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Something Must Be Done!

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During hard times there are few phrases as frequently heard as, “Something must be done!” And what is usually meant by the phrase is that governmental action is needed to cure the economic woes of society.

In other words, government spending should be increased to raise the demand for goods and services; interest rates should be lowered to stimulate investment activity; protection should be given to domestic producers to insulate them from the unscrupulous “poaching” of foreign producers; public-works projects should be used to guarantee a job at a “living wage” to all of those desiring to work.

We live in an era that has seen the bankruptcy of socialism, the failure of the welfare state, the corrupting influences of governmental regulatory activity, the irresponsibility of government deficit-spending and the unprincipled political pandering to every conceivable special-interest group. And yet still the cry is heard: “Something must be done!” — by the government.

Fifty-five years ago, the English economist John Maynard Keynes published his book The General Theory of Employment, Interest and Money. He ended the volume by pointing out to his readers, “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

At the end of the twentieth century, Americans, and indeed practically the entire world, are the slaves of defunct collectivist economists of half a century ago. Faced with the trauma and tribulations of the Great Depression, intellectuals of almost every stripe came to the conclusion that individual freedom and free markets could not be trusted to either deliver the goods or the jobs that seemed to be so desperately needed. Their only disagreements were over the form which government management should take.

Marxists looked to Moscow and Stalin’s five-year plans. A socialist command economy might be harsh and lacking in some of the “bourgeois” freedoms, they believed, but at least everyone had a job; and planning assured that society’s resources would not stand idle.

Fascists looked to Rome and Berlin. Even though Hitler’s racial policies in the 1930s became an uncomfortable embarrassment, fascism, as an economic system, still appealed to many. Here, government did not have to nationalize industry. It could instead plan the economy in partnership with business and labor — setting wages and prices and establishing employment and production targets for growth and stability.

Keynes and his “New Economics” seemed to offer a third way. Government did not have to nationalize or directly plan an economy. By use of government deficit spending and manipulation of interest rates through control of the money supply, government planners could influence the demand for goods and services and the amount of private investment activity. By using these policy tools, government could indirectly manage an economy for “full employment”

Over the last fifty years, just about every variation on the collectivist economic theme has been tried. And every one has turned into disaster. Central planning has twisted men’s souls and ravaged their bodies. Both communist and fascist forms of planning have denied human beings their most basic freedoms and produced nothing but poverty and terror.

And while Keynesian economics and neo-mercantilist trade policies have appeared less visibly destructive of freedom and prosperity, their effects have been no less detrimental. Moreover, in the name of “full employment” and “economic stabilization,” the economic power of governments in the Western world has become immense. Governments in America and western Europe now absorb anywhere from twenty-five to seventy-five percent of all of the wealth produced by the people in these nations. Governmental regulations intrude into every comer of economic life. Government determines who can work and under what conditions, how products may be produced and in what manner they may be marketed, what kind of profits may be earned, and what level of wages must be paid.

Nor have Keynesian “demand management” policies brought economic stability. The post-World War II period has seen nothing but unending cycles of booms and busts, inflations and recessions. And with every enlargement in the size of government has come an increased number of groups in the society dependent upon the continuation of governmental spending and protection. The corruption of our legislative processes is merely me aspect of the political consequences of Keynesian economics put into practice.

During the first half of this century, many economists and political philosophers were drunk with the idea of power. They suffered from what the Austrian economist Friedrich A. Hayek has called “the pretense of knowledge.” They were convinced that they had the wisdom and ability to plan, guide and direct the lives of millions. Their minds had given them the insight and knowledge to know how to “set things right.”

Market demand was too low? They knew just the right amount of government spending to rectify the problem. Wealth was unfairly distributed? They knew just the right amount of taxation and redistribution of wealth to assure “economic justice.” Industry and jobs were not where they should be in the economy? They knew just where industry should be located and where jobs should be created.

Through the public educational process and other forms of government propaganda, Americans were brainwashed into believing them. And even though every economic intervention has failed and continues to fail, Americans still believe them. Why? Because we have been conditioned to believe our government masters and brainwashers when they tell us that next time “they will get it right,” that they have learned from their mistakes, and that Americans should just continue to trust them.

But they are not to be trusted. Not only because power corrupts, but also because they can never know how to do all of the things they promise to do. No mind or group of minds can ever have the ability or capacity to master all of the knowledge and information that is required to plan direct or guide an economy.

The value of a market economy is that it leaves each individual free to plan his own affairs and to use his own knowledge as he sees fit. But if he is to benefit personally from that knowledge, he knows that he must use it in a way that serves the ends of society. He can earn a living only by using his knowledge to fulfill the wants and desires of others in the peaceful social order of voluntary exchange.

Competitively established market prices, both for resources and commodities, transmit across the entire economy information about the ever-changing supply-and-demand conditions to which each member of the society must adjust if he is to go about his business of earning a living. The market incorporates and encapsulates more knowledge and information than any economic planner or interventionist can ever hope to know or master. But if the market is to fulfill its informational tasks, it is vital that we return to first principles. By protecting and respecting individual life and property, government can help to secure the conditions for prosperity; but government cannot create that prosperity. Prosperity comes only from men applying their minds and the means available to them for various desired ends. Prosperity, therefore, can only come from freedom, because only when men are free do they have the interest and the incentive to set their minds to work.

What does this mean in terms of economic policy? The exact opposite of what the economic planners and social engineers desire. Government’s role in society must be reduced to the much ridiculed “night-watchman state.” And government expenditures must be lowered to only those needed to protect individual liberty and private-property rights.

This means: no governmental subsidies; no governmental protectionist privileges; no governmentally sponsored monopolies or cartels; no governmental licensing of occupations or professions; no governmental regulation of industry or the workplace; no governmental setting or influencing of wages or prices; no public-works projects; no governmental “demand management” policies; no governmental control of money.

As we approach the end of the twentieth century, we are at a dead end with collectivist and interventionist economic policy. Something must be done! But not by the government. The place to start is to recognize that we are the intellectual victims of defunct economists and political philosophers of a bygone era and, more important to recognize that governmental policies are the cause, not the cure, of our economic problems.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).