Sunday, April 25, 2010

Plunder or Enterprise: The World's Choice

Plunder or Enterprise: The World's Choice

May 18, 2007

by Thomas E. Woods, Jr.

Although supporters of the market economy often have good reason for pessimism, it is important, especially in this age of globalization, not to lose sight of the genuine victories that the classical liberal tradition can boast. Half a century ago, Gunnar Myrdal could declare: "The special advisers to underdeveloped countries who have taken the time and trouble to acquaint themselves with the problem, no matter who they are …all recommend central planning as the first condition of progress." At that time, development economists who dissented from this consensus could have fit inside a phone booth. Today, economists who still favor central planning for the less-developed countries may as well hold their convention in a phone booth.

Public protests against globalization — protests that occur by and large in the prosperous West — denounce free trade and the mobility of capital as instruments of exploitation and oppression. The great development economist Peter Bauer used to say that if that were the case, then we should find the greatest prosperity among those less-developed countries that have the fewest economic connections to the West, and that those places that are altogether isolated — and therefore suffer from none of this alleged exploitation at all — should be paradise on earth. Needless to say, that is not even close to what we find, and most serious observers know it.

Today practically everyone agrees that some kind of market economy is essential if the less-developed countries are to progress to developed status. There are differences of opinion, to be sure, and the so-called "new development economics" of the past decade holds far more peril than promise. But that the terms of the debate have shifted there can be little doubt.

As globalization has proceeded, the subject of the market economy has attracted more and more attention, with friend and foe alike seeking to understand the implications of the creation of a truly global marketplace. One of the market's virtues, and the reason it enables so much peaceful interaction and cooperation among such a great variety of peoples, is that it demands of its participants only that they observe a relatively few basic principles, among them honesty, the sanctity of contracts, and respect for private property.

This is not to say that the philosophical principles the market embodies come naturally to every cultural milieu. Peter Bauer always insisted that a people's religious, philosophical, and cultural values could have important consequences for their economic success or failure. A people who believe in fatalism or collectivism, rather than in personal responsibility, will be less likely to undertake the risks associated with capitalist entrepreneurship, for example.

Or consider the example of tenth-century China. Rodney Stark points out that a substantial iron industry was beginning to flourish there at that time, producing an estimated thirty-five thousand tons of iron per year — a figure that ultimately grew to a hundred thousand. This abundance of iron translated into better agricultural tools, which in turn meant increased food production. Great wealth was being created, and China's economic prospects seemed excellent.

The imperial court, on the other hand, decided that all this accumulation of wealth by mere commoners amounted to an intolerable departure from pure Confucian principle, which imagined great wealth in the hands only of society's elite, and demanded that commoners be satisfied with their lot. The government simply seized the entire industry, and this wonderful example of innovation and wealth creation was crushed. Here is an example of cultural values that were incompatible with a market economy.[1]

"A people who believe in fatalism or collectivism, rather than in personal responsibility, will be less likely to undertake the risks associated with capitalist entrepreneurship."
But I want to go even further, and suggest that morality and the market are mutually reinforcing. It isn't merely that the market requires certain moral attributes in order to function properly. The market itself encourages moral behavior.

It takes little imagination to surmise how critics of the market would respond to such a claim. Doesn't the market encourage greed, rivalry, and discord? Does it not urge people to think only of themselves, accumulating wealth with no thought to any other concern?

The Communist Counter-Example

That human beings seek their own well-being and that of those close to them is not an especially provocative discovery. What is important is that this universal aspect of human nature persists no matter what economic system is in place; it merely expresses itself in different forms. For all their saccharine rhetoric, for example, communist apparatchiks were not known for their disinterested commitment to the common good. They, too, sought to improve their own well-being — except they lived in a system in which all such improvements came at the expense of their fellow human beings, rather than, as in a market economy, as a reward for serving them.

Communism brought out the worst in human nature, and crippled people's ability or ambition to participate in a market economy. "Traveling around the country," wrote American reporter Hedrick Smith in 1990, "I came to see the great mass of Soviets as protagonists in what I call the culture of envy. In this culture, corrosive animosity took root under the czars in the deep-seated collectivism in Russian life and then was cultivated by Leninist ideology. Now it has turned rancid under the misery of everyday living."[2]

The Soviet ruling class, with their cushy cars, clinics, and country homes, are a natural enough target for the wrath of the little people. But what is ominous for Gorbachev's reforms is that this free-floating anger, the jealousy of the rank and file, often lights on anyone who rises above the crowd — anyone who works harder, gets ahead, and becomes better off, even if his gains are honestly earned. This hostility is a serious danger to the new entrepreneurs whom Gorbachev is trying to nurture. It is a deterrent to even modest initiative among ordinary people in factories or on farms. It freezes the vast majority into the immobility of conforming to the group.

Under the system of tyranny and deprivation that the Russian people were forced to endure for seven decades, illicit "profiteering" — "think of the worker stealing wheelbarrows and multiply him by a million," one writer says — made it possible for countless Russians to acquire the goods they needed. We might therefore expect the profiteer to emerge as at least vaguely heroic, but the actual effect seems to have been to poison the idea of profit in the minds of many Russians, since they came to assume that anyone making a profit must be engaged in behavior that was somehow illicit or underhanded.

The countless stories in the Soviet press, as late in the socialist experiment as the 1980s, about vandalism and attacks on small shops by those who resented the success of their fellow man "bear witness to the powerful influence of decades of Leninist indoctrination," Hedrick Smith explained. "For great masses of Soviet people, capitalism is still a dirty word, and the fact that someone earns more, gets more, is a violation of the egalitarian ideal of socialism. Tens of millions of Soviets deeply mistrust the market, fearing they will be cheated and outsmarted. They see the profit motive as immoral."

The Supreme Soviet's Anatoly Sobchak once remarked, "Our people cannot endure seeing someone else earn more than they do…. They are so jealous of other people that they want others to be worse off, if need be, to keep things equal." Sobchak described this attitude as one of the chief obstacles to economic reform. Television personality Dmitri Zakharov put it this way: "In the West, if an American sees someone on TV with a shiny new car, he will think, 'Oh, maybe I can get that someday for myself.' But if a Russian sees that, he will think, 'This bastard with his car. I would like to kill him for living better than I do.'" That is what Marxism-Leninism did to these people.

Overlooked Perils of Interventionism

That system, the polar opposite of the free market, encouraged greed in the ruling class and apathy, envy, and alienation among everyone else. Scarcely anyone defends it any longer. At the same time, we are urged not to let the socialist debacle sour us on the state itself, which we are told is an indispensable instrument in the pursuit of "social justice." But the less predatory state that such critics have in mind carries its own moral and cultural perils, only a few of which we can consider here.

Economists speak of the disutility of labor. Albert Jay Nock referred to the human inclination to seek after wealth with the least possible exertion. In a formulation familiar to libertarians, Franz Oppenheimer described two ways of acquiring wealth: the economic means and the political means. The economic means involves the production of a good or service that is then sold to willing buyers seeking to improve their own well-being. Both parties benefit. The political means, on the other hand, involves the use of force to enrich one party or group at the expense of another — either to acquire someone else's wealth directly or to give oneself an unfair advantage over his competitors through the use or threat of coercion. That is a much easier way of enriching oneself; and since people tend to prefer an easier over a more difficult path to wealth, a society that hopes to foster both justice and prosperity needs to discourage wealth acquisition via the political means and encourage it through the economic means.

But the state, wrote Oppenheimer, was the organization of the political means of wealth acquisition. It was through this channel that people could find paths to their own economic well-being that involved the use of force — carried out on their behalf by the state — rather than their own honest work. For that reason, the baser aspects of human nature can find in the state an irresistible attraction. It is easier to become dependent on welfare than to work; it is easier to accept farm subsidies and thereby to increase food prices than it is to compete honorably and freely; and it is easier to file an antitrust complaint against a competitor than to outcompete him honestly in the marketplace. By making these and countless other predatory options possible, the state fosters unattractive moral attributes and appeals to the worst features of human nature.

In short order, society degenerates into a condition of low-intensity civil war, with each pressure group anxious to secure legislation aimed at enriching itself at the expense of the rest of society. The Hobbesian war of all against all that allegedly characterizes life under the pre-political state of nature creeps into political life itself, as even those who were initially reluctant to seek political favors pursue them with vigor, if only to break even (that is, vis-à-vis groups who are less scrupulous about using the state to secure their ends). All of this looting under cover of law is what Frédéric Bastiat memorably called "legal plunder."

The same phenomena are observable around the world, when misguided development aid programs have strengthened the interventionist state in less-developed nations. Ben Powell makes the important point, echoing Peter Bauer, that the fashionable proposals we hear about nowadays that seek to direct foreign aid to responsible, relatively non-predatory regimes miss the point: these aid programs are inherently bad, no matter how selectively the funds are allocated. Not only do they tend to enlarge the public sector of the recipient country, but competition for a share of the grant money also diverts private resources away from the satisfaction of genuine wants and into the wasteful, anti-social expenditure of time and resources for the purpose of winning government favors.

Some Virtues of the Market

If the state is the organization of the political means of wealth acquisition, then the market is the embodiment of the economic means. The market all but compels people to be other-regarding, but not by means of intimidation, threats, and propaganda, as in socialist and statist systems. It employs the perfectly normal, morally acceptable desire to improve one's material conditions and station in life, both of which can grow under capitalism only by directing one's efforts to the production of a good or service that improves the well-being of his fellow man. This is why the title of Frédéric Bastiat's book Economic Harmonies is such a beautiful encapsulation of the classical liberal message. (The American Anti-Imperialist League's George McNeill made essentially the same observation, if perhaps more vividly, in the late 1890s: "Wealth is not so rapidly gained by killing Filipinos as by making shoes.")

John Rawls famously argued in A Theory of Justice that we could judge a society on the basis of the material condition of the least well-off. The market wins according to that moral criterion as well. Capital University's Robert Lawson has shown that all around the world, the poor are consistently better off in the least interventionist, most market-oriented societies. America's poor are better off than much of the European middle class today, and better off than the American middle class of the 1950s.

This happy outcome follows from the very nature of capitalism. When businesses invest in capital equipment to render the production process more efficient, they make it possible to produce more goods at a lower unit cost. Competition then passes these cost cuts on to the consumer in the form of lower prices (a phenomenon not always so visible in an inflationary economy, but at work all the same). This greater abundance increases the purchasing power of all real incomes, and thereby redounds to the benefit of everyone.

The Enron Objection

Needless to say, the market possesses a great many virtues in addition to these. But what we might call the Enron objection will at this point be raised: doesn't that fiasco reflect a serious moral problem at the heart of capitalism? Enron, it is said, was the free market in action, and Ken Lay an apostle of laissez faire. In fact, neither claim is true. Time constraints limit me to recommending the Enron chapter in Tim Carney's important book The Big Ripoff: How Big Business and Big Government Steal Your Money (2006). To make a long story short, Enron was on the receiving end of countless waves of government subsidies. It also manipulated the bizarre regulatory thicket that was the California energy market in grotesquely anti-social ways that enriched Enron at the expense, quite literally, of everyone else. The Cato Institute's Jerry Taylor correctly described Enron on balance as "an enemy, not an ally of free markets. Enron was more interested in rigging the marketplace with rules and regulations to advantage itself at the expense of competitors and consumers than in making money the old-fashioned way — by earning it honestly from their customers through voluntary trade."

Enron was in fact punished by the market for its behavior, while the American government, awash in Ponzi schemes, accounting irregularities, and unfunded liabilities it can't possibly cover, goes about its business in peace. "Far from an example of a market failure," argues Jacksonville State University's Christopher Westley, "Enron's saga shows that firms which invest too much in politics can easily become complacent in the face of changing market conditions…. If there's a scandal to be found in the Enron debacle, it is this: Enron's faith that its political investments would eventually solve its problems caused it to avoid making necessary changes in its organization until it was too late. Anyone who checks Enron's stock price, now listed on one of the penny stock exchanges, knows that the market has penalized this strategy." and Kmart, on the other hand, were up front with their investors about their financial difficulties, and ended up doing much better — by and large, their investors, no doubt impressed by these firms' honesty and transparency, stuck by them.

"Capitalism stands its trial before judges who have the sentence of death in their pockets." –Joseph Schumpeter

The nature of the attacks on capitalism frequently changes: one day it's the corruption of businessmen, as with Enron, the next it's environmental degradation (which is typically the fault of poorly developed property rights and arbitrary regulatory regimes rather than of capitalism itself). Sometimes capitalism will be criticized for one alleged failing one day and exactly the opposite failing the next. Thus socialists once claimed that capitalism was less efficient than socialism, and could not produce in nearly the same abundance. Now that that argument has been silenced, we have begun to hear exactly the opposite claim: capitalism brings about too much wealth, and makes people materialistic and fat. As Joseph Schumpeter put it, "Capitalism stands its trial before judges who have the sentence of death in their pockets. They are going to pass it, whatever the defense they may hear; the only success a victorious defense can possibly produce is a change in the indictment." For a system that has brought about such astonishing and unprecedented advances in the well-being of the great mass of mankind, it is surprisingly vulnerable to attack.

Capitalism and Public Opinion

Murray Rothbard was fond of citing the arguments of Étienne de la Boétie (as well as those of such later figures as David Hume and Ludwig von Mises) to the effect that governments survive or perish on the basis of public opinion. Since those who rule are of necessity vastly outnumbered by those who are ruled, it is curious that any regime — much less the truly oppressive — should get away with it for so long. The only way they can do so, according to these men, is through the voluntary consent of the public. That consent need not take the form of wild enthusiasm, which is rarely forthcoming for any regime; passive resignation is quite enough.

If a critical mass of the population withdraws that consent, on the other hand, regimes collapse. The fall of the communist regimes in Eastern Europe was a textbook example of exactly what La Boétie meant: when next to no one obeys commands any longer, how can the ruling elite hold on to power?

It is not only political regimes but also economic systems that must pass a public opinion test if they are to endure. And here we encounter an essential cultural attribute for the maintenance of a free economy: a critical mass of the population must consider market exchange, and the institutional supports that make it possible, to be fundamentally just.

And yet from our major institutions here in the United States we hear something like the opposite. Schoolchildren are given the impression that the private sector is the source of all wickedness and oppression, from which public-spirited government officials, in their selfless commitment to justice, must rescue and protect us. The selection of subject matter itself exhibits a pro-state bias: students leave school knowing all about how a bill becomes a law, for example, but with no idea of how markets work.

All of this applies just as strongly to popular culture and the media, with of course a few noble exceptions like John Stossel. That is why I am surprised not by how much of the market economy has been suppressed in the United States, but by how much has managed to survive in the face of a hostile educational and cultural establishment. Europe's opinion molders, as Olaf Gersemann observes in his book Cowboy Capitalism, are utterly contemptuous of American capitalism, a phenomenon they do not understand, and it is not surprising that in such an intellectual milieu those countries find themselves burdened with even more statism than we do.

The Culture of Enterprise: Concluding Thoughts

"To my ear, the term 'culture of enterprise' suggests a society that possesses a conscious appreciation of the distinct virtues of the market economy."

We are being much too ambitious if we think even the best economic institutions can transform human beings from flawed creatures into saints. The correction of human failings is the business of families, churches, and voluntary organizations of all kinds. The twentieth century served, among other things, as an extended lesson in both the danger and the folly of state-led efforts to transform human nature. We can be more than satisfied if our economic system is content to take human beings as they are, direct their energies into productive rather than anti-social outlets, and reward them for satisfying the needs of their fellow men.

Thomas Jefferson once observed that the mass of mankind was not "born with saddles on their backs, nor a favored few booted and spurred, ready to ride them." That is what the free economy is all about: anyone is free to serve the public in the manner he thinks best, and no one, not even those who have been most successful in the past, can claim exemption from the daily referenda that take place whenever the public decides to buy or to abstain from buying what he has to sell.

To my ear, the term "culture of enterprise" suggests a society that possesses a conscious appreciation of the distinct virtues of the market economy, some of which I have described here, and why it is morally and materially superior to statist alternatives, as I have also described here. In other words, the points I have made in my remarks today are the kind of arguments that should resonate with and constitute important pillars for a culture of enterprise. Instead of being held up for condemnation and abuse, entrepreneurs in such a society would be respected and honored for the risks they assume with their own property in order to bring improvement to people's lives, from the latest technological innovation to the most mundane of necessities. For a true culture of enterprise to last, people must see in the unhampered market economy not merely the least intolerable system but a positive good, in which living standards consistently rise, human creativity is given free rein, and human interaction proceeds on the civilized basis of respect for others' person and property.

The decades following World War II taught anyone who was paying attention how not to encourage prosperity or escape from less-developed status: demonize producers and the successful, nationalize industry, harass foreign investors, make property insecure, institute "import substitution" policies, and suffocate entrepreneurship through regulation. Development aid programs, meanwhile, either expressly endorsed these policies (as in the case of import substitution) or enabled them to continue by masking the true effects of such disastrous measures or propping up the regimes that implemented them. If the less-developed countries are to enjoy the prosperity of such success stories as Hong Kong and South Korea, or enjoy the growth rates being observed today in Ireland and even China, they must abandon the destructive and wicked policies of the past, discard the culture of envy their leaders have fostered, and embrace the principles of freedom that have allowed more people than ever before in history to enjoy the material conditions of civilized life.

And at a time when our countrymen are being courted by all manner of interventionist politicians — with one noble exception, I hasten to add — peddling all kinds of grandiose schemes for human betterment, Americans themselves could stand to be reminded of the values that inform a culture of enterprise. There was something disturbing, and yet revealing, in the title of MSNBC's election coverage segment last year — Battleground: America. Every two years, but especially every four, the country becomes in effect a battleground between opposing forces, in which the winner acquires the power to take the country to war unilaterally, to impose a uniform social policy on 280 million Americans, and to implement all manner of policies on his own authority, by means of executive orders and signing statements. Americans typically take for granted that this is normal, and indeed how life must be.

But in fact we don't need Hillary Clinton or John Edwards, Rudy Giuliani or John McCain, to "run the country" (to use an infelicitous if unfortunately common phrase) or to make us prosperous. A free and responsible people can manage its affairs without the platitudes and paternal custodianship of a Great Leader, and exhibits no superstitious reverence toward the occupants of political office. Once a society begins to absorb this revolutionary discovery, it has already embraced the culture of enterprise.

Thomas E. Woods, Jr., is a resident scholar at the Mises Institute. He is the author of The Church and the Market: A Catholic Defense of the Free Economy. His other recent books include The Politically Incorrect Guide to American History (a New York Times bestseller) and How the Catholic Church Built Western Civilization. Send him mail. See his archive. Visit his website. Comment on the blog.

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