Friday, April 1, 2011

The Founding Documents of Economic Freedom: "Kings and Ministers are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs."

In revising my Comparing Economic Systems in the 21st Century, I was struck by the relevance of the writings of Thomas Hobbes, John Locke, and Adam Smith to our current political-economic debates on deficits, regulation. taxes, and government health insurance. It is a valuable lesson to return to the founding documents of economic liberty, just as constitutional lawyers return to the constitution itself, to remind ourselves of the core issues of the economy and the state.

These “worldly philosophers,” to use the title to Robert Heilbroner’s famous 1953 book, debated whether it is human nature to act cooperatively, requiring limited discipline by government, or are we naturally selfish, unruly, belligerent, and uncooperative, such that society can exist only with a strong hand of the state?

In the next few paragraphs, I summarize the ideas of the worldly philosophers in capsule form for those who have not read them for many years.

Thomas Hobbes: The Leviathan State

Thomas Hobbes’s masterwork, The Leviathan, was published in England in 1660, at a time when the power of the king was under heated debate. Hobbes, often accused of being an apologist for the divine right of kings, argued in his Leviathan, that competition is deeply rooted in human nature and is one of the three principal causes of conflict. Competition makes men “invade for gain” and “use violence to make themselves masters” of other men’s possessions. A “condition of nature” would be tantamount to a “condition of war of every man against every man.”

In such a condition of nature, contracts and covenants are “void upon any reasonable suspicion” by the contracting parties. In such a dog-eat-dog world, people can reach and honor agreements only “if there be a common power set over them both, with right and force sufficient to compel performance… For he that performs first has no assurance the other will perform after, without the fear of some coercive power.”

According to Hobbes, a powerful government is the only way to make order out of this natural state of conflict, violence and war against each other:

“But in a civil estate, the only way to erect such a common power is to appoint one man, or assembly of men, to bear their person; and … therein to submit their wills, every one to his will, and their judgments to his judgment. …This is the generation of that great Leviathan, or rather, to speak more reverently, of that mortal god to which we owe, under the immortal God, our peace and defense. For by this authority, given him by every particular man in the commonwealth, he hath the use of so much power and strength conferred on him that, by terror thereof, he is enabled to form the wills of them all.”

In other words, Hobbes argues that societies require a powerful sovereign, to control the natural tendency of people to feud, violate agreements, and steal. Hobbes’ Leviathan must have sufficient authority to frighten its subjects into submission to its judgments and will. In turn, the Leviathan’s subjects should be grateful for the “peace and defense” that state power to “terrorize” brings about.

John Locke: The Social Contract

John Locke (1632-1704) was an English philosopher and physician often cited as the father of Liberalism. He published anonymously his Two Treatises of Government in 1689. In his Second Treatise, Locke enunciated his philosophy of natural rights, in which individuals’ rights to private property derive from ownership of their own labor. According to Locke, we create property through our own labor, such as a farmer clearing and irrigating fields. It is our work or perhaps the work of forefathers that has created this property; therefore it is our right to own it. Such property rights should be secure and protected by the state.

According to Locke, there are natural sources of authority, such as parents’ rights to raise and discipline children, but “legitimate government is instituted by the explicit consent of those governed. Those who make this agreement, transfer to the government their right of executing the law of nature and judging their own case. These are the powers which they give to the central government, and this is what makes the justice system of governments a legitimate function of such governments.”

Locke proposed a form of government based upon a social contract between the government and the governed. To quote Locke:

“Men being, as has been said, by nature all free, equal, and independent, no one can be put out of this estate and subjected to the political power of another without his own consent, which is done by agreeing with other men, to join and unite into a community for their comfortable, safe, and peaceable living, one amongst another, in a secure enjoyment of their properties, and a greater security against any that are not of it…When any number of men have so consented to make one community or government, they are thereby presently incorporated, and make one body politic, wherein the majority have a right to act and conclude the rest…And thus every man, by consenting with others to make one body politic under one government, puts himself under an obligation to every one of that society to submit to the determination of the majority, and to be concluded by it; or else this original compact, whereby he with others incorporates into one society, would signify nothing…”

The power of the government is strictly limited by the social contract; citizens have no obligation to obey the government if it violates the social contract:

“The people cannot delegate to government the power to do anything which would be unlawful for them to do themselves. ... whenever the Legislators endeavor to take away, and destroy the property of the people, or to reduce them to slavery under arbitrary power, they put themselves into a state of war with the people, who are thereupon absolved from any farther obedience.”

If the government exceeds the power delegated to it, citizens have the right to dissolve that government and return to their “original liberty”

“Whenever the legislative shall transgress this fundamental rule of society, and either by ambition, fear, folly or corruption, endeavor to grasp themselves, or put into the hands of any other an absolute power over the lives, liberties, and estates of the people; by this breach of trust they forfeit the power the people had put into their hands, for quite contrary ends, and it devolves to the people, who have a right to resume their original liberty.”

In sum, Locke, contrary to Hobbes, favored a government “of the people, by the people and for the people,” whose power is strictly limited to the powers that the people themselves have given it. That government cannot take away the natural rights of people, such as their right to property. If it exceeds the bounds of the social contract, the government becomes null and void, and the people need no longer obey it.

Adam Smith: The Invisible Hand

Adam Smith provided the pioneering analysis of free-market capitalism in his Wealth of Nations, published in 1776. Smith (1723-1790) was a Scottish philosopher, aptly called the father of economics. His classic Wealth of Nations was written as an attack on the prevailing system of pervasive state controls of the economy, called mercantilism.

Adam Smith argued that a highly efficient and harmonious economic system is the result if competitive markets were left to function freely without government intervention.

Both Hobbes and Locke began their analyses with human behavior in a state of nature. Hobbes used human nature to justify a strong intrusive state. Locke considered that people could agree on a social contract whereby a limited government could be created.

Smith turned Hobbes’ notion of destructive competition on its head. Smith concluded that the very competition that Hobbes condemned, surprisingly, causes individuals’ selfish motives to serve the general welfare.

Adam Smith wrote of an invisible hand of markets that causes selfish individuals to promote the public interest by voluntarily producing and exchanging goods in the market place:

“Every individual...generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Smith wrote further on the invisible hand using this memorable phrase:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Smith’s most striking insight was that any intervention of the state in the economic dealings among self-interested persons is more likely to do harm than good:

“It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense... They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.”

Because state action is likely to do more harm than good, the power of the state should be strictly limited:

“According to the system of natural liberty, the sovereign has only three duties to attend to ... first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, so far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice, and thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain.”

In sum, Smith argued that if individuals were given free rein to pursue their own selfish interests, the invisible hand of competitive markets would cause them to behave in a socially responsible manner. Products desired by consumers would be produced in the appropriate assortments and quantities, and the most efficient means of production would be used. No government or social action would be required, for individuals acting in their own interests could be counted on to do the right thing. In fact, government action would probably interfere with this natural process, so government should be limited to providing essential public services—national defense, a legal system to protect private property, and highways—that private enterprise could not produce on its own. An equilibrium of consumers and producers would be created spontaneously in the competitive marketplace, for if the actions of consumers and producers were not in harmony, the market price would adjust to bring the two groups into equilibrium.

Smith’s notion of a natural tendency toward an efficient economic equilibrium was the foundation for the liberal economic thought of the nineteenth century, which is now the free-market ideology of the twenty-first century. In the words of one authority, Smith’s most important triumph was that “he put into the center of economics the systematic analysis of the behavior of individuals pursuing their self-interest under conditions of competition,” and this remains “the foundation of the theory of resource allocation.” Most of the later theorizing aimed at a further elaboration of Smith’s vision of market capitalism.

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