Front Page Titles (by Subject) III: The Political Economy of Liberty - Literature of Liberty, Autumn 1981, vol. 4, No. 3
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III: The Political Economy of Liberty - Leonard P. Liggio, Literature of Liberty, Autumn 1981, vol. 4, No. 3 
Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.
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The Political Economy of Liberty
In Benjamin Tucker's terms, a political economy which relies upon authority or fears liberty can only engender personal oppression and economic stagnation. The following summaries chiefly concern historical episodes either of state intervention in the economy or responses to such intervention. The Waltman, Bruno, Topik, and Berkowitz-McQuaid articles allow us to appreciate the confused motivations and perverse consequence of government economic regulation and protectionism in the areas of taxation, protectionism, and bureaucratic welfare.
Mason's article on the British anti-socialist response to the growth of government direction of the economy reveals one trend of the individualist opposition to political collectivism. Individualists, such as the British liberals and Benjamin Tucker's libertarians, had faith that the free and voluntary energies of men and women are capable of creating a healthy economy and humane community without paternalistic central planning. Recently, Tucker's faith in the compatibility of individual freedom and a humane community, has been well articulated by Richard P. Hiskes [“Community in the Anarcho-Individualist Society: The Legacy of Benjamin Tucker,” Social Anarchism 1(October 1980):41–52:
At a time when citizens are clearly weary of big government and its grasping and seemingly insatiable demands, it is at least worth considering that there is a tradition in America which insists that such need not be the case, and that an alternative is available which values community and fellowship as well as freedom from the coercion of the state. The end of the welfare state need not mean the end of welfare, but only the demise of a particular, and increasingly unpopular, form of it. Individualism can embrace a communal concern for others, and because it can, it is time to stop expressing the same tired objections to it efficacy as a model for political organization.
British Anti-socialism: 1870–1914
“Political Economy and the Response to Socialism in Britain, 1870–1914.” The Historical Journal 23(September 1980):565–587.
Political economy suffered a sharp decline in prestige and influence in Great Britain after 1870. Eager to respond to the sudden appearance of the “social problem” in politics, a young generation of economists including Jevons, Cairnes, Sidgwick, Toynbee, and Marshall led an assault on the methods, doctrines, and policies of the classical school. Unfortunately, the very success of their attack has conditioned historians to assume that they spoke for their whole generation. This was not the case. Prof. Mason shows that there was a strong anti-socialist current of opinion during the period, even though academic economists and liberal social reformers rejected it.
The myth of a golden age of laissez faire in the mid-nineteenth century exercised a powerful influence on anti-socialists later in the century. The battle against socialism was seen as a reenactment of the earlier fight against protectionist policies. Despite the general disrepute of political economy among academics and reformers, the arguments of the orthodox school held a prominent place in the works of numerous anti-socialist writers of the 1880s and 90s. Authors such as Goschen, J.S. Nicholson, J.H. Levy, and the publicists of the Liberty and Property Defence League all drew their inspiration from this tradition.
Most prominent anti-socialists at the end of the nineteenth century were born before 1850. They had been able, therefore, to imbibe the teachings of the classical school before its period of crisis after 1870. This accounts for their limited use of Social Darwinian arguments to defend laissez faire. Self-interest, competition, and the right to private property were rarely presented as the economic form of the struggle for existence. Herbert Spencer was an exception in this respect, but he was a relatively isolated figure whose greatest influence was in America.
The passage of time, however, brought its inevitable changes, and the late nineteenth century anti-socialists presented a reconstructed version of political economy, singularly different from the school of the early 1800s. The orthodox school was pessimistic, emphasizing the iron laws of economics. Later antisocialists, on the other hand, were optimistic and stressed the voluntarist aspects of economic behavior.
Similarly, the late 1800s was an era when socialists were leaving utopias behind. They even went so far as to adopt some of the traditional materialist arguments of political economy as “scientific” justification for their moral ideals. At the very same time, anti-socialists like the Duke of Argyll were beginning to stress the non-materialist origins of wealth and progress. Against the claims of “labor” as the sole wealth producing agent, they emphasized the significance of the “right” to property and highlighted the “mind” and “ability” of the entrepreneur in the creation of wealth.
The late nineteenth-century antisocialists never achieved the practical political success of the free traders in the 1840s. They were a fringe group far from the corridors of power and alienated from the mainstream of contemporary economic thought. Their frequent defense of the Malthusian theory of population and the Ricardian theories of wages, rent, and value were a reflection of their relatively isolated position. In their quest for the ideal antidote to socialism, the antisocialists vacated the middle ground and were ignored by the academic establishment. Nonetheless, through journals such as the Liberal Unionist, the Spectator, and the Quarterly Review, their views were widely disseminated among the public. These views doubtless played a larger role in the British debate on socialism than has yet been recognized.
Income Tax Laws and Contingency
“Origins of the Federal Income Tax.” Mid-America 62(October 1980):147–160.
On three separate occasions, in 1861, 1894, and 1913, the Congress of the United States enacted a national income tax. Studying the motives and maneuvers which brought these laws into being, Prof. Waltman finds material which, he believes, elucidates the general process of policy formation. In his search for patterns in the development of policy, Waltman seeks to answer two basic questions: (1) What factors put the income tax on the national political agenda? and (2) What were the sources of the specific details incorporated in these three pieces of legislation?
An examination of each law reveals quite clearly that the income tax as a policy alternative emerged from quite different agenda items. In 1861, the dominant problem was public finance. The outbreak of the Civil War made it imperative that Congress devise new means for raising revenue. From deliberations on this question, the income tax emerged.
In 1894 and 1913, on the other hand, the dominant question was not revenue but social justice. The Populist Movement of the late 1800s and the Progressive Movement in the early part of our century both championed a tax on incomes as a way to achieve “the redistribution of wealth and the equalization of burdens.” George Tunell wrote concerning the 1894 law: “The income tax was not regarded primarily as a fiscal measure. Little was known as to how much it would yield and apparently no one cared very much to know.”
The varying motivations leading up to the three income tax laws demonstrate that the same policy may be adopted in order to solve quite different problems. In Prof. Waltman's view, therefore, students of public policy would be wise to avoid creating policy categories around such government department clusters as finance, housing, transportation, and the like.
The three income tax laws also illustrate the powerful role that precedent plays in the selection of specific policies. Regardless of the functional problems they had been designed to attack, the 1861, 1894, and 1913 bills are virtual carbon copies of each other. In the case of public policy at least, new wine seems to store quite well in old bottles.
The same laws also serve to inject caution into attributing too much weight to environmental variables in the process of policy formation. For example, if, in 1861, the Ways and Means bill for a national property tax had been even slightly more palatable, it is doubtful that an income tax would have emerged from that congressional session. Likewise, in the latter two cases, one could not say that Populism or Progressivism “caused” or, more weakly, “led to” the adoption of the income tax. Without the prominence of tariff reform as an issue, the item would have stayed on the fringe of serious political activity. All three income tax laws grew out of the old-fashioned pull-and-tug of politics, with a large degree of happenstance.
Prof. Waltman explicitly denies that his argument implies that all is happenstance or that each instance of policy making is unique. That would lead to the destructive conclusion that no generalizations can be made about policy formation. Instead, he is suggesting that any model which purports to “explain” public policy must not ignore the complex and often tortured processes whereby decisions are reached.
Government Subsidies in France
“Un Secret d'etat: l'aide publique a l'industrie.” Les Temps Modernes 416(March 1981):1578–1588.
French democracy, Nicolas Brimo observes, has a special fondness for secrecy, and nowhere is secrecy guarded more jealously than when questions are raised concerning government subsidies to private industry. No one, for example, is quite certain how much direct and indirect state aid entrepreneur Marcel Dassault has received to equip the French air force and to export his Mirages jets around the globe.
Government in France has, according to Brimo, ingeniously organized itself to foil the curiosity of journalists and parliamentarians concerning industrial subsidies. As part of this organizational smokescreen, aid to private industry may take 7 specific forms, be channeled through any of 24 budgetary tracks, and be distributed by no less than 23 separate committees. The Ministry of the Budget does issue an annual report disclosing subsidies to nationalized enterprises, but no such report exists for aid to companies in the private sector. Even within the economic agencies of the French government, ignorance and confusion reign. The task force on Public Expenditures, a branch of the General Commissariat of the Economic Plan, grudgingly admits “its inability to measure the effectiveness of these interventions (subsidies)” because of the diverse character of the aid.” In addition, “the beneficiary of such interventions is not always identifiable with certainty...or lack of information.”
Brimo contends that a more detailed knowledge of public aid to the private sector would be particularly instructive at a time marked by a resurgence of classical libral ideology—often raucously supported by prime recipients of state subsidies. Taking the pulse of the time, former President Valery Giscard D'Estaing loudly publicized his liberal philosophy, while downplaying the embarrassing fact that whole industries in France (metals, weaponry, ship building) and entire regions (the North, Loraine) survive only through massive state aid.
A classic case of government obfuscation in the area of industria aid centers around a report issued in 1978 by Herve Hannoun, a state financial inspector, Hannoun's report represents the only attempt by a government official of the Fifth Republic to arrive at some estimate of what the state was expending directly or indirectly on private industry. Only five typed copies of the 70 page report were produced in January, 1979. The Elysee Palace quickly placed the document under top secrecy. Nonetheless, by September 1979, a leak revealed the principal conclusions of the “rapport hannoun“—complete with figures and names.
In brief, the document reports that six industrial groups which account for less than 10% of the increased value of French industry receive 50% of government sub sidies. These six groups employ only 10% of the industrial work force, account for only 11% of exports, and but 2% of the total investments in industry. Four of these six groups are privately owned.
The report further demonstrated that, without public assistance, none of these groups could have registered profits. Ignoring the government policy objective of employment stimulation through sub sidy, the six groups have not expanded their manpower and, in some cases, have actually reduced it. Despite in creased state aid, private industry increased its investments in the French economy by a mere 17% from 1970–1979, while during the same period state enterprises more than doubled theirs.
All in the name of “liberalisme,” the leaders of the Fifth Republic have poured mounting sums into private industry, increasing its profits while producing stagnating investments and declining employment for the nation. An unsuccessful policy based on false premises, the subsidy program to industry nonetheless received the staunch support of Valery Giscard D'Estaing, often described by his supporter as “one of the
Brazilian “Liberalism” & State Protectionism
“State Interventionism in a Liberal Regime, 1889–1930.” Hispanic American Historical Review 60, no. 4(November 1980): 593–616.
One of the strange paradoxes in Latin America's history is the influence that liberalism enjoyed in that area of the world between independence and the Great Depression. Historians have very frequently assumed that, while liberal ideas had their noble aspects, they were ill-suited to Latin America's hierarchical, tradition-bound social structure and, thus, probably destined for failure. Few historians, however, have examined liberalism's economic performance.
Prof. Topik's article examines the economic policies of one of the most long-lived liberal regimes in Latin America, Brazil's First Republic (1889–1930). The article studies the actual activities of the government in the economic sector and then poses two questions: 1) Did the economic policies themselves conform to the essence of liberalism? and 2) If so, were they adequately suited to the Brazilian context?
Prevailing historiography has characterized the regime established in 1889 as noninterventionist, decentralized, and favorable to foreign investment. Supposedly, the activist, developmentalist state emerged only after the 1930 revolution and the rise to power of Getulio Vargas.
Prof. Topik contends that the federal government in the 1889 to 1930 period was considerably stronger and more economically active than has generally been recognized. Its activities, which gradually increased in intensity, may be grouped roughly into four categories: centralization, regulation, incentives to private enterprise, and direct state ownership. These interventions were generally pursued with the aim of preserving the liberal superstructure of the economy. They usually represented accommodations to the severely underdeveloped economy of the country (e.g., an acute credit shortage) or to substantial changes in the world market such as the shortages of strategic materials during World War I.
In the area of regulation, the federal government of Brazil acquired the right to control most of the railroads in the country. Concession agreements ceded to the government the right to set rates, determine routes, and decide the type of equipment to be used—all matters of vital national interest. As a result, the Ministry of Transportation and Public Works maintained low rail rates and established routes in unprofitable areas over the loud objections of railway companies. Similar controls prevailed in the area of shipping. The Constitution of 1891, for example, enjoined foreign freighters from participating in the coastal trade. Domestic shipping became the monopoly of Brazilian lines. An 1897 law also forbade foreign ships from fishing in Brazilian waters, though this only came to be enforced in the 1920s. Also of public importance, utilities eventually came under state regulation.
In addition to controls on the “public” sector of the economy, the government effectively encouraged private enterprise through grants of incentives and concessions. The state was particularly energetic in expanding the transportation infrastructure and encouraging agriculture. At its height in 1898, fully one-third of all federal spending went to railway subsidies. Subsidies to maritime companies cost the treasury an average of more than US $1,5000,000 a year between 1980 and 1930, reaching almost US $4,000,000 by the end of the period. A series of ad hoc measures to drive up the price of coffee absorbed about US $133,000,000 of federal funds (mostly borrowed from abroad), while the state of Sao Paolo spent $136,000,000 to protect the crop.
The republican framers of the 1891 constitution sincerely intended to remove the impediments to development which, they believed, the imperial state had erected. However, they were not dogmatically bound to a foreign model of liberalism and reluctantly allowed concessions to the necessities of an underdeveloped country and an increasingly complex world economy. Nonetheless, Brazil's ruling class maintained what it believed was the essence of liberalism, sacrificing some of its form to preserve its basic content. Relatively limited state interference and the inviolability of private property encouraged foreign investment in Brazil. At the same time, Brazilian “liberals” mobilized national capital to build the export infrastructure and to finance international commerce.
Herbert Hoover & Federal Welfare
“Bureaucrats as 'social Engineers': Federal Welfare Programs in Herbert Hoover's America.” American Journal of Economics and Sociology 39(October 1980): 321–335.
Herbert Hoover's career in the 1920s exemplified the cooperative aspects of federal welfare efforts during that period. Paradoxically, Hoover saw himself as both a “planner” and as an anti-statist. He believed that the federal government should “serve as a midwife to a new, nonstatist commonwealth” composed of private interest groups. The private parties involved in the process (corporations, trade associations, etc.) would create new organizations and techniques to spread enlightened ideas. The “socially responsible” standards they developed would serve as the key element in defining an American social welfare system.
The federal welfare structure of the 1920s rested upon three basic programs: vocational education, vocational rehabilitation, and infant/maternal hygiene. The American military mobilization in World War I gave impetus to the first two programs, because the nation required an effectively trained work force to wage the war. The growing political power of women in the early 1920s helped to promote the third.
The three welfare programs undertaken by federal administrators were all modest in scope. In 1924, for example, four physicians, a nurse, an accountant, a secretary, and a stenographer composed the entire staff of the Washington office for the infant and maternal health program. As late as 1928, 96 percent of total federal welfare expenditures went to war veterans.
Barriers to the expansion of direct federal welfare activities were strong. All the welfare programs created during the 1920s operated on the principle of federal grants-in-aid to the states. Each program involved state provision of services to welfare recipients. Such people received advice or training from a professional counsellor or teacher, not money from the federal government.
An even more important barrier to federal welfare expansion was the struggle to meet the decade's standard of efficiency. The well-run public program was supposed to resemble the well-conducted business. It was to perform its operations at the least possible cost and create products which society valued. The desire for program efficiency through business-like administration was the characteristic which most clearly defined the 1920s style of public welfare.
In the vocational education and rehabilitation programs, the drive to get the greatest return for the dollar led to a policy of preferential treatment for those most likely to find a place in the work force. As a result, women, blacks, and the severely injured often did not receive assistance from welfare officials, since these categories of clients would encounter significant obstacles to finding jobs.
The efficiency standard was in large part responsible for the fact that, of the 207 people who managed to see the State of Georgia's two rehabilitation counsellors in fiscal 1921, only 12 received some form of vocational training.
Despite such statistics, the efficiency standard could make the rehabilitation programs seem like a smashing success. Government statisticians, for example, had calculated that in 20 years, those helped by rehabilitation programs would collectively earn $147,004,000. In order to generate that impressive sum, federal and state governments had spent only $1,124,500. Thus, the nation would have reaped returns of over 10,000 percent on investment—impressive even by 1920s standards.
The Great Depression wiped out the ideological rationale for the social welfare system of the 1920s. By 1937, New Deal officials had created a distinctively public approach to social welfare problems, and regarded themselves as administrators of welfare programs which provided federal services directly to the people. After 1937, federal bureaucrats would no longer confine themselves to providing demonstration projects to interested observers in corporations, trade associations, localities, and states. They would, with increasing success, create a world of their own. In this world, equation of welfare and efficiency occupied but a modest place.
Neoconservatism and Capitalism
“The New Defenders of Capitalism.” Harvard Business Review 1(March–April 1981):96–106.
The lack of attention businessmen have paid to defending their beliefs has proven costly. Hostile intellectuals have developed a powerful case against capitalism that largely went unanswered—until it eventually bore its fruit in the form of regulatory and other government policies that literally forced the businessman to pay attention.
Yet despite the intellectuals' traditional hostility to capitalism, there are signs that this attitude is reversing. Most intellectuals have always looked upon capitalism as an evil: a system unsound in itself and the cause of moral and spiritual depredations throughout society as a whole. To some extent, this attitude has been a response to the supposed record of capitalism—to periodic depressions, to the sorry lot of workers, to the rewarding of the rapacious and the greedy.
However, the past decade has been a time when many intellectuals have gradually shifted their ideas to neoconservatism. Formerly those thinkers trusted in the government's ability to solve a whole range of social and economic problems but, in response to the failure of so many of the social programs of the 1960s, these same intellectuals have become skeptical of government intervention. It is not so much that intellectuals have become unqualified partisans of capitalism, as that they are more disillusioned with the evils of socialism than those of capitalism.
The new defenders of capitalism have discovered that socialism coexists more comfortably with tyranny and totalitarianism than with liberty and democracy. Irving Kristol capsulizes the empirical argument against socialism in his book Two Cheers for Capitalism: “Never in human history has one seen a society of political liberty that was not based on a free economic system—i.e., a system based on private property, where normal economic activity consisted of commercial transactions between consenting adults. Never, never, never. No exceptions.”
If the main indictment these intellectuals direct against socialism is that it jeopardizes liberty and democracy, the main virtue they find in capitalism is, conversely, that it nurtures liberty and democracy. This is so, they argue, because the economic freedom on which capitalism rests is itself a form of liberty. Even in achieving the value of equality—the central value of the political culture of socialism—capitalism does a better job. Where the argument still rages is over inequal distribution of wealth. However, although...“Western society does not claim to be egalitarian, it is intellectually and socially free. The grosser forms of inequality and abuse in earning power, social benefits, and the like are at least kept under public scrutiny so that injustices can be identified and kept within limits. The end result is that Western capitalism is far more socially just than any other socialist society, and income in Western society is incomparably more fairly distributed than under socialist societies.”
Neoconservatives agree that while a market system cannot function properly without equality of opportunity, neither can it function without inequality of result. Unless all individuals are given a chance to compete, the economy is deprived of initiative and energy, yet if those who succeed in competition are not given a chance to reap extraordinary rewards, the economy will also be deprived of that same initiative and energy. This does not mean that those who fail need to be penalized by starvation. A safety net in the form of social insurance is, in this view, entirely compatible with a healthy market system (the only qualification being that the insurance should not be so generous as to destroy the individual's incentive to work).
Thus the main emphasis in the case for capitalism is not that it reduces inequality—although under certain political conditions it certainly does—rather that capitalism improves the lot of everyone. Rich and poor alike grow richer under capitalism. In capitalist societies the very idea of what constitutes poverty undergoes a change from absolute to relative deprivation. It is socialism that has turned out to be a system of increasing pauperization.
A reservation about capitalism is that it may fail to satisfy the spiritual hunger for something larger, more heroic, more exalted than “bettering one's condition.” In an ironic way, the very successes of democratic capitalism make it vulnerable to the charge of spiritual poverty. Yet this spiritual sickness cannot be cured by any set of economic or political arrangements, and perhaps it is a great virtue of capitalism that it refuses even to try. It is thus a bulwark against totalitarians, not only because it allows liberty but also because its claims are limited: “we are not required to worship it.”