Freeman

ARTICLE

Order and Disorder

JANUARY 01, 1980 by WILLIAM H. PETERSON

Dr. Peterson is the Scott L. Probasco, Jr., Professor of Free Enterprise, director of the Center for Economic Education at the University of Tennessee at Chattanooga, and a member of the Mont Pelerin Society.

In one part of Spain, some 20,000 demonstrators protest the construction of a generating station to be equipped with an American-sup-plied nuclear reactor, and police cordon off access highways to prevent the gathering of an estimated 10,000 more. In another part of Spain, Basque separatists block the main highway to France, burn buses and cars, and initiate a general strike involving tens of thousands in the Basque region. And across Spain, social and economic indicators spell other troubles: the crime rate rises, drug addiction spreads, unemployment approaches the 9% mark, and inflation rots the Spanish peseta at the rate of 16% a year.

Spain, one discovers, is part and parcel of “the Western sickness”—the disorder of the Western democracies.

But in Madrid, at a week-long meeting last September of the Mont Pelerin Society—an international group of market economists—the talk is not only of disorder but of order: the essential social harmony and economic growth implicit in a society of unhampered markets, of neoliberal values, of freedom and free enterprise. For example:

• University of Chicago economist George Stigler reaffirms the competitive order, with its system of built-in rewards and penalties, as a means of enhancing the ethics of society.

• British economist Arthur Shen-field gives the case for withdrawing legal exemptions from unions and resubjecting them and their members to the law of contract and tort as a means of correcting labor power abuses.

• Guatemalan businessman and university trustee Manuel Ayau cautions his fellow businessmen everywhere to do their homework on the finer points of free enterprise economics and avoid seeking government favors like a plague—or else risk the image of appearing as naive and two-faced in the court of public opinion.

• Erasmus University economist Roland Vaubel of Rotterdam employs the Buchanan- Tullock “theory of public choice” and finds politicians, bureaucrats and voters, in utilizing the coercive powers of the state, a lot less public-interest-ed and a lot more self- interested than is commonly presumed.

• West German economist Gerhard Prosi analyzes and rejects the push for codetermination—government insistence on union representation on corporate boards—citing West German experience in which union representatives opted for short-run worker advantages at the expense of long-run company objectives.

• University of Illinois economist Donald Kemmerer puts in a plug for “honest money” and the gold standard as a means of restoring order in the current international monetary turmoil.

The turmoil, monetary and otherwise, is pervasive as well as gloomy. Swedish economist Eric Brodin, for instance, finds Sweden’s famed “middle-way” welfare state counterproductive, to put it mildly. Sweden’s taxes are about the highest in the world. This factor has contributed mightily to its “brain drain” and bodes ill for its export- oriented economy to compete in world markets. To make matters worse, income tax progressivity—the tax biting deeper and deeper as incomes inflate—depresses employee productivity by dulling the incentive to work harder or longer and by inducing absenteeism. Swedish absenteeism increased 63% from 1960 to 1978, Brodin notes.

In addition, he points out, the tax burden has pushed as much as 10% of the Swedish economy into the “underground” of barter and unreported sales and incomes, so as to evade the tax collector. Thus, say, a Swedish dentist and carpenter swap some bridgework for some kitchen cabinets. Things like that prompt Eric Brodin to suggest that the Swedish tax system increasingly puts a tax on honesty; and he quotes renowned Swedish economist Gunnar Myrdal who is blunter still on accelerating tax-cheating: “We are becoming a nation of hustlers.”

In like manner, University of Rome economist Antonio Martino details the spread and repercussions of statism in inflation-rife Italy. One indicator he employs is the ratio of public sector spending to national income. He reports that this percentage has climbed in Italy from 37% in 1960, to 44% in 1970, and is expected to be between 55% and 60% in 1979, a trend greatly facilitated by the Italian government’s penchant for financing its deficits over the years by money creation—in effect, the printing press.

Professor Martino notes how Luigi Einaudi, Italy’s first president and an early member of the Mont Pelerin Society, had anticipated the problem of deficit finance. During the drafting of Italy’s postwar constitution, Dr. Einaudi sought and won a provision which states: “Every law which involves new or greater expenditures must indicate the means to meet them.” But, as may be expected, this provision has been progressively ignored by Italian politicians, especially since the early 1960′s when they “opened the door to the Left.”

Helping to break Italian budgets, says Dr. Martino, has been the policy of purchasing “problem firms” so as to save threatened jobs. But “problem firms” seem to become even more problem-prone under state ownership, for losses, apparently, are of little consequence. For example, Alfa Romeo, the prestigious state car manufacturer, produces about 200,000 cars a year, and annually loses on the order of 200 billion lire. In other words, the manufacturer—or rather the Italian taxpayer loses roughly one million lire, or $1,235, per car.

The irony of these and similar national examples of disorder put forth by other Mont Pelerin speakers is told by Nobel Laureate in Economics F. A. Hayek. To restore “order” the authorities ignore the fact that it was their interventions that largely caused the problems in the first place, and so they intervene further. For example, they fight inflation with price controls. But the more they intervene, frequently egged on by interest groups, the greater becomes the disorder.

So Hayek points to the “spontaneous order” inherent in free markets, the order springing from the nature of knowledge. He stresses the dynamics and wide dispersion of economic knowledge, especially that related to supply and demand. It is the inevitable lack of this knowledge, along with the vain attempt to repeal the law of supply and de mand, says Hayek, that frustrates central planners, welfare administrators and industry regulators—as well as their respective nations.

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January 1980

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