Fifty Years of Statist Policies and Economic Fallacies

It is about fifty years since, as an undergraduate, I took my first economics classes in college. Virtually all my professors were adamant that unrestrained market capitalism was unworkable, and on the way out. Planning, many of them said, was the future for complex societies and economic development. Like “deva vu, all over again,” the same claims are being insisted upon a half-century later, with nothing seeming to have been learned from all that has happened since.

Back then, my Marxist and Keynesian professors said that market economies may have been sufficient in simpler, “horse-and-buggy” days of the past with rudimentary farming and small craftsmen and proprietary businesses. That was a long-gone era, when people could be “rugged individualists”; but today’s society is too intricate with degrees of interdependence and mass production that cannot be trusted to selfish, laissez-faire, profit-oriented private enterprises and corporations.

There needed to be the “big picture,” and only government had that Olympian perspective representing the society as a whole to guide and direct all that goes on, so there will be no more Great Depressions. The dark decade of the 1930s had demonstrated the “failure of capitalism,” with all its instability and injustices. We can never go back to that, they said

Lyndon Johnson’s Great Society and Richard Nixon’s more of the same

That’s why “enlightened” government policies had to be introduced to regulate industry and redistribute wealth in the name of “social justice.” The 1960s had shown the way, with Lyndon Johnson’s Great Society programs, with their “wars” on poverty, illiteracy, racism, and a variety of other undesirable things.

If only Johnson had not done that “real war thing” in Southeast Asia! The Vietnam War so polarized and divided the country that it opened the door for the election in 1968 of Richard Nixon.

I still recall watching the presidential election-night television coverage on NBC in November 1968, and seeing anchorman David Brinkley almost break down in tears and with a choking voice say, “The liberal hour is over!” By which he meant, of course, the New Deal “liberalism” of the interventionist-welfare state. If only it had been true!

Richard Nixon just did more of the same, with undesirable additions including the “war on drugs,” four more years of the Vietnam War with its extension into Cambodia, the introduction of a cabinet-level Department of Education, and imposing economy-wide wage and price controls. He also formally ended the U.S. dollar’s last legal links to the gold standard.

The 1970s: Soviet power and Keynesian chaos

In my first economics class, the 7th edition of Paul Samuelson’s widely used textbook was assigned. I still recall its chapter on comparative economic systems, in which a diagram extrapolated U.S. and Soviet Gross National Product out to the year 2000, with the projection that by the end of the 20th century the Soviet economy was likely to have outpaced that of America. Socialist central planning would have shown its superiority even to the mixed economy of capitalism.

The only macroeconomics back then was Keynesian, with supplementary readings on the reality of trade-offs between unemployment and inflation known as the Philips Curve. Milton Friedman and monetarism were treated as harebrained throwbacks to the discarded economics of the “laissez-faire” years of the Hoover administration that caused and worsened the Great Depression in the early 1930s. The right monetary and fiscal dials turned in just the right ways could keep inflation within “socially acceptable” bounds while maintaining full employment.

As for the Austrian economists, Ludwig von Mises was an “ancient” 19th-century crank and Friedrich A. Hayek was an out-of-step polemicist who made the absurd and extremist claim that socialism was inconsistent with freedom. Besides, what is more important — that some economic freedoms are restrained or that the poor are fed, clothed, and housed by government?

The 1970s soon shook the naïve Keynesian confidence in micro-managing the macroeconomy, as America entered the era of “stagflation,” the combination of rising price inflation and increasing unemployment. Here was a conundrum for which textbook Keynesianism had no answer. With Hayek winning the Nobel Prize in Economics in 1974, followed by Friedman in 1976, the Austrian theory of the business cycle was once more taken seriously, along with the monetarist emphasis that continuous price inflation is always and everywhere a monetary phenomenon.

Moreover, by the end of the 1980s, Paul Samuelson’s optimistic prediction of Soviet economic strength was shown to be a pipe dream built on false economic data made up by the central planners in Moscow and passively and gullibly accepted by many economists and foreign policymakers in the West. This forecasting fantasy disappeared when the Soviet Union disappeared from the political map of the world at the end of 1991.

The 1980s: Reagan’s freedom rhetoric, but government still grows

With Ronald Reagan’s election as president of the United States in 1980, supported by Margaret Thatcher’s becoming the prime minister of the United Kingdom in 1979, the terms of the economic- policy debate dramatically changed. From the bully pulpit of the White House, Reagan’s rhetoric once again made respectable a belief in individual freedom, the case for freer markets, and the reasonableness of a smaller government under constitutional constraints.

The Democrats denigrated him as a jellybean-eating dunce, and the Progressives demonized him as the enemy of a decent and caring society. Moreover, he said that the Soviet Union was an “evil empire,” when “everyone knew” that a “democratic” socialism would be the essence of a humane society. He was throwing out the good socialist baby with the somewhat tainted communist bathwater. He was a crazy Hollywood has-been with his finger on the nuclear button.

In fact, little in the way of downsizing the scope of government changed over Reagan’s eight years in the White House. The supply-side tax cuts he introduced did increase government revenues, but the expenditure side of the federal government experienced no noticeable reining in; spending just continued to grow even in the hallowed “conservative” years of the Reagan presidency. In fact, throughout Reagan’s two terms in office government spending remained significantly above the 20 percent of Gross Domestic Product (GDP) that it had been earlier. Budget deficits during Reagan’s eight years were between 4 and 6 percent of GDP.

The 1990s: Slower spending and budget surpluses

The only major period of reduced federal spending as a percentage of GDP over the last fifty years came during Bill Clinton’s presidency in the 1990s, when the Republicans held both houses of Congress for six of his eight years in office; political horse-trading resulted in limited spending restraints with accompanying budget surpluses for four of those years. Government kept getting bigger, but at a slightly slower rate.

Horror of horrors, during Clinton’s time in the White House some policy pundits feared that a permanent era of budget surpluses might have arrived. What if all the government’s debt was soon paid off? How would the Federal Reserve create money in the banking system, if there was no more federal debt for them to buy as the standard means for monetary expansion? Some macroeconomic economic-policy manipulators began having nightmares: how could they play their usual social-engineering games, if their federal debt toy disappeared?

The 2000s: Exploding government under Bush and Obama

But they had nothing to fear. The trend towards higher taxes collected and expenditures undertaken as percentages of GDP accelerated during the George W. Bush and Barack Obama administrations from 2001 to 2016, with trillion-dollar-a-year deficits during this period and the national debt’s growing from around $5 trillion when Bush took office in 2001 to $20 trillion when Obama left the White House. Now, under Donald Trump, $1 trillion-a-year deficits are returning as far as the eye can see, with a total national debt currently at almost $23.3 trillion.

Throughout these presidencies, the welfare state has remained with us, and grown. Today, the “entitlement” programs, including Social Security and Medicare and related health-care programs, absorb half of all that the federal government spends, and will increase as percentages of both the federal budget and GDP under current legislation.

Neither has the regulatory state diminished during all these decades. One frequently referenced indicator of the scope of government regulation over business is the number of pages in the Federal Register, which lists all the regulatory rules and restrictions imposed on the U.S. private sector. During Reagan’s last year in office in 1988, the Federal Register numbered 53,376 pages of government commands over private enterprise. In 2016, Barack Obama’s last year in office, the pages totaled 97,110, for an almost 82 percent increase over nearly three decades.

Shackled markets have still generated amazing betterment.

It is very hard to think of the last fifty years as a dark and dreary period of unrestricted, anything goes, laissez-faire capitalism. It is far more amazing that, in spite of all the wealth produced by the private sector that has been siphoned off by the federal government (ignoring the matching amounts taken by local and state levels of government), and all the burdensome chains of regulation, the existing market economy has still succeeded in dramatically improving the standards and quality of life in the United States.

It shows that any amount of market freedom can go a long way. And it suggests just how much better our quality of life might have been by now, if government had not taxed, spent, and regulated with the abandon that it has during these past fifty years.

When Progressives, or democratic socialists, or the leaders and spokesmen for the Democratic Party say that all the problems in America today are due to unbridled capitalism, they are the victims of their own rhetoric. A really free-market economy is something the people of the United States have not experienced for a very, very long time.

Old economic fallacies once more in new policy battles

Even so, voices on the Left are adamant that all our current difficulties are due to the extent to which free markets are rampant in the land. For instance, British economist Diane Coyle, who is a professor of public policy at the University of Cambridge in Great Britain, published an article entitled “The End of the Free-Market Paradigm.”

All the economic evils we face, she writes, are due to the wrong-headed and misguided idea that individuals should be left on their own to pursue their own personal self-interest. The market paradigm, we are told, works on the false premise that people live atomistic existences free from social influences and pressures.

People are interconnected and interdependent in ways that markets just cannot cope with, and certainly not in our digitalized era of massive data on people and their preferences in an increasingly globalized setting, she insists. In her view, “Economic researchers must ditch their unscientific attachment to the assumption of isolated individuals transacting in free markets, and instead focus on the economy of the 2020s.”

Adam Smith understood “network effects.”

People are tied to and greatly influenced by “network effects,” which only government can successfully regulate and direct in socially useful forms, says Coyle. What exactly is a network effect? Well, understanding it is as old as Adam Smith in his book The Wealth of Nations.

Early in the book, Smith has a famous chapter, “The Division of Labor Is Limited by the Extent of the Market.” People clearly benefit from specialization and the greater productivity and output that may be forthcoming from market participants’ focusing on producing what they are better at in comparison with their neighbors. But precisely because of the greater output that can be forthcoming, how specialized any one person can afford to be is dependent on the number of other participants in the network of division of labor to whom he may sell his product, and who, in turn, have sufficiently sizeable specialized products of their own to pay for what he has for sale.

Thus, the more a division of labor develops, the more it creates opportunities for people to become even more intensively and productively specialized than they were before. By adding more people to the arena of specialized production in a system of division of labor, better and wider economic opportunities exist for all in that society.

Carl Menger on the origin of money and network effects

Another example of network effects is the emergence and evolution of money, a story that was effectively told by the founder of the Austrian school of economics, Carl Menger. People discover mutual gains from trade, but often barter transactions (the direct exchange of one good for another) get in the way of taking advantage of all such trades. Sam might want to buy Joe’s product B, but Joe is not interested in buying what Sam has for sale in exchange, commodity A. Or they each might want what the other would be willing sell, but they cannot agree on terms of trade without physically cutting up one of the goods and damaging its usefulness.

Menger showed that Sam might first trade away his product A, for some of George’s commodity C, not because Sam personally has any use for C, but because he is confident that he could offer it to Joe, who would be happy to sell Sam some of his good B, which is the one that Sam wanted to buy from the start. In this case, commodity C has served as a medium of exchange to facilitate a mutually beneficial gain from trade.

Menger went on to explain that as such indirect opportunities for beneficial trade manifest themselves, people look around for some good (or goods) possessing qualities and characteristics most likely to be the ones that others would be interested in having when entering into a trade.

Over time, the good (or small number of goods) possessing the particularly attractive qualities and characteristics would be used by more and more people in an increasing number of trades, such that over time it (or they) would spontaneously emerge as the money-good (or goods) used by a growing number of people in the market. Historically, gold and silver have been selected by market participants in this unplanned and evolutionary manner. Clearly, as a result, the opportunities for successful and productive interdependent production and trade are greatly enhanced.

Coyle’s naïveté or ignorance of economic history and ideas 

Both the development of a social system of division of labor and the emergence of a medium of exchange are market-based examples of positive network effects in society. Yet Coyle treats all this as if it’s some great discovery never understood or appreciated before now, owing to the atomistic and self-interested conduct of people in profit-guided market settings.

It is embarrassing to think that a professor of economics at Cambridge University is so naïve or uninformed about the history of economic institutions and the ideas of earlier economists that she thinks this is all new with the arrival of social-media platforms and the collection of big data.

Or that earlier economists were somehow unaware of the social interdependencies and implications of such network effects because they never used that particular terminology to define or classify the logic and historical examples in their analyses.

The particular twist that Coyle seems to want to give to her reference to our increasingly digitalized world and the vast amount of data available through it is to claim that it should all now be viewed as a “public good.”

Public goods, it is argued, are goods it is impossible or very difficult to exclude someone from accessing and using even if they have not paid for them; and for which there is little or no (marginal) cost for allowing one more person to use it and no diminishment in its availability for others.

Our digitalized world is not a public good.

But that is really not true in the case of our greatly digitalized world. People can be excluded from accessing most social-media platforms, if the provider wants to do that. That many social-media and other platform providers offer their services at little or no price is due to the fact that they consider that more participants are better for selling advertising to third parties on their platforms, or collecting data about their customers that may be marketed in various ways.

Coyle is also concerned that there are only two or a few providers of such digitalized services, suggesting potentially anti-social monopoly problems. In this she suffers from the mistaken practice of looking at competition and monopoly as a frozen picture at a moment in time.

The Austrian economists and others such as Joseph Schumpeter argued that market competition needs to be viewed as a dynamic process not only in time but through it. When looked at from a wider historical perspective it little matters that at any moment there are more or fewer rivals in the market. What matters is whether or not the market is open to new competitors and their innovative ideas and offerings, or is closed or restricted owing to government regulations and other barriers to shield the existing suppliers from potential rivals.

In other words, what we face in the types of arguments offered by Coyle are merely another “rerun” of the ones already made against free markets, individual choice, and the spontaneous developments arising from creative entrepreneurial competition that I heard half a century ago.

Even when such arguments are presented as new and relevant insights against the free market, they are as stale and out-of-date as the ones offered those many decades ago. They contain nothing that had not been understood and refuted by market-oriented economists, beginning with Adam Smith.

They are just the latest attempt to justify further reducing the choices of consumers and producers in the existing market setting or replacing them with the paternalistic hand of those who presume to know better how the world should be allowed to work.

This article was originally published in the April 2020 edition of Future of Freedom.

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