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- America’s Fiscal History: From Liberty to Paternalism - September 23, 2021
The tense and seemingly polarized political environment in America today has raised the issue of whether there is some way to reduce the ideological and government-policy conflicts by finding some middle way between the “extremist” positions of “left” and “right.” The fundamental question in all of this is, Can and should liberty be compromised in the pursuit of such a middle-of-the-road alternative?
Senior staff members of the Niskanen Center have issued what amounts to a manifesto making the case for such a middle way in an article titled, “The Center Can Hold: Public Policy for an Age of Extremes”(December 2018). The authors are Brink Lindsey, Will Wilkinson, Steven Teles, and Samuel Hammond.
They basically argue that neither the libertarians nor the progressives and democratic socialists have the only or full and correct answer to America’s or the world’s social, political, and economic problems. There are elements of truth, reasonableness, and experience within both of these “extremes,” and the lesson to be learned, they argue, is to construct a compromise between the two.
Strengths and Claimed Weaknesses of Liberal Capitalism
On the one hand, they say, the market economy has now long demonstrated that it delivers the goods in the long run, sponsoring and creating incentives for work, saving, investment, and most especially the dynamic innovation that improves the material conditions of humankind. Markets and competitive prices are essential for the working of the free economy, but there are limits and problems inherent in the market system, they insist, that only government can effectively and justly correct.
In their view, business needs the restraining and overseeing hand of government policy to correct environmental and financial-market problems that cannot be prevented when the market is left on its own. What must be created, they say, is “a framework of rules designed to link the pursuit of private profit to the service of the public interest” because “it is essential to a properly constituted market where firms can’t make excess profit by pushing off costs onto others.” (See my article “Ten Years on: Recession, Recovery, and the Regulatory State.”)
In addition, capitalism is said to have a tendency toward excessive market concentration when free from government rules and regulations on the size of firms. “If you want competition, therefore,” they write, “you need an active governmental bias in its favor.” A paternalistic governmental hand is needed in the educational sphere as well — not only in the sense of government schooling, but governmental oversight of private and charter schools as well. Regulators must control who can open schools and when they are to be closed, because parents are too ill-informed without political assistance to know what to look for and to want in a school for their children. (See my article “Educational Socialism Versus the Free Market.”)
Furthermore, markets and society in general contain social legacies from the past, a past in which they may have discriminated against or excluded and harmed various minority groups. To break away from this negative intergenerational legacy, society and government must function with “a strong presumption of widespread opportunity and an openness to redistribution.”
Problems With Progressives and Needs for Government
This now gets us to the authors’ view of progressives and the political left. They declare a rejection of anything-goes, unbridled democratic decision-making under which majorities may do harmful and undesirable things to a minority, and which may have wider bad effects on society as a whole. And they tip their hat to public choice theory in that they warn of the dangers in which government regulatory and redistributive powers are used to provide concentrated benefits for narrow special interest groups at the expense of the majority in society, who bear the diffused costs of the gains for those smaller groups able to influence government.
“Democracy,” they say, “like the market economy, needs to be properly regulated to function effectively.” What is needed are “rules that correct for democratic pathologies, but without taking away from the people the right to rule themselves.”
They also discard the political left’s residual calls for old-fashioned socialist central planning and direction of economic and social affairs. They give a nod to Friedrich A. Hayek by stating that there is more knowledge dispersed among all the members of society than a handful of central planners can ever hope to fully and successfully master and apply. Instead, they want single-focused, direct regulatory or fiscal policies to move people and activities in the desired directions while leaving it to people in markets and society to adapt as they see best to reach the politically decided targets and patterns of human interaction.
The upshot of their critique of the “left” and “right” is to then offer a new package deal of their own: “the free-market welfare state.” They argue that societies with large social-welfare programs and wealth transfers “correlate positively” with free markets and “good governance.” Besides, as another economist they quote says, “The more wealth we have, the more government we can afford.”
Referencing the famous Austrian-born economist Joseph A. Schumpeter, they point out that capitalism is both creative and destructive. That is, competitive capitalism effectively replaces existing technologies, products, and ways of producing and marketing goods with new and better ones that all work to make human circumstances greatly improved over time.
But, in the shorter run, capitalism’s disturbances of the prevailing conditions of work and the social order disrupt how people make a living, the standard and quality of their lives, and their senses of community and shared meaning. People often resent and resist these changes to their lives by turning to political means that potentially restrain markets and sometimes weaken the democratic process.
Searching for a Middle Way for Policy
In the authors’ view, the only way to temper, if not to prevent, these antisocial tendencies is to counter them through the institutions of the welfare state that offer security-providing financial floors to prevent those negatively affected by market changes from falling too far, and through trying to otherwise prevent their fall through those anti-market policies that would hinder desired improvement from the wider social perspective.
For them, government is and should be viewed “as an insurance company with an army.” They point to what they consider to be the “comparative advantage governments have in pooling risk [that] produces enormous utility for society as a whole and is unlikely to ever be unwound, at least not without enormous levels of gratuitous suffering.”
All that needs to be done, the authors say, is that “government commitments are in line with available resources [as] an essential element of good governance.” Good government therefore “should interpret its role as defending programs like Social Security and unemployment insurance, ensuring their long-run integrity through prudent public finance.” (See my article “There Is No Social Security Santa Claus.”)
What is required is to put aside ideological perspectives and blind spots, to instead pragmatically judge each issue on its empirically observed merits of success or workability. If markets work, all the better. If they don’t achieve the social goals desired, then use the government to restrain, regulate, or replace the market, and to redistribute income and wealth so outcomes are more in line with desired social patterns of human affairs.
They call for an end to thinking about “politics as a war between liberalism and conservatism.… Rather, both sides hold a partial view of the good, which when balanced within a well-designed constitution can correct each other’s pathologies.… Our distinctive vision represents an attempt to learn from and incorporate what is best in a variety of ideological traditions,” they conclude. “With this approach, we hope to model the art of moderation … and [move] away from the toxic tribalism of our current politics.”
The Old German Welfare State Under a New Label
At one level, we have heard all of this before, more than 100 years ago. In the late 19th century, the beginnings of the modern welfare state were being introduced and implemented in Imperial Germany, at first under the guidance of the “iron chancellor,” Otto von Bismarck, in the 1880s and 1890s. Young American scholars who had gone over to Germany to finish their advanced degrees in one of the social sciences came back to the United States enthusiastic about the “progressive” direction of enlightened German social-welfare policy.
The manifesto authors’ experiential pragmatism, which sets aside notions of government based on “extreme” principles, was articulated, for instance, in a work about Imperial Germany written by William H. Dawson in the decade before the First World War: “No department of economic activity should on principle be closed to the State; whether it should or should not participate side by side with private enterprise, is a matter of expediency and the public interest.… The jurisdiction of the government is a matter not of principle, but of expediency.” What was known as the German Historical School advocated this pragmatic approach to government; it called it state socialism and said it represented a middle way between a totally free market and radical socialism. As Dawson explained, “State socialism is the mean between these two directions of thought; in it the two extremes meet.”
Another American, Frederic C. Howe (who later served in FDR’s New Deal administration), said in his book Socialized Germany (1915):
In the mind of the Germans the functions of the state are not susceptible of abstract deductions. Each proposal must be decided by the time and the conditions. If it seems advisable for the state to own an industry it should proceed to own it; if it is wise to curb any class or interest it should be curbed. Expediency or opportunism is the rule of statesmanship, not abstraction as to the philosophic nature of the state.… The individual exists for the state, not the state for the individual.…
This paternalism does not necessarily mean less freedom to the individual than that which prevails in America or England. It is a different kind of freedom.… This freedom is of an economic sort.… First in the list of such [redistributive] activities are the social insurance schemes which distribute to the community the burdens of sickness, old age, accident, and invalidity. These in themselves have freed millions of men and women from fear of the future, from loss of self-respect, and have kept them as producing members of the community.
So the Niskanen Center authors are merely calling for more of the same, more of what has been advocated and, in many places, implemented as a supposed alternative to the philosophical extremes of free market capitalism and centrally planned socialism. They, like others over the last 125 years, are the intellectual grandchildren of those in Imperial Germany who first created what these modern American authors call the market-welfare state, forms of which nations around the world have been living under for many decades now, including the United States. (See my article “American Progressives Are Bismarck’s Grandchildren.”)
The Paradoxes of Democratic Paternalism
To begin with, they want to have their cake and eat it too. That is, they want a political-economic system that combines what are fundamentally two irreconcilable principles: one that says human relationships should be based on the individual’s freedom of choice and peaceful association with others; and another under which a higher political authority restricts or manipulates what choices people may make and what forms their associations with others may take on, including a redistribution of the respective income shares received by all members of society from what they otherwise would have been if based on free exchange and contract without government interference.
The ethics and economics of the free society are grounded in the idea that individuals, all things considered, are better judges of their own interests and resulting choices than those in government, who know little or nothing about them as distinct and unique persons. The classical liberal or libertarian has never claimed that all individuals have perfect knowledge or wisdom to always make decisions that are free from error, mistake, or faulty judgement, but only that all people have a better sense of their own circumstances, their own lessons of life, and their own notions of want and desire, and a greater incentive to try to get the decisions right, than a politician or bureaucrat sitting far away not even knowing of those individuals’ actual existence or situations.
The political paternalist usually responds that individuals are guided in their choices not only by imperfect or faulty knowledge, but by emotions and passions that cloud their judgement about a more objective weighing of the risks and payoffs involved in alternatives between which they may choose, and too often fails to give sufficient weight to the gains in the future over the pleasures of the more immediate present.
Of course, it might be asked, if it is true that too many of our fellow citizens are bundles of emotional and illogical decision-making, then why is it that it is presumed that these same individuals can somehow transcend these frequent and seemingly inescapable human shortcomings and frailties to intelligently and wisely cast their democratic votes for those who are to hold political office and who then devise the policies meant to correct the very human-decision-making imperfections that somehow do not prevent the democratic process from being dysfunctional as well?
I need a jailer and a keeper because I cannot be trusted to be left free to make my own decisions and handle my own mistakes; but I am nonetheless informed, knowledgeable, and wise enough to select the political jailers and keepers who will make just the right institutional and policy decisions for me that I am unable to successfully make without such political overseers taking on that responsibility for me.
This is the great paradox of democratic paternalism. “The people” are supposed to rule in the sense of picking those who will hold political office and hire others to man the government bureaucracies, which will then micromanage their lives through the policy tools of the interventionist-welfare state. But those same people cannot be left alone to peacefully rule over their own daily lives, decide on the choices to make and the human relationships to enter into, or accept the competitive market outcomes of relative income shares reflecting the appraised value of each person’s contribution to the production processes that manufacture and then supply the goods that all of us as consumers decide to buy or not to buy.
Is this not just the Rousseauian myth that while individuals may err in their personal choices, the general will of the people as a whole may be trusted to make the right decisions for the community in general?
The Intermediary Institutions of Civil Society
But are there not needed collaborative efforts in society that are beyond market supply and demand, it may be asked in response? Are there not injustices due to the actions of people in both the past and the present? Must not there be some mechanisms to address these and related social problems, and does not this require middle-of-the-road solutions between laissez-faire and the all-controlling state?
At one point in their manifesto, the authors highlight the relevance and importance of intermediary institutions of civil society — family, church, neighborhood — but one sees no willingness to see the power and importance of them in handling many of the very types of problems that they turn to the government to handle and cure. The needs of those truly in serious personal and financial straits are more likely to be effectively met by those in local communities, by people who are drawn to a concern for their fellow human beings with a better appreciation and understanding of the immediate surrounding circumstances and the opportunities to alleviate the distresses and problems of those requiring such support.
There are also the benefits of potential competitive forces even in the arena of charity and philanthropy. When the government is taken out of the process, such charitable organizations must make persuasive appeals for financial and in-kind support from others in society. They must make the case that the problem being given their attention and the methods they consider best to employ will be effective in helping those to whom they have reached out. There is, to use F.A. Hayek’s phrase, a “discovery procedure” in the work of charitable and community good works no less than in the marketplace to uncover the better ways to solve the“social problem that seems to be afflicting various members of society.
Of course, this raises uncertainties not present when government preempts all or most of such activity through compulsory taxation and bureaucratic control. Will enough people be willing to give personal and financial support? Will all those considered to be needing such assistance be reached? But these are questions that are inescapable in a free society. The classical liberal or libertarian, however, argues that the most effective results are likely to emerge within a setting in which individuals are cultivated to consider their voluntary responsibilities to others in society, based on senses of ethical association with their fellow human beings.
Dehumanizing Humanity Through State Action
Long ago, the French social philosopher Bertrand de Jouvenel, in his The Ethics of Redistribution(1951), argued that transferring decision-making concerning welfare and other societal matters from the domain of the private sector to that of the state reduces both the financial and the psychological ability of people to be concerned with ameliorating the poorer conditions of some of their fellow human beings.
Preserving primary responsibility for such matters in the private arena of civil society enables the cultivation of an intergenerational awareness of duty and responsibility to freely give of one’s time and resources to the economic, social, and cultural needs of the human community that may fall outside of the profit-oriented market order.
But once this transfer of responsibility is made from the individual and the family to the political authority, it diminishes not only the monetary wherewithal for doing so, but it breaks the chain of learning proper senses of social obligation that normally have been passed on from parent to child by observing and experiencing such conduct within the household in which a person grows up.
Instead, there emerges more of a depersonalized indifference in the form of “I’ve paid my taxes, that’s the responsibility of the government and its welfare agencies.” If this seems like an exaggeration, a few years ago the German news magazine Der Spiegel (August 10, 2010) ran an article on how many German millionaires rejected the notion of private sector charity, arguing that to follow the still-existing American example of voluntary giving for social and philanthropic purposes threatened to undermine the welfarist duties best left to the government and its bureaucratic “experts.” These were not to be considered concerns of private individuals or families, but affairs of state. What can be more dehumanizing in matters of having a sense of shared community and interpersonal empathy and action than such an attitude? (See my article “A World Without the Welfare State.”)
The Welfare State’s Unlimited Tendency to Grow
Again, our authors would no doubt reply that this shows the need for a balance of private and public, so the former is not swallowed up by the latter. But where is the “objective” or consensus borderline between one and the other that is to be discovered and maintained? At a meeting of the Mont Pelerin Society as far back as 1956, the German free market economist Wilhelm RÖpke, who was himself a strong, though increasingly frustrated, advocate of trying to find a similar type of middle way, warned:
If it is granted that the modern welfare state is nothing but an ever-expanding system of publicly organized compulsory provision, then it follows that it enters into competition with the other forms of provision in a free society: One’s own, by saving and insurance, or voluntary provision by families and groups. The more compulsory provision encroaches upon the other forms, the less room will be left for individual and family provision, as it absorbs resources which might be devoted to this purpose and at the same time threatens to paralyze the will for individual provision and for voluntary mutual assistance.
Worse still, it is impossible to stop on the road once one has advanced far enough as the weakening of self-reliance and mutual assistance will give rise to increasing pressure for further public provision for the masses, and this in turn will further paralyze individual and voluntary mutual assistance.
If we look at the development in this way, we will find that it is quite wrong to regard the modern welfare state with its mechanical and compulsory mass relief as a sign of progress.… Anybody who is serious about human dignity should on the contrary measure progress by the degree in which we can today expect the masses to solve the problem of their rainy days from their own resources and under their own responsibility.
This, and only this, would be worthy of free and grown-up persons, not the constant reliance on the state for an assistance which, as we saw, can in the last analysis come only out of the pockets of the taxpayers themselves.… Is it progress if we classify more and more people as economic wards to be looked after by the colossal guardian “State”?
In a further discussion of the welfare state at another Mont Pelerin Society meeting two years later in 1958, RÖpke warned that “the modern Welfare State is, indeed, a development moving on its own momentum. In its concept, there is no limit to it. At the same time and for the same reasons, it is a one-way street. To extend the Welfare State is not only easy but one of the surest ways for the social demagogue to win votes and influence.” He forlornly concluded, “But to return on this road is next to impossible even if it is a case where no reasonable person can have any doubts that there are mistakes which have to be corrected.” (See my article “Freedom and the Fear of Self-Responsibility.”)
The Regulatory State and the Power of Special Interests
The same applies to the regulatory state, in that there is no logical limit to the extension of controls and compulsions other than the countervailing influences and powers of other special interest groups and bureaucracies all battling over the same resources through state action. The authors, in spite of their nod to public choice theory, fail to follow its logic to its inescapable conclusion.
That conclusion is that unless there is a constitutional and cultural insistence on a separation of economy and society from the state, the latter will always be tending to encroach upon the former, as RÖpke warned. Why? Precisely due to the pressures of the concentration of benefits on selected groups benefiting from regulatory governmental policies, and from the bureaucracies overseeing the general interventionist system.
Those likely to gain from government interventions of various sorts have strong incentives to be informed and willing to incur costs to obtain the regulatory restraints on competitors or the financial redistributions that government actions can bring their way. Those who direct or who are employed in the government departments, bureaus, and agencies have strong incentives to always see their own personal interest improved through greater regulatory and redistributing authority and larger budgets paid for through taxpayer dollars. At the same time, politicians have the motive to promise more and more government “free stuff” and entitlements to gain the support of coalitions of interest groups in exchange for campaign contributions and votes on election day. (See my article “Out-of-Control Government: How, Why, and What to Do.”)
The checks on these forces from other directions in the political process under our current system do not arise from some natural limits to growth in government, but merely the temporary successes and frustrations of some coalition-forming vested interest groups versus others in the play of democratic politics.
There are no wise and deliberative avenues to ensure more rational and far-seeing interventionist-welfare-state policies in place of the current democratic free-for-all, as the authors of the Niskanen Center manifesto call for and believe can be attained. Of course, there could be an attempt to go beyond democratic politics to a stronger and more independent state, but even moderate authoritarianism has been found to have its own corrupting and poisoning practices, which the authors would, no doubt, find equally unacceptable.
Marginal Choices in Markets vs. Politics
Students in economics classes are taught the meaning of “the margin.” That is, in everyday life many, if not most, of our choices are incremental — a little bit more of this at the cost of a little bit less of that, until some preferred or optimal combination is chosen by the individual, given the limited means and opportunities before them from which they may select.
If this is possible for individuals in their daily choices and decisions in the marketplace, then why not in the political arena as well? We forgo a little bit of personal or market freedom here to have some collective government-policy benefits there. It must not be forgotten that political choices have qualities inherently different from those made by people in the market arena.
First, market choices tend to be individualistic; that is, that you want to spend some of your money on an ocean cruise and a new flat-screen television does not prevent me from putting instead more of my earned income into a savings account for future retirement or donating to what I consider a worthy charitable cause.
The marketplace is the real institutional setting of pluralism, diversity, and inclusiveness. Numerous individual preferences and values are simultaneously served in the competitive market process. Thus, a diverse set of desires by many different people and groups are satisfied at the same time; and the set includes many minority segments of the population who, if they are willing and able to spend the minimal amounts necessary to make it marginally profitable for some producers and suppliers to fulfill their demands, can have those demands satisfied, as can majorities of buyers desiring other things.
This adaptability and availability does not exist in the same way in the arena of political choice and decision-making. Majorities (or coalitions of minorities able to form a majority on election day) get what they want at the expense of the losing minority voters; the winning choices are coercively imposed on all others in society until potentially changed in the next election cycle; and citizens are compelled to pay through taxes for government programs and activities about which they may strongly disapprove, thereby divesting them of the financial means and personal freedom to pursue the goals they would have preferred instead if not for the imposing power of the political authority. (See my article “Political Planning Versus Personal Planning by Everyone.”)
Civil Society and Overcoming Past Injustices
At the same time, there are no more powerful means of achieving many of the ends about which the authors express their concern than the institutions of civil society and the unregulated and unhampered working of the competitive market process. History has shown enough times over the last 200 years that the greatest threat of anticompetitive conduct by private enterprises arises from the use of government to prohibit or restrain domestic and foreign competition. Prevent political privilege and favoritism through government policy, and few concerns will remain in the long run about monopoly or concentrated economic power in production or marketing. (See my article “Capitalism and the Misunderstanding of Monopoly.”)
There certainly have been injustices to individuals and social groups in the past, and sometimes they have been shockingly egregious in their forms and consequences. But history cannot be rewritten or undone. Cruelties and injustices committed many decades or even centuries ago cannot be reversed. If nothing else, many of the real victims and perpetrators of such circumstances are long gone; justice cannot be meted out to actual guilty parties when they are long dead.
To turn over responsibility and power to government to right past wrongs inevitably makes many in society pay for sins they never committed and rewards others who are not the ones abused or hurt at that earlier time. Guilt becomes not individual, but collective and group-based. In the name of a cry for social justice regarding crimes and indignities committed in the past, many innocents are to be made to pay for the wrongful actions of those with whom they may have no direct or indirect connection by birth, place, or time. It is to make the sins of a nameless father in the past fall upon living individuals who are categorized by current ideological prejudices and political pressures as the sons and daughters who are to pay in some form. This is a recipe for political demagoguery and dangerous societal divisions that uses past injustices as a rationale for redistributive plunder in the here and now.
Here too, the only solution to the fact that some descendants of those mistreated in the past may be the disadvantaged of the present is to depoliticize such concerns and instead appeal to and draw upon the good will and charitable sentiments of others through the free associations of civil society to find ways of improving the circumstances of the presently disadvantaged. To do otherwise is to transform society into a politicized tribalism in which each sees the government as a tool in a zero-sum game in which some segments try to gain by politically disadvantaging others. This creates neither justice nor tranquil social outcomes. (See my article “Free Markets, Not Government, Improve Race Relations.”)
Liberty Compromised Is a Humane Society Lost
However disappointing and frustrating it may be for the Niskanen Center authors, there is no just, workable, or sustainable middle way of the form and type they dream about. Sometimes the choices we face are categorical (either/or) and not incremental. If freedom is to be preserved, the political order and its institutions need to be thought of as just such a categorical choice, and not one of marginal trade-offs between liberty and coercion. Once the latter road is taken, every step slowly but surely sees freedom diminished and compulsion increased.
In other words, liberty in its personal, social, and economic aspects cannot be compromised without threatened and actual loss of its essential qualities and a losing of the moorings that protect humanity from the paternalistic and overbearing and tyrannizing state. It also means the loss of the institutional and cultural settings in which social problems can be dealt with in ways far better and more effectively than when these matters are misguidedly transferred to government decision-making
This was emphasized by the Austrian economist and social philosopher F.A. Hayek in his last major work, Law, Legislation, and Liberty, in volume 1 (1973, p. 57):
When we decide each issue solely on what appear to be its individual merits, we always over-estimate the advantages of central direction.… If the choice between freedom and coercion is thus treated as a matter of expediency, freedom is bound to be sacrificed in almost every instance.… To make the decision in each instance depend only on the foreseeable particular results must lead to the progressive destruction of freedom. There are probably few restrictions on freedom which could not be justified on the grounds that we do not know the particular loss they will cause.
“That freedom can be preserved only if it is treated as a supreme principle which must not be sacrificed for particular advantages was fully understood by the leading liberal thinkers of the nineteenth century, one of whom even described liberalism as ‘the system of principles.’ Such is the chief burden of their warnings concerning ‘What is seen and what is not seen in political economy’ [Frederic Bastiat] and about ‘the pragmatism that contrary to the intentions of its representatives inexorably leads to socialism’ [Carl Menger].”
Classical liberalism and libertarianism are the political philosophies of compromise, justice, and inclusiveness, a true middle ground of human relationships in society. But it is only because it reduces the political to the minimum needed to preserve individual liberty, private property, and freedom of association while leaving free persons to find their own balances between desired and diverse ends and to coordinate and make compromises on their conflicting purposes through the institutions of the competitive market process and the voluntarism of civil society.
[Originally Published at AEIR]