In whatever direction we turn, we find the heavy hand of government intruding into virtually every aspect of American society. Indeed, it has reached the point that it would be a lot easier to list those areas of people’s lives into which government does not impose itself – and, alas, it would be a very short list. But it was not always that way.
Around a hundred year
s ago, say, in the first decade of the 20th century, all levels of government in the United States only taxed away and spent about 8 percent of national income, leaving 92 percent of what individual’s had produced and earned in their own hands to use and spend as they thought best as free people.
Plus, there was no regular deficit spending because the federal government in Washington, D.C. annually balanced its budget; and it often even ran budget surpluses with which it paid down government debts accumulated during past “national emergencies,” usually a war that had earlier needed rapid funding with borrowed money.
Today, all levels of government – federal, state, and local – tax or borrow and, then, spend around 40 percent of the Gross Domestic Product in the United States. And if one adds the financial cost imposed upon the citizenry in the form of economic and social regulations to which businesses and enterprises must conform, the total burden of government is significantly higher.
Government has also influenced the American people in another way: They have lost their understanding of what a free market society was, could, and should be. The growth in the interventionist and redistributive state over the last 100 years has resulted in several generations who have come to think that political paternalism is as normal and “American” as apple pie.
The Change in American Economic Policy
This shift in the role of government in American society was noticed by the free market, Austrian economist, Ludwig von Mises, while traveling around the United States on a lecture tour back in 1926. After returning to Austria, he delivered a talk on “Changes in American Economic Policy” at a meeting of the Vienna Industrial Club. He explained:
“The United States has become great and rich under the rule of an economic system that has set no restrictions on the free pursuits of the individual, and has thereby provided the opportunity for the country’s productive powers to be developed. America’s unprecedented economic prosperity is not due to of the richness of the American soil; instead, it is due to an economic policy that has reflected how best to exploit the possibilities offered by the land.
“American economic policy has always rejected–and still rejects today–any protection for inferior or less competitive against that which is efficient and more competitive. The success of this policy has been so great that it is hard to believe that Americans would every have reasons to change it.”
But Mises went on to tell his Viennese audience that new voices were being heard in America, voices that claimed that America’s economic system was not managed “rationally” enough and that it wasn’t “democratic” enough because the voters did not have it in their immediate power to influence the direction of industrial development. Governmental controls were being introduced not to nationalize private enterprise but to direct it through various regulatory methods.
The American economy was certainly far less regulated by government than the countries in Europe, Mises pointed out. However, there were strong trends moving the United States along the same more heavily interventionist path Europe had been traveling for a long time. In the America of 1926, Mises observed, “But today both major parties, the Republicans as well as the Democrats, are ready to undertake every very radical steps in the this direction in order to win the votes of the electorate.” He concluded, There can be no doubt that the results American would achieve from such a policy would be no different than what it has ‘achieved’ in Europe.”
In Europe, the trend towards collectivism in the 1930s and 1940s took some extreme forms. Socialism, communism, fascism and Nazism were all tried on the other side of the Atlantic. They represented a total rejection of a free economy and individual liberty. In America, the collectivist trend never went to such an extreme, though Franklin D. Roosevelt’s first New Deal came very close to the fascist model.
Defining the Free Market Economy
Socialism, communism, fascism and Nazism are now all but dead. They failed miserably. But they have been replaced by what is merely another more watered down form of collectivism that may be called “interventionism.” Indeed, interventionism is the predominant economic system in the world today. In 1929, Ludwig von Mises published a collection of essays under the title, “Critique of Interventionism.” He argued,
“All writers on economic policy and nearly all statesmen and party leaders are seeking an ideal system which, in their belief, is neither [purely] capitalistic nor socialistic, is based neither on [unrestricted] private property in the means of production nor on public property. They are searching for a system of private property that is hampered, regulated, and directed through government intervention and other social forces, such as labor unions. We call such an economic policy interventionism, the system itself the hampered market order.”
He added, “All its followers and advocates fully agree that it is the correct policy for the coming decades, yea, even the coming generations. And all agree that interventionism constitutes an economic policy that will prevail in the foreseeable future.”
With the demise of communism in the 1990s, public policy around the world, including in the United States, is back to where it was when Mises wrote these words 85 years ago. Comprehensive government ownership of the means of production and a fully centralized planned economy has very few adherents left, even “on the left.” At the same time, in spite of all the casual rhetoric about the triumph of capitalism, we have not seen much evidence of a movement toward a truly free market system.
Here are eight points that define a genuine free market economy, or what Mises referred to as the “unhampered economy”:
All means of production are privately owned.
The use of the means of production is under the control of private owners who may be individuals or corporate entities.
Consumer demands direct how the means of production – land, labor, and capital – will be used.
Competitive forces of supply and demand determine the price for consumer goods and the various factors of production including labor.
The success or failure of individual and corporate enterprises is determined by the profits or losses these enterprises earn, based on their greater or lesser ability to satisfy consumer demands in competition with their rivals in the marketplace.
The market is not confined to domestic transactions and includes freedom of international trade, investment, and movement of people.
The monetary system is based on a market-determined commodity (e.g., gold or silver), and the banking system is private and competitive, neither controlled nor regulated by government.
Government is limited in its activities to the enforcement and protection of individual life, liberty, and honestly acquired property.
Defining the Interventionist Economy
Unfortunately, many modern politicians and academics who say they endorse free market capitalism are willing to tolerate a great deal of government intervention.
When it comes to identifying the role of government in their conception of the market order, many if not most “conservative” economists still assume that government must be responsible for a social safety net that includes Social Security, some form of government-provided health care, and unemployment compensation; must have discretionary monetary and fiscal powers to support supposed desired levels of employment and output; must regulate industry to assure “competitive” conditions in the market and “fair” labor conditions for workers; and must directly supply certain goods and services that the market allegedly does not provide.
Indeed, many people who claim to be “on the right” believe that government should institute some or all of these “public policies.” It should be appreciated, however, that the very notion of “public policy,” as the term is almost always used, supports government intervention in the market in ways that are simply inconsistent with a genuine free market economy.
Interventionism as public policy is not consistent with the free market since it intentionally prevents or modifies the outcomes of the market. Here are the eight points of the interventionist economy:
The private ownership of the means of production is either re