Mises Daily

The State Expands, and Weakens

Permit me to draw your attention to what strikes me as the most profound political paradox of our times. The US government is larger, more consolidated, more powerful, and more intrusive than it has ever been in its history – indeed our sweet land of liberty is now host to the most powerful leviathan state that has ever existed.

Never before has a government in human history owned more weapons of mass destruction, looted as much wealth from a country, and assumed unto itself so much power to regulate the minutiae of daily life. By comparison to the behemoth in Washington, with its printing press to crank out money for the world and its annual 2.2 trillion dollars in largess to toss at adoring crowds, even communist states were powerless paupers.

At the same time – and here is the paradox – the United States is overall the wealthiest society in the history of the world. The World Bank lists Luxembourg, Switzerland, and Norway as competitive in this regard, but the statistics don’t take into account the challenges to mass wealth that exist in the US relative to small, homogenous states such as its closest competitors. In the United States, more people from more classes and geographic regions have access to more goods and services at prices they can afford, and possess the disposable income and access to credit to put them to use, than at any other time in history. Truly we live in the age of abundance.

What is the relationship between the rise of big government and the rise of American prosperity? It seems that people on the right and left are quick to confuse correlation with causation. They believe that the US is wealthy because the government is big and expansive. This error is probably the most common of all errors in political economy. It is just assumed that buildings are safe because of building codes, that stock markets are not dens of thieves because of the SEC, that the elderly don’t starve and die because of Social Security, and so on, all the way to concluding that we should credit big government for American wealth.

Now, this is where economic logic comes into play. You have to understand something about the way cause and effect operates in human affairs to understand that big government does not bring about prosperity. Government is not productive. It has no wealth of its own. All it acquires it must take from the private sector. You might believe that it is necessary and you might believe it does great good, but we must grant that it does not have the ability to produce wealth in the way the market does.

Lasting prosperity can only come about through human effort in the framework of a market economy that allows people to cooperate to their mutual advantage, innovate and invest in an environment of freedom, retain earnings as private property, and save generation to generation without fear of having estates looted through taxation and inflation. This is the source of wealth. This is the means by which a rising population is fed, clothed, and housed. This is the method by which even the poorest country can become rich.

Now, does this system as described characterize the United States? Yes and no. This is, after all, the country that recently jailed Martha Stewart, the world’s most successful woman entrepreneur, for the crime of having not disclosed to the inquisitors every last detail about the circumstances surrounding her choice to sell a stock before its bottom dropped out.

Some of our most successful magazines celebrate entrepreneurship, but recently enacted laws, such as the Sarbanes-Oxley Act, empower the federal government to oversee the books of every publicly listed company and even manage their methods and operations in every detail. Some have compared this act to FDR’s National Industrial Recovery Act.

This is a country with cradle-to-grave security promises that just recently added a benefit of low-price prescriptions for seniors that is going to cost hundreds of billions over time. This is a country that, when faced with a problem of airport security, created a whole new federal bureaucracy to gum up the works of every airport in the country.

These are incredibly bad policies, enterprise killers in every way. Why, then, does enterprise continue to thrive? The answer is complex. In many ways we continue to live off the capital of previous generations. Some economic sectors benefit greatly from an artificial injection of created credit, making prosperity seem more real than it is in sectors such as housing and perhaps stocks. There is a bitter irony at work here too in that the larger the economy, the more there is to tax, and so government grows as an after-effect of economic growth.

But here I would like to concentrate on what I think is an explanation that is too often overlooked. It requires that we understand something about the extraordinary capacity of the human mind to overcome obstacles put in its path. In all the history of states, in all the history of reflection on social organization and economics, this component is the most underestimated because it is the least predictable and the most difficult to comprehend. Human beings are creative and determined, and, if they have a love of liberty, and cooperate through exchange, they can overcome seemingly impassable obstacles.

It is because of this power of human ingenuity and determination to improve the world around us, despite the bureaucrats, that a vast gulf has come to separate the accumulated power of the nation state from its effective power in the management and guidance of society and the world economy.

Now, there is a sense in which the state is nowhere as effective as it claims. Economic law limits what the state can do. The state cannot raise wages for everyone. It cannot dampen prices that want to rise without causing shortages, or increase prices that want to fall without causing surpluses. It cannot predict the course of markets or human events. It can control surprisingly few forces that work in the world.

In all its central planning, government is forever declaring that major combat operations are over, whether in foreign or domestic policy, only to discover that its real struggles and battles last and last. A good example is in the area of foreign trade. If a good or service is more efficiently produced abroad, the logic of the market will reassign production patterns until they conform. An attempt to protect domestic industry can do nothing to change this reality. Instead, protection only increase prices for consumers, subsidizes inefficient firms, and brings about ever-increasing amounts of wasted time, work, and resources.

I only mention these few examples of the limits of the state as a prelude to my general claim. It’s my view that the gulf between accumulated power and effective power is going to grow ever wider in the coming years, to the point where the nation state itself will grow effectively weaker, more anachronistic, and finally irrelevant to the course of social development.

In these minutes, I would like to explain more in depth what I mean, and provide an account of how the relationship of society to the state has dramatically changed over the last fifty years and will continue to do so in the years ahead. This change has fundamentally altered our view toward public life and our expectations concerning what institutions we depend upon for our security and well being. We have come to depend on the state less and less in our daily lives, even as the state has accumulated ever more power. Indeed, unless we work directly for the state, and sometimes even if we do, our activities and affairs owe ever more to the private sector.

In saying this, I am to some extent agreeing with what has become a common complaint made by neoconservative writers and left-liberal pundits. They have said for years that the civic culture is no longer coherent and cohesive. They complain that the nation state has lost its hold on the public imagination. They whine and wail about how we have all retreated into our suburbs and Internet connections and no longer rally around grand national projects that inspire us with a vision of all that government can do.

Or to put it another way, they worry that the government has run out of good excuses for spending money, taxing us, regulating us, drafting our kids, and getting us embroiled in foreign wars. For the neoconservative crowd, 9-11 really was a godsend, just as the Oklahoma bombing was a godsend to the left-liberals of the 1990s. They were equally adept at exploiting these horrible tragedies to the great advantage of the state, and in browbeating the rest of the population into going along with the political priorities of the regime in power. But in retrospect, it is clear that these events only represented a brief parenthesis in the long-run decline of the nation state in our social consciousness.

Before proceeding further, it is useful to back up just a bit to remember that the nation state as we know is a modern invention, and not an essential feature of society. In many ways, it is, as Bastiat said, nothing but an artifice that permits some to live at others’ expense. He was speaking of 19th century France, and all that he wrote applies in our time as well.

But states were not always structured as we know them today. From the fall of the Roman empire to the late middle ages, societies in Europe were governed not by bureaucrats, elected councils, regulations, or any kind of permanent structural apparatus of coercion and compulsion, but by competing cells of authority that were woven together not by ideology but by separate function. The merchant class managed its affairs, the Church had its purview and courts, the international traders developed their code, feudal lords were masters of their domain, free cities managed themselves, the family was largely autonomous, and the state, such as it was, consisted of extended families and lines of rulers who usually dared not transgress their traditional authority.

Every institution was supremely jealous of its power and authority. The emergence of liberty from feudalism occurred not because any institution brought it about, but because they all tended to stay within their realms, cooperating where necessary but also competing for the loyalty of the public. All the institutions we associate with civilization – such as universities, stock markets, charities, global trade, scientific establishments, vocational schools, courts of law – were born or recaptured from the ruins of the ancient world during these supposed dark ages without nation states.

Voltaire once wrote of how kings would conduct their wars, raising their own money and employing their own soldiers, always acquiring or losing territory and usually up to no good. But for the most part, though they dominate the history books, their activities had little or no impact on the people. It was during this time, historian Ralph Raico reminds us, that the process of accumulating capital began again and the division of labor began to expand – two features that are essential to rising population and prosperity.

The nation state as we know it – defined by a fixed governing class that enjoys the legal monopoly on the right to use aggressive force against person and property and holding a status that is higher in authority than any other institution – was a development of the break-up of Christendom, and the resulting centralization and wars of the late 16th century and early 17th century, as Martin Van Crevald points out. As competitive sources of authority weakened, the state as an entity separate from its ruler came to be strengthened and consolidated, sometimes in opposition to competing authority centers and sometimes in cooperation with them.

The emergence of the modern state immediately gave rise to a countervailing force: the great liberal movement all over Europe and then in the United States. This liberal movement emphasized a single theme in its writings. It is as follows: society contains within itself the capacity for managing itself in all its affairs, especially its economic affairs, and states, to the extent that they do more than merely punish criminals, are a source of despotism and tyranny.

It was this conviction that was accepted as commonplace during the founding period of the United States, and not just by statesmen but also by merchants, farmers, ministers, and intellectuals. The conviction that society requires no central management, and should thereby be left alone by the governing class, had a name: liberalism. It meant to love liberty.

The structure and founding ideology of the United States was intended to protect that idea of liberty, under the belief that if people are free to pursue their dreams, cooperating with each other and also competing with each, freely associating to their mutual betterment, and governing their own affairs rather than permitting themselves to be governed from on high, the result would be human flourishing as never before known in history.

Now, it should be obvious that this model was rejected in the 20th century, the century of government control. It began with a horrible war that brought the communists to power in Russia and the managerial class to power in the United States. Economist Thomas DiLorenzo has discussed how we came to be saddled with an income tax, a central bank, and direct democracy, all in one year. The interwar years provided an ever-so-brief respite before the world became uglier with two models of central control having presented themselves as the only viable systems: fascist and communist. We flatter ourselves if we think the New Deal represented a third choice, for it borrowed from the other two and added only the ingredient of democratic expediency.

World War Two cemented into place the planned society in which all attention was directed toward the public sector as liberator and savior of mankind. The words economic development, technology, and security were bound up with one institution only: the nation state. It was the nation state that fought and won the war, launched the bomb, reconstructed economies, rescued the aged, educated the youth, stabilized the economy, and planned the exploration of space. The nation state was the new god: supposedly omniscient, omnipotent, and omni-competent.

The Mises Institute recently brought out an unpublished essay by Murray Rothbard written in the late 1950s on the subject of technology and the state. In it he departed from the whole of conventional wisdom at the time by arguing that the government was not the appropriate institution to trust with our technological future. Research and development is best done by the private sector, he said. All major innovations in world history have come about this way, he wrote, and it is from within the private sector that we should expect the next revolution. From government we can only expect technology that reinforces political priorities, but no real innovations that are both useful for the mass of the consuming public and economically viable.

These days the paper is not shocking at all. Not so in those times. The paper was not published because there was no one around to publish it. It was an argument that all his colleagues would have rejected outright. In those days, it didn’t even seem to have superficial plausibility. Even those who commissioned the piece found themselves squeamish about its contents. When you think about the public consensus that existed for the state in those days, it does indeed strike us as a different world.

In 1955, the federal government was relatively small but exercised enormous effective power. The federal budget was $68 billion, which is about one thirty-sixth as large as today’s government. In fact, the whole federal government was smaller than a single department of the government today: the Department of Education, which, ironically is the one that the Republicans keep saying that they will abolish.

But the size of the state by today’s standards masked its effective hold on the public mind. The G.I bill, it was believed, would educate all soldiers, while the federal government would reconstruct the Europe the Nazis destroyed even while it protected us from the demonized Soviets who had been our allies in the war the day before yesterday.

The Cold War purported to pit US capitalism against Soviet communism, but the truth was that there was very little enthusiasm for market economics in the United States. It was not taught in the classrooms. Mises himself could not find a paid position as professor of economics. Keynesian thinking – which imagined the government to be an effective manager of the macroeconomy – was seen as the only real alternative to socialism.

The technological advances of the period mostly involved television and commercial flight, advances widely attributed to government wartime spending. Our information came from three approved networks and a handful of wire services. Publishing books was expensive so self-publishing was out of the question. Intellectual and economic life was dominated by a kind of forced conformity and the culture seized by an unrelenting fear of nuclear holocaust.

The planned economy that had become fashionable in the 1930s continued its hold on public policy in the 1950s, and successfully kept many innovations at bay. The cell phone is a good example of this. Probably many people in this room carry one. As with most new technology that enters into mass distribution, we all wonder how we got along without them before. The development and expansion of this industry – which was fully born in 1994 – has been entirely a result of private-sector initiative. We own our phones, manage our accounts, deploy the phones for email, web surfing, and even for taking and sending pictures.

The prices and plans are market based, and accessible to a vast amount of the buying public. The industry is incredibly competitive. In every mall in America, cell phone dealers have their booths. When I was a kid we dreamed of personal communication devices that we read about in James Bond novels. We imagined that they would be in our cars. But even Ian Fleming couldn’t have imagined their portability or the advance of wireless communications. Nor could we have imagined that they would be a mass product, available not just to spies or the rich but to everyone.

It is highly significant that this industry is rooted so deeply in the private sector. It was not too long ago when economists and political scientists believed that communication technology must always fall within the purview of the state. This belief was the basis of the creation of the old Bell system. I can recall as a young adult that the phone strapped to the wall was the only real-time contact we had with the outside world. It was owned by the one phone company, thanks to government monopoly and regulation. Our right to communicate was sustained and controlled by the state.

In 1947, the federal government, which had by then taken ownership of the entire radio spectrum, graciously relented and permitted the first mobile telephone service. It gave up enough of the frequency spectrum to permit some conversations to take place – twenty-three conversations and no more. This position was not fully reversed until 1988 and it wasn’t until 1994 that the government allocated enough spectrum to permit today’s cell phones to work as they do. How much earlier we might have enjoyed their use we cannot say for sure. But this much we do know: when the federal government allowed just a little bit of light into the room, entrepreneurs took it from there to create a dazzling display.

So too with the mails. There was only one way to deliver a letter or package when I was a young adult, and very few imagined that it could be done any other way. A few exceptions in the law were made and now look what we enjoy: vast choice in package delivery, with the private sector offering far more choices than the public sector ever dreamed of offering. Here again it was that the federal government had finally permitted an exception to the rule against using any provider but the federal government. Thus a slight ray of light allowed into darkness has brightened the whole world.

Not enough can be said about the way the web has completely reshaped the world. While the Internet was frozen and nearly useless after the government put it in place for purposes of military and bureaucratic communication, the private sector transformed this creaking and poorly constructed structure into the institution that would change the whole world.

So it is in sector after sector. We have in these examples the story of the modern world, shaped by private enterprise, driven forward by the power of entrepreneurship, improving in a hundred million ways by employing private property toward the common good. It is done largely outside the government’s purview. Sometimes it seems as if government works little more than an absentee mafia lord, showing up to collect a check and then retreating again to his private estate. You don’t want to make him angry but neither do you let the prospect of his sudden appearance deter your activities.

Most of our daily lives are conducted as if we are all striving to live in absence of government – precisely as the critics say. We live increasingly in private communities and use technologies that are provided for us by private enterprise. We depend on the matrix of exchange and enterprise to give us security in our homes and in our financial affairs. We manage our finances with no sense of anticipation that government will care for us in the future. Our churches and schools and workplaces and families have become the units that draw our social attention. Government and the old-fashioned civic religion just can’t find a place for itself in this scenario. But rather than a bad thing, this strikes me as a wonderful thing, a return to the America that Tocqueville described rather than the regimented national life of the postwar period.

To celebrate this is not really a matter of ideology. If the market had not been working spectacularly well despite attempts by government to hobble it and channel its energies, we would certainly find ourselves much poorer today than we were 50 years ago. And yet here we are, a country with a population that has fully doubled in size in that period and a GDP that has increased by a multiple of 28. This much we can say: by historical standards, this is a miracle, and the market, not the government, is responsible.

In the meantime, the market has outrun the state to such an extent that the whole planning apparatus of the postwar period, always based on a kind of pseudo-science, has become preposterously untenable.

This is especially true given the size and expanse of the global economy. In 1953, the dollar value of world merchandise trade between all countries totaled $84 billion, not a small sum but about one fourth the size of the total US GDP in the same year. Today, the dollar value of world merchandise trade is 7.3 trillion, or nearly two-thirds the size of the total US GDP. This increasing integration of the world economy, which was given a huge boost by the collapse of Soviet satellites and the opening of China and India, has shattered the dreams of anyone who hoped national economic planning had a future.

Let me present the following metaphor of how I imagine the relationship of the productive matrix of human voluntarism to exist alongside the leviathan state. Imagine a vigorous game of football with fast and effective players, cooperating with their teams and competing with the other team. These, we might say, constitute the activities of the market economy: consumers, producers, savers, investors, innovators, workers, and all institutions associated with the voluntary sector of society such as houses of worship, educational institutions, charitable endeavors, families, and artistic and literary associations of every sort. They are the players in this game.

However, right on the 50-yard line sits a huge, old bull elephant, enormously strong but also sclerotic, slow, and completely unsuited to being a player in this game. Everyone knows that this monstrous animal is there, and they wish it were not. But the game proceeds apace, with runners, kickers, and throwers zipping around it. This mastodon is powerful and authoritative, more so than ever, but it can hardly move. It can bat its trunk at players that prove especially annoying, even impale them on its tusks, but it cannot finally stop the game from taking place. And the longer these players confront this strange obstacle, the better they become at working around it, and growing stronger and faster despite it.

I’ll block that metaphor before it becomes too implausible, but let me just say this about the future of the elephant state: like a slowly dying large animal, the state will continue to be an annoyance and even deadly under certain conditions, but it will not be an effective player in our daily lives. The reason is this. The state cannot deal with change, and ours is a time of constant and relentless change. It does not navigate the world with attention to outcomes, and ours is a world in which all human endeavors are expected to achieve. Its bureaucratic structures are fine for dealing with repetitive tasks but it cannot face new challenges. It can consume resources but it is incapable of producing them. It is uninventive, unresponsive, unintelligent, uninformed, and unmotivated to succeed.

Ludwig von Mises provided the first full account for why this is so. The government exists outside the matrix of exchange. There are no market prices for the goods and services it endeavors to produce. The revenue it receives is not a reward for social service but rather money extracted from the public by force. It is not spent with an eye to return on investment. As a result there is no means for the government to calculate its own profits and losses. Its inability to calculate with attention to economic rationality is the downfall of governments everywhere. Its decision-making is ultimately economically arbitrary and politically motivated.

This feature of government can doom whole societies, as it did in the Soviet Union where the government presumed ownership over the whole capital stock. Because government control was complete, and there were few legal channels of escape, society and economy withered and died over time. Eventually the situation became so absurd that even the elite in the Soviet Union did not live as well as the middle class in well-developed countries. As much as power can be its own reward for some, this situation was clearly unsustainable.

But government control doesn’t always take that path. It always impoverishes relative to what might otherwise have been the case. But when its control is not comprehensive – or to extend that football metaphor, when the elephant doesn’t cover the entire field but still leaves room for the game to take place – the miracle that is the marketplace can still do remarkable things. Sometimes it only takes the government lessening control over one area of life to inspire stunning achievements. The government keeps trying to pave the world, but private enterprise keeps growing up through the cracks.

If you want a picture of the contrast between what Murray Rothbard called power and market – or the state and the private sector – consider what you see at most major airports in this country. You have two structures working side by side: the public sector as represented by the Transportation Security Administration and the mostly private sector as represented by the airlines.

So you arrive with your luggage, and the TSA is the first to swing into action. And there you have it: the very picture of the bureaucrat: alternatively inattentive and belligerent, completely disregarding of customer well-being, so slow that they seem to exist out of time itself. They laugh amongst themselves as if they experience a real class identity and pay no mind to others. They treat mere citizens as subordinates, and are quick to accuse us of wrongdoing.

Most of all, they don’t do their job well. They will apply a strict chemical test to a tube of Crest, but will let a black ball with fuse in it go right through unnoticed. They will give a thorough search to a young mother, and think nothing of ripping a baby out of her arms, only because she came up randomly on the list of those to get a thorough check.

Private enterprise could never work this way. If you applied a profit and loss test to such state services, bankruptcy would be a foregone conclusion. But once we get past the TSA, we are greeted with smiles and warmth hitherto unknown in the history of airline travel. Airline employees seem very-much aware that the travelers have likely gone through Hell in dealing with the TSA. Even these unionized employees do all they can to serve others. Somehow we arrive at our destinations in one piece and not suffering total humiliation, but this is not due to the TSA. It is due to the forces of private enterprise that still exist in the airline industry.

We can think of this airport scene as a kind of microcosm of the whole economy. It is burdened, vexed, harassed, hampered, and hobbled by the state. But through the miracle of human creativity and determined effort, private enterprise has created a grand and glorious world that has surpassed the most far-flung dreams of the old utopians, a world where food once inaccessible to kings is available to the poorest of the poor, where no one need be without clothing or shelter, where even those we call poor would have been seen as enormously blessed only decades ago.

All of this leaves the question of what our political priorities should be. If it were up to me, I would push a button and reduce government to the size it was after the American Revolution under the Articles of Confederation, and then look forward to debating whether we should get rid of the rest.

But because that is not likely to happen soon, my own sense is that if present trends continue, the years ahead will have more in common with the Gilded Age of the late 19th century than the country and the world as we knew them from the 2nd World War to the end of the Cold War.

Unlike the planned and regimented economy of the postwar period, the Gilded Age was a time when technological advance and demographic shifts made the society essentially ungovernable, even given the vast power of the state. Not that this is any reason for the lovers of liberty to let down their guard: the War on Spain and the Great War that followed the post-civil war peace shattered civilization. The same can happen again to the great civilization being created and renewed in our own time. After all, a demented elephant can do a lot of damage.

We can do our part to encourage the good developments and forestall the bad. What should our priorities be? Two politicians I saw on C-SPAN recently gave a speech to instruct us on the first question we should ask when we go to vote.

The first one said that we should think mainly about the children, that we should elect politicians who put children’s interests first. As an extension of that principle, we should ask the state to further the interests of our families and communities, this person said. Now, if all this means anything, it strikes me as highly dangerous. The state does not own the children and we don’t really want to live in a society in which the state is permitted to do with our children, family, or communities what it wishes.

Moreover, there is no such thing as the collective interests of children, families, and communities, and to pretend that there is, is potentially despotic. In any case, it solves no political issue, since right and left both have different plans for what they believe is best for our children. These days, their plans reach into every area of their lives, from what program they should be using to learn to read to the conditions under which they are permitted to take their first job. I can’t but think of Hannah Arendt’s warning that politicians who invoke the children are potential totalitarians.

The second politician said that we should think mainly about our security when we go to vote. The Constitution, he said, empowers the federal government to collect taxes to provide for the common defense, so that is what we should do. He proceeded to justify the whole of the American military empire that has generated so much hatred and opposition around the world, and interfered so seriously with our trading relationships. He was the classic case of a person who completely ignores the founders’ warnings against war, standing armies, and militarism.

Now, these politicians disagree profoundly on what the political priorities should be and what we should be asking of the state. The first says we should ask for welfare. The second says we should ask for warfare. They agree to disagree, and spend our money on both. Why? Because, well, because it’s no skin off their noses. Such is the nature of public government as Hans-Hermann Hoppe describes it: there is no real ownership, so, of course, there is a squandering of resources and ever-higher costs.

The only real restraint against all forms of government is public opinion. A public that says no to the state is the best defense against despotism, and the best cultural and political context in which liberty grows and thrives. Our times have taught us that world economy does not need the state. As the old liberals said, society contains within itself the capacity for self-management. Our experience in our families and communities has taught that the state does very little to our benefit. Our experience in our workplaces has taught us that the state makes productivity more difficult and gives us very little to nothing in return.

I’m often asked what an average person can to do to further liberty. I say that the first and most important step is intellectual. We all need to begin to say no to the state on an intellectual level. When you are asked what you would like the government to do for you, we need to be prepared to reply: nothing. We should not ask it to save our children, nor not leave them behind, nor conscript and kill them in the name of security, nor give us anything at all.

We can still be good citizens. We can be good parents, teachers, workers, entrepreneurs, church members, students, and contributors to society in a million different ways. This is far more important to the future of liberty than how we vote. We must regain our confidence in our capacity for self-governance. I believe this is happening already. The empire is shrinking despite its every attempt to expand. Even if the public sector cannot and will not prepare for a future of liberty, we can. Let us look for and work toward the triumph of liberty unencumbered by leviathan.

This speech was delivered to a free-market businessmen’s group in Okemos, Michigan, on April 16, 2005

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