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As President’s Day approaches, this quote from George Washington provides a concise description of the challenge we face as a free society. The Founders understood the propensity for government to grow at the expense of individual liberty. Much thought and discussion went into the design of our federal system of government, as the Founders sought ways to create checks and balances that would constrain the scope of government while allowing individuals to prosper in a free society.
Today, more than 200 years later, the growth of government continues to threaten individual liberty and economic freedom. As the 20th century made amply clear, individuals interacting voluntarily in a market can create a more prosperous and free society than that designed by government planners. Nonetheless, government continues to play a more prominent role in our economy, and Congress continues to push for more spending on bigger government programs.
Because we live in a world of scarcity, we have a limited number of resources trying to satisfy an infinite number of needs. Every society must therefore make a decision as to how scarce resources will be allocated. There are two options: voluntary exchange or coercion.
Markets allow individuals to peacefully interact through mutually beneficial exchange in a way that provides gains to all parties. Markets are voluntary, dynamic, and evolving. Just as important, markets offer a powerful engine for coordinating activities of the wide array of individuals that make up a society.
Government, on the other hand, is coercive by nature. Resources are allocated by taking from one group to give to another. Expenditures beyond the basic services of government are an attempt to allocate resources through politics rather than markets. Taxes are collected from all, and then spent by the government on particular programs that benefit particular people. When we turn to the government for resource allocation, we leave the world of voluntary transactions. The limited government envisioned by the Founders was an attempt to limit the scope of such coercive transactions.
CSE’s efforts to expand liberty and economic freedom are drawn from the rich intellectual history that shaped the thinking of America’s Founding Fathers. In our century, these ideas have been enriched and explored by such thinkers as Nobel laureates Friedrich A. Hayek, James M. Buchanan, Ronald H. Coase, and Douglas C. North. These scholars examine the critical nexus between markets and governments, and their insights provide both the underpinnings of CSE’s philosophy as well as successful strategies to further market-based public policy.
Hayek presented a compelling case that the central government cannot replace the market’s ability to communicate vast amounts of complex information. Markets allow individuals to coordinate their plans in ways that can almost instantaneously react to changes in market conditions. Individuals with particular knowledge of time and circumstance are far more effective in adjusting to changing economic conditions than a government bureaucracy. With a dynamic market that is constantly evolving, the government can never maintain or capture the information necessary to allocate resources efficiently.
What drives the market’s superiority is the price system. Prices offer a conduit for information that allows both consumers and producers to adjust their behavior in response to far-flung bits of information about the relative scarcity of specific goods and services. Government price controls—direct and indirect—distort the information conveyed by prices. Coordination breaks down, and economic activity becomes less efficient. This is often followed by even more government intervention, which seeks to undo the damage of the first intervention. As a result, government expands at the price of economic liberty.
Buchanan’s research—dubbed public choice economics--focused on the application of economics to political processes. All too often analysts compare an imperfect market structure to a perfect government. Buchanan made it clear that governments are far from perfect, and government actors must be analyzed much the same as market participants. Individuals within a political setting are no different than individuals in a market setting. They all seek to better themselves. What are different, however, are the institutional constraints that guide behavior. In an open market, sellers seek to increase their profits by finding cheaper methods of production, or identifying new opportunities that others have missed. Because markets are voluntary, sellers must seek to satisfy buyers who always have the option of saying no. Unless there are mutual gains from trade, no trade occurs.
Political actors, on the other hand, seek to advance by gaining more votes, expanding legislative control, or bureaucratic reach. Yet political markets are different than economic markets in important ways. Markets are often called a positive sum game, because mutually beneficial exchanges ensures that all parties to a trade gain something from the exchange. Political markets are zero-sum games at best; when the cost of government is included in the transaction, they may even be negative sum games. That is, political actors engage primarily in redistribution, which means when one person gains, someone else loses. Add in what it costs the government to shuffle resources, and the economy may be shrinking.
Public choice analysis offers powerful insights demonstrating that the institutions governing political behavior often lead to unintended consequences; indeed, the institutions themselves can generate outcomes that promote activities that reduce economic growth. All too often, private companies turn to government to obtain what they cannot achieve in the marketplace. Tariffs, regulations, and legislation are used to eliminate competitors and protect revenues. These artificial constraints on competition impose heavy costs on consumers, who now face higher prices and fewer choices in the marketplace.
Coase and North both conducted important research on the role that institutions play in fostering economic growth. Importantly, markets do not exist in a vacuum; they are part of a complex set of institutions that include the political system, the legal system—even the cultural and moral values of the individuals within a society. Work on the role of institutions provides insight into why it is difficult to export free-market economies. Without institutions that protect property rights and enforce contracts, markets do not work well. Countries with limited property rights or a weak judicial system often see little benefit when markets are introduced. Success requires a much broader approach that includes all the institutions that build a free society.
America’s Founders understood the importance of a free society. They sought to build institutions that fostered the growth of freedom. Government’s role in the economy was limited and the rule of law was an important cornerstone of society. In the intervening years, there has been an ongoing intellectual struggle to maintain a free society. Communism, socialism, fascism, and other forms of centrally planned economies have been in vogue at various times with the intellectual elite.
The 20th century is marked by costly experiments in alternative forms of government that took a heavy toll in terms of human life. Despite the prosperity and liberty created by the Founders vision, the push for larger government continues. As Hayek noted, “It is a regrettable but undeniable fact that economics…is liable to recurrent fashions and fads, the periodic re-intrusion into professional discussions of popular superstitions which earlier generations of economists had successfully driven back into the circles of cranks and demagogues.” (Quoted in Reason, vol. 33, no. 10, March 2002) We have all heard or read the latest fads that promote big government, from the costly Kyoto international treaty to Congress’ latest attempt to pass a $74 billion farm bill. However, when addressing these challenges, we would do well to heed Washington’s warning.