Abridged from the keynote address delivered at the May 2005 Adam Smith Award Dinner.
I am very glad to be here. Though I have never been here before, I have had a half-century relationship with FEE. I first met Leonard E. Read in 1957 at a Mont Pelerin Society meeting in Switzerland. He and the Foundation for Economic Education he created were indeed in advance of all those think tanks that later blossomed all over the world.
Ignoring the Evidence of History
Several years ago I wrote a piece in which I stated that classical liberalism had lost its spirit. We have lost this spirit because of our failure to understand and appreciate the superiority of the Western value system. When Italian premier Silvio Berlusconi suggested during a visit to Washington that the Western value system was superior to all the alternatives, he was condemned by American media, academia, and politicians. Ignoring the evidence of all human history, they have come to believe their own stylized constructions of reality and refuse to admit that any system can be better than any other. That’s how political correctness has corrupted our very souls. Only if we acknowledge that the Western value system is indeed superior to all known alternatives can we restore the spirit of classical liberalism.
The first step towards such restoration requires us to recognize that our basic institutions are the heritage of a public philosophy clearly articulated by our eighteenth-century forebears, notably by Adam Smith and the Scottish Enlightenment as well as by the American Founders. It was they who refined a set of norms, rules, procedures, and practices that we now simply take for granted: the rule of law with its universal and nondiscriminatory application; separation of powers; and universal and open franchise. This means guaranteed protection of person, property, and contract, with periodic elections, open entry into competition for political office, and constitutional limits on the extent of governmental action. That is the institutional heritage of classical liberalism, which we must zealously protect. However, the motivation for such protection becomes more and more tenuous as public understanding of the foundations of the free society is eroded.
Once we abandon the idea of universal and nondiscriminatory application of the law, the "general welfare" state becomes the transfer state, with programs targeting particular segments of the population. As differing majority coalitions grow more and more effective, the transfer state becomes a game where claimants use political authority to take from each other and where the precepts of classical liberalism fade or even disappear.
Between a Rock and a Hard Place
Such a shift demonstrates a flaw in the structure of our political institutions. Procedures for collective decision-making have to operate within constitutional rules that evolved long before the modern welfare state placed demands on our fiscal capacities. These procedures allow decisions on the spending side of the budgets to be made independently of the decisions on the taxing side. The very simple logic of Public Choice theory explains that under those conditions rates of government spending will always be higher than the revenue from the taxes legislatures are willing to impose on their constituents.
During the second half of the 20th century this gap between government spending and tax revenue was widely ignored by the general public. The looming fiscal crisis has only emerged into public consciousness in the new century. Some estimates suggest that the net deficit we are facing in the United States amounts to nearly 45 trillion dollars. At the same time we are not willing to tax ourselves enough to pay these liabilities that the government promised the American people.
We are definitely between a rock and a hard place. How will our political institutions respond given current public attitudes? One can expect widespread and politically effective resistance to any reduction in promised benefits and at the same time to any increase in taxes.
It seems very clear to me that we will move towards the introduction of discriminatory changes. President Bush’s scheme to reform Social Security already suggests cutting benefits for upper-income groups and raising or maintaining benefits for lower-income groups. On the tax side the government will have to gradually raise the percentage of income subject to the Social Security tax. Thus Social Security will completely lose its "insurance" aspects and will evolve into a very simple welfare transfer program. The structural flaws we allowed to emerge in our constitutional democracy will lead to further erosion of our classical liberal heritage rather than its restoration.
This raises an important question: why, in spite of the acknowledged failure of socialism both in idea and in practice, do people continue to demand the very programs that define the modern welfare state? We surely hoped that the demise of command-and-control socialism would cause societies everywhere to turn to the market and democratic governmental structures, but this was not to be. Socialism is dead, but Leviathan lives on.
We should be alarmed by a continuing increase in the politicized share of economic activity motivated by the demands for welfare payments. I call it parental socialism. Under parental socialism people generally recognize "the fatal conceit" that Hayek emphasized and the dismal failure of managerial socialism. Americans generally do not believe that collective organization is efficient; nor do they seek to control the lives of others. They demand welfare programs for a very different reason: they simply want to be dependent on the state. People are afraid to be free.
Fear of Freedom
The popular demand for collective provision of welfare programs can be traced to the historical coincidence of two fundamental changes in the current of ideas. Late in the 19th century, the German philosopher Friedrich Nietzsche pronounced that God is dead. Nietzsche meant that religious faith in a Supreme Being, along with the institutional embodiment of this faith, no longer remained a motivational force in the lives of people.
At the same time the socialist idea, inspired by Karl Marx, emerged in public discourse. Socialism demanded collective and political control over production and exchange as a solution to all social ills and spiritual needs. As the dominance of the Church waned, individual liberty was deliberately forsworn by the shift of authority from God, to the state itself. The sentiment expressed in the old hymn "God Will Take Care of You" was transformed into "the state will take care of you." The state simply replaced God as a parental surrogate.
Welfare programs were in fact not imposed from above by an elite who claimed superior wisdom or by those who simply sought to benefit at the expense of others. Popular support for welfare found its source in this very shift in allegiance from God to the state. People became fearful of the personal responsibility they would have to assume if released from the shackles of collective control.
When the fiscal illusions of the modern state fostered by our flawed constitutional processes are revealed, this social democratic god will fail. In one sense this failure is already here: modern welfare democracies cannot finance the liabilities they have accrued over several decades without bringing fiscal deprivation to some elements of the constituency. The conflict over whose ox is to be gored will be central to the politics of the first half of this century. More hierarchical classifications will emerge to identify individuals by membership in politically defined groups, and more discrimination will follow.
Ideas Have Consequences
A bedrock assumption of classical liberalism is the opposite: people are natural equals and should be treated as such along all dimensions of political organization and action. In this sense, classical liberalism is profoundly egalitarian, rather than hierarchical. Adam Smith’s reference to the natural equality between a philosopher and a street porter reflects this attitude, which must remain a crucial part of classical liberal faith if we want to preserve the institutions of civic order that this faith made possible.
Classical liberalism as an idea and an institutional structure makes no claim to serve as God. In fact religious faith, with its emphases on self-reliance and independence, is a complement to classical liberalism. To the extent that God returns, the dependency of individual citizens on the state is necessarily reduced as long as religious zealotry does not motivate political intrusion on the personal liberties of those who lack similar faith. The separation of church and state, if respected by politicians along with the open competition among different religious factions, serves to keep such zealotry in check.
It is only too easy to take a pessimistic stance and judge the situation to be hopeless, but I always say, "I’m a pessimist looking forward, but an optimist looking backward." We Westerners are fortunate to have the institutions of the free society as part of our heritage. We must ensure that these institutions are not eroded beyond recognition through our failure to appreciate their basic ethical logic.
Ronald Reagan’s "shining city on a hill" stirred the souls of men and women throughout the land. It is vital that we continue to hold on to the Classical Liberal Dream and to teach, indeed to preach, its principles.
James M. Buchanan is one of the most important economists and teachers of our time. In 1986 he was awarded the Nobel Prize in Economics for his revolutionary Public Choice theory. Public Choice forever changed our understanding of the rationale behind economic and political decision-making, explaining how politicians’ self-interest affects government policies. Dr. Buchanan has profoundly influenced generations of students, scholars, and businessmen through his teaching, writing, and lecturing.
Among the many influential books he has written are The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962) with Gordon Tullock; Cost and Choice (1969); The Limits of Liberty (1975); and Liberty, Market, and State (1985).
Professor James Buchanan earned his B.A. from Middle Tennessee State College, his M.S. from the University of Tennessee, and his Ph.D. from the University of Chicago. He currently serves as the Advisory General Director of the James M. Buchanan Center, named in his honor, at George Mason University.