The Message from Eastern Europe


Dr. Peterson, Heritage Foundation adjunct scholar, is the Lundy Professor of Business Philosophy at Campbell University, Buies Creek, North Carolina. This article is abstracted from his remarks presented in Mexico City on December 6, 1989, at the invitation of El Centro de Estudios en Economia y Educación, A.C., and its president, J. Rolando Espinosa, of Monterrey, N.L., Mexico. The occasion was a press conference on the Center’s publication of La Falacía de la Economía Mixta Mexicana (The Fallacy of the Mixed Mexican Economy) by J. Rolando Espinosa, Ludwig von Mises, and Oscar H. Vera.

“Kommunismus ist 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 smiling at the passage and commenting “Leftward, ho!” on the scene?

Eastern Europe is sending us a message. No one questions the fact that Communism has proved for decades a bitter failure in the lives of East Europeans who at long last have revolted against the system. 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 governments so understand—Western governments which practice interventionism galore, which continue 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 Maxx involving the ownership of the tools of production 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 soft socialism of the welfare state and market interventionism—government interference with prices and production, from rent control to import tariffs, from affirmative action to fuel-economy standards for auto manufacturers.

This half-way, middle-of-the-road soft socialism, popularly known as “the mixed economy,” is precisely of the tactical kind prescribed by Karl Marx and Friedrich Engels in 1848 in The Communist Manifesto. There, Marx and Engels state baldly: “The theory of the Communists can be summed up in a single sentence: Abolition of private 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 government controls—so as to prepare the way for an economic coup d’état—has been reiterated and reinforced a thousand-fold in the West since 1848. Mostly unwittingly. Consider, for example, the following statement by Senator Hubert Humphrey of Minnesota innocently espousing welfarism—what I call soft 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 industry [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 glass for fiber optic transmission of telephone messages 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 addition, both Anaconda and Kennecott have disappeared in takeovers. Some monopoly!

In any event, it is dear that American interventionism, including antitrust, has legions of well-meaning advocates along with millions of its supposed 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 indecisiveness sapped Carthaginian morale and supply lines in the field and at home. Despite some victories, notably at Cannae in 216 B.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 1884 by 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, notwithstanding 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 will not find, 45 years after V-E Day, all the freedom and free enterprise they may have envisioned behind the Berlin Wall. Ludwig Erhard, founder and visionary of the postwar “German Economic Miracle,” is no more. The social democrats and their philosophy of welfarism and what the French call dirigisme or indicative planning are in. And therein lies the danger. Marxism is anything but dead; it is breathing and suffused into Western public policy. As the ultra-liberal 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 après 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.”

Nationalizing the 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—f production. The welfare state seizes income via taxation 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 Social Security 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 return—I 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 expended 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 socialism coexisting 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 programs.

Average member-country government spending in the European Community rose from 36 percent of Gross Domestic Product in 1967 to 51 percent 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 10 percent in 1929. Thus does Fabian soft socialism march onward and upward.

Marching Toward Greater Soft Socialism

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 Mises demonstrated—and experience shows—that every government intervention into peaceful private activity tends to make things worse 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 officially began, the contest between capitalism and socialism is over: capitalism has won.”

But victory receding? I say, “Yes,” in light of the entrenchment of soft socialism in the West. Consider further the why of soft socialism% quiet victory. In modern democracies, conventional wisdom—the Zeitgeist of our age—is at base anti-capitalism; 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, interventionism. 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 bureaucrats tend to spring from self-interest to counterproductive ends. Look at what decades of intervention and inflation have done to Argentina, for example, indeed to all Latin America.

Thus do modern democracies inflict interventionism on themselves and bleed from resulting myriad interest groups seeking and frequently getting quasi-monopolistic “rents,” to use the Buchanan-Tullock word. These rents arise from government dispensing all manner of special privileges and perquisites—the stock-in-trade of legislators and officials who dance a quid-pro-quo tango with voters organized into powerful lobbies.

Look more closely at this interventionist virus in our body politic. The essence of soft socialism is, as I say, interventionism. Interventionism is government 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’ “Middle Way”

Syndicated newspaper columnist and self-described pragmatist Marquis Childs took that line in his book entitled Sweden: The Middle Way 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 employment.” 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 century 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 regulation. 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 number.”

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 working of the market orders, commands, and prohibitions 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 factors 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 courting 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 inflation”—but not adding that inflation is itself a result of interventionism.

Or note, for another example, the issuance of import and export licenses. Such a license has a cash value. It is like a commodity in trade. Whether cash passes over or under the table is beside the point. The licensee is expected to do his part of what amounts to a quid pro quo. Most likely he is expected, at a minimum, to work for the party in power, i.e., the party issuing the license.

When the advocates of interventionism are reminded of practically inevitable corruption, they are often inclined to dismiss it with a shrug. Better, they say, that the “right” things be done publicly rather than the “wrong” things be done privately—which would occur, allegedly, if the happen-stance and planlessness of the private market were involved.

Yet clearly when the standards of right and wrong are left to the government to decide, corruption and the politicization of standards follow; the democracy of the marketplace, i.e., of the sovereign consumers, of the people themselves, is denied. Interventionism is inherently undemocratic, inherently corrupt, inherently unstable, inherently inefficient.

Please note the use of the words “happen-stance” and “planlessness” above. It relates to the charge that capitalism or the market system is planless, haphazard, mechanical, without direction. The pejorative term “laissez faire” of conventional wisdom about sums it up. Too, free market systems are similarly charged as being without, again, a “social safety net.” Perish the thought that mindless, planless, helter-skelter forces should jeopardize the security of society and its individual members. In Britain interventionism in the form of welfare planning covers the cradle-to-the-grave.

But is the alternative: plan versus no plan? Is the issue between a dead mechanism and conscious planning? Is not the crucial question, asked Mises, just whose planning? He maintained the real issue is freedom versus government omnipotence—what his student, Nobel Laureate in Economics F. A. Hayek, calls the pretense of knowledge, the fatal conceit. As Mises put it in Human Action (1966): “Laissez faire does not mean: Let soulless mechanical forces operate. It means: Let each individual choose how he wants to cooperate in the social division of labor; let the consumers determine what the entrepreneurs should produce. Planning means: Let the government alone choose and enforce its rulings by the apparatus of coercion and compulsion.”

This is not to denigrate out of hand the government apparatus of coercion and compulsion. We the people are not angels. We grant to the state a monopoly of force so as to suppress predators within and without. We equip it with prisons, billy clubs, electric chairs, armed forces—in an word, power.

But, alas, power anywhere has a way of corrupting, as Montesquieu and Acton taught us; and wisely the American Founding Fathers attached a Bill of Rights to the U.S. Constitution, put limits on governmental power, on political democracy, and specified in the Ninth Amendment (today mostly mothballed) that those rights enumerated in the Constitution “shall not be construed to deny or disparage others retained by the people.”

Clearly the Founding Fathers worried, rightly, about who guards the guardians. They said government functions best under, in the words of the Declaration of Independence, “the consent of the governed.”

Ah, consent. That’s the word. It signifies both economic and personal freedom. Alas, it’s a word lost in the lexicon of modern democracy and public policy, so very much subject to what Tocqueville and Acton termed “the tyranny of the majority,” which most often works out to be a coalition of minorities.

I say: We should restore that word “consent” and its spirit if we wish to get at the core of interventionism, of what I am calling soft socialism. We should see that if hard socialism is a failure, so is soft socialism. The mixed economy is the mixed-up economy. So to me the message from Eastern Europe is this:

Avoid Fabianism and interventionism—soft socialism in all its coves—like a plague. Reaffirm the rule of law, the integrity of contracts, and other private property rights. Return power to the people, to the individual. Return to limited government and market capitalism—i.e., to freedom and free enterprise. And lay Marxism to rest once and for all.


May 1990

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