Can government protect us from the excesses of the profit system?

A private profit-making economy without government regulation is unbearable

Recall for a moment the kind of unregulated labor conditions described by historian David Landes in turn-of-the-twentieth-century Argentina:

“In the textile, metal, match, and glass factories, the air was always full of a fine dust that irritated the lungs. In leather factories, the curing process required the use of sulfuric, nitric, and muriatic acids as well as arsenic and ammonia, all of which gave off harmful vapors that filled the building. In the packinghouses, workers trod upon floors that were slippery with coagulated blood, entrails, and animal excrement. The stench was overwhelming. The men who carried meat to the freezers had to wrap their hands and faces in rags or old newspapers . . . lest . . . fresh blood . . . freeze to their bodies.”

David S. Landes¹¹²

In unregulated, “sink or swim” markets, women and children suffer even more than men. In early-twentieth-century New York, 146 female workers, mostly immigrant, all desperately poor, perished in the Triangle Shirtwaist Factory fire because their employer had locked the doors to prevent unauthorized work breaks or theft. Civilized communities should never accept such conditions—the full force of law must be brought to bear to prevent them. But similar travesties continue to this day.

Toward the close of the twentieth century, Pygmies in central Africa were working all day for logging companies in exchange for two cigarettes. These were what defenders of completely free markets call “voluntary transactions,” which they assume by definition to make both parties better off. But no reasonable person can argue that the Pygmies were better off for these transactions, no matter how voluntary, any more than the nineteenth century Chinese paid by British merchants in opium were better off for theirs.

On paper

1. Nobody was forced
2. Both sides agreed
3. So both sides must be better off

In central Africa

1. A day of logging
2. Two cigarettes
3. And no other buyer for the day

This is the sharpest thing said on this side, and it is aimed at a definition rather than at a company. If a transaction counts as beneficial simply because it happened, the word has stopped telling us anything, and the locked doors at the Triangle factory were part of a voluntary arrangement too.

Protecting workers is only the beginning of what the community, acting through government, must do

From the late nineteenth century on, progressives and other critics of private profit-making markets have gradually developed a broad program calling for the state to:

• Protect the powerless, disabled, minorities, children, and women, and reduce economic inequality;
• Provide public education and health services, standards, and mandates;
• Regulate and control greed and selfishness among private interests, especially corporations and the rich, and ensure that businesses provide safe working conditions, produce safe consumer products, and stop polluting the environment;
• Take full responsibility for national employment levels and control of the business cycle.

Read the fourth one twice. The first three are about preventing harm. The fourth is about running the economy, and it arrived so quietly that hardly anybody noticed it was a different kind of claim.

By the end of the twentieth century, virtually all political parties in the world, and especially those intent on winning democratic elections, took this program for granted, and so did government officials and central bankers. Even the parties that most publicly identified with free markets, such as the Republican Party in the US, firmly embraced it.

Which parties accept the programme above

Parties of the leftAll of them, and it is theirs. This is not surprising and nobody claims otherwise.

Parties of the free marketAlso all of them, including the ones that campaign against it. He names the Republican Party.

Whatever you conclude on this page, this side has already won the practical argument almost everywhere. The case you are about to read on the other door is a minority position held against the settled practice of every government on earth.

Supporters of government intervention like to describe government as synonymous with community, a community of all citizens. This is false

Government is not synonymous with community. Like other institutions, it looks upon the world through the lens of self-interest. And because it enjoys a monopoly of coercive force, it has the potential to be the worst predator of all.

We should not assume that government is less selfish, more altruistic, more driven by ideals of the common good than private markets, and is therefore the fittest agent of our community aspirations. All human institutions are flawed, because human beings are flawed, but government is more flawed and more dangerous than private markets.

We can walk away forever from a bad boss, merchant, or customer, but we cannot walk away from the government. Therein lies a paradox. We have concentrated power in public guardians in order to protect us from private violence, theft, and fraud. But, having done so, who will guard us from the guardians?

A bad employer

1. Treats you badly
2. You can leave
3. Others can leave too, and that is the pressure on him

A bad government

1. Treats you badly
2. You cannot leave, not really
3. And it holds a monopoly of force, which he does not

Both columns assume people in charge behave badly sometimes. The claim is only about what you can do next. Whether leaving is genuinely available to a Pygmy logger, or a woman behind a locked door, is precisely what the other side was arguing.

This is not a hypothetical problem. We began this book by asking why human beings have still not pulled themselves out of often desperate poverty after all these thousands of years of so-called civilized life. Until the eighteenth century, the human economy as a whole barely grew at all. Why is this? Economist John Maynard Keynes said that “The destruction of the inducement to invest by [a tendency to keep what wealth one had under a mattress] was the outstanding evil, the prime impediment to the growth of wealth, in the ancient and medieval worlds.”¹¹³ But what Keynes overlooked was that people hid their money because they feared theft, and they especially feared theft by government.

• Sung China, 10th c.Merchants were classed with undertakers and other unclean groups, and the government did not hesitate to confiscate mercantile fortunes that came to its attention. The pattern persisted throughout Chinese imperial history.¹¹⁴
• The Islamic worldFernand Braudel: ownership was temporary, for there, as in China, property legally belonged to the prince. When the rich person died, his possessions reverted to the Sultan of Istanbul or the Great Mogul of Delhi.¹¹⁵
• Cairo, 18th c.André Raymond’s study shows that the great merchants there rarely were able to maintain their positions for more than a generation. They were devoured by political society.¹¹⁶
• Osaka, JapanThe Yodoya family had made itself immensely rich, performed many services to the nation, and regularly lent money to the ruling classes. In the end all their money was confiscated, on the grounds that Yodoya was living beyond his social status.¹¹⁷

This is the answer this side gives to the question the book opened with. Not that people could not build wealth, but that for most of history there was no point, because it would be taken. Keynes saw the hoarding and called it the outstanding evil. This case says he was looking at the symptom.

Since the eighteenth century, the record of capital accumulation has improved. Governments have gradually learned that it is better to pluck the goose than to kill it, and Lord Macaulay correctly observed that, at least in Britain:

“Profuse government expenditure, heavy taxation, absurd commercial restriction, corrupt tribunals, disastrous wars, . . . persecutions, conflagrations, inundations, have not been able to destroy capital so fast as the exertions of private citizens have been able to create it.”

Lord Macaulay¹¹⁸

Even so, humanity’s capital continues to be very much at risk. If only the recurrent destructions of capital by government can be avoided, the world might yet be awash with wealth. Every child might be, in financial writer James Grant’s words, “a trust-fund baby.”¹¹⁹

Government is also corrupt

The primary charge against government is that it is predatory, a devourer of society’s capital. But predation is not the whole story. More often than not, government is also corrupt. Moreover, the opportunities for corruption multiply the more deeply government gets into the economy.

To be sure, the line between predation and corruption may be indistinct. Demanding a bribe is both predatory and corrupt. But the heart of government corruption lies in the “soft” bribery of ordinary interest-group politics.

This is familiar ground, but some of the deals worked out between politicians and special interests may be complex and only later reveal their true nature. For example, large US tobacco companies were supposedly punished for deceiving the public about smoking risks when they agreed in 1998 to pay 46 states and their lawyers hundreds of billions of dollars in fines over 25 years. In fact a tacit deal was struck in which the same states agreed to limit new entrants into the tobacco business. The existing companies then used their newly protected cartel status to raise prices repeatedly, in unison, thereby generating far more money than was needed for the fines, money that flowed directly into profits.

1The companies are fined hundreds of billions

2The states quietly limit new entrants

3Protected, the companies raise prices in unison

4More is raised than the fines cost, and the rest is profit

Everybody at the table came away better off, and the smoker paid for all of it. This is what the word corruption means in this chapter: not a bribe in an envelope, but a punishment that turns out on inspection to be a favour.

Not surprisingly, Milton Friedman argues that “Probably the most important source of monopoly power has been government assistance, direct and indirect.”¹²⁰ Businesses are among the most important special interests, but so are unions and trial lawyers, each of which also benefit from government monopoly grants and licensing restrictions.

Politicians and their clients are the central figures in interest-group politics, but there are other, almost equally important figures, such as regulators, heads of interest group organizations, and lobbyists. For example, the US Department of Agriculture is supposed to protect the public from contaminated meat. But when small meat producers proposed to test each cow slaughtered for mad cow disease, a deadly illness transferable to humans, the Department repeatedly ruled in the early 2000s that such testing could not be done. In issuing this edict, the department sided with large meat producers who not only wished to avoid the cost of testing, but also wanted to use the power of government to prevent smaller producers from gaining an advantage from it. The regulators clearly saw large meat packers, not the general public, as their clients.¹²¹

Sometimes “little deals” between regulators and powerful commercial interests have very large historical consequences. For example, in seventeenth- and eighteenth-century France, the rich woolen, silk, and linen producers persuaded the government to ban the production of cotton cloth, which was then a new product. On one level, this produced rather comical results as government spies began “peering into coaches and private houses and reporting that the governess of the Marquis de Cormoy had been seen at her window clothed in calico of a white background with big red flowers, almost new.”¹²²

All was not gossip and amusement, however. Enforcement of the rules led many thousands of ordinary people to be executed or sent into gruesome labor on ships. Meanwhile Britain, having considered banning cotton but deciding against it, created its industrial revolution and surged ahead economically by producing cotton textiles. France’s refusal to allow cotton meant that it stagnated economically and fell far behind.

Cotton cloth arrives, and the wool trade objects

France bans itSpies at windows, thousands executed or sent to the galleys, and a country that stagnates and falls far behind.

Britain considers and declinesCotton textiles, and then the industrial revolution.

The same decision, taken twice, a few hundred miles apart. What makes this the sharpest example in the chapter is that nobody in France set out to ruin France. They set out to help the woolen trade, and did.

A government that is neither predatory nor corrupt, and that refrains from trying to run everything, can be of great help to an economy

The case for a state that acts only as an economic umpire, not an economic chief, that scrupulously limits itself to setting rules that apply to everyone, that does not try to intervene to assist any person or persons, or otherwise pursue its own aims and objectives—that case has been made in France and in many other countries.

Boisguilbert asked the French government in the early eighteenth century to “laissez-faire la nature,” by which he meant to get out of the way of commerce.¹²³ Jeremy Bentham asked the British and other governments to “be quiet.”¹²⁴ Economist Ludwig von Mises did not necessarily agree that a limited government is that “which governs least,” because the state should strenuously “protect the smooth functioning of the market economy against fraud or violence from within or from without the country,”¹²⁵ an idea echoed by Harvard philosopher Robert Nozick.

An umpire

1. Sets rules that apply to everyone
2. Enforces them against fraud and violence
3. Does not decide who should win

A chief

1. Decides what should be produced
2. Assists this person and not that one
3. Pursues aims of its own

This is the concession, and it is a large one. The third claim is not that government should be small or absent but that it should be strenuous about a short list. Von Mises objects to the phrase governs least. Whether the line between umpire and chief can be held in practice is the question the other side would put back.

Advocates of laissez-faire have become accustomed to having their words fall on deaf ears. Not long before the French Revolution, Jacques Turgot was appointed Comptroller-General of France and tried in twenty brief months to reform the tottering economic system along free-market lines. But he was forced to resign, thereby sealing the fate of Louis XVI and the old regime. In 1770, Turgot said wryly of his friend de Gournay that he was “. . . astonished to see the [French monarchy] . . . fancy . . . that it ensured abundance of grain by making the condition of the cultivator more uncertain and unhappy than that of all other citizens.”¹²⁶

A few years later, Étienne Bonnot, the Abbé de Condillac, exclaimed that “experience teaches [government] nothing. How many mistakes have been made! How many times have they been repeated! And they are still repeated!”¹²⁷

One can only imagine what the Abbé de Condillac would have thought of life at the beginning of the twenty-first century in Zimbabwe, a country once described as the “breadbasket” of Africa, which at that time writhed in misery under the iron grip of Robert Mugabe’s government. Land redistribution schemes had turned over much of the best cropland to Mugabe supporters who had not the slightest knowledge of farming. As a result, over half of the country’s 12 million people were on the brink of starvation.

In towns, gasoline supplies had long since disappeared. Everything was price controlled, often at a price well below the cost of production. To avoid evasion of the price controls, no “new” product, brand, or packaging could be sold without prior written permission from one of the ministries, which required a bribe if obtainable at all. The economy as a whole was estimated to be imploding at a rate of 10% a year, but property and market values had already lost 99% of their previous value.¹²⁸ Throughout all this, Mugabe gave speeches railing against “greedy entrepreneurs, ruthless markets and the forces of globalization.”¹²⁹

At the end of the twentieth century, some free-market economists tried to offer broad-based statistical studies purporting to show that government leadership of the economy was a losing proposition. One study looked at 115 countries and concluded that per capita gross domestic product was negatively correlated with government intervention.¹³⁰ Another found a similar negative correlation between government spending as a percent of GDP and GDP growth.¹³¹ Yet a third found that the poor especially benefited from less government intrusion.¹³²

The problem with all such studies is of course that they can and will be rebutted by someone else’s study. The misleading idea, as economist Israel Kirzner puts it, that “Chaos and misery [are] . . . bound to ensue unless market forces are curbed, redirected or superseded by the firm, benevolent hand of an all-wise government,”¹³³ is simply too entrenched in the human psyche to be displaced by statistical evidence that can always be disputed in some way.

A few committed believers in government leadership of the economy are willing to admit that their ideas have not lived up to expectations. The leading British socialist Aneurin Bevan quipped at a Labour Party Conference in 1945 that “only an organizing genius could produce a shortage of coal and fish in Britain.”¹³⁴ Walter Lippmann, a progressive who was always sympathetic to the idea of government economic leadership, admitted that it tended to produce the opposite of what was expected:

“This is the vicious paradox of the gradual collectivism which has developed in western society during the past sixty years: it has provoked the expectation of universal plenty provided by action of the state while, through almost every action undertaken or tolerated by the state, the production of wealth is restricted.”

Walter Lippmann¹³⁵

Nevertheless, as Ludwig von Mises pointed out, “Government interference with business is still very popular. As soon as someone does not like something that happens in the world, he says: ‘The government ought to do something about it. What do we have a government for?’”¹³⁶

Philosopher Michael Novak, who once believed in state leadership himself, shakes his head at this: “One of the most astonishing characteristics of our age is that ideas, even false and unworkable ideas, even ideas which are no longer believed in by their official guardians, rule the affairs of men and run roughshod over stubborn facts.”¹³⁷ Novak emphasizes that, in his view, it is the poorest who suffer: “[The] suffering [of poverty] is unnecessary because over the centuries a [free-market] system has been worked out to create ‘the wealth of nations’—all nations. To bring that system to all the world’s poor is . . . our chief unfinished business.”¹³⁹