whomsoever vested, is an intolerable evil.

Under a gold standard, it is gold that is the actual money. Paper currency and various forms of checking and other deposit accounts that may be used in market transactions in exchange for goods and services are money substitutes, representing a fixed quantity of the gold-money on deposit with a banking or other financial institution that are redeemable on demand.

Any net increases in the quantity of currency and checking and related deposits are dependent upon increases in the quantity of gold that depositors with banking and financial institutions add to their individual accounts. And any withdrawal of gold from their accounts through redemption requires that the quantity of currency notes and checking and related accounts in circulation be reduced by the same amount. Under a gold standard, a central bank is relieved of all authority and power to arbitrarily “manage” the monetary order.

Many critics of the gold standard consider this a rigid and inflexible “rule” about how the monetary system and the quantity of money in the society is to be determined and constrained. Yet, the advocates of the gold standard have long argued that this relative inflexibility is essential to discipline governments within the confines of a “hard budget.”

Without the “escape hatch” of the monetary printing press, governments either must tax the citizenry or borrow a part of the savings of the private sector to cover its expenditures. Those proposing government spending must either justify it by explaining where the tax dollars will come from and upon whom the taxes will fall; or make the case for borrowing a part of the savings of the society to cover those expenditures – but at market rates of interest that tell the truth about what it will cost to attract lenders to lend that sum to the government rather than to private sector borrowers, and therefore, at the social cost of private sector investment and future growth that will have to be foregone.

In other words, it prevents the government from “monetizing the debt” to cover all or part of its budget deficits. The borrowed sums cannot be created out of thin air through central bank monetary expansion. The government, under a gold standard, can no longer create the illusion that something can be had for nothing.

As Austrian economist, Ludwig von Mises, expressed it:

Why have a monetary system based on gold? Because, as conditions are today and for the time that can be foreseen today, the gold standard alone makes the determination of money’s purchasing power independent of the ambitions and machinations of governments, of dictators, and political parties, and pressure groups. The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties, and prosperity for all) called “sound money.”

Milton Friedman’s “Second Thoughts” About the Benefits of Paper Money

It must be admitted that even some advocates of economic freedom and limited government have been advocates of paper money. The most notable one in the second half of the twentieth century was Milton Friedman. Over most of his professional career he argued that maintaining a gold standard was a waste of society’s resources. Why squander the men, material and machinery digging gold out of the ground to then simply store it away in the vaults of banks? It is better to use those scarce resources to produce more of the ordinary goods and services that can enhance the standard and quality of people’s lives. Control the potential arbitrary recklessness of central banks, Friedman proposed, by setting up a monetary “rule” that says: Increase the paper money supply by some small annual percent, with no discretion left in the hands of the monetary managers.

But it less well known is that in the years after Friedman won the Nobel Prize in Economics in 1976, he had second thoughts about this monetary prescription. In a 1986 article on, “The Resource Costs of Irredeemable Paper Money,” he argued that when looking over the monetary mismanagement and mischief caused by governments and central banks during the twentieth century, it was “crystal clear” that the costs of mining, minting and storing gold as the basis of a monetary system would have been far less than the disruptive and destabilizing costs imposed on society due to paper money inflations and the booms and busts of the business cycle brought about by central bank manipulations of money and interest rates.

In his 1985 presidential address before the Western Economic Association on “Economists and Public Policy,” he said that Public Choice theory had persuaded him that it would never be in the long-run self-interest of governments or central bankers to manage the monetary system according to some hypothetical “public interest.” Those in government or holding the levers of the monetary printing press will always be susceptible to the temptations and pressures of short-run political gains that monetary expansion can fund. He admitted that it had been a “waste of time” on his part to try to get governments and central banks to follow his idea for a monetary rule.

And in another article in 1986 (co-authored with Anna Schwartz) on, “Has Government Any Role in Money?” Friedman said that while he was not ready at that time to advocate a return to the gold standard, he did conclude that “that leaving monetary and banking arrangements to the market would have produced a more satisfactory outcome than was actually achieved through government involvement."

Monetary Mismanagement versus Markets and Gold

But it is not only the political dangers arising from government mismanagement of paper money that justifies the establishment of a gold standard. It is also and equally the fact that monetary central planning is unworkable as a means to maintain economy-wide stability, full employment, and growth.

Especially since the 1930s, many economists and policy makers influenced by Keynes and the Keynesian Revolution have believed markets are potentially unstable and susceptible to wide and prolonged fluctuations in employment and output that only can be prevented or reduced in severity through “activist” monetary and fiscal policy.

But in reality, the causation runs the in the opposite direction. It is central bank manipulations of money, credit and interest rates that have generated the instability and periodic swings in economy-wide production and employment.

The fact is financial institutions and interest rates have important work to do in the market economy. Banks and other financial intermediaries are supposed to serve as the “middlemen” who bring together those who wish to save portions of their earned income with others who desire to borrow and invest that savings in profit-oriented productive ways that generate capital formation, technological improvements, and cost-efficient production of new, better and more goods and services to satisfy consumer demands in the future.

Market-determined interest rates are meant to bring those savings and investment plans into coordination with each other, so the amount of invested capital and the time-shape of the investment horizons undertaken are consistent with the available real savings to support them to maintainable completion.

Monetary expansion by central banks creates the illusion that there is more actual investable savings in the economy than really exists. And the false interest rate signals generated in the banking system by the monetary expansion not only misinforms potential investment borrowers about the amount of real savings available for capital projects, but creates an incorrect basis for determining the present value calculations that influence the time horizons for the investments undertaken.

It is these false monetary and interest rate signals that induces the misdirection of resources, the mal-investment of capital, and the incorrect allocation of labor among employments in the economy that sets the stage for an inevitable and inescapable “correction” and readjustment that represents the recession stage of the business cycle that follows the collapse of the artificial boom.

The monetary central planners can never be more successful in determining a “optimal” quantity of money or the “right” interest rates to assure savings-investment coordination than all other socialist planners were when they tried to centrally plan agricultural production or investment output for an entire society. All such attempts at monetary planning and management by central bankers are instances of what Friedrich A. Hayek called in his Nobel Lecture a, “pretense of knowledge,” that they can know better and do better than the outcomes generated by competitive interactions of the market participants, themselves. And as Adam Smith warned, nowhere is such regulatory power “so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it.”

There is no way of knowing the optimal amount of money in the economy other than allowing market participants in the competitive exchange process to decide what they want to use as money – which has historically been a commodity such as gold or silver. And there is no way of knowing what interest rates should be other than allowing the market forces of supply and demand for lending and borrowing to determine those interest rates through the process of private sector financial intermediation, without government or central bank interference or manipulation.

The Return to the Gold Standard as a Monetary Constitution

Finally, how do we return to a functioning and workable gold standard? Under the current government and central bank-controlled monetary system the simplest method might be for the monetary authority to stop creating and printing money and credit. Over a short period of time a fairly reasonable estimate could be made about the actual quantity of a nation’s currency and checking and related deposits that are in existence and in circulation. A new legal redemption ratio could be established by dividing the estimated total quantity of all forms of these money-substitutes into the quantity of gold possessed by the government and the central bank.

A country following this procedure would then, once again, be on the gold standard. Its long-run maintainability, of course, would require the government and the central bank to follow those “rules of the game” that no increase in the quantity of money-substitutes may be created and brought into circulation unless there have been net deposits of gold in people’s accounts with banking and other financial institutions.

Can we trust governments and central banks to abide by these rules of the game? The temptations to violate them will still remain strong in a political environment dominated by ideologies of wealth redistribution, special interest favoritism, and numerous “entitlement” demands.

It is why the real long-run goal of monetary reform should be the denationalization of money. That is, the separation of money from the state by ending of central banking, altogether. In its place would emerge private, competitive free banking – a truly market-based money and banking system.

But nevertheless, in the meantime, a gold standard can serve as a form of a “monetary constitution” setting formal limits and imposing restraints on those in government who would want to abuse the monetary printing press, similar to the way political constitutions, however imperfectly, are meant to limit the abuses of power-lusting monarchs and the plundering majorities in functioning democracies.

If it fails, it should not be for want of trying. And a gold standard can be one of the positive institutional reforms in the attempt and on the way to a fully free market monetary system.

Monday, March 14, 2011

Practicing the Principles of Non-Intervention -- At Home and Abroad by Richard M. Ebeling

Events in other parts of the world, such as the civil war in Libya, and the revolutions and mass public demonstrations against various tyrannical and autocratic governments in several countries in the Middle East, have aroused a deep sympathy among the American people.

Ordinary people, long politically oppressed by despotic rulers who have denied them individual freedom and plundered their often-meager incomes and wealth, have risen up against their cruel governments. Many Americans wonder what should or could the United States do? Some of our fellow citizens even call for political and military intervention to assist those who seem to be yearning to breathe free in their own lands.

What should the freedom of freedom, therefore, view as the best course of action in these circumstances?

Personal Freedom and the Principle of Non-Intervention at Home

As an advocate of individual liberty, I consider all forms of government interference in people's lives, other than those minimally essential for the protection of life, liberty, and property, to be morally wrong, politically harmful, and economically counterproductive. As part of that political philosophy, I believe that the government of the United States should no more intervene into the internal affairs of other countries than in the personal, peaceful, and voluntary affairs of its own citizens at home.

Many of my fellow countrymen follow courses of action in their own lives that I consider stupid, immoral, and harmful. But I also feel strongly that it would be morally wrong and pragmatically counterproductive to force my fellow countrymen to follow the courses of action I consider to be wiser and better for them.

Either every man must be respected and protected as a free agent in his own affairs, or we run the risk of degenerating into a society of coercing meddlers, each with his own banner of "right living," each trying to use the political power of the state to make our fellow citizens bend to our vision of the good, proper, and virtuous life. Society becomes a war of all-against-all, as individuals sharing similar conceptions of that "right living" form coalitions for strength in the struggle for votes, influence, and control of the state's authority to use force.

Personal Choice, Not Political Coercion, Makes for Moral People and a Good Society

But men being what they are, even when they begin as pure-at-heart "true believers," only wishing to use the state for the good of others (as they conceive that good), soon are taken over by the "dark side of the force." The welding of power over others becomes an aphrodisiac, a "high" stronger than any narcotic; and, besides, having political power also has its use for material gain, both for oneself and for those with whom one is in coalitions for power. Few have been able to resist these temptations over the ages. Even when the first generation of coercing meddlers coming to power remained fairly uncorrupted by the opportunities for personal gain, their heirs in acquiring the reins of political authority have tended to have fewer inhibitions for resisting these temptations.

Furthermore, coercion can never, ultimately, be a means for making men good or virtuous. Force can control men's behavior — it can prohibit them from doing certain things and command them to do others — under the threat and use of various physical or psychological punishments. But this does not make those actions moral or virtuous. An act is moral or virtuous only by virtue of it being the free choice of a human being who, in principle, could have done the opposite. Morality and virtue are in the minds and hearts of men, not in the control of their external conduct.

Imposed conformity does not result in moral conduct; it is the denial of morality. By narrowing or abrogating the field in which a man in his actions must make up his own mind as to what is "the right thing to do," the state removes the necessity to more conscientiously think and decide about what he should do as a self-responsible human being.

By denying him the freedom to choose in various corners of his life, the state frees the individual from being more fully responsible for his actions. When men are freed from responsibility for their actions, the conditions are created for the growth of a climate of amorality: "It's not my responsibility, I paid my taxes" or "I'm not accountable, I just obeyed orders."

In the free society, the only appropriate means for trying to change other people's conduct is through reason, persuasion, and example. The coerced man often harbors resentment and anger in his heart, both against the coercer and at himself because he had not the courage to resist being made to do what he did not want. The free man, when he changes the things he does due to the persuasion or example of others, feels gratitude and joy for having been shown a better purpose in life or how to more successfully pursue his ends.

When other men freely choose to change their behavior due to our arguments or example, it is more likely, therefore, to represent an actual change of heart or of mind. And that is how the world is, ultimately, really changed — one person at a time, for good or evil.

The Dangers and Unintended Consequences from Foreign Intervention

Men and governments in other countries have done and are doing many evil things. They have killed, brutalized, tortured, and destroyed; and especially in the century that has recently ended, it was done on a scale that goes beyond our mind's ability to fully comprehend. They have shocked our conscience and made us doubt the existence of any humanity in the human being. In a world of such conduct by others in other lands, it has been natural that many in America have wanted to "do something" — to come to the aid of those victimized by evil and to stop evil from doing it anymore.

But similar to the pattern too often at home, people disturbed by the immoral acts of others abroad have turned to the state to right the wrongs occurring in foreign lands. They have wanted their government to intervene in the affairs of people in other countries, to oppose bad governments and evil men and, in their place, foster good government and support better men.

Rarely has this been successful in achieving the end desired; and even when the result in the short-run has seemed better than what had been before, the intervention has often had longer-run, usually unintended, consequences that have made new outcomes often similar to, and sometimes worse than, the ones the intervention was meant to cure.

Even when people oppressed by a tyrant have been liberated from their torment, the people freed frequently turn against their liberators. It begins to play on their pride that they were not able to free themselves. Also, the liberating government is often not satisfied with merely eliminating the evil government; to justify the sacrifice made by its own people, in lives and money, to free those who had been living under foreign oppression, the liberating government tries to establish a "new order" of good government and honest politics in that foreign land.

But, alas, good government and honest politics often have different meanings for the people in that foreign country. Customs, traditions, and other societal practices call for political structures and methods of authority frequently quite different from what the liberating government's "advisors" view as the good or the better. Irritated and angry at the appearance of being told by the liberators how to live their lives and run their affairs in their own country, the people in that foreign land soon start wishing that the meddling Yankee (or the Limey Brit, or the French Frog, or the Russian Bear) would go home.

And too often, the emotional reaction of being dictated to by the foreign power (who only yesterday was hailed as the great liberator), plays into the hands of the demagogue and would-be new tyrant hoping to ride to power on the wave of anti-foreign sentiment. The military forces and civilian advisers of the liberating government soon find themselves the new targeted enemy of the very people whom they wanted to free from the evils and injustices of the past.

At home, the interventionist government often finds itself — sooner or later — governing a "house divided" over the justification for the intervention and its continuance. Sometimes there is no consensus from the start that the foreign intervention is justified. People in the society, to the extent they take any interest in international events, take different sides concerning who is in the right and who has been wronged in that foreign country — who is the oppressor and who needs to be freed. If the foreign intervention is undertaken, then from the start, there will be many in the country who oppose and resent their wealth being taxed and the lives of their loved ones in the military being put in harm's way to fight for "the wrong side." If the foreign intervention has broad support among many in the society, then dissent is muted at first.

But if the intervention is not short and clearly successful, then second thoughts begin to emerge among a growing number of people: Was the intervention the right thing to do from the start? Are we becoming the enemy of the very people we wished to befriend? Are we making the situation in that country worse than it was before? Is it worth the sacrifice in men and money — ours and theirs — to continue the intervention?

Even if the foreign intervention seems to have been successful — with the goals appearing to have been achieved quickly, with minimal sacrifice in lives and money, and with "our boys" already having come home — the intervening government often leaves behind a situation in that foreign country that soon becomes not much different from what existed before.

Why? Because merely overthrowing the existing political order and imposing a new political order does not change the ideas, beliefs, customs, and traditions of the people. Such impositions may temporarily affect the external behavior of those people, but it does not transform what guides their sense of right and wrong, good and bad, just or unjust; these are matters of their hearts and minds, and these cannot be coerced into change. The only alternative is for the intervening government to stay on in that foreign country as a permanent, coercing meddler, and that usually only leads to more problems, not solutions.

Practicing the Principle of Freedom Abroad: Private Solutions to Foreign Problems

What, then, is to be done in the face of evil in other lands? For the advocate of freedom, the answer is the de-politicization, the privatization of foreign intervention. In our private life, we have many friends, neighbors, and family members whom we care about and desire to help; we desire to help them in getting through times of trouble and hardship, and we want to help them in trying to find better principles to guide their lives, so many of the problems that have been caused by their past choices do not happen again.

Sometimes these tasks are more than we, ourselves, can try to solve, so we form voluntary associations, organizations, and clubs to pool our efforts with those who share the same desire to help and see value in the same peaceful methods for attaining the end. Others "go it alone" in their endeavors to assist their fellow men, and still others form different associations because, though they believe in the same end, they think there are better means to achieve it than the ones we decide to try. And others in the society choose not to participate at all in these types of tasks, because they place a higher value on other things, in terms of an expenditure of their time, money, and efforts.

No one is compelled to care or to help, nor is any one forced to accept one way of doing things as the only correct method. Such voluntary associations and institutions are among the essential foundation stones of civil society. They are also the free society's private solutions to what are called "social problems."

The de-politicization or privatization of foreign intervention means an approach analogous to the private institutions of voluntary association for the handling of domestic "social problems." Those who see distress and hardship among peoples in other lands, and who desire to assist them, should not be restricted in forming associations and charities to pool their resources to supply such help. But neither should others who do not share that same concern, or who consider there to be other answers to solve those foreign problems, be compelled to provide assistance if they choose not to.

If oppression reigns in a foreign land or if a peaceful people in another country are threatened or aggressed against by another state, any citizen in a free society should have the liberty to volunteer his help. This help can include financial contributions or personal service. He can offer to fight alongside the "freedom fighters" resisting their own government's tyranny, or he can offer his services in the military of that foreign country to help repel the aggressor nation. He can choose to do so for free or for pay. He can form associations and societies to pool his own resources with those of others to buy military equipment, medical supplies, or emergency food and clothing. He can try to persuade others in his own country to see the rightness in the cause and join him in fighting the good fight to win freedom for others in those other lands.

The Importance of Principle, and Not Expediency – Even for Seemingly “Good Causes”

But what would be inconsistent with any person's crusade in the cause of freedom in other lands would be to abrogate the freedom of his own fellow citizens in the pursuit of that cause. It is easy to say that all that is asked for is a small violation of the liberty of his fellow citizens in the good cause of the freedom of so many others. But is this any different from the appeal often heard, that it is only small violations of people's liberty that is being asked for to feed the hungry, to house the homeless, to assist the poor, to support the handicapped, to. . .?

Once the principle of liberty is breached, no matter how deserving the cause may sound, all other such abridgments soon become matters of pragmatic judgment. Well, if it seemed reasonable or meritorious to abridge some people's liberties for this cause, then surely to extend that abridgment just a little longer, or a little more, for this other good cause cannot be objected to, can it? If we sacrificed some people's liberty to intervene in country X for a good cause, then surely to do it again or more forcefully for the noble endeavor of helping these other unfortunate people in country Y cannot be objected to, can it? Where does it stop? And whose judgment shall prevail in making this decision?

The fundamental duty of the state is the protection of the life, liberty and property of the citizenry within its own territorial jurisdiction. If the state goes beyond this, it can only do so by taking the wealth, income, and resources of some to improve the circumstances of others, i.e., by means of coercive meddling. Either we have the protection of equal individual rights for all before the law or we have unequal privileges for some at the expense of others. This is the choice concerning the role of the state, whether in domestic or foreign affairs. There is no third alternative.

(An earlier version of this article originally appeared in Freedom Daily in December 1995, published by The Future of Freedom Foundation in Fairfax, Virginia)

Sunday, March 13, 2011

Adventures in Economics: An Interview with Richard M. Ebeling

(This interview appeared in the February 2011 issue of the "Lara-Murphy Report," published by the United Services & Trust Corp., Nashville, Tennessee,

Austrian Economics – “Then” and “Now”

Lara-Murphy Report: You have spent your whole career promoting and teaching Austrian economics—in fact, one of us is a former Ebeling student! From your perspective, what has happened with the Austrian movement as a whole? What would you say to today’s young libertarians and Austrians, who take it for granted that the average person on Wall Street has probably at least heard of Austrian business cycle theory?

Richard Ebeling: When I first became interested in Austrian Economics as a teenager back in the 1960s, there was virtually no Austrian School – most certainly it was not mentioned in the classroom. Keynesian Economics was riding high, with its argument that only Big Government could keep the economy on an even keel through manipulative monetary and fiscal policy. And socialist central planning was considered the ideal for “third world” countries to rise out of poverty; it was also said to be a good thing if more government control, regulation, and income redistribution could be introduced here at home in America, as well.

This was the message that I was getting from all my undergraduate professors while I was studying economics. To speak up in my classes and suggest the relevancy and importance of the ideas of the Austrian Economists was to invite ridicule, sarcasm, and verbal attack from both professors and fellow students. The attitude was that the Austrian argument for a free and competitive market process was out-of-date and as dead as the Dodo bird.

I had to learn all my real economics understanding by reading on my own. That is how I found out about and came to appreciate the ideas of those earlier, leading members of the Austrian School – Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, and Friedrich A. Hayek.

I had the luck to be invited to a unique Austrian Economics conference sponsored by the Institute for Humane Studies in June 1974, where I had the wonderful opportunity to meet Murray Rothbard, Israel Kirzner, Ludwig Lachmann, and Henry Hazlitt, and a handful of other young people who, like myself, had discovered the Austrian tradition on their own (many of whom are prominent members of the Austrian School today).

More than thirty-five years later the world is a very different place. There are colleges and universities where a student can take courses in Austrian Economics, and even study Austrian Economics as a specialized field in an economics graduate program, such as at George Mason University in Virginia.

Every year I teach a course on Austrian Economic Theory at Northwood University in Midland, Michigan, as well as incorporating Austrian ideas into all my other classes, as part of an economics department that is free market and Austrian “friendly.”

There are Austrian-oriented institutions and think tanks, such as the Ludwig von Mises Institute in Auburn, Alabama, for instance, that offers a vast print and online library of all the great works of the Austrian Economists, and where an interested student can attend conferences on Austrian ideas. Excellent online courses are regularly offered (including by Bob Murphy) and online articles are published virtually everyday applying Austrian ideas to contemporary economic policy issues for an increasingly worldwide audience.

And there are vibrant and challenging Austrian blogs such as “Coordination Problem” and “ThinkMarkets.”

Most certainly, the current economic crisis has served as a powerful catalyst for economists and business analysts to find in the Austrian theory of money and the business cycle a clear, coherent, and empirically relevant explanation of how government manipulation of interest rates and monetary expansion create the distortions and imbalances throughout the economy that set the stage for an inescapable recession following a false boom. It has provided a far better explanation for understanding how we got in to the present mess, and why only allowing the economy to self-correct can put America back on the path of a well-coordinated and sustainable market system of freedom and prosperity.

These are wonderful times to be an Austrian Economist. The insights and contributions of great Austrian thinkers, like Mises and Hayek, are helping to clear away the intellectual rubble and misguided policies created by Keynesian and collectivist ideas.

Trends Can Change – They Have in the Past and They Will in the Future

LMR: Ironically, just when it seems everything is finally clicking for those who are interested in spreading the ideas of liberty, the U.S. government at least seems to be accelerating its slide into a form of corporatism, if not outright socialism. You have studied the history of liberty quite extensively. Is our pessimism accurate, or does every generation of liberty-lovers think they face the worst threat ever?

RE: Ludwig von Mises always emphasized that “trends can change.” He pointed out that they have changed in the past and will most likely do so again in the future. One of the most frustrating, yet promising things in life is that the future always has an element of unpredictability.

I lived a good part of my life, like many of us, in the shadow of the Cold War. As an economist I understood why socialism could not and did not work as an economic system, and why a socialist economic system always resulted in political tyranny and loss of personal freedom.

But who among us, who lived through that time, really expected to see the end of the Soviet Union in our lifetime – unless it came about either through a terrible and bloody civil war within Soviet Russia or through a catastrophic global nuclear war? And, yet, in the late 1980s and early 1990s, the contradictions and corruptions of the Soviet system began to unravel. And within a few, short years the Soviet system imploded, and only with the loss of a relatively small number lives of brave souls during those last years.

I was in the Soviet Union working as a consultant on market reform and privatization 1990-1991, and I saw with my own eyes heroic Lithuanians in Vilnius and Russians in Moscow who died fighting for freedom against Soviet tyranny. But on the whole, Soviet socialism went out with a whimper, and not a huge bloody bang. Who, honestly, predicted that this great change would happen this way, at that time?

In Human Action, Ludwig von Mises refers to the “reserve fund” of wealth and capital in a prosperous society that a plundering government can draw upon for a long time, to feed its gluttonous drive for power and to provide the favors and privileges for special interest groups that keep the political elite in control.

But the reserve fund of private sector wealth for the government to eat from finally and inevitably must reach its end, Mises argued. That is, very possibility, what we are witnessing here in the United States and some other parts of the world today. America and countries in Europe are facing major fiscal crises caused by blood sucking taxes, crushing government debt burdens and huge unfunded liabilities adding up to tens of trillions of dollars (such as social security and government healthcare programs), strangling regulations that hinder competition and innovation, and inflationary misdirection capital and labor that throw market supplies and demands out of balance.

If we are at such a turning point – such a change in trends – what will be crucial in determining the direction it all takes will be the power and influence of the ideas that explain to our fellow citizens how the crisis has come about, why government is no longer – and never was -- the answer; and why a reborn system of individual liberty and free market capitalism is essential in the decades to come.

The responsibility of making that case falls upon all of us who care about liberty.

Austrian Economics Helps Explain How the Real World Works

LMR: In the previous question, we said it was “ironic” that the growing popularity of the Austrian and libertarian movements is occurring precisely as the federal government and Federal Reserve amass more powers. But is this actually to be expected? In other words, does the public not bother to worry about “abstract” things such as economic freedom and civil liberties, when the nation is at peace and the unemployment rate is 3%? Are Americans only now looking to the Austrians because they might be able to avert the brewing disaster?

RE: Perhaps it is a part of human nature to often take the psychological attitude that, “if it ain’t broken, it don’t need fixing.” And for decades, in spite of the occasional inflationary boom and bust cycle, it seemed to many that the American interventionist-welfare state was both desirable and sustainable. The current fiscal crisis that is hitting both the Federal government and the majority of state governments across America is forcing people, as voters and taxpayers, to rethink not only what government can afford to do, but also what it is government should do.

An essential part of this rethinking about the role of government in society is understanding why politicians and bureaucrats have neither the wisdom nor the ability to manage a complex and ever-changing market order in which multitudes of millions of people interact and coordinate their diverse wants as consumers with their abilities and talents as producers.

The Austrians, more than most other economists, have demonstrated beyond any doubt that only a functioning and free market economy can provide the means for achieving this coordination through a price system that tells the truth about the changing conditions of supply and demand, and leaves people at liberty to competitively discover and take advantage of mutual gains from trade that results in rising standards and qualities of living for all in the long run.

Whether the growing number of Austrian Economists can succeed in helping to stop this massive monetary and fiscal madness before it becomes the disaster to which it must otherwise lead, only the future will tell. But either way, there is only one path back to freedom and prosperity: radically reducing the size and intrusion of government into our personal lives and market activities; drastically cutting state and federal taxing and spending and eliminating the interventionist-welfare state; and ending our system of monetary central planning by abolishing the Federal Reserve, and returning to a commodity-backed monetary system such as the gold standard, along with the total privatization of banking and the financial system.

The Austrians offer the clearest and most persuasive arguments, in my view, as to why and how this needs to be done.

The “Lost Papers” of Ludwig von Mises, and Their Significance

LMR: For our final question, could you give the highlights of your famous acquisition of Ludwig von Mises’ “lost papers”? Many of our readers might not realize that you are a real-life Indiana Jones.

RE: Actually, I’m a big fan of those Indiana Jones movies, so thank you for that comparison and complement!

Ludwig von Mises, as many of your readers may know, was one of the most influential Austrian Economists of the twentieth century. He explained why socialist central planning could not work; why government intervention leads to insoluble distortions that prevent markets from effectively functioning; and why government monetary manipulation is the source of the booms and busts of the business cycle.

He lived and worked in Austria through much of the 1920s and 1930s, and was viewed as a forceful enemy of both Soviet socialism and German Nazism. By the time Hitler invaded Austria in March 1938, Mises was teaching in Geneva, Switzerland, but he had kept part of what had been his old apartment in Vienna. The Nazis came looking for him at that apartment. He was safe in Geneva, but they boxed up and took away all his papers, correspondence, manuscripts, and family and professional documents. For the remainder of his life, he believed the Nazis had destroyed all of these materials.

In fact, they ended up in a small town in Bohemia, where the Nazis stored all the vast collections of papers, documents and archival materials that they plundered from all the countries they occupied during the war. This huge cache of material was captured by the Soviet Army at the close of the war, and ended up being housed in a special KGB archive in Moscow that Stalin ordered to be built in the late 1940s. And there they remained, closed to every one except the Soviet secret police and the Soviet foreign ministry until the 1990s.

My wife, Anna, and I found out in 1996, that Mises’ papers had survived the war and were in this archive. Anna is originally from Moscow and, using her friends and contacts in the post-Soviet government, arranged for us to gain access to Mises’ papers in this archive. We spent nearly two weeks in October of 1996 going through Mises’ papers, which turned out to be around 10,000 pages of materials, and returned to the U.S. with photocopies of virtually the entire collection.

Liberty Fund of Indianapolis contacted me shortly after our return, and offered to publish a selection of these papers. I have served as the editor of this project, overseeing the translation process and editing the papers for publication in a three-volume set under the title of the Selected Writings of Ludwig von Mises. Two of the three volumes have already been published, and the third volume should be out by late 2011 or early 2012.

It gives a unique insight into Mises, not as the grand theorist of the free market and critic of socialism, interventionism, and inflationism. But, instead, we see Mises as the detailed economic policy analyst during the years before and after the First World War when he made his living as a senior staff member as the Vienna Chamber of Commerce. For those who sometimes wonder, “Well, how do you apply Austrian Economics to the real world of economic policy and practice?” Here is it, by the leading voice of Austrian Economics during the last one hundred years.

Preparing these papers for publication has been one of the most thrilling and rewarding experiences of my long years as an economist.

Wednesday, March 9, 2011

Lyndon Johnson's "Great Society": A Free Market Critique by Richard M. Ebeling

(The following talk was delivered at John Jay College of Criminal Justice in New York City on March 7, 2011, as a lecture in a series on “The 1960s: the Struggle for Justice Intensifies.”)

Fifty years separate us, now, from the 1960s. For many who are college-age students, today, it all must seem like ancient history. And even for those of us who are old enough to have lived a part of our young lives in that decade, it seems a long time ago, also – and yet, at the same time, it seems like only yesterday.

Our memories fill up most frequently, I suppose, with two recollections of that time: the Civil Rights Movement and the Vietnam War. The first involved the abolition of the last remnants of that “peculiar” institution that had, at first, kept enslaved a portion of the population of the United States; and, then, even when slavery had ended, still used legal barriers, restrictions, and sometimes-brutal force to prevent a distinguishable minority of that population from having impartially secured equal rights before the law.

The second stands out as a searing memory of a military conflict ten thousand miles away from the United States, which went on for more than a decade, and at the cost of 55,000 American lives and at least one million causalities among the Vietnamese people. It was a war that tore the United States apart unlike any other armed conflict in American history since the Civil War of the 1860s, a century earlier. Tens of thousands of young men, not fortunate enough to have a college deferment, were conscripted into the U.S. armed forces, and sent off to fight a war that at least half of the American people either did not support or did not understood. And which finally ended with one of the most humiliating defeats in American military history.

Vietnam: The Hubris of War Planning and Conflict Fine-Tuning

A part of the Vietnam War tragedy was due to the fact that it was managed by “the best and the brightest,” as David Halberstam called them in his well-known book with that title. These were the people within the Kennedy and Johnson Administrations who orchestrated and escalated the war as the conflict progressed through the 1960s.

Halberstam referred to these war managers as the “whiz kids.” They believed that they had the theoretical and quantitative knowledge and ability to fine-tune a military conflict. By incremental “escalation,” they could bring to bear just enough pressure at vital points considered crucial to the enemy in North Vietnam. This would compel the appropriate response from the communist regime in Hanoi, to assure that the conflict ended with an “acceptable” outcome.

The disaster and the destruction that befell both the American and the Vietnamese people resulted from their arrogant pretense of possessing all the necessary and relevant knowledge for them to design and direct a war on the other side of the world, and, seemingly, all according to a central plan constructed in Washington, D.C.

What they learned (or should have learned) were the inescapable limits to man’s ability to try to consciously direct the future course of human events, and the ever-present occurrence of “unintended consequences.” It was a costly lesson in the need for humility and caution in believing that it is in our power to socially engineer global affairs to our own liking.

Lyndon Johnson – Master of Events and Manipulator of Men

The same, I would like to suggest, was also the case in the domestic policies of the Lyndon Johnson Administration, which became known as the Great Society agenda. Johnson was the consummate politician. Born in west Texas, he won a seat in the House of Representatives in 1937, and was a loyal supporter of Franklin Roosevelt and his New Deal programs. He won a seat in the U.S. Senate in the 1948 election, and later became the Democratic Party leader in the Senate, until his run for the vice-presidency of the United States as John F. Kennedy’s running mate in 1960. He became president in November 1963, following the assassination of JFK.

Johnson considered himself to have an uncanny power to read situations, manipulate and intimidate men, and control the flow of political events. In his leadership role as majority leader, Johnson supposedly knew every detail of the public and private lives of all the other members of the U.S. Senate. He, seemingly, knew just the right “buttons” to push to make the votes and often the policies go the way he wanted.

In one of the ironies of history, in 1954 he used his Senatorial influence to stop, then-President Eisenhower, from militarily intervening into what was at that time France’s colonial war in Vietnam against Ho Chi Minh’s communist guerrilla forces. The French defeat left a divided Vietnam that became the catalyst for the next phase of this conflict, which pulled America into the vortex of war and finally brought about the downfall of LBJ.

While the Vietnam War became inseparably intertwined with Johnson’s name and was a defining mark of his presidency, he really viewed his Great Society agenda as the legacy for which he wanted to be remembered. In his mind, he was attempting to fulfill and complete the New Deal programs initiated by his mentor, FDR.

The Great Society: Designing a “War” on America’s Ills

What guided the Great Society agenda was not just Johnson’s political savvy. It was also the equally arrogant pretense of knowledge on the part of many in the economics profession of that time. As a student in my first undergraduate economics classes in the late 1960s, I soon learned that there was only one economics: Keynesian Economics, named after the famous British economist, John Maynard Keynes, who had published a book called The General Theory of Employment, Interest, and Money, in 1936.

Most economists, especially in macroeconomics, were convinced that the market economy was inherently flawed and susceptible to periodic and wide fluctuations in employment and production. They believed they had discovered the necessary monetary and fiscal policy tools to “steer” the economy and simultaneously maintain “full employment,” stable prices, and stimulate long-run growth in the economy as a whole.

At the same time, there was a general attitude among many economists and a large number of self-proclaimed social critics that most of the “evils” of the world – poverty, illiteracy, lack of decent housing or medical care, and environmental degradation – were all due to a lack of will-power and well intentioned and implemented policy. The guiding premise was that the private sector had failed in meeting these problems, and indeed, may have contributed to them due to a disregard for “national needs,” while pursuing private purposes.

In a speech in May of 1964, President Johnson proposed a series of “activist” government policies that would create a “Great Society” for America. He told his audience that he was determined “to assemble the best thought and broadest knowledge from all over the world to find [the] answers” to these social ills. In 1965, following Johnson’s reelection to the presidency, he initiated a wide variety of pieces of legislation to fight his declared “wars” on these social ills. Government programs and spending were either introduced or expanded in almost every domestic direction.

Among the leading Great Society programs were:

· Medicare and Medicaid (as amendments to the Social Security Act)

· Economic Opportunity Act

· Office of Economic Opportunity

· Community Action Agencies

· Elementary and Secondary Education Act

· Higher Education Act

· Model Cities Program

· Housing and Urban Development Act

· Urban Mass Transit Act

· Supplemental Nutrition Assistance Program (Food Stamps)

· National Endowments for the Arts

· National Endowments for the Humanities

· Wilderness, Endangered Species, and Federal Water Pollution Control Acts

In the time available, it would, obviously, be impossible to offer a detailed, critical examination of each of these programs and pieces of legislation, and their impacts on various parts of society over the decades. Instead, I would like to approach it from a skeptical view of the underlying political, economic and social premises upon which the Great Society agenda was proposed and implemented. And, then, draw some conclusions about their longer-term effect on American society today, including the fiscal crisis in which the country finds itself.

Political Paternalism and the Reduction of Freedom

The fundamental premise upon which the Great Society vision for America was conceived is the idea of political paternalism. Good men, with enough political power, authority, and financial resources can successfully solve the problems of society. The dilemma, however, is that for government to do anything for us, it must at the same time have the police power do things to us.

If government is to plan our retirement, provide our education, oversee and guarantee our health care, supply our housing, and give us various amounts of cash and other in-kind benefits, then that same government must, invariably, determine and dictate the form, quality, quantity, and conditions under which we can be and will remain eligible for such welfare redistributive benefits.

Thus, many of the welfare programs specified, for example, the make-up and membership of a household to receive government housing, child allowances, and cash payments. Federal money to education invariably ended up coming with standards, requirements, and restrictions on the content of what was taught and the benchmarks for measuring student success for continued funding. Government financing of health care necessarily incorporated regulations, controls, and rules about the pricing of health care services, the types of treatments and coverage permitted or restricted, and access to what care in terms of age and gender.

Increasingly, the individual’s options and choices were narrowed by, and confined to, what the government directly supplied, or mandated through its rules and regulations. This, obviously, hit those in the lower income categories the most. Once such individuals and groups were completely or heavily dependent upon these government programs, escape from them was difficult due to the significant loss of benefits if such a recipient wished to find private-sector employment at a wage that would greatly reduce or terminate their eligibility for these programs. Thus, an underclass of more or less permanent wards of the state was created with inter-generational dependency on government transfers growing in frequency.

This political paternalism, obviously, also implied that those in the government establishing these standards and rules for welfare eligibility presumed to know what all those receiving such benefits and services “really” needed. That is, what kind of housing, what type of medical care, what content of education, what kind of nutritional requirements the recipients of these programs should receive.

Political Hubris and Unintended Consequences

This, too, was no less an arrogance or hubris on the part of the government welfare providers that the poor and unfortunate recipients of the government largess clearly did not have the knowledge, experience, or forethought to make such decisions for themselves. Since the State was providing these benefits, the State clearly knew best what “these” people really needed for them to have some minimum form of a “decent life.” The “poor” were classified and homogenized into one or a small handful of sizes that were to “fit all,” with little regard or sensitivity to the diversity between individuals and their personal and family needs and values.

This implicitly condescending attitude toward those receiving Great Society transfers resulted in some free market critics, such as Milton Friedman, to argue that if government was going to redistribute wealth it would show much more respect and confidence in such recipients if, instead of in-kind benefits in the form of such things as government housing, food stamps, health care services, etc., the government merely gave them cash equivalents. This way, each individual, in his own circumstances, and in terms of his own judgment about what was more or less important to her and her family could make the market-based trade-offs that would most fit with what they needed or valued.

But here, in essence, was the same fundamental flaw in the Great Society agenda as was to be found in the executing of the Vietnam War: the confidence and belief on the part of the implementers of these programs that they could redesign the social order at home just like the foreign policy makers believed they could remake entire societies abroad.

And here, too, were a series of unintended consequences. These included the weakening and break-up of groups and families due to inter-generational dependency on government programs; the emergence of an “entitlement mentality” that taxpayer funded transfers from the government were as legitimate as a source of income as earning a living from a private-sector job; the entrapment of those on welfare in isolated, poorly-managed, and increasingly crime-infested public housing projects; and the deteriorating of educational standards in public schools, especially in inner city areas of the country.

For the free market critic, the entire direction of the Great Society agenda was wrong-headed. Precisely because it was desirable to see an improvement in the condition of those least and less well off in society, government’s role had to be less rather than more. As a later president was to say, “Government was the problem, not the solution.”

The Free Market Agenda for a Truly Great Society

The free market agenda for a truly great society was for people to have the liberty to make their own decisions, find and take advantage of their opportunities, and have the latitude and incentive to design their own lives, according to their own conception of the good, desirable, and worthwhile. Government controls, regulations, redistribution, and handouts were the opposite of the direction needed for America.

· Government regulations and licensing requirements had to be reduced and abolished to make it easier for the less well off to start their own businesses, or expand their existing businesses to improve their own lives and create employment opportunities for others.

· Taxes had to be lowered in all personal income and corporate brackets to leave income, wealth, and savings in the hands of the people, themselves, to generate over time the investment and capital formation that would create jobs, raise the productivity and value of those in the work force, and increase standards of living for all over time through more and better goods and services of all kinds offered on the market.

· Union power had to be reduced since, historically, it had been used to limit entry into the labor market in many “closed-shop” sectors of the economy to artificially keep up the wages and benefits of those fortunate enough to belong to a particular labor union monopoly, at the expense of others locked out of employment opportunities.

Individual freedom, personal choice and responsibility, and open, competitive markets in a setting of limited government taxing, limited government spending and limited or no government regulation was the social and institutional circumstance most conducive to really fighting a war on poverty and illiteracy, and a lack of economic opportunity, with equal justice for all before the law.

Eliminating the disincentives for private sector construction of less expensive housing would better provide more housing for lower income groups. This would include ending or reducing zoning and various building codes that limited the locations for low-income housing and raised the costs of construction; it also required reducing property and other related taxes on the residential housing market.

Shifting to market-based education in place of the government monopoly school system would introduce needed competition in the educational market to improve the quality, variety and availability of education for all, including and especially for those in the lower income categories.

And moving to a truly market-based health and medical care system would provide the market-generated competition to keep costs down, while providing the incentives to improve hospital services and treatments.

Benefiting All Through the Freedom of Each

Free market economists, like Friedrich A. Hayek, explained that there is more knowledge and wisdom dispersed and decentralized in all the minds of all the members of society than can ever be known, integrated, or mastered by even the “best and brightest” who assert their ability to manage, direct, and redesign the complex society in which we live.

That is the advantage and the benefit of the competitive market order: it brings to bear all that there is to know and can be used to improve the condition of society through the informational mechanism of the price system, and the unhindered interactions of supply and demand. Shall we rely upon, and be limited to, what the government regulators, planners, and redistributors are able to know and understand; or shall we be free to utilize and benefit from what all of us can contribute through the institutions and workings of the free market economy?

Deficits, Inflation and Keynesian Mismanagement

Another legacy of the Great Society was the false confidence of the Keynesian macroeconomic planners that they could push the fiscal buttons and turn the monetary dials in just the right calibrated amounts to maintain full employment, stable prices, and economic growth all at the same time. They were sure that they could juggle the costs of an ever-more expensive war in Vietnam and supply all the needed money for the increased spending of the domestic Great Society programs without having to significantly raise taxes to foot the expanding financial bill, so the Johnson Administration could do all it wanted to do, both at home and abroad.

The government funded much of its spending through deficit financing. The amounts seem small by today’s trillion-dollar deficit standards, but for the 1960s the spending and the deficits were large compared to what government had spent in earlier years. The Federal Reserve – America’s central bank – attempted to keep interest rates low and private sector investment high by basically printing the money that was needed to feed the costs of growing government. In other words, they “monetized” the debt, to use the jargon of the economist.

Thus, added to everything else, by the end of the 1960s and into the 1970s, the United States was starting to experience and suffer from serious price inflation. Manipulated interest rates distorted and imbalanced the relationship between savings and investment; those who saved saw the real value of their “nest-eggs” eaten away due to rising prices; inflation distorted cost-accounting by making it difficult to know what one’s wealth, capital, and investments were really worth due to the uncertainty of what prices and costs of doing business would be tomorrow compared to today.

The inflationary spiral was not “broken” until the early 1980s, by which time America was suffering from “stagflation” – rising prices and increasing unemployment – a dilemma for which standard Keynesian theory had no answer.

Thus, the Great Society dream heralded by Lyndon Johnson in 1964 and 1965 began to degenerate into a disillusioning reality in the 1970s and 1980s. The Great Society provided neither the prosperity, nor the justice, nor the freedom that Lyndon Johnson had held out as its promise.

Liberalism: True and False

And that gets us to our conclusion: What is a just, good and great society? The Great Society advocates of the 1960s argued that theirs was a liberal vision for a better America. But was it?

I would like to suggest that theirs was a false conception of liberalism, and therefore a misguided idea of a free and great society. The real, or true, liberalism, as it took form in the nineteenth century as a political and economic ideal, and an agenda for social reform, emphasized the freedom and rights of the individual to his life, liberty, and honestly acquired property. The individual human being was an end in himself, not the tool or means to the coercing will of others possessing political power.

These earlier (or, classical) liberals opposed and helped to do away with absolute monarchy and replace it with representative government. They lead the cause for, and finally triumphed in bringing about, the end to human slavery. They insisted upon civil liberties and equal justice before the law for those whom the older political order had discriminated against, including Jews, religious dissenters, various ethnic and national groups, and women.

They also considered economic liberty – the freedom to own and use private property for consumption and production purposes; to peacefully compete in any trade, profession, or occupation the individual found attractive and advantageous; and to freely enter into any voluntary association and market exchange found to be mutually agreeable, including the terms of trade found acceptable by the traders – to be inseparable from any understanding of and practical existence to human freedom.

The classical liberals considered this also to be a morally better society. Why? Because it is based on the idea of respecting the dignity of the individual not to be viewed and treated as a “pawn” (a coerced means) to be manipulated, controlled or restricted by police power, to serve someone else's preferred ends — even if that “someone else” is a large majority of his fellows in society.

The Self-Governing Individual and the Free Society

For these liberals, “self-government” did not only mean the right of the citizenry to participate in the political process to select those who will hold political office and enforce the laws of the land. It also crucially meant the “self-governing” individual. The individual was “sovereign” to freely live his life in peace, deciding what values and goals will give meaning and purpose to his own sojourn on earth. The individual had the unmolested right to the private property he had honestly produced or acquired in trade, as the means for pursuing and possibly fulfilling his dreams and conceptions of a good and happy life for himself and those others he may care about.

They considered such a truly liberal society also to be the one that provided the free market incentives and opportunity structures that would have the good affect of directing men (without force, and through the motive of self-interested improvement) to apply their knowledge, ability, and experience in ways — as if by an “invisible hand” — to reciprocally help improve the conditions of others as they advanced their own desired ends in the interplay of market competition.

They also argued that such a free society is more conducive to not only raising people out of poverty and making it possible for more people to be self-supporting, but also to foster a proper sense of benevolence and compassion towards others who may have fallen upon misfortune or “hard times” not of their own making. The history of voluntary charity and benevolence in the era of nineteenth century classical liberalism – before the advent of the modern welfare state and its undermining of some of this philanthropic spirit – attests to the magnitude of this private generosity and its success.

The Politically Governed Individual

What I have suggested to be considered the false liberalism of the Great Society turned its back on this earlier liberal tradition. Indeed, it turned liberalism on its head. Liberalism now meant bigger government, more intrusive government, more regulating and controlling government, with government’s very visible hand increasingly in every corner and aspect of American life.

Rather than self-governing, the individual in this new Great Society was to be governed. By whom? By those who arrogated to themselves the idea that they were “the best and brightest,” the social engineering “whiz kids,” who claimed to know how various segments and groups in the society should and would be made to live.

This paternalistic legacy of the Great Society era remains with us today. Indeed, it is at the center of the political and social controversies enveloping American debate and conflict about the future direction of the country. Many, if not most, of the supposedly “untouchable” entitlement programs that are at the heart of the current budgetary and debt crisis facing both the Federal government and state governments are the outgrowths of the redistributive programs either introduced by or greatly expanded during the Great Society presidency of Lyndon Johnson.

LBJ wanted to be remembered for his Great Society legacy. And he has had his wish. His paternalistic and welfare state agenda is the Albatross that has a stranglehold around the fiscal neck of the American people.