Liberty Matters

Crises Can Be Negative and Positive

Peter Mentzel has raised a crucial issue, namely, the role that political, economic, or "systemic" crises play in bringing about radical change. But as he is of course aware, crises can provoke change in a pro-liberty or an anti-liberty direction, depending upon the underlying ideological inclination of the society concerned. I call the former "positive crises" and the latter "negative crises."
Because of the seminal work of Robert Higgs,[60] it is natural to associate crises, especially those in the 20th century like World War I, the Great Depression, World War II, the attacks of 9/11, and the Great Recession of 2008, with dramatic increases in the size and scope of state power. However, this is not necessarily the inevitable outcome of a systemic crisis. In previous centuries such a crisis might have resulted in the very opposite, namely, opportunities for expanding the scope of liberty. Here are some examples of "positive crises" :
  • The financial crisis faced by both the British and French empires following the military conflict for control of North America in the 1750s and 1760s led to the imposition of new taxes and economics controls in the American colonies, which in turn le d to the American Revolution . An even greater fiscal crisis in France le d to the failed liberal reforms of Turgot in the mid-1770s and the King’s calling the Estates General in 1788 to vote for new taxes -- causing the political deadlock that led eventually to the liberal phase of the French Revolution (1789-1793). The financial crises in both countries took place when economic and political ideas had been moving in a liberal direction as a result of the Enlightenment, the Physiocratic economists in France, and the Smithian school in Britain. The demands of the reformers in 1776 and 1789 were liberal, and the old regimes in both instances either collapsed or were defeated by revolutionary violence.
  • The crop failures, rising food prices, and political repression of democratic, liberal, working-class, and socialist groups in the 1840s in Europe resulted in a nearly continent- wide series of uprisings known as the "1848 Revolutions." New constitutional governments were established (some temporary, some more long-lasting ); bills of rights were written ; and the face of Europe was changed for good. However, because of the complex mix of ideological movements in play at the time -- classical-liberal, socialist, conservative/monarchist, Bonapartist, and of course nationalist  -- the political outcomes of the crises were quite mixed. Many historians have concluded that the 1848 Revolutions "failed" in the sense that they did not result in an unequivocally new, revolutionary regime . But a more-considered conclusion would be that the regimes which returned to power after the revolutions had to make considerable concessions to liberal principles, creating post-1848 regimes very different from the pre-1848 regimes. These concessions would include much greater freedom of the press and association, and constitutional limits on kingly power, free trade, etc.
  • Post -World War II Germany was in ruins and was occupied by the British, French, American, and Russian a rmies. All four armies shared the same hostility to free markets, free prices, and entrepreneurial activity of any kind ( including smuggling, black markets, etc.), which is not surprising since all armies are in essence forms of bureaucratic socialism, or what Mises would call Zwangswirtschaft (economy based on force) or, to coin a phrase, Zwangsgesellschaft (society based on force). The rampant unemployment, industrial inactivity, shortages, and black markets required drastic, even revolutionary action to establish real prices and allow markets in labor, goods, and services to clear. Ludwig Wilhelm Erhard (1897-1977), who was minister of economics under Chancellor Konrad Adenauer, unilaterally decreed the abolition of most price controls one weekend in 1949 while the American military wasn't paying attention (they were probably on golf courses built with American taxpayer s’ money), thus launching the German Wirtschaftswunder (economic miracle). The ideas behind this action came from a small group of liberal conservatives in Freiburg known as "Ordo" liberals.
  • Finally, there was the massive program of deregulation which took place in New Zealand during the Labor government of David Lange , whose minister of finance in 1984 was Roger Douglas. New Zealand faced a series of economic crises following the signing of the Closer Economic Relations agreement with Australia in 1981 (which lowered tariff barriers and eliminated visas for travel between the two countries) and a currency crisis which led to the devaluation of the NZ dollar. New Zealand had become one of the most heavily regulated economies in the industrialized world by the early 1980s. A new generation of Labo r politicians (supposedly left-wing) realized by sheer necessity that the economy required significant deregulation and the removal of tariffs and subsidies to industry. Douglas pursued such a policy, which also included deregulat ing finance markets  and removing restrictions on interest rates and foreign exchange. His program was called "Rogernomics" ( after "Reaganomics,” 1981-1989) and was ideologically anchored in the free-market ideas which were also influencing Britain under Margaret Thatcher and Keith Joseph ("Thatcherism," 1979-90), and Prime Minister Bob Hawke and Treasurer Paul Keating in Australia ("Economic Rationalism," 1983-91). An interesting and unexpected side benefit of Lange's reformist government was the introduction of a "nuclear free zone" around New Zealand, which lead to the banning of U.S. warships from docking at any New Zealand ports.
It is hard to see a similar "positive crisis" emerging in the near future. The ideological framework has changed so much back towards statism that any future crisis would most likely lead to a radical increase in state power. Many economists thought that Keynesian economics had been weakened by its obvious policy failures in the 1970s and 1980s ("stagflation" -- simultaneous economic stagnation and inflation) and the spread of free- market ideas in academia: Chicago-school monetarism, Buchanan- and Tullock- inspired Public Choice, and a newly invigorated Austrian school. However, when the Great Financial Crisis of 2007-8 erupted, the mainstream economists stampeded back into the Keynesian corral.
We have also seen the monumental expansion of the American surveillance, police, and military state since 9/11. With two failed wars already under its belt (Afghanistan, Iraq) and four more potential conflicts on the horizon (Iraq again, Syria, Iran, and Ukraine) the institutional and ideological momentum towards further growth in state power seems unstoppable. I fear that any future crisis will be a "negative crisis," at least in the short term.
One potential silver lining in a very dark cloud is that the next systemic crisis might lead to the breakup of the mega-states of the European Union and the United States under the combined pressure of massive debt (for both state and crony banks) and the consequences of the massive "Quantitative Easing," which both  central banks have inflicted upon the "real," or productive, sectors of their economies but which have not yet been unleashed in their full fury.
[60.] Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government (First edition Oxford University Press, 1987. Independent Institute, 25th Anniversary edition, 2013).