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The Economics of a Free Society

May 23, 2008

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[This article is excerpted from Part I of Pillars of Prosperity. An MP3 version of this article, read by Dr. Floy Lilley, is available for free download.]

These selections lay out my views of the proper role of government, namely that it should serve only to protect the life and property of its citizens.

I respect the Constitution not because of a nostalgic attachment to an anachronistic document, but because the Founders knew the danger in allowing government to overstep its legitimate functions. It is unfortunate that many Americans today don't understand the Founders' wisdom in framing our government on the principles of federalism and republicanism — as opposed to "democracy."

A free society can only work when its members agree that there are certain things left to the discretion of individuals — no matter what a temporary majority might think. In practice this means the government must respect private property and the rule of law, or what is also called free-market capitalism.

Current Political Philosophies' Errors to Result in Political and Economic Crisis

Congressional Record — US House of Representatives September 20, 1984

Mr. Speaker, I have a deep concern for the direction in which our country is going. I have expressed this concern by pointing out the political and economic contradictions that surround us and have suggested that these contradictions merely are manifestations of philosophic errors made by our intellectual leaders.

Although the country currently is more or less in a euphoric mood, I am convinced the errors we are making today will eventually result in a severe political and economic crisis.

I don't believe anyone precisely knows the future, yet we all make projections as to our expectations. It's impossible to know exact events and their timing but trends are known to us and certain policies do have specific consequences. Economically definable laws do exist and cannot be repealed. For what it's worth, I would like to make a few comments about what we can expect if our current beliefs about government's role are not changed. The odds of a significant change in attitude occurring in Washington in the near future are utterly remote. Repealing the welfare-warfare state may be popular with a growing number of frustrated American citizens, but that attitude is not yet reflected in Washington. The constituency for the monolithic state is alive and well in the US Congress. When disagreement exists in areas such as welfare versus warfare, the poor versus the rich, labor versus business, compromise is always reached and both sides receive an increase in funding. This is a policy of utter folly and is tragically locked in place.

Government is literally out of control. Spending, taxes, regulations, monetary inflation, invasion of our privacy, welfarism to both the rich and the poor, military spending, and foreign adventurism around the world will one day precipitate a crisis that will truly test our will to live in a free society. If government were not so much out of control, would not the most conservative president of the last 50 years be able to do something about the runaway deficits? The deficits have tragically only gotten very much worse under Reagan. All the problems we face, high interest rates, inflation, deficits, vicious business cycles with accelerating unemployment are serious problems indeed, but the real threat under the conditions to come will be the potential loss of our personal liberty. Without liberty, prosperity is lost and equality of poverty prevails.

We have a cancer in the land — the malignant growth of big government — and we can ignore it, treating only the symptoms, hoping they are not reliable signs that a horrible disease has struck our nation. But if we do, we are treating our problems as some foolishly deny the early signs of cancer, by taking aspirin and hoping the pain to be only that of inconvenience and that the symptoms will go away in the morning. Instead, the pain gets worse requiring more and more narcotics to numb the pain. Magic cures are sought and tried. Although big government is the disease, attempts to solve all the problems by making government even bigger and more intrusive in our lives are continually tried. This will soon end. We cannot forever ignore the root causes. It's highly unlikely that we'll reach the 1990s without a convulsion of our economic or political system.

Although nothing goes up or down in a straight line, we can be sure the long term will bring us ever-increasing interest rates — higher with each cycle and over 20 percent before this cycle completes itself in 1986 or 1987. Without the introduction of a commodity money, one with quality — as well as limitation on its quantity — we will never see the return of long-term fixed low interest rates. The reform will come eventually, if we're to continue to have even a relatively free society. I just hope we don't wait too long.

Price inflation, although difficult to predict on a month-to-month or even year-to-year basis, will reach unbelievable heights in this decade. Currency destruction, through the insatiable desire to create massive new fiat monetary units, eventually brings higher prices. Wage and price controls will return regardless of whether a Republican or a Democrat occupies the White House. Free-market rhetoric will do nothing to protect us from the pressure the administration will receive to "do something," even if it's the wrong thing. Nixonian Keynesianism will continue to dominate, and abusive people-control in the form of wage, price, currency and credit controls will return, more vicious than ever before.

There will come a day that the world financiers will rush from dollars just as they have recently rushed into dollars, causing even worse chaos in the international financial markets. Without a stable monetary unit, the speculation will continue and worsen. Overreaction is now becoming more commonplace, but this is a predictable consequence of a world gone mad with fiat currencies, debt creation, and overspending.

Massive debt liquidation will come. The early stages have already started. It will occur with old-fashioned defaults, threats of deflation, and further currency destruction through monetary inflation and liquidation of debt with a depreciating dollar. Whether or not the liquidating debt collapse will be dominated by deflation or inflation of the money supply is yet to be determined since that will depend on government actions and many market forces. An inflationary collapse is a more likely scenario — knowing the special interests, the Congress, the administration, and the central bankers' unwillingness to face up to the reality of cutting spending, balancing the budget, and curtailing the supply of money. So in spite of all the tough talk, we can expect the Fed to accommodate and reverse any trend toward deflation.

Without a significant change in attitude by the American people and Congress as to the purpose of government, the choices are horrible; an inflationary collapse or a deflationary one. The form and timing of the collapse is yet to be determined; the event itself is certain. This crisis will come, as others have, because we refuse to face up to reality and live within our means.

The people's insatiable appetite for the goods of life without providing a commensurate amount of work and effort needed to produce them (while demanding that politicians deliver the loot) guarantees the process will continue. But a penalty will have to be paid. That penalty — a major banking, currency, economic, and political crisis — will hit this nation and the western world, most likely before the 1990s.

The economic hardship, of which we had a taste in 1981 and 1982, will be much worse. That in itself is bad enough news, but historically, when a nation debauches its currency international trade breaks down — today 40 percent of international trade is carried out through barter — protectionist sentiments rise — as they have in Congress already — eliciting hostile feelings with our friends. Free-trade alliances break down, breeding strong feelings of nationalism — all conditions that traditionally lead to war; a likely scenario for the 1990s, unless our economic policies and attitudes regarding government are quickly changed.

Many who concede we are moving in this direction of war, carelessly believe that the lack of military spending is the problem and insist on new massive military spending as the solution. This only serves the inflationists, the internationalists, the banking elite, and industrialists who benefit from the massive manufacture of military weapons. It ignores the important fact that most military conflicts throughout history have been the consequence of economic events. Economic events, when combined with a foreign policy void of wisdom and fraught with folly, sets the stage for needless war.

Conservatives are quick to correctly point out that guns don't cause crime, criminals do, but fail to see that weapons, or the lack of massive weapons, don't cause war, politicians' bad policies do. This is a good reason why the current conservative administration should have stopped subsidizing trade and foreign assistance to the Soviet bloc nations and to Red China, which includes nuclear and military technology, instead of increasing it. This is sheer madness.

Massive military spending to stop the spread of communism, which our own taxpayers are also required to finance, contributes to the economic problem of deficits, inflation, and high interest rates. In addition it justifies, in the political world of compromise, increased domestic spending, higher deficits, accelerating inflation and higher interest rates — all compounding the economic problems that started the trouble in the first place

Depression and war are the needless consequences of politicians' folly. They are prevented by limiting government power, not by expanding it. Today, campaign rhetoric is frequently heard about balanced budgets and reducing the size of the government; witness the success of conservatives in 1980; yet nothing ever happens. The spending, the regulations, the taxing, and the deficits continue. Time is running short, the frustration running high. Hiding from reality won't help; kidding ourselves won't do. The sooner we admit, "you can't get blood from a turnip," the better off we'll be.


What is the solution?

Most importantly, a new attitude about the role of government is necessary if we expect to solve our problems. As long as we, as a nation, accept the notion that government is the ultimate provider and world policeman, implementing the elusive concept of liberty will be impossible. The degree to which governments are permitted to exert force over the people determines the extent to which individuals retain their liberty as well as the chances for peace and prosperity. Historically, governments have always initiated force against the people with disastrous results. America is the best example of what can happen if that force is restrained, thus maximizing individual freedom and prosperity. Yet today, that wonderful experiment is all but abandoned. We must once again clearly reject the idea that government force and threat of force can be carelessly administered.

Voluntary contracts must be permitted. The trend toward government dominance, interference, and altering of voluntary contracts is prevalent and a most dangerous sign. Responsibility to care for one's self is necessary for a free society to function, and trust that individuals will look out for their own self-interest, even if imperfectly, is required and should be achieved through contractual arrangements. Government interference in voluntary agreements between two parties must be strictly prohibited. Enforcement of those contracts in event of a violation invites the government's participation in settlement of the dispute. This limited involvement of government in voluntary contracts is necessary in a free society.

The strict limitation of government power imposed by the Constitution must be respected. We must accept the principle that government's function is not to regulate and plan the economy, protect us from ourselves, arbitrarily attempt to make us better people, or police the world by interfering in the internal affairs of other nations. Its proper function in a free society is to protect liberty and provide for a common defense. When that proper role is assumed, our problems will vanish.

To bring about real changes, we first need to recognize that the politician, per se, is a lot less important than he appears. He is basically a puppet of public opinion that reflects the prevailing ideas of the intellectual and thought leaders. John Maynard Keynes, in one of his more lucid moments, said:

Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

Media opinion is critical in establishing popular views just as that same media may support or destroy certain political careers. Having accepted the philosophy of economic interventionism and political pragmatism, our society grants political knighthood to the highly paid lobbyists who represent the powerful special interests. But we must remember the lobbyists are the result, not the cause, of our problems. The politician is the puppet of the opinion makers.

Political success is the single goal that drives participants in our political system. No invitations to participants are sent to men of principle, upholders of equal rights, and defenders of the Constitution. Determined political aspirations under today's circumstances are key to achieving a successful political career — the career being an end in itself. We must be aware that this system of politics is not conducive to bringing about changes necessary to solve our problems. The legislative and political intrigues that control the system for the benefit of the special interests must one day come to an end if personal liberty is to be restored.

The resort to power to control people and the economy must be rejected. Also violence to bring changes beneficial to liberty serves no purpose (unless exerted in true defense under reprehensible conditions). The illicit use of power, even with noble intentions, has created history's dung heap of human misery. True change will come through persuasive intellectual influence. If the people refuse to listen, mere recording of significant movements in history will be the limited result of the effort. Yet, not making the effort to persuade the thought leaders to accept freedom and total nonviolence of the state, guarantees that the perpetuation of organized force — the tyranny of the state — will flourish and the suffering will continue for all of us.

Ideas do count; all government action is a result of ideas. It's incorrect to suggest that freedom ideas must be rejected because they are idealistic — the planned economy is also a result of an idea. It's only a choice between good and bad ideas. The job of the true believer in liberty is to convince the majority of our leaders that freedom ideas are superior to the ideas of government coercion. Never can we relax by hoping that the good intentions of the big government proponents will protect us from the evils of government power that intimidate us all. All politicians, from total statists — Marxists and Fascists — to average conservatives and liberals of today's Congress, devoutly promise that all their actions are based on good intentions. But it doesn't matter: bad ideas regarding the nature and role of government breed bad results and suffering occurs nevertheless. Twisted logic, Machiavellian justifications, excuse making, and short-run benefits can never justify the removal of one iota of liberty from any one person if we intend to live in a free society.

Once the role of government is agreed upon, and government initiation of force is rejected as a legitimate function, the consequences will quickly occur — all positive.

Individuals will reclaim their moral and natural right to their lives and liberty as granted to them by the Creator. The state will be put in its proper place as the protector of equal rights, not the usurper. That in itself should be enough reason to institute a system of limited government, but the benefits go far beyond the moral justification of true liberty. Prosperity will abound and the chance for war will be greatly reduced.

If this is done, the welfare-warfare state is repealed and spending by the federal government reduced by 80 percent. Special interest politicians will not be served and will vanish. Lobbyists will become mere petitioners for liberty. The budget will be immediately balanced and the debt repaid. No more wealth will be transferred to the poor, the rich, the foreigner, the bankers, or arms manufacturers. Military spending will once again be used for defense and not for the domination of an unofficial American empire.

Money will be honest, the unit precisely defined, and its integrity guaranteed by government or by voluntary contracts. Counterfeiting privileges of the Fed will be abolished and relegated to notorious underground figures. Honest money will allow credit to be freely created in the market and not by the privileged banking cartel, yet controlled by the integrity of the market and the convertibility of the dollar. The economic benefits of low long-term fixed interest rates will be welcomed by all, since credit can then fuel true long-term economic growth.

This scenario sounds utopian, yet it's more practical than the ill effects of the planned society financed by fiat money and debt creation. It's difficult to understand the persistence in following the impractical ideas of runaway government coercion.

The philosophy of the free market, sound money, private property ownership, and equal rights, offers the only real "compromise" to the impasse existing in Washington where only token attempts are made to cut the deficit. A truly practical approach to this dilemma can be immediately implemented. I suggest six points:

First, instead of debating forever over whether or not the cuts should be made in domestic welfare or military spending, the answer is simple: cut both, and quit arguing — that is, if anyone is serious about his declared hostility toward massive deficits.

Second, all votes on spending should be tradeoffs. Welfare to the poor versus welfare to the rich; domestic aid versus foreign aid; aid to friends versus aid to Communists; water projects in the United States versus water projects in Africa; subsidized loans for steel plants in the United States versus those in South America. Sure, many projects will still exist inconsistent with a truly free market but these projects would only be financed by dropping expenditures elsewhere.

Third, centralized planning fails everywhere else so we can expect it to fail with centralized control over bank credit. Sound money, and breaking up the credit/bank cartel, will solve the problem of high interest rates and long-term financing.

Fourth, talks with the Soviets need not stop — only be redirected. But all subsidies to all Communists must end. We can discuss ways to enhance free trade and voluntary cultural exchanges. True friendly unsubsidized relations with even the apparent enemy go a long way toward reducing the chances of war. A nonaggressive purely defensive foreign policy which would prompt troop and missile withdrawals from Europe and elsewhere would be actions much stronger than all the political rhetoric heard surrounding disarmament conferences.

Fifth, equal rights must be guaranteed and enforced regardless of circumstances of race, color, or creed. Equal rights cannot, however, be defined vaguely to include demands on another's life or property. The goal of freedom must surpass our obsession with material wealth and its forced redistribution.

Sixth, prosperity with freedom for the individual is the only humanitarian system ever offered that prevented mass starvation and suffering. Refusal to accept the free market based on a natural-rights philosophy is the most impractical thing we can do. A system that provides sound money, low interest rates, the removal of the bankers' monopoly over credit, and peace and prosperity will restore trust in the politicians, the money, the future, and in ourselves.

More government cannot possibly offer the solution to the problems we face. Big government is the cause; freedom is the answer.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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