January 6, 2020 Reading Time: 16 minutes

In the midst of the Second World War, the famous Austrian-born economist Joseph A. Schumpeter (1883-1950), published his famous book, Capitalism, Socialism, and Democracy (1942). He asked the question, “Can Capitalism Survive?” He answered, “No.” He expected some form of socialism, dictatorial or “democratic,” to supersede the private market economy in postwar America. He was proven wrong. Postwar American capitalism may have been increasingly regulated and interfered with by the government, but it was not replaced by socialist central planning. 

Today, the media and a variety of more serious public policy publications are awash in articles and essays insisting that the postwar “neoliberal” era has finally and inescapably come to an end, with a far more “progressive” and socialist system the way of the future. Planetary problems and domestic income inequalities and other social injustices require and demand nothing less than the more direct and guiding hand of government over social and economic affairs for the betterment of humankind, it is argued. “Liberalism” and relatively competitive markets have had their day, its critics insist. (See my articles, “All Socialisms are Antisocial,” and “Why Neo-liberalism is Really Neo-socialism,” and “How the Word Liberalism Came to Mean Its Opposite.”)

Most of these criticisms and challenges have come from “progressives,” the new “democratic” socialists, and a growing number in the Democratic Party, as well as in the academic community. But criticisms and rejection of domestic and international liberalism have also come from conservatives, who have called for a “new nationalism,” that would require a more “activist” state to serve national interests and identity, and to which the citizen of the nation-state must conform and offer allegiance. (See my articles, “Conservative Nationalism is Not About Liberty” and  “Hazony’s Tradition-Based Society is a Form of Social Engineering.”)

There has also been a number of those who have come around to rejecting classical liberalism and libertarianism, who previously considered themselves to be proponents of these views. They have insisted that classical liberal and libertarian ideas are not in tune with the social problems and “progressive” trends that are inescapably part of the modern world. (See my articles, “Liberal Capitalism as the Ideology of Freedom and Moderation” and “Classical Liberalism and the Limits to Compromise.”)

Claiming that Classical Liberalism is a Spent Force

Now another voice has offered his view on whether or not classical liberalism and libertarianism can survive in their historical forms of defending individual liberty, free markets, and a government primarily limited to the protecting of people’s individual rights to life, liberty and honestly acquired property without interventionist regulation and compulsory redistribution. And his answer, too, is, “No.”

Tyler Cowen is a prominent professor of economics at George Mason University in Virginia. He has written a number of insightful books devoted to aspects of the economics and culture of a free society, and has written regular columns for both The New York Times and Bloomberg News. He also co-authors the provocative and widely read blogsite, “Marginal Revolution.”

Professor Cowen rang in the 2020 New Year with a blog contribution on, “What Libertarianism Has Become and Will Become – State Capacity Libertarianism.” The gist of his argument is that classical liberalism and libertarianism are out-of-date and passé political philosophies that had their relevance and significance in the 19th century for advancing the cause of personal liberty and freer markets, and during the first half of the 20th century as an argument against radical socialist central planning. But society and its problems have moved on and what people want from their government has become more expansive. 

Insisting that the Welfare State is Here to Stay

He expressed part of this argument in an earlier essay on “The Paradox of Libertarianism” before the financial crisis of 2008-2009, in which he said: “The bottom line is this: human beings have deeply rooted impulses to take newly acquired wealth and spend some of it on more government and especially on transfer payments. Let’s deal with that.” Furthermore, “The more wealth we have, the more government we can afford.” He concludes that this is a “package deal.” The more wealth a market-based economy produces, the more government people will want in terms of social welfare programs. That’s just the way it is, Professor Cowen asserts. Live with it and give up the classical liberal and libertarian idea of prosperity and a highly limited government. With prosperity will come bigger government, he asserts. 

The “inevitability” implied in this is, in fact, nothing of the sort. It could be just as reasonably argued that as the members of the society grow in wealth and improved standards of living, they will need and desire less government dependency and support. Rising standards of living enable more people to financially support themselves, as well as providing the means for those gaining in material comfort and ease to have the monetary means to demonstrate more willingness and generosity to assist some who may still be less well off than themselves through avenues of private charity and philanthropy; plus, having the greater leisure time to participate in such endeavors through the institutions of civil society.  

Why any such spirit of private giving and benevolence has diminished in fairly wealthy countries in Europe and in various circles in the United States may be taken as the consequences resulting from governmental redistributive largess and an ideology that has weakened the belief in or the goodness of “self-reliance” and personal responsibility. Ten years ago, the German news magazine “Der Spiegel,” reported that in a survey of leading businessmen in Germany, the vast majority said that private giving was not their responsibility; it was the job of government and its bureaucratic “experts.”  Where did that come from, other than an ideological and intellectual culture that presumes and persuades too many in society that political paternalism is superior to personal responsibility and the voluntary private sector.

Chronological Sequence Does Not Imply Causal Necessity 

It is very easy to see a “trend” in the past and presume that it is inevitable or irreversible. Back in 1968, in reviewing a variety of forecasts and predictions of what the year 2000 was likely to be like, conservative sociologist Robert Nisbet (1913-1996), pointed out that it is easy to fall into the trap that what has chronologically happened in the observed past implies what must continue in the future: 

“We are confusing continuity of chronology with continuity of circumstance and event. We are mistaking our metaphoric reconstructions of the past, by which we assuage the pain of need for temporal order, for causal connection . . .  

“Nothing, I assume, could seem more certain to the individual for whom reality consists of the hard data of atoms, molecules, reflexes, social-security numbers, and the like than that absolute knowledge of the hard data of the present should yield – properly processed in the machines – knowledge of the future. But it won’t and it never will. And the reason, I repeat, is that the present does not contain the future, the far is not to be found in the near, nor was our present ever contained in the past. Not if what we are concerned with is change . . .

“A trend, the dictionary tells us, is the general direction taken by a stream, a shoreline, etc.; it is an underlying or prevailing tendency or inclination. These are all tempting words for the historian or predicter of societal development. How easy it is, as we look back over the past – that is, of course, the ‘past’ that has been selected for us by historians and social scientists – to see in it trends and tendencies that appear to possess the iron necessity and clear directionality of growth in a plant or organism. 

“We think of these ‘trends’ as cumulative movements, as genetic sequences, as actually causal. We forget that they are, one and all, a posteriori constructs, frequently metaphoric in character, always post hoc, propter hoc. But the relation among past, present, and future is chronological, not causal.” 

Nisbet especially emphasized all this is the case in the arena of man and society, because something is at work here that is not present in the world of atoms and molecules, that being human ideas and purposes.

Faulty Reasoning at Work, Not Propensities for More Government

Why do so many people accept the notion that imposing and raising legal minimum wages are good for people at the lower income levels? Do they have some inexplicable “propensity” to demand higher wages for others through government mandate as their own economic circumstances improve? I think the more reasonable explanation is a failure to understand and appreciate all the implications of the logic and reality of supply and demand in labor markets. That is, it is the result of wrong and faulty ideas that are sometimes easier to impress upon people than the often abstract and indirect chains of causation through which market processes operate, including in the demand for labor. 

So, if we observe that as wealth and material betterment have improved in our society, people at the same time have been supporting increases in redistributive welfare programs, the more rational explanation is an educational, cultural and intellectual setting in which academics and opinion makers and writers have been successful in influencing the climate of ideas in socialist and welfare statist directions through their ability to interpret the past and the present through the prism of their collectivist ideas.

Friedrich A. Hayek (1899-1992) once pointed out, in his introduction to Capitalism and the Historians (1954), the underestimated power of historians in society in shaping public opinion by the interpretive schemas they give to historical events. Does Professor Cowen believe that the Great Depression of the 1930s or the financial crisis of 2008-2009 “proved” the failure of capitalism and free markets? Does he believe that a private property, free market economy is inseparable from exploitation and abuse of women and “people of color” by white, male capitalists?  Does he believe that an international “liberal” economic order of free trade and investment is the vehicle by which “capital” oppresses people in less developed countries around the world? 

Well, these are the ideas that have been and are now, certainly, floating around in academic, intellectual and social media circles. If they end up triumphing in the arena of political and economic policy, will Professor Cowen conclude this is how society responded to being wealthier, that is, wanting more government regulation, redistribution and control over domestic and global affairs just because people were materially better off? 

It will have been the success of false ideas about how markets work, how incomes are determined, and what equality under liberty and the rule of law means and offers in a free society. So, Professor Cowen, the welfare state and bigger government is not a “package deal” with growing prosperity. It is the misfortune of the coinciding of material betterment due to the extent to which markets have been able to operate and the influence of misguided and dangerous ideas about man, society, justice and government that have been at work in American society for decades. 

The New “Third Way:” State Capacity Libertarianism

What does Professor Cowen offer as an alternative to the presumed passé paradigm of classical liberalism and libertarianism? He calls for “State Capacity Libertarianism.” Certainly, we have here a catchy phrase that is clearly meant for a movie theater marquee. At least classical liberalism harks back to the idea of something better that should be returned to, like “Classic Coke,” for those old enough to understand to what that refers. 

But State Capacity Libertarianism? What imagery does that conjure up? A State that allows as much liberty as the political authorities are willing to put up with? Perhaps President Xi of China could write the playbook for that one!

What Professor Cowen is searching for is the elusive, I would suggest mythical, “third way,” a system that is neither unrestricted laissez-faire, free market capitalism (which he considers to be a thing of the past, if it ever existed) and a heavily top down centralized planning and regulating system that would stifle entrepreneurial innovation and siphon off through its fiscal burden the financial capacity for longer-term economic growth.  

The State, as he conceives it, needs to be centralized and legally strong enough to maintain the stability and working order of a market-based economic system; but it must also have the power, ability and financial means to perform a wide array of additional tasks that he believes the State can or must do, and which “the people” clearly want to be done by government outside of market supply and demand. 

So what are these additional tasks? Professor Cowen believes that this includes government regulation and direction for solutions to “climate change.” There needs to be a strong (though not tyrannical) State for infrastructure building, exploration of space, better K-12 education, and health issues that threaten the safety of society. There must be subsidies for science, the fostering of nuclear power, intellectual property dispute resolutions, and coordination of various global policies. 

In addition, fearful of terrorist attacks, foreign hacking and hijacking of American elections, the dangers of proliferation of nuclear weapons, and destabilizing wars abroad, Professor Cowen is also a foreign policy interventionist supportive of an activist role for the United States around the world. 

He tries to balance his proposals between those offered by the more radical “progressives” and democratic socialists on the one hand and other moderate libertarians, those labelled “liberaltarians,” who are willing to work and concede too much to the political “left” in terms of State intervention. 

No Logical Limits Once on the Interventionist Highway 

But once you are in the ideological and policy quagmire between free market liberalism and some form of “democratic” socialism with its demands for extensive and intrusive government control and planning, who decides and how do you decide the “right balance,” the correct degree of markets mixed with the interventionist-welfare state? 

The German ORDO Liberals of the postwar period in Germany advocated and attempted to implement what they called a “social market economy,” what one of their leading intellectual mentors, Wilhelm Röpke (1899-1966), called, “the middle way.” Their idea was, as they expressed it, a State strong enough to secure a functioning market economy that offered an accompanying array of limited but essential welfare state safety nets; but which at the same time was a State strong enough to be able to also ward off the attempts of more radically interventionist and socialist-leaning policy advocates from lurching the system too far to “the left.”

But in the late 1950s, Röpke and other ORDO Liberals were already warning of the dangers of that balanced middle way being pushed too far in the interventionist and redistributive direction. As Röpke expressed it, once the State takes on these welfare state responsibilities there was no logical limit, other than fiscal bankruptcy and the danger of inflation as politicians turned to monetary-supported deficit spending to cover the costs of a welfare system the private economy could no longer afford to maintain through taxes alone. 

It is possible to reasonably define the minimal limit below which a laissez-faire liberal system should not be reduced, that being a government restrained but “strong” enough and sufficiently funded to properly secure each individual’s right to his life, liberty, and honestly acquired property through police, courts and defense. But in the real world of modern democratic politics, where is the logical and unambiguous maximum limit to the interventionist-welfare state short of complete paternalistic government control of all social and economic affairs?  

Is it necessary to remind a professor at George Mason University of the insights provided by such economic theorists as James M. Buchanan (1919-2013) that the logic of increasingly constitutionally unrestrained democratic decision-making is a powerful nexus between the three sides of what Milton Friedman (1912-20006) called the “iron triangle” of politicians willing to sell other people’s money in exchange for campaign contributions and election day votes; of bureaucrats interested increasing their budgets and the administrative authority of their departments, bureaus, and agencies for purposes of personal advancement; and the network of special interest groups hungry for regulations and redistributions to improve their own economic circumstances at other citizens’ expense through the power of the State?

Professor Cowen’s State Capacity Libertarianism is merely another fool’s errand in search of the political “holy grail” of a perfect (or far superior) political arrangement just matching the utopian dream of a “mixed economy” society in which government is just the right interventionist-welfare state size: one that is not too small and not too big, but one that is just right. 

Now, on Adam Smith’s Great Chessboard of Society, Professor Cowen would, certainly, leave the human pawns a far wider latitude to move themselves about among the squares on that board in pursuit of self-interested association and mutual betterment. But he points to the “undeniable” gains and improvements from government-healthcare services, infrastructure improvements, and educational opportunities in lesser developed countries that also have degrees of market openness and competition. On the other hand, he frowns upon the disastrous policies in these areas in places such as New York City, for instance. 

So, are we back to the argument that it isn’t the government interventions that are a problem, it’s just that the “right people” were not elected and put in charge to get it right and better?  Isn’t that the rationale we heard throughout the 20th century every time socialism failed somewhere in the world? It was just “bad people” in power, it was never the socialist idea, itself. 

Political Decision-Making Means Economic Irrationality

Which gets us to another point. If government is to take on various responsibilities under State Capacity Libertarianism far beyond strictly limited government classical liberalism, how will it be decided on the right form and location of infrastructure maintenance and extension? How much and what type of space exploration should be financed? Where and at what cost should nuclear power be developed? What policy strategy should be introduced and funded for dealing with climate change? What public school educational reforms should be implemented and at what expense, even as a waystation to a future privatized education, as Professor Cowen suggests might be a longer-term goal?

There are no rational answers to these and many similar questions once the provision of such goods and services are removed from the arena of market-determined buying and selling at competitively established prices. The year 2020 marks 100 years since the publication of Austrian economist Ludwig von Mises’s (1881-1973), famous essay “Economic Calculation in the Socialist Commonwealth” (1920), in which he demonstrated the difficulties if not impossibilities of rational economic decision-making in an institutional setting in which private property in the means of production have been nationalized, and markets and prices for the factors of production no longer exist. (See my article, “Socialism and the Green New Deal are Economically Impossible.”)

No doubt, Professor Cowen might reply that to raise this point is a misplaced and extreme exaggeration, since in no way, shape or form is he calling for the abolition of markets and prices. And he would be absolutely correct in giving that reply. I, in no way, wish to make any such accusation. Professor Cowen is a most cogent defender of competitive markets and the price system. 

But, nonetheless, to the extent that the government subsidizes scientific research or development of nuclear power; or directs the forms and locations of infrastructure activities; or determines when and how there may be space exploration; or what reforms will be introduced into public education; or any number of other similar instances of government intervention and planning preempting or replacing private sector provision of such goods and services, the society has lost part of its capacity for market-based, rational decision-making as to what should be done, where, when, and in what forms in these areas of social interest. 

Are such goods and services desired by the public at large, and at what costs in the form of forgone other productions that might have been possible instead, can only be fully known when consumers express their demands for such goods and services on a functioning market; and only when entrepreneurs are left free to best estimate the future prices buyers might be willing to pay as a basis upon which to competitively bid for the use of the factors of production in the face of similar bids by their supply-side business rivals. 

To the extent that tax-based government bids for goods and resources influence the formation of prices, and to the extent that government subsidies and other forms of financial support distort more fully market-determining costs of producing and supplying any such goods and services, to that extent the members of the society make irrational decisions. In this instance, such an element of “irrationality” means the degree to which prices and production decisions are not completely determined by interacting participants in the private sectors of the economy. 

Government “Successes” – Compared to What?

Professor Cowen says at one point, “Public health improvements are another major success story of our time, and those have relied heavily on state capacity — let’s just admit it.” It has never been denied by any classical liberal economist that government can tax the citizenry, direct the use of resources, and generate results, even results that when looked at alone and out of other contexts seem to be “success stories.”

But is that how people, themselves, would have demonstrated their personal and family preferences for health improvements through allocating portions of their own earnings for this purpose compared to using those sums of money for other things that might have been ranked by them as more important, all things considered in their lives?  We don’t fully know because incomes were taxed and those in political authority made these decisions for people. To me, that is not the “positive freedom” of control over one’s own life that Professor Cowen emphasizes as so important to value and preserve in a free society. 

Now, admittedly, unless one is an anarchist, there will always be such irrational decision-making in so far as even in the classical liberal society, government will need tax revenues to perform the minimal functions usually associated with classical liberalism. Decisions will have to be made about how and to what extent police, courts, and national defense will be provided for and supplied. But precisely because non-market-based decision-making is an inescapable element to all government directing activity, the moral of the lesson is an important economic reason why the arena of government activity should be kept to a minimum. (See my articles, “Public Goods, National Defense, and Central Planning” and  “Why Not Private Provision of Many Government Services?”

The Need to Make Classical Liberalism an Exciting Vision for the Future

What about Professor Cowen’s starting premise that classical liberalism and libertarianism are out of touch with the contemporary world, that they do not speak to the issues of the day, and that the purpose of a “State Capacity Libertarianism” is precisely to fill this void? In my opinion, all that Professor Cowen’s proposal does is continue America’s drift in political and economic collectivist directions. 

He has conceded all the essential premises of the opponents of classical liberalism. The constitutionally minimal state is unworkable and undesirable. There are numerous economic activities that cannot be left to the marketplace, which means not left to the individual choices and interactions of people themselves. The society needs and must have a wide variety of redistributive “social safety needs” because, well, just because current public opinion wants them. And, implicitly, it is a waste of time to try to buck this “trend” and attempt to argue against it. The welfare state is here to stay; live with it. 

I would argue the exact opposite from Professor Cowen. It is precisely because of the prevailing opinions and views and the pressures that they are placing on public policy decision-making that is it necessary to logically, factually, and morally insist that this is an undesirable and dangerous direction for the country to continue moving in. 

A principled stand for the classical liberal idea and ideal is essential if the collectivist premises of our time are to be challenged and reversed. I know this is not easy. Classical liberals have known for more than two hundred years how difficult the logic of the “economic way of thinking” can be for many to, at first, grasp and understand. They have understood the appeal of “what is seen” from short-term government policies, as opposed to what are the “unseen” longer term consequences. They have appreciated the appeal to emotion compared to calmer reasoning.  

We must do what Hayek called for in his famous essay, “The Intellectuals and Socialism” (1949), we must once more make the case for liberty and the classical liberal order an exciting challenge and attractive vision. That cannot be done, in my view, when the starting presumption is that essential elements of the socialist critique of the market economy is implicitly taken for granted and the core elements of the welfare state have been accepted by default, including the idea that “it’s here to stay.” And, why, according to Professor Cowen? Because people “like it” and when looked at in isolation (that is, without due regard for the opportunity costs of preempting people’s personal choices) it has had claimed “successes.” 

Not Limiting Ourselves to the “Politically Possible”

I would suggest us taking the advice that was offered by British economist, W. H. Hutt (1899-1988) in his monograph, Politically Impossible . . .? (1971), when thinking about the role of government and public policy issues. We should generally ignore, or at least heavily discount, the question about whether or not a social or economic policy is politically possible at the present moment. 

As classical liberal (or libertarian) -oriented economists, we should follow our economic thinking to the conclusions that our reasoning and the historical evidence suggests to us. That is, we should be concerned with truth and validity, not the expediency of to what democratic public opinion seems to confine discussion of a free society at a moment in time. 

Our eye should be on the horizon of the ideal of a truly free (classical) liberal society. Yes, no matter how far and fast we try to move towards that horizon, it always seems to remain in front of us, never approached in an ultimate and final sense; and the terrain through which we travel toward it at any moment may be different than the issues that have had to be confronted in the past. 

But we will never come really anywhere near that beautiful and exciting ideal of the free human being, guiding and directing his or her own life in voluntary and mutually beneficial association with others in all facets of everyday existence, if we stop far short of moving as much toward it as we, otherwise, might by conceding what need not be conceded, and in this instance the self-limiting presumption that the welfare state is here to stay. (See my recent book, For a New Liberalism.)

Richard M. Ebeling

Richard M. Ebeling

Richard M. Ebeling, an AIER Senior Fellow, is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel, in Charleston, South Carolina.

Ebeling lived on AIER’s campus from 2008 to 2009.

Books by Richard M. Ebeling

Get notified of new articles from Richard M. Ebeling and AIER.

Related Articles – Economic History, Economic Trends