For most of Europe’s political establishment, the eurozone’s shrinkage or implosion would represent a severe setback for their particular vision of European unification. Some government leaders, such as France’s Nicolas Sarkozy, are consequently pushing for massive bond-market intervention by the European Central Bank. Others, most notably Germany’s Angela Merkel, favor an approach with even farther-reaching implications: renegotiating the Treaty of European Unification so as to provide for common fiscal governance. That would necessitate a significant diminution of eurozone members’ sovereignty.

However, should the apparently unthinkable happen and the common currency as we know it come to an end, European governments will have a once-in-a-lifetime opportunity to rethink the type of monetary order they wish to embrace. But this would involve widening the range of political choices about Europe’s future they are willing to contemplate.

One such scenario is a three-way monetary division within the EU that reflects the differing political commitments and economic priorities of different nations. Germany and the more fiscally responsible eurozone members such as Austria, Finland, and the Netherlands could, for instance, decide to reconcile themselves to being the only ones with the necessary fiscal and monetary discipline to maintain a common currency.

Alongside this bloc would be two other groups. One would consist of those EU countries such as Britain, Sweden, and Denmark that have maintained their own monetary systems because of reservations about the euro’s implications for national sovereignty. Another group would include EU nations such as Greece, Portugal, and Italy that are simply unable or unwilling to embrace the disciplined monetary and fiscal policies required by a common currency; these nations would consequently find themselves outside the eurozone and reverting to their national currencies.

A more radical monetary opportunity for a post-euro EU would be currency competition. This was once proposed by Britain’s Margaret Thatcher as an alternative to the present common currency. Contemporary proposals for currency competition, such as that advanced by Philip Booth and Alberto Mingardi, involve the monetary authorities of different countries authorizing the use of currencies alongside the euro in domestic settings other than their own. Consumer choice rather than state sovereignty would thus ultimately determine which currencies were used.

Yet another option would be the embrace of what might be called a European gold standard. In the 1950s and 1960s, the German economist Wilhelm Röpke argued that European monetary integration could occur via a nucleus of countries agreeing to adhere to a gold standard, much as had happened somewhat spontaneously in the nineteenth century through a process of unilateral decision-making by individual countries. Once this had occurred, adherents of such a gold standard would have to insist upon all members maintaining monetary discipline as well as freedom and stability in foreign exchange markets. Countries unable to adhere to these rules would not be admitted to the European gold club. Those who failed to abide by the club’s rules would simply be expelled. There would be no “once-in, never-out” policy.

There are European precedents for this type of monetary union. In 1865, for example, Italy, Switzerland, Belgium, and France agreed to fix their currencies to particular weights of gold and silver, and to allow their currencies to be freely interchangeable. Other countries such as Romania, San Marino, Greece, Spain, and Serbia gradually joined this group to form what became known as the Latin Monetary Union (LMU). Over time, the LMU moved in the direction of a de facto gold standard as silver came to be used less and less. The LMU, like the international gold standard, eventually crumbled as a consequence of World War I, though it formally lasted until 1927. Greece, interestingly enough, was expelled from the LMU in 1908 for debasing the gold in its currency.

Needless to say, none of the monetary options outlined above is likely to gain much support from contemporary European politicians. Partly, this reflects awareness of each option’s particular drawbacks. There is no such thing as the perfect monetary system. The ability of gold standards, for instance, to function as regulative monetary mechanisms traditionally has been impaired by the slowness with which the gold supply adjusts to real changes in demand. In political terms, these options also demand a discipline from governments that will not necessarily help their reelection chances.

But a more important, long-term reason for political resistance to adopting any of these post-euro possibilities is that each would mean that the days of European politicians’ using the process of monetary and fiscal harmonization as a vehicle to cement continent-wide political integration from the top down would be over. That would, in turn, require significant rethinking of the very meaning and character of European integration.

Here we see how a lack of political imagination about the EU’s future on the part of much of Europe’s political class limits their economic imagination when it comes to Europe’s monetary possibilities. All of the present fiscal governance measures being proposed by government leaders such as Chancellor Merkel assume that the most appropriate response to the present monetary crisis is the centralization of fiscal policy.

In one sense, that is the correct response, if Europe’s leaders want a single monetary policy managed by a central bank for economies as different as Greece and Germany. This assumes, however, that Europe’s political and economic integration must involve the gradual centralization of monetary and fiscal policies managed by supranational European institutions that, by definition, diminish national sovereignty in the name of harmonization.

But why, one may ask, must this be the case? Certainly, there are good reasons for a gradual political and economic integration of European countries. It is easy to dismiss some European politicians’ insistence that a eurozone breakup would eventually lead to war as alarmist and as a way for convinced dirigistes to avoid giving substantial answers to critical questions about the EU’s direction. We should not forget, however, that the modern European nation-state’s development has not proven to be an unmitigated blessing. When mixed with forces such as fascism, nationalism, and communism, the nation-state has provided a potent means for oppression, not to mention violent aggression against other Europeans.

Yet achieving an integration of nation-states through gradually embracing a centralized supranational European state brings with it all the problems of political and economic centralization on a much larger scale, not least among which is the likelihood of a steady diminution of political and economic liberty. Not long before his death in 1966, Röpke maintained this would be the logical trajectory of any such European entity that directed a centralized monetary policy and sought to implement top-down fiscal governance.

But Röpke also took a dim view of such policies because he believed that the subsequent centralizing tendencies of Europe would have deeply detrimental effects upon the genuine pluralism represented by the vision of l‘Europe des patries—an idea, Röpke noted, articulated by modern Europeans ranging from Montesquieu to Charles de Gaulle. This alternative idea of Europe, Röpke maintained, translated into a federalism that emphasized market freedom and competition across borders, and that precluded any kind of centralized European economic planning precisely because top-down fiscal governance was incompatible with a highly decentralized form of political integration.

From this standpoint, most contemporary European leaders’ responses to the continent’s currency and fiscal problems underscore just how much they have lost sight of one of Europe’s great strengths: genuine pluralism amidst the many commonalities that have linked Europeans for centuries, since long before the Treaty of Rome was signed in 1957. Indeed, the present EU habit of hammering together policies at the top before occasionally submitting them (almost as an afterthought) for ratification by national parliaments or popular referenda helps to fuel dislike of the entire integration process, not to mention the legitimacy crisis that increasingly confronts Europe’s political classes.

There is, however, an alternative: that the process of European integration be primarily driven from the bottom up. Here the focus of integration would shift away from politics. Instead the emphasis would be individuals and businesses trading with, competing against, and investing in each other across borders. Governments would primarily limit themselves to removing barriers to the free flow of persons, capital, and trade between nations. One example of what such integration might look like is the European Free Trade Association (EFTA). Created in 1960, EFTA’s attention has always been upon liberalization of the movement of persons, goods, and capital between its member-states. It has never tried to impose fiscal, social, or monetary policies upon its members.

Of course, if the EU moved in such a direction, it would mean a much smaller role for European politicians and bureaucrats. It would also run contrary to their deeply ingrained dirigiste instincts. Nonetheless, it would allow for an escape from the pattern of one-size-fits-all approaches that tend to diminish the space for political and economic experimentation throughout today’s EU. In this respect, a willingness to explore post-euro monetary options that break away from the hitherto dominant European trend toward top-down centralization of monetary and fiscal policy would be a step in the right direction.

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 2012 forthcoming Becoming Europe: Economic Decline, Culture, and America’s Future.

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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:

• Ryan T. Anderson, “Liberty, Justice, and the Common Good:
  Political Principles for 2012 and Beyond”
   
• O. Carter Snead, “Protect the Weak and Vulnerable:
  The Primacy of the Life Issue”
• Maggie Gallagher, “Defend Marriage: Moms and Dads Matter”
• Samuel Gregg, “Fix America’s Economy:
  Two Principles for Reform”
• Ed Whelan, “Defend Our Laws: Justice Matters”
• Helen Alvaré, “Uphold Conscience Protection:
  Religious Freedom’s Contribution to the American
  Experience and Threats to its Survival”
   
• Jennifer Bryson, “Promote Democracy:
  Start at Home but Don’t Stay at Home”
• Yuval Levin, “Heal the Sick and Reduce the Debt:
  The Moral Economy of the Healthcare Debate”
• Jane Robbins, “Empower Parents:
  Return Educational Policy to the States”
• Patrick Trueman, “End Child Pornography:
  Enforce Adult Pornography Laws”
• Laura Lederer, “End Human Trafficking:
  A Contemporary Slavery”
   
• Robert P. George, “Reflections of a Questioner:
  The Palmetto Freedom Forum Revisited”

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Copyright 2011 the Witherspoon Institute. All rights reserved.

Let me begin with Forster’s qualified defense of the usefulness of the idea of social contract. While Forster rightly regards Rawlsian social contract theory as deeply flawed, he is willing to defend the concept of social contract as a useful thought experiment for thinking through the important issue of why we are obliged to obey our rulers.

Thought experiments may indeed be occasionally helpful in illustrating particular points, but they are an inadequate basis for building theories of political order. And I remain unconvinced that the idea of social contract has always or even mostly functioned as a type of thought experiment.

We use the expression social contract theory for a reason—to describe the reasoning operative within a particular conception of political society. Whether it is Hobbes, Rawls, or Locke, their use of the social contract device goes beyond thought experiments; it is an integral building block of their arguments. Take away the social contract dimension of their reasoning and their respective political theories start to look conceptually hollow.

A second criticism advanced by Forster concerns my argument that the fictitious character of social contracts weakens their saliency as reference points for reasonable discussions of political order. Forster claims that earlier social contract theorists (unlike, say, Rousseau) never regarded social contracts as historical events and maintains that their “argument never depended on its being historical.”

I, however, would suggest that Locke, for instance, does appear to have regarded his version of a social compact as some sort of historical event. He also seemed to think that its historicity was more than incidental to his argument.

One piece of evidence for this suggestion is that Locke himself raised the objection that there appear to be no historical cases of humans meeting together in the state of nature and then agreeing to form a political society. Locke goes on, as Frederick Copleston points out, to claim that such instances actually can be found (the foundations of ancient Rome, Venice, and particular American communities).

Then, as if to acknowledge the thinness of this evidence, Locke effectively claims that the paucity of proof of historical consent does not prove that social compacts never existed. So if Locke considered such matters to be unimportant when it came to the validity of social contract, then why would he seek to defend their apparent historicity?

One reason may be that the search for historicity reflects Locke’s unease (hardly unique to Locke) with the fifteenth-century legal scholar Sir John Fortesque’s observation in De Laudibus Legum Angliae (1470) that “amongst nearly all peoples, realms have come into being by usurpation.”

Locke himself supported King James II’s overthrow in the 1688 Glorious Revolution and the subsequent passing of the Bill of Rights in 1689. There were many reasons for James II’s removal from the throne, but we should not pretend that his eviction was based on some type of contract violation. It proceeded from the refusal by significant segments of Britain’s political elites to accept his political authority any longer.

Which brings me to another point that I think demonstrates the problems of social contract theory: political authority in itself does not require a contract or some form of transmission process for its legitimacy.

Contra Locke, the rational foundation for civil government is not, in fact, consent. As Aquinas wrote, “it is natural for man, more than any other animal, to be a social and political animal, to live in a group” [emphasis added].

Put another way, political society, and therefore political authority, arises from an immediate demand of practical reason: any given human society needs someone to make decisions that bind every member of that society. Humans thus have always had some form of such political authority. Such authority finds its foundation not in social contract or some other transmission theory, but from the sheer fact that it is reasonable (and frankly inescapable) to have a ruler or rulers who can make certain types of coordinating decisions for a society and whose decisions are considered authoritative by the citizens.

If, then, political society is a natural society, the purpose served by social contract theory or devices is unclear. Why do we need this intermediate step of a social compact that takes us from a fictional state of nature into political society?

In some instances, social contract theories, related thought experiments, and other imaginary devices such as veils of ignorance, original positions, and pre-political states of natures have served to rationalize pre-existing preferences. By setting the parameters for political debate through these concepts, their authors can preclude conclusions they happen to dislike.

A good recent example is President Obama’s invocation of the “social compact” in April 2011 as one reason for his opposition to budget proposals advanced by the House of Representatives. In this case, President Obama’s conception of the social compact functioned to absolve him from the necessity of even discussing the merits of particular details of the House’s proposals.

Another reason for the prevalence of social contract theories is that they often allow us to rationalize philosophically and legally the emergence of new sets of political arrangements. A number of authors, for example, have speculated that Locke’s social compact arguments, with their particular emphasis on consent, flow from his desire to legitimize the particular political order instituted in Britain by and after the Glorious Revolution.

One weakness of such interpretations is that Locke appears to have worked out the basic principles of his political theory some years before 1688. Hence Locke’s treatises deserve to be treated, as Copleston writes, as more than just another Whig pamphlet. Nevertheless, it’s not clear that Locke’s political theory—either before or after 1688—can be entirely separated from his opposition to the Stuart dynasty, his disputation of the divine right of kings (which obviously opposes any notion of consent from the governed), and his personal beliefs as a longtime Whig.

Of course, nobody can completely escape the influence of context when developing his or her ideas, but this does not mean Locke could not have formulated a more robust account of political order to explain why James II needed to be removed from power. Pre-existing classical natural law arguments about the legitimacy of removing rulers who become tyrants would have been perfectly adequate.

Finally, I would like to address Forster’s suggestion that my portrayal of Locke reflects the widespread influence of a secularist understanding of Locke that dominated twentieth-century thinking about Locke—an interpretation that Forster and others have done much to challenge.

As it happens, it is not a background of secularist interpretation that gives rise to my doubts about Locke. Rather it is my view that Locke—like Hobbes, Kant, Hume, Bentham, Mill, and the consequentialism that distorts much contemporary reasoning—has an inadequate grasp of the workings of intentionality, practical reason, and the will, and therefore of human freedom and human flourishing.

These insufficiencies might owe something to Locke’s metaphysics of the person, which essentially locates human identity in consciousness. As for Locke’s conception of the will, Locke specifies that “the will in truth signifies nothing but a power, or ability, to prefer or choose.” Taken together with his tendency to treat freedom as absence of constraint, these constitute a potent combination of dualism, voluntarism, and perhaps even nominalism.

This philosophical mixture suggests that Locke, like Hobbes, believes that our passions are what direct us to one end rather than another. Indeed a concept of goods that give us intelligent reasons for action—and thus sets us on the path to human flourishing—cannot be found in Locke’s thought. Though Locke does consider morality’s demands to be a matter of conformity to rational nature, he never really explains how we know this nature or why it is normative.

And this leads us to a better understanding of Locke’s own answer to the question that Forster suggests social contract thought experiments can help us answer. In Locke’s view, we do not obey our rulers because a concern for human flourishing, justice, and the common good tells us that it is reasonable to do so. Instead, we obey because our rulers have a superior will. “Law’s formal definition,” Locke wrote, “is the declaration of a superior will.” How different this is from Aquinas’s understanding of law as “an ordinance of reason for the common good, promulgated by him who has the care of the community.”

In the end, this difference may well reflect varying conceptions of God. The notion of divine wisdom (logos) is integral to the classical natural law understanding of why the commands of God create concrete responsibilities in conscience for human beings.

By contrast, Locke joins some of his contemporaries, such as Grotius and Pufendorf, in explaining this obligation in terms of a God who exercises raw, perhaps even willful, power. “For who will deny,” Locke writes, “that clay is subject to the potter’s will and that the pot can be destroyed by the same hand that shaped it.”

The above arguments explain, I hope, why I am less confident than Forster that Locke and social contract devices in general have much to contribute to a contemporary public discourse concerned with truth. Forster is surely right to insist that Locke needs to be taken seriously (not least because of his influence upon the American founding and the significance of his Letter Concerning Toleration). My contention is that in doing so we must also acknowledge the inadequacies of Locke’s reliance upon the device of social compact and the problems characterizing Locke’s conceptions of human anthropology, human flourishing, and ultimately, God.


Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.

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Copyright 2011 the Witherspoon Institute. All rights reserved.

In very broad terms, social contract theory is a way of understanding the relationship between governments and the people. It holds that, having agreed upon the need for a government, individuals create a state on the basis of mutual promises. This permits the state to claim that its authority is based on a delegation of people’s rights to pursue their particular interests in their own way.

Our present economic disputes are, at a deeper level, about the precise content of those mutual promises. One influential interpretation may be found in John Rawls’ Theory of Justice.

On the basis of what reasonable people in an imaginary “original position” and blinded by a “veil of ignorance” about their future abilities, social status, etc., would want, Rawls argued that each person had “an equal right to the most extensive total system of equal basic liberties with a similar system of liberty for all.”

As part of this calculation, Rawls maintained that no one in the original position would risk being abandoned at the bottom of the social heap. Rawlsian social contract theory has thus, economically speaking, usually been interpreted as translating into extensive entitlement programs and large welfare states.

At the other end of the social contract spectrum is an older concept. This was given prominent expression in John Locke’s Second Treatise of Government.

In Locke’s view, what he called “the Law of Nature” meant that individuals were morally bound not to damage other people’s lives or property. The only way to ensure that this was given effect was through a government that defended everyone against anyone else’s attempts to damage their lives or property. The citizens thus agreed to set up a state that would protect the life, liberty, and property of everyone living under its sovereignty.

In economic terms, this position broadly equates to a state that focuses upon protection of property rights and adjudication of contractual disputes. Issues of distribution according to criteria such as need are deemed beyond the state’s competence.

The significance of these understandings of the social contract is difficult to overstate. The Lockean conception profoundly shaped the Declaration of Independence and much of today’s movement for limited government. By contrast, the Rawlsian interpretation represents the most contemporary philosophical underpinnings of modern American progressivism.

Indeed, once we bracket out the technical economic arguments informing today’s opposed positions—symbolized by, say, President Obama and Congressman Ryan—it’s likely that most of the philosophical assumptions informing today’s heated discussion of political economy fall more or less into one of these camps.

But both conceptions of the social contract pose significant problems. Ironically, it was the libertarian philosopher Robert Nozick who pointed out in Anarchy, State and Utopia that Locke (seen by some as one of libertarianism’s progenitors) “does not provide anything remotely resembling a satisfactory explanation of the status and basis of the law of nature in his Second Treatise.”

As for Rawls, numerous scholars have observed how his particular social contract theory simply excludes widely accepted criteria of justice, which leads to endorsement of essentially unjust wealth-distributions. For once we exclude considerations such as merit and desert (as Rawls insists we must), we cannot look backwards to judge who, for example, has worked harder or contributed more. We are thus forced to make arbitrary judgments about when to assess the validity of the precise distribution of wealth at any one point of time in the future.

If, then, considerable incoherence characterizes each of these positions, perhaps we should consider that something may be wrong with the very notion of a social contract itself.

One problem is social contract theory’s assumption that society is essentially artificial. This flies in the face of the commonsense observation that humans are naturally social and political beings. Another difficulty is that the people’s supposed delegation of authority to a government is—as figures as different as the natural law scholar John Finnis and the father of modern skepticism David Hume have noted—invariably a fiction rather than a real historical act.

A third problem lies in social contract theory’s conscious choice to eschew robust conceptions of human happiness, flourishing, or any substantive discussion of the proper ends of human choice. Much social contract theory assumes there is such disagreement about these matters that it is better to avoid them altogether (which itself invariably ends up privileging particular positions).

With other social contract theorists, there’s often an unspoken commitment to relativism. In the end, happiness is whatever you “feel” (not reason) it to be. The main action is subsequently to be found in arguing about the rules of the game that might be agreed upon by what an older Rawls described as a “reasonable overlapping consensus” (which turns out to be less than reasonable, far from overlapping, and based less on agreement than upon who turns out to be more ruthless in seeking official endorsement of their particular desires).

But what if there are in fact conceptions of the flourishing of free, rational, individual, social, creative, and flawed human beings that can be demonstrated by reason alone to be more coherent than other conceptions?

What would be, for instance, the implications for political economy if it could be reasonably demonstrated that entrepreneurship, for example, is not only central to wealth-creation but also an action through which I can realize virtues such as industriousness, prudent risk-taking, and courage?

Note the implicit claims underlying this example: that, in themselves, industriousness, courage, and prudent risk-taking are good, and that laziness, cowardice, and recklessness (or excessive caution) never constitute human flourishing. The way to prove this is to ask ourselves who can reasonably claim that, for instance, laziness is ever intrinsically better than industriousness.

Granted, attention to human flourishing does not in itself resolve every question posed by concerns for freedom and justice in the economy. It does, however, give content to a number of ideas that help us think coherently about important aspects of political economy, such as the state’s role in economic life.

A basic requirement for human flourishing is that we act for ourselves—as the fruit of our own reflection and choices—rather than have others act for us. It is thus extremely important that people are free to make such choices.

To make these choices in economic life, people need certain things. For most people, it’s very hard to take the risk of starting a new business without a loan and it’s often imprudent to do so without such assistance. The same people, however, also require the liberty to make the choice to start the business for themselves. We will never know how many potential entrepreneurs have been deterred from taking a prudential risk by all 9,834 sections of the United States’ Internal Revenue Code.

The principle that helps us to resolve these dilemmas in ways consistent with a commitment to human flourishing is the oft-cited, much misunderstood concept of subsidiarity.

Subsidiarity’s genius is the manner in which it uses this attention to free choice, human flourishing, and the need for support to provide guidance concerning how we apply subsidiarity’s two axioms of non-interference and assistance. It helps us determine (1) what economic roles can only be performed by the state (such as the provision of courts to adjudicate contractual disputes); (2) when the state should allow other communities to provide assistance (private banks should normally be the first place of call for loans); (3) when the state should intervene outside its normal economic responsibilities (when those communities that would normally assist are clearly unable to do so); and (4) when such interventions should cease (when they start impeding human flourishing or when the communities that normally provide assistance are now able to do so).

Does this always produce clear-cut answers about the state’s economic role? No. There will always be reasonable disagreements over precisely when an intervention should begin or cease.

But the process of deliberation is one marked by coherence and undergirded by a reasonable conception of human flourishing that takes free choice and assistance seriously. It also helps to rescue contemporary political economy from the fictions and cul-de-sacs associated with social contract theory. That subsidiarity tends to facilitate more efficient outcomes and would most likely result in scaling back what many regard as the state’s currently excessive economic role is, in some ways, beside the point.

None of this means that technical economic arguments about matters ranging from the efficacy of markets versus neo-Keynesianism to the merits of fiat money versus the gold standard are unimportant. If anything, these issues require even more attention.

But political economy, strictly speaking, has always been about more than positive economics. A serious concern for human flourishing has the potential to transform our starting-points for economic reflection. Given the serious failures of much mainstream economics over the past decade, what have we got to lose?


Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.

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Copyright 2011 the Witherspoon Institute. All rights reserved.

More than one commentator has observed that the intensity of the struggle in Wisconsin and other states is partly fueled by a subtext of public sector unions’ being able to influence who their employers are (i.e., the executive and legislative wings of government) via political donations. Those union-supported politicians in turn accede to these unions’ salary and benefits demands. The same politicians also help unions to fund themselves by mandating that union dues simply be extracted from government employees’ paychecks, and by creating impediments that obstruct those public sector workers who might choose to exercise their freedom of association by declining to join a given union.

The situation is further complicated by the fact that neither public sector unions nor governments have to consider an omnipresent reality for private sector businesses: the need to make a profit if they are to survive. Instead, governments are able to fund the salary and benefit packages demanded by many public sector unions through increased taxes, deficit spending, and ever-increasing amounts of debt.

Fewer observers, however, have noted the growth of an unhealthy collusion between government and many American companies that is equally damaging to the common good, not least in that it allows many businesses to escape the disciplines of market competition.

The most visible examples of this are obviously bailouts and subsidies for businesses and industries that have established close relationships with federal and state politicians. In recent months, the Washington Examiner’s Timothy Carney has illustrated in pointed article after pointed article the disturbing links between government subventions and those businesses that enjoy political connections on both sides of the aisle.

There are, however, less visible ways in which many American businesses seek to avoid the rigors of competition and pass on the costs of doing so to taxpayers and consumers. A good example is America’s tariff regime.

In his book Mad About Trade (2009), the trade-analyst Daniel Griswold points out that “The official Harmonized Tariff Schedule of the United States rivals the U.S. income tax code for random complexity.” Its 2,959 pages encompass 99 chapters and feature 10,253 tariff lines. Each tariff line consists in turn of three different tariff rates.

When we look at the details, we find Byzantine provisions for different products that defy rational explanation. Why, for example, is the tariff on men’s overcoats 15.9 percent if made of cotton, but only 5.6 percent if the coat is primarily of manmade fibers, but contains 25 percent or more by weight of leather?

Page after page of America’s Tariff Schedule reveals a mishmash of similarly arbitrary, discriminatory, and distortionary customs duties. The only way to explain this situation, Griswold concludes, is the ability of different businesses to persuade legislators that their particular industry (such as those who manufacture coats made of cotton) somehow requires more protection from foreign competition than others (such as those manufacturing coats made of man-made fibers with a substantial leather content).

No doubt many of these provisions are publicly justified as somehow being in the national interest. But as Adam Smith once sagely commented, “I have never known much good done by those who affected to trade for the public good.” In other words, businesses (such as Detroit-based car companies) in financial distress will often claim they merit special government assistance because their continued existence is somehow essential for the common good, whereas the real reason they want legislators to privilege them with taxpayers’ money is their failure to compete in the marketplace (such as with Japanese car manufacturers who have created profitable factories – and thousands of well-paying jobs – in America’s UAW-free South).

Then there are the ways in which some American businesses use government power to try to shut down their domestic competitors. Anti-trust laws are a prominent instance of this.

As Judge Robert Bork illustrated in his book, The Antitrust Paradox (1978), the original purpose of anti-trust laws was to promote consumer welfare and competition. Today, however, anti-trust laws are often used by businesses seeking to undermine the competitive advantages that their rivals have developed in perfectly legal and entrepreneurial ways. The Justice Department is thus used to weaken one’s competitors, not least by forcing them to incur considerable legal expenses.

The attractions of business-government collusion are enhanced when the state’s involvement in the economy grows. This is partly a question of incentives. The larger the scope of government economic intervention, the more businesses are incentivized to cultivate politicians in much the same way that public sector unions have.

As a result, consumers become displaced as the focus of business activity. Nor do the incentives for people of an entrepreneurial bent lie with creating something that the entrepreneur thinks consumers will value.

Instead the incentives become increasingly aligned with successful political entrepreneurship. Competition becomes less about a company’s ability to offer new and better products for consumers at lower prices. Instead, it become a struggle among businesses to secure state subsidies, to lobby legislators to establish tariffs that stack the deck against foreign competition, or to persuade governments to provide one company with exemptions from regulations that apply to every other company in the same industry.

It’s a form of soft corruption that produces higher prices for consumers, undermines value creation in the marketplace, and facilitates unwholesome relationships between politicians and businesses. It also represents the gradual subversion of the market economy by mercantilist arrangements. Smith identified the core of the problem in his Wealth of Nations (1776): “in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and consumption.”

In the end, however, everyone loses. Economies dominated by the struggle for government favors and largesse become less competitive in the global marketplace. Governments actually begin to believe the dirigiste illusion that they, rather than private enterprise, are the real drivers of economic growth. Technological and business innovation begins to falter. The commercial world slowly becomes dominated by “insiders” (those close to legislators and governments), while “outsiders”—such as entrepreneurs with creative ideas and capital but few political contacts—begin to consider moving to more hospitable economic climates. The work of wealth creation subsequently begins to decline in intensity.

Circumventing this situation is not simple. The more companies invest themselves and their assets in the business of political entrepreneurship, the less likely they are to favor the type of market liberalization that might shift the incentives back towards meeting consumer demand. Nor do those politicians who derive their own benefits from the patronage system implicit to corporate welfare arrangements have any strong interest in winding back these neo-mercantilist trends.

There is, of course, something fundamentally wrong about businesses and governments behaving in this manner. In market economies, companies are rewarded for their ability to innovate and produce more and often higher quality goods at comparatively lower prices by the choice of consumers to buy their product rather than the merchandise offered by others.

By contrast, corporate welfare and regulations that shield companies from competition amount to granting legal privileges to businesses primarily on the basis of their ability to court the favor of politicians. How many people can honestly describe this as just?

One byproduct of the 2008 financial crisis has been a revival of discussion about the need to restore a modicum of moral coherence to those parts of the business world that went astray in the 2000s. Unfortunately in our relativistic ethical environment, this rarely goes beyond platitudes and appeals for greater social responsibility on the part of business. This often translates into businesses being cajoled into supporting any number of politically correct causes—something increasingly described in business circles as just another cost of doing business.

Given the degree of business-government collusion that increasingly disfigures American economic life, perhaps one step forward for a morally healthier commercial culture would be for businesses to voluntarily swear off the addictive practices of political entrepreneurship and corporate welfare.

By all means, businesses should defend themselves against competitors who cynically employ political influence in an effort to drive them out of the market place. It takes, however, another type of moral courage to tell your family, shareholders, and employees that the days of cuddling up to Senator Leveraged and Congressman Influential are over.

Certainly, extracting themselves from the sticky web of government patronage or refusing to contemplate seeking corporate welfare might well prove economically costly—at least in the short-term—for many businesses. They would, however, no longer be open to the charge of behaving in ways not dissimilar to public sector unions. They would also have the satisfaction of knowing they are back in the business of creating wealth, instead of the less dignified endeavor of perpetually trying to live at everyone else’s expense.


Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.

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Copyright 2011 the Witherspoon Institute. All rights reserved.

Now, however, there is reason to worry that America is lurching too far in the opposite direction. The Economics journalist Robert Samuelson recently observed that signs of undue risk adverseness are creeping into the American economy. Among other symptoms, Samuelson cites a 50% decline between 2007 and 2009 in the amount raised by venture capital funds, a reduction in the number of investors in the stock market, and the fact that of all new job hires, approximately half are from temporary hire firms—a clear sign of employers’ hesitations about full-time hires.

Given the severity of the 2008 financial crisis and the associated recession, such trends are understandable. But another element in play is the degree of uncertainty now characterizing the American investment climate.

In everyday speech, the phrases “risk” and “uncertainty” are used interchangeably. But as the Chicago economist Frank Knight demonstrated in his famous 1921 book Risk, Uncertainty, and Profit, they are different phenomena.

In economic terms, Knight explained, risk concerns those probabilities that can be reasonably measured. This is expressed in terms such as “there is a 40% risk that the gold price will collapse this year.”

Measurable risks are thus no deterrent to the making of economic choices. If we take them seriously, they help us to calibrate our economic choices to be consistent with our responsibilities, resources, and opportunities. The same measurements also allow us to distinguish between prudent risk takers and the reckless, and reward them appropriately.

Uncertainty, by contrast, involves those risks that cannot be quantified. It can occur either because of the sheer complexity of a given situation or because the subject matter cannot be reasonably measured. As long as a situation of uncertainty persists, it will deter many people from even considering whether to take economic risks.

A good example of the workings of uncertainty is the American tax system. As one 2010 Wall Street Journal report noted, “The U.S. tax code is slowly being turned into a temporary patchwork of provisions that need to be addressed every year or two, depriving individuals and businesses of the predictability they need for long-range plans.” Everyone knows that the recent extension of Bush tax cuts comes up for review in two years. But approximately 141 tax provisions already require annual renewal. That’s up from fewer than a dozen in the 1990s.

Which of these will be renewed at the end of 2011? Which will not? As the end of 2011 draws closer, taxpayers and investors may be able to quantify the odds of extension or expiration of these tax provisions. For the present, such calculations are extremely difficult, if not impossible. We thus have uncertainty. And uncertainty deters prudent people from investing and entrepreneurship.

But in America’s current economic climate, the degree of uncertainty may well be heightened by the gradual impact upon the economy of another factor: a notable weakening of several conditions that make up vital elements of the rule of law.

Over the last century, economists and legal scholars from different schools of thought have concluded that the rule of law is indispensable for sustained economic development. As Friedrich von Hayek once observed, “There is probably no single factor which has contributed more to the prosperity of the West than the relative certainty of the law which has prevailed here.”

The faltering of the rule of law is usually associated with failed states or emerging dictatorships. Compared to countries such as Mugabe’s Zimbabwe, Chavez’s Venezuela, or the near anarchy of Somalia, the United States exemplifies a country in which the rule of law prevails rather than the “rule of men.”

Yet the rule of law embraces more than the absence of either tyranny or anarchy, and there are several reasons to worry that the rule of law in America is weaker than it ought to be.

There is surprising agreement among scholars writing from a variety of jurisprudential positions concerning the rule of law’s content. In Natural Law and Natural Rights (1980), for example, John Finnis argued that legal systems embody the rule of law to the extent that: (1) their rules are prospective rather than retroactive, and (2) not impossible to comply with; (3) rules are promulgated, (4) clear, and (5) coherent with respect to each other; (6) rules are sufficiently stable to allow people to be guided by their knowledge of the content of the rules; (7) the making of laws applicable to specific situations is guided by rules that are promulgated, clear, stable, and relatively clear; and (8) those charged with the authority to make and administer rules are accountable for their own compliance with the rules, and administer the law consistently. Finnis’ list closely parallels the conditions famously identified by Lon Fuller in his Morality of Law (1964).

Even brief contemplation of these conditions underscores the rule of law’s indispensability for reducing uncertainty. A legal environment in which governments reconfigure the rules governing commerce on an almost daily basis will deter potential investors from making decisions. Similarly, the inconsistent administration of property and contract law will make most people hesitate before risking their capital.

In this light, we begin to see significant erosion of aspects of the rule of law for a number of institutions especially important for America’s economic growth. Once again, a good illustration is the United States Internal Revenue Code.

In February 2010, the Internal Revenue Code consisted of 9,834 sections. Each one is subject to the official interpretations found in the federal tax regulations issued by the Department of the Treasury, many of which are themselves shaped by various court decisions. Then there is the Internal Revenue Bulletin (IRB). This is issued weekly and described by the Internal Revenue Service (IRS) as “the authoritative instrument for the distribution of all forms of official IRS tax guidance.” The IRS cautions, however, that “Rulings and procedures reported in the IRB do not have the force and effect of Treasury tax regulations, but they may be used as precedents.” The precise force of these precedents remains unspecified.

A tax code of this size and complexity which is subject to so many sources of potentially conflicting official and semi-official explanations is bound to embody significant contradictions, and offers considerable scope for arbitrary decision-making. Uncertainty is the result. It’s also valid to claim that the same tax code may well be impossible for large numbers of honest law-abiding citizens to understand and comply with—not to mention difficult for conscientious civil servants to administer justly. As a result, many people may unintentionally violate the law or simply choose to forgo making any number of potentially wealth-creating opportunities for fear of violating the law.

Tax law is complex in most countries. But there are other subtle diminutions of the rule of law that have little to do with complexity but which affect the workings of key American economic institutions. One is the Federal Reserve’s charter. This specifies that the United States central bank is responsible for “conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.”

The difficulty with this dual mandate of avoiding inflation while promoting the highest possible employment level is that it charges the Fed with realizing goals that are sometimes mutually exclusive. In high inflation situations, central banks can only stabilize prices if they are willing to tolerate, even for relatively short periods of time, high unemployment.

From this perspective, the Fed has been given responsibilities that may well be impossible to fulfill in certain conditions, or which effectively require the Fed to ignore one of its two primary legislated responsibilities. In both cases, space is created for the rule of men in the form of the Fed knowingly pursuing policies that, however economically sensible, don’t meet the requirements of the legislation determining the Fed’s objectives. Again, the resulting lack of predictability when it comes to monetary policy will encourage many investors to opt for security rather than even moderately risky entrepreneurial ventures.

Then there are the rule-of-law problems associated with the sheer volume of law that directly shapes American economic life. The 2010 healthcare reform legislation, for instance, amounted to 2,700 pages. Not far behind it in length was the 2010 financial overhaul act: a mere 2,300 pages. More than a few legislators have confessed to never having read either piece of legislation in its entirety. Nor should we assume any great familiarity on their part with the thousands of pages of legislation which these acts superseded, integrated, or reinterpreted. The possibility that many laws governing healthcare and financial services have subsequently been rendered unclear, inconsistent, and impossible to comprehend is high.

Indeed, the amount of legislation affecting these industries is now so great that it is likely that even good judges with no interest in judicial activism are issuing rulings that are ad hoc and arbitrary in nature. Many centuries ago, Thomas Aquinas stressed the need for the rule of law over the rule of men precisely because he considered it desirable and just that, as much as possible, laws would determine in advance what judges decided, thereby reducing the scope for arbitrariness from the bench.

Here we should remember that judicial arbitrariness doesn’t always proceed from the desire to use one’s judicial authority to advance private ideological agendas. Arbitrariness can also occur because of a prevailing incoherence of legal principles, legislation, and precedents, in the midst of which judges often can’t help being arbitrary if they are to make any decisions at all. If there is anything in the legal system certain to discourage long-term investment in a given economy, it is judicial arbitrariness.

It is true that the extent to which the different conditions of the rule of law prevail in any society is usually a matter of degree. Human fallibility alone means that rule of law can only be imperfectly realized, even in those communities that understand its importance for reducing uncertainty and promoting human flourishing.

Imperfection, however, is one thing; decline and erosion are quite another. If America is going to retain its economic place in the world—a preeminence underpinned by its continuing edge in the realms of entrepreneurship, risk-taking, and venture capital—then attention to these troubling rule-of-law issues is indispensable. The rule of law is hard enough to build. Once lost, it may be gone forever.

Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.

Copyright 2011 the Witherspoon Institute. All rights reserved.

One of the attractions of Marx’s thought was the notion that everything, be it politics, religion, or literature, could be explained by the dialectics of history—or, more specifically, the workings of economic history. Among other things, this involved observing changes in the means of production and asking who benefited. As a way of thinking, Marxism dovetailed neatly with the spread of philosophical materialism, positivism, determinism, and social Darwinism throughout nineteenth-century Europe.

There was a half-truth to Marx’s deeply economistic outlook. Economic developments can radically reshape social, political, and cultural life. But Marx was wrong insofar as he underestimated the manner in which particular moral convictions can themselves significantly shape—for better or worse—economic institutions and practices.

Adam Smith’s Wealth of Nations, for instance, did not just reflect Smith’s analysis of particular economic transformations occurring in eighteenth-century Britain. Smith’s articulation of an intellectually powerful case against the mercantilism of his age also flowed from his conviction that mercantilist economic systems were not only profoundly inefficient but also deeply unjust. The injustice lay, in Smith’s view, in the manner in which mercantilist institutions (such as guilds) unduly inhibited the spread of entrepreneurship, investment, capital accumulation, and free trade across the globe. Mercantilism, Smith understood, simultaneously condemned large numbers of people to poverty while legally privileging others whose wealth was at least partly derived from their closeness to political power.

The spread of Smith’s ideas and a belief in the values underpinning them facilitated significant developments in economic life throughout nineteenth-century Britain and Europe, sometimes in surprising places. Between 1815 and 1870, for example, the economies of the then fragmented German states moved away from mercantilist, cameralist, and interventionist arrangements towards deregulation and free trade. The initial impetus for economic liberalization came from government officials in Prussia who had read Wealth of Nations and regarded the growth of economic liberty as one way of spreading freedom more generally throughout the German-speaking world.

There are also modern instances of similar value commitments helping to drive economic change. The market liberalization agendas of the 1980s symbolized by the Thatcher government in Britain and the Reagan Administration in America were propelled by more than economic necessity. They were also underpinned by the discrediting of neo-Keynesian ideas (which themselves embodied a range of normative beliefs) in the 1970s, as well as a widespread desire (especially evident in “Anglo-Saxon” countries) to assert the value of liberty over what were considered excessive concerns for economic equality and security.

The centrality of moral principles to economic life becomes apparent when governments attempt to push the economy in directions at odds with a society’s morals and culture. One prominent example of this was the Obama Administration’s healthcare legislation. The widespread opposition of Americans to Obamacare was a source of puzzlement to most Europeans (including many conservative Europeans) who simply could not understand why anyone would object to the state’s assumption of such a central role in the provision of health care.

Many Americans believed that the healthcare legislation would unreasonably constrict people’s economic choices, incentivize people to take less responsibility for their own lives, facilitate the further bureaucratization of healthcare, and, perhaps most significantly, expand the government’s control of the American economy. No doubt, there was and remains much worry about the economic inefficiencies associated with any government monopoly. Yet a strong value component was central to all of the above-listed concerns. This may also account for the continuing opposition of a steady majority of Americans to Obamacare—an opposition which played a major role in the Democrat Party’s losses in the 2010 mid-term elections.

But while moral beliefs have an important impact upon economic life, the manner in which they are given institutional expression also matters. This is illustrated by the different ways in which people’s responsibilities to those in need—what might be called the good of solidarity—are given political and economic form.

In much of Western Europe, the language of solidarity permeates public discourse to an extent that often surprises Americans. At the same time, it is widely assumed throughout Western Europe that this moral responsibility should be primarily articulated through state action. This helps explain Western Europe’s extensive welfare states. It follows that even minor efforts to reform social welfare programs or reduce the welfare state’s size are often regarded by many Europeans as a heartless assault on the value of solidarity.

Thus the rather modest welfare and labor-market reforms presently being implemented in Spain, Greece and France have sparked considerable moral indignation (and not just from welfare recipients) despite widespread acknowledgment that such reforms are inevitable. Obviously there are many whose negative reaction is partly driven by consciousness that such reforms mean that the days of not-very-demanding jobs for life may be numbered. Nevertheless it’s also true that many Western Europeans genuinely believe the good of solidarity is threatened by efforts to move beyond the present and economically unsustainable status quo, precisely because of the state-oriented institutional expression given by Europeans to the surely uncontroversial proposition that we are our brother’s keeper.

While Americans are often regarded as more individualistic than Western Europeans, this perception is partly driven by the different economic and institutional expressions that Americans have often given to the idea of concern for neighbor. This was among one of the distinguishing features of America that struck the French social philosopher Alexis de Tocqueville when he visited the United States between 1831 and 1832. The emergence of social and economic problems, Tocqueville noted, did not elicit demands from Americans for the government to “just do something.” Indeed, Tocqueville marveled at the relative absence of government from American life and the corresponding vitality of civil society, especially when compared to the state’s all-pervasive presence in his native France.

Tocqueville quickly realized, however, that this “absence” of the state was not symptomatic of a callous disregard by Americans towards their fellow citizens in need. Though Americans tended, Tocqueville noted, to dress up their assistance to others in the language of enlightened self-interest, he observed that Americans usually expressed the value of helping those in need through the habits and institutions of free and voluntary association. In short, Tocqueville wrote, Americans banded together to try and resolve social and economic problems through voluntary associations. Some of these associations (like churches) had a more-or-less permanent presence in American society. Others lasted only as long as a particular economic or social problem persisted. As a consequence, the same pressures for centralized top-down government-led solutions and all their economic implications that prevailed in France were not present in the young American republic.

If the foregoing analysis is substantially correct, then the implications for successful economic reform are twofold. First, reform efforts cannot consist simply of policy adjustments. They also need to be associated with arguments about the ways in which proposed changes express and institutionalize a range of moral axioms. The reluctance of European political leaders such as President Sarkozy of France and Prime Minister Zapatero of Spain to explain their welfare changes in value terms means they are reduced to articulating technical arguments which, as valid as they are, simply do not resonate with large numbers of Western Europeans.

The second challenge is for policy-makers and the citizenry as a whole to understand that particular values are better actualized in certain economic and political settings than others. Seeking to realize the principle of solidarity primarily through the welfare state and heavy labor market regulation, for instance, has contributed to a tendency to think that our obligations to those in need are exhausted by paying the taxes that fund welfare programs. It has also facilitated a breakdown in what might be called intergenerational solidarity throughout much of Europe. The desire to guarantee employment security, for example, is one of the main causes of the catastrophic levels of youth unemployment in countries like Greece, Spain, and France.

In the last sentence of the last chapter of his General Theory of Employment, Interest and Money, John Maynard Keynes made the observation that “it is ideas, not vested interests, which are dangerous for good or evil.” The context of his concluding thought was Keynes’ effort to explain some of the normative concerns underlying his attempt to revolutionize economics as a social science. However one regards Keynes’ policy prescriptions, he certainly understood that it is at our own peril that we downplay the nexus between moral convictions, the institutions in which they are realized, and our economic cultures. Contemporary governments, policy-makers, and citizens would do well to remember this.


Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.

Copyright 2010 the Witherspoon Institute. All rights reserved.

But one of the Great Recession’s unexpected benefits is the manner in which it has reignited a range of economic debates that have needed attention for some time. One is a widespread questioning of the methods and priorities of mainstream economic science. Another discussion concerns the conduct of monetary policy. The decisions of the Federal Reserve and the European Central Bank, for instance, are now subject to micro-scrutiny by not only governments and the financial industry but also by increasing numbers of skeptics with serious reservations about the very manner in which modern central banks operate. Closely related to this are questions about the long-term viability of fiat money: the means of exchange that has dominated the world since the end of the gold standard.

As the Latin word fiat (“let it be done”) suggests, fiat money is a state-issued means of exchange which a government simply declares to be anything which, when presented as payment, extinguishes a debt owed to another. More specifically, as John Maynard Keynes stated in his Treatise on Money (1930), fiat money is “created and issued by the State, but is not convertible by law into anything other than itself, and has no fixed value in terms of an objective standard.” In short, it has no intrinsic value in itself inasmuch as fiat money is not representative of a fixed and known amount of a commodity such as gold or silver. Instead fiat money is ultimately backed, as the U.S. Treasury states, “by all the goods and services in the economy” as well as a confidence that the issuing government can ultimately pay its debts.

Here we should note that fiat money’s viability relies heavily upon the concept of legal tender. This expresses the legal obligation of individuals to accept payment of debt in terms of the currency issued by the state. Indeed, the ideas of legal tender and fiat money are inseparable inasmuch as legal tender provides fiat money with the legal force it needs if it is to be mandated as the means of extinguishing debt in a given jurisdiction.

Contemporary fiat money represents the end of a long process of development whereby governments have used their power of legal tender to use money to pursue various policy goals. Prior to the introduction of paper money, governments were more than willing to debase gold and silver coinage to artificially reduce their debts. Adam Smith pointed out in his Wealth of Nations (1776) that “when national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid.” Smith then added that “the liberation of the public revenue, if it has ever been brought about all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment.”

Smith was thinking of circumstances in which governments shirked their debts by debasing the currency, thereby evading formal bankruptcy while legally diminishing what they owed their creditors in real terms. The introduction of paper money made this process even easier, if only because printing more paper was less complicated than diluting the amount of gold or silver mixed into a given coin. As the economic historian Norbert Olszak writes in his Histoire des banques centrales (1998), the Bank of England’s first banknotes were described as “certificates of deposit.” They attested to the holder’s claim on a deposit of gold or silver held by the bank. By the mid-eighteenth century, however, the same documents were being formally described as “promissory notes.” The change in wording was deliberate: the purpose was to diminish in peoples’ minds and in the eyes of the law the strict link between the commodities and the paper that was supposed to redeem them.

For part of the nineteenth century and early twentieth century, the linkage of national currencies to the gold standard meant that the value of currencies as well as the amount of currency in circulation was somewhat stabilized by the fact that the paper monies issued by central banks such as the Bank of England were convertible into a fixed amount of gold. But after most countries left the gold standard in 1914 in order to fund unprecedented war expenditures, the prospect of fiat money became more real, despite the attempts of many politicians and economists to reestablish some link between gold and currencies in the inter-war years. Following World War II, the Bretton Woods agreements resulted in many nations setting their exchange rates relative to the American dollar, on the basis that the United States (which then held over half the world’s gold) would peg the dollar’s price to 1/35^th of a troy ounce of gold. The idea was that all currencies pegged to the U.S. dollar would therefore indirectly enjoy a fixed gold value. The tendency, however, of successive post-war American governments to issue more dollars than their holdings in gold could back in order to fund programs such as Lyndon Johnson’s Great Society, the Korean and Vietnam wars, and containment of an expansionist Soviet Union eventually made the system untenable and fiat money a reality in 1971.

This brief excursion into economic history hints at some of the deeper economic—not to mention moral—problems associated with fiat money. One is, as noted, the greater ease with which it permits governments to devalue currencies, thereby reducing the wealth of those with assets denominated in that currency. This surely constitutes an injustice to those individuals and businesses that have saved and behaved in a fiscally responsible manner while simultaneously letting the fiscally imprudent off the proverbial hook.

This underscores the second problem associated with fiat money: its facilitation of systemic moral hazard throughout entire economies. Moral hazard describes those situations whereby people are encouraged to take excessive risks because of the implied assurance that someone (usually the state) will bail them out if the enterprise or investment fails. From this standpoint, fiat money’s very existence arguably encourages the development of moral hazard throughout every sector of the economy. The high level of the U.S. federal government’s public deficit, for example, is at least partly premised on the unspoken supposition that the Fed (which is, after all, a government institution that operates within legal parameters set by Congress and whose members are nominated by the President) can simply print more money in paper or electronic form if creditors become worried that the U.S. government’s borrowings cannot be covered by anticipated taxation revenues, foreign borrowings, and its existing resources. This in turn encourages more people and governments to buy U.S. government debt in the form of bonds, which permits more deficit-spending, thereby encouraging a cycle of ever-spiraling public debt.

Thus, prior to the delinking of the American dollar from gold in 1971, the money supply between 1960 and 1970 grew by 47%, while the public debt grew by approximately 34%. In the decade after the dollar’s delinking from gold, however, a rapid acceleration occurred with the money supply growing by approximately 87% while the public debt increased by almost 139%. Between 1980 and 2005, the pace further accelerated at the respective ratios of 254% and 753%. The absence of some form of “golden brake” (even the pseudo-gold standard that existed between 1946 and 1971) is surely part of the reason for the accelerating increase in public debt.

A third and related problem of fiat money concerns the way that it encourages the illusion that governments and central banks can somehow “manage” multi-trillion dollar economies. The international obligations accepted by all countries adhering to the gold standard (even in its debased post-World War I forms) placed some limits on governments’ capacity to use their legal tender powers to pursue any number of macroeconomic objectives. With fiat money, however, any such restrictions are removed. Instead government and central bank officials can increase or decrease the money supply as they see fit in response to any number of economic phenomena. Sometimes it works (as in the case of Paul Volcker’s successful fight against inflation in the late-1970s and early-1980s), but it also often fails. A good example of this is the Fed’s easy money policies which sought to ease the effects of the dot-com bubble’s implosion in 2000, but which also played a major role in inflating America’s housing market between 2001 and 2007. In other words, the state’s efforts to manage fiat money means that monetary policy is far more dependent on the decisions of fallible human beings who cannot possibly know all the consequences of their choices, rather than the functioning of the rules of something like the gold standard, which, for all its imperfections, provided more predictability about the economy’s likely direction.

As a formal monetary institution, the contemporary system of fiat money is just thirty-nine years old. We are thus only at the beginning of this experiment. If, however, America and Europe’s economic tribulations continue to worsen and an endless cycle of devaluations, deficits and debts ensues, then the case for fiat money will become harder to sustain. That is what makes the articulation of alternatives to our present status quo even more urgent.


Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.

Copyright 2010 the Witherspoon Institute. All rights reserved.

It is important to remember that monetary policy reflects the state’s choice to prioritize one set of economic possibilities (e.g., long-term monetary stability) over other options (e.g., the government’s ability to use its money-supply monopoly to bolster employment during recessions). These trade-offs, however, don’t just involve technical economic arguments. They also come down to questions of principle.

The case, for example, for fiat money managed by modern central banks is linked to the conviction that the state’s control of the money-supply should be used to realize particular goals. This helps to explain why part of the Federal Reserve’s charter includes the objective of “maximum employ­ment.” The underlying principle is that economic justice requires the state to go beyond maintaining the rule of law, promoting monetary stability, enforcing contracts, protecting private property, and preserving minimal safety nets.

What, then, are the principles underlying the gold standard? To grasp these, we should recall how the classical gold standard worked in its heyday between 1870 and 1914. During this period, the gold standard gradually linked the different currencies of major trading powers such as Germany, America, Britain and France insofar as all notes and coins of countries adhering to the gold standard were underwritten by and redeemable in specific weights of gold.

The effects were twofold. First, the gold standard facilitated an unprecedented stabilization of prices. Thus, as noted by Lewis E. Lehrman and John D. Mueller, “between 1879 to 1914, average annual CPI inflation [in America] was 0.2 percent, with average annual volatility (up or down) of only 2.2 percent. No other standard comes close in combining low average inflation with low volatility.” A second effect was that each unit of the currency circulating in a country could be equally used for payments in other countries. A common and stable universal currency was therefore created without any need for an international monetary authority.

Apart from generating monetary stability, the gold standard also automatically adjusted balance-of-payment deficits. If a country overextended itself by importing more than it exported, gold left the deficit country to cover the imbalance of payments against nations with surpluses. The money supply in the deficit country subsequently fell, thus reducing demand and providing a brake against inflation. The fall in demand also forced deficit countries to become more competitive. In surplus countries, the gold imports increased the money supply, augmented demand, reduced competitiveness, and thus gradually diminished the original causes of the gold inflows.

Central banks played a critical role in this process. Indeed the entire system relied on close cooperation between the world’s central banks. In surplus countries, the gold standard required central banks to lower the discount interest rate charged to members of the domestic money system in order to reduce the gold inflow. This resulted in gold flowing back to deficit countries. Conversely, central banks in deficit countries would raise the discount interest rate, thereby reducing demand, and averting potential inflation.

Consequently, under the pre-1914 gold standard, modern China could not have built up and maintained its presently large currency reserves. Similarly, neither the Bush nor Obama Administrations would have been able to run huge deficits. Nor would it have been as easy for American consumers to acquire such irresponsibly high personal debt levels.

There were several economic advantages to the gold standard. For one thing, its workings were driven by known rules. Monetary decisions by central banks could therefore be foreseen to a certain extent and were thus more predictable. One downside to the gold standard was the slowness with which the gold supply adjusted to real changes in demand. This impaired gold’s ability to function as a regulating mechanism. Ironically, however, it was soon realized that the gold standard’s regulating effects could be accelerated by measures that removed impediments to the ability of economies to adjust quickly to change. The gold standard therefore created incentives for trade liberalization, competition, and entrepreneurship.

A number of principled considerations were, however, also operative. The gold standard placed a high premium on economic security by reducing the uncertainty and risk that flows from fluctuations in the value of money that have nothing to do with the relative valuation of different goods and services. Constant oscillations in the value of currencies undermine our ability to discern what we find marginally preferable to what is marginally inferior.

Another commitment at stake was the conviction that stable money meant greater economic prosperity for increasing numbers of people. Greater monetary certainty spurred productivity and investment, not least because many long-term contracts benefited from a confidence that prices would remain relatively constant over time. Then there were the ways in which the gold standard bolstered the economic well-being of particular marginalized groups. Monetary stability helps, for example, those who lack the financial sophistication to navigate the shoals of inflation, or who are on fixed incomes (e.g., the elderly and disabled).

At the same time the gold standard also encouraged governments to promote the common good instead of narrow sectional interests. Within nation-states, for instance, the gold standard diminished opportunities for the state to manipulate monetary policy in order to favor those with an interest in inflationist policies.

Likewise, the gold standard also generated a commitment on the part of governments to promoting the international common good. As the German economist Wilhelm Röpke once wrote, the gold standard relied upon the unwritten agreement of central banks and governments “to behave in matters of monetary and credit policy in such a way that this fixed and free coupling remained an undisputed permanent institution, irrespective of trade fluctuations.” This required central banks and governments to prioritize the global economy’s long-terms needs over the short-term exigencies of national economies. It also entailed a willingness to resist popular pressures to revert to a type of monetary nationalism in the face of the fluctuations in employment and growth sometimes generated by the gold standard’s adjustment mechanisms.

We should wonder, though, whether the gold standard demanded too much from governments. As the economist and financial historian Michael D. Bordo pointed out in 1981, most countries on the classical gold standard did not follow the rules of the game. During economic downturns, governments were sorely tempted to escape those strictures of the gold standard that facilitated the process of downward correction that adjusted general living standards to the reality of a lower level of economic well-being. Even before 1914, governments knew that abandoning the gold standard would allow an expansion of credit and public spending not possible under the pre-1914 gold standard.

This situation was exacerbated by two factors. First, in the conditions of democracy, monetary authorities became more susceptible to popular pressures to use monetary policy to provide short-term fixes to immediate economic problems. Second, the rise of neo-Keynesian economic theories encouraged politicians and central bankers to adopt monetary policies and interventionist strategies that routinely violated the gold standard’s disciplinary boundaries. In his Tract on Monetary Reform (1923), Keynes demanded that Britain abandon the gold standard because, in his view, it required countries to pursue deflationary policies just when expansionary measures were needed to combat rising unemployment. On these grounds, Keynes dismissed the gold standard as a “barbarous relic.” Underlying Keynes’ argument was a political concern: that liberal democracies might falter under the impact of mass unemployment. Others, however, such as the distinguished French economist Jacques Rueff disagreed. Against Keynes, Rueff insisted that unless the gold standard was allowed to work its anti-inflationary magic, many people would turn to demagogues to save the social order from inflation’s destructive effects.

Is a restoration of something like the pre-1914 gold standard possible? The domestic opposition from those with vested interests in inflationist and interventionist policies would be formidable. Even if that was overcome, the gold standard’s reinstatement on an international level would require a nucleus of countries to agree to adhere to it—something which happened rather spontaneously in the nineteenth century through a series of unilateral decisions by individual countries. Once this had occurred, adherents of a re-established international gold standard would have to insist upon all members maintaining maximum monetary discipline as well as freedom and stability in foreign exchange markets. Countries unwilling to adhere to these rules could not be admitted to the club.

There is of course no such thing as a perfect monetary system. All involve trade-offs. Each has its disadvantages. Nor is something like the pre-1914 gold standard the only alternative to the present fiat money system. Today most politicians, central bankers, and economists regard the gold standard as neither desirable nor possible.

What cannot, however, be denied is that the case for the gold standard goes beyond efficiency arguments. It embodies an emphasis on limiting arbitrary state action, promotes the longer-term economic well-being of less powerful groups, encourages prudence and a concern for lasting stability over urges “to just do something” (however ineffective or counterproductive), and generates a concern for the national and international common good over more narrow sectional interests.

Such principles and commitments should surely be demanded of any monetary system.

Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.

Copyright 2010 the Witherspoon Institute. All rights reserved.

In doing so, these governments are finally acknowledging a truth initially obscured by the crisis of the euro: that for all the disarray generated by the euro’s recent tribulations, Europe’s economic woes have more systematic causes.

One cause is several decades of low economic growth. As the Czech president Václav Klaus recently observed, “average annual economic growth in the eurozone countries was 3.4 percent in the 1970s, 2.4 percent in the 1980s, 2.2 percent in the 1990s and only 1.1 percent from 2001 to 2009.” “A similar slowdown,” Klaus added, “has not occurred anywhere else in the world.”

A second problem is Europe’s profound demographic decline. On current projections, for example, Spain’s over-65 population is set to increase from its present level of 17 percent to 25 percent by 2030. That means fewer people working to support growing numbers of pensioners.

When low economic growth and declining demography are combined with European welfare states—generous state-provided health and unemployment insurance; early retirement and liberal state pensions; large public sector employment; legislation that emphasizes job security over labor market flexibility—something eventually has to give. Greece has reached that point. The rest of Europe is struggling to avoid following Greece into the abyss.

Even so, many European governments are proceeding down the reform path with barely disguised reluctance. In France, for example, President Sarkozy’s government wants to raise the official retirement age from 60 to 62. That will not strike many as a radical reform. By contrast, Spain’s Prime Minister Zapatero is already cutting pensions, civil servants’ wages, and social programs. He has also promised labor market reform, something the IMF has identified as desperately needed in Spain. Yet, as the Economist correctly notes, Zapatero “shows no willingness to force reforms past the unions. He will do what he has to do, but always the minimum and without enthusiasm.”

No doubt, this reflects a disinclination of many European politicians—on the left and right—to concede that the post-war European effort to use the state to provide as much economic security as possible has encountered an immovable obstacle in the form of economic reality. Yet it is arguable—albeit highly politically incorrect to suggest—that it also reflects the workings of a potentially deadly nexus between democracy (or a certain culture of democracy) and the welfare state.

One justification for democracy is that it provides us with ways of aligning government policies with the citizenry’s requirements and of holding governments accountable when their decisions do not accord with the majority’s wishes. But what happens when some citizens begin viewing these mechanisms as a means for encouraging elected officials to use the state to provide them with whatever they want, such as apparently limitless economic security? And what happens when many elected officials believe it is their responsibility to provide the demanded security, or, more cynically, regard welfare programs as a useful tool to create constituencies that can be relied upon to vote for them?

The end result should surprise no one: a spiral of expanding welfare that neither politicians nor the expanding number of welfare beneficiaries have any real desire to stop until things become so unmanageable that there is no alternative.

The problem, as Alexis de Tocqueville noted in Democracy in America, is that public opinion, especially what he called “common opinion,” is “the dominant power” in democracies. The contemporary French philosopher Pierre Manent goes even further to claim that in democracies “it is not dogma that comprises shared opinion; it is shared opinion that is dogma.” It follows that if enough people want expansive welfare programs in a democracy, the capacity for politicians to oppose, for example, the desire of 51 percent of the population to progressively loot the other 49 percent, is limited. To resist is to court electoral rejection or, as we have seen, rioters running amok in the streets of Athens.

A number of twentieth-century scholars have sought to address this problem of democracy and ever-expanding state welfare. In the third volume of his book Law, Legislation and Liberty (1979), for example, the Nobel Prize-winning economist Friedrich von Hayek outlined a series of constitutional rules that he thought might limit the democratic state’s tendency to drift in this direction. Several decades earlier, German market-orientated economists such as Walter Eucken, Franz Böhm, and Wilhelm Röpke elaborated a whole system of constitutional principles they believed would render democratic states strong enough to resist capture by interest groups, but also limited enough to prevent governments from expanding their economic powers beyond a number of core functions.

But if the twentieth century has taught us anything, it is that even the most robust of constitutional arrangements have not been able to achieve such ends in democracies that lack politicians and citizens who grasp the essential wrongness of using the state to support themselves at the perpetual expense of others. Moreover, implementing such policies does not even require solid majority support from the population. In most democracies, people can only gain political power by cobbling together large enough coalitions of support based on a range of often incompatible promises made to sometimes very different interest groups. After being elected, democratic governments are under enormous pressure to use their political power to favor their various supporters if they want to avoid having their erstwhile followers turn against them.

The bartering of privileges and grants to different groups is thus almost inevitable in a democracy if a government wants to retain its coalition of support. In these circumstances, expanding the welfare state to reward particular adherents is a difficult temptation to resist. As Röpke commented: “To expand the welfare state is not only easy but it is also one of the surest means for the demagogue to win votes and political influence, and it is for all of us the most ordinary temptation to gain, at no cost to ourselves, a reputation for generosity and kindness.”

Likewise, democratic governments attempting to reduce the welfare state run the risk of alienating particular groups within their supporting coalition. This may be enough to ensure a government’s defeat at the next election. This is precisely what happened to Gerhard Schröder’s Social-Democrat-Green government in Germany after it implemented welfare reforms between 2003 and 2005. Not surprisingly many governments opt instead to retain the status quo, despite often being aware of the long-term economic consequences. Unfortunately for Europe, that status quo is no longer fiscally sustainable.

Does this mean that shrinking the welfare state requires a diminishment of democracy? The answer is no. Most authoritarian regimes ranging from Hitler’s Germany to Chavez’s Venezuela have proved more than willing to use generous welfare schemes to mollify large segments of the population. In other words, it is not as if democracy is unique in being coupled with welfare states, and so the cure need not lie in reducing democratic norms or institutions.

The beginning of a proper response is to recognize that a democracy’s ability to resist the long slouch towards the soft despotism of the welfare state requires two things. The first is to shift the incentives for economic mobility and security so that they lie in the private sector rather than in becoming a recipient of state largesse. This task is very difficult when much of the population already enjoys some measure of state income. Yet it is dwarfed by the immensity of the second challenge: developing a moral and political culture which underscores the undesirability of politicians and citizens using the state to live at others’ expense.

If opinion polls are correct, it may well be that, culturally speaking, it is too late for much of Europe. The modern European welfare state goes back to the late nineteenth century when Otto von Bismarck, Imperial Germany’s ruthless “Iron Chancellor,” introduced state social insurance in an undisguised attempt to placate the growing German industrial working class and the ever-increasing number of Social Democrats they elected to the German legislature. Far too many Europeans now simply assume a munificent welfare state as part of the economic landscape. Indeed the increasing number of older West Europeans today has no incentive to change. Their attitude might be described as “Après moi, le déluge.”

America, however, is a different story. The sheer intensity of resistance to the Obama Administration’s healthcare legislation was about many things. But it surely reflected the fact that millions of Americans are simply unwilling to go the way of Western Europe. Successful long-term resistance, however, is going to depend upon Americans understanding that the link between democracy and the welfare state has to be broken, and that the only way to achieve this objective over the long term is through recommitting the United States to some of the very best aspirations of its Founding—a love of liberty, an embrace of the virtues needed to sustain freedom, and an unwillingness to delegate to the state the responsibilities that free men and women owe each other.


Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, the prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.

Copyright 2010 the Witherspoon Institute. All rights reserved.

In one of his last collections of essays, Le Péché Monétaire de l’Occident (1971), Rueff sharply criticized Western governments’ apparent inability to put their currencies in order. The root causes of the inaction, in Rueff’s view, did not lie in prudential disagreements about the technicalities of securing monetary stability. Instead the “sin” lay in the constant manipulation of monetary policy by politicians pursuing short-term and, in many instances, self-interested goals, while simultaneously claiming to be deeply concerned about monetary stability.

Rueff knew what he was talking about. In 1958, Rueff engaged in a more or less singlehanded and ultimately successful struggle against the French political establishment to balance France’s budget and secure the franc’s convertibility. This followed the French economy’s near collapse after years of dirigiste policies and lost colonial wars in Vietnam and Algeria. Successful reform, Rueff stressed, involved being absolutely honest about the policy changes needed and their associated costs. Fortunately, Rueff was able to persuade the one man who mattered—France’s new head of government, General Charles de Gaulle—that the achievement of monetary stability was worth the pain of austerity in the form of dramatic social security cuts, drastic reductions in government subsidies to industry, and the dismantling of trade barriers.

Contemporary Europe could well use far-sighted monetary economists such as Rueff when it comes to addressing some of its present economic problems. Sound monetary policy could not, Rueff understood, be premised on falsehoods. Yet this is precisely the sin presently wreaking such havoc in the euro system today.

Since euro coins and banknotes entered circulation on January 1, 2002, many benefits have flowed from their adoption by many EU member states. The euro has helped them integrate their financial markets, facilitated price transparency across national boundaries, and reduced exchange-rate risks and the costs of currency conversions. The associated creation of the European Central Bank in 1998 with a clear mandate for fighting inflation has aided nations with long histories of monetary instability—such as Italy, Greece, Spain, and Portugal—in escaping the inflation spirals to which they were once susceptible.

But from the euro’s very beginning, it was tarnished by a high degree of fudging of public finances by EU member states anxious to be admitted to the currency. Member states seeking admission were required to have a budget deficit level of less than 3 percent of GDP and a debt ratio of less than 60 percent of GDP. To meet this requirement, some governments employed what might be generously described as “creative accounting” or simply misrepresented their fiscal position. In 2004, Greece’s then-finance minister George Alogoskoufis confessed, “It has been proven that Greece’s budget deficit never fell below 3 percent since 1999.” In the end, most applicant countries were admitted to the euro despite having debt levels exceeding 60 percent. Italy and Belgium, for example, were permitted entry despite having debt ratios of over 120 percent.

Over the long term, the European Stability and Growth Pact (SGP) was supposed to maintain fiscal responsibility in the euro zone by limiting government budget deficits to 3 percent of GDP and their debt to 60 percent. These provisions were, however, quickly violated by countries such as Italy and Portugal but also, ironically, by those nations (Germany and France) who had lobbied the hardest for rigid adherence to these thresholds. The European Commission continues to act as if violation of the SGP is a serious matter. But as Alberto Alesina and Francesco Giavazzi wrote in their book, The Future of Europe (2006), today “the large countries in Europe can do just about anything they please with deficits.”

The effects of this mishmash of untruths, fiscal fudges, misrepresentations and the refusal of sovereign states to be bound by their freely undertaken international obligations are only likely to be magnified by Europe’s present financial and economic problems. This is especially true when it comes to the European Central Bank, its independence, and its role of maintaining the euro’s stability.

Ever since its foundation in 1998, the ECB has been a whipping boy for European politicians from the left and right who argue that the ECB’s legally mandated priority of maintaining price stability has kept productivity and economic growth rates in the EU far below those of America. In reality, these problems have little to do with monetary policy and everything to do with low rates of entrepreneurship, unsustainable levels of welfare expenditure, an aversion to competition, high rates of public sector employment, and structural rigidities associated with some of the world’s most inflexible labor markets. Indeed, it is probable that the ECB’s avoidance of the low interest-rate policies adopted by the Federal Reserve in the 2000s may have made the 2008 recession in Europe more bearable than it might otherwise have been.

Against considerable political pressures, the ECB has hitherto doggedly defended its independence. All that, however, changed when the European Union decided to set up its 750-billion-euro bailout fund in early May 2010 to stabilize financial markets and rescue not only the holders of Greek government debt, but also, implicitly, the holders of any EU government debts that seemed shaky.

One of the more obvious difficulties associated with this package is that it further deepens the moral hazard problem that governments in Europe and America have at best paid lip service to over the past two years. In the long term, protecting governments from the consequences of their failed economic policies by socializing their losses is unlikely to deter the same governments from fiscal irresponsibility in the future. And while the rescue package might give some breathing space to countries such as Greece, it may also result in their governments putting off the harsher but essential elements of the austerity measures they need to take to reduce their sovereign debts.

But the more serious and longer-term damage of the package has been to the independence of the European Central Bank. As the economist John Taylor astutely pointed out in a recent Financial Times article (May 11, 2010), part of the deal involves the ECB buying “the debt of the countries with troublesome debt burdens, just days after it said it would not engage in such purchases.” Clearly the ECB was pressured by EU governments to follow a line similar to that adopted by the Federal Reserve over the past two years.

At present, the ECB is not engaging in “quantitative easing”—i.e., printing money—to fund these purchases. But it is difficult to imagine that the ECB will be able to continue to buy such debt over the long term without engaging in what some European government leaders now call “money creation” (yet another euphemism for printing money). That’s why the ECB’s decision to buy the government debt of some weaker economies amounts to a stunning volte face on the part of a central bank famed for its tough anti-inflation stance. The shock was such that it provoked a rare public criticism of the ECB’s decision by Germany’s central bank president, Axel Weber, in Börsen-Zeitung, a German financial newspaper.

As a result of these decisions, the ECB now has a serious credibility problem. No doubt, the ECB and some European politicians will insist that it remains as independent as ever. This, however, is surely one of those instances of promoting a falsehood about the economy that Jacques Rueff warned against. For the truth is that the ECB’s independence has been compromised. Hence we have every reason to expect those European politicians who have argued for precisely such a diminution of the ECB’s autonomy to view this as a precedent for further compromises.

Even more seriously, there is a question as to whether the ECB’s recent actions are compatible with its legally mandated priorities and responsibilities. No doubt the ECB will argue that its particular role in the implementation of the EU’s very own TARP for bankrupt governments is in the interests of long-term monetary stability.

This, however, would constitute yet another misrepresentation. The more the ECB involves itself directly in supporting European governments’ fiscal policies, the less independent it will be in appearance and practice, and the less it will be able to resist exhortations to adjust monetary policy to fit goals dictated in part by the short-term horizons of elected officials. As the Economist (May 11, 2010) recently stated, “The central bank’s credibility relies in part on a reputation for living up to its pledges and partly on its disdain for political expediency. On both counts, then, [the ECB] has lost something.”

Like politics, economic policy is a messy affair. This is especially true in mass democracies like those of Western Europe, in which permanent economic security is now regarded as a God-given right. Inevitably, there will be compromises. But this is all the more reason for those formulating EU monetary policy to resist being economical with the truth or claiming they are not doing something that everyone knows they are doing.

In his most important book, L’Ordre Social (1945), one of Jacques Rueff’s last exhortations to his readers was: “Be liberal, be socialist, but do not be liars.” It’s advice that Europeans directing monetary policy would be wise to listen to today.


Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.

Copyright 2010 the Witherspoon Institute. All rights reserved.

Writing in the fourth century B.C., the Greek philosopher Diogenes described money as the legislators’ game of dice. Almost 2000 years later, the scholastic theologian Juan de Mariana wrote an entire treatise, De monetae mutatione (1609), assailing governments for depreciating currencies in pursuit of dubious ends. For his pains, Mariana was charged with treason and sentenced to life imprisonment in a Franciscan monastery. 152 years after Mariana’s death, Adam Smith lamented in his Wealth of Nations (1776) that “in every country in the world . . . the avarice and injustice of princes and sovereign states abusing the confidence of their subjects, have by degrees diminished the real quality of the metal, which had been originally contained in their coins”.

These observations are not mere historical asides. They reflect an on-going problem with governments’ management of the supply of money. Sometimes this has devastating consequences. Few today, for example, would question the contributions of flawed monetary policy to the Great Depression. Many remember the debilitating stagflation of the 1970s that owed much to the neo-Keynesian monetary policies pursued by governments after World War II. Today scholars such as the historian of the Federal Reserve Allan Meltzer suggest that the Federal Reserve’s present strategy for preventing future inflation is seriously flawed and setting us up for significant problems in the future.

It is not as if alternatives have not been considered. The now-common model of relative central bank independence arose partly from a desire to dilute the ability of politicians with short-term horizons to influence monetary policy. Likewise, one of the chief attractions of the gold standard which functioned in increasingly diluted forms until President Nixon terminated the dollar’s direct convertibility into gold in 1971 was its ability to constrain governments’ ability to succumb to demands for cheap money.

Along these lines, suggestions have been made to remove government from the business of money-supply altogether. In his well-known monograph The Denationalization of Money (1976), the Nobel Prize economist Friedrich von Hayek sketched a powerful economic argument for ending the state’s monopoly of the money supply. This has been developed by economists such as Jesús Huerta de Soto, whose Money, Bank Credit, and Economic Cycles (1998) contains a comprehensive plan for privatizing the money supply.

The technical details of these and other measures for checking governments’ ability to manipulate the money supply for nefarious purposes continue to be debated. A separate question, however, is whether there is a principled reason for governments—either directly or through central banks—to monopolize the money supply. The fact that governments sometimes perform their designated functions ineffectively or even occasionally abuse them is not in itself a reason to strip the state of a given responsibility.

One reason traditionally given for the state’s monopoly of the money supply is that it is an expression of national sovereignty. While sovereignty’s meaning is endlessly debated, there is considerable agreement that sovereignty expresses a given government’s supreme authority over a given territory. In the mid-fifth-century B.C., for example, Athens compelled her allies to adopt Athenian coinage—a move that signaled Athens’ expanding sense of the territorial boundaries of its sovereignty. The scholar who most developed the concept of sovereignty in the modern era, Jean Bodin (1530-1596), identified the right to issue coinage as a key element of sovereignty. In our time, some of the most contentious debates surrounding the euro have concerned its diminution of the national sovereignty of EU member-states adopting this transnational currency.

But is a state monopoly of the money supply truly essential to sovereignty? When Smith listed the “only three duties [which] according to the system of natural liberty, the sovereign has to attend to,” he did not include the supply of money. It was not until 1914 that the United States legislated to mandate that only one bank would be privileged by the government to issue legal tender.

Some clarification of the issues involved begins to emerge when we consider the purpose of money. Money’s most basic function is to serve as a medium of exchange. From this is derived money’s three other functions: a store of value, a unit of account, and a standard of deferred payment.

It is not immediately clear why any of these functions necessitate a state monopoly of money. Money is certainly a commodity unlike any other economic good. But there is no obvious reason why attempts to undermine money’s ability to perform these functions could not be addressed through the ways we address most other economic crimes. As noted by the distinguished nineteenth-century English jurist and civil servant Lord Farrer, contract law, tort law, and criminal law are more than sufficient to adjudicate such matters without invoking any special law of legal tender.

A different understanding of money, however, is often used to justify the state’s monopoly of the money-supply. This is the idea that, besides the aforementioned functions, money is also a tool for the state’s management of an economy. This occurs through methods such as setting official interest rates or what today is euphemistically called “quantitative easing” (i.e., printing money). None of these techniques for regulating the amount of money in circulation would exist if governments did not enjoy a monopoly of the money supply.

This is further predicated upon the (much disputed) claim that the state can effectively steer an economy so that it serves the common good. The link to sovereignty is the state’s need to invoke a unique authority that allows it to claim responsibility for managing economic activity within a defined set of territorial boundaries.

The problem is that there are many occasions when the state’s regulation of the money supply involves the pursuit of goals that undermine money’s ability to perform its other economic functions. The state’s inflation, for example, of the money supply to reduce public deficits or finance a war economy can undermine money’s ability to serve as a stable unit of value over long periods of time. Prominent modern examples include Germany after each world war or France during its Indo-China and Algerian wars.

Is there any way to resolve this tension between what might be called the “state-centered” and “market-orientated” views of money’s functions? The irony is that concerns about sovereignty are diminishing quickly among “centralizers,” just as they have long disappeared among “privatizers.”

In 2009, for example, a UN panel of experts on restructuring the global financial and economic system chaired by another Nobel economist Joseph Stiglitz proposed the creation of a global reserve currency. This implies all nation-states ceding some of their sovereignty to an international organization, much as many EU members have done to the European Central Bank. Indeed the panel recommended giving responsibility for managing such a currency either to the IMF or to a newly created “Global Reserve Bank.”

In one sense, the centralizers are pushing at an open door. Economic globalization has already diluted national governments’ ability to use their control of the money supply to “manage” domestic economies. Fluctuating exchange rates and the ability of traders to transfer billions across national boundaries by pressing a keyboard have also reduced most governments’ ability to control their national currencies. In short, sovereignty is becoming a moot point.

The difficulty for centralizers such as Stiglitz is how they address the fact that the record of a Global Reserve Bank’s management of monetary policy for the world economy is likely to be as undistinguished as the record of most national central banks in directing monetary policy for national economies. No matter how sophisticated the statistical information and mathematical resources at their disposal, it is simply impossible for any group of central bankers to know, for example, what is the optimal interest-rate for the world in the present, let alone nine months into the future. Mistakes, sometimes with enormous consequences, would inevitably be made.

The contribution of flawed monetary policy (especially by the Federal Reserve System) to the 2008 financial crisis presently appears to be creating some momentum for the international-centralizers. But perhaps the silver lining of this particular cloud is that decreasing worries about sovereignty are clarifying what is really at stake when it comes to creating the stable monetary frameworks upon which economic prosperity depends. Is the key to successful long-term monetary stability the further centralization of control of the money-supply? Or should we investigate decentralizing options, which treat money much as we treat most other essential commodities (such as food) and rely upon market-orientated solutions?

Given the historical record of state-centered strategies of economic management, prudence suggests that we should at least seriously investigate private options. But we may have to await more catastrophic errors by central bankers, national or international, before we allow ourselves to think—and perhaps do—the presently unthinkable.


Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.

Copyright 2010 the Witherspoon Institute. All rights reserved.

As time passes, more people may recognize that the financial crisis owed much to factors that had little to do with markets as such. As several scholars illustrated in the 2009 monograph Verdict on the Crash, the causes included regulations that encouraged irresponsible behavior by banks, imprudent central bank policies, not to mention outright collusion between politicians and government-sponsored enterprises such as Fannie Mae and Freddie Mac.

Unfortunately for promoters of free markets, knowledge of these facts will take time to counter the widespread perception that economic liberalism—manifested in financial liberalization, privatization, deregulation, and increased competition—contributed significantly to the 2008 crisis.

In the meantime, those committed to economic liberalism have a chance to rethink and reformulate the case for markets. Certainly the efficiency arguments for economic freedom will be revisited, refined, and rearticulated. But it’s also an opportunity for economic liberals to reexamine what is often a weakness in their position—the principled case for markets.

As David Henderson comments in The Changing Fortunes of Economic Liberalism (2001), economic liberals have encountered several recurring problems in advancing their views. First, unlike socialist and nationalist movements, economic liberalism has never acquired mass support. Second, Liberalism requires counter-intuitive reasoning (such as the notion that free markets create economic order) that isn’t easy to grasp and which doesn’t lend itself to sloganeering. Third, economic liberalism threatens many established interests. These include over-mighty unions, guilds, politicians who use welfare programs to create tame electoral constituencies, and businesses who like corporate welfare and resent competition.

Another obstacle, however, faced by economic liberals are the difficulties they often experience in making arguments not based primarily on efficiency and utility. Even the most econometric economist would probably admit that man does not live by efficiency or utility alone. Yet the number of economic liberals willing to stray outside this territory when arguing for markets remains small. The truth is that economic liberalism has long been largely detached from “thick” conceptions of human flourishing and too often unnecessarily associated with rather flimsy notions of the good.

One reason for this is that free marketers have invested enormous intellectual energy in policy debates. Policy engagement was critical to the successful economic reforms that saved many Western countries from the stagflation into which they collapsed in the 1970s. But the cost may have been neglect of the deeper arguments that intellectually nourish the very same policy positions.

This does not fully explain, however, why many economic liberals are tongue-tied at best when it comes to principled defenses of markets or, in some cases, positively hostile to such reasoning. Surveying the literature on this subject, one most commonly encounters unapologetically utilitarian arguments. In crude terms, these amount to the following: free markets maximize economic utility; hence they are morally superior to inefficient non-market arrangements.

Examining the historical record, there’s no question that economic liberalization has helped lift ever-increasing numbers of people from poverty. Millions of contemporary Indians and Chinese can attest to this. Some conservatives—especially those presently exploring non-socialist alternatives to markets—are far too quick to dismiss these realities. Nevertheless, if humans are creatures with more than material interests and aspirations, then economic utility-maximization arguments are necessary but insufficient in building a normative defense of markets.

More thoughtful economic liberals have long recognized this. Some, such as John Stuart Mill (who eventually moved away from economic liberalism), tried to ground economic liberalism upon a type of utilitarianism. But as scholars from a host of different philosophical schools have noted, all forms of utilitarianism are deeply flawed because they assume the impossible: that humans can somehow foresee and weigh all the known and unknown consequences of particular actions or rules.

Then there are appeals to “progress.” This was central, for example, to Friedrich Hayek’s case for economic liberty. Progress, Hayek maintains, does not normally occur through people seeking to resolve problems in a coerced or collective manner. Progress comes when individuals freely act upon their abilities and particular knowledge of their unique circumstances while pursuing their own chosen purposes.

That Hayek makes an important point about economic development is not in question. Yet Hayek has surprisingly little to say about the content of progress. In his famous Constitution of Liberty (1960), he concedes that progress “in the sense of the cumulative growth of knowledge and power over nature, [progress] is a term that says little about whether the new state will give us more satisfaction than the old.” Such a question, Hayek comments, is “probably unanswerable.” But for Hayek, this is irrelevant. More important is “successful striving for what at each moment seems attainable,” or “movement for movement’s sake.”

This response leaves unanswered some very important questions. Towards what are people moving? What are we becoming in the process of doing so? In many responses to such queries, one detects Mephistopheles’ retort in Goethe’s Faust: “The future creates what is moral.”

Other economic liberals have employed social evolutionary arguments to bolster their position. These may be found in some of Hayek’s works and some contemporary libertarian circles. The market, it is held, reflects a type of natural selection process with which humans are wrong to interfere.

The innovation and competition encouraged by markets does of course gradually render many technologies (e.g., typewriters) and industries obsolete. This “creative destruction” is, as Joseph Schumpeter noted, how entrepreneurship improves aspects of people’s quality of life over time. But the problem with evolutionary arguments is that they cannot provide a principled reason for anything. Moreover, if, as a matter of positive science, societies simply evolve, then evolutionarily-inclined economic liberals cannot morally object to governments “evolving” to assume increasing control over the economy. For who could claim on evolutionary grounds that there is something intrinsically wrong with ever expanding government?

If this analysis is accurate, then economic liberals need to consider non-utilitarian, non-progress-for-the-sake-of-progress, non-evolutionary, principled defenses of market economies. One such argument is that economic liberty and its associated institutions provide a bulwark against unwarranted expansions of state power and thus helps minimize undue coercion—a vital prerequisite for human flourishing, moral or otherwise.

A second is that free markets have proved remarkably successful in allowing people to tackle the problem of scarcity in a peaceful manner that encourages people to consider the economic needs and wants of others. In short, markets address an issue which, if left unresolved, will facilitate tremendous social disorder. The alternatives are command economies, economies centered on theft, or economies based on altruism. Reason and history tell us that neither command nor theft-based economies are options. Likewise Aristotle’s and Aquinas’s insights that common ownership produces social tension and that people treat privately owned things better than they treat things owned in common suggest that there are limits to altruism’s ability to serve as the primary principle of economic organization in complex societies.

These are reasonable positions that illustrate how free markets contribute to key non-economic dimensions of the common good, but economic Liberalism’s case would be further bolstered if its advocates were willing to expand their arguments about how markets facilitate moral growth. The manner in which entrepreneurship fosters and requires virtues ranging from prudence to courage is one example. Another is how free trade and exchange can promote forms of human association with intrinsic value beyond their economic dimension. One could also underscore the opportunities commercial societies provide to pursue a rich variety of moral goods in ways closed to many people in pre-commercial orders.

Some economic liberals, however, resist reasoning based on more –than material concepts of human flourishing. Sometimes this reflects a utilitarian or positivistic outlook that struggles to acknowledge human life’s non-material aspects. Other economic liberals worry that attention to the good as such  opens the door to undue state coercion in the name of encouraging human moral development.

In this regard, modern advocates of economic Liberalism might consider reexamining elements of the pre-nineteenth century philosophical roots of their thought. These partly lie in the early modern natural law tradition associated with people such as Hugo Grotius and Juan de Mariana. Their market-orientated economic writings are infused with a concern for the good life. The most important philosophical tradition that undergirds the moral case for economic liberty, however, is the Scottish Enlightenment

Too often primarily interpreted through the lens of the skeptical proto-utilitarian David Hume, the Scottish Enlightenment includes figures such as Gershom Carmichael, Francis Hutcheson, Lord Kames, William Robertson, and Hugh Blair who understood and supported the economic case for commercial societies but saw no reason why this should be separated from robust accounts of the good. This is equally true of Adam Smith. Modern Smith scholars such as James R. Otteson have illustrated that the author of the Wealth of Nations was deeply concerned with humanity’s moral growth in the context of emerging market economies in ways that went beyond utility maximization.

We live in an era in which pressures to expand government intervention in the economy are enormous. Paradoxically, however, successful long-term resistance to such trends may require economic liberals to resist the temptation to invest their energies in activism. As Harold James states, “The only way of dealing with a collapse in values is to rebuild values.” This suggests that economic liberals should direct considerable attention to the difficult, long-term task of rebuilding a powerful case for economic liberalism based as much on full-bodied conceptions of the good as it is on sound economics.


Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty and his prize-winning The Commercial Society. His forthcoming book, Wilhelm Röpke’s Political Economy, will be published in early 2010.

Copyright 2009 the Witherspoon Institute. All rights reserved.

No reasonable conception of the good can be limited to the economic realm, let alone utility. Unfortunately many contemporary economists do not see this, precisely because they are more-or-less utilitarian and positivistic in their outlook. In this regard, they differ from the founder of modern economics, Adam Smith. This much is evident from reading the corpus of Smith’s works, which traverse jurisprudence, philosophy, astronomy, and rhetoric, as well as economics. But while prepared to countenance particular forms of protectionism in a very small number of instances, Smith was not convinced that significant restrictions of trade within and between nations would help facilitate human flourishing within communities. Neither am I.

McDaniel suggests that there are good reasons derived from considerations for both utility and human flourishing to insulate economies partially from movements in international markets. One is the concern that, in an interdependent world, such insulation may diminish the impact of significant global market failures upon those economies that choose one or more forms of protection. He also maintains that there would be other benefits, such as the innovation he associates with craftsmen who pride themselves on producing locally made quality products. The same partial insulation, he suggests, may even place some nations in a position to help those negatively affected by global economic downturns.

Several difficulties mar each of these arguments. First, there is no evidence that various forms of insulation, ranging from tariffs to subsidies, do much to mitigate the effects of global recessions upon countries adopting such measures. If anything, they inhibit countries from quickly responding to the new circumstances and thus prolong the downturn’s negative effects.

Nor does it seem to be the case that partial insulation from the global economy fosters much innovation or productivity. History suggests that efforts at partial economic insulation tend to encourage economic insularity. This is exemplified by guilds. As a form of economic and social organization, guilds often began with a concern to produce a certain product of a certain quality. But they invariably became preoccupied with determining who could and could not engage in certain occupations or produce certain goods and services. Being what we would call today “closed shops,” they disliked free trade and competition—domestic or foreign—because it threatened their monopolies and often made available to consumers better, newer, and less-expensive products than those produced by guilds. A similar logic was recently at work with the recent effort of organizations such as the United Steelworkers to persuade the Obama Administration to raise tariffs on Chinese-made tires for the next three years.

The same insularity encouraged by various forms of protectionism also actually discourages nations from worrying about other countries’ economic problems. A good example is the fierce resistance of European and American farming lobbies to permitting developing countries wider access to European and American markets. Many developing nations would escape their poverty far more quickly if the highly protected American and European agricultural markets were “de-insularized.” But this would mean removing the legal and economic privileges presently accorded to many American and European farmers. They will never give up these privileges without a fight, no matter how much such measures impede developing countries’ emergence from poverty.

More significantly, however, McDaniel asks us to reflect upon the consequences for economic decision-making if political reasoning was concerned with “integral human development” or “all-round human flourishing.” McDaniel correctly observes that it would radically change the way that most present-day policy-making occurs.

I myself would welcome a shift in this direction. First, it accords with the demands of reason. Second, it holds out the potential for the development of an understanding of politics that provides the workings of government and law with a far more coherent rationale than that provided by Millian or Rawlsian Liberalism.

I am less convinced, however, that a politics committed to promoting integral human flourishing means that governments should implement policies that significantly inhibit free trade. Naturally there are some things whose nature provides strong reasons to inhibit or completely prohibit their trading. Legitimate national security considerations, for example, should significantly limit the trading of certain forms of sophisticated weaponry or military technology. Likewise human trafficking is an evil in itself and ought always to be prohibited.

But beyond these and similar instances, policies that undermine free trade in goods and services arguably diminish opportunities for the type of flourishing that McDaniel and I value. Let me explain why using the example employed by McDaniel and myself: a fictional Scottish wine industry.

McDaniel suggests that, as part of a legitimate desire to promote a variety of moral goods, some Scots may decide that, despite the enormous economic disutility involved, they want to start a wine-growing industry in Scotland. Enough patriotic Scots may also want to support this industry by purchasing this home-grown wine and would be consequently willing to pay more than they would otherwise pay for better quality, less expensive Italian vintages.

If such an industry succeeded under its own volition, then this is all well and good. My objection, however, would be to using the state to subsidize such an industry or protect it from foreign competition. Leaving aside arguments based on utility, the price of using the state to prop up such an industry over the long term will likely be quite direct—and sometimes more-or-less intentional—damage to the ability of those in other communities to flourish.

Perhaps the damage is to those Scots who request no government subsidies for their freely chosen profession but who discover that a large proportion of their taxes, which could be used to improve, for example, Scottish education levels (and thus participation in the good of knowledge), are being directed towards subsidizing highly uncompetitive Highland vineyards. In this instance, the communal integrity (of Scotland) that McDaniel rightly values would be significantly impaired.

More remotely, the damage might be to a group of Chilean winemakers. Instead of taking government subsidies to produce Chilean whiskey, this community determines its comparative advantage lies in Chile’s soil, climate and their own wine-making skills. Through their own entrepreneurial volition, they subsequently create a self-sustaining, profitable wine industry and, in doing so, provide tremendous opportunities for all-round flourishing for many Chileans working in the business. Then they discover that barriers have been erected to inhibit their entry into the Scottish wine market—and any number of subsidized, protected Western wine markets. This limits the Chilean industry’s capacity to grow and provide expanding opportunities for human flourishing inside and outside Chile.

But even more fundamentally, such policies generally represent a significant injustice—and justice is a key precondition for any society’s promotion of human flourishing. They unreasonably compromise freedom of association and the access of all peoples—especially the poor—to the goods of the earth. Some of the early promoters of the idea that free trade was a demand of justice, such as Hugo Grotius and Francisco de Vitoria, were so insistent on this point that they actually regarded denial of free trade as a legitimate casus belli. Moreover, from the standpoint of human flourishing, the ability of all people to maximize their opportunities for integral human development often lies just as much in expanding access to opportunities that transcend and traverse national boundaries as in rootedness in local communities.

Here it is worth adding that many small and medium-sized communities actually impede human flourishing. Some such societies often embody characteristics such as provincialism, irrational hostility towards outsiders and foreigners, ignorance of the wider world, and customs that unjustly restrict opportunities for integral development by some individuals and groups belonging to these communities. Some of globalization’s positive effects are to broaden horizons, diminish prejudices, and provide opportunities to pursue integral human flourishing in ways that often cannot be accommodated in relatively isolated groups.

Similar critiques could be made of some of McDaniel’s other specific suggestions. But let me conclude by stressing my agreement with McDaniel that much contemporary economic science and economic policy-making fails to do justice to the reality that human flourishing is about far more than utility-maximization. Many economists and economic policy-makers effectively cut themselves off from consideration of such matters. This partly reflects the present hyper-specialization of much higher education, but also the influence of positivism and what the economists Wilhelm Roepke and Friedrich Hayek called “scientism”—the indiscriminate application of the methods and concerns of the natural sciences to the humanities and social sciences.

This contrasts with Adam Smith’s outlook. Smith was deeply conscious of the moral challenges posed by the emerging commercial society of his time. Rather than seeking to resolve real and imagined conflicts between human flourishing and market-oriented economic development through government intervention, however, Smith sought to achieve a similar end through infusing this new society with a synthesis of commercial, classical, and Christian virtues. As Ryan Patrick Henley illustrates in his excellent book, Adam Smith and the Character of Virtue (2009), Smith was convinced that human flourishing was possible for people living in modern commercial societies that embraced free trade with relatively few caveats. So am I.

To be sure, not everything for which Smith argues is completely consistent with the vision of integral human development that McDaniel and I advocate. But I would suggest that Smith—in whom we certainly find significant streams of virtue ethics and non-utilitarian argumentation—is one starting point for rethinking questions of political economy such as free trade in a manner that takes both the demands of integral human flourishing and the insights of modern economic science seriously.

Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty and his prize-winning The Commercial Society. His forthcoming book, Wilhelm Roepke’s Political Economy, will be published in early 2010.

Copyright 2009 the Witherspoon Institute. All rights reserved.

Estimates vary, but according to the IMF, total world trade in goods and services will decline by 12.2% in 2009. Accompanying these developments have been fears of resurgent protectionism. The Economist argues, however, that such worries have proved to be overrated. In one sense, this is true. If by protectionism we mean the raising of tariff barriers, then we have not seen anything like the 1930 Smoot-Hawley Tariff Act that limited foreign access to America’s markets and helped facilitate the Great Depression. Indeed, some countries, such as Australia and China, have actually reduced import duties.

On the other hand, the European Union and the United States have introduced new farm subsidies to already outrageously subsidized agricultural sectors. Moreover, there are other ways to impede or distort the relatively free access of individuals and businesses to global markets. One example is the early 2009 stimulus package passed by the American Congress. It contains “Buy American” provisions that actively discriminate against foreign imports.

Yet another instance of creeping impediments to free trade is the recent demand by several United States senators that any cap-and-trade bill contain “a longer-term border adjustment mechanism”—in other words, a tariff—to protect American industry against competition from countries that refuse to adopt expensive carbon-emission measures similar to those contained in the Waxman-Markey bill passed by the House of Representatives. Some European Union countries, most notably France, have insisted that “economic measures” should be taken against those countries that don’t enact carbon-emission requirements like those embraced by the EU. India and China have already told the United States they have no intention of adopting such policies on the grounds that they would drastically impede these nations’ ongoing rise out of poverty—one of the economic miracles of our time.

But why, some might ask, are these emerging barriers to free trade so worrying? Shouldn’t governments encourage “economically patriotic” policies? Surely a government should “look after its own.”

There are two reasons why free trade should be protected and promoted. The first concerns free trade’s profound contribution to global economic prosperity. The second is that free trade is a human right—not an absolute right, but a right that governments should only circumscribe in the most adverse of circumstances.

The economic case for free trade was codified by Adam Smith when his Wealth of Nations was published in 1776. He challenged the then-reigning mercantilist orthodoxy that one country could only become richer at other nations’ expense. “The modern maxims of foreign commerce,” Smith wrote, “by aiming at the impoverishment of all our neighbors, so far as they are capable of producing their intended effect, tend to render that very commerce insignificant and contemptible.” Observing the political and economic conflict between the eighteenth century’s two great powers, France and Britain, Smith commented that “If those two countries . . . were to consider their real interest, without either mercantile jealously or national animosity, the commerce of France might be more advantageous to Great Britain . . . and for that same reason that of Great Britain to France.”

Smith’s point was simple yet revolutionary: free trade would, in the long term, mutually enrich everyone. For one thing, free trade encouraged an ever-increasing depth and sophistication of the division of labor. This facilitated technological development and the ability to grow ever-increasing amounts of wealth. Free trade also created an ever-widening space for individuals, businesses, and entire nations to find, develop, or even change their comparative advantage. As Smith put it, “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.”

It was certainly possible, Smith noted, for a country like Scotland to grow grapes. The financial cost, however, of doing so compared to, for example, growing grapes in Italy, made that an economically foolish choice for Scots. By contrast, individuals, businesses, and countries in a global free market would be encouraged to focus on doing what they did best and would not be incentivized by protectionism into developing industries that, in the long run, couldn’t compete in the marketplace, even with extensive tariffs.

Appeals to economic efficiency and prosperity are enough for some, but just as human beings are more than homo economicus (and Smith himself never thought that human life could be reduced to economics) so too are purely economic arguments insufficient for governments to adopt particular policies, even those concerning economic subjects. But if governments have some responsibility to protect their citizens’ rights, then perhaps they may wish to consider the claim that the liberty to trade goods and services across national boundaries is not a privilege but rather a right.

Excessive rights-talk disfigures much contemporary political discussion, but compared to most modern rights-claims, the idea of free trade as a right has both a much older lineage and a more coherent rational basis. The first to apply the word “right” to free trade was the sixteenth-century scholar Francisco de Vitoria (1492-1546) in his De Indis et de Ivre Belli Relectiones (1532).

According to Vitoria, the right to free trade was derived from the natural right of free association enjoyed by all people. Free association, to Vitoria’s mind, was essential for human flourishing, and he did not believe national boundaries should unreasonably limit people from freely associating with others, including for economic reasons. Interestingly, Vitoria developed this line of argument in the context of claiming that the New World’s native peoples should not be prevented from freely trading with European merchants by either their indigenous rulers or European monarchs. Such were Vitoria’s convictions against mercantilist policies that he even depicted laws unduly limiting free trade between nations as “iniquitous and against charity.”

The Dutch philosopher and jurist Hugo Grotius (1583-1645) also built a rights-based case for free trade. As a target, Grotius aimed at the Portuguese claim to a monopoly of the trade routes to the East Indies. In Mare Liberum (1609), Grotius employed uncharacteristically insistent language to maintain, as an “unimpeachable axiom of the Law of Nations . . . the spirit of which is self-evident and immutable,” that “Every nation is free to travel to every other nation, and to trade with it.”

Grotius’ argument for free trade as a right was based on the premise that nature did not supply every place with the necessities of life. Moreover, Grotius observed (foreshadowing Smith’s economic analysis) that it was clear that “some nations excel in one art and others in another.” These factors meant that if the goods of the world were truly to serve everyone, then free trade was a necessity. Grotius notes that his argument was hardly novel, as it could be found in the works of Roman philosophers such as Seneca (4 B.C. – 65 A.D.). Almost a century after Grotius’s death, we find the same position stated in the most important eighteenth-century text on international law, Emer de Vattel’s Le droit de gens (1758). This book insists that the “obligation,” as Vattel describes it, of nations to engage in mutual commerce, means that those “privileges and tolls, which obtain in many places, and press so heavily upon commerce, are deservedly to be reprobated.”

To be sure, none of these thinkers considered free trade to be an absolute right. Grotius and Vattel believed, for example, that states engaged in a legitimate war could justly prohibit its citizens from trading with citizens of enemy powers. Nor was Smith an absolutist about free trade. In some circumstances, he was willing to approve certain subsidies for particular industries. Generally, however, Smith insisted that the onus of proof for the wisdom of interfering with free trade lay with those proposing a restriction or subsidy.

Will free trade, either as a right or an empirically validated economic argument, ever gain universal acceptance? Smith himself concluded there was so much resistance to free trade arising both from economic ignorance and also established interests determined to protect themselves from competition by whatever means necessary that “to expect . . . that freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it.”

One of Smith’s contemporaries and greatest admirers, the English philosopher and politician Edmund Burke, once wrote that “Free trade is not based on utility but on justice.” Certainly the economic argument for free trade’s long-term economic utility and protectionism’s detrimental effects is difficult to refute. Yet it may be that free trade’s greatest hope in the long term will be that enough people recognize there is something fundamentally unjust about unduly impeding the ability of all the world’s resources to serve all human beings in an increasingly globalized world in which nation-state borders mean less and less.



Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty and his prize-winning The Commercial Society. His forthcoming book, Wilhelm Röpke’s Political Economy, will be published in early 2010.
Copyright 2009 the Witherspoon Institute. All rights reserved.

Greed and sheer imprudence played a role, but so too, Kaletsky argued, did those (unnamed) economists who posited that their models proved that events such as the collapse of Lehmann Brothers in 2008 or Long Term Capital Management in 1998 were mathematically likely to happen once every billion years.

Kaletsky’s broader point was that contemporary mainstream economics had been sufficiently discredited by the financial crisis that the entire discipline required what he called an “intellectual revolution,” or it risked being dismissed as a rather suspect sub-branch of statistical analysis and mathematical modeling.

Kaletsky is hardly alone in arguing that economists need to rethink key aspects of their discipline. Though unwilling to call for a total paradigm shift, the Economist recently opined that the financial crisis has raised profound questions of coherence about two areas of economics: macro-economics and financial economics. “Few financial economists,” the Economist observed, “thought much about illiquidity or counterparty risk, for instance, because their standard models ignore it.” Likewise, the Economist commented, “Macroeconomists also had a blindspot: their standard models assumed that capital markets work perfectly.”

All this is certainly true. But the key expression to note here is “their standard models.”

Since John Maynard Keynes’s time, mainstream economics has undergone a steady process of mathematization. Anyone doubting this need only peruse their nearest copy of the American Economic Review and observe the plethora of algebra, mathematics, and abstract modeling that is central to most mainstream economists’ argumentation—regardless of whether they are committed neo-Keynesians or proponents of the efficient markets hypothesis.

Of course there is, as Nobel Prize economist Myron Scholes notes, a difference between the academic economists creating the models and the Wall Street financial engineers applying these models in the marketplace. Indeed many economists who support the efficient market hypothesis have introduced numerous qualifications—based, for example, on their willingness to import insights from other disciplines—to explain apparently irrational economic behavior by individuals and institutions.

Much of this work will bear fruit over time. It is telling, however, that there appears to be little inclination on the part of some contemporary economists to ask some searching questions about their heavy reliance on mathematical logic and argumentation. This may well be because doing so would raise some rather profound questions about the very nature of post-Keynesian economic science.

One who posed precisely these questions was the German economist Wilhelm Röpke (1899-1966). Röpke is well-known as an intellectual architect of post-war West Germany’s path from collectivist economic oblivion to market-driven economic miracle in the ten years following its economic liberalization in 1948.

Less attention, however, has been given to Röpke’s fierce critiques of the post-war Keynesian consensus. On one level, this was driven by Röpke’s belief that Keynesian policies would inexorably reduce political and economic freedom. But another source of Röpke’s angst was his conviction that Keynes and his disciples had corrupted economics as a social science.

In Röpke’s view, Keynes was “a representative of the geometric spirit of the 20^th century” and “an exponent of positivistic scientism,” for whom “economics was part of a mathematical-mechanical universe.” While Röpke assigned more blame to Keynes’s disciples, he insisted that Keynes’s approach to economics had created an “old economics” and a “new economics” in which the sense of one was nonsense in the other.

According to Röpke, the neo-Keynesian new economics was inclined to reduce economics to mathematical and statistical formulas and analyses. Röpke may have been thinking of Paul Samuelson’s 1947 effort to reconfigure economics on the basis of mathematical language. For Röpke, such efforts conflated the object of economics with one tool of economic analysis. Opening a post-Keynes economic textbook, Röpke suggested, made readers wonder if they had stumbled upon a chemistry curriculum.

Mathematics is a form of language based upon symbols. Its origins lie in facilitating the study of the natural sciences. But mathematics is less adequate when it comes to analyzing things which are unquestionably real and have implications for economic life such as traditions, institutions, and values. Röpke believed that mathematical formalism addressed these realities by generally ignoring them. Economics thus became a quantitative exercise that “teems with equations in ever-increasing profusion” and focused upon developing models and patterns of aggregate behavior by whole populations.

While accepting that the new economics enhanced the use of macroeconomic concepts, Röpke complained that Keynes had effectively “declared the method of thinking in aggregates to be the only one, both now and in the long run.” Economics consequently lost sight of its essence which is not macro-aggregates but the choices of individuals and institutions. On this basis, Röpke believed that the “new economics” was destroying economics as “a ‘moral science’ in the sense that it deals with man as an intellectual and moral being.”

In Röpke’s view, sound economics certainly allows the use of mathematics to explain certain relationships that have quantitative characteristics. Nevertheless the more economics drifted in a mathematical-statistical direction, the less attention it paid to that which is un-mathematical and which does not always behave predictably—human beings. Though Röpke believed that mathematics can help describe relatively stable and uncomplicated economic relationships, he was unconvinced it could handle the full complexity and instability of actual economic life. The eventual result, Röpke stated, was not only that “with all our cleverness, we have become decidedly less wise, while knowing more and more about less and less,” but also the “dehumanization of economic science.”

Worries about these developments were not confined to convinced free marketers. One of Keynes’s earliest followers and first biographer, Sir Roy Harrod, commented that many economists’ effective replacement of attention to basic economic principles with an immersion in mathematics and aggregates had led him to conclude that “we should be better off with the old political economy.”

Reflecting upon the expression political economy might not be a bad place to start for those interested in rethinking economics’ foundations in a post-crisis era. In Adam Smith’s Wealth of Nations, the term acquires three meanings.

The first is the commonly accepted positive sense of political economy as the scientific study of “the nature and causes of the wealth of nations.” More broadly, however, Smith’s political economy also embraces the study of the interrelationship between economic theory and the political ideas and movements of a given time. Lastly, there is the sense in which Smith understood political economy in terms of what we today call economic policy: “a branch of the science of the statesman or legislator” whose objective was “more properly to enable [people] to provide such a revenue or subsistence for themselves; and . . . to supply the state or commonwealth with a revenue sufficient to the public services.”

On one level, the Wealth of Nations does involve abstract analysis of economic life. Smith carefully dissects the claims of prevailing economic thought, presents a fresh theory about how wealth is created, and elaborates on what should be done in policy-terms if wealth creation and society’s overall material enrichment are deemed desirable. But in doing so Smith also attempts to develop a powerful normative argument for an economy based around private property, free competition, and limited government over and against the mercantilist systems that dominated eighteenth-century Europe.

As the economic historian Emma Rothschild reminds us, Smith sees economic liberty as something to be approved and pursued partly because of its capacity to liberate people from many forms of oppression. For Smith, the move from mercantilist to market economies was not only a matter of following the promptings of scientific economic reasoning focused on wealth-creation. Smith also regards market economies as superior to previous economic arrangements on grounds of the greater efficiency and liberty they accorded to ever-widening numbers of people to seek human fulfillment.

Unfortunately, with some notable exceptions, this Smithian conception of political economy did not persist after Smith’s death in 1790. By John Stuart Mill’s time, political economy was being defined as studying the behavior of homo economicus, a creature whose nature is far removed from that of the more complex, not-always rational being found in Smith’s writings. From here, it was only a short step towards the reduction of much economics to a branch of applied mathematics, however valiantly this trend has been resisted by the Austrian and Public Choice schools.

Obviously there are many aspects and tools of modern economics with which we would not want to do without. But a renewed focus upon political economy in Smith’s three senses might provide a rich starting point for economists interested in the deep rethinking advocated by Kaletsky. It would maintain economics’ strong empirical-positive dimension, but blend it with a deeper appreciation for human complexity, and thus engender more humility about economics’ predictive power—a virtue all of us could use more of in our post-crisis era.

Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty and his prize-winning The Commercial Society. His forthcoming book, Wilhelm Röpke’s Political Economy, will be published in early 2010.

Copyright 2009 the Witherspoon Institute. All rights reserved.

It was not just that Merkel decided not to speak in the hushed, polite tones that politicians usually reserve for any discussion touching upon central banks’ conduct of monetary policy. Merkel’s Berlin speech drew attention for two reasons: first, her forthright criticism of the policies currently being pursued by the Federal Reserve and the Bank of England; second, her claim that the independence of some central banks, including the ECB, has been compromised as a result of political pressures.

Merkel’s first set of criticisms echo the deeply anti-inflationist approach to monetary policy consistently pursued by Germany’s central bank, the Deutsche Bundesbank, since its foundation in 1957. Even today, Germans remember that rampant inflation twice wiped out the savings of Germany’s middle-classes after World War I, thereby helping to open the path to power to Adolf Hitler’s National Socialists. It is no coincidence that two German members of the ECB board, including Axel Weber, the present Bundesbank president, have publicly warned in recent weeks about the potential for loose monetary policy to create future inflationary problems and asset-price bubbles.

In political terms, Merkel’s comments also reflect her determination to restrain European Union member-states from adopting neo-Keynesian deficit-spending programs on the scale presently being pursued by the Obama Administration. As Federal Reserve Chairman Ben Bernanke recently noted, the overall effect of these and other measures will be to raise America’s debt-to-GDP ratio to 70% by 2011. This represents an increase from 40% in 2008. This may explain why Merkel was perhaps the most forthright dissenter at the recent G-20 meeting when President Obama urged the world’s leading economic powers to adopt policies similar to his own in response to the global recession.

But it was, however, Merkel’s concerns about possible compromises to the independence of central banks that drew the most attention. “We must”, Merkel insisted, “return together to an independent central-bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years’ time”. Her position contrasts with that of other European centre-right leaders such as France’s Nicholas Sarkozy who, not long after being elected president in 2007, expressed the desire to diminish the ECB’s independence.

Such remarks may simply reflect France’s ingrained dirigiste instincts. Over the past 15 years, the trend has actually been toward increasing central banks’ independence. One of the Blair Labor government’s first decisions following its election in 1997 was to grant the Bank of England operational control over monetary policy. This trend, however, should not blind us to the fact that politicians have many reasons for wanting to exercise strong influence over central banks. It is hard for governments to resist the temptation to try to manipulate interest rates in order to maximize their re-election chances. It also gives governments the option of letting the inflation genie out of the bottle in order to boost short-to-medium-term employment at the expense of devaluing savings, shattering price stability, and undermining long-term employment growth.

One of the financial crisis’ long-term effects will be to raise questions about central banks’ ability to maintain an independent monetary policy during periods of economic stress: that is, precisely when such independence is most important. Of course, no institution can be rendered completely immune from political and public pressures. But over forthcoming months, central banks are going to be faced with making decisions unlikely to please governments and legislatures worried about being reelected.

Though the Obama Administration has tried to avoid creating any public perception that the Federal Reserve is merely doing the Treasury’s bidding, it is unclear how the Administration and Congress will react when the Federal Reserve chooses to reduce the chance of future inflation by winding back some of the measures it has taken since the onset of the financial crisis last year. As David Wessel remarked recently in the Wall Street Journal (06/04/09), Chairman Bernanke “may find Fed lending so intertwined with the Treasury’s bailouts that the Fed lacks the flexibility and independence it needs. Or he may find tightening tough while Congress is contemplating changes to the Fed’s governance and powers.”

The bigger political question, however, is the place of central banks in democratic political orders. Insulating central banks from excessive political influence reflects recognition of the truth that even in a democracy there are many public-policy decisions that should not be made by legislative or popular votes. Most democracies, for example, embody constitutional limits on the ability of governments and legislatures to interfere with the judiciary’s operations. This is usually derived from awareness that the common good normally requires some separation of powers in order to prevent excessive centralization of power.

The problem is that when it comes to the economy, governments have legitimate reasons for being concerned about and involved in the development of economic policy. This inevitably raises questions about how to maintain the autonomy of central banks and what ought to constitute the content of that autonomy. Governments committed to pursuing populist and socialist policies have no qualms about dramatically limiting or even abolishing such autonomy. This is why Venezuela’s Hugo Chavez has steadily eroded the independence of his country’s central bank, describing its autonomy in a 2007 address as a “neo-liberal idea” obstructing his long march towards “new socialism.”

A more traditional way for governments to resolve these questions has been to charter the central bank’s specific responsibilities, and then generally limit the government’s formal involvement in monetary policy to periodical meetings between the government and central bank governors, appointing members of the central bank’s board at legislatively-specified intervals and arriving at memoranda of agreements with the central bank about inflation targets. The intended effect is to create a situation of “independence within government.” Thus, according to European Union law, the ECB’s prime objective is “to maintain price stability.” It also has the responsibility —“without prejudice to the objective of price stability”— to “support the general economic policies” of the European Union, these being specified by Article 2 of the Treaty on European Union as “a high level of employment and sustainable and non-inflationary growth.” The ECB therefore has the luxury of having a prime objective to which the other goals are subordinate.

By contrast, the Federal Reserve has the responsibility of “conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.” It is thus legislatively charged with realizing goals that are not only ascribed equal importance but which may be incompatible in some circumstances. As the experience of the early 1980s illustrated, the Federal Reserve’s pursuit of stable prices (i.e., fighting inflation) could only be achieved by accepting high unemployment for three years. In retrospect, this was surely the right decision, but whether it reflected the Federal Reserve adhering to all its legislatively-mandated responsibilities is another matter.

In the end, it may be that the only way to protect central banks’ ability to conduct monetary policy in ways that truly insulate them from excessive political pressures and the distorting effects of internally incoherent legislation is to cut the links between them and governments. This is the argument contained in Professor Tim Congdon’s recent thought-provoking monograph, Central Banking in a Free Society (2009), published by the Institute of Economic Affairs.

Among other things, Congdon reminds us that the Bank of England was a private bank from its foundation in 1694 until its effective nationalization by the Attlee Labour Government in 1946. Looking at the present, Congdon maintains that central banks should be “privatised and owned by the banking system, not by the state,” primarily because he holds that “central banks in private ownership would be subject to a better pattern of incentives, with checks and balances that would be more likely to keep them on the right course, than if they remain in the state’s hands.” In this scenario, the capital for central banks would be directly provided by commercial banks rather than governments.

One advantage of this approach is that the central bank would acquire a primary objective—monetary stability—uncomplicated by secondary goals or other state-mandated primary purposes. Another benefit is that the task of maintaining monetary stability would be even further insulated from direct and indirect political influences—if only to the extent that all other private businesses enjoy some protection from government pressures.

In the present political and economic climate, proposals for radically rethinking central banking are unlikely to achieve either popular or elite acceptance. Governments’ natural survival instinct during recessions is to try to augment their influence over monetary policy. This is especially true when governments are anxious to prove to economically-battered and politically-angry electorates that they are doing something, even if they themselves know that what they are doing is more than likely to have deleterious long-term economic consequences. But if we take seriously the advice of President Obama’s Chief of Staff Rahm Emanuel to “never let a serious crisis go to waste,” then now is as good a time as any to rethink the practices and institution of central banking.

Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty and his prize-winning The Commercial Society. He is a contributor to Public Discourse.

Copyright 2009 the Witherspoon Institute. All rights reserved.

Works such as Amity Shlaes’ powerful and eminently readable history of the Great Depression in America, The Forgotten Man (2007), have illustrated that, contrary to popular mythology, the New Deal was for the most part an economic failure. At the same time, few will dispute today that the interventionist policies adopted by the Nixon and Carter Administrations in the 1970s merely exacerbated the problem of stagflation. They also aggravated the effects of the recession (which included the highest unemployment levels since the Great Depression) that followed when the Federal Reserve raised the federal funds rate and the primary credit rate to extremely high levels as Paul Volcker fought successfully to break the back of inflation in the early 1980s.

Still, evidence of policy failure usually has not deterred governments of all stripes, particularly those with populist inclinations, from continuing with or reviving tried-and-failed approaches. Nor does it necessarily lead to politicians and public officials being willing to confront the root causes of problems, especially if the probable solution is unpopular.

This scenario seems likely to repeat itself today when it comes to addressing something that is not only one of the underlying causes of the current recession, but which is now contributing to the current climate of uncertainty: the turbulent American housing and mortgage market.

By now, most people understand that many of the toxic financial assets held by American and European banks were premised to varying degrees on a grossly inflated housing market in America and parts of Europe. Hence, the harsh reality is that until the housing market bottoms out it is going to be very difficult to price the real market value of these financial assets. This in turn creates uncertainty about the real value of many assets held by banks, thereby leaving many banks stranded in their present state of financial limbo, unwilling to lend and unable to attract private investors and capital. As a consequence, economic growth is stalled and will remain so until the housing market regains a state of equilibrium.

It follows that one of the fastest ways to allow the market price of the assets in question to be realized is to permit the housing market to stabilize under its own volition. There is, however, a considerable human price to be paid for this necessary process of adjustment. In some cases, it takes the form of families losing their homes through foreclosures on their mortgages. While the vast majority move quickly into rented accommodations and are in fact very likely to own a house again in the future, the social cost and psychological distress associated with home-loss should not be trivialized. Yet others face the daunting prospect of being stuck with mortgages that are worth considerably more than the property’s actual current value. Naturally enough, there are plenty of people who want to see governments try to alleviate the pain, if not attempt to render the adjustment unnecessary.

Thus no one was surprised when President Obama announced the federal government’s mortgage relief plan this past February 18th. It includes using $75 billion of taxpayers’ money to help approximately four to five million homeowners avoid foreclosure. The same plan also allows the Treasury Department to purchase $200 billion worth of preferred stock in the technically insolvent government-sponsored mortgage giants, Fannie Mae and Freddie Mac, thus allowing the two lenders to re-negotiate mortgages with some of their clients facing difficulties. These measures follow in the wake of other smaller-scale mortgage relief strategies implemented by the Bush Administration—none of which, incidentally, slowed down the foreclosure rate across the United States.

Unfortunately, there is little reason to be optimistic about the probable effects of the Obama Administration’s interventionist approach to mortgage relief. In fact, it is most likely to be counterproductive. For one thing, it will encourage many people to stay locked—potentially for years—into mortgages that, financially speaking, they would be better off exiting. For some people, selling their home at a loss or even foreclosure would actually be a better alternative. Either scenario would enable many mortgage holders to extract themselves from an economically burdensome situation and begin the process of rebuilding their financial lives. Certainly, foreclosure will have some negative impact upon a person’s credit record, but so too will the fact of requesting and receiving government assistance in order to keep one’s otherwise untenable mortgage afloat.

At the macro-level, there is no guarantee that the envisaged intervention will stabilize the housing market. Data provided by the Office of the Comptroller of the Currency suggests that, at present, approximately 55% of those people who renegotiate their mortgages are re-defaulting within six months. This indicates that government-sponsored mortgage relief will merely delay the final reckoning for millions of people. It will also impede foreclosures from shifting properties from those unable to pay their debts to those who can afford to buy. This transfer, along with the normal process of people buying and selling houses at market prices, is crucial for stabilizing the housing market, thus helping to facilitate an accurate market pricing of all those financial products built upon mortgage assets. This is critical if the banking sector’s current difficulties are to be resolved in any lasting way.

Leaving aside the economic difficulties with the Administration’s plan, there are also serious moral problems associated with such government mortgage relief efforts. Primary among these is the problem of moral hazard. Government officials, including the President, have insisted that the mortgage relief plan will not assist those who have behaved irresponsibly.

But this claim is hard to reconcile with the details of the plan, released on March 4th. It makes, for instance, eligibility for what is called “mortgage modification” dependent on how much borrowers owe above their house’s current value (which is presently a rapidly-moving downward target). Eligibility also depends upon borrowers providing, among other things, an “affidavit of financial hardship.” This is a sure recipe for arbitrariness on the part of those deciding who gets relief and who does not. Defining what counts as “financial hardship” is usually a very subjective matter. It depends on factors as variant as one’s income, responsibilities, family-size, stage of life, cost-of-living differences, etc.

Even more problematic, however, is the fact that the plan avoids the issue of why some people are facing financial hardship. There is a considerable difference between, for example, a married couple with a good credit history and who are only experiencing mortgage payment difficulties because the main wage-earner has been made redundant though no fault of his own, and those individuals who freely—and, in many instances, recklessly—played the house-flipping game in order to make rapid financial gains. The willingness to take high risks is rightly associated with the prospect of large gains. But the corollary in justice is that those who take high risks must also be willing to accept the possibility of heavy losses.

As presently configured, the government mortgage relief plan actively undermines this reasonable expectation. Whether we like it or not, it will send the message to many people that they need not face up to the consequences of being financially irresponsible. Quite rightly, those home owners who have behaved prudently and continue to meet their mortgage payments, often at considerable sacrifice, will wonder why a portion of their taxes is being used to shield large numbers of people who have behaved rashly from the effects of their own actions.

The end result is likely to be a community-wide increase in disavowal of personal responsibility for one’s actions in a society that increasingly struggles to accept these concepts as indispensible foundations for a free political order. Over the long term, this is likely to contribute to future economic recklessness on Wall Street and Main Street, not to mention reinforce an already complacent attitude among government officials to the moral hazard problem.

Mortgage relief is a difficult and at times emotional issue. Home ownership is generally a good thing, not least because it creates incentives for a range of personally and socially beneficial behaviors. This does not mean, however, that we should refrain from asking hard, perhaps unpopular questions about policies that, on the surface, appear benign and caring, but which may well do considerable damage to America’s already frayed moral and economic fabric.

Samuel Gregg is Research Director at the Acton Institute and contributor to Public Discourse. He has authored several books including On Ordered Liberty and his prize-winning The Commercial Society.

Copyright 2009 the Witherspoon Institute. All rights reserved.

A little discussed question, however, is whether Keynesian-inspired policies are more likely in the long-run to actually foster one of the major causes of the current financial crisis. Among other things, Keynes is famous for his remark that “in the long-run, we are all dead.” To be fair to Keynes, this comment from his Tract on Monetary Reform (1923) is invariably cited out of its original context. But there is no escaping the fact that Keynesian policies ignore a major factor underlying our present economic problems: moral hazard.



Moral hazard is a term commonly used to describe those situations when a person or institution is effectively insulated from the possible negative consequences of their choices. This makes them more likely to take risks that they would not otherwise take, most notably with assets and capital entrusted to them by others. The higher the extent of the guarantee, the greater is the risk of moral hazard. 



The mortgage lenders Fannie Mae and Freddie Mac are prominent examples of this problem. Implicit to their lending policies was the assumption that, as government-sponsored enterprises with lower capital requirements than private institutions, they could always look to the Federal government for assistance if an unusually high number of their clients defaulted. In a 2007 Wall Street Journal article, the Nobel Prize-winning economist Vernon Smith noted that both Fannie Mae and Freddie Mac were always understood as “implicitly taxpayer-backed agencies.” Hence they continued what are now recognized as their politically-driven lending policies until both suffered the ignominy of being placed in Federal conservatorship last September. 



Consider, too, the legal protection of limited liability. On one level, this arguably encourages managers and investors to take full advantage of the massive wealth-creating potential often associated with high-risk endeavors. But at the same time, limited liability also tends to shelter these individuals from a major incentive not to take excessive risk: the prospect of personal bankruptcy. As observed in 1971 by another Nobel Laureate in economics, Kenneth Arrow, limited liability regulation creates incentives for people to do things that they might not do if they were subject to the provisions of unlimited liability. “The law,” Arrow wrote, “steps in and forces a risk shifting not created in the market-place.”



At the level of government policy, a prominent instance of moral hazard was what some call the “Greenspan doctrine” of 2002. This involved the U.S. Federal Reserve stating that, while it was powerless to prevent the emergence of asset bubbles (such as the dot-com and housing booms), the Federal Reserve would do everything that it could to soften the effects of an imploding bubble. This included providing investors with the option of selling their depreciated assets to the Federal Reserve at a time of crisis. Not surprisingly, the result was a surge in excessive risk-taking by investors confident that, if everything did not proceed as planned, they could recoup their losses at someone else’s expense. In his recent book, Fixing Global Finance (2008), the financial journalist Martin Wolf underlines “the distortions introduced by government guarantees to risk-taking.” These, he writes, “create an overwhelming incentive to privatize gains and socialize losses.” 



In many respects, the “Big Three” American car companies are (barely) living examples of what sometimes happens to specific industries when the danger of moral hazard is underplayed. When the Carter Administration chose to rescue Chrysler in 1980, this action conveyed a message to the three Detroit-based car manufacturers: they could take the risk of producing cars that fewer and fewer consumers apparently wanted to buy; they could also risk refraining from confronting the serious inefficiencies introduced into their companies’ operations by years of automobile executives acquiescing in outlandish demands from the United Automobile Workers union. Why? Because if the car companies subsequently found themselves facing economic Armageddon, they had high expectations—based on an established policy-precedent—that the Federal government would bail them out. 



Thus, no one should have been surprised to find the chief executive officers of the now not-so-Big Three—accompanied by a legion of lobbyists and the ever-present UAW—appearing before the United States Congress in late 2008 requesting assistance in order to avert bankruptcy. Does anyone doubt that the next time the Big Three skirt the edge of insolvency, they will once again request protection from the consequences of bad decisions? Such is the logic of disdaining moral hazard.



While there is a great deal of literature on the economics of moral hazard, the same material contains curiously little reflection on why the adjective “moral” is attached to the word “hazard.” Indeed, when economists started studying the subject of moral hazard in the 1960s, their analysis rarely included an explicitly ethical dimension. For the most part, this remains true today. So why do we not simply describe these situations as instances of “risk hazard”? 



It may be that the word “moral” reflects some innate, albeit largely unexpressed, awareness that there is something ethically questionable about creating situations in which people are severely tempted to make imprudent choices. To employ a loose analogy from the realm of moral theology, the one who creates “an occasion of sin” bears some indirect responsibility for the choices of the person tempted by this situation to do something very imprudent or just plain wrong.



If governments and businesses took moral hazard seriously, they would make an effort to identify those state and non-state structures, policies, and practices that create incentives for people to take excessive risks with their own and other peoples’ assets. They would then do what they could to minimize these instances of moral hazard. The economic price might be fewer booms. But economic growth over time would likely be steadier. The chances of mild or severe recessions would also be reduced. 


This brings us to back to the Keynesian policies that most governments are adopting to address the current crisis. In a 2007 Financial Times column, a prominent member of the former Clinton and now Obama Administration’s economic team, Larry Summers, argued that we should beware of what he called “moral hazard fundamentalism.” This was, he said, “as dangerous as moral hazard itself.” By this, Professor Summers meant that ruling out significant government economic intervention on the grounds that it might encourage moral hazard would itself be irresponsible.



The problem is that the Keynesian-interventionist outlook involves, by necessity, a degree of systematic denial of the reality of moral hazard. In an attempt to maintain full employment in perpetuity, Keynesian policies embrace measures ranging from keeping interest-rates artificially low, partially nationalizing industries, to engineering large public works programs. An unfortunate effect is that many businesses as well as ordinary consumers become somewhat insulated from many of the negative consequences of poor decisions and bad investments. As a result, some will become complacent, which is the road to economic stagnation. Others, however, are likely to take risks that become increasingly irresponsible over time until we find ourselves in situations similar to our current predicaments. 



Of course, as long as human beings are fallible creatures, many will take excessive risks at different points in their lives. For some people, it will be with their marriage. Others will behave in an excessively risky manner with their own and others’ financial resources. As a consequence, some people will suffer losses. In a society where right reason and the ethic of loving one’s neighbor reigns, individuals and communities should be ready to help those in genuine need. Law also has a potentially important role to play. As the legal philosopher John Finnis observes in Natural Law and Natural Rights (1980), a sound bankruptcy law can meet all the demands of justice—legal, commutative, and distributive—while respecting the dignity of all those effected, especially the dispossessed, but also those at fault. But neither we nor governments do anyone any favors by creating circumstances or incentives that encourage people to behave imprudently and recklessly in the worlds of finance and industry.



In his many works, the German economist Wilhelm Röpke noted that we should never forget the economic implications of one of the famous pensées of the seventeenth-century French mathematician, philosopher, and physicist Blaise Pascal: “L’homme n’est ni ange ni bête, et le malheur veut que qui veut faire l’ange fait la bête” [Man is neither an angel nor a brute, and the misfortune is that he who wants to make the angel makes the brute]. Röpke’s point was that basing economic policies on the pretence that humans are angels is likely to encourage some rather un-angelic behavior. 

This is advice that governments should keep in mind if they do not want their response to the present recession to sow the seeds of a future economic crisis. Taking moral hazard seriously would be a welcome first step.




Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty and his prize-winning The Commercial Society. 

Copyright 2009 the Witherspoon Institute. All rights reserved.

Today, relatively little is left of the original Bretton Woods. Many of its provisions concerning exchange rates and currencies, for instance, were gradually abandoned. Bretton Woods’ most prominent institutional legacies are the IMF and the World Bank. For different reasons, neither is especially liked by developed or developing countries. In recent years, both have struggled to define their missions. The World Bank has additionally been dogged by allegations of ignoring or even facilitating corruption in developing nations, not to mention criticisms that, more than most bureaucracies, the primary objective of many of its staff seems to be institutional self-preservation.

The contemporary financial crisis has demonstrated, however, that the basic impulse for Bretton Woods-like solutions to international economic problems is alive and well. Some national leaders, for instance, have echoed (probably unconsciously) John Maynard Keynes’s call at Bretton Woods for a “world central bank”. More generally, there is a strong push, especially from Western European governments, for the creation of more intergovernmental planning and bargaining mechanisms as the means to impose a new international regulatory order upon national banking and financial systems.

But is this ‘top-down’ approach really the best way to address the financial crisis over the long term? One prominent twentieth-century figure who would have vehemently disagreed was the German economist Wilhelm Röpke (1899-1966).

An outspoken opponent of Communism and National Socialism, Röpke publicly denounced the new Nazi regime in February 1933. He was subsequently dismissed from his academic position and departed into exile. In later years, Röpke was an increasingly fierce critic of Keynesianism at a time when questioning Keynesian ideas was deeply unpopular. But Röpke is perhaps best known for being one of the intellectual architects of Germany’s 1948 economic reforms. Achieved against the opposition of the German left, many German conservatives, as well as the Allied Military Occupation authorities, these market-liberalizing reforms took West Germany from ruin to riches in just over ten years.

Röpke first achieved international attention as a result of his contributions to business-cycle theory in the 1920s and 1930s. Less well-known is that Röpke was one of the few economic liberals to write extensively on international political economy. Throughout his many writings on this subject, we find an approach that raises profound questions about the wisdom of top-down strategies for reforming the world’s financial architecture.

The sources of Röpke’s thinking about these matters were twofold. The first are insights derived from Scottish Enlightenment luminaries. Book IV of Adam Smith’s Wealth of Nations, for instance, is devoted to questions of international economy. The second are medieval and early-modern commercial practitioners and natural law theorists addressing questions of commercial law.

The problem with “top-down” approaches to international economic problems, Röpke held, is that they usually fail to grapple with the roots of economic disorder. Invariably, these are—as Adam Smith observed—found at the national and local level. The tariffs, for example, which lock developing countries out from some of the world’s biggest markets are implemented by national governments (or, in the EU’s case, via common agreement by member-states), usually after intense lobbying from domestic industries seeking protection from the disciplines of international competition. Likewise the woes of Michigan’s car industry are largely attributable to decades of Michigan executives bowing to the seemingly-insatiable demands of Michigan-based unions. Meanwhile, car companies employing non-union workers in states such as Tennessee and Kentucky are flourishing and paying their employees well.

Looking at today’s financial crisis, we now know that much of it has been driven by failed domestic economic policies. Congressionally mandated housing policies forcing banks to allocate fixed percentages of their loan portfolios to particular income groups helped to facilitate the Fannie Mae and Freddie Mac debacle. Also contributing to the American housing bubble’s implosion was the Federal Reserve’s maintenance of low domestic interest rates for far too long.

The ease of international capital movements certainly meant that the effects of the American mortgage crisis were felt internationally. The causes, however, had nothing to do with open capital markets per se. Many of the causes lay in mistaken American domestic policies, not to mention the choices by thousands of American borrowers to apply for (and American lenders to extend) loans which never had any realistic chance of being paid.

Just as he believed domestic economic problems required domestic solutions, so too did Röpke argue that international economic order is best achieved “at home”. Britain’s unilateral economic liberalization in the 19^th century, he noted, was central to the emergence of the world’s first global economy—not a series of intergovernmental meetings or decisions by international organizations. Likewise, Röpke underlined that currency convertibility was finally achieved in Western Europe in 1958 not as result of Bretton Woods, but rather because West Germany’s unilateral economic liberalization was voluntarily replicated, albeit to different degrees, by other nation-states.

Though by no means a Machiavellian cynic, Röpke observed that national governments are not averse to simply disassociating themselves from economic policies set by supranational and international institutions when it suits them. A contemporary example is the manner in which French governments routinely defy EU competition rules or budgetary requirements whenever they believe such obligations unduly restricts their ability to pursue dirigiste policies.

Röpke’s aversion to international top-down approaches to resolving economic problems was by no means dogmatic. He expressed favorable views of the GATT (now the World Trade Organization) because its size remained small and its trade liberalization brief was clear and narrow. Generally, however, Röpke stressed that almost all international governmental organizations eventually became dysfunctional, highly politicized, and hyper-bureaucratic, not to mention captured by interest groups pursing their own agendas.

But surely, it might be asked, we need rules to govern the workings of the international economy?

Röpke certainly agreed with the need for rules. He observed, however, that international law successfully developed and embodied norms, laws and conditions that brought order to international economic and financial transactions for centuries, without requiring the creation of large numbers of permanent international institutions.

The roots of these international rules and moral norms, Röpke observed, were to be found in the Res publica Christiana of the Middle Ages which gradually developed into a more secularized order public international. Its commercial aspects first achieved expression in the Lex mercatoria, a medieval body of commercial laws devised by merchants and lawyers. The Lex mercatoria was, Röpke notes, derived from reflection on commercial practice as well as the demands of natural law.

Over time, the Lex mercatoria’s precepts were absorbed into common and civil law. France’s Code commercial of 1807, for example, essentially codified the Lex mercatoria’s treatment of contracts. In this way, the Lex mercatoria laid the foundations for contemporary features of international commercial law, ranging from the treatment of trademarks to insolvency issues. It also helped generate formal treatments of related subjects, such as Hugo Grotius’s 1609 Mare Liberum (commissioned by a subsidiary of the Dutch East India Company) that even today constitutes a major basis for international maritime law.

The advantage of this approach, Röpke states, is that it allows the regulatory framework governing international economic relations to respond gradually over time to changes in global economic transactions. A ‘bottom-up’ strategy is certainly slower than that embodied by Bretton Woods. But it also militates against attempts to radically alter the rules governing international economic and financial transactions in response to a particular crisis. This is not always a bad thing. Rules and institutions designed to respond to a specific economic problem of the near past are generally not very good at anticipating or responding to future crises. That is precisely why decisions made at Bretton Woods, designed to address the wreckage of the Great Depression and World War II, have limited relevance to today’s financial crisis.

Some might object that Röpke’s reflections upon ordering international economic relations seem naïve today in light of the global economy’s sheer complexity. But this complexity only raises questions about the wisdom of entrusting the international economy’s governance to new or reformed international organizations that, given the size and speed of modern economic transactions, will be simply incapable of keeping track of everything occurring.

It’s unlikely, of course, that many governments today will pay heed to suggestions made by a long-dead economist. The pressures to be seen to “do something” are probably too great. Still, Röpke reminds us that there is an alternative to the top-down strategy likely to be implemented in forthcoming months. Moreover, to cite Röpke himself, “The outlook is bad . . . if nations strive after international order while at home they continue to pursue a policy contrary to what is required for it.”


Samuel Gregg is Research Director at the Acton Institute and the author of several books, including On Ordered Liberty and his prize-winning The Commercial Society. This piece draws upon his forthcoming book, Wilhelm Röpke’s Political Economy. Gregg is a contributor to Public Discourse.

Copyright 2008 the Witherspoon Institute. All rights reserved.