The Message from Eastern Europe; W. Peterson

The most likely scenario for Eastern Europe is a mixed economy, retaining socialist qualities while adopting some capitalist attributes. The government control inherent in the socialist phi losophy is something that appeals to politicians and bureaucrats of every persuasion. If, however, capitalism is adopted with the fervor of a religious conversion, the industrialized world and newly developed nations could see both profits and com petition from Eastern Europe in the not-so-distant future. Capitalism adopted as a reluctant admis sion of the failure of Communism, however, will result in a relatively stagnant Eastern Europe, with the same problems that plague many other nations with controlled economies. 0 The Message from Eastern Europe by William H. Peterson "K ommunismusist kaput!" So one East Berliner declared to an American journalist. But is Communism really finished? If indeed the Cold War is over, has it been in fact "a famous victory,"

as poet Robert Southey put it in his "Battle of Blenheim"? Or, has Communism simply passed into a phantasmagoria of deceptive guises, with the ghosts of Karl Marx and Friedrich Engels smil ing at the passage and commenting "Leftward, ho!" on the scene? Eastern Europe is sending us a message. No one Dr. Peterson,HeritageFoundationadjunctscholar,is the Lundy Professor of Business Philosophy at Campbell University,Buies Creek, North Carolina. This articleis abstractedfrom his remarkspresentedin MexicoCityon December6, 1989, at the invitationof El Centrode Estu dios en Economia y Educacion,A.c., and its president, J. Rolando Espinosa,of Monterrey,N.L., Mexico. The occasionwas apressconferenceon the Center'spublica tionofLa Falacia de la Economia Mixta Mexicana (The Fallacy of the Mixed Mexican Economy) by J. Rolando Espinosa,Ludwig von Mises, and OscarH. Vera. questions the fact that Communism has proved for decades a bitter failure in the lives of East Euro peans who at long last have revolted against the sys tem. Still,apart from the people of the East, do the people of the West themselves read the situation correctly and understand just why Marxism failed?

And, equally important, do their respective gov ernments so understand-Western governments which practice interventionism galore, which con tinue to control and control, inflate and inflate, tax and tax, spend and spend, and elect and elect, but with negative repercussions on economic growth and, more importantly, on individual freedom and national viability? Clearly the problem of the West is no longer hard socialism-the outright socialism of Karl Marx involving the ownership of the tools of pro duction a la Joseph Stalin and Leonid Brezhnev. Overt Marxism is dead. Eastern Europe testifies to that. Rather, I submit, the problem of the West and the Third World is covert Marxism, the softsocial188 THE FREEMAN • MAY 1990 ism of the welfare state and market intervention ism-government interference with prices and production, from rent control to import tariffs, from affirmative action to fuel-economy standards for auto manufacturers.

This halfway, middleof-the-road soft social ism, popularly known as "the mixed economy," is precisely of the tactical kind prescribed by Karl Marx and Friedrich Engels in 1848 in The Com munist Manifesto. There, Marx and Engels state baldly: "The theory of the Communists can be summed up in a single sentence: Abolition of pri vate property." There, while espousing the violent overthrow of capitalism, they also deploy ten interventionist traps, including the progressive income tax and "free" public schools, to hasten that abolition and quite possibly,as they say, "win the battle of democracy." Their theme, their ploy, of initial intervention ism, of state direction and mushrooming govern ment controls-so as to prepare the way for an economic coup d'etat-has been reiterated and reinforced a thousand-fold in the West since 1848. Mostly unwittingly.Consider, for example, the fol lowingstatement by Senator Hubert Humphrey of Minnesota innocently espousing welfarism-what I callsoft socialism-before a Harvard Law School Forum on March 24,1950: "The greatest threat to the free enterprise system in America is not Social Security, minimum wage, aid to education, rural electrification programs, and the like. The greatest threat to free enterprise is growing monopoly in America."

To validate his charge of monopoly, Senator Humphrey cited Anaconda Copper as controlling "almost half the capital assets of the whole indus try [while] another quarter of the capital assets of the copper industry is controlled by Kennecott Copper Corporation." But I note that in the four decades since that statement, vigorous inter-modal competition has set back copper-the use of aluminum for long distance electrical transmission, for example, or glassfor fiber optic transmission of telephone mes sages and data. Too, Senator Humphrey ignored the impact of consumer sovereignty on his purely domestic copper monopoly scenario. Did he think that big copper consumers like GM and AT&T would simply roll over and play dead, when other major copper producers are readily available across the globe-in Canada, Mexico, Australia, Africa, and South America, for example? In addi tion, both Anaconda and Kennecott have disap peared in takeovers. Some monopoly!

In any event, it is clear that American interven tionism, including antitrust, has legions of well meaning advocates along with millions of its sup posed beneficiaries such as Social Security recipients. Parallel support can be seen throughout the West. Soft socialism is conventional wisdom. The Fabians But for many of interventionism's at-heart Marxist proponents here and abroad, it reflects a sly Fabian tactic. Recall Quintus Fabius Maximus Verrucosus, the shrewd Roman general who was known as the Cunctator-the Delayer. He opposed the renowned Hannibal of Carthage not by a head-on bloody confrontational battle but by long, drawn-out delaying tactics and occasional sharp lightning flank attacks. Years and seeming procrastination and indeci siveness sapped Carthaginian morale and supply lines in the field and at home. Despite some victo ries, notably at Cannae in 216B.C., Hannibal never was able to take Rome itself and was ultimately recalled by a weary Carthage. In the end, then, Fabius won through masterly wearing down his foe, even though he too was replaced with another general by a Rome similarly tired of lack of outright victory.

Fabius, in a way, inspired the formation of the Fabian Society,a group of British political activists who derived their name from the Cunctator and promoted evolutionary (read interventionistic) as opposed to revolutionary socialism in England. Founded in 1884by Beatrice Potter, Sidney Webb, and others, the Society specifically rejected the Marxist call for a violent class struggle, attracted such literary luminaries as George Bernard Shaw and Lytton Strachey, and played a leading role in the creation of the Labour Party in the early 20th century. The rest, as the saying goes, is history. So, not withstanding the breakup of Eastern Europe, what might yet prove to be the ultimate Fabian triumph of Marxism through expanding interventionism in the West may prove more immediately to be something of a rude awakening for some half-million East Germans fleeing out and-out Marxism for West Germany.

There these refugees willnot find, 45 years after THE MESSAGE FROM EASTERN EUROPE 189 V-E Day, all the freedom and free enterprise they may have envisioned behind the Berlin Wall.Lud wig Erhard, founder and visionary of the postwar "German Economic Miracle," is no more. The socialdemocrats and their philosophy of welfarism and what the French call dirigisme or indicative planning are in. And therein lies the danger. Marx ism is anything but dead; it is breathing and suf fused into Western public policy.As the ultra-lib eral Nation put it in a lead editorial last fall: "The exodus of thousands of youthful East Germans across the Austro-Hungarian border cannot be interpreted, as some Western commentators would have it, as an abandonment of the teachings of Karl Marx. To be sure, the emigrants are hoping for a better life than they found under the East German regime. But the country to which they are . . . traveling is not Thatcher's Britain or apres Reagan America. . . .

"Both in the time of the Weimar Republic and under the present government, the Social Democrats altered the features of capitalism. By leaving East Germany the new emigrants have chosen capitalism with a human face. Its human ization was and is the work of the party that Marx founded. And so the newcomers have gone from Stalin back to Marx." Nationalizingthe Fruits of Production Back to Marx? The Left toys with us. Still, I recall the American economist W. Allen Wallis saying that while today's neo-socialists in the West may not have succeeded in nationalizing the tools of production, they have certainly gone far in nationalizing the fruits-i.e., the income-of pro duction. The welfare state seizes income via taxa tion and redistributes it like Robin Hood. Alas, the welfare state dominates the West. For example, the U.S. Government dispenses some 38 million checks a month for SocialSecurity alone, with massive political implications. And counting all its transfer payments-these are, by definition, payments for which Uncle Sam receives no goods or services in returnI find that more than half of the U.S. $1.2 trillion budget, or $620.5 billion, as of the second quarter of 1989,is expend ed on transfers.

Obviously the constituencies collecting these goodies are very powerful indeed. And obviously, too, this is hardly capitalism in action but, as I say, soft socialismcoexisting with, and serving as a drag on, our market economy. So you can readily see that this soft socialism is marked by vast government spending growing throughout the West. Leading this dubious race is Sweden, which according to figures supplied by the Organization for Economic Cooperation and Development (OECD), spends some 60 percent of its Gross Domestic Product on government pro grams. Average member-country government spend ing in the European Community rose from 36 per cent of Gross Domestic Product in 1967to 51 per cent in 1987. Canadian government spending jumped from 32 percent in 1967 to 46 percent in 1987,while even Japanese public spending shot up from 18 percent to 33 percent. Comparable U.S. total government spending was 37 percent in 1987, a figure suggesting, in a sense, America is better than one-third socialized. In contrast, total U.S.

government spending-Federal, state, and local-amounted to but around 10percent in 1929. Thus does Fabian soft socialism march onward and upward. MarchingTowardGreater SoftSocialism Why, then, this march toward greater and greater soft socialism? Why now when economist Ludwig von Mises demonstrated as far back as 1920 that socialism, hard or soft, cannot function without a viable price system, without, to use his phrase, "economic calculation"? Why now when Misesdemonstrated-and experience showsthat every government intervention into peaceful pri vate activitytends to make thingsworse rather than better? Why now when we witness the breakdown or outright failure of hard socialism in Eastern Europe? Failure conceded, as East Europeans vote with their feet or bring down Communist parties that have ruled over them since the end of the Second World War. Failure further conceded, as witness the concession of economist Robert Heilbroner, longtime socialist sympathizer, author of the best selling book The Worldly Philosophers, in The New Yorker in January 1989: "Less than 75 years after it officiallybegan, the contest between capi talism and socialism is over: capitalism has won."

190 THE FREEMAN • MAY 1990 But victory receding? I say, "Yes," in light of the entrenchment of soft socialismin the West.Consid er further the why of soft socialism's quiet victory. In modern democracies, conventional wisdom the Zeitgeist of our age-is at base anticapitalism; and, however modulated, however transmuted and sometimes jargonized into "democracy," it is this thinking which gives rise and growth to welfarism ("the social safety net") and its half-brother, inter ventionism. After all, how many world leaders come out four-square for capitalism? Especially in the Western democracies? Here politics subtly transcends economics. For as economists James Buchanan and Gordon Tul lock have long reminded us, logic and experience in winning intellectual battles are not enough. Public choices by voters, legislators, and bureau crats tend to spring from self-interest to counter productive ends. Look at what decades of inter vention and inflation have done to Argentina, for example, indeed to all Latin America.

Thus do modern democracies inflict interven tionism on themselves and bleed from resulting myriad interest groups seeking and frequently get ting quasi-monopolistic "rents," to use the Buchanan-Tullock word. These rents arise from government dispensing all manner of special priv ileges and perquisites-the stockin-trade of legis lators and officials who dance a quid-pro-quo tan go with voters organized into powerful lobbies. Look more closelyat this interventionist virus in our body politic. The essence of soft socialism is, as I say, interventionism. Interventionism is govern ment interference in economic activity,certainly to augment political ends, but nominally to advance the public interest. To many of its naive proponents it represents the third way, a middle way, a melding of the "best" of socialism with the "best" of capitalism into, again, soft socialism. The question is, however, who is to decide on what is the best of each system. And of course the answer is: Government knows best.

Childs'"MiddleWay" Syndicated newspaper columnist and self described pragmatist Marquis Childs took that line in his book entitled Sweden:The MiddleWay published in 1936. John Maynard Keynes and his paradigm-setting The General Theory on Employment,Interest,and Money, also published in 1936, took that same line. Keynes argued that government should manage macro-demand through fiscal policy so as to achieve "full employ ment." Today the West and the Third World still pretty much take that line, though the stardom of Keynes as the premier economist of the 20th cen tury has in recent decades lost its luster. Back to Marquis Childs. In 1947,in introducing a paperback edition of Sweden: The Middle Way, he said: "Capitalism in [Scandinavia] was modified and controlled, its excesses curbed, by much more realistic methods than those of government regu lation. In many fields the profit motive has been drastically restricted or even abolished. More nearly than in any other part of the world the test has been the greatest good for the greatest num ber."

Does interventionism involve the greatest good for the greatest number? Indeed, what does it involve? Said Mises in Human Action (1966): "The authority interferes with the operation of the market economy, but does not want to eliminate the market altogether. It wants production and consumption to develop along lines different from those prescribed by an unhampered market, and it wants to achieve its aim by injecting into the work ing of the market orders, commands, and prohibi tions for whose enforcement the police power and its apparatus of violent compulsion and coercion stand ready." The Mises point on compulsion and coercion is important in understanding the modus operandi of interventionism. He is saying that those who ask for more interference are asking for less freedom, less democracy, for more politicization of the social system. Too, because corruption is a regular effect of interventionism, they are also asking for, however inadvertently, still more corruption. Corruption ensues because favoritism cannot be avoided.

Under interventionism, marketplace democracy is foregone. Discrimination supersedes. The public authority must pick and choose, and political fac tors are virtually impossible to ignore. Consider, for example, public pensions for the aged, with millions looking to the state for their monthly check, with parties and candidates court ing their vote and frequently getting into a bidding competition to boost the pension so as better to "protect our senior citizens from the ravages of old age," adding, "and from the ravages of inflaTHE MESSAGE FROM EASTERN EUROPE 191 tion"-but notaddingthatinflationisitselfaresult of interventionism. Or note, for another example,the issuanceof import and export licenses.Such a licensehas a cash value. It is like a commodity in trade. Whether cash passes over or under the table is besidethe point.The licenseeis expectedto do his part of what amounts to a quid pro quo. Most likelyhe is expected,at aminimum,to workfor the partyin power,Le., the partyissuingthe license.

When the advocates of interventionism are remindedofpracticallyinevitablecorruption,they are ofteninclinedto dismissit witha shrug.Better, they say, that the "right" things be done publicly rather than the "wrong" thingsbe done private ly-which would occur, allegedly,if the happen stanceandplanlessnessoftheprivatemarketwere involved. Yet clearly when the standards of right and wrong are left to the governmentto decide,cor ruptionand the politicizationof standardsfollow; the democracy of the marketplace, i.e., of the sovereignconsumers,of the peoplethemselves,is denied.Interventionismis inherentlyundemocrat ie, inherentlycorrupt,inherentlyunstable,inher entlyinefficient. Please note the use of the words "happen stance" and "planlessness"above.It relatesto the charge that capitalism or the market system is planless,haphazard, mechanical,without direc tion.Thepejorativeterm"laissezfaire"ofconven tionalwisdomabout sums it up. Too, free market systemsare similarlycharged as being without, again,a "socialsafetynet."Perishthe thoughtthat mindless, planless, helter-skelter forces should jeopardizethesecurityofsocietyanditsindividual members.InBritaininterventionismin theformof welfareplanningcoversthe cradle-to-the-grave.

Butis thealternative:planversusno plan?Is the issue between a dead mechanismand conscious planning?Is not the crucialquestion,askedMises, justwhoseplanning?He maintainedthe realissue is freedom versus government omnipotence -what his student,NobelLaureatein Economics F: A. Hayek,callsthe pretenseof knowledge,the fatal conceit. As Mises put it in Human Action (1966):"Laissezfaire does not mean: Let soulless mechanical forces operate. It means: Let each individualchoose how he wants to cooperate in the social division of labor; let the consumers determine what the entrepreneurs should pro duce. Planningmeans:Let the governmentalone chooseand enforceits rulingsby the apparatusof coercionand compulsion." This is not to denigrateout of hand the govern ment apparatus of coercionand compulsion.We the peopleare not angels.We grant to the state a monopolyofforceso as to suppresspredatorswith in andwithout.We equipit withprisons,billyclubs, electricchairs,armedforces-in an word,power.

But,alas,poweranywherehas a way ofcorrupt ing, as Montesquieu and Acton taught us; and wiselythe AmericanFoundingFathersattacheda Bill of Rightsto the U.S. Constitution,put limits on governmentalpower, on politicaldemocracy, and specified in the Ninth Amendment (today mostlymothballed)that those rightsenumerated in the Constitution"shallnot be construedto deny or disparageothersretainedby the people." Clearlythe FoundingFathers worried,rightly, about who guards the guardians.They said gov ernmentfunctionsbest under,in the wordsof the Declarationof Independence,"the consentof the governed." Ah, consent.That's the word. It signifiesboth economicand personalfreedom.Alas,it's a word lost in the lexicon of modern democracy and publicpolicy,so very much subject to what Toc queville and Acton termed "the tyranny of the majority," which most often works out to be a coalitionof minorities. I say: We should restore that word "consent"

and its spiritif we wish to get at the core of inter ventionism,ofwhatI am callingsoftsocialism.We shouldsee that if hard socialismis a failure,so is soft socialism.The mixed economyis the mixed up economy.So to me the messagefrom Eastern Europe is this: Avoid Fabianism and interventionism-soft socialismin all its covers-like a plague.Reaffirm the ruleoflaw,the integrityofcontracts,andother privatepropertyrights.Return powerto the peo ple, to the individual.Return to limitedgovern ment and marketcapitalism-i.e., to freedomand free enterprise.And lay Marxismto rest onceand for all. D 192 John Arbuckle: Entrepreneur, TrustBuster, Humanitarian by ClaytonA. Coppin T he importance of the entrepreneur to the spectacular growth of the American econ omy in the late 19th and early 20th cen turies is now widelyunderstood. The contributions of John D. Rockefeller, Andrew Carnegie, and J. ~ Morgan are well known.