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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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These questions were eventually answered by a new theoryECONOMY THE POVERTY OF LAISSEZ FAIRE — THE EVIDENCE LAISSEZ FAIRE HAS NOT WORKED “The Emperor’s New Clothes” is a marvelous story. Of course, no one takes it seriously. It may be one thing, perhaps the downside of inbreeding, for a stark naked emperor to be convinced he is wearing a magnificent suit of clothes. It is quite another for the populace to go along with the fantasy. We know that people are not that gullible. In fact, people are gullible, more than we realize. It is difficult to question widely held beliefs, particularly in uncontroversial matters where we are often blind to obvious flaws. As Nietzsche cynically observed, “Men believe in the truth of anything so long as they see that others strongly believe it is true.” For decades the most uncontroversial of disciplines, physics, accepted the Rutherford solar system model as the correct model of the atom. This envisages a central sun-like nucleus, composed of positively charged protons and electrically neutral neutrons, orbited by negatively charged planetary electrons. Even high school physics students should be aware of the problems. For one thing, like charges repel. This electric repulsion is far more powerful than gravitational attraction. So why don’t the protons fly apart? How can the nucleus be stable? Independently, a positively charged nucleus generates a radial electric field. As the negatively charged electrons orbit the nucleus and intersect this field they should continuously emit electromagnetic radiation and their orbits should gradually decay into the nucleus. How can any atom be stable? These questions were eventually answered by a new theory, quantum mechanics. But until the advent of quantum theory the inconsistencies were hardly noticed, even by physicists. The failure to see past widely accepted beliefs is not just a modern phenomenon. Nearly a millennium ago the great supernova of 1054 went unrecorded in Europe, though Chinese observers claimed it was brighter than Venus for weeks. The Western belief that the heavens are perfect and unchangeable blinded us to visible reality. We have a parallel in economics. Laissez faire is the object of a faith that is widely accepted and uncontroversial. According to this faith a pure free market system, unencumbered by government interference, must provide the best economy. But despite our unquestioning belief and despite the appearance of prosperity so confidently exuded by soaring financial markets, there is a wide range of data (that we ignore) that calls this faith into question. It is remarkable that even economists are blind to this. Of course, no country has a pure free market economy. Everyone knows that in all developed countries governments tax their citizens and spend 20% of GNP or more on items ranging from social programs to highways, from libraries and schools to courts and prisons, from parks to national defense. Such taxation and spending necessarily distort the pure free market. While this observation may be valid as far as it goes, and while it may be boringly trivial to even casual students of economics, it understates how far removed we are from pure laissez faire and just how strange a truly pure free market economy would be. Every country has laws that limit child labor, that protect patent rights, that prohibit profitable industries such as counterfeiting, enslavement, kidnapping, selling unethical drugs. Because such laws open the door to government interference with individuals or institutions seeking to maximize profits, they necessarily conflict with a pure free market. True believers in laissez faire must find them abhorrent. Such a view — that laws against anything from slavery to drug trafficking are bad because they necessarily diminish the wealth of society — seems bizarre indeed. (Though Ludwig von Mises, a true believer consistent in his defense of pure laissez faire, argued against government interference with drug trafficking.) Still, free market apologists might contend that except for such extremes, the closer we come to pure laissez faire, the better. But there is little evidence for even this fallback position. The U.S. has come closer to laissez faire than most other countries, especially since the Reagan Administration. If free market policies are the best economic policies then we should have experienced the most robust growth in the world during this period. But this has not happened. We have been outstripped by our trading partners. They are mixed economies characterized by massive and focused government intervention. They discourage private consumption and encourage savings. They single out strategic industries for protection and investment. (Governmentlinked corporations generate more than half of Singapore’s GNP.) Although the PRC has recently moved in the direction of a free market economy, in part to sustain its totalitarian political system, its dramatic economic growth began in 1949, well before free market elements were tolerated. Despite retaining a far greater measure of central economic planning and control than the U.S., the Chinese rate of growth has continued to outpace ours. It is true that the developing economies of South and East Asia have benefited from strong regional growth from a low base, in contrast to the more mature economy of the U.S. But it is difficult to make this argument about Japan or Europe. Yet these mature economies have matched or exceeded our growth, despite their tolerance of higher tax rates and greater government interference in economic affairs. Contrast our track record to that of the longest-lived socialist democracy. From 1946 to 1969, when Sweden was governed by the Social Democrats under Tage Erlander, its real GNP growth averaged nearly 3.8% (better than ours), without a down year. “Sweden’s prosperity was as high as its taxation and its standards of state-sponsored health, education, and social security.” (Davies, Europe: A History, p. 941.) Even our own internal comparisons fail to flatter laissez faire. Over the past half-century we have seen lower tax rates and less government interference. We have come a long way toward free enterprise from the proto-socialist policies of Franklin D. Roosevelt. Since the Kennedy Administration we have reduced the marginal tax rate on our highest incomes from the 91% that remained in effect from the 1940s into the mid-1960s (and a brief peak of 94% during World War II) to 28% in the 1986 tax code. Yet our economic growth has slowed. Despite our adoption of the most enlightened free market policies, our performance resembles that of a declining Great Britain in the late nineteenth century. “Britain soon lost what early lead it possessed. Industrial production, which had grown at an annual rate of 4 percent in the period 1820 to 1840 and about 3 percent between 1840 and 1870 became more sluggish; between 1875 and 1890 it grew at just over 1.5 percent annually, far less than that of the country’s chief rivals… finally, British industry found itself weakened by an ever rising tide of imported foreign manufactures into the unprotected home market — the clearest sign that the country was becoming uncompetitive.” (Kennedy, The Rise and Fall of the Great Powers, p. 228.) Although our government policies have been increasingly laissez faire and increasingly friendly to corporate America, our investment, productivity and economic growth have all lagged. Similarly, as the world has moved toward purer capitalism, worldwide economic growth has slowed. From 5.5% in the 1960s, world GNP growth declined to 3.4% in the 1970s, 3.2% in the 1980s, and further in the 1990s. (Maddison, Monitoring the World’s Economy 1820-1992, p. 227.) It is likely to decline still further in this first decade of the new millennium. How can we look at this evidence and still maintain that laissez faire is the best possible economic system? Clearly it is not. Nor has it been. The “European economic miracle” of the late nineteenth century was achieved by Germany under The Iron Chancellor, Otto von Bismarck. Unlike the laissez faire policies pursued by England and France during that period, Bismarck’s Germany adopted interventionist economic policies, guiding the development of vital industries such as steel and coal and nationalizing the railroads. Germany also provided insurance and social security for workers and free compulsory education for youth. Whatever you might think of Bismarck’s authoritarianism (whose effects were less pervasive than many suppose; while he was chancellor Germany became the first European country to institute universal male suffrage, and its universities, suffused with a measure of internal academic freedom, gained a place among the greatest in the world), the fact remains that German economic progress eclipsed that of France and England, its two major rivals. From being the weakest of the three countries, economically, technologically and militarily, it surpassed France and challenged the industrial and military might of England. Similarly, the dramatic spurt in Japanese economic growth associated with the Meiji Restoration was achieved under government regulation. Contrast these economic performances to that of present-day Mexico, which has faithfully followed the guidance of the most sophisticated proponents of laissez faire. Mexico has vigorously pursued free market policies from privatizing state-owned industries to eliminating tariffs in the name of free trade. But it has not been a leader in economic vitality, stability of currency, or improvement in standards of living. Mexico’s privatization of state industries created new billionaires but real wages declined, the average family losing 30% of its purchasing power. The $21 billion brought into state coffers by privatization failed to prevent a currency collapse that led to the country’s inability to pay interest on its debt. The forced devaluation of the peso contributed to the impoverishment of the middle class and the overthrow of a political party that had ruled for nearly a century. (Argentina, which also faithfully adhered to the commandments of orthodox free enterprise, even pegging its currency to the U.S. dollar, has experienced a similar economic and financial collapse.) Similarly, despite aid and investment from other industrialized countries, the rapid Russian transition from communism to free market capitalism was a disaster. It more deeply impoverished the majority of its people. It reduced most of the country outside the major cities to a meager subsistence exacerbated by the collapse of communications, health care and law enforcement. This led to a decline in life expectancy. It strengthened a powerful underworld that has little allegiance to the country itself or to the quality of life of its citizens. These examples provide a reality check that raises critical questions for laissez faire. If laissez faire is the best of all economic policies, why has it performed so poorly? Why is our economic growth slower than that of mixed economies? Why has our economic growth declined as we increasingly pursued purer free market policies? Why did real per capita weekly earnings in the private non-agricultural sector fall 13% since the early 1970s, with much of our middle class able to stay afloat only as a result of a large increase in the number of two-income families? (By contrast, real wages in the mixed economies of Europe have doubled since the early 1970s.) Why, despite an increase in the number of two-income families and also in the average workweek, has our standard of living increased more slowly than those of our major trading partners with more mixed economies? Why have we been surpassed in real GNP per capita by a number of European countries plus Japan and Singapore (all mixed economies)? |
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