C
ritics accuse libertarians of reveling in government failures.Yes and no. No one is pleased to see the destruction caused by government policies, whether small scale, as when a tighter regulation causes business failures, or large scale, as when wars destroy life for millions.
The kernel of truth to the claim is this: the failure of govern-ment illustrates something extremely important about the structure of reality that most people are likely to forget. It comes down to this: statesmen and public officials, no matter how powerful they may be, cannot finally control social outcomes.
If I might offer a summary of a point emphasized in all of Mises’s works: the structure of society and world affairs gener-ally is shaped by human actions, stemming from imaginative human minds working out individual subjective valuations, and their interactions with the material world, which is gov-erned by laws that are beyond human control.
What that means is that you and I cannot on our own, even if we have maximum political power, control all of human soci-ety, and especially not its economic side.
*December 2003
Let’s first consider an example from current popular wisdom about the manufacturing base. Many products that were once made in the United States—thinking here of televisions, pianos, firecrackers, plastics, and bicycles—are now made in China.
This has caused a great deal of alarm—all unwarranted, so far as sound economics is concerned.
But let’s say we have the ambition to change this social out-come. Anyone is free to build a bicycle and attempt to market it to willing buyers. Let’s say you rent some property, hire the workers, acquire all the necessary capital, and then put your bike on sale. In order to cover your costs and make a profit, you find that you must price your bikes above the going market price. Maybe you can persuade people that you have a special product that is better than the others. Or maybe yours will sit on the floor. Or maybe you will have to lower your price and you will find that your revenue does not cover your costs, and you have to go out of business.
No matter what you decide, this much is clear: you are not dictating the outcome. You wanted to build bikes, but it is the consuming public that decides whether it is in our interest to do so. There is nothing you have to say about it. You cannot make people fork over the money. I would venture to suggest that you will ultimately come to the conclusion that you should be doing other things besides attempting to keep up with other businesses that have lower labor and capital costs and hence can make a profit through selling goods at much lower prices.
But let’s say you decide that you don’t want to bow to the realities of the market. Instead you lobby Congress to tax every-one who buys a bike from overseas. The tax is high enough that you can continue to charge exorbitant prices for your bikes. You make a profit. But at what expense? The consumers who buy your bikes have less income left over for other pursuits, whether consumption, saving, or investment. The workers you are employing are being kept from other pursuits as well, and the capital you are consuming is not available for other projects.
Ultimately, you have skewed the entire economic system in a way that benefits you at everyone else’s expense. Others have found a way to do what you are doing much more efficiently, but because you lobbied and got your way, society is prevented from benefiting from others’ innovations. And how long must this distorted system last? That you managed to tax everyone to benefit you does nothing to change the reality that others can do what you are doing more cheaply and better. Do workers really want to be employed in an industry that is something of an artifice? Do consumers really want to pay high prices just so that you can continue to indulge in your bike-making passion?
Clearly not. At some point, people will catch on to the racket, and find other ways to go about acquiring bikes. Maybe they will exploit loopholes in the law that allow them to import bike parts. An industry of do-it-yourself bike building becomes a threat to your profits. Or perhaps black markets will take over.
Or maybe people will turn away from bikes altogether and starting trying out new forms of informal transportation. Skate-boards are fitted with handlebars. Gas-powered scooters develop a peddle-only option. The very definition of a bike comes into question. Increasingly, enforcement will have to become ever more onerous.
At some point in this game, we face a choice. We can con-tinue to impose an ever more absurd and preposterous system of regulations and protections just so that you can benefit, or we can bow to reality and let in foreign bikes for consumer pur-chase. Let’s say your tariff lasts a year or even 10 years. What will it accomplish? In that time, vast resources are wasted. Con-sumers of all sorts are exploited. Capital is consumed in eco-nomically wasteful ways. People are pushed around and the police powers of the state grow. It does society no good at all.
My point is that whatever the fate of the so-called manufac-turing base, there is nothing in the long run that can be done to turn it in one direction or another. The fate of manufacturing is in the hands of consumers at large, and subject to the laws of
economics which no man can repeal. It is the outcome of human choice.
Now, the Bush administration has thought otherwise and imposed a huge range of protections to benefit its supporters and people who the administration hoped would become its supporters. The result has been to skew the world economy, hobble markets, delay inevitable transitions, and impose mas-sive social costs.
What this example shows is that governments are not omnipotent. Many try to be, and no government is liberal by nature. But there are limits. Governments bump up against human valuations time and again. Even in the highly rarified event of a despotic government that rules a population unani-mously in support of despotism, government still bumps up against the structure of the world, which resists control.
Let us consider another example. Let us say that government desires a strong dollar. But it still wants to print dollars and ship them around the world. In this case, there is nothing that gov-ernment can do to insure the dollar’s strength against depreci-ation. Nothing. This is due to the laws of economics. All else equal, the value of a currency in terms of goods falls as its quan-tity increases. Governments that desire otherwise can only shake their fist in anger.
The same is true domestically. The government wants eco-nomic recovery before a recession has fully run its course. It thereby drops interest rates, spends vast amounts of money to gin up demand, and otherwise encourages as much consump-tion as possible. These tactics can result in some short-term gains but it doesn’t work in the long run. These tactics deplete savings and capital and weaken the foundation for solid future growth.
The issue of the price of prescription drugs will be a big one in this coming campaign. The problem is high prices. Popular wisdom has it that this is because of the greed of the medical industry. The truth is that these high prices are partly a result of subsidized demand due to Medicare and Medicaid, insurance
regulation, and the restricted supply due to patent laws. In other words, the political class is responsible for the high prices.
It’s true that the pharmaceutical industry is not complaining. In fact, high prices are precisely what its friends in government want to bring about.
They may regret that the poor have to pay the higher prices, but not enough to do anything substantive about it. Prices would plummet today if patents were repealed, free trade (including re-importation) allowed, and subsidized demand ended by the abolition of Medicare and Medicaid. But no one wants to consider that solution, so Congress creates ever more intrusive programs designed to control prices, keeping the prices high enough to satisfy the industry but low enough to reduce the political clamor.
The problem is that the government can’t have it both ways.
It cannot reward its friends with high prices and keep con-sumers happy at the same time. The current system with its large subsidies is only creating massive new liabilities in pro-grams that cannot be funded in perpetuity without massive tax increases that no one is willing to advocate. Absent tax increases, the only answer is inflation, which taxes us in other ways.
One way to think about government is as a rat wandering through a maze with no escape. There is no magic solution to getting around basic economic laws. All lunches must be paid for by someone, prices cannot be both high and low at the same time, and all attempts to coerce generate counter-reactions. In short, there is no alternative universe in which the fantasies of politicians come true.
But try telling that to the political class. The last thing they want to hear is that their power is limited, that their will is not a way. They are prone to believe that membership in the politi-cal class comes with the privilege of shaping the world to their liking. If you read the social science literature, you find the same error at work on a nearly universal basis. Very rarely does
anyone come along and say: great theory but it has nothing to do with reality. You are just playing intellectual games.
Socialism was really nothing other than an intellectual game.
People from the ancient world to the present conjured up some vision of how they would like the world to work and then advocated a series of measures of how to achieve it. Mises and his generation explained that their vision was fundamentally at odds with reality. In the real world, capital must have prices rooted in the exchange of private property in order for it to be employed in its highest-valued capacity. It solves nothing to say that everyone should own capital collectively. This was the equivalent of pointing out that the Emperor was wearing no clothes.
In some ways, what we do as commentators on economic affairs is to follow this model again and again. The other day, a candidate for president suggested that the answer to our eco-nomic woes was more regulation. He had it all figured out in his mind. Immediately, free-market economists from all over the world joined forces to point out that his goal of higher eco-nomic productivity could not be achieved this way. It was an unwelcome message but one necessary to deliver regardless.
The experience of Iraq has provided myriad examples of the same. The US government wants to pump oil. It wants to start factories, stores, and commerce generally. But it refuses to put private owners in charge. As a result, all its military muscle has amounted to very little at great expense. It is a classic example of how governments fail when they try to fight against forces they cannot control. Factories in Iraq that have gone into oper-ation have done so without support of the occupying govern-ment.
And think of the war generally. At the outset, the visionaries in the Bush administration imagined that Iraq was really a very simple problem to solve. It only needed to be decapitated and the magic dust of the US presence would otherwise create an orderly and prosperous society that would be a model for the region.
Then reality hit. Crime was unleashed. Feuding political fac-tions clamored for control. Production stopped. Society flew into chaos. This was not because of the absence of political leadership.
It was because of the presence of foreign martial law in a country that was seething in resentment against the United States.
Time and again, we have seen evidence that the Iraq war only accomplished the opposite of its aims. Its purpose was to find weapons, punish terrorism, and bring order to the region.
Instead it has fueled terrorism and brought new levels of disor-der to the region. Having failed to achieve its stated goals, the administration then redefined the war in terms that reflect whatever was accomplished: namely to toss out and capture Saddam.
In this sense, the war was like any other government pro-gram: bringing about the opposite of its stated intentions and doing so at greater expense. Thus do we see the intersection between foreign and domestic policy. Government is famously ham-handed at home and similarly incompetent abroad. No matter how much government claims that it is master of the universe, it constantly confronts forces beyond its control.
In all the talk of the calamity of this war, never forget the broader picture: what an incredible opportunity was squan-dered after the end of the Cold War. The West had emerged as the universally acknowledged ideological victor in that 40-year struggle. That the Cold War was not actually an ideolog-ical struggle so much as a classic standoff between two empires is irrelevant for understanding the implications of this fact: totalitarian communism collapsed while the free eco-nomic system of the market remained standing in total tri-umph. The world was ready for a new period of genuine liber-alism, and looking to the United States. On the verge of an amazing period of technological advance, we were perfectly situated to lead the way.
There had never been a time in US history when George Washington’s foreign policy made more sense. A beacon of lib-erty. Trade with all, belligerence toward none. Commercial
engagement with everyone, political engagement with as few as possible. The hand of friendship. Good will. This was the prescription for peace and freedom. It was within our grasp.
Our children might have grown up in a world without major political violence. A world of peace and plenty. It could have been.
But it was not to be, mainly because George W.’s father decided that he wanted to go down in the history books for doing something big and important. What else but war? The United States was now the world’s only superpower and itch-ing for some fight somewhere. It’s a bit like a playground filled with wimps and one boy with a black belt in karate who never absorbed the lesson in how and where to use his fighting skills.
And then there was this oil-drilling dispute between Iraq and Kuwait, and Bush decided to intervene. Twelve years later, US forces are still there, causing unrelenting havoc for those poor people.
Here at home we are given constant examples of the huge gulf that separates government’s perceptions of itself versus the reality. The Bush administration wanted to give the steel indus-try a boost. The administration established tariffs, which amounts to a tax on all consumers of steel. American manufac-turers faced a choice of paying the tax to buy imported steel or paying the higher prices for domestic steel. Those who could do neither had to cut back production and hiring in other areas.
Other consumers had to pay higher prices, which diverted income from other pursuits.
As for the steel industry itself, the tariffs did nothing to help it achieve greater efficiency, which is the only way to deal with more efficient competitors. They only ended up subsidizing inefficiency. Even then, it wasn’t enough. During the period of tariffs, the industry dramatically consolidated in order to become more efficient in other ways.
Once faced with the prospect of trade wars—the ultimate cost of protectionism—the Bush administration pulled back and repealed the new tariffs, thereby landing the industry in
exactly the same predicament it was in before the tariffs were passed. As for commercial society as a whole, it paid dramati-cally higher steel costs, and faced sporadic shortages, for absolutely no reason.
Faced with failure on every front, the Bush administration did the right thing and repealed the tariffs. Not that it was hon-est about the failure. Instead it claimed its policy worked so well that it could now repeal it. This is like a physician prescrib-ing poison and then changprescrib-ing his mind. He can’t but try to put the best spin on it, I suppose.
But what a beautiful example of the powerlessness of gov-ernment this is! The Bush administration wanted to save Amer-ican industry and only ended up vastly raising the costs of doing all forms of business. More cutbacks are inevitable as steel production shifts to other countries and the United States finds its comparative advantage elsewhere.
Much legislative energy is poured into helping some groups gain favorable treatment in the workplace. I’m thinking here of the usual litany of victim groups as identified according to race, ability, sex, national origin, religion, and the like. Have these laws actually helped the group in question? The results are mixed at best. If you send people out into the workforce with a high price attached to their heads—and the prospect of a law-suit is a very high price indeed—you only make employers less likely to hire them.
I don’t doubt that some people have been helped by these laws, but they are not the people most in need of help. Today, the disabled, blacks, women, and religious minorities go in search of jobs with a major problem: employers fear them on the margin, and, on the margin, are less likely to hire them rel-ative to others, provided they can get away with it. It is the least qualified among them who pay the highest price. A good test case is disability: it is a documented fact that unemployment among the truly disabled is higher today than it was when the Americans with Disabilities Act was passed.
Because libertarians know in advance that government poli-cies are destructive, we tend to focus our editorial energy on pointing to its destructive effects. But in our zeal to draw
Because libertarians know in advance that government poli-cies are destructive, we tend to focus our editorial energy on pointing to its destructive effects. But in our zeal to draw