Freeman

ARTICLE

The Future of Capitalism: Manifest Destiny on the New Frontier

MARCH 01, 1977 by DANIEL PETERSON

Daniel Carl Peterson is a senior, majoring in Classical Languages, at Brigham Young University, Provo, Utah.

As we enter the third century of The Wealth of Nations, it is Adam Smith’s most famous doctrine—that of the "invisible hand"—which has fallen most deeply into disrepute. There are, today, many thousands of very visible hands which reach out to steady the economic ark, hands of men who cannot see the preternatural power which Smith believed he saw conducting individual self-interest to the tune of the general welfare.

 

We can perhaps agree with Henry Hazlitt’s observation that such skepticism derives, to a great degree, from the tendency to permit apparent local discords to obscure the overall harmony of the marketplace. Whether or not this be the case, however, the public’s faith in capitalism can hardly be said to be in vibrant health.

 

The fact is that the destiny of the free market will be determined to a large extent by commonly-held notions of its past. Were this a prescriptive essay, we might ordain that this be otherwise—but the popular mind is stocked nevertheless with images of an economic system which booms irresponsibly and busts disastrously, which enslaves children, humiliates minorities, allows a greedy few to live in sybaritic ease, and, while befouling the air and water, assaults the landscape. A best-selling book—recently proclaimed his "economic bible" by the New Politics governor of California—bears the subtitle, "Economics as if People Mattered." The invisible hand is conceded to be a generally useful beast—cries for nationalization are rather rare in the United States—but it is an often dangerous one, and given to petty meannesses. It must therefore be restrained, so it is thought, and, of necessity, restrained by the only institution powerful enough to bring it to heel—the state.

 

Public Opinion

 

The mind-set of the general populace is a fact which we must not forget in attempting to forecast the future of free enterprise. In a democratic society such as that of the United States, the progress which the economy has made toward statist bureaucracy could not have come without the substantial approval of a majority of the voters. Such dissatisfaction as exists—and it is not inconsiderable in this election year—is aroused less by the extent of state authority than by the phenomena of its exercise. It is widely assumed that, if only the "right people" could be elected and certain bureaucratic inefficiencies eliminated, we would again be on the right track. Few would propose return to the days of dog-eat-dog competition, under which people were, we are told, dying on the streets. Even those who seem opposed in principle to so-called "creeping socialism" frequently make revealing exceptions in their own cases. Each faction of society sees itself as somehow uniquely deserving: Agriculture needs farm price supports, various manufactures require protective tariffs, and the professions beg licensure so that doctors, lawyers, barbers, and sanitary engineers will not be demeaned by quackery on the fringes of their practice. When our own personal hopes and human sympathies run into the uncompromising austerity of classical economics, the invisible hand often seems cold indeed.

Since modern defenders of an approximately laissez faire economy have, for whatever reasons, failed to convince the public that the market offers a more certain, if admittedly less meteoric, means of fulfilling the imperatives of our newly sensitized social ethic, we can expect current trends toward increased state regulation to continue. Perhaps it will be valuable, therefore, to isolate some of the characteristics of government action.

First, we must admit the validity of Mao’s rather starkly expressed dictum that political power flows from the barrel of a gun. A government without power to coerce is without effective authority, as this nation learned well under the Articles of Confederation. It follows, then, that every extension of state power involves ipso facto an extension of the power to coerce.

Moreover, the exercise of government power is relatively inflexible, in the sense that it allows for a comparatively small number of alternatives, thus requiring substantial uniformity. By contrast, the "consumer plebiscite" of the market—to use Ludwig von Mises‘ phrase—allows wide variations of choice.

The Struggle for Control

From these two characteristics emerges a source of great concern: Various groups will continue to attempt control of the government in order to implement their social philosophies or to benefit their friends. Such is the nature of democratic—and indeed, all other—politics. So long as the domain of state action remains limited, so too will possible abuses, and the loyalty of those groups out of power will be little strained. But when the scope of government authority is widened to include the jobs and the property of the opposition, the threat increases that the fragile tree of society will splinter. For as Milton Friedman has argued, every added area of control over the economy increases the risk of potential dominance—by those who regulate the nation’s livelihood—over both the economic and the non-economic prerogatives of the opposition. Each accretion of state power multiplies the temptations for rulers to overstep their bounds and, thus, magnifies the danger that the ruled will rebel rather than allow themselves to be led by the jugular vein.

 

What is more, discretionary government, with its propensity to deal in terms of blocs and ethnic groups and labor-versus-management, actually creates and promotes factions, reinforces them where they already exist, and teaches them to see in the state a vast reservoir of coercive power with which to impose their visions on society. We are reaping the harvest in violence, terrorism, and a general pull toward the left.

 

A World-Wide Situation

 

It may seem that we have been speaking solely about the United States and its associates among the western nations. But similar principles can be verified on the international level. Where political considerations have not had a negative effect on world prosperity, they have generally been irrelevant to it. Many of the issues shadowing international peace today, issues such as hunger and technological backwardness, are really problems of production inefficiency and poor economic organization, and should not have been regarded politically in the first place. To do so is to open the door to violent blackmail as a means of "solving" such problems, since, as we recall, inflexibility and potential force are characteristic of political action. Ultimatums are out of their element in the marketplace; an atmosphere of free trade would, by de-ideologizing these issues, defuse them as well.

 

But we would not need to ask the nations of the "Third World" to sacrifice their economic interests in the cause of world peace; as we shall note later, it is highly probable that the economic output of these nations, which is to say their real wealth, would be increased by a de-bureaucratization of their productive processes. The most effective rebuttal to Karl Marx, John Davenport has remarked, is Henry Ford.

 

Yet there is little immediate likelihood that the free market will find an enthusiastic response in the developing nations, for which fact the West is at least partially to blame. Our foreign aid policy, which deals with rising nations on a state to-state basis, reinforces their tendency toward reliance on statist economic policies. That these nations then regularly bite the visible hand that feeds them has probably little hurt their economic development. What has impaired their capacity has been their disregard for free trade and property rights, which disregard discourages investment of foreign capital, and their similarly irresponsible fiscal policies which, more often than not, devour their limited domestic capital through rampant inflation.

Bureaucratic Inefficiency

In this context, we might recall the recent controversy about international industrial bribery. Friedrich A. Hayek has demonstrated that corrupt men are drawn to concentrations of government power, so that—though the vast majority of civil servants are presumably honest—the very nature of bureaucracy militates against the pious dream of an incorruptible public administration. In fact, we venture the prophecy that instances of bribery will keep pace with burgeoning regulation. If no favors were available from the state, no businessman would seek them.

 

Nonetheless, far more harmful than graft in its effect upon the public weal is the widely-trumpeted inefficiency of the bureaucracy. It is commonly hoped that bureaucratic overhead will eventually be trimmed—but the writings of Martin Anderson, Edward Banfield, Ludwig von Mises, and others paint the outlook for such improvement as rather bleak. Because the performance of most government bureaus does not lend itself easily to precise measurement, it is difficult for department heads to maintain cost-effective oversight of their ever-growing charges. And because the logic of bureaucratism tends always to greater centralization, the sheer size of the problems to be solved will overwhelm the bureaucrats, no one of whom can hope to master even a minute proportion of the data involved. Thus, capital resources will be taxed and squandered.

 

There is, of course, an irreducible bureaucracy essential to a civilized polity. But governments do not create wealth, and, as the bureaucratic sector grows relative to the sector of profit management, the percentage of society’s capital which it absorbs will become larger. What is more, as this growth continues, and the price mechanism is distorted, or even—in areas of more purely bureaucratic management—disregarded, state inefficiency will actually tend to increase, since the market price is in fact the guide of economic planning.

 

Visible hands are self-generating. After one intervention has deflected market forces and distorted the indicators, fingers will be pointed to this dysfunction as a manifestation of capitalistic inadequacy, and cries will be heard for a second incursion to cure the effects of the first—though this will naturally not be recognized. The Federal Reserve System gave us the Great Depression and the New Deal. Government-fed inflation, at least once, yielded wage and price controls. Earlier this year, the state of California raised the minimum wage, and demand began to rise immediately for a state jobs-program to alleviate high unemployment among the young. Truly, the left hand knows not what the right hand doeth.

 

No Middle Way

 

Thus, we are on an upwards-tending spiral toward more government control of our economic affairs. But this was predictable, for mixed economies are, as often noted, inherently unstable. Once a government obligation to egalitarianism is proclaimed, and the necessary laws enacted, there is no fixed limit to the amount of personal wealth that can be expropriated. And once state responsibility for a "fair" wage-price structure and for "full employment" is assumed, the floodgates – are gaping wide. Attempts to reconcile laissez faire economics and socialism are bound to be uneasy. Indeed, Professor von Mises has argued that a middle ground simply does not exist.

 

By both theoretical analysis and documentation of thousands of planned-economy failures, neoclassical economists have shown the counter productivity of welfare economics. They have called for release of the invisible hand as the most accurate guide to the efficient use of capital. They have noted that capitalism itself has contributed more than any other system to the prosperity of the common man.

 

And yet, while the case for the market has never been stronger, there is no doubt that the old nostrums of interventionist economics are on the rise again. They are incarnate in a proliferation of socialist governments. In the countries of the West, the visible hand is active once more in the construction of a neo-fascist controlled economy which rocks its subjects to sleep with its acknowledgment of private property rights, but in crea singly circumscribes these rights with volumes of regulatory law.

 

Reprinted by permission as the first place winning essay, college division, 1976 Adam Smith Bicentennial Essay Contest, sponsored by National Federation of Independent Business in cooperation with the Intercollegiate Studies Institute.

In addition to a scholarship award of $1000, the essay winner was invited to attend as a guest the 1976 meeting of the Mont Pelerin Society in St. Andrews, Scotland.

 

— BIBLIOGRAPHY —

Anderson, Martin, The Federal Bulldozer (MIT. Press, Cambridge, Mass., 1964). Banfield, Edward C., The Unheavenly City (Little, Brown and Company, Boston, 1968). Davenport, John, The U.S. Economy (Henry Regnery Company, Chicago, 1964).

Friedman, Milton, Capitalism and Freedom (The University of Chicago Press, Chicago, 1962).

Hayek, F.A., The Road to Serfdom (The University of Chicago Press, Chicago,

1944).

Hazlitt, Henry, Economics in One Lesson (Harper & Brothers, New York, 1946). Mises, Ludwig von, The Anti-Capitalistic Mentality (Libertarian Press, South Holland, Ill., 1972.)

Smith, Adam, The Wealth of Nations.


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Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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