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The Uncertain Future of Capitalism

by John Hood
February 18, 2009

As the dogged tax collector for Louis XIV’s lavish public spending and burgeoning warfare state, Jean-Baptiste Colbert was one of the most powerful men in 17th century France and the originator of two memorable statements about the relationship between government and the economy. In one instance, he was revealingly blunt. “The art of taxation,” he said, “consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” In the second instance, it was the response to Colbert that made history. The story goes that in 1680 he called together a group of French businessmen to discuss how his preferred system of mercantilist management of the economy could be of greatest help to them. One merchant reportedly responded, simply, “Laissez-nous faire,” or “leave us alone.” Colbert was not amused.

In September 2008, as Congress and the Bush administration rushed to enact a bailout bill in response to a sudden tightening in the financial markets, another French statesman channeled his inner Colbert. “Lais-sez-faire is finished,” said President Nicholas Sarkozy, “the all-powerful market that is always right, is finished.” Other European and Latin American leaders uttered similar statements, seizing an opportunity to rap an unpopular American president on the knuckles. Shortly afterward, of course, their own equity and money markets tumbled, tempering their glee at America’s financial problems. But as political panic in Washington turned into a worldwide economic contraction, there remained a strong sense that something larger than a business cycle was underway. Left-wing activists, journalists, and academics followed Sarkozy’s lead and proclaimed an end to the wave of economic liberalization that began in the 1970s. Some even announced that capitalism itself had finally reached its apogee, shortly to be replaced with something else.

At its core, conservatism is about accepting reality as it is, rather than dreaming up alternative realities in which there are no inherent tradeoffs of time and resources, no unanticipated consequences, and no constraints on human perfectibility. So conservatives should accept the reality of the current, perilous moment. Every element of the global trading system is in peril: sound money, free trade, fiscal responsibility, even freedom of the seas in key regions such as Southeast Asia and the Horn of Africa. And yet there are good reasons to doubt the likelihood of calamity. Over the past two decades, dozens of countries have deregulated major industries, adopted flatter and less distorting tax codes, privatized government utilities and infrastructure, and wrung inflation out of their economies with rule-based monetary policies. Some of the largest population centers on the planet—such as China, India, Indonesia, and Brazil—have adopted market-based reforms, resulting in the largest decline of poverty in the history of the human race.

These decisions were hard to make and even harder to implement. Now, however, I believe it will prove harder still for today’s demagogues to turn the clock back on free-market reforms. That doesn’t mean they won’t try. Whether it’s Hugo Chávez’s quasi-socialist Venezuela, Vladimir Putin’s Russian autocracy, Islamist-tinged banditry in Iran, or the stultifying social democracy pervading parts of Europe and the imaginations of American leftists, there is no shortage of economic models presented as alternatives to international capitalism. Do any of them truly present a coherent, practical alternative? No. But economic policies are the product of politics, not academic analysis. In times of crisis, voters are vulnerable to political appeals to such persistent temptations as fear and envy. Because capitalism is a complex and dynamic interplay of flawed human institutions, famously engaged in an unending process of creative destruction, it has a tendency to create political and cultural challenges to its own survival.

Unfortunately, in addition to the usual suspects—union bullies, left-wing academics, political demagogues, and special-interest lobbies—some politicians and activists who claim to believe in capitalism have over the past two decades adopted policies and rhetoric that place capitalism in future jeopardy. These self-inflicted wounds include the creation of unsustainable new government entitlements, the toleration of corruption, and the spread of crony capitalism—not just in rapidly developing economies overseas but right here in the United States, in the form of local “economic development” incentives, statewide corporate welfare, and the bailout mania in Washington, D.C. After observing a “conservative” party that abandons the basic principles of capitalism and a liberal party that never subscribed to them in the first place, the general public can be forgiven for concluding that the principles no longer hold.

 

MAKE NO APOLOGIES FOR FREEDOM

Conservatives must recognize that there will always be political threats to the free market. The debate will never end. I also believe we must recognize the need for carefully designed public policies, ranging from fiscal transparency rules to mandatory household-savings programs, that can serve as footholds and anchors on the slippery slope to socialism, or at least to European-style social democracy. But conservative intellectuals, magazines, think tanks, and political activists should never be apologetic about the moral superiority of economic freedom, the greatest force for social progress on the planet.

First and foremost, we should reject the notion that the definition of freedom is a cultural construct. Apologists for modern-day socialists, fascists, Islamists, and petty dictators would have us think so. They employ terms such as “freedom” and “democracy” in Orwellian fashion, suggesting that using the power of government to coerce private individuals or rig elections can advance real freedom or democracy by reducing the power or resources of “undesirable” elements (be they religious minorities, corporate executives, or opposition figures of all stripes).

Don’t be fooled. Freedom is not an arbitrary concept or term. It does not change its meaning from continent to continent, country to country, or culture to culture. While there is plenty of room to debate specifics and measures, its basic elements are unmistakable. Freedom means the ability of human beings to interact with each other without interference by thugs with guns. Freedom is sustained where governments protect individual rights to life, liberty, and property—both those of their citizens and of foreign visitors and investors—and limit their role to providing true public goods, operating an effective system of courts to resolve disputes, and combating truly fraudulent behavior through well-defined and effectively enforced rules of disclosure.

Political and economic freedom ought to go together. In the long run, we can hope that they do—that in China, for instance, economic liberalization will produce greater electoral and personal liberty; and that in India it will reduce corruption and bureaucracy. In the short run, however, there are countries with one but not the other. Political and economic freedom can be and are measured separately. Let’s take a brief look at a good measure of each and discuss some of the implications. The annual survey by Freedom House does the best job, I think, of measuring and ranking the extent of political freedom and civil liberties around the world. Its research methodology generates three broad categories of countries: free, partly free, and not free. About 3 billion people, or nearly half the world’s population, live in free countries. Another 1 billion people or so live in partly free countries. The remaining 2.5 billion people live in unfree countries. About half of those reside in China.

There is a cultural pattern to the distribution of political freedom (though that does not make it a cultural construct). Politically free countries are found primarily in the Americas and Europe, plus Southern Africa, the Pacific Rim (Indonesia, Japan, Australia, and New Zealand), and India. Most non-free countries are in Africa and Asia.

As far as economic freedom is concerned, I think the best measure is the Index of Economic Freedom produced by The Wall Street Journal and The Heritage Foundation. Based on 10 numerical measures, it generates a final percentage score and five categories of countries: free, mostly free, moderately free, mostly unfree, and repressed. Unfortunately, the majority of the world’s population resides in mostly unfree or repressed countries. However, average economic freedom has been improving over time in most of the world—as have living standards, which is no accident.

Again, economic freedom isn’t distributed evenly across the globe. The Anglosphere encompasses all of the free countries—the United States, the British Isles, Australia, New Zealand, and the former British colonies in Hong Kong and Singapore. Of the 23 mostly free countries, all but Japan and Taiwan are in Europe or the Americas. Most of the unfree and repressed countries are in Asia and especially Africa, a particularly tragic case.

Of all the regions on Earth, only sub-Saharan Africa has failed to make significant progress on economic liberalization over the past three to four decades. That’s one reason why it is also the only region that has failed to achieve strong economic progress during the same period. In 1970, the three poorest regions were East Asia, South Asia, and sub-Saharan Africa. Each had a poverty rate (as measured by the World Bank, not comparable to the U.S. poverty line) of about 35 percent. By 2000, the poverty rate in East Asia (including China and Indonesia) had plummeted to 2 percent. It fell to 2.5 percent in South Asia (including the Indian subcontinent). But in Africa, poverty rose to 50 percent by 2000. Among the handful of countries bucking Africa’s poverty trend were Mauritius and Botswana, which happen to be ranked first and second, respectively, in economic freedom among African countries.

 

STRATEGY FOR DEFENDING CAPITALISM

To bring the issue closer to my own home: It is essential that American conservatives react to recent political and economic events with reason and sobriety. They should seek to steer a middle course between two destructive poles: despondency and complacency. To be glumly despondent about the present moment, a conservative would have to be ignorant of history, of the inevitable tos and fros of political fashion. Like stocks, electoral success fluctuates. Despondency would also ignore the rightness (so to speak) of conservative ideas, their strong philosophical and empirical support. On the other hand, to be complacent, a conservative would have to ignore lots of evidence that the key elements of market capitalism are in peril. Not to take such challenges seriously would be a grave mistake.

I think there are sound reasons not to lurch too far in either direction. Take public perception of business institutions. Corporate executives and politicians have both done their part to weaken respect for corporations—by making poor decisions and then compelling taxpayers to bear much of the cost of cleaning up the mess. Since 1959, Gallup has asked this question: “Which of the following do you think will be the biggest threat to the country in the future: big business, big labor, or big government?” As recently as 1969, only 12 percent of Americans thought big business presented the biggest threat. By 2002, with the tech bubble popped and accounting scandals cropping up regularly in the press, 32 percent tagged big business (the number has actually declined a bit since then, to about 27 percent). But big government is still feared even more: During the past decade, the share of Americans labeling it the biggest threat ranged from 57 percent to 65 percent.

On a different measure, public confidence in social institutions, Gallup’s recent findings are enlighten-ing. While 60 percent of Americans express “a great deal” or “quite a lot” of confidence in small business, only 20 percent feel that way about big business, with health insurers faring even worse and bankers faring a little better (although that was before the bailout disaster). But what institution enjoys the least public confidence? Congress—at only 12 percent. The public may be suspicious of corporate America and, unfortunately, unfamiliar with the merits of such economic policies as free trade. But Americans remain far from convinced that the federal government can be trusted to “fix” things.

In other words, there is still plenty of opportunity for conservatives to conduct a principled and effective defense of market capitalism and to resist new encroachments by expansive government. I work primarily at the state level, but the following ideas have application regardless of the level of government conservatives will seek to influence. I believe that a successful strategy must contain these elements:

• Keep It Simple. While conservative and libertarian scholarship about the politics, economics, and political economy of economic freedom is complex, the insights it yields can and should be communicated simply and directly. Here are some examples: Being free makes most people happier, healthier, and wealthier. Every-one makes mistakes, but when you or I screw up, we pay the price. When politicians screw up, we also have to pay the price. Proposals for bigger government are based on the assumption that bureaucrats know better than you do how to spend your money, that government lawyers know better than bankers how to lend and invest, and that government lawyers know better than doctors how to manage your health care. No matter what politicians intend to accomplish when they create a new government program, insiders and special interests will twist it to their own advantage. Private companies are often poorly run. But government monopolies are always poorly run.

• Make It Personal. The Joe the Plumber phenomenon came too late to help John McCain’s doomed presidential candidacy, but it captured the imagination of many Americans by transforming an abstract debate about tax equity into a personal narrative about freedom. It put a literal face on the concept of economic opportunity. It was, however, a pure accident. For advocates of economic freedom, such themes should be intentional. Identify and promote individuals who have been or will be harmed by taxes, regulations, and government malfeasance. Statistics and trends are fine, but put them in the second paragraph. Lead off with a personal story.

• Plant Anchors and Dig Footholds. “The natural progress of things,” Thomas Jefferson observed, “is for liberty to yield and government to gain ground.” That’s another admirably simple way of conveying a complex truth about the interaction of politics, economics, temptations, and fears. But conservatives often read this quote too fatalistically. It is also the natural progress of things for water to run downhill to the ocean and for big metal objects to fall speedily to the ground. But every day, thanks to human effort and ingenuity, we capture running water to irrigate crops, generate electricity, and slake the thirst of millions, while airplanes fly safely overhead. Through effort and ingenuity, we can also hope to at least arrest the growth of government, if not actively roll it back in some important areas.

To switch analogies, rock climbers scale slippery slopes all the time without falling. That doesn’t mean the danger is absent, only that it can be minimized through a skillful use of anchors and footholds. Sometimes conservatives argue so vociferously against all governmental institutions that they talk themselves out of a sale to a general public that harbors distrust of big government but also desires action. With regard to the financial crisis, for example, there is nothing inconsistent with market principles—and plenty consistent with good sense—in favoring better disclosure rules and regulations to ensure that lenders, borrowers, and investors truly know the details of the transactions to which they are a party. In their absence, there’s a risk of far more onerous and costly government intervention later, as we have seen. In health care, some conservatives have long argued that proposing universal access to quality care, to be delivered through refund-able tax credits, is the only marketable alternative to a government-run system. And on entitlement reform, even the most diehard libertarian commentators seem comfortable with proposing mandatory savings programs as an alternative to government transfer programs.

The concept here is that conservatives should never lack for a policy response to problems of wide-spread public concern. But our responses need to use the least coercion possible and create the least amount of risk of future government expansion. We must plant our anchors deep into the rock.

Capitalism is in peril, make no mistake, but capitalism is also resilient. It is itself a reflection of something deeply embedded in human nature: the trading impulse. The peril comes when political malfeasance, economic change, and natural disasters bring other natural impulses to the surface, such as fear or envy, and opportunistic politicians seek to channel these impulses into power over others. We must not let them prevail.

Mr. Hood is president of the John Locke Foundation, a think tank in Raleigh, North Carolina, and the author of Investor Politics: The New Force That Will Transform American Business, Government, and Politics in the Twenty-First Century (2001) and Selling the Dream: Why Advertising Is Good Business (2005).


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