My Primer for Obama

Tuesday, April 10, 2012

President Obama’s recent speech to the American Society of Newspaper Editors signaled the opening of a political gambit in the upcoming presidential election. In dealing with the proposed budget of Representative Paul Ryan, the president sought to discredit nineteenth-century laissez-faire economics by linking that movement to Social Darwinism: Ryan’s plan, the president said, “is thinly veiled Social Darwinism. It is antithetical to our entire history as a land of opportunity and upward mobility for everybody who is willing to work for it.”

The president’s well-crafted reference to the term ushered in a fierce political dispute between his supporters and detractors. In the midst of the din, no one has undertaken the essential task of sorting out the theoretical differences and similarities between Social Darwinism and laissez-faire.

 Illustration by Barbara Kelley

Charles Darwin’s Origin of the Species was published in 1859. Darwin’s tome offered the first complete view of evolution, which in two words boils down to “natural selection.” Random variation is found in all attributes of any large population of species. Those members that have variations that prove successful win out over their less successful rivals. In nature, this process takes place by a bloody process of competition for scarce resources. Individual organisms stop at nothing in order to satisfy nature’s imperative of self-preservation. The familiar expression “nature red in tooth and claw” spelled death for the losers in the Darwinian race for survival.

The social contract theory that projects the same grim fate for human beings is found in Thomas Hobbes’s Leviathan, which envisions life in the state of nature as “solitary, poor, nasty, brutish and short.” Only state power could supply the needed antidote. The critical question became, what kind of state? The standard laissez-faire answer has always been a state that is strong enough to prevent aggression and fraud.

Even if government did nothing other than control those twin perils, there would still be an enormous gulf between biological and social competition. With biological evolution, death follows from the failure to marshal resources. In social settings under laissez-faire, bankruptcy is the fate of the individual or firm that is unable to succeed in competitive markets. It has long been understood that the unregulated operation of the market can produce major inequalities of wealth. To listen to President Obama speak, one would conclude that that is just about the only thing that markets do.

With biological evolution, death follows from the failure to marshal resources.

Put otherwise, open markets under laissez-faire have made this country a “land of opportunity.” Markets work through voluntary exchange. State enforcement of these exchanges improves the odds that they will produce joint benefits for all parties involved, regardless of their relative wealth. A state that adopts laissez-faire, therefore, commits itself to a regime of freedom of contract, meaning the government will not intervene to set prices, wages, and terms and conditions in competitive markets. The basic intuition is that contract terms set by the state will always reduce the gains from trade, even if they do not destroy the transaction in its entirety.

The question is whether laissez-faire requires more than the faithful enforcement of ordinary contracts. Of course it does. In particular, it was widely understood that the creation of public infrastructure and the organization of national defense are government functions, given that the government can’t coordinate the behavior of private actors without the use of state-based coercion.

But unlike the proponents of the modern social democratic state, the defenders of laissez-faire understood that state powers had to be tightly limited, so that they tended to favor flat taxes for general revenues and just compensation for property taken for public use. Put otherwise, only the critics, and never the supporters, of laissez-faire claimed that private markets could operate without public support.

The above account is a thumbnail sketch of laissez-faire given over fifty years ago by the great economic historian Jacob Viner, one of its most thoughtful critics. To Viner, laissez-faire fell short on one dimension: Namely, it did not provide for any redistribution of wealth from rich to poor, which forms such a large part of the Obama tax crusade.

Yet Viner’s criticism is overstated when set against the behavior of the champions of laissez-faire, who in the late nineteenth century understood much about the diminishing marginal utility of wealth even without government prompting. On their own, many of the richest people of that age acted in the same generous way as the financial titans of our own age. The theoretical foundation for their actions lay in the elusive notion of an “imperfect obligation,” or an obligation that was binding on conscience and enforceable by informal social sanctions even if not enforceable by law.

It is tempting to pooh-pooh the force of a fuzzy notion like “imperfect obligation” by claiming that it subjects the welfare of the poor to the whims of the rich. But putting the point in perspective changes the focus from income to consumption. At this point, we should think of robber-barons such as John D. Rockefeller, Cornelius Vanderbilt, and Leland Stanford, who founded the University of Chicago, Vanderbilt University, and Stanford University respectively. In modern days we can think of the Sloan-Kettering Foundation, the Gates Foundation, and the Buffett Foundation as organizations whose founders acted in accordance with deeply ingrained principles of philanthropy.

Under laissez-faire, bankruptcy is the fate of those unable to succeed in the market.

The same attitudes, moreover, carried over to the creation of charitable hospitals and the provision of care to the poor through churches and organizations like the Salvation Army, all of which would be a lot bigger in the absence of heavy competition from state-run institutions that operate off of tax dollars. For once, Warren Buffett got it right when he observed that he is a lot better at giving away money than the federal government is.

These principles of laissez-faire, which I am proud to endorse, do not amount to a grisly form of Social Darwinism, as the critics of laissez-faire claim. Social Darwinism has no view whatsoever on the question of how the state supplies public goods to its citizens. Social Darwinism also (at least in some of its versions) takes a decidedly hostile attitude toward private charity. In its weaker version, the argument is that charitable assistance only weakens the fiber of the human race and thus should be assiduously avoided. Classical liberals never denied that risk, but thought that they could design their private institutions in a way that provided for short-term need without planting the seeds of long-term breakdown in social mores.

In its stronger (and rarer) version, Social Darwinism argued that the state should prohibit voluntary assistance to the poor and perhaps take on the ugly business of eugenics and forced sterilization of mentally impaired human beings. That view received a grudging constitutional blessing from Oliver Wendell Holmes, who wrote that “three generations of imbeciles is enough” in his opinion for Buck v. Bell (1927), sustaining Virginia’s program of forced sterilization for the feeble-minded.

The irony here runs deep. The same Justice Holmes was the perennial favorite of the Progressives because of his one sentence denunciation of laissez-faire in the 1905 case of Lochner v. New York: “The Fourteenth Amendment does not enact Mr. Herbert Spencer’s Social Statics.” Yet Holmes never bothered to identify which Supreme Court justice, if any, had taken a position remotely similar to the one that Holmes falsely attributed to Spencer.

It is worth stressing that the Supreme Court had many thoughtful defenders of variations of laissez-faire, such as Melville Fuller, who served as Chief Justice between 1888 and 1910. Other defenders included Stephen J. Field (1863–1887), John Marshall Harlan (1877–1911), Rufus Peckham (1895–1909), and David Brewer (1889–1910). These men brought to the bench different backgrounds and attitudes and (Harlan excepted) stand sorely condemned for their endorsement of “separate but equal” in Plessy v. Ferguson.

Unlike laissez-faire, Social Darwinism takes a decidedly hostile attitude to private charity.

As the legal historian James Ely has argued, it would be quite a mistake to think that any of them in any way endorsed the Social-Darwinist position that influenced Holmes. Instead, their program was one that we would do well to emulate today. Their greatest institutional challenge was to find the correct approach to rate regulation for the railroads and public utilities—the most pressing judicial issue between the end of the Civil War and the rise of the New Deal.

Their performance was far from perfect, but they were consistent in their effort to let regulators bleed out monopoly profits without allowing them to confiscate the capital invested in these public utilities. Similarly, they understood that regulating rate and hours in competitive industry produced dislocations that could be avoided by federal action. They also sought to limit the unwise expansion of federal power under the Commerce Clause in a set of decisions that I have already discussed.

On the negative side of the ledger, they were too statist insofar as they gave their blessing to land-use regulations, including rent control and zoning. Nor did they do anything to rein in state or federal powers of taxation when they sanctioned progressive taxes, estate taxes, and inheritance taxes. The bottom line is that if these justices erred, they did so on the side of big government, not on the side of any lean version of laissez-faire economics.

Yet their intellectual failures are miniscule in comparison with those of President Obama. His insistence that his program will open up opportunities for all Americans across the board is a bit of idle self-promotion in the face of the deadly combination of high unemployment rates and shrinking labor-market participation that his policies have wrought. His plea to restore the dignity of the middle class is code for his nonstop program of strengthening the hand of labor unions whose regressive and exclusionary policies undermine job opportunities for the very individuals Obama purports to hold closest to his heart.

He compounds these errors by insisting that the enormous contributions of those at the top of the income scale are futile exercises in “trickle down” economics, without bothering to note the literally thousands of good jobs created by the new technologies and businesses introduced by the billionaire entrepreneurs whom he castigates at every turn. His final insult is to denounce those who pay the bulk of the nation’s tax revenues as free riders on those who take much from it. Right now, the top one percent that garners roughly 20 percent of the income pays about 40 percent of the taxes. But in our current political culture, it receives only a small fraction of the particularized goods that constitute the bulk of the entitlement budget.

Yet Obama, without argument, always treats the current social distribution of burdens as the legitimate baseline. Every new increase of burdens on the rich is legitimate. Any effort to undo them is not. But it is not possible to cut the taxes on those who at present pay no taxes nor to cut benefits on those who at present receive no benefits.

It is imperative for all thinking citizens to oppose programs that have two objectives: increasing transfer payments and destroying the productive base. Every defender of laissez-faire should oppose the president’s policies, even at the cost of being dubbed a Social Darwinist. It is, after all, a small price to pay.

The Poor Are Getting . . . Richer?

Prof. Epstein,

You wrote: "[President Obama] compounds these errors by insisting that the enormous contributions of those at the top of the income scale are futile exercises in “trickle down” economics. . . ."

Let me suggest that the problem is one of liberal (mis) perception. If the rich are getting richer, the poor oftentimes have cell phones (even iphones), computers, air-conditioned apartments, large flat-screen televisions and sometimes even automobiles. Likewise the middle class often owns multiple cars, boats on the lake, cabins in the mountains and takes vacations to locations such as Disneyworld or Myrtle Beach. These "futile exercises" in trickle down economics have redefined U. S. poverty upward to a life-style which surpasses that for most of the remaining population of the globe.

The left's inability to acknowledge this isn't philosophical but an economic and cultural astigmatism which is inadvertently demonstrated by two game shows. On Wheel of Fortune the grand prize is $100,000 and when a contestant wins, confetti and streamers drop, spotlights travel across the stage and family members come running, kissing and hugging each other. In contrast, on Deal or No Deal when a contestant walks away with $100,000 there is just standard applause. This same $100,000 is treated as a life changing event in the former show, but in the latter, it verges on a consolation prize.

President Obama's mistake is thinking like Deal or No Deal. He needs to tune in to Wheel of Fortune.

---Anthony Benvin

Laissez-Faire and Darwinism Holding Hands

Dear Dr Epstein,

I've been working on a historical literary project that takes place in 1884, roughly a decade after Herbert Spencer propounded Social Darwinism, plenty of time for it to perfuse society and become not only a hot topic but an internalized rationale. In looking at its diffusion, the striking aspect was that Social Darwinism promptly splintered into as many different versions as there were authors who took it up. Marxist thinkers (Kropotkin foremostly, if I recall clearly) even had their own version as a justification of communism. Laissez-faire existed in far fewer morphs but did include, for example, I believe it is correct to say, debtors' prisons prior to the innovation of bankruptcy that you mention.

Darwinism and naturalistic (organic?) systems, such as laissez-faire, go hand in hand. Indeed, Phil Gramm (together with a co-author) was just in the WSJ correlating lowered regulation and increased economic growth necessarily with increases in wealth "inequality." I see much of Progressive thinking as little more than pessimistically-guided efforts to erect bulwarks against people being allowed to pursue their own insights. All the Progressives I know believe that left to our own devices we will surely go astray through greed, prejudice, false consciousness (whatever that is) and so on. Laissez-faire and its bedfellow Enlightenment liberalism operate in the opposite dimension—on the optimism that, left to our own devices, we will surely advance through enterprise, innovation, risk-taking and so on.

That's the sense in which I took Obama's comparison . . . just the same old Progressive peevishness that someone somewhere is gaining wealth.

---Charlie Tips

Missing the Mark

Your assessment of a correlation between Social Darwinism and Laissez-Faire capitalism misses the mark. Under unrestricted capitalism, the general standard of living, even for those who are temporarily marginalized due to an inability to compete in a particular industry, is improved. In the Darwinian model, to lose is to die. However, "losers" in a laissez-faire capitalist system have heightened opportunities to thrive rather than starve. As history has amply shown, an unrestricted free market invents new methods of production, new industries, and new products, culminating in wider opportunities, lower costs, and general well-being. All that is needed is incentive and the willingness to work. The correlation is mistaken at the root.

---Mark Wilson