Mises Daily

Illusions of Power

This talk was delivered at the Foundation for Economic Education in Irvington-on-Hudson, New York, on December 12, 2003.

Critics accuse libertarians of reveling in government failures. Yes and No. No one is pleased to see the destruction caused by government policies, whether small scale, as when a tighter regulation causes business failures, or large scale, as when wars destroy life for millions.

The kernel of truth to the claim is this: the failure of government illustrates something extremely important about the structure of reality that most people are likely to forget. It comes down to this: statesmen and public officials, no matter how powerful they may be, cannot finally control social outcomes.

If I might offer a summary of a point emphasized in all of Mises’s works: the structure of society and world affairs generally is shaped by human actions, stemming from imaginative human minds working out individual subjective valuations, and their interactions with the material world, which is governed by laws that are beyond human control.

What that means is that you and I cannot on our own, even if we have maximum political power, control all of human society, and especially not its economic side. Let’s first consider an example from current popular wisdom about the manufacturing base. Many products that were once made in the US – thinking here of televisions, pianos, firecrackers, plastics, and bicycles--are now made in China. This has caused a great deal of alarm--all unwarranted, so far as sound economics is concerned.

But let’s say we have the ambition to change this social outcome. Anyone is free to build a bicycle and attempt to market it to willing buyers. Let’s say you rent some property, hire the workers, acquire all the necessary capital, and then put your bike on sale. In order to cover your costs and make a profit, you find that you must price your bikes above the going market price. Maybe you can persuade people that you have a special product that is better than the others. Or maybe yours will sit on the floor. Or maybe you will have to lower your price and you will find that your revenue does not cover your costs, and you have to go out of business.

No matter what you decide, this much is clear: you are not dictating the outcome. You wanted to build bikes, but it is the consuming public that decides whether it is in our interest to do so. There is nothing you have to say about it. You cannot make people fork over the money. I would venture to suggest that you will ultimately come to the conclusion that you should be doing other things besides attempting to keep up with other businesses that have lower labor and capital costs and hence can make a profit through selling goods at much lower prices.

But let’s say you decide that you don’t want to bow to the realities of the market. Instead you lobby Congress to tax everyone who buys a bike from overseas. The tax is high enough that you can continue to charge exorbitant prices for your bikes. You make a profit. But at what expense? The consumers who buy your bikes have less income left over for other pursuits, whether consumption, saving, or investment. The workers you are employing are being kept from other pursuits as well, and the capital you are consuming is not available for other projects.

Ultimately, you have skewed the entire economic system in a way that benefits you at everyone else’s expense. Others have found a way to do what you are doing much more efficiently, but because you lobbied and got your way, society is prevented from benefiting from others’ innovations. And how long must this distorted system last? That you managed to tax everyone to benefit you does nothing to change the reality that others can do what you are doing more cheaply and better. Do workers really want to be employed in an industry that is something of an artifice? Do consumers really want to pay high prices just so that you can continue to indulge in your bike-making passion?

Clearly not. At some point, people will catch on to the racket, and find other ways to go about acquiring bikes. Maybe they will exploit loopholes in the law that allow them to import bike parts. An industry of do-it-yourself bike building becomes a threat to your profits. Or perhaps black markets will take over. Or maybe people will turn away from bikes altogether and starting trying out new forms of informal transportation. Skateboards are fitted with handlebars. Gas-powered scooters develop a peddle-only option. The very definition of a bike comes into question. Increasingly, enforcement will have to become ever more onerous.

At some point in this game, we face a choice. We can continue to impose an ever more absurd and preposterous system of regulations and protections just so that you can benefit, or we can bow to reality and let in foreign bikes for consumer purchase. Let’s say your tariff lasts a year or even ten years. What will it accomplish? In that time, vast resources are wasted. Consumers of all sorts are exploited. Capital is consumed in economically wasteful ways. People are pushed around and the police powers of the state grow. It does society no good at all.

My point is that whatever the fate of the so-called manufacturing base, there is nothing in the long run that can be done to turn it in one direction or another. The fate of manufacturing is in the hands of consumers at large, and subject to the laws of economics which no man can repeal. It is the outcome of human choice.

Now, the Bush administration has thought otherwise and imposed a huge range of protections to benefit its supporters and people who the administration hoped would become its supporters. The result has been to skew the world economy, hobble markets, delay inevitable transitions, and impose massive social costs.

What this example shows is that governments are not omnipotent. Many try to be, and no government is liberal by nature. But there are limits. Governments bump up against human valuations time and again. Even in the highly rarified event of a despotic government that rules a population unanimously in support of despotism, government still bumps up against the structure of the world, which resists control.

Let us consider another example. Let us say that government desires a strong dollar. But it still wants to print dollars and ship them around the world. In this case, there is nothing that government can do to insure the dollar’s strength against depreciation. Nothing. This is due to the laws of economics. All else equal, the value of a currency in terms of goods falls as its quantity increases. Governments that desire otherwise can only shake their fist in anger.

The same is true domestically. The government wants economic recovery before a recession has fully run its course. It thereby drops interest rates, spends vast amounts of money to gin up demand, and otherwise encourages as much consumption as possible. These tactics can result in some short-term gains but it doesn’t work in the long run. These tactics deplete savings and capital and weaken the foundation for solid future growth.

The issue of the price of prescription drugs will be a big one in this coming campaign. The problem is high prices. Popular wisdom has it that this is because of the greed of the medical industry. The truth is that these high prices are partly a result of subsidized demand due to Medicare and Medicaid, as well as the restricted supply due to patent laws. In other words, the political class is responsible for the high prices. It’s true that the pharmaceutical industry is not complaining. In fact, high prices are precisely what its friends in government want to bring about.

They may regret that the poor have to pay the higher prices, but not enough to do anything substantive about it. Prices would plummet today if patents were repealed, free trade (including re-importation) allowed, and subsidized demand ended by the abolition of Medicare and Medicaid. But no one wants to consider that solution, so Congress creates ever more intrusive programs designed to control prices, keeping the prices high enough to satisfy the industry but low enough to reduce the political clamor.

The problem is that the government can’t have it both ways. It cannot reward its friends with high prices and keep consumers happy at the same time. The current system with its large subsidies is only creating massive new liabilities in programs that cannot be funded in perpetuity without massive tax increases that no one is willing to advocate. Absent tax increases, the only answer is inflation, which taxes us in other ways.

One way to think about government is as a rat wandering through a maze with no escape. There is no magic solution to getting around basic economic laws. All lunches must be paid for by someone, prices cannot be both high and low at the same time, and all attempts to coerce generate counter-reactions. In short, there is no alternative universe in which the fantasies of politicians come true.

But try telling that to the political class. The last thing they want to hear is that their power is limited, that their will is not a way. They are prone to believe that membership in the political class comes with the privilege of shaping the world to their liking. If you read the social science literature, you find the same error at work on a nearly universal basis. Very rarely does anyone come along and say: great theory but it has nothing to do with reality. You are just playing intellectual games.

Socialism was really nothing other than an intellectual game. People from the ancient world to the present conjured up some vision of how they would like the world to work and then advocated a series of measures of how to achieve it. Mises and his generation explained that their vision was fundamentally at odds with reality. In the real world, capital must have price rooted in exchange of private property in order for it to be employed in its highest-valued capacity. It solves nothing to say that everyone should own capital collectively. This was the equivalent of pointing out that the Emperor was wearing no clothes.

In some ways, what we do as commentators on economic affairs is to follow this model again and again. The other day, a candidate for president suggested that the answer to our economic woes was more regulation. He had it all figured out in his mind. Immediately, free-market economists from all over the world joined forces to point out that his goal of higher economic productivity could not be achieved this way. It was an unwelcome message but one necessary to deliver regardless.

The experience of Iraq has provided myriad examples of the same. The US wants to pump oil. It wants to start factories, stores, and commerce generally. But it refuses to put private owners in charge. As a result, all its military muscle has amounted to very little at great expense. It is a classic example of how governments fail when they try to fight against forces they cannot control. Factories in Iraq that have gone into operation have done so without support of the occupying government.

And think of the war generally. At the outset, the visionaries in the Bush administration imagined that Iraq was really a very simple problem to solve. It only needed to be decapitated and the magic dust of the US presence would otherwise create an orderly and prosperous society that would be a model for the region. The reality hit. Crime was unleashed. Feuding political factions clamored for control. Production stopped. Society flew into chaos. This was not because of the absence of the political leadership. It was because of the presence of foreign martial law in a country that was seething in resentment against the US.

Time and again, we have seen evidence that the Iraq war only accomplished the opposite of its aims. Its purpose was to find weapons, punish terrorism, and bring order to the region. Instead it has fueled terrorism and brought new levels of disorder to the region. Not having done that, the war is then re-defined in terms that reflect whatever government has done: namely to toss out and capture Saddam,

In this sense, the war was like any other government program: bringing about the opposite of its stated intentions and doing so at greater expense. Thus do we see the intersection between foreign and domestic policy. Government is famously ham-handed at home and similarly incompetent abroad. No matter how much government claims that it is master of the universe, it constantly confronts forces beyond its control.

In all the talk of the calamity of this war, never forget the broader picture: what an incredible opportunity was squandered after the end of the Cold War. The US had emerged as the universally acknowledged ideological victor in that forty-year struggle. That the Cold War was not actually an ideological struggle so much as a classic standoff between two empires is irrelevant for understanding the implications of this fact: totalitarian communism collapsed while the free economic system of the market remained standing in total triumph. The world was ready for a new period of genuine liberalism, and looking to the US. On the verge of an amazing period of technological advance, we were perfectly situated to lead the way.

There had never been a time in US history when George Washington’s foreign policy made more sense. A beacon of liberty. Trade with all, belligerence toward none. Commercial engagement with everyone, political engagement with as few as possible. The hand of friendship. Good will. This was the prescription for peace and freedom. It was within our grasp. Our children might have grown up in a world without major political violence. A world of peace and plenty. It could have been.

But it was not to be, mainly because George W.’s father decided that he wanted to go down in the history books for doing something big and important. What else but war? The US was now the world’s only superpower and itching for some fight somewhere. It’s a bit like a playground filled with wimps and one boy with a black belt in karate who never absorbed the lesson in how and where to use his fighting skills. And then there was this oil-drilling dispute between Iraq and Kuwait, and Bush decided to intervene. Twelve years later, the US is still there, causing unrelenting havoc for those poor people.

Here at home we are given constant examples of the huge gulf that separates government’s perceptions of itself versus the reality. The Bush administration wanted to give the steel industry a boost. The administration established tariffs, which amounts to a tax on all consumers of steel. American manufacturers faced a choice of paying the tax to buy imported steel or paying the higher prices for domestic steel. Those who could do neither had to cut back production and hiring in other areas. Other consumers had to pay higher prices, which diverted income from other pursuits.

As for the steel industry itself, the tariffs did nothing to help it achieve greater efficiency, which is the only way to deal with more efficient competitors. They only ended up subsidizing inefficiency. Even then, it wasn’t enough. During the period of tariffs, the industry dramatically consolidated in order to become more efficient in other ways.

Once faced with the prospect of trade wars, the ultimate cost of protectionism, the Bush administration pulled back and repealed the new tariffs, thereby landing the industry in exactly the same predicament it was in before the tariffs were past. As for commercial society as a whole, it paid dramatically higher steel costs, and faced sporadic shortages, for absolutely no reason.

Faced with failure on every front, the Bush administration did the right thing and repealed the tariffs. Not that it was honest about the failure. Instead it claimed its policy worked so well that it could now repeal it. This is like a physician prescribing poison and then changing his mind. He can’t but try to put the best spin on it, I suppose.
But what a beautiful example of the powerlessness of government this is! The Bush administration wanted to save American industry and only ended up vastly raising the costs of doing all forms of business. More cutbacks are inevitable as steel production shifts to other countries and the US finds its comparative advantage elsewhere.

Much legislative energy is poured into helping some groups gain favorable treatment in the workplace. I’m thinking here of the usual litany of victim groups as identified according to race, ability, sex, national origin, religion, and the like. Have these laws actually helped the group in question? The results are mixed at best. If you send people out into the workforce with a high price attached to their heads – and the prospect of a lawsuit is a very high price indeed – you only make employers less likely to hire them.

I don’t doubt that some people have been helped by these laws, but they are not the people most in need of help. Today, the disabled, blacks, women, and religious minorities go in search of jobs with a major problem: employers fear them on the margin, and, on the margin, are less likely to hire them relative to others, provided they can get away with it. It is the least qualified among them who pay the highest price. A good test case is disability: it is a documented fact that unemployment among the truly disabled is higher today than it was when the Americans with Disabilities Act was passed.

Because libertarians know in advance that government policies are destructive, we tend to focus our editorial energy on pointing to its destructive effects. But in our zeal to draw attention to issues others ignore, let us not forget the bigger picture. There are always limits to what the government can do, and the government’s destruction is always accompanied by examples of great creativity on the part of the market.

Even as government dominates the headlines, private entrepreneurs are busy every day working to improve products and services that improve our lives. They do it without taxing us or regulating us, or making us suffer through tedious elections or political debates. They make their products and offer them to us in a way that pleases the consuming public the most. We can choose whether we want them or not.

Consider the success of Wal-Mart. If government had set out to create a volume discounter that made a world of material goods and groceries available to the multitude in all countries, it might have tried for a thousand years and not created anything resembling this company. Even the military has relented and now routinely points its employees not to its on-base stores but to Wal-Mart, Office Depot, and others for the best prices.

Foreign development aid is another example. It took decades to get the message across, but today finance ministers in the developing world understand that they have far more to gain through integration into the world economy than from development aid and all the restrictive policies that come with it. Today, as Sudha Shenoy points out, the largest resistance to new trade deals comes from the developing world, not because they don’t want trade but because they desire trade without the labor and environmental controls the US demands.

The same is true in the area of communications. In the last century, governments aspired to control them all: the phones, the mails, the media. Today, we see that government, in practice, controls very little of the communications industry, despite every attempt to hobble private enterprise.

In that same vein, a major issue for everyone these days are computer viruses and spam, which threaten to make our chief mode of communication less reliable. Congress passes ineffectual legislation against spam and viruses, while private enterprise has given us dozens of means of winning the battle.

Private enterprise creates; government destroys. That is the great economic lesson of our times and all times.
Of course there is one way in which government never fails. It can loot. It can gain footholds into society’s command centers. It can punish enemies. It can even indoctrinate people in its preferred vision of the world through propaganda.

This is the best way to understand the public school system. It doesn’t work to educate but it does work to transfer vast sums from the private to the public sector. And here too, we see the power of private enterprise: booster clubs in public schools represent a de facto source of privatization, and the clubs and groups connected to them are the only really successful things going on in public school.

We’ll hear much in the coming months about all the wonderful reforms politicians are going to bring us. This is the time when politicians vie for our allegiance by telling all about their ideas and vision for the future. As usual, they will parse their words in ways to maximize the numbers of people who are persuaded and minimize the amount of trouble they get into for inadvertently telling people something they don’t want to hear.

As an aside, whoever came up with this idea of a mass democracy just wasn’t thinking things through very clearly. Nothing runs well by majority vote, to say nothing of the fact that a truly free society shouldn’t be “run” at all; it works on its own without would-be masters-and-commanders grasping at the helm.

Let me then offer to you my own top ten list of political lies you are told, all designed to make you believe that government should have more power than it already has, so that it can create more of the disasters we are accustomed to:

10. My new program will generate jobs. Truth: only the market generates jobs on net.

9. My education program will reform schools so that they leave no child behind. Truth: the public schools do not work for the same reason no government program can work. They exist outside the market economy.

8. My program will save industry x. Truth: industry must be part of the market or else it is not really industry at all.

7. I won’t raise your taxes but I will pass lots of new programs: Truth: all programs must be paid for.
6. As president, I will pursue a humble foreign policy. Truth: nothing in the office of the president encourages humility.

5. This war is humanitarian and winnable. Truth: war is nothing but a government program on a massively destructive scale, and just as error prone.

4. My reform will bring market-based competition. Be on the lookout for this lie, which market partisans are likely to believe. There is only one kind of genuine market, and it is rooted in private property and nothing else.

3. We will secure the nation. Truth: government cannot provide security better than markets, any more than it can provide food or houses better than the market.

2. Government is compassionate. Truth: men who seek power over the lives of others are the coldest, cruelest humans of all.

1. You can’t love your country and hate your government. Truth: A person who loves his country loves liberty first.

One hundred years from now, the great story of the latter part of the 20th century and the first part of the 21st century will be the vast improvements in life wrought by technology. Consider the web, the cell phone, the PDA, the affordable laptop computer, advances in medicine, and the spread of prosperity to all corners of the globe. What has government had to do with this? The answer is: nothing contributory. It has worked only to impede progress, and we can only be thankful that it hasn’t succeeded.

Through all of human history, governments have caused frightening levels of bloodshed and horror, but in the end, what has prevailed is not power but the market economy. Even today governments can only play catch-up. This is because of the reasons that Mises outlined. Government cannot control the human mind, so it cannot, in the long run, control the choices people make. It cannot control economic forces, which are a far more powerful and permanent feature of the world than any government anyway.

Governments have a propensity to overreach in so many areas of life that their exercise of power itself leads to their own undoing. The overreach can take many forms: financial, economic, social, and military. In this way, and with enough passion for liberty burning in the hearts of the citizenry, governments can be responsible for their own undoing. It comes about as a result of overestimating the capacity of power and underestimating its limits.

I believe this is happening in our time. It may not be obvious when taking the broad view, but when you look at the status of a huge range of government programs and institutions, what you see is a government that is at once enormously powerful and rich, but also fragile and teetering on the brink of bankruptcy. Events of the last year indicate just how far the government has slipped in its ability to manage the economy, society, culture, and world order. Despite the exalted status of the state today, the vast and sprawling empire called the US government may in fact be less healthy than it ever has been.

A few months back, we had a special speaker come to Auburn, probably the most famous man who has visited us since the Country and Western star Alan Jackson was in town. He was Mikhail Gorbachev, a very interesting figure in the history of nations. He came to power with the reputation of a reformer and instituted many reforms that were designed not to give more liberty to the people, but to stop the unraveling of an empire before it was too late. But it was too late. All his talk of perestroika and glasnost couldn’t fool the people, who had become convinced that the Soviet machine was something of a hoax.

The empire unraveled not because of him, but despite his efforts to save it. When it came time to make the critical decision of whether to try to hold the empire together by more and more force, or not, history had already made the choice for him. The empire dissolved in the blink of an eye. Not too many months later, he was out of a job, not because he was recalled in some formal process, but because the forces of history had run him over.

Democratic governments are not immune from the forces of history that overthrew Soviet tyranny. All governments overreach and no government is permanent. So let us fear government but not exaggerate its powers. It can cause enormous damage and it must always be fought. But in this struggle, we are on the right side of history. The power of human choice, aided by the logic of economics and the laws that operate without any bureaucrat’s permission, are our source of hope for the future.


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