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The Restoration of Market Thinking

The Restoration of Market Thinking

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October 22, 2010

October 2000 -- John L. Kelley, author of Bringing the Market Back In, is a professor of history at Shawnee State University, Portsmouth, Ohio. Along with Atlas Society advisor David Mayer, Kelley sits on the research advisory board of the Buckeye Institute for Public Policy Solutions. As a graduate student at Indiana University in the late 1960s, he served as a senior editor on a conservative student publication, The Alternative, published by a fellow history graduate student Robert Tyrrell.

(In 1976 Tyrrell renamed it The American Spectator and subsequently took the publication to Washington, D.C.)

In the 1970s, Kelley taught at Ohio University-Portsmouth, then returned to the classroom to finish his doctorate at Ohio University. His professors included Alonzo L. Hamby, whose book Liberalism and Its Challengers: From FDR to Bush sparked Kelley’s interest in writing a history of the market liberal movement.

Describing his intellectual foundations, Kelley writes: “I am what might be called a ‘Cold War baby.’ Growing up during the 1950s, when the Soviet-American conflict was at its most intense, I was aware that the struggle had its Manichean aspects. It was, to put it too simply, a struggle between two world systems. Although the struggle was fought on many fronts and on many levels, I found the war of ideas a particularly interesting aspect of the engagement.”

Thus, Kelley concludes:“If only an adulterated market liberalism has for the moment triumphed, that’s still worth celebrating when one considers the alternatives. And on a personal note, that qualified victory has allowed me to indulge one of my enthusiasms, amateur astronomy. Recently, I purchased a Maksutov 6" telescope made by the Moscow-based firm Intes Micro.”

Note: Text in italics originally appeared in the Navigator. The other text is exclusive to this website.

Navigator: Your book begins with the 1950s triumph of what you term “Vital Center” liberalism. Could you please describe its main tenets and its role in American politics prior to the election of John F. Kennedy?

Kelley: Vital Center liberalism was an attempt to find a happy medium between laissez-faire capitalism and full-blown socialism. It endorsed a political economy of regulated capitalism, Keynesian macroeconomics, and a social welfare state. During the 1930s both liberal and socialist reformers argued that old style capitalism had been tried and found wanting.   They claimed that it suffered from a tendency toward monopoly, “unjust” wealth distribution, market failure and cyclical instability.

Now before W.W.II there had been a lot of talk that government would need to plan for production because the economy had matured, with little hope for new job creation without government intervention. But the surge of production during the war suggested that there was a lot of life left in capitalism. Also, the reformers’ experience with government planning, such as the War Production Board, convinced most liberals that central planning was more daunting that they had imagined.

By war’s end many economists, including the influential Alvin Hansen at Harvard, had concluded that Keynesian techniques would allow the government to promote full employment and a “growth economy” without directly interfering in the operation of an essentially capitalist economy.   This private, albeit regulated, economy would produce a “social dividend” that would finance a social welfare state.

Schlesinger called this mixed system the “Vital Center” in his 1949 book of the same title. He intended the book as both a defense of this new hybrid political economy and as a critique of what he considered the naïve idealism of the American left. In 1947 Schlesinger had been one of the founders of the Americans for Democratic Action, which sought to disassociate liberals from “popular front” sympathizers for the Soviet Union. No doubt he had in mind supporters of Henry Wallace’s 1948 presidential campaign. Wallace variously had been FDR’s Secretary of Agriculture, Vice President, and secretary of commerce.  Truman had sacked him in 1946 after he made a seemingly pro-Soviet speech. In 1948 he ran as the presidential candidate of the Progressive Party, which was almost entirely in the control of communists or fellow travelers. By the way, information now available from the Venona intercepts, KGB files and the like suggest that the men Wallace was considering for his secretaries of state and treasury, Lawrence Duggan and Harry Dexter White, were Soviet agents! Poor Henry finally saw the light, returned to his Republican roots, and in 1956 voted for Eisenhower.

Navigator:   What form did “Vital Center” liberalism take under Kennedy, and who were the most important figures in the movement?

Kelley: Well, Godfrey Hodgson called it “technocratic liberalism” and Bruce Miroff characterized it as “pragmatic liberalism.” It was an elitist form of liberalism, confident that the knowledge classes had the tools to direct the economy to higher levels of production that could be taxed to fund improvements in the quality of life and correct old social injustices. Certainly in its first eighteen months or so it might have been called passionless liberalism. Kennedy never was a romantic or “bleeding heart “ liberal. He hadn’t joined the Liberal Union or Young Democrats while at Harvard and in the 1950s his closest political friends in the Senate were southern conservatives like George Smathers (D-Florida) and Richard Russell (D-Georgia). As you may know, Eleanor Roosevelt, certainly a lady of the left, didn’t hold him in high regard. And Schlesinger felt it necessary to write a 1960 campaign book explaining to liberals why Kennedy was superior to Nixon! In the campaign JFK did endorse medical care for the elderly, federal aid to education, and civil rights legislation, but he was more interested in foreign affairs than domestic policy.

Probably Kennedy’s greatest contribution to the Vital Center agenda was his tax cut legislation, ultimately passed in 1964.  All three of members of JFK’s CEA were Keynesians and its chair, Walter Heller, tutored in the president in the “New Economics.” Heller argued that government economic policies could be used to do more than just drive an economy out of deep recession. Properly tailored fiscal and monetary policies could fine-tune an economy, expanding its output beyond what private markets alone could accomplish. Heller’s economics had a seductive appeal. Reform projects could be financed without changing the social covenant between the broad middle class and the government. The “social dividend” produced by government economic catalyzation would provide for all.

Remarkably, many in the business community—at least those in Fortune 500 companies—were prepared by the early 1960s to accept this proposition. Why? One reason, no doubt, was the ubiquity of Keynesian assumptions in contemporary college economics textbooks. Paul Samuelson’s Economics, a Keynesian tome, dominated the market. Incidentally, by 1985 it had been translated in twenty-five languages. Older generations of the elite seemed by the mid-1960s to have fallen under the Keynesian sway. When the Harvard class of 1939 was interviewed in 1964, more than 57 percent said that they now favored Keynes’s ideas. Time put Keynes on its last 1965 cover as the man of the hour.

Navigator: What events in the Johnson and Nixon administrations began to bring “Vital Center” liberalism into question?

Kelley: Certainly the inflation of the late 1960s and the “stagflation” of the 1970s would be part of the answer. Keynesians had argued that if inflation started to get out of hand, then government tax increases would soak up “excess” demand and restore price stability. They also assumed there was a more or less permanent trade off between employment and inflation—the famous Phillips curve. Milton Friedman challenged both of these assumptions, disagreeing with the new economics on both practical and theoretical grounds.

Friedman argued that even if Heller’s scheme for “growing the economy” were theoretically correct, as a practical matter governments couldn’t act in a timely fashion to redirect it away from the rocks. Lack of immediate information and the inevitable wrangling in Congress over corrective measures meant that rarely would the government be able to make changes at the proper time and of the appropriate scale. The evidence of the late 1960s confirmed this, prompting Johnson’s CEA chairman, Arthur M. Okun, to suggest that Congress should delegate authority over fiscal policy to the president! This only confirmed the market liberal warning that Keynesian techniques had a bias toward authoritarian politics.

Friedman also challenged the New Economics’ basic assumptions, arguing that there was no “multiplier” able to stimulate a lagging economy. The fiscal stimulus would be cancelled out by government borrowing to finance the deficit.   If the government raised taxes to cope with inflation, there would be a compensating freeing up of other dollars because government-borrowing needs would drop.

Stagflation wasn’t a problem until the 1970s but Friedman anticipated it in his 1967 presidential address to the American Economics Association.   He argued that the Phillips Curve—which suggested a tradeoff between inflation and unemployment—wasn’t a permanent relationship. Once employees began anticipating inflation they would raise their wage demands sufficiently to curtail any stimulative effects of the inflation.   Only an accelerating inflation rate could produce a reduction in unemployment beyond the short-term.

Well, inflationary expectations got built into the economy in the 1970s and Nixon’s use of price and wage controls proved totally inadequate to bring the problem under control. By the end of the Carter presidency the misery index (of inflation plus unemployment) stood at nearly 21 percent! Keynesians were so demoralized in the late 1970s that I wouldn’t have been surprised to learn of economists renting hotel rooms for jumping. More seriously, one indication of the disarray within the profession was the 1978 founding of the Journal of Post Keynesian Economics. In the Journal’s“Statement of Purposes” the editors commented that “it has required the modern stagflation debacle to demonstrate its [Keynesianism] policy ineptitude.” Pretty strong words.

Navigator: Could you explain how, in one sense, the McGovern campaign represented a Leftist attempt to break out of “Vital Center” paradigm?

Kelley: Well this gets us to another cause of the crisis of Vital Center liberalism. Johnson had launched his War on Poverty in 1964 with the expectation that the problem of poverty could be solved within the reigning paradigm. Economic growth produced by Keynesian demand-management would create new jobs, civil rights laws would destroy racial barriers to those jobs and various social and educational programs would combat the culture of poverty, preparing the poor for the new opportunities.  

Johnson proved to be wildly optimistic about what government action could accomplish, but he wasn’t alone. I quote in my book a memo from John Rubel to Sargent Shriver, head of the Office of Economic Opportunity, about how the Jobs Corp was going to work: “the input—the raw material—that is fed into this machine is people. The output is people. It is the function of this machine to transform people.” This technocratic liberalism was over-confident but Johnson encouraged this type of thinking, wanting to exceed the legislative record of FDR. Johnson over-promised what could be accomplished by his “war.” Inevitably the shortfall was noted by the American public, which footed the bills. In the 1980s, Ronald Reagan could always get a sympathetic laugh among working Americans by quipping that “We fought a war on poverty and poverty won.”

But the story doesn’t end there. The poverty programs did provide considerable employment for middle-class minorities and it would be just human nature for such beneficiaries to rationalize the need for those programs and their expansion. So a new special interest group entered the Democratic Party. There were more radical forces at work as well.  I am thinking for example of Frances Fox Piven and Richard Cloward, activist social science professors who tried to use poverty programs like Community Action to organize the poor to demand income redistribution. Piven and Cloward with assistance from the Legal Aid Office, a war on poverty agency, helped George Wiley establish the National Welfare Rights Organization. Wiley’s organization demanded a $6500 per year guaranteed annual income and Senator George McGovern sponsored a NWRO-drafted bill to provide just that. By the way, $6,500 was no small amount thirty years ago. My first university teaching position in 1969 paid only $8,000.

The 1972 McGovern campaign was the vehicle chosen by the welfare rights activists and other new groups—feminists, gays, and environmentalists—to advance their causes.   McGovern obtained the party’s nomination because he understood the new delegate selection process; after all he had helped write the new rules as co-chairman of the McGovern-Fraser Committee. The platform endorsed busing, sexual equity in allocation of top government posts, and a guaranteed annual income above the poverty line. Bad as these dubious stabs at social justice were, it also advocated increased progressivity of the income tax—and this at a time when middle class workers were being pushed into higher brackets by bracket creep. McGovern, of course, lost the election in one of the landslides of the twentieth century but these new elements in the Democratic Party didn’t go away.   Indeed more were added to the Congress in the “Watergate class of 1974”.

Navigator: Bringing the Market Back In seems to suggest that the end of “Vital Center” liberalism, both rhetorically and programmatically, came late in the Carter administration. Is that right?

Kelley: The Carter years were transitional ones and the administration itself was conflicted. Most of Carter’s non-White House appointments went to the liberal wing of the Democratic Party, but his OMB pursued conservative policies. He established two new federal departments, Energy and Education, that market liberals ever since have been trying to abolish, but he also appointed Paul Volker to be chairman of the Federal Reserve.  He proposed an elaborate energy policy which if adopted would have been anathema to market liberals, yet he supported, quite successfully, deregulation of the transport industry.  Carter gave only lukewarm support for Humphrey-Hawkins, which in its original form would have made the government the employer of last resort. In its final form, the bill called for reducing inflation to 3 percent, which was thought to work against any substantial public jobs program. A grumpy Arthur Schlesinger carped that Carter was the most conservative Democratic president since Grover Cleveland!

Carter’s administration was filled with contradictions and many of them were produced by the conflicts between what the president understood—he certainly wasn’t an unintelligent man—were the hard lessons of fifteen years of Vital Center liberalism on steroids and the continuing demands of his Democratic liberal constituencies.

By the end of his one-term presidency, inflation had climbed to 13.5 percent, unemployment was 7 percent, wages were stagnating and tax rebellions were springing up all over the country. Those who trusted the government to do what is right “only some or none of the time” increased from 22 percent in 1964 to 66 percent in 1980. Without a doubt, by the time Mr. Carter departed for Georgia, Vital Center liberalism was suffering a crisis of confidence.

Navigator: Reviewing the revival of market liberalism, you give principal credit to Friedrich von Hayek, both for his 1944 book The Road to Serfdom and for his calling together the Mont Pélerin Society in April 1947. Who was at the meeting, and what did they hope to accomplish?

Kelley: Well, as a result of the worldwide depression of the 1930s, many intellectuals concluded that capitalism was doomed. Some, like Karl Polyani or the various fellow travelers that visited Russia in the 1920s and 1930s, rejoiced at its anticipated demise. Lincoln Steffins came back from the “workers paradise” and famously (and fatuously) remarked that he had seen the future and it worked. Hayek and other classical liberals like Ludwig von Mises, Louis Rougier, and Wilhelm Röpke counterattacked in the 1930s, holding various conferences under the auspices of the Graduate Institute of International Studies in Geneva. The message of those conferences was that Keynes’s “middle way” would not hold. It would inevitably lead to an authoritarian regime. Those conferences led to an international gathering of classical liberals in Paris in 1938 to discuss Walter Lippmann’s book, The Good Society. They decided to form a permanent organization, the “Colloque Lippmann,” but World War II aborted these plans.

Hayek published The Road to Serfdom in 1944, with an American edition the following year. The reaction, particularly in the United States, was so strong that he decided to try again to organize the academic friends of capitalism. Some thirty-nine participants from ten countries met in April 1947 at the Hotel du Parc on Switzerland’s Mont Pélerin. A significant number of the American-based participants—Milton Friedman, F. A. Harper, Henry Hazlitt, Ludwig von Mises, Leonard Read, and George Stigler— were to play important roles in the subsequent revitalization of market liberal ideas in the United States. I might note that the Volker Fund, founded by a Kansas City, Missouri, millionaire wholesale furniture dealer, paid the way for the American participants. This was just an early example of the key role that foundations, often established by self-made men, were to play in financially underwriting the market liberal revival.

Hayek wanted to establish a cross between a political organization and an “International Academy of Political Philosophy” whose members would develop effective ideas for combating the threat to liberty posed by totalitarian movements. He hoped that the group could agree on specific economic policies that would flow from a commitment to classical liberalism, but there was too wide a range of opinions among the participants. By the way, Friedman argued for a negative income tax at that first meeting.

What they did agree to was a Statement of Aims calling for a research program that would, among other things, define the proper functions of the state, determine how to re-establish the rule of law, and explore the “possibility of establishing minimum standards [of welfare] by means not inimical to initiative and the functioning of the market.” They have been at it ever since, and by the 1980s membership had grown to over 400. The influence of individual members of the society, if not the society itself, has been remarkable. For example, by 1986 four of its members—Friedman, Hayek, Stigler, and James Buchanan—had received the Nobel Memorial Prize in Economic Science.

Navigator: As I understand it, three main schools of market liberalism developed after the first Mont Pélerin meeting. The first, of course, was the Austrian School of Economics to which Hayek belonged. Who else was involved and what were their essential insights?

Kelley: Actually, the Austrian school predated the Mount Pélerin conference. Its roots extend back to the late-nineteenth-century Austrian economists Carl Menger, Eugen von Böhm-Bawerk (Mises’s teacher), and Friedrich von Wieser, all of whom made important contributions to the theory of marginal value, substituted subjective value for the labor theory of value, and explained interest on capital as required because of the higher valuation put on earlier to later possession of goods. The most important twentieth-century Austrians were Ludwig von Mises and his student, Hayek. In 1922, Mises publishedSocialism, wherein he argued, presciently, that socialism was impracticable because it eliminated markets and the prices that came with the market. Without pricing information, socialist managers wouldn’t be able to determine proper allocation of resources. The socialist economist Oskar Lange—ironically, teaching at Chicago in the 1930s—responded by proposing that a central board could set prices for capital goods, direct managers of state-owned firms to maximize profits, and then respond to the development of shortages or surpluses by raising or lowering prices. Hayek insisted that this approach would require an omniscient central authority able to change every price without delay by just the right amount. He suggested that it might just barely work in a society where customer preferences were essentially frozen, but this could only be done through “force and propaganda.” The (mis)operation of the Soviet system has proved just how correct Mises and Hayek were.

Navigator: Second was the Chicago School of Economics, of which Milton Friedman is perhaps the most prominent thinker. Who else was involved, and how did their perception of market liberalism differ from that of the Austrians?

Kelley: Certainly, Friedman is the first name that comes to mind, and justifiably so if you are thinking in terms of influence on the public debate. To illustrate, look at the impact of his 1962 classic, Capitalism and Freedom. There he proposed a series of policy changes that have been tried: floating exchange rates, a monetary rule to guide the Fed, a voluntary army, educational vouchers, the negative income tax, and deregulation of the transport industry. No cloistered academic, Friedman wrote a column for Newsweek, barnstormed for state initiatives to limit spending, and advised presidential candidates.

There were many other distinguished Chicago school economists in those early years, many of them focusing on the often-dubious nature of anti-trust law and business regulation. Friedman’s colleague George Stigler demonstrated that business regulation, contrary to the expectation of progressives and Vital Center liberals, was often anti-consumer because the industries being regulated “captured” the regulating agency. Contrary to the claims of John Kenneth Galbraith that advertising often just created artificial wants, Stigler argued that advertising provided consumers with vital information, reducing their transaction costs. In related research, Lester Telser’s studies rejected the argument that dominant corporations maintained market share and high profits by using expensive advertising to effectively bar entry by smaller firms. Telser found very low and erratic correlations between advertising budgets and industrial concentration. Harold Demetz argued that higher profits in concentrated industries reflected greater efficiencies, reputation, and goodwill. John McGee examined the evidence against Rockefeller’s Standard Oil Trust at the turn of the century and found that it hadn’t been guilty of predatory pricing.

In a classic 1960 article, “The Problem of Social Costs,” Ronald Coase argued that in a world of perfect information, with clearly defined property rights and no impediments to negotiations between parties, the activities of one party couldn’t impose external costs. This article became one of the pioneering pieces in the Law and Economics movement, being cited 661 times in scholarly journals between 1966 and 1980. Coase’s message for policymakers, legislators, and judges was that rather than immediately reaching for a regulatory “solution” to externalities, they should try to clearly assign property rights and lower bargaining (transaction) costs.

How did the Austrian and Chicago schools differ? The Austrians, certainly those who followed Mises, argued from first principles rather than relying on mathematical manipulations or empirical investigations. Not very many policy wonks among the Austrians! In his classic Human Action, Mises announced that the laws of praxeology were “like those of logic and mathematics, a priori.” He insisted that they were “not subject to verification or falsification on the ground of experience and facts.” Now one might imagine that such a position could be quite a conversation-stopper for those of a more positivist vein, say, Friedman. Yet despite these methodological differences and their quite fundamental disagreements about money and central banking, the two sides generally got along fairly amicably. Friedman, for example, attended some sessions of the 1974 Royalton Conference, where Israel Kirzner, Ludwig Lachmann, and Murray Rothbard sought to sustain interest in Austrian economics after Mises’s death in 1973. I might note that there could be substantial differences between disciples of Mises and Hayek. When Murray Rothbard, solidly in the Mises camp, evaluated Hayek’s manuscript for The Constitution of Liberty, he was appalled by its toleration of a substantial role for government and recommended against the Volker Fund’s underwriting its publication.

Navigator: The third development was Public Choice theory. Who were the leading figures here, and how did their ideas add to the market-liberal mix?

Kelley: Where the Chicago school defended capitalism against charges of market failure, Public Choice economists like James M. Buchanan or Gordon Tullock reversed the lens and examined government performance, using the tools of economic analysis. Public Choice built on the insights of Kenneth Arrow, Anthony Down, and Mancur Olson, whose research raised serious doubts about how effectively a democratic system could formulate and serve the public interest. Buchanan and Tullock rejected the “naïve” assumption that men were any more prone to serve the public interest when they became bureaucrats than when they were private individuals. Although a free-market structure permitted the public interest to be advanced by individuals serving their private interests, because generally buyers and sellers incurred all costs and benefits of their transactions, such was not the case in a “transaction” between a bureaucrat and a “client.” As for legislatures, to achieve majorities, politicians logrolled, producing budgets larger than any one legislator would have preferred.

Interest groups gained from the fact that benefits were concentrated while costs were dispersed. So government all too often served group interests rather than a public interest. Legislators seemed caught in a prisoner’s dilemma, where if they abstained from rent-seeking, others would simply claim the boodle. Buchanan suggested various responses to these problems: reassign government functions to states and localities (where fellow-feeling might reduce the temptation to raid the treasury), reinstate the pre–New Deal constitutional regime, revitalize the pre-Keynesian “fiscal constitution” requiring normal expenditures to be financed from taxation, and institute supermajority decision-rules in Congress.

Now, despite their quite different emphases, these three market liberal schools complemented each other. Take economic regulation: the Austrians deductively demonstrated that government couldn’t improve upon market coordination, Chicago provided studies demonstrating empirically how consumers suffered from it, and the Public Choice, or Virginia, school explained the business search for cartelization or other government favors as exercises in rent-seeking. It was a powerful mixture.

Navigator: In addition to developing theoretical frameworks of understanding, each of these schools developed critiques of “Vital Center” liberalism. Could you give us some idea of the most important of these critiques?

Kelley: Well, there has been an absolute deluge of market liberal studies evaluating the performance of government programs. I have mentioned some of them in discussing the Chicago school. Other examples? Studies by George Hilton in the 1960s critiqued the inefficiencies and higher costs for ground transportation produced by the ICC. Martin Anderson’s 1964 The Federal Bulldozer documented how urban renewal often benefited developers and the upper classes rather than the inner-city poor. In the early 1970s Martin Feldstein studied the effect of unemployment compensation system and its interaction with other government benefits available to the unemployed and concluded that some individuals would experience marginal tax rates on work approaching one hundred percent.   The result was higher unemployment rates. In a 1974 study Sam Peltzman studied the 1962 amendments to the Food, Drug and Cosmetic Act and concluded that these new regulations, inspired by the Thalidomide scare, failed to reduce the proportion of ineffective drugs reaching the market but doubled development cost and resulted in 50% fewer new drugs reaching market yearly. In 1982 Walter Williams, in The State Against Blacks. showed how unnecessary state licensing laws restricted entry for the poor and minorities while keeping prices higher for consumers.

Of course, many of the studies revealing the deficiencies of government policies were conducted by social scientists that were not necessarily market liberals. Take the 1966 Coleman Report. Commissioned by HEW to study how federal dollars under the 1965 Elementary and Secondary Education Act might be best targeted, the noted sociologist James Coleman famously concluded that there was no creditable evidence to support the idea that large expenditures would improve student performances. A 1968 study by Garth Magnum of the 1962 Manpower and Training Act found that it had no appreciable effect on unemployment. A review of the Job Corps determined that two-thirds dropped out before completing the program and graduates did no better than “no shows” (applicants for the program who hadn’t appeared). When David Armor in 1972 examined the effects of busing, he found that none of the studies could convincingly show that it had improved academic achievement among minority students. Two researchers looking at the disappointing evidence on various government negative income tax experiments concluded cynically that “if you advocate a particular policy reform or innovation, do not press to have it tested.” By 1980 or so, much of edifice of Vital Center liberalism had been tested and found shaky.

Navigator: Did the market liberal critiques of Vital Center programs have a direct intellectual effect on liberals themselves? That is, did the liberals say, “I see now that Hayek and Friedman and Buchanan are right”?

Kelley:They have had a considerable impact. I suppose that one measure of their influence would be the remarkable number who have won the Nobel Prize in economics. In addition to Hayek, Friedman, Stigler, and Buchanan, the list includes Ronald Coase, Gary Becker, Robert Lucas, and Douglas North. Other examples of influence? Robert Nozick won the National Book Award in 1974 for his defense of the limited state, Anarchy, State and Utopia. Milton Friedman’s 1980 TV series, “Free to Choose,” had an estimated 10 million viewers on PBS alone and has been broadcast in at least ten other countries. The book (of the same title), which accompanied the series, was on the New York Times best-seller list, sold over 400,000 hardback copies, and is still in print. James Gwartney’s Economics: Public and Private Choice, with its strong Public Choice emphasis, was the third-largest-selling economics text in the early 1990s. Ayn Rand’s writings continue to sell several hundred thousand copies annually.

Some American liberals began incorporating Chicago or Public Choice ideas into their writings and programs. Paul Samuelson’s Economics, for example, became more sympathetic to Friedman’s monetarism in later editions. With a nod toward the Public Choice school, he began warning readers “we must be alert to government failure —situations in which governments cause diseases or make them worse.” In the mid-eighties, Senator Patrick Moynihan lamented that the Republicans had all the new ideas, and the Democrats were now the “stupid” party. Mainstream publishing houses became more open to market liberal publications. When Hayek tried to publish The Road to Serfdom in the U.S., three publishing houses turned him down for political reasons. Today mainstream publishers routinely release market liberal volumes by Thomas Sowell, Friedman, Charles Murray, David Boaz, Richard Pipes, and many others.

Both TV and print journalism are more open to these ideas. Look at John Stossel on ABC. Or consider the New Yorker. In 1995 it ran an admiring profile of Ayn Rand. Five years later it printed an article by John Cassidy concluding that Hayek’s ideas had been so vindicated by events that the twentieth century should be called “Hayek’s century.” Incidentally, I think one of the best current writers using Public Choice insights is the liberal journalist, Jonathan Rauch, author of Demosclerosis: The Silent Killer of American Government(updated in 1999 as Government’s End: Why Washington Stopped Working). Have most liberals converted? Clearly not, but they can no longer ignore the classical liberal perspective.

Perhaps the most profound effect of market liberal ideas has been on socialists. In The Commanding Heights, Daniel Yergin and Joseph Stanislaw tell the story of Vaclav Klaus, later to be Czech prime minister after the Velvet Revolution. As an economist in the old communist regime he had been assigned the responsibility of studying the enemy, market liberals like Friedman and Hayek. The only trouble was the more he read them, the more he concluded they were correct. Or take the case of the American economist Robert Heilbroner, author of the widely read The Worldly Philosophers and a supporter of socialism’s aspirations since his college days in the 1930s. He looked at the collapse of the Soviet Union and admitted in 1990 that Mises “was right” all along. Central planning boards couldn’t properly set prices “because the economy never stood still long enough for anyone to decide anything correctly.” He regretted that as a “blueprint for a rationally planned society, [socialism] was in tatters.” While Heilbroner still hoped that the socialist dream could be revived, the Keynes biographer, Robert Skidelsky, would have none of it, declaring that collectivism had been the “most egregious error of the twentieth century.” This is a remarkable reversal of market liberal fortunes. As recently as the 1970s Ernest van den Haag at a meeting of the Mont Pélerin Society quite seriously raised the question whether market liberalism had any future!

Navigator: In any event, did the market liberal critiques of Vital Center liberalism have anything to do with the 1980 election?

Kelley: Probably not much.   Awareness of the market liberal critiques, to the extent that the general public has ever became sensitized to them, came after 1980. The “transmission belts” for those ideas—I am thinking of organizations like the Cato Institute and the Heritage Foundation—only developed noticeable profiles after 1980. Certainly there was a visceral sense among much of the public in 1980 that something was wrong with old-style liberalism, but that’s quite different from saying that the public had repudiated their general enthusiasm for government programs.

The voting specialist Everett Carll Ladd reviewed the relevant polling data in 1981. He concluded that there had been a sharp drop in confidence in government competency, but he found public support for government services to be absolutely solid. Reagan recognized that attitude and tried to reassure voters in 1980 that he wasn’t Goldwater reincarnate.   Martin Anderson, who helped write Reagan’s campaign speeches on economic policy, recalls that Reagan promised to gain control of federal spending, not by cutting sinew and bone, but by slowing the growth of existing programs, rejecting new ones, and eliminating waste and fraud. Obviously this was too facile. The economist Herbert Stein suggested that Reagan had a “mandate to provide a free lunch.” By 1980 Carter was a gloomy Gus, announcing that Americans had to sacrifice and eat their spinach. Reagan promised nearly pain-free reform.

Navigator: As an aside, I cannot help asking a What If question: How do you think U.S. political history would be different if Ronald Reagan had beaten Gerald Ford for the nomination in 1976?

Kelley: That’s an interesting question. I think he might have beaten Carter, who was a rather uninspiring campaigner. Certainly Reagan would have done better in the South than Ford. The election was quite close in the Electoral College (297–240) and Carter received barely more than fifty percent (50.1 percent) of the popular vote. But would a Reagan victory in 1976 have been more advantageous for market liberals than one in 1980? I don’t think so. The second oil shock hadn’t yet hit and inflation, bracket creep and mortgage rates were higher by 1980.

In 1980, Reagan could plausibly claim that not only was there need for reform but that it was needed urgently. It would have been harder to make that argument in 1976, especially since he would have had to defend the record of his own party, then holding at least the White House, which under Nixon had been complicit in the run-up of the size of the social welfare state and increase in “social” regulation of business. By the way, in the mid-1980s Reagan’s Director of OMB, David Stockman, reviewed the legislative history of the major social welfare programs of the 1960s and 1970s.   He found that on average 90 percent of Senate Republicans and 80 percent of House Republicans had voted for them!

Navigator: Who were Reagan’s top economic advisors? What percentage of them had been influenced by the market liberal movement? And to what degree had they been influenced?

Kelley: Well, the players changed over time but the original team included Donald Regan from Merrill Lynch as secretary of Treasury, Murray Weidenbaum as chairman of the Council of Economic Advisers, and David Stockman as director of OMB. Although not an economic adviser in the usual sense, Paul Volcker was chairman of the Fed when Reagan arrived, and the president re-appointed him in 1983. Regan was an effective manager. He supported the president’s 1981 tax cuts and played an important role in the drafting of the first version of the 1986 tax reform bill, but I don’t think he ever was consciously a movement market liberal. Now, Murray Weidenbaum certainly was a member in good standing, having directed Washington University’s Center for the Study of American Business before coming to Washington. He also co-edited AEI’s Regulation journal. His specialty had been the heavy cost to business of the new “social regulations” of the 1970s. Although he called for cost-benefit testing in deciding whether to impose regulations on business, he was not an advocate of root-and-branch surgery on the regulatory state.

As for Stockman, certainly he had been influenced by market liberal ideas. He writes in his account of the Reagan years, The Triumph of Politics, that he became a disciple of Hayek in the 1970s and by 1980 was a libertarian, opposing economic and morals regulation. Of course, after William Greider’s Atlantic Monthly November 1981 article (wherein Stockman told him that nobody understood the budget numbers and that supply-side economics was a rationalization for Hoover-style trickle-down economics) his influence in the administration and Congress was much reduced.

Navigator: What was the degree of influence of market liberalism at the second tier of the Reagan administration? Deep and widespread? Or shallow and spotty?

Kelley: Well, Thomas Langston looked at biographical sketches provided in theCongressional Quarterly Weekly Report in 1981 and concluded that 69 of 350 appointees had conservative credentials. Obviously, not all conservatives are market liberals. By 1985 some 50 scholars or former fellows of the Hoover Institution had served in some capacity in the Reagan administration; the Heritage Foundation had sent 36 and the American Enterprise Institute had contributed 34. Of course many of these served in secondary or tertiary capacities, in sub-cabinet positions, as White House staffers, or on various boards or commissions.

Among the more influential of those second-tier market liberals were the supply-siders Paul Craig Roberts and Norman Ture, who served as undersecretaries for tax and economic affairs and assistant secretary for economic policy, respectively. Certainly they influenced Reagan’s 1981 tax proposal, but they both resigned in 1982. Indeed, most of the “hard-core” market liberals disappeared from the administration fairly early on. Martin Anderson is an example. He headed the Office of Policy Development, reporting to Ed Meese. But by almost universal agreement, Meese was in over his head, and control over domestic policy gravitated to Stockman and Jim Baker, Reagan’s first chief of staff. Anderson found his proposals repeatedly rejected, and he resigned in 1982. Another early, but third-tier, market-liberal casualty was Steve Hanke, a senior economist working for the CEA. Hanke took privatization seriously (although that had never been a significant concern of Reagan’s) and preferred the selling off of all government lands.

When Reagan did endorse selling “surplus” lands, Interior Secretary James Watt interpreted the mandate narrowly, and Hanke resigned in protest. Another early exit was Peter Ferrara, who supported Social Security privatization (and had written on that topic for Ed Clark’s Libertarian Party 1980 presidential campaign). Working in the Office of Policy Development, Ferrara tried to influence the Greenspan Commission but quickly found that Baker and his deputy, Richard Darman, weren’t interested. He resigned in 1983.

In assessing the impact of market liberals on the Reagan agenda one has to keep in mind that Reagan initially set for himself only a relatively few goals: expand the defense budget, cut marginal tax rates, bring spending and inflation under control, and give business some regulatory relief. All else was peripheral, and even regulatory relief had to be subordinated to other considerations. Murray Weidenbaum reported that one reason the administration didn’t immediately propose revision of the environmental statutes was because it wanted to “avoid raising controversial legislative questions that could impede the speedy enactment of its tax and budget initiatives.”

Navigator: Market liberals had long been offering critiques of Vital Center liberalism. But had they constructed a viable program for the new administration, the sort of thing that a shadow government might have ready to go?

Kelley: An interesting question. As market liberals were not gathered together in a single policy factory, they weren’t really able to do precisely that. There were any number of publications on the eve of Reagan’s election that gave a broad overview of various market liberal desiderata. Possibly the most influential was the Hoover Institution’s 1980 publication, The United States in the 1980s. Martin Anderson was the initial project director on the book and claims in Revolution that many of the book’s policy recommendations became the administration’s policies.   Some seventeen people who contributed to the book or advised on it eventually served in the Reagan administration.   Interestingly, Mikhail Gorbachev later declared the book the “real blueprint” for the Reagan administration. A competing claim for influence has been made by the Heritage Foundation for its massive 1980 publication, Mandate for Leadership.

Navigator: Of course, one difference between the Reagan administration’s election and a shadow government taking power in a parliamentary system is the American division of power. Were market-liberal proposals actually put forward by the administration but then killed by the Democrat’s control of the House or by the anti-libertarian Republicans in the Senate? Or did the administration just not put forward that much market-liberal reform?

Kelley: A parliamentary system certainly gives a prime minister an advantage that Reagan never possessed.  The Republicans controlled the Senate only until the 1986 elections and never controlled the House. And, by the way, for all the talk about the remarkable Republican triumph in the 1994 off-year congressional elections, it’s well to remember that Newt Gingrich never had the lopsided margins in the House that Johnson enjoyed.

The Madisonian constitutional system was designed to thwart quick change in government policy, absent an astonishing consensus in the land, for example when Japan attacked Pearl Harbor.   Then the vote for war was unanimous in the Senate with only Jeannette Rankin dissenting in the House. But that was highly exceptional. Robert Dahl has characterized the American system as “slow-motion democracy” and it has thwarted or modified many impassioned causes before and probably will again.   Inevitably this means that the Reagan administration had to tailor even its highest priority proposals to what realistically it thought Congress would accept. As for the rest, many initiatives sent to the Hill were effectively DOA. For example, the 1982 proposal to abolish the Department of Education went nowhere; same for a 1983 proposal to provide tax credits for K-12 schooling, or a 1985 proposal to substitute tuition vouchers for direct support for head start programs.  

Navigator: In sum, looking back at Reagan’s eight years, what market-liberal accomplishments were achieved?

Kelley: I think that William A. Niskanen best summarized its accomplishments when he said there had been no Reagan revolution, only a Reagan “evolution.” On the positive side of the accounting there was reduced inflation, a slowing of the rate of government growth, some deregulation, a reduction in income tax rates. On the negative side of the ledger, tax cuts were financed by shifting taxes to the future via the deficit, modest deregulation was offset by increased trade restraints, and the federal budget continued to grow. Now, these accomplishments might not seem like much if you were expecting a market-liberal “maximum” agenda to be adopted. But that was never a possibility.

Furthermore, the Reagan years can be seen as just one installment in a long journey towards a more properly delimited government. Steps along this path began even before Reagan’s election. The deregulation of much of the surface transport industry, for example, occurred during the Carter years, with the adoption of the Airline Deregulation Act in 1978, the Staggers Rail Act, and the Motor Carrier Act in 1980. Another major blow to government transport regulation had to wait for 1995 when the Gingrich Congress abolished the ICC, the oldest of all federal regulatory agencies.

Market-liberal ideas haven’t triumphed, but they have changed the terms of the debate. The burden of proof is clearly on the side of those calling for an expanded government. Look what happened to the Clinton health care proposal. Furthermore, all the major social welfare programs presently in place date from no later than the early 1970s. Social Security may never be privatized but the size of its problems and Medicare’s problems have been so ingrained in the popular mind that there is little enthusiasm for new large-scale initiatives. In recent budgets, discretionary spending has actually dropped. Now, all of this may seem like small potatoes, but when one considers all the forces working for government expansion, it is some encouragement.

Navigator: What has the market-liberal movement accomplished in the realm of ideas since the Reagan administration? Have new schools emerged, comparable to the Chicago school? Have there been new insights comparable to Public Choice?

Kelley: There may be new developments, like bionomics, that retrospectively will be seen as important developments, but I suspect that Milton Friedman was correct when he toldForbes in 1988 that the “intellectual movement [for a free market] is approaching middle age, but the political movement is in its infancy.” Friedman suggested that there have been three cycles in political economy since the eighteenth century: the first was associated with Adam Smith, the second with the Fabian Society, and the third with Hayek, dating from the Austrian’s publication in 1944 of The Road to Serfdom. When one considers the astonishing quantity and quality of scholarship supporting free-market capitalism that has been published in the last fifty or so years, one has to wonder what more could be needed to prove the superiority of the system over other models.

Navigator: What, in your opinion, was the main cause of the Reagan deficits? Supply-side fantasies? Congressional spending? The military build-up? The recession? Or do we have to say, “All of the above”?

Kelley: All of the above contributed something. I am not a number cruncher but perhaps the single largest contributor was the unanticipatedly rapid drop in inflation, which dramatically lowered nominal GNP projections and thus the government’s “inflation dividend”.   By one estimate, that alone accounted for two thirds of the administration's $310.7 shortfall in its 1981–86 revenue forecasts. Although overall government spending grew at a lower rate in the Reagan years than during the Carter administration (about 3 percent compared to 5 percent) real defense spending grew by about 30 percent between FY 1981 and FY 1985. Another cost of government, servicing the debt, increased from $90 to $136 billion FY 1981-1986 because of the deficit. The supply-side flavored 1981 tax cuts added substantially. Even a supply-side enthusiast like Lawrence Lindsey concludes that the revenue cost of ERTA was $33 billion in 1985.

Navigator: Do you think the deficits were net beneficial, because they kept down spending? Or were they net detrimental, because they persuaded George Bush to go back on his anti-tax pledge and thus contributed to Bill Clinton’s victory?

Kelley: In the 1980s and early 90s the deficits certainly had a restraining effect on proposals for new government programs. One repeatedly read of complaints by liberal congressmen that it was no longer fun being a legislature because of the disciplinary restraints imposed by the ballooning deficits and then the 1986 Gramm-Rudman Deficit Reduction Act. Look at the 1988 Medicare Catastrophe Coverage Act as an example.  It required participants to pay for their own benefits. After it was passed, the elderly looked at the way it was structured and concluded that for most of them the benefits were not worth the costs. They successfully lobbied Congress for its repeal in 1989. Now, if this benefit had been financed in the old fashion way, assigning the cost to general taxpayers, the cost would have been dispersed while the benefits would have been concentrated and it probably would still be on the books.

Yes, Bush’s breaking his word on “no new taxes” contributed to his defeat in 1992, but was that such a terrible loss for market liberals? In 1990 he approved the Clean Air Act and the Americans for Disabilities Act. Many of his appointees were big government conservatives. In one year alone, 1991, he presided over a 25 percent expansion of the Federal Register. Although Clinton won in 1992, his legislative failures in 1993–94 contributed to the Republican triumph in 1994. Republican congressmen generally aren’t thoroughgoing market liberals, but they generally are more sympathetic than are Democrats.

Navigator: What are the main market-liberal institutions today, and what are their main sources of funds?

Kelley: There has been such an astonishing proliferation in the last twenty years, it’s impossible to keep track of them. One area of remarkable growth is overseas, thanks to the efforts of Antony Fisher. He founded the London-based Institute for Economic Affairs in 1957 and then went on to midwife the birth of dozens of others around the world. When he died in 1988, the network (by then coordinated by the Atlas Foundation) consisted of forty free-market institutions in twenty countries. Obviously the largest concentration of market-liberal institutions is in the U.S. In late 1991 The Economist ran an article on what it considered the world’s twenty-one most significant think tanks, regardless of their ideological persuasion, and gave the Hoover the highest score; also included on its list were AEI, Heritage, and Cato.

Where do they get their money? There were contributions from individuals and certain corporations, but in the U.S. non-profit foundations played an absolutely vital role, providing start-up costs and continuing, if often lower, levels of support. I am thinking of the Lynne and Harry Bradley Foundation, the Bechtel Foundation, the Adolph Coors Foundation, the Koch family of foundations, the Lilly Foundation, the John M. Olin Foundation, J. Howard Pew Freedom Trust, Smith Richardson Foundation, and the Sarah Mellon Scaife. Most of these, of course, are foundations identified with a wealthy individual or family, rather than a corporation. In the 1970s two men in particular, Irving Kristol and William Simons, played important roles in encouraging this giving and suggesting where it might do the most good. Kristol used his Wall Street Journal column to urge business to underwrite the battle of ideas. After serving the Ford administration as secretary of the Treasury, Simons became president of the Olin Foundation. Among its many other movement contributions, Olin began endowing university chairs. And Olin is not alone today in supporting educational institutions. Between 1992 and 1994 some twelve conservative foundations, most of them advocates of market-liberal ideas, gave nearly 90 million dollars to universities or other higher-education organizations, including the Institute for Humane Studies and the Intercollegiate Studies Institute. A 1999 National Committee for Responsive Philanthropy report stated that the top twenty U.S. conservative think tanks spent $158 million in 1996 and were likely to spend $1 billion between 1990 and 2000. The Left has nothing like this network of philanthropic organizations committed to focused advocacy.

Navigator: Could you summarize the essential criticisms lodged against market liberalism today, from both the Left and the Right—that is, from progressives, liberals, neo-liberals, conservatives, neo-cons, paleo-cons, theo-cons, and any others I may be forgetting?

Kelley: Well, Progressives writing in The Nation or Mother Jones advocate the continuation of New Deal labor-oriented left-liberalism, to which they have added the environmental and civil rights agendas of 1970s-style McGovernism. Their working assumption seems to be that if a social or economic problem exists, corporate policies probably are its root causes. More centrist are today’s neo-liberals represented by the Democratic Leadership Council. The DLC downplays the McGovern redistributionist, anti-business orientation of the 1970s while insisting that the new global economy does require an active role by government. Just as Progressive Era government had to respond to social change, economic dislocation, and distress associated with late nineteenth-century industrialization, so government today must respond to the dislocations and problems associated with post-industrial capitalism. Their “solutions” include everything from more government investment domestically in human capital to global compacts establishing environmental and labor regulations. Now, mainstream liberals like Al Gore or Bill Clinton find themselves trying to appeal simultaneously to the Democrats’ “core” constituencies, who are mainly in the “progressive camp,” and to large financial contributors, who often come from high-tech industries unsympathetic to much of the progressive agenda. It’s a difficult balancing act.

Neo-conservatives have generally given just “two cheers for capitalism,” as Irving Kristol titled his 1975 book. Although highly critical of the efficacy of many Great Society programs, and opposed to affirmative action, Kristol argued the inevitability of some sort of welfare state, accepted the need for regulation of business, and worried about the corrosive effects of capitalism on bourgeois morality. Neo-conservatives have been far more comfortable than many market liberals would be with trying to figure out how the state can promote virtue. Patrick Moynihan announced that the “central liberal truth is that politics can change a culture and save it from itself.” James Q. Wilson has cautioned market liberals that the major conflicts of American history have not been about the size of government but “right principles.”

Conservative opponents of market liberalism? Well, the “national greatness” school of conservatism, perhaps best represented by William Kristol and David Brooks at the Weekly Standard, argues that the “leave us alone” brand of conservatism is too negative and uninspiring. Kristol and Brooks have called for conservatives to emulate Teddy Roosevelt. Whether that’s the presidential TR who built up the regulatory state and the American Navy or the TR of 1912 who ran on a Progressive Party platform calling for national health insurance, this sounds like a recipe for expanded government.

Paleo-conservatives like Russell Kirk and Robert Nisbet spoke for the importance of local community and worried about the eroding effects of a centralizing state and an unrestrained capitalism. Certainly there’s no denying Schumpeter’s point about “creative destruction” of capitalism. Nisbet worried about its impact on community and what he called the need for a “clear sense of purpose, membership, status, and continuity.” Although his populist tone probably would have repelled Kirk and Nisbet (who both died in the 1990s), Pat Buchanan has accepted the title of paleo-conservative, calling for protectionism and immigration restriction. These proposals are probably anathema to most market liberals.

Theo-conservatives like Father Richard John Neuhaus, editor of First Things, argue that the United States is a Christian nation, ultimately governed by natural law. They see the Supreme Court usurping power by its pro-abortion and “anti-family” rulings. Some theo-cons have joined forces with the Christian Coalition; Alan Keyes might be thought of as a theo-con presidential candidate. George W. Bush has also met with various prominent figures in this camp. Although theo-cons probably would not think of market liberals as their primary opponent, market liberals who are generically libertarian probably would find their proposals alarming.

Finally, we might mention the communitarian movement. In their 1991 platform, written by Amitai Etzioni, Mary Ann Glendon, and William Galston, they declare that the movement seeks “balances between individuals and groups, rights and responsibilities, and among the institutions of state, market, and civil society . . .” In an apparent attempt to build the largest possible coalition, the document assures us that a “communitarian perspective does not dictate particular policies.” At that level of generality it’s hard to imagine market liberals opposing the movement. But communities rarely maintain themselves entirely through voluntary interactions.

Navigator: One often reads about the “libertarianism” of cyberspace? Is that a phenomenon you have followed? Is the so-called New Economy notably more market-liberal than the industrial economy? Secondly, do you think there's something per se liberating about the world of the Internet?

Kelley: Certainly there is abundant anecdotal and some statistical evidence that self-identified libertarians are disproportionately employed as engineers or in computer related fields. A study by John Green and James Guth in the early 1980s (but reported in the October 1987 issue of Liberty) found that 18 percent of contributors to the National Libertarian Committee were employed in computer-related fields, 10 percent in Engineering.  A year later Liberty surveyed its readers and reported (July 1988) that 26 percent of their readers were employed in computer science, 13 percent in engineering. I have read the recent Reason review of Paulina Borsook’s Cyberselfish: A Critical Romp Through the Terribly Libertarian Culture of High-Tech, which finds, to her considerable dismay, the computer culture marbled with libertarianism. Also, “Cyber-communities” have been criticized by the communitarian Robert Putnam in his new book, Bowling Alone, as a poor substitute for local face-to-face contact.

I know that some argue that the Internet allows individuals to obtain their political information unmediated by liberal broadcasters and this is supposed to be promising for libertarians. Certainly there are a zillion libertarian and market liberal websites to which one can turn. No doubt cyberspace technology will make it easier for like-thinking groups to coordinate action but I don’t see why that will exclusively benefit libertarians. My understanding, for example, is that the WTO protestors networked in advance through the Internet.

Much has been made of the role that television, fax, and the Internet have played in making the borders of authoritarian/totalitarian societies more porous. Surely that is all for the good and any movement away from statism is a move towards liberty but the progress may well stop far short of what any libertarian would find satisfactory. A social democracy is not a libertarian community.

Navigator: Over the last fifty years, some market liberals have hoped to build an alliance that would espouse freedom as the ultimate political value but maintain silence on moral values (and so could embrace everyone from evangelicals to nihilists). Others have said that a common political vision can be built only on the basis of a shared moral vision. Speaking as a historian of liberty, do you have any opinion on that dispute?

Kelley: As a historian, not a moral philosopher, I would say the evidence suggests that any promising “politics for liberty” must include those who share a common political vision, however they arrive at it. Indeed, all the polling data I have ever seen indicates that the percentage of the electorate that might be considered even tentative market liberals doesn’t exceed 25–33 percent. If that’s so, then gaining political power simply isn’t in the cards unless market liberals are prepared to ally with other groups whose interests overlap theirs on some issues. This may permit you to nudge policy in a more market liberal direction, but for the moment no market-liberal revolution is in the making.

Coalition politics is unpredictable. Look at the run-up to the Civil War. Horace Greeley famously commented in 1860 that an “Anti-Slavery man per se cannot be elected; but a Tariff, River-and-Harbor, Pacific Railroad, Free-Homestead man may succeed although he is Anti-Slavery.” Greeley recognized that the country was not passionately anti-slavery but thought a Republican victory, albeit a triumph of disparate interests, was the best way to advance the cause. Now, some market liberals have examined that 1860 political bargain and found it unacceptable. Jeff Hummel titled his recent Civil War volume, Emancipating Slaves, Enslaving Free Men.

As you suggest in your question, market liberals have been debating these issues for a long time. Minimal state versus anarcho-capitalism; principled liberty versus consequentialism. One of the reasons that Rand’s Atlas Shrugged had such an impact on its readers in the 1950s was that it defended capitalism on moral, rather than utilitarian or consequentialist, grounds. Of course other prominent market liberals doubt that you could ever persuade a majority to accept capitalism if it didn’t produce great wealth. Even withthe abundance that capitalism produces, many demand that it be redistributed to achieve “social justice.” Hayek dismissed social justice as an empty concept, but he accepted the need for government provision for these that could not make a living in the market: the old, sick, mentally ill, widows, and orphans. He cautioned that a system that didn’t provide these services would produce “great discontent and violent reaction.”

Simply as a prudential consideration, it’s hard to fault Hayek’s judgment. But inevitably there are efforts to turn such conditionally offered aid into “rights.” David Kelley, in A Life of One’s Own: Individual Rights and the Welfare State, has pointed out the consequence of giving a welfare claim the same moral status as a right to life, liberty, and property. It produces a conflict of rights. As these new “rights” are actually claims upon the liberty and resources of others, and as resources are always scarce, it turns “all rights into privileges” and the state determines the beneficiaries. Surely all friends of liberty, however they ground their support for it, can recognize the danger in such an arrangement.

Kelley suggests that we distinguish between benevolence and altruism, in effect between charity and a rightful claim on others’ resources. Although he considers benevolence a virtue, he insists that it is not the highest virtue. Benevolence “must yield pride of place to courage, integrity, rationality, dedication, and the other virtues that make achievement possible.” That seems to put it just about right.

This article was originally published in the October 2000 issue of Navigator magazine, The Atlas Society precursor to The New Individualist.  

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