This essay was one of two winning entries for the North American Region in the N. Goto Essay Contest held in conjunction •with the 1986 general meeting of The Mont Pelerin Society in Italy. The author would like to thank the Philip M. McKenna Foundation for financial support which helped in the preparation of this paper.
Liberty is both a highly valued outcome of a beneficent political economy, and an essential ingredient into it. In some respects a consideration of the role of liberty as both output and input is straightforward. Limited government, serving to maintain the legal environment necessary for an economic order based on private property and voluntary exchange, provides fertile ground for individual liberty. And the lifeblood of a political economy characterized by limited government, private property, and voluntary exchange, is the flow of information that can be provided only when individuals possess a full measure of political and economic liberty.
However, a careful examination of how a political economy based on classical liberal principles both nourishes, and is nourished by, individual liberty reveals a complicated interaction between the social institutions necessary for liberty and the exercise of liberty. The exercise of liberty, unless tempered by a responsibility that can never be imposed entirely by a force external to the ethical convictions of the individual, will with time undermine the social institutions upon which liberty depends. A careful study of the political economy of liberty contains within it a warning of just how fragile is the foundation upon which liberty stands.
Scarcity, Rules, and Liberty
In order to examine the connections between economics, politics, and liberty, it is useful to consider first the most fundamental of economic problems. That problem is scarcity. In a world without scarcity each of us could be entirely independent of others. Each individual could exercise complete freedom in a broad range of activities and have no impact whatsoever on anyone else. Because we live in a world of scarcity, individuals must interact with one another and this interaction is shaped by rules of social conduct. Such rules impose restrictions on the activities of individuals and establish the important distinction between liberty and license. Without the restrictions imposed by such rules, scarcity itself would impose on us an even more confining set of restrictions.
Consider the fact that although scarcity makes cooperation desirable, it makes competition inevitable. Each of us wants more than he has and the only way to get more is by competing against others for control over limited resources. Competition is commonly seen as the source of a host of social ills, with the replacement of competition by cooperation suggested as necessary for social improvement. What this view fails to recognize is that competition is not the cause, but rather the consequence, of the ultimate social ill, namely scarcity. With no way to eliminate scarcity, the important question is not how to prevent competition, but how to provide rules for social conduct that motivate the type of competitive behavior which leads to productive and cooperative outcomes. Competition can be either productive or destructive depending on the rules that define permissible limits in our dealings with one another.
Consider the possibility of no rules, or more accurately the rule of force. Everyone would be free to do whatever he wanted as long as he possessed the power to force his will on others. In this setting, people would be forced to compete through the exercise of unrestrained brute strength and there would be no freedom in the meaningful sense of “independence of the arbitrary will of another.”
If one person had enough physical power he could force others to work for him without compensation, to be his slave. But the master today has no assurance that he will not be someone else’s slave tomorrow.
Neither is the rule of force likely to motivate productive and cooperative outcomes. There would be little motivation to devote one’s effort to the production of wealth since there would exist no protections against its forcible expropriation by others. Competing successfully would depend more on developing the skills needed for plundering and defending against plunder than on developing the skills needed to produce wealth. Even if one were able to survive in such a social environment, one’s standard of living would be low. With resources being devoted overwhelmingly to predation and protection from the predatory activity of others, little would be produced and poverty would be the norm. Life in such a Hobbesian jungle would indeed be “solitary, poor, nasty, brutish, and short.”
Freedom from rules is simply not a viable social possibility. In a society without rules there would be little prosperity and no genuine freedom.
Social Order at the Sacrifice of Liberty
Emergence from the Hobbesian jungle, which finds a “war of each against all,” is necessary if we are to realize the benefits of a civil social order. Underlying any beneficent social order are rules that will impose limits on individual behavior. All rules serve to limit freedom of action. However, when rules are applied generally they can, by limiting the actions of each in predictable ways, expand the liberty of all.
On the other hand, when they become too numerous and detailed, rules can destroy liberty just as surely and effectively as no rules. And the tendency is in the direction of too many rules. Traditionally the obsession within societies has been the horrors of disorder. With plunder, riot, rape, mayhem, and murder the common experience, the loss of liberty has been seen as the unavoidable cost of escaping disorder. The prevalent human condition throughout history has been subjugation to rigid and brutally enforced rules that specify the type and location of one’s work, travel, religious practices, and even social status. The overriding problem of society has been that of maintaining order, and only the most limited amount of liberty has been considered compatible with this objective.
While a rigid social order based on detailed rules concerning every aspect of behavior may be preferred to the chaos that would prevail in the absence of all rules, the shortcomings of such a social order are apparent. The first problem is to find leaders who can be trusted with the power that has to be exercised in a totally controlled society. Such power is subject to enormous abuse. Those who have such power are in a position to advance their interests at the expense of their subjects, and will seldom be able to resist the temptation to do so. The only possible advantage an all powerful government has over anarchy is that the exercise of government power is visible. Moving from the anarchy of no rules to the detailed control of leviathan government is to substitute one thief in the light for many thieves in the night.
The cost in terms of sacrificed liberty is much the same regardless of whether it is sacrificed to anarchy or to unlimited government. One who finds himself forced to toil for the benefit of others is not likely to care who his masters are—the physically dominant brutes in the “jungle” or the politically dominant brutes in the government.
So, traditionally, the social choice appeared to have been between some combination of two undesirable states: the regimentation of detailed rules or the lack of social order. Society could have less of one only at the cost of having more of the other. There appeared to be no realistic hope that individuals living together in a world of scarcity could simultaneously have both more liberty and more social order. It was in the 17th and 18th centuries that philosophers began to give serious consideration to a structure of rules that offered the possibility of overcoming this social dilemma.
The Rule of Private Property
It was the writings of John Locke, Adam Smith, Bernard Mandeville, and other 17th-and 18th- century philosophers that gave modern birth to the ideal of compatibility between individual liberty and social order. Crucial to this ideal was a fundamental conceptual shift regarding the role of rules. Social rules were traditionally seen as necessary to force particular outcomes which were required if a productive social order was to be maintained. Fields had to he tilled, cloth had to be woven, cattle had to be tended, and particular services had to be rendered. Concentrating authority in the hands of a ruler who could require these things to be done was seen as the only guarantee that they would he done. The fundamental insight of the aforementioned philosophers was that establishing general rules of social conduct, which ignored particular outcomes, could create an environment in which desirable outcomes emerged from the exercise of individual liberty.
Crucial to this liberating view of social order are rules which clearly define individual rights by providing assurances that individuals can plan and carry out their activities without the return to their activities being arbitrarily confiscated by others. Lacking such assurances, little motivation exists for people to be productive and no basis exists for them to interact with each other in a civil manner.
The rule of private property can now be seen as crucial to the goal of a productive social order that is compatible with, indeed dependent upon, individual liberty. The rule of private property requires that individual rights to property be well defined and subject to transferfrom one individual to another by mutual consent of both parties. When liberties are constrained only by the broad limits imposed by the role of private property, then a system of social communication and cooperation is established within which the liberty of each individual is compatible with the liberty of all. Indeed, under the rule of private property the liberty exercised by one expands the options over which liberty can be exercised by all.
The social cooperation facilitated by the rule of private property, though well known to all serious students of economics, is sufficiently relevant to a consideration of liberty to deserve discussion. When property is privately owned and voluntarily exchanged, market prices emerge. These prices are the means by which each market participant communicates to all other market participants the value he places on the marginal units of goods.
Property Encourages Honesty
In addition to creating a truly impressive network of communication, private property moti vates an equally impressive degree of honesty. Honesty can be expected to prevail since it is in no one’s interest to be dishonest about the price he is willing to pay. The self-interest of market participants insures that they will assess carefully the value they expect to realize from an incremental unit of each good, and then communicate their desire for more only if the incre mental unit is worth more to them than the prevailing market price. Furthermore, each participant in this communication process is motivated to act as if he gives the concerns of others the same consideration he gives his own. When an individual reduces his consumption of a product in response to an increase in its price, he is in effect saying, “Others are saying to me that this product is worth more to them at the margin than it is to me, so I will consume less so they can consume more.”
This system of communication and cooperation obviously does not work with perfection. However, even when full recognition is given to what has become known as “market failure,” any impartial evaluation must acknowledge that the benefits derived from the rule of private property,, and the derivative market process, cannot even remotely be duplicated by any known alternative social role, or set of rules. Because the information and incentives generated by market competition allow each of us to interact cooperatively and honestly with literally millions of people around the globe, we are able to specialize our efforts, direct resources into their most productive uses, and thus generate enormous wealth.
Surely more important than the wealth generated under a system of private property and market exchange is the individual liberty that this system permits, The rule of private property makes it possible to allow people a large measure of liberty because this rule makes people accountable for the consequences of their decisions. Every time an individual puts a resource to use, a cost is imposed; that cost being measured in terms of the value of the resource in the highest valued alternative use. When an individual owns a resource he is fully accountable for this cost, since his use of the resource requires the sacrifice of the highest amount someone else is willing to pay for it. Given this accountability there is no harm, and indeed much benefit, in giving individuals wide latitude to use resources as they choose.
In the absence of private property rights there is a constant clamoring, often with justification, for detailed restrictions on individual behavior. Consider, for example, the fact that it is difficult in the extreme to divide up and parcel out the atmosphere as private property. As a consequence, the atmosphere is a common property resource and individuals are not held accountable for the costs being generated when they use the atmosphere as a receptacle for their auto exhaust, or industrial smoke. The result is broad public acceptance of huge Federal and state bureaucracies imposing a host of detailed restrictions on our behavior in the name of forcing us to act in environmentally responsible ways.
Eliminate the accountability provided by the rule of private property and you eliminate the very basis upon which people can be tolerant of the freedom of others. A reduction in the scope of individual liberty, with detailed directives and regulations replacing general rules of social conduct, is the certain consequence of either the inability or the unwillingness to rely on private property and voluntary exchange to order economic activity.
The Need for Government
The advantages we realize from observing the rule of private property are general advantages. The rule of private property is not designed to generate particular outcomes or to allow particular individuals to benefit at the expense of others. Rather it allows the liberty necessary to accomplish objectives that on balance benefit us all, but which no one could have predicted or programmed ahead of time. However, unless each of us refrains from attempting to infringe upon the property rights of others, the general advantages realized from an economic process which fosters both the production of wealth and a social tolerance for liberty will be diminished for everyone.
Unfortunately, even though we become collectively worse off when property fights are vi olated, it is possible for each individual to improve his situation by infringing on the property of others. The only parasite on a healthy organism is in an enviable position. It is true that if there is a multitude of parasites attempting to free ride on the same organism no one benefits; the organism perishes, as do the parasites. But this elementary fact provides little motivation for any one individual to cease being a parasite and turn to productive activity. Each individual recognizes that denying himself the immediate gains from plunder will do nothing to preserve the benefits derived from private property and voluntary exchange if there is a general failure to respect property fights. Indeed, in a world where everyone is engaged in plunder it would be the height of folly for an individual to confine his efforts to productive activity.
In other words, the free and productive social order based on private property and voluntary exchange is a public good; a good which when available to one is available to all. As with any public good it has to be paid for by the contributions of individuals, contributions which in this case take the form of sacrificing opportunities to infringe on the property fights of others. As is the case with all public goods, each individual faces the tempting possibility of free riding on the contributions of others. Since individuals know that they can benefit from the free and productive social order that is being paid for by the restraint of others, whether they restrain themselves or not, when left entirely to individual choice we can expect too little respect for private property rights.
Faced with the problem of maintaining social order, each individual is generally willing to exercise restraint if, by agreeing to do so, everyone else is made to do the same. Such collective respect for private property rights has the potential for making everyone better off and, with good prospects for enforcement, will be agreed to almost universally. Enforcement of the social rules of the game is essential here, and it is the need for such enforcement that provides the rationale for the monopoly in coercion which is granted to government.
It is the legitimate role of government to exercise its power in order to serve as an impartial referee who knows the rules of the game, observes the play of the participants, and imposes penalties on those who violate the rules. Good government, as a good referee, does not strive for particular results, but is concerned solely with facilitating the interaction of individuals each of whom is free to pursue his own purposes as long as he operates within the limits established by the agreed upon set of rules.
By enforcing the rule of private property, government is both performing as a referee and requiring that those who benefit from a free and productive social order contribute their part in maintaining it. Those who persist in violating the property rights of others will, if government is doing its job, be denied their liberty through imprisonment, This has the effect of converting the public good provided by respect for private property into a price-excludable public good. That is, those who do not pay the price are excluded from the benefits.
Up to this point the discussion has been concerned primarily with the protective or rule en forcement role of government. The government has to enforce general rules if liberty and social order are to be maintained. In this capacity the government makes no choices in the sense of weighing the benefits and costs of alternatives. It has only to determine if the rules are being obeyed and to take predetermined measures if they are not. The discussion has, however, touched on a further function of government. Public goods other than social order exist, and the government is also the institution through which members of the community decide which of these goods to finance publicly, and how extensively they should be funded, in this capacity, government is called upon to make genuine economic choices, and to engage in directly productive activities.
The Need to Control Government
The government is then more than the referee in the game; it is a participating player as well. In its capacity as a player government is also subject to rules. This situation presents some rather difficult problems. The fact is that the government is necessarily exempt from certain rules that apply to all other players in the game. The government, in one sense, has the authority to violate property rights by forcing citizens to pay for certain public goods. One can argue that this is not really a violation of property rights since everyone is part of the collective process in which the decision to provide public goods is made and goods are provided in return for payments rendered. This argument notwithstanding, it remains true that government’s legal power to compel people to make payments places it outside the rules that apply to private individuals and organizations.
Not only does government enter into the game under less restrictive rules than are imposed on nongovernment players, but since it is government that enforces the rules on all, it is government that enforces the rules on itself. Letting a player in any game be the judge of his own infractions creates an opportunity for abuse that few can be expected to resist. Of course, the government is not a single player but rather a collection of the members of the community. Even so, in their roles as political decision makers individuals will coalesce around certain objectives and will be tempted to take whatever action is necessary to realize their objectives. Whether acting individually or in groups, people find fewer things easier to do than justify in their minds those actions that advance their interests. As a player in the game the government has to be called to task for violations of the rules just as other players; but how can we be sure that the government will be sufficiently diligent in calling infractions and imposing penalties against itself?.
The problem here was clearly seen by James Madison when, in arguing for ratification of the United States Constitution, he wrote:
If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: You must first enable the government to control the governed; and in the next place, oblige it to control itself.
Obliging government to control itself is no easy task. Government power, unless tightly circumscribed, creates opportunities for some to benefit at the expense of others through in voluntary transfers. This abuse of government power tends to feed upon itself. First, government transfers reduce the private return from producing new wealth and increase the private return from acquiring or protecting existing wealth through political influence. This shift in relative returns draws more people out of productive activity and into political activity, which shifts relative returns yet further in favor of the latter. Second, government transfer activity is destructive of the accountability that characterizes an economic order operating in accordance with the rule of private property. As this accountability is reduced the very basis for individual liberty is also reduced and there will be increased pressure for yet broader government control on individual behavior. The power needed by government to maintain a free social order can easily become the force that undermines that order.
Our liberty and prosperity depend on general rules of social conduct. It is government’s legitimate function to enforce those rules, as well as to provide a limited number of public goods. In order for government to perform its role properly, the conduct of government also has to be disciplined by general rules. It is important that these rules on government are obeyed. No society will long remain free unless they are. But how do we impose the discipline on government to get it to enforce these rules on itself and ensure that government power is not used to destroy the very liberty it is supposed to protect?
Constitutional Limits and the Limits of Constitutions
The only genuine hope for controlling government is through constitutional limits on government activity and constitutionally grounded procedures for operating within those limits. It is only by elevating these limits and procedures to the constitutional level that there can be any real prospect of immunizing them against the special interest pressures of ordinary politics.
But while the constitutional approach is the only one that holds promise for limiting government power and for making this power a positive rather than a negative force for freedom, constitutions by no means provide an easy or assured route to responsible government. An effective constitution cannot be created simply by writing words on parchment. The U.S. Constitution, surely the most effective and durable written constitution in history, has served as the model constitution (sometimes being copied nearly verbatim) for numerous political regimes around the world. Few of these cloned constitutions have been particularly durable or effective. A successful constitution has to be derived from customs, beliefs, and ethical understandings that are rooted in a pre-existing social order. A constitution can serve effectively to guard against only those abuses of government power that are widely recognized as abuses. If battered by the force of public approval of particular government practices, constitutional barriers against those practices will soon be breached. As observed by Henry Simons: “Constitutional provisions are no stronger than the moral consensus that they articulate. At best, they can only check abuses of power until moral pressure is mobilized; and their check must become ineffective if often overtly used.”
There can be no doubt, for example, that the success of the U.S. Constitution derived from the fact that it was the product of intense and widespread public concern for individual liberty. The 55 delegates to the constitutional convention who met in Philadelphia during the summer of 1787 were not operating from a clean slate. For at least two decades interest in securing liberty had been elevated to an obsession among the American people. According to a colonist writing in 1768, “Never was there a People whom it more immediately concerned to search into the Nature and Extent of their Rights and Privileges than it does the People of America at this Day.”
Edmund Burke noted before the House of Commons in 1775 that the colonists’ intensive study of law and politics had made them acutely inquisitive and sensitive about their liberties. An outpouring of writing, taking the form of everything from political tracts by the unlettered to celebrated contributions to political philosophy by the intellectual luminaries of the day, were manifestations of the public concerns that found expression in the U.S. Constitution. The protection of liberty was the pre-eminent concern, a concern that saw government power as a necessary evil and discretionary government power as an unmitigated evil.
There is no way of shifting to a constitution the responsibility for protecting individual liberty against the abuse of government power. Liberty will not long survive the absence of effective constitutional limits on government, but constitutional limits on government will not long remain effective in the absence of public approval of those limits.
Individual Responsibility and Political Restraint
Public approval of constitutional limits that make liberty possible depends ultimately on in dividuals accepting responsibility for the consequences of exercising that liberty. Responsibility has no meaning in the absence of individual liberty, but liberty has no future in the absence of individual responsibility. In the words of Hayek, “A free society will not function or maintain itself unless its members regard it as right that each individual occupy the position that results from his action and accept it as due to his own action.”
This sense of individual responsibility is not easily maintained. As Hayek also points out, liberty “can offer to the individual only chances and . . . the outcome of his efforts will depend on innumerable accidents. . . .” When an individual suffers a setback it is always possible for him to find plausible reasons for absolving himself of responsibility. The temptation is strong to petition government for relief through exemptions from the rules of the game that apply to everyone else. The individual may recognize that if such exemptions were generalized everyone would be worse off, but still feel sincerely that in his particular case special treatment is fully justified.
When politicians begin exceeding their constitutional authority in order to provide special assistance to the few, they soon find it impossible to avoid providing special assistance to the many. The sense of individual responsibility that is the only effective bulwark against the abuse of government power will quickly break down in the face of that abuse. Few people retain a strong sense of responsibility for their actions when those around them are seeking to avoid this responsibility through political influence. The destructive dynamic here is clear. An expanding government weakens the sense of individual responsibility, and results in more demands on government and yet further government expansion. And, by increasing the opportunities for people to benefit at the expense of others, an expanding government weakens the rule of private property and thus undermines the accountability upon which individual liberty depends.
There is every reason for concern that the size of government in the western democracies has reached the point of posing a threat to the long tradition of liberty that has made these de mocracies beacons of hope throughout the world. Underlying this development is a fundamental shift in the way the public views government. Rather than seeing government power as a threat that is socially beneficent only when tightly circumscribed, discretionary government power in pursuit of particular ends is now widely seen as the primary force for social progress.
The surface consequences of this shift in responsibility from the individual to the state are clear enough. Expanding budgets and chronic deficits have become ubiquitous features of the modern welfare state, and have raised concern that this fiscal irresponsibility creates the potential for economic adversity. The most troubling thing about chronic budget deficits, however, is not their adverse economic consequences, but the fact that they reflect our inability to exercise political restraint. There is much discussion of the financial burdens our lack of fiscal responsibility is imposing on future generations. But our lack of fiscal responsibility derives from a general lack of political restraint that portends a far greater burden on the yet unborn than the obligation to pay our debts. That burden is the loss of the liberty that we enjoy today because of the political restraint exercised by our ancestors, but which cannot long survive our political intemperance.
Liberty is possible only when adherence to general rules of conduct makes the regimentation of detailed directives and restrictions unnecessary for the maintenance of social order. Liberty can never be license since the unrestrained use of liberty quickly and surely renders inoperative the general rules upon which it is based. The ideal setting for liberty is one in which individuals have internalized an ethic of responsibility and restraint that motivates voluntary compliance with society’s general rules. It is because this ideal can never be fully realized, however, that government is granted the power to force compliance on those who would, in the absence of external restraint, threaten the general liberty by abusing their own liberty. Government power is necessary if liberty is to be prevented from cannibalizing itself.
Government power may be necessary to maintain liberty, but it is not sufficient. The ability of government to enforce impartially general rules can be sabotaged by the same lack of individual responsibility and restraint that makes government necessary in the first place. The ability of government to enforce impartially general rules will be sabotaged if the lack of responsibility and restraint reaches the point where government becomes the dominant source of discipline in society. The more necessary government is to the maintenance of the general rules upon which liberty depends, the more insufficient to this task it is sure to be.
There is no avoiding the fact that liberty will perish if the exercise of liberty is not tempered by an ethic of individual responsibility. The affirmation of this fact is the ethical responsibility of those of us who cherish liberty and understand the fragile foundation upon which it stands.
2. In the words of John Locke, “The end of law is not to abolish or restrain but to preserve and enlarge freedom; for in all the stales of created beings capable of laws, where there is no law. there is no freedom. For liberty is to be free from the restraint and violence of others, which cannot be when there is no law; but freedom is not, as we are told. a liberty for every man to do what he lists. For who can be free, when every other man’s humor might domineer over him?” See John Locke. The Second Treatise of Government. ed. by Thomas P. Perdon (New York: The Liberal Arts Press, Inc., 19543, pp. 32-33.
3. The first recorded awareness that individual liberty could be expanded under a set of universally applied rules (the rule of law) comes from the ancient Greeks. particularly the Athenians during the fifth and fourth centuries B.C. The Greek ideals of liberty were kept alive by Roman writers, such as Cicero, whose work was important to the modern development of classical liberal principles.
4. As Hayek points out, “The benefits I derive from freedom are thus largely the result of the uses of freedom by others, and mostly of those uses of freedom that I could never avail myself of.” F, A. Hayek, op. cit.: p. 32.
5. Under certain conditions it is obviously possible for sellers to benefit by misrepresenting their products. But just as obvious is the fact that this problem is mitigated by market forces. Also, specific market arrangements tend to develop that reduce the seller’s potential to gain from fraud, because both buyer and seller can benefit from such arrangements. For a useful discussion of such arrangements, and the theory behind them, see Benjamin Klein and Keith Leffler. “The Role of Market Forces in Assuring Contractual Performance,” Journal of Political Economy (August 1981), pp. 615-41.
6. Buchanan makes a clear distinction between the rule enforcement role of government and the role of government as economic decision maker in his discussion of “the protective state” and – the productive state.” See James M. Buchanan, The Limits of Liberty: Between Anarchy and Leviathan (Chicago: The University of Chicago Press, 19753, Chapter 4.
12. Hayek, op, cit., p. 71. While acknowledging here the obvious fact that no one can be in complete control of the outcomes that affect him. Hayek continues with the observation that when an individual has to accept responsibility for those outcomes. “it forcefully directs his attention to those circumstances that he can control as if they were the only ones that mattered,”