TGIF: "Liberalism and Capitalism"

Ludwig von Mises's 1927 path-breaking work in political theory speaks to the current generations. In section 5 of his introduction to Liberalism: The Classical Tradition, Mises sounds impeccably relevant in describing how the opponents of liberalism and the market economy twist facts that are plainly before our eyes. You'll see how he refuted the absurd claim that capitalism serves only a tiny privileged and exploitative group. The work of most thinkers passes away soon after they do. Not so with Ludwig von Mises.

He began the section by acknowledging what should be obvious. Governments have always interfered with individual freedom, free enterprise, and free markets—in a word, capitalism—in substantial ways. Laissez faire has never been allowed. That does not prove it is impossible, only that people either did not understand the system or did not want its success demonstrated. Mises wrote:

A society in which liberal principles are put into effect is usually called a capitalist society, and the condition of that society, capitalism. Since the economic policy of liberalism has everywhere been only more or less closely approximated in practice, conditions as they are in the world today provide us with but an imperfect idea of the meaning and possible accomplishments of capitalism in full flower. Nevertheless, one is altogether justified in calling our age the age of capitalism, because all that has created the wealth of our time can be traced back to capitalist institutions. It is thanks to those liberal ideas that still remain alive in our society, to what yet survives in it of the capitalist system, that the great mass of our contemporaries can enjoy a standard of living far above that which just a few generations ago was possible only to the rich and especially privileged.

This could have been written yesterday. The fabulous wealth that Americans and the inhabitants of other semi-capitalist countries enjoy would have been unfathomable just a short time ago. Previous generations would laugh at how we use the word poor today. That's what even partial freedom has accomplished. Those lagging behind have been compelled to live without the market economy, to their misfortune. We would all be richer with complete freedom.

To be sure, in the customary rhetoric of the demagogues these facts are represented quite differently. To listen to them, one would think that all progress in the techniques of production redounds to the exclusive benefit of a favored few, while the masses sink ever more deeply into misery. However, it requires only a moment’s reflection to realize that the fruits of all technological and industrial innovations make for an improvement in the satisfaction of the wants of the great masses. All big industries that produce consumers’ goods work directly for their benefit; all industries that produce machines and half-finished products work for them indirectly. The great industrial developments of the last decades, like those of the eighteenth century that are designated by the not altogether happily chosen phrase, “the Industrial Revolution,” have resulted, above all, in a better satisfaction of the needs of the masses. The development of the clothing industry, the mechanization of shoe production, and improvements in the processing and distribution of foodstuffs have, by their very nature, benefited the widest public. It is thanks to these industries that the masses today are far better clothed and fed than ever before. However, mass production provides not only for food, shelter, and clothing, but also for other requirements of the multitude. The press serves the masses quite as much as the motion picture industry, and even the theater and similar strongholds of the arts are daily becoming more and more places of mass entertainment.

As economist Bryan Caplan says, mass consumption requires mass production, and nowhere in history has mass production benefited only a small segment of society. Mises continued:

Nevertheless, as a result of the zealous propaganda of the antiliberal parties, which twists the facts the other way round, people today have come to associate the ideas of liberalism and capitalism with the image of a world plunged into ever increasing misery and poverty. To be sure, no amount of depreciatory propaganda could ever succeed, as the demagogues had hoped, in giving the words “liberal” and “liberalism” a completely pejorative connotation. In the last analysis, it is not possible to brush aside the fact that, in spite of all the efforts of antiliberal propaganda, there is something in these expressions that suggests what every normal person feels when he hears the word “freedom.” Antiliberal propaganda, therefore, avoids mentioning the word “liberalism” too often and prefers the infamies that it attributes to the liberal system to be associated with the term “capitalism.” That word brings to mind a flint-hearted capitalist, who thinks of nothing but his own enrichment, even if that is possible only through the exploitation of his fellow men.

Here, things in some ways have changed for the worse. The illiberals of the so-called left and right tribes have indeed made the word liberal a pejorative. It's become almost as pejorative as capitalism. But as Mises pointed out, one simple and undeniable fact about the market economy is overlooked:

It hardly occurs to anyone, when he forms his notion of a capitalist, that a social order organized on genuinely liberal principles is so constituted as to leave the entrepreneurs and the capitalists only one way to wealth, viz., by better providing their fellow men with what they themselves think they need. Instead of speaking of capitalism in connection with the prodigious improvement in the standard of living of the masses, antiliberal propaganda mentions capitalism only in referring to those phenomena whose emergence was made possible solely because of the restraints that were imposed upon liberalism. No reference is made to the fact that capitalism has placed a delectable luxury as well as a food, in the form of sugar, at the disposal of the great masses. Capitalism is mentioned in connection with sugar only when the price of sugar in a country is raised above the world market price by a cartel. As if such a development were even conceivable in a social order in which liberal principles were put into effect! In a country with a liberal regime, in which there are no tariffs, cartels capable of driving the price of a commodity above the world market price would be quite unthinkable.

In other words, the illiberal pins on the market economy the failings that come from the government's subversion of the market economy.

The links in the chain of reasoning by which antiliberal demagogy succeeds in laying upon liberalism and capitalism the blame for all the excesses and evil consequences of antiliberal policies are as follows: One starts from the assumption that liberal principles aim at promoting the interests of the capitalists and entrepreneurs at the expense of the interests of the rest of the population and that liberalism is a policy that favors the rich over the poor. Then one observes that many entrepreneurs and capitalists, under certain conditions, advocate protective tariffs, and still others—the armaments manufacturers—support a policy of “national preparedness”; and, out of hand, one jumps to the conclusion that these must be “capitalistic” policies.

Note his reference to the military-industrial complex as anti-capitalist. In the Trump-tariff age, Mises's next segment is particularly apt.

In fact, however, the case is quite otherwise. Liberalism is not a policy in the interest of any particular group, but a policy in the interest of all mankind. It is, therefore, incorrect to assert that the entrepreneurs and capitalists have any special interest in supporting liberalism. Their interest in championing the liberal program is exactly the same as that of everyone else. There may be individual cases in which some entrepreneurs or capitalists cloak their special interests in the program of liberalism; but opposed to these are always the special interests of other entrepreneurs or capitalists. The matter is not quite so simple as those who everywhere scent “interests” and “interested parties” imagine. That a nation imposes a tariff on iron, for example, cannot “simply” be explained by the fact that this benefits the iron magnates. There are also persons with opposing interests in the country, even among the entrepreneurs; and, in any case, the beneficiaries of the tariff on iron are a steadily diminishing minority. Nor can bribery be the explanation, for the people bribed can likewise be only a minority; and, besides, why does only one group, the protectionists, do the bribing, and not their opponents, the freetraders?

Mises here rebuts the notion that business is a monolithic class that calls all the shots. In fact, diverse interests vie for favors from the state. One industry's subsidy is many other industries' expense. Beware simple models. They will lead you astray. Mises went on:

The fact is that the ideology that makes the protective tariff possible is created neither by the “interested parties” nor by those bribed by them, but by the ideologists, who give the world the ideas that direct the course of all human affairs. In our age, in which antiliberal ideas prevail, virtually everyone thinks accordingly, just as, a hundred years ago, most people thought in terms of the then prevailing liberal ideology. If many entrepreneurs today advocate protective tariffs, this is nothing more than the form that antiliberalism takes in their case. It has nothing to do with liberalism.

Ideas, not interests, rule the world? We need to pay more attention to this guy.

TGIF: The Income Stagnation Myth

Many people, including some free-market advocates, think Americans are materially worse off today than they were in the 1970s. Some subscribers to that view blame globalization, that is, free trade in goods, which means in labor services.

By any reasonable measure, those people are wrong. Stagnation is a myth. Living standards have never been higher. That goes for an increasing portion of the rest of the world too. After thousands of years, extreme poverty has plummeted to under 10 percent in just a few decades.

This is all well documented. Trade specialist Daniel Griswold writes,

This “nostalgianomics” is misplaced. The American economy is certainly more globalized today than it was decades ago, and just as certainly, most Americans are better off today by any real measure of economic well-being than their counterparts were a half century ago. Increased globalization is one of the main reasons why Americans today have higher living standards than they did in the over-idealized past.

Griswold, whose work at the Cato Institute and George Mason University's Mercatus Center has focused on this demonstrable human progress, lays out the case in his 2023 paper "The Misplaced Nostalgia for a Less Globalized Past." (Chelsea Follett interviewed him recently at HumanProgress.org, a Cato project.)

America and the world differ dramatically from the world of a half-century ago. That in itself is not saying much. Since the Industrial Revolution, which was more gradual than we think, change has been the rule. It takes a state to stifle change, and its efforts usually fail, although it can wreak havoc in the attempt. To favor liberty is to favor change, and even though change disrupts patterns and requires adjustments, most people benefit, especially the next generations. Griswold writes:

Along with technological and scientific advancements, the U.S. economy has become far more deeply integrated with the rest of the world. This integration has been driven both by new technologies that have facilitated the movement of goods, services, and people around the world—such as containerization and the internet—and by major trading nations’ concerted efforts to reduce tariffs and other legal restrictions on those same movements.

Unfortunately, trade restrictions are often popular because many people blame the global division of labor for so many ills. Innovation and changing consumer tastes, however, have been more powerful reasons for change. If people are serious about controlling change, they'd have to call on the government to do much more than impose tariffs. Who wants politicians and bureaucrats to regulate science, technology, and consumer choice? Anyone?

Contrary to popular belief, globalization did not "hollow out" the U.S. economy. U.S. manufacturing output has continued to grow. It's not true that "America makes nothing anymore." But as Griswold writes, technology enables producers to create more and better goods with fewer people. Robots now perform the drudgery that human beings used to endure. That trend began in the 1950s, not the 1970s. New jobs have replaced the old jobs because consumer wants are unlimited and businesses profit by satisfying them. That governments have often led the way in opening global markets is not an argument against globalization. It's an argument against government intervention. Politics should steer clear of economics.

What about the alleged wage stagnation? Griswold writes:

Nostalgianomics’ depiction of American “wage stagnation” since the 1970s is fundamentally flawed in several key ways. First, the most typical indicator of such stagnation—U.S. production and nonsupervisory workers’ average inflation-adjusted hourly earnings—relies on an overstated measure of U.S. inflation that makes Americans’ real-wage gains seem smaller over time.

Second, examining only wages excludes nonwage benefits—bonus pay, health insurance, paid leave, contributions to retirement savings, etc.—that have made up an increasing share of total compensation in recent decades.

But hasn't the middle class been shrinking? Actually, it has—but not to worry:

[T]he share of U.S. households earning a middle-class annual income of $35,000 to $100,000 (in 2021 dollars) did indeed shrink since 1979, from 49.1 percent to 39 percent, but so did the share of households earning below $35,000 (from 30.3 percent to 25.2 percent). By contrast, the share of households annually earning more than $100,000 increased from 20.6 percent to 35.8 percent. Thus, the American middle class has shrunk in recent decades—but only due to households getting richer. 

Griswold gives us another way to look at this story.

Even these adjusted income data understate the gains enjoyed by American workers in our more globalized era. In Superabundance: The Story of Population Growth, Innovation, and Human Flourishing on an Infinitely Bountiful Planet, Cato scholars Marian Tupy and Gale Pooley compare time prices (i.e., how many hours people must work on average to acquire various goods and services) across decades and find that American workers have experienced dramatic gains since the 1970s. In particular, they calculate that the number of hours an average U.S. blue-collar worker would have to work to afford a basket of 35 consumer goods fell by 72.3 percent between 1979 and 2019. [Emphasis added.]

That's a huge increase in real wages.

It doesn't sound like stagnation, does it? And we haven't even talked about the quality improvements of products. Americans who aren't typically thought of as wealthy are richer than the middle and upper classes were in the 1970s. "American workers are better off than in decades past," Griswold writes, "not only because familiar goods have become more affordable but also because new types of products have come on the market and spread rapidly." In the 1970s the chairman of General Motors did not have a powerful computer-cum-phone in his pocket. Griswold:

Those who are nostalgic about life in the 1970s would likely have lived without microwaves, personal computers, and the internet. Those looking back to the 1950s forget or ignore the fact that most homes not only lacked air conditioning and color TV but also lacked dishwashers and clothes washers and dryers.

More could be said, but that ought to be enough to dispel the myth of stagnation. (For more, see Griswold's data-rich paper.) The myth may be oddly appealing to certain free-market advocates because it seems to allow them to say to America's rulers, "Statism harms the middle class and poor while benefitting the rich!" But whether or not stagnation has occurred is an empirical, not an ideological matter. If market advocates ignore the facts, they sacrifice their credibility.

The fact is that despite government interference and favoritism (such as central banking, regulation, taxes, subsidies, tariffs, etc.), profit-driven, consumer-serving market forces will increase, within limits, general well-being. Sure, we would have been richer without the intervention, but markets, like Timex watches, can "take a licking and keep on ticking." Acknowledging that we'd have been even better off is not equivalent to saying that incomes have stagnated for the last half-century. That's nonsense. So is the claim that wages have not kept pace with productivity growth or that labor's "share of national output" has shrunk. (See Gene Epstein's lecture at the Mises Institute on these points.)

It's self-defeating to deny what's right before our eyes.

The Abduction of Mahmoud Khalil

The Trump administration's abduction and threatened deportation of Mahmoud Khalil, a 30-year-old green-card holder and permanent legal resident of the United States, is horrifying not just for him and his pregnant wife, a U.S. citizen, but as a sign of things to come. Khalil, who is a Syrian-born Algerian of Palestinian descent, has been detained pending deportation without being charged with any crime against persons or property, but because he engaged in speech and other peaceful activities on behalf of the Palestinians in the Gaza Strip. He was a graduate student at Columbia University at the time.

The government says Khalil's "presence or activities in the United States would have serious adverse foreign policy consequences for the United States." That's absurd. It also says Khalil supports Hamas but provides no evidence. That is all outrageously vague, which is how authoritarian governments always operate. Even speech supporting Hamas is protected under the Supreme Court's 1969 Brandenburg decision (not to mention natural law). If he's suspected of committing a specific crime, the government should charge him and give him his day in court. Instead, Khalil was handcuffed and seized at his New York City home and taken to Louisiana where he is to appear before an immigration judge.

However, the system of checks and balances is not dead yet. According to Reuters, "U.S. District Judge Jesse Furman had temporarily blocked Mahmoud Khalil's deportation [last] week, and extended the prohibition on Wednesday in a written order following a hearing in Manhattan federal court to allow himself more time to consider whether the arrest was unconstitutional."

It should be noted that the Trump action is a predictable result of the premises that free-immigration opponents subscribe to. Defenders of the action like Secretary of State Marco Rubio hold that Khalil never had a right to be in the United States but was merely permitted initial entry as a guest. Therefore, Rubio and others argue, the government can revoke that permission retroactively, notwithstanding his change in status from student-visa holder to green-card holder.

That's where bad premises take you.

TGIF: Say No to a Sovereign Wealth Fund

Donald Trump wants to create a sovereign wealth fund (SWF). It's a bad idea if your standard is freedom, free enterprise, and free markets. That's not Trump's standard, but we already knew that.

A sovereign wealth fund is a government-run investment program. Where does the money come from? In the private sector, people save money (defer consumption) and let entrepreneurs and capital owners (perhaps including themselves) use it to produce goods and services that serve consumers sooner or later. They do so because they anticipate a worthwhile future return (interest, dividends, capital gains) that will enable them to consume more than they could have otherwise.

What about the government? Governments with SWFs typically used budget surpluses to get them going. We might ask why those governments didn't cut taxes and spending instead. After all, the government had taken in more money than it required to cover its spending. If you look at this from the politicians' and bureaucrats' point of view, the answer is obvious. They like using other people's coerced money for social engineering.

As for the U.S. government, it has not had a budget surplus in ages. It doesn't have money sitting around with nothing to do. Its formal debt is larger than the GDP, and its unfunded future liabilities from the entitlement programs are humongous. It faces daunting annual budget deficits way into the future, with interest on the debt a rising budget item. Is Trump proposing to borrow money to stock the SWF?

To put it mildly, it's a bad time to set up a SWF, which is not to say there is a good time. Instead, it's the right time to massively cut spending, shrink the government, let the taxpayers spend their money as they prefer, and retire the debt. (A good case can be made for repudiating the debt. People who chose to lend money to the government relied on its power to tax, that is, to aggress. They voluntarily took a risk. With no debt to repay, the government would have less of an excuse to tax us. That would be a boon. I don't expect Trump to repudiate the debt, well not directly, though monetary inflation would bring a partial and implicit repudiation since it would be repaid in dollars that buy less than when the money was borrowed. This has happened before.)

"The idea that Washington should set up an investment fund when it can’t even manage its own budget is laughable at best and dangerous at worst," writes  the Cato Institue's Romina Bocci in "The Fool’s Gold of a US Sovereign Wealth Fund."

Some people say that the government could finance a SWF by selling assets such as land, raw materials, and buildings. But that answer raises other issues. If the government sells off assets, it could do other things with the money: namely, pay off debt or cut taxes and spending. One might also ask if selling assets is appropriate. Shouldn't government land be opened to homesteading as it should have been long ago?

Any dollars the government invests, however it procures them, could have been invested by private individuals. For example, when the government pays off a Treasury bill, the holder has cash to invest privately. As everyone should realize, the government ultimately obtains money and resources only by taking it from producers. The government is a transfer machine.

Here's another question: do we want the government to be a player in the capital markets? Emphatically not! That's why Cato's Romina Boccia describes an SWF as not just laughable but dangerous. "[W]hy should the government be in the business of managing investment portfolios when private capital markets already allocate resources far more efficiently?"

Any presidential administration will bring its political agenda to its investment program. A Harris administration would have "invested" in so-called green enterprises. (This has been a fiasco in the past. See the Solyndra case.) Trump's program would undoubtedly embody his belligerent nationalist, industrial-policy program. We can only shudder.

More generally, a government fund administrator would be different from a private investor. Anyone who has read Ludwig von Mises's, classic Bureaucracy will know that. Apart from the president's political agenda, a bureaucrat would only be playing entrepreneur. Since he would not be risking his own capital and would not personally profit or lose from his decisions, he would face different incentives from his private counterpart, who would face bankruptcy. Mises and F. A. Hayek also made this point when they refuted the socialist economists who argued that government planners could mimic the market.

As Boccia writes, an SWF "would invite political interference in capital markets, opening the door to cronyism, favoritism and inefficiency. Given Washington’s track record, does anyone believe that a government-run investment fund would be free from political meddling?" Her example of such political meddling is the U.S. International Development Finance Corporation. Peter C. Earle of the American Institute for Economic Research gives another example in "Scrapped Ventilators and Sovereign Wealth: Why Central Planners Shouldn’t Invest."

Back to the drawing board, Mr. Trump.

TGIF: A New Washington Post?

If Jeff Bezos is as good as his word, the advocates of full liberty will owe him a standing ovation. As everyone knows by now, Amazon.com founder Bezos, one of the greatest entrepreneurs of all time—a man whose profit-making activities have benefitted mankind worldwide—has announced that the editorial page of his newspaper, the Washington Post, will be devoted to promoting the free market and personal liberty. Before Bezos bought the Post in 2013, it was a leading champion of government intervention throughout the economy, which means throughout our lives. If he consistently follows through, this will be quite a change.

As he put it in a memo to the staff, which was posted on X:

We are going to be writing every day in support and defense of two pillars: personal liberties and free markets. We’ll cover other topics too of course, but viewpoints opposing those pillars will be left to be published by others.

I'll get one of my pet peeves out of the way. Bezos's two pillars are one: individual liberty. Nothing is more personal than how we make and spend our money. My decision to earn my living as a plumber is a personal decision. When the government forbids me to do that without a license, that violates my personal liberty. An individual is an integrated whole.

Bezos continued:

There was a time when a newspaper, especially one that was a local monopoly, might have seen it as a service to bring to the reader’s doorstep every morning a broad-based opinion section that sought to cover all views. Today, the internet does that job.

He's got a point. Some people will be bothered that Bezos says "viewpoints opposing those pillars will be left to be published by others." That sounds like he won't let his op-ed editor publish regular or guest columnists who oppose freedom and free markets. (No columnist has resigned to my knowledge.) It's not just the unsigned editorials that will take up the cause. Isn't that narrow and intolerant? Bezos reasonably points out that through the internet, the full range of views is at everyone's fingertips. So why is every newspaper obliged to present a smorgasbord of opinion?

His next paragraph is excellent:

I am of America and for America, and proud to be so. Our country did not get here by being typical. And a big part of America’s success has been freedom in the economic realm and everywhere else. Freedom is ethical—it minimizes coercion—and practical—it drives creativity, invention, and prosperity.

How often do you hear it said that ethical ideals, particularly freedom, are practical? Not very. Libertarians have been saying that for a long time, but it hasn't sunk in. Many people believe that freedom is impractical and that the government must routinely override it to maintain order or other values. That's balderdash, but many people have been taken in by the self-serving line.

Bezos wrapped up:

I’m confident that free markets and personal liberties are right for America. I also believe these viewpoints are underserved in the current market of ideas and news opinion. I’m excited for us together to fill that void.

A couple of points: Bezos is accused of sucking up to Trump. But freedom and free enterprise—which means, among other things, unobstructed global trade and the free movement of people—are not pillars of Trumpism. Trumpism is the rule of Trump's autonomous whims, which may face few checks from other power centers. The ability of producers and consumers to plan long-term is at the mercy of his mood. (He might give company X an exemption from a tariff, but he might not.) It's what historian Robert Higgs calls "regime uncertainty," a highly destructive thing. It's not the free market. It's the opposite! We'll have to watch the Post's editorial page closely, but this announcement would be a funny way to win over the MAGA crowd.

I'm left wondering what the page will say about foreign policy. Contrary to popular impression, an interventionist foreign policy must violate freedom and free enterprise. How could it not? If Bezos's Post opposes Trumpian interventions in Ukraine and the Middle East, that will be significant. Full disengagement from those conflicts is imperative in the name of liberty. Trump's plan to build up the military is wrongheaded. As classical liberals (libertarians) have long understood, the warfare state is inimical to liberty.

Abolish Draft Registration, Mr. Trump

During Friday's famous White House meeting, VP Vance criticized Ukrainian President Zelensky for his government's abduction of men from the streets to fight against Russia. Good for Vance. Conscription is one of the worst things a government can do, especially during a war. As a form of slavery, it goes against every libertarian, or classical liberal, principle. It's indecent.

Presumably, President Trump shares Vance's horror. So this is a good time to abolish draft registration here. The penalty for not registering is a maximum five years in prison and a maximum fine of $250,000. President Carter should never have imposed it, and presidents from Reagan onward should have scrapped it. Shame on them for not doing so.

Well, Mr. Trump?

Let's Not "Run after a Share in the Trouble"

Of course “principles,” phrases, and catch-words are always invented to bolster up any policy which anybody wants to recommend. So in this case. The people who have led us on to shut ourselves in, and who now want us to break out, warn us against the terrors of “isolation.” Our ancestors all came here to isolate themselves from the social burdens and inherited errors of the old world. When the others are all over ears in trouble, who would not be isolated in freedom from care? When the others are crushed under the burden of militarism, who would not be isolated in peace and industry? When the others are all struggling under debt and taxes, who would not be isolated in the enjoyment of his own earnings for the benefit of his own family? When the rest are all in a quiver of anxiety, lest at a day's notice they may be involved in a social cataclysm, who would not be isolated out of reach of the disaster? What we are doing is that we are abandoning this blessed isolation to run after a share in the trouble.

—William Graham Sumner, "The Conquest of the United States by Spain" (1898)