Monty Pelerin's World

Economics, Finance and Politics Through The Prism of Classical Liberalism

The Economic Crisis is Only a Symptom

The Economic Crisis is Only a Symptom

There are few economic problems that don’t originate in politics.

Originally, economics was known as political economy because the early practitioners understood the importance of institutions on economics. One of the early journals of economics was started in 1892 at the University of Chicago entitled The Journal of Political Economy.  It is still one of the most prestigious journals in the field of economics.

Citizen faith in government has deteriorated recently as shown in virtually every political poll. Rasmussen found: “…63% of likely voters believe, generally speaking, that it would be better for the country if most incumbents in Congress were defeated this November.” Gallup had the federal government ranking ahead of only socialism in terms of positive image:

People know something is wrong. They know economic conditions have taken a turn for the worse. They sense that they don’t matter much, at least in the eyes of their government. Furthermore, many believe that government is out of touch and corrupt. Politicians are viewed more as a ruling class than representatives of the people.

History is replete with examples of the rise and fall of empires. Is there some mysterious, material force that produces “cycles of civilization?” History seem to support such a contention, but coincidence and correlation is not causation. Societies rise and fall as the result of policies, laws, customs and traditions. Man creates the forces that drive civilizations.

Over the centuries, brighter folks than our elected officials experimented with virtually every combination and permutation of laws and customs. Ideas that worked were adopted, while those that didn’t were abandoned. It was in the context of this evolutionary cauldron that “best practices” were discovered and civilizations advanced. Those that abandoned “best practices” deteriorated.

Our learned Founders knew history and the nature of man. They created a Constitution that represented 2,000 years of wisdom and experience. Their remarkable achievement enabled a fledgling nation to rise quickly to a world power with wealth, freedom and living standards that were unsurpassed.

Now we appear to be on the downside of our historical run. An enormous economic crisis engulfs our country and the world. Has our time of leadership come and gone? What happened?

At the risk of appearing simplistic, I argue that the driving force for our success was our conception of limited government. Our Founders knew the tendency of rulers and constructed a framework designed to protect citizens from government. This setting maximized individual freedom, encouraged initiative and rewarded success.

Slowly but incessantly the remarkable document that was our Constitution was weakened. Now, few politicians understand it; even fewer believe it has any bearing. Politicians suffer from what Friedrich Hayek termed “the fatal conceit.” As David Brooks described it:

In moments of government overconfidence, officials come to see society not as a dynamic and complex organism, but as a machine, which can be rebuilt. In such moments, governance and engineering merge into one.

Our Constitution has been reduced to a quaint artifact of history. It no longer provides protection from government. Politicians still take an oath to uphold it. Yet that oath is little more than the tradition associated with assuming office. Our Constitution’s role in government appears to be no more important than the Queen is to England’s government.

Virtually everything that our Parliament of Whores has imposed over the last century was rejected by our Founders. The Founders were not “unjust” or “unfair” or “uncaring.” They were practical and refused to adopt policies that history had shown harmful. While today’s politicians cannot explain or account for the complex set of traditions, customs, rules and laws that evolved over time, they believe they can make changes that will be improvements.  What hubris!

Hayek said: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”  Apparently he was wrong because our politicians have not learned from their many failures.  Greater intrusions into the economy and lives of citizens continue at accelerating speed.

Our serious economic crisis can be attributed to the abandonment of Constitutional principles that began long ago. Establishment of a central bank was anathema to our Founding Fathers. Arguably the establishment of the Federal Reserve in 1913 was unconstitutional. Thomas Jefferson warned against empowering banks:

I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a moneyed aristocracy that has set the Government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.

President Andrew Jackson concurred with Jefferson’s views:

The bold effort the present (central) bank had made to control the government … are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it.

Ludwig von Mises

No serious economist can overlook the key role played by the Federal Reserve in causing the current crisis. Nor can one overlook its debauchery of the currency. One of its founding purposes was to protect the value of the currency. Since its formation, the purchasing power of the dollar has lost 96 percent. Most of that occurred after 1971 when the country left the gold standard and the Fed was without limitations.

Government was generally precluded from entering the realm of economic matters by the Constitution. Once that restriction was ignored, there was no limit to the harm that could be inflicted. Economics itself is a self-correcting system under most circumstances. However, in a world where government is unconstrained, politicians see every minor discomfort as an opportunity for an intervention and a means to gain more power.

All intervention contravenes the corrective mechanism of markets, generally worsening the original problem. This leads to demands for additional political intervention. Each one worsens the problem and weakens the economy’s ability to self-correct. Interventionism is not self-sustaining as explained by Ludwig von Mises:

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

Our biggest problems are in areas where government intervened years ago – schools, health care, Social Security, the banking system, poverty, the Post Office, Amtrak, etc. etc. No intervention has worked. All these problems have grown worse. It is likely that Mises’ end of the Santa principle is near.

Over time, government grew into a corrupt Leviathan. Once politicians gained life and death power over the economy, their decisions took on value. As Sheldon Richman stated:  “If there are no privileges to sell, there are no privileges to buy.” Businesses don’t contribute to politicians out of admiration. They do so as a means of survival, often under extortion-type circumstances.

The elimination of Constitutional protections led to the demise of  free-market economics and the concentration of power at the Federal level. A political oligarchy, willing to serve the highest bidders, now runs the country. Recently the banking industry was their patron.

Our Founders were wise men who risked their lives to create this country. Our current political representatives are arrogant, unprincipled clowns in comparison. We must return to Constitutional protections if we are to regain our way of life and preserve our country.

Prospects look dismal.

Monty Pelerin posted this today on American Thinker