Free enterprise is often associated with the past. This perception puts the markets champions, seen as hopeless reactionaries, on the defensive.
A typical narrative follows: America had an insufficiently active government under the Articles of Confederation. The Constitution expanded government to meet societys needs. In this climate, where property rights continued to trump the common good, the central government could not maintain national cohesion and ensure racial equality. During the Civil War, government grew to preserve the Union, enable commerce through expansion of infrastructure, and abolish the ancient evil of slavery. During the late nineteenth century, laissez faire reigned supreme. Unchecked, robber barons exploited their customers and workers.
American society, so continues the narrative, overcame its laissez-faire history and embraced active government in the Progressive Era. Commerce, banking, monopolies, food and drugs, and labor conditions finally became regulated. The market was still too free, however, causing the stock market crash and the Great Depression, which the New Deals reforms finally addressed. Anachronistic free marketers resisted this progress.
A generation later the free market proved inadequate on race relations, education, poverty, social insurance, workers conditions, and the environment. New regulations, taxes, and programs arose in the 1960s and 1970s to address these deficiencies. Ronald Reagans election marked a conservative counterrevolution toward the free market, causing the savings-and-loan crisis, rising income disparities, and, ultimately, the 2008 financial collapse. After four consecutive reactionary presidentsBill Clinton being a practitioner of neoliberal austerityderegulation and market fundamentalism have again revealed themselves as outdated approaches to Americas modern problems.
This repeated recognition that the free market no longer suits societys needs is a common theme of modern liberalism. Through experience the inadequacy of the unhampered market has forced enlightened observers to accept the need for more government.
One obvious problem with this narrative is the steadily changing definition of free market. The free market is said to have caused problems addressed in the Progressive Era, yet once again the market economy was blamed for the Depression.The New Deal is said finally to have abolished laissez faire, yet laissez faire has been the culprit in every crisis since. Thoughtful proponents of this narrative explain that the 1980s, for example, were somehow substantially more laissez-faire than the 1970s, yet they rarely present more than a handful of superficial examples of deregulation amid an overall trend of regulatory expansion.
A major problem market proponents have in confronting this narrative, whatever its shortcomings, arises because they themselves sometimes accept it implicitly, often complaining about the liberties lost over the years. The significant kernel of truth is that the national government has unmistakably grown well beyond anything imagined in 1789 or even the nineteenth century. And surely, for every argument statists have defending this growth, compelling historical and economic counterarguments are available.
Yet we must be careful before conceding this premise that the past was laissez-faire. By celebrating the political economy of yesteryear, we risk associating our ideals with the pasts many injustices. We can and should avoid this baggage entirely.
Slavery: The Opposite of Free Enterprise
No libertarian defends the horrid institution of slavery. The problem comes in how free marketers sometimes describe slavery as a mere exception to the rule of early American freedom. In fact this exception virtually swallowed the principle whole.
Progressives love contrasting the pro-liberty, anti-tax rhetoric of the founding generation with the slavery that they tolerated or championed. Robin Einhorns American Taxation, American Slavery is a sophisticated contribution to the argument that those loudly protesting taxes were often the very people who clung to human bondage. This argument indicts the rhetoric of property rights, which is foundational to free enterprise and, in a warped form, the right of one person to own another. Infamously, the Supreme Court found in Dred Scott v. Sanford (1857) that the Fifth Amendment protected a white mans right not to be deprived of his slave without due process. Given this association between Americas slave-owning generations and the rhetoric of liberty, it is crucial that free marketers explain, emphatically and intelligently, how slavery was the very negation of the free-market system.
The subjugation of slaves would undermine early Americas status as a free country even if slaves were a tiny minority. They were not. Slaves amounted to 18 percent of the population at the time of the Constitutions ratification and 12.6 percent on the eve of the Civil War, at which point there were nearly four million.
Libertarians should study the brutality of this system. Historians estimate that hundreds of thousands of slaves were forced to migrate in antebellum Americas internal slave trade. Children were frequently ripped from their families. Beatings and rape were ubiquitous, and torture as punishment was hardly unusual.
Even slaves with relatively humane masters lacked the freedoms that most of todays Americans, living under the modern leviathan, take for granted.
Peter Kolchin, in his seminal American Slavery: 16191877, sums up the reality:
Slaves could hardly turn around without being told what to do.They lived by rules, sometimes carefully constructed and formally spelled out and sometimes haphazardly conceived and erratically imposed. Rules told them when to rise in the morning, when to go to the fields, when to break for meals, how long and how much to work, and when to go to bed; rules also dictated a broad range of activities that were forbidden without special permission, from leaving home to getting married; and rules allowed or did not allow a host of privileges, including the right to raise vegetables on garden plots, trade for small luxuries, hunt, and visit neighbors. Of course, all societies impose rules on their inhabitants in the form of laws, but the rules that bound slaves were unusually detailed, covered matters normally untouched by law, and were arbitrarily imposed and enforced, not by an abstract entity that (at least in theory) represented their interests, but by their owners. Slaves lived with their government.
I thank God I dont live with my government! For many years the pro-market tradition saw slavery as a grave violation of its principles. Kolchin writes:
Early political economistsincluding Adam Smith, whose book The Wealth of Nations (1776) remained for decades the most influential justification for the principles underlying capitalismbelieved that slavery, by preventing the free buying and selling of labor power and by eliminating the possibility of self-improvement that was the main incentive to productive labor, violated central economic laws.
Although critics blame market exchange for the rise of slavery, this criticism is grossly unfair. The slave trade was indeed a market of sortsunfree, unjust, and regulatedbut the most fundamental relationship in slavery was not a market at all. Kolchin explains:
Slave owners engaged in extensive commercial relations, selling cotton (and other agricultural products), buying items both for personal consumption and for use in their farming operations, borrowing money, and speculating in land and slaves, but the market was conspicuously absent in regulating relations between the masters and their slaves. In other words, relations of exchange were market-dominated, but relations of production were not.
The slave power dominated political life in the South and enjoyed federal support through the Fugitive Slave Clause. Slavery was a major government program, its enforcement costs socialized through law. The chief way that the Souths slaveholding elite externalized the costs of the peculiar institution was slave patrols, writes Jeffrey Rogers Hummel in Emancipating Slaves, Enslaving Free Men. These slave patrols were established in every slave state to enforce black codes, inflict punishment, and suppress insurrections and were compulsory for most able bodied white males. Slave patrols, necessary to slaverys maintenance, were a flagrant violation of the free economy.
The destruction of the Indians, the restrictions on women owning property, and many other antebellum policies also illustrate that the United States hardly had a free market before the Civil War. Slavery best makes the point. The conflation of a slave society with free enterprise is an obscenity.
Protectionism, Nationalism, and Corporatism
Outside of slavery nineteenth-century America often fell far short of the free-market ideal. Protectionism was a perennial problem, from the nationalist Tariff of 1816 to the sectionally biased Tariff of 1824 and the infamous Tariff of Abominations in 1828, from President Andrew Jacksons threat to invade South Carolina to enforce the Tariff of 1832 to the Morrill Tariff of 1861. In 1870 the average tariff rate hit 44.6 percent. High tariffs financed the corporatist arrangement of federal subsidies for waterways, canals, and railroads during the Civil War, a war that defied market principles dramatically through its taxation, conscription, militarization of society, massive inflation, and inauguration of new government bureaus.
After slaverys abolition and before the twentieth century, American economic liberty in some senses achieved a peak, but not without many qualifications. Immediately after the Civil War, state-level black codes kept nominally free blacks in a form of extended slavery, indenturing them to employers and criminalizing vagrancy. The U.S. government began enforcing Reconstruction in the conquered South through military rule. Reconstruction counteracted State-imposed rights violations but also fostered a rise in government education and infrastructure projects financed through federal subsidies and considerable hikes on state-level property taxes. Government schooling became much more prevalent in the South, and by the end of the century 75 percent of the states had compulsory attendance laws.
The banking systemfundamental to any modern economywas regulated by the central state for most of the nineteenth century. There was a National Bank from 1791 to 1811 and again from 1816 to 1832.The Civil War birthed a new federal banking system that quickly grew, eventually culminating in the creation of the Federal Reserve in 1913.
In the late nineteenth century Benjamin Tucker identified four State-created monopoly powers that robbed Americans of their libertythe land monopoly, money monopoly, patent monopoly, and tariff monopoly. These mostly involved federal privileges, but the heavy hand of government was also felt locally. Nineteenth-century state governments, at times working with federal authorities, displaced and killed American Indians; regulated various professions, labor relations, consumption goods, and businesses; and implemented social programs.
All in all, the U.S. regulatory state, explains Roderick Long, was not a twentieth-century innovation, but rather was deeply involved from the start, particularly in the banking and currency industries and in the assignment of property titles to land. (Even such land as was not stolen from the natives was seldom appropriated in accordance with any sort of Lockean homesteading principle; instead, vast tracts of unimproved land were simply declared property by barbed wire or legislative fiat.)
In substantial ways the economy of the late nineteenth century was freer than today, although some groups were heavily controlled, not least of all the southern blacks persecuted by Jim Crow laws, to say nothing of whites restricted by segregation from freely associating with these blacks.
Even nationally the twilight of the nineteenth century was a mixed bag. Veto-happy Grover Cleveland was probably the most laissez-faire president in half a century and ever since. Yet Clevelands terms had nontrivial blemishes: He used U.S. Marshals to quell the Pullman strike and enforce the Sherman Antitrust Act, supported the Dawes Acts aggrandizement of presidential authority over Indian affairs, strengthened the Chinese Exclusion Act, begrudgingly acquiesced to an income tax to offset reduced tariff revenue, created the Interstate Commerce Commission, and despite a largely anti-imperialist record, threatened and used military force to assert dominance in Latin America against European influence and in favor of U.S. banking interests.
The markets defenders often mimic its opponents in moving the benchmarks to describe historical periods as laissez-faire. This dangerous game does not stop with the nineteenth century.
American life before the New Deal was certainly freer in important respects, but we must be cautious in defending the 1920s. Putting aside the bloated bureaucracies lingering from World War I, the Fordney McCumber Tariff of 1922, the Immigration Control Act of 1924, and the calamity of alcohol prohibition, it was 1920s credit expansion that Austrian economists credibly blame for the boom and 1929 crash. We lose credibility in carelessly praising the preNew Deal Era while blaming the Depression on policies enacted in that time.
Less ambitious free marketers idealize the 1950sthe decade of top marginal tax rates exceeding 90 percent (and, for the poorest Americans, 20 percent); the FCCs puritanical regulation of the airwaves and maintenance of the telephone monopoly; the booming military-industrial complex; and the growing regimentation of industry, farming, and higher education. The transformative Great Society was in many ways an expansion on Eisenhower-era precedents more than a qualitative break from the past.
Even more desperate acts of nostalgia glorify the Reagan years. Although some government impositions were curtailed on the margins, Ronald Reagan oversaw growth of the New DealGreat Society regime, as deficit spending exploded, Social Security and protectionism expanded, and foreign aid and bureaucracies ballooned.
None of this sober reflection backward should prompt us to see our history as an inexorable march toward liberty. There have been major advances in modern timesabolition of the draft, strengthened free-speech rights, and greater legal tolerance for minoritiesbut even in areas like racial oppression and personal freedom, many matters have worsened. Over two million Americans are behind bars. The drug war has devastated African-American communities. Last year the national government deported more immigrants than ever before. The war on terror has shredded basic rights. Washingtons run-of-the-mill economic interventionsin the name of health, equality, environmentalism, and fighting povertyhave escalated.The national debt and entitlement state have seen an unprecedented boom.
Neither todays dismal state of affairs nor past oppression should make us nihilistic. History can teach us a lot about liberty. Certain areas of American life were freer in the nineteenth century than today and others were not, and the social blessings arising from relative conditions of liberty are worth identifying and understanding. Economics shows that free markets serve the masses by elevating workers productivity and smashing the old order of privilege and oppression. Both experience and economic science demonstrate the superiority of liberty to statism.
The golden era of freedom and free markets is not now and its not behind us. It is still ahead of us. This is reason to rejoice. We can happily envision a much better future.
Reprinted with permission. © Copyright 2012, Foundation for Economic Education.