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Press Release

    While Markets Sputter, Government Grows

    07/30/2002

    The twentieth century represented an important epoch in one of the world’s greatest struggles—the fight between freedom and totalitarianism. The collapse of centrally planned economies and the dissolution of the largest totalitarian state signaled a clear victory for the alternative of freedom. Yet, when taking stock of the world, it’s clear that totalitarianism is alive and well. Brutal regimes continue to debilitate nations and squander resources in ways that destroy the creative spark that generates wealth and prosperity. Here in the United States, government continues to levy ever-larger taxes, regulate more aspects of our lives and interactions with others, and lay claim to greater amounts of property. Has economic liberalism won the battle but lost the war?

    Clearly, government continues to grow at a substantial pace in the United States. President Bush is in the process of creating a new federal agency and expanding federal oversight of corporate accounting practices, Congress is finalizing appropriations bills that mark a return to deficit spending, and state governments are scrambling to identify new revenue sources to pay for the spending binge of the 1990s. At all levels of government, and in both political parties, the push is for larger government. This increase in the size and scope of government ignores important lessons from the past.

    Emerging from the industrial revolution, a new class of intellectuals began to challenge our understandings of society and markets. The new methods of production were viewed as dehumanizing and alienating, fundamentally altering societal relationships in terms of power and money. Capitalism was viewed as philosophy that was no longer applicable; something that would be replaced by a more organized society better representing the interests of workers. At the same time, a growing confidence in science and man’s understanding of the world introduced the technocratic state, with an implausible assessment of government’s ability to order society’s intricate interactions. The very visible jackboot of government was fast replacing Adam Smith’s invisible hand.

    As collectivists gained ground, new theories of economics and politics emerged, asserting that governments had the ability to calculate and allocate resources in a manner that surpassed the ability of a chaotic, ungoverned market. A few scholars, such as Ludwig von Mises, recognized the impossibility of a government coordinating the millions upon millions of transactions that comprise society. And Friedrich Hayek similarly suggested that the government could not match the ability of a market to process the decentralized decisions of consumers and producers. Such scholars championed economic liberty, allowing individuals the freedom to make their own choices as long as they did not violate the rights of other individuals.

    Yet, by and large, government control and central planning were fashionable and came to dominate political discussions. Bolstered by the Great Depression, technocrats saw their stars rising. Rather than assess the institutional failures that prompted the massive deflation, economists and technocrats began to tinker, calling for more government policies to manage the economy. Keynesian economics took center stage as governments turned to economists for fiscal management. Importantly, this represents an significant departure from classical liberalism, as analysts worried more about “society” rather than the individuals it represented.

    This was most clearly seen in the totalitarian states, where planned economies directed the flow of resources. Capital and labor flowed according to government edict. Put in more human terms, the wealth and property created by individuals were confiscated by the state, and the individuals themselves had little say in choosing a livelihood to provide for their family. It is no wonder the entrepreneurial spirit—and all the wealth and jobs it creates—died or went underground in these planned economies.

    Although not quite as stark, the mixed economies of the West underwent a similar transformation as governments contrived to make economies grow. Tax policy, government spending, and monetary policy became the new tools of economic management. The entrepreneurial efforts of individuals freely interacting were subsumed into highly stylized and technical models of behavior that distinguished little between spending by an individual or spending by the government. Institutions, and the powerful effect they have on behavior, were ignored in favor of fiscal and monetary policies that became levers for government control of the economy. Economic liberty and individual freedom as virtues in and of themselves became lost in the new policy world.

    Towards the end of the century, the costs of these policies became quite evident. Collectivists an increasingly difficult challenge of explaining away the fact that totalitarian societies could not feed themselves. At the same time, interventionist policies throughout the West began to take their toll as inflation eroded the wealth and economic growth of these nations. Unemployment pushed upwards, businesses were wary to invest, and consumers faced double-digit interest rates. Under the weight of this economic burden, nations once again turned toward markets for economic growth. The Reagan Revolution in the United States and the Thatcher Revolution in Britain sought to unleash market forces and eliminate the bureaucratic sclerosis that had stifled growth. These ideas spread to other nations that began experimenting with privatization and free markets. Ultimately, the century ended with the collapse of the largest totalitarian state, the Soviet Union.

    Throughout history, free societies have been the exception, not the rule. But where they exist, people flourish. However, without vigilance, governments grow and politics overtakes markets in controlling society’s resources. In the United States, government is expanding once again, in response first to a foreign threat and then in response to a weak domestic economy. And while the threats and scandals will diminish, the government and its newly found activities will remain. Washington cannot ignore the lessons of history and the importance of markets in a free society. As markets struggle to correct themselves, policymakers should adopt policies that promote rather than replace markets. Policies such as tax cuts, avoiding unnecessary regulatory burdens, and maintaining a firm grasp on federal spending.