Dr. Peterson Is the director of the Center for Economic Education at the University of Tennessee at Chattanooga. Ha adapted this article from a paper for the Committee on Monetary Research and Education at Arden House, Columbia University, given on March 23, 1980.
How can we unfetter productivity? How can we unleash the inborn incentives dwelling in each and every one of us? How can we release the job-creating, prosperity-inducing genie of savings, of business investment, of capital formation?
How can we, in other words, un-hamper our much hampered system of capitalism? I think the answer is, in a sense, as simple as saying, laissez faire-laissez passer, as Adam Smith and the French Physiocrats said more than 200 years ago. (Or saying, in five “D’s”—deregulate, decontrol, despend, detax and disinflate.) We know, in other words, what has to be done. After all, our problem is not really economic; it is political, and beyond that it is moral.
Even so, I think we who believe in a free society are perhaps at a loss (I know I am) as to just how to tell all concerned—and, really, everybody is concerned—how to unravel the endless, counterproductive snarls of our mixed or, rather, mixed-up economy or, better yet, mixed-up man.
Somehow, then, we must unbind this bound Prometheus that is America—
. . . this so-called Superpower humbled by Iran, bullied by the Soviet Union, hoodwinked by the Third World, and stretched over a barrel of oil by OPEC,
. . . this nation with about the lowest personal saving, business investment and employee productivity rates in the last decade of any nation in the Western industrial world,
. . . this pitiful seemingly helpless giant economy just wracked by unprecedented double-digit inflation and extremely high interest rates* and now plunged into its seventh recession since the end of World War II,
* The Consumer Price Index was up 18% at an annual rate in the early months of 1980, a time when the prime interest rate at major banks hit 20%.
. . . this increasingly “underground” economy, many of whose citizens commit criminal tax evasion in unreported transactions equivalent to more than 10 percent of the GNP or currently more than a quarter-trillion dollars, according to an estimate by economist Peter M. Gutmann of City University of New York,
. . . this increasingly confiscatory economy whose central government soak-the-rich progressive income tax rates stretch from 14 to 70 percent and whose taxpayers year by year pay soak-everybody higher and higher de facto if unlegislated rates as inflation surges ahead,
. . . this socially disturbed society whose once sacred institutions of home and family are being battered by rising divorce and desertion rates and whose literature mirrors a trou bled society,
. . . this increasingly criminalistic society whose serious crime rate against both persons and property has about tripled since 1960,
. . . this huge amorphous Welfare State doling out an ever larger share of its precious national income in the form of politically-entangled in-centive-destroying transfer pay ments, payments for which the Federal Government receives no goods or services in return, payments in an amount, by the way, of some $350 billion at an annual rate currently, or about 60 cents out of the Federal expenditure dollar, up from 35 cents in 1960, today at 16 percent of the national income, up from 7 percent in 1960.
So the question is—can this once mighty industrial colossus possibly rediscover the lost genius of its own creation?
Indeed, I think the question boils down to—can America save itself?
Or maybe the larger question is—if America represents the quintessence of Western Civilization, if it represents the only military might that could conceivably dissuade the Soviets from their dream of world conquest, now advanced by the subjugation of Afghanistan, if it represents the only island of freedom and free enterprise, however emaciated, to which an increasingly Marxian world can hopefully repair then the larger question is: can man save himself?.
Productivity, you see, represents survival. It cuts to the very soul and eons-long heritage of man who, not that long ago, emerged from a cave, and began to cultivate crops and domesticate animals. Man the thinker, the human actionist, you see, is the answer to productivity—or its lack. And that answer, again, is ultimately not economic but moral. In my judgment, our age is marked by a profound moral crisis, a crisis involving a flee-lunch philosophy of something-for-nothing and a rising misuse of the state to that end, hence a crisis involving the sanctity of property and the dignity and freedom of the individual. And on questions of morals, I believe we must look to the nature of man, to his goals, values and traditions, to his fears, confusions and misapprehensions. As Alfred Marshall said at the outset of his classic Principles of Economics some 90 years ago: “Economics is concerned, on the one side, with the study of wealth, and on the other and more important side, with the study of man.” (My italics.)
In this discussion let me reintroduce man in his ancient and modern moral dilemma of using the state not for preservation of life, liberty and property a la John Locke but, advertently or inadvertently, for usurpation of life, liberty and property via the basically immoral process of redistribution of wealth. Let me first provide some background for my point of reference.
Again, our problem is how to unbind Prometheus or, if you wish, unfetter productivity. Recall the story from Greek mythology of Prometheus, the Titan who stole fire from Olympus and presented it to man. The act was inordinate and it infuriated the great god Zeus who punished Prometheus by chaining him to a rock. There each day an eagle tore at Prometheus’ liver until he was finally rescued by Hercules.
To me the message of Prometheus—read the Western democracies—is the temptation of inordinacy. Inordinacy—the word and the idea are to be found in The Reigning Error, the classic 1974 work on inflation by William Rees-Mogg, editor of the London Times—means man’s temptation to reach beyond his grasp, to seek to go beyond the rules and limits of nature and ethics, i.e., to knowingly commit wrong at the expense of right. Such inordinacy is not only fraught with frustration, it is fraught with the greatest danger to the Western world, a danger mirrored today in the high price of gold.
To get back to right and wrong: The key wrong, in my judgment, is the apparently inborn human penchant for lapsing into defiance of principle, into avoidance of restraint, into derision of tradition, into a philosophy of statism, into the undermining of property, into a disdain of work, into, in a word, inordinacy. Today that penchant is seen in surging crime. It is seen in swelling government budgets. It is seen in mounting waste, bureaucracy, corruption. It is seen in galloping inflation. As Rees-Mogg has noted: “Inflation is an inordinacy of money. It is money without order.”
So inordinacy is a form of human folly, an abandonment of reserve, a loss of self- control, even a crime of sorts, a crime against the inherent limits of man, of nature, of law, a folly of robbing Peter to pay Paul. It is manifest in the Old Testament, which, broadly, is a message against inordinacy, a rebuke from the Lord Jehovah to the children of Israel.
Biblical Call for Discipline
The Israelites are told the story of Adam and Eve who had partaken of the Forbidden Fruit, were banished from Paradise and condemned to eternal scarcity (“By the sweat of thy face shalt thou eat bread”). They are told the story of how Cain slew his brother Abel and became a fugitive from justice, the story of the Great Flood that covered the earth and wiped out every living thing save the family of Noah and the creatures in his ark, and the story of Noah’s descendents who sought to build a tower reaching up to Heaven, and how their inordinacy of this Tower of Babel suddenly made their words incomprehensible to many.
These and other Biblical stories add up to a call for discipline over self. For order. Control. Restraint. The Law of Moses proclaims dietary restrictions, including prohibition of the partaking of swine and camels. The Ten Commandments spell out limits, boundaries, restraints, moral scruples, “Thou shalt not do this . . . thou shalt not do that.”
So it is in Greek mythology. Greek tragedy is concerned with the inexorable retribution of hubris, the inordinacy of extreme human pride, of daring to reach beyond the limits of man and nature.
So it was, then, that Icarus flew so close to the sun that his wings melted and he plunged to his death, that Phaethon borrowed the chariot of the sun only to be struck down by a thunderbolt from Zeus to prevent the world from catching fire, that Zeus punished the aforementioned Prometheus for stealing fire from Olympus and giving it to man.
All these myths are in the nature of admonitions, of warnings, of cautions that life is perishable, that man is fallible, that judgment is difficult, that power is corrupting, that human nature has a dark side, that the immoralist wreaks retribution sooner or later, that rob-the-rich-give-to-the-poor Robin Hood can relieve the rich merchants traversing Sherwood Forest once or twice but soon the merchants wise up, travel a different route, and the poor are worse off than ever, that life, you see, is inevitably bound by checks and balances, by built-in feedbacks and controls. As Emerson noted in his essay on Compensation: “Dualism underlies the condition of man. Every sweet has its sour; every evil its good. For everything you have missed, you have gained something else; and for everything you gain, you lose something. All things are moral.”
Social Limits and Controls
In the social world, all things are indeed moral. Thus morals, ethics, values, traditions are social controls, evolved through the hard knocks of man’s experience; and all systems of control have in common one simple principle: they set limits; they establish boundaries; they require norms; they condition behavior. And morals, I submit, bear heavily on the problem of unfettering our much fettered productivity.
Some limits are conventional, as in the provisions of the U. S. Constitution, or in measurements of football fields and tennis courts, the provision of so many points for a touchdown, of so many games in a set.
Some limits are physical, as in the application of physics to the engineering of a given internal combustion engine, for example, so that gasoline explosions can be converted into sustained energy that propels your car. Limits are strict. Thin the walls of the engine enough and the engine will blow up.
Says Rees-Mogg on this point: “Sanity consists in limitation; the inordinate is always insane and always ends in destruction.” Or as Samuel Johnson observed in 1751 (thereby supplying the title to the Rees-Mogg book): “The reigning error of mankind is, that we are not content with the conditions on which the goods of life are granted.”
On the other hand, while just laws, political and moral, set bounds to human conduct, they nonetheless allow that conduct to be free within those bounds. Man is free where he is not legally or morally prohibited; but it is up to him how he pursues that freedom, how he, to paraphrase the Declaration of Independence, pursues that happiness.
For in truth, freedom and order are two sides of the same coin. Freedom is a function of law, civil and moral. Without this rule of law, where anything goes, where nothing is sacred, where nothing is prohibited, where property and contract are unprotected, where personal responsibility counts for little, then human cooperation breaks down, and with it civilization, quite apart from productivity. Beginnings or extensions of such breakdown trends are evident in our times, especially in the progressive removal of limits in our once-limited system of government. The irony of this condition is that the greatest threat to freedom today is law-—in-ordinate law, extortionate law, regulatory law, tax law, monetary law, situational ethics, warped civil and moral law transformed into a Frankensteinian monster of a Welfare State.
For, it is still argued, as it has been for millennia, that if we could only release ourselves from Moloch capitalism, from the vices of greed, avarice and selfishness, and if we would just put our trust in princes, into a benevolent state, we would be gloriously able to distribute income on the basis of justice, righteousness and fairness. Then altruism would replace naked self-interest, then all would be good and lovely in the world. Such is the message derived from a host of writers including Plato, Sir Thomas More and Karl Marx.
Theory of Public Choice
Strange, all such Brave New Worlds of which we have a historical record, all such attempts to strike down profit-seeking and elevate selflessness and the “common good,” have met frustration if not disaster. Yet the siren-song of statism goes on: Private choices are obviously selfish; public choices are clearly altruistic. Or so we are told.
Indeed, a fairly new development to undo such mythology in the history of economic thought came in 1962 when James M. Buchanan and Gordon Tullock wrote their Calculus of Consent and expounded their “theory of public choice.” All too often political scientists and professional economists have held, say Buchanan and Tullock, that “the representative individual seeks not to maximize his own utility, but to find the ‘public interest’ or ‘common good.’ Moreover, a significant factor in the popular support for socialism throughout the centuries has been the underlying faith that the shift of an activity from the realm of private to that of social choice involves the replacement of the motive of private gain by that of social good . . . .”
In other words, Buchanan and Tullock believe that people do not change their self- centered thinking when they shift from the marketplace to the polling booth. In both places people aim at their own advantage and interest. The rational pursuit of self-interest not only holds for individual voters but for politicians, bureaucrats and other government officials as well, whatever platitudes about the “common good” they may voice.
Thus the art of government, especially in this sanctimonious age of democracy unlimited, springs from a moral void and increasingly follows the dictum of Voltaire: to take from some to give to others, to engage in the trade of conferring of privileges and immunities, to fashion government into a game or racket, of quid pro quo, of protectionism, of a benefit for a vote. So vote yourself better housing, cheaper food, free medical care; and, whether citizen or legislator, vote all this in the holy name of the public interest. Or as the Romans observed in the context of “bread and circuses,” Be- neficium invito non datur (a benefit cannot be conferred on an unwilling person). Thus does statism progressively overwhelm capital creation and smother productivity.
Elusive “Social Justice”
Let us suppose, however, altruism somehow does replace self-interest as at least the nominal economic modus operandi. Let us further suppose a public-spirited government planning board is thus charged with altruism as its guiding light to fix wages and prices and allocate production. Social justice. That would be the only criterion.
Ah, but economists from Adam Smith to Ludwig Mises have pointed out the inherent inability of just wages and just prices to clear markets. Human nature and marketplace dynamics simply do not allow such clearance. Utopia is not of this earth. Planning—that sweet-sounding euphemism for socialism—is therefore vain, even though many continue to equate planning with Christian charity and brotherly love.
As Hayek wrote in his Road to Serfdom, the alternative is not plan or no plan. The question is, whose plan? Should each individual plan for himself, or should a benevolent Big Brother plan for him? Mises said the issue is not automatism versus conscious action; it is freedom versus government omnipotence. Said Mises: “Laissez faire does not mean: Let soulless mechanical forces operate. It means: Let each individual choose how he wants to cooperate in the social division of labor; let the consumers determine what the entrepreneurs should produce. Planning means: let the government alone choose and enforce its ruling by the apparatus of coercion and compulsion.”
The devil of this truth lies in the Zeitgeist of the 20th century—a spirit of unlimited democracy, of democratic interventionism or, if you wish, interventionistic democracy. Democratic planning does not lessen the force of what Mises calls “the apparatus of coercion and compulsion,” but the problem is people think, inordinately, it does. Vox pop, vox Dei. And so a few years ago, in a tribute to that perennial gladiator, Senator Hubert Horatio Humphrey, we passed, however emasculated, the Humphrey-Hawkins Full Employment and Balanced Growth Act, which calls upon the President to set 5-year goals for the U.S. economy. Planning of a foot-in-the-door sort, apart from extensive interventionism, is now an official doctrine of the land.
Witness, then, inordinate democracy at work. Observe how organized minorities work their demands on cowed (or, should I say, cowardly) politicians. Observe powerful organized minorities representing farmers, veterans, blacks, educators, women, elderly (euphemistically called “senior citizens”), unions, businessmen (usually subdivided into industries), bankers, doctors, lawyers, Indians, Mexican-Americans, Italian-Americans, Irish-Americans and scores, if not hundreds, of other hyphenated and unhyphenated interest groups, exercising their public choice, ever anxious to wangle some contract, grant, tariff, subsidy, minimum wage, privilege, immunity, exception, welfare benefit or what have you from Congress and various legislatures and bureaucracies. Such wangling, such dark-sided human nature, serves to deter capital formation and individual incentive—i.e., to fetter productivity.
To be sure, all these organized minorities add up to majority rule. Naturally enough, the politician curries favor with these voting groups, frequently and ironically by giving them grants out of their very own tax money. The extent of this mutual milking process in America is seen in figures prepared by economist William A. Niskanen, Jr. of Ford Motor Company in 1976 based upon 1975 figures.
He found that there are more Americans being supported by tax dollars than there are workers in the private sector who support them. He toted up civil servants at all levels of government, members of the armed forces, the unemployed and disabled, public pensioners and those on welfare. He sought to eliminate double-counting—i.e., those on more than one welfare program. (However, he did not allow for nominally private sector employees of government contractors such as defense suppliers.) He then found that these tax dependents, including family members, outnumbered working nongovernment taxpayers by a healthy—or, rather, unhealthy—margin, of about 81.3 million tax dependents against 70.2 million private sector taxpayers. The numbers and the margin are of course greater today, five years later.
Spend, Tax, and Elect
Can there be any doubt that these tax dependents, through their elected representatives, will continue, most inordinately, to vote themselves goodies from the U.S. Treasury? Is this not the theory of public choice in action? Is this not but a logical consequence of public choice, of “voter rationality,” of might makes right, of incipient moral bankruptcy? The situation brings to mind the remark attributed to Harry Hopkins, the intimate of Franklin D. Roosevelt: “We shall spend and spend, tax and tax, elect and elect.”
As a wealth redistribution scheme, I think we can agree that the process is none too efficient. It breeds bureaucracy. It breeds red tape. It breeds social friction. It breeds the crassest politics. It breeds immorality. Moreover, as noted, it significantly destroys human incentive and capital formation—the very foundation of our productivity and well-being. And yet for all of us who think we’re getting too much government, let us be thankful we are not getting all the government we are paying for.
We are paying, however, for a good deal—almost a three-fold increase in the share of personal income going for total government spending in the last half century in the U.S., from 10 percent in 1928 to 39 percent in the first quarter of 1980.
Currently, as we noted, federal government transfer payments—mainly to individuals but including grants-in-aid to state and local governments, and net subsidies to farmers and others—are running around an annual rate of $350 billion out of total current federal government expenditures of around $580 billion, or about 60 cents out of each expenditure dollar. They are greater than current defense spending of about $130 billion at an annual rate or, for that matter, total current business spending on new plant and equipment at an annual rate of about $190 billion. Indeed, current transfer payments come to more than defense and business investment spending combined.
Moreover, the easy assumption that transfer payments are zero-sum games, in contrast to voluntary exchanges which are positive-sum games, is not so. In truth, transfer payments are negative-sum games—for four reasons. First, government overhead to effectuate the transfers—overhead with the usual Parkinsonian tendencies. Second, the resources expended by lobbying groups seeking or defending the transfers. Third, the negative incentive effects on working and saving. And, fourth and most important, the destruction of vast potential capital formation.
This outlay of $350 billion in transfer payments, I need hardly remind you, is especially inordinate and politicized. Most politicians regard the outlay as sacrosanct. To seriously reduce or eliminate the outlay would be tantamount to political suicide. So these transfer payments are fraught with dubious morals, with a something- for-nothing syndrome, if not with quite a degree of outright corruption. For instance, Joseph Califano, when he was Secretary of Health, Education and Welfare, conceded in 1978 that some $6 billion in welfare funds could not be accounted for. How much of that sum slipped into the wrong pockets on both the giving and receiving ends of government largess?
Immorality? Corruption? Sagging productivity? Logically, then, these seem to be the implications of what has been called our Redistributive State. It was Machiavelli, let me remind you, who said politics and morals don’t mix. It was Tocqueville, I believe, who first coined the phrase “democratic despotism” to describe the tyranny of the majority. It was Emerson who said democracy becomes a government of bullies. It was Henry Adams who said politics boils down to the organization of hatreds. (Witness the official assault on the oil companies in America.) It was Disraeli who said there is no honor in politics. (And not long afterwards he had the occasion to upbraid a fellow Tory on the floor of Parliament: “Damn your principles! Stick to your party!”)
I cite these authorities in an effort to buttress the moral answer to our plight of sagging productivity.
For in our economic education efforts, should we not only utilize fact and theory but moral principles as well? Even Franklin D. Roosevelt felt compelled to bemoan welfare when he declared in his State of the Union Message of 1935: “The lessons of history . . . show conclusively . . . that continued dependence upon relief induces a spiritual disintegration fundamentally destructive to the national fibre. To dole out relief is to administer a narcotic, a subtle destroyer of the human spirit . . . . The federal government must and shall quit this business of relief.” But quit it never did. Relief has now blossomed into that spectacular failure, the ubiquitous Welfare State. Listen to George Gilder writing on “The Coming Welfare Crisis” in Policy Review 45 years after F.D.R.: “Welfare now erodes work and family and this keeps poor people poor.” Or to Marvin Stone, editor of U.S. News and World Report: “Welfarism, once planted, sinks deep roots that are difficult, if not impossible, to dig out.”
Is Government Necessary?
Well, is government necessary? Most affirmatively, yes. Without it, who would serve to preclude fraud and force? Who would protect private property and the sanctity of contract? Thomas Paine described government as a necessary evil but it was Ludwig Mises who reminded us: “Government as such is not only not an evil but a necessary and most beneficial institution, without which no lasting cooperation and no civilization could be developed and preserved.”
Is there a way out? Can we save ourselves from ourselves? Maybe. Maybe not. I believe in democratic if limited—repeat, limited—government. I believe in education. I believe education is, indeed, our only salvation. I believe we as economic educators should reassert the moral basis of freedom and free enterprise. The moral basis of government was well stated by Locke who, citing the corruptibility of power long before Lord Acton, gave the case for limited government. He declared that the only reason for government was for the protection of life, liberty and property. Let us, then, reaffirm that nothing is for nothing, that something is only for something, that the essential purpose of government is to provide law and order, to preclude fraud and force.
Let us say further that the market is far more democratic than anything that can be found in the political realm. Let us say that the consumer is a lot more sovereign in the marketplace than he is in the polling booth, that economically he votes every day, usually several times a day, that virtually every producer-candidate he votes for is running scared and delivering on his campaign promises on an “or else” basis.
Let us also say, in the vein of Adam Smith, that the market system is a system of social cooperation and, moreover, the Golden Rule in action. As you know, the Golden Rule says, “Do unto others as you would have others do unto you.” What does the market say? It says, in the words of Adam Smith in his Wealth of Nations: “Give me that which I want and you shall have this which you want.” The market, in other words, says, let me help you so you can help me.
In sum, unfettering productivity is a matter of unfettering freedom and free enterprise—i.e., reining in our inordinacy, regaining our moral roots and limiting once again our now unlimited government.