Fix America’s Economy: Two Principles for Reform

 
 

Candidates in the 2012 presidential race should champion two principles for reviving America’s economy: the Adam Smith principle for limiting government and the subsidiarity principle for regulating government intervention.

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More than one scholar has observed the almost providential symmetry between the American Revolution’s outbreak in 1776 and the publication that same year of the book that revolutionized the way the world thinks about the economy: Adam Smith’s The Wealth of Nations.

In their own way, both events were about human freedom. The American revolutionaries were fighting for independence from a government that, in their view, kept violating a hard-won principle: no taxation without representation. Likewise, Smith’s Wealth of Nations severely criticized mercantilism—the dominant economic system of eighteenth-century Europe that routinely undermined economic liberty in the name of extensive, state-driven economic development.

Two hundred thirty-five years later, many Americans remain acutely aware of economic freedom’s moral and political significance. This is partly because, in the last ten years, we’ve seen state intervention expand into American economic life in ways that seem far removed from the vision of America’s Founders. Among other things, this has been reflected by increases in the state’s share of GDP, the steady devaluation of our currency, “stimulus” packages funded by deficit spending, the explosive escalation of public debt, the bailing out of politically connected industries, the remorseless growth and duplication of welfare programs, and the government’s extension of its control over healthcare.

The causes of these unhappy developments are many: several generations of politicians, public officials, and economists who have distrusted (and sometimes disdained) Americans’ ability to take responsibility for their own economic future; businesses that prefer to lobby for corporate welfare instead of creating goods and services that people actually want; and, perhaps most troubling, the many citizens who have gradually started to see the state as the primary means of securing their livelihood.

We can see signs everywhere of the damage wrought by economic freedom’s decline in America. Few people, however, speak of this decline’s moral and cultural consequences.

The economist Arthur Brooks is exactly right when he notes that the end-game of America’s free enterprise culture is not the endless acquisition of wealth. The goal is human flourishing. This idea is as old as Aristotle, but it is deeply integral to the American experience and the aspirations contained in the immortal phrase, “Life, Liberty and the Pursuit of Happiness.”

Respect for economic liberty is indispensable if we want to live in an America that promotes human flourishing. Market economies are, for example, especially good at furnishing societies with the material basis they need to preserve and protect human life, expand the frontiers of knowledge, support the arts, engage in philanthropy, and address the needs of the least among us. A decline in free markets thus undermines our ability to produce the material resources that help us to live human life as it ought to be lived.

No doubt, we can find much happiness in pursuit of some of the wide-ranging and often very uneconomic interests of a Thomas Jefferson, Benjamin Franklin, or Charles Carroll. But other realizations of happiness can take shape in the pursuit of the means that allow us to engage such interests: in the development, for example, of the moral and practical habits that are crucial to success in dynamic business environments.

In much of Europe, a contrary attitude has long been characteristic of its economic culture: that if people are to lead fulfilling lives, they need to be given things and protected from risk. In policy and institutional terms, this translates squarely into the European social model, which is presently collapsing before our very eyes throughout the Old Continent.

Ironically, however, there is a scarcity of evidence that such policies actually help make people happy. Why? Because people who are always given things know that they have not earned what they have. As evidence, Brooks points to studies that underscore correlations between unearned income and dissatisfaction with life. These illustrate, for example, that welfare recipients are generally less happy than those who earn the same income through employment.

The fight to take back America’s economy from those who have sought to realize the social democratic dream over the past eighty years must thus be more than an argument about the relative efficiency of markets versus mixed economies. It must have a moral dimension. Man does not live by efficiency alone. Life is about much more than maximizing utility.

There is a role for government in our economy’s restoration, but it is a limited one. Much of the disorder that presently characterizes America’s economy comes directly from the pathology of government overreach.

Market economies need institutions that can provide the legal apparatus that protects property rights, enforces and adjudicates contracts, maintains the rule of law, and furnishes the police function. Each of these responsibilities requires an authority with a monopoly of legal coercion, something the Western tradition has long assigned to the state.

Once, however, governments and courts expand their economic remit beyond these areas, their effectiveness is much more questionable. Indeed, the evidence is overwhelming that when governments seek to “spread the wealth” or “end poverty forever” through welfare programs, they distort (and often suffocate) the usually far more effective role long played in this area by strong families, intermediate associations, religious organizations, and other private actors.

If this is true, then part of the debate about the economy that will shape the 2012 elections should be about identifying principles we can use to distinguish the state’s proper economic responsibilities from activities that others should fulfill.

One such principle might be called the “Adam Smith” principle. Though often caricatured as an eighteenth-century Ayn Rand, Adam Smith thought long and hard about the government’s appropriate economic role.

Broadly speaking, Smith held that the government’s general responsibilities embraced foreign policy, national defense, the administration of justice, and public works. Each of these responsibilities has an economic dimension, especially the last two. Beyond these areas, Smith was willing to contemplate limited interventions in certain spheres of the economy and in particular circumstances. Nevertheless, he generally considered these to be the exception rather than the rule.

No doubt, some will regard this view of government’s primary economic functions as excessively minimalist. That, however, may underscore just how habituated we have become to the state’s excessive intervention into many spheres of life. Moreover, when we consider the legitimate government functions identified by Smith, we realize that activities such as the administration of justice (understood as the application of the rule of law through courts and maintenance of public order through the police function) for all 310 million Americans can hardly be dismissed as small undertakings.

Still, as Smith himself acknowledged, there will be exceptions. But how do we prevent the exceptions from becoming the rule and thus a rationalization for endless economic intervention by the government? Part of the answer lies in a second principle: the much-misunderstood idea of subsidiarity.

Subsidiarity may be summarized in the idea that “higher” organizations (such as governments) should normally not directly intervene in the life of “lower” communities (such as families, businesses, and churches). Subsidiarity thus assumes that the best people to address economic and social problems are usually those closest to the difficulty. Intervention by higher bodies is permitted, however, when (1) a “lower” community has proved itself manifestly incapable of addressing problems that properly fall within its sphere of responsibility; and (2) other communities closer to the problem are unable to resolve the difficulty.

Subsidiarity consequently tells us that in normal circumstances, the function of child-raising is properly performed by families. It also tells us that when a family proves incapable of addressing particular problems associated with child-raising, non-governmental actors such as churches should usually be the first to render assistance. When no other group can provide appropriate forms of help, governments may then need to act—at least until the problem is resolved, at which point the state should bow out to prevent the permanent displacement of families from their proper functions.

As the example of child-rearing shows, subsidiarity combines axioms of noninterference and assistance. It follows that when a case of assistance and coordination through law or government proves necessary, as much respect as possible for the rightful liberty of those being assisted should be preserved. Why? Because freedom—including economic liberty—is essential if people are to realize human happiness.

A moment’s reflection on what the application of these principles might mean for the state’s economic role soon indicates that it would result in a significant winding back of government intervention in America’s economy. Both Obamacare and the Dodd-Frank Financial Regulation Act, for instance, are very hard to justify according to these criteria. Corporate welfare would also be radically curtailed. Those promoting government entitlement programs would have to prove that a perceived social or economic deficiency cannot be adequately addressed by non-state associations. It might even start a long-overdue discussion about whether or not the state should exercise a monopoly of the money supply.

Consistent application of these principles would also remind us that there are many free associations and communities that precede the state and which directly provide most of the conditions that assist people to pursue human happiness. And that brings us squarely to another crucial insight with enormous potential for restoring health to America’s economy and reducing the size of government.

America’s commitment to economic freedom has never been understood as absolving us from our concrete responsibilities to those in need. As the Wall Street Journal’s William McGurn writes, the argument of American conservatives with American liberals is not about whether people should help those in need. The issue concerns the how: how, McGurn asks, do we “balance our care for fellow citizens without wrecking the economy, ruining families, or giving birth to more soulless bureaucracies?”

Historically speaking, free associational approaches to resolving social problems are deeply ingrained in American civic culture. Not even FDR’s New Deal or LBJ’s Great Society managed to undermine America’s position as the world’s most generous nation in the areas of private charity, private philanthropy, and voluntarism. From this standpoint, a “Tocquevillian” civil society approach to addressing social problems may well be a powerful way of forestalling the development of proto-European tendencies to regard government as the primary means of addressing social difficulties, thereby (albeit often unintentionally) inflicting enormous damage on the economy.

Economic freedom is not the only bulwark against governments with exalted senses of their own importance. Such governments invariably seek, for instance, to unduly restrict the liberty of religious organizations and to weaken the family, precisely because these also constitute spheres of freedom that check state power.

But if the economy features as the biggest single issue in the 2012 election, defenders of the market should be willing to supplement empirical economic arguments with full-bodied contentions about the nature of human happiness and how we realize it. To do so would not only be consistent with the very best of the American Founders’ vision; it would also breathe new life into America’s great and ongoing experiment of ordered liberty. 

Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, Wilhelm Röpke’s Political Economy, and his forthcoming Becoming Europe: Economic Decline, Culture, and America’s Future. This essay is part of the 2012 Election Symposium. Read all of the entries here:

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