[This exceprt from chapter eleven of my book The Several Roads to Serfdom has become more relevant today than it was three years ago when I wrote it.]
Hayek’s masterpiece: In chapter six of
The Road to Serfdom, Friedrich Hayek explains the difference between economies that operate under the rule of law and those that operate by the whim of government. “Under the first the government confines itself to fixing rules determining the conditions under which the available resources may be used, leaving to the individuals the decision for what ends they are to be used. Under the second the government directs the use of the means of production to particular ends.” [Page 81.] One can see from the tone and scope of these keynote sentences that Hayek has focused upon the law as it relates to economic matters. The title of the chapter, “Planning and the Rule of Law,” leaves no doubt that Hayek has set out to contrast the way capitalist and socialist economies understand and use the law. Briefly put, capitalist governments make laws designed to maximize the free use of resources by individuals, whereas socialist governments reserve to themselves the power to restructure and redirect the use of resources as they see fit.
History has rendered that particular distinction practically obsolete. As Hayek acknowledged in the introduction to the 1976 edition of his book, and as Fukuyama confirmed in
The End of History and the Last Man, “hot” socialist economies are almost extinct. Even the so-called communist nations, the People’s Republic of China, for example, while continuing their dictatorial ways, run their economies by means more capitalist than socialist. Those nations cannot, of course, be said to operate under the rule of law as Hayek understood it. The Chinese government still reserves the right to change the law to suit the momentary perceptions of the dictatorial rulers rather than to enforce the ideals of their quasi-capitalist economies. The local family enterprises that were the first to go into business in modern China, were able to do so because the government found it beneficial to make a law permitting the businesses to open. The Chinese dictators could just as easily pass a law forbidding for-profit enterprises and, thereby, revert to pure socialist practices. That it does not – or has not done so – speaks either to their good economic sense or to a visceral fear of uprising.
It has not eluded notice, however, that western, free-world governments have gradually taken on some of the trappings of socialism. The Medicare and Social Security laws in the United States are clearly not capitalist in nature, since by law they dictate the flow of certain economic resources. The U. S. government has also enacted laws of a quasi-socialist type to control (or benefit) certain areas of free enterprise. They have, for example, interfered with the tobacco business by methods that fly in the face of rule of law Hayek envisioned as the staple of free capitalist societies. The excise tax on tobacco aims primarily to encourage people to stop killing themselves. As noble as that objective may seem, the government has handled the “tobacco problem” in a self-contradicting manner. It has taxed smokers while leaving the tobacco farmer’s product relatively untaxed, leading at least this observer to believe that, in its treatment of tobacco farmers, the government has implemented one of the most fraudulent forms of economic fascism, that which favors a small body of producers with no possible benefit to anyone other than the recipients of the largesse.
Medicare, Social Security, and levies like the tobacco tax are a few of the tools of what has come to be called “social engineering.”
[1] Such laws aim to produce effects the government believes will benefit the people. Social engineering laws, like all others, whether socialist or capitalist, are burdened with two separately identifiable – but closely related – bodies of cost:
(1) economic costs in dollars and cents, and
(2) ideological costs or benefits, like those enforced and obtained by the tobacco tax.
One or the other of the two costs lie at the heart of the disagreements that inevitably crop up when social engineering programs become subjects of debate. Legislators typically frame their analysis of economic costs by weighing them against benefits. But since the benefits derived from social programs do not lend themselves easily to dollars and cents evaluation, political issues arise even in that process. Imagine the difficulties involved in trying to put a dollar value on human life, or on good health.
Social engineering laws – and in fact, all laws – could be said to be plans. They certainly result from a governmental attempt to implement a “planned” solution to a perceived problem. Sometimes the plans work and sometimes they don’t, but in all cases, plans that seek to marshal the government’s power to limit or control people’s activities arouse objections. When raised by libertarian ideologues, the objections usually take the form of questioning the right of the government to do anything that might be interpreted as an interference with the people’s rights and liberties. Those of the opposite persuasion tend to think the government is obliged to do whatever is necessary to achieve social equality. Consequently, nations that permit free expression generally find themselves engaged in a continuous debate over what is good planning and what is not.
Hayek anticipated – or saw with his own eyes – the turmoil that arises from disagreements of that sort. To help us resolve the difficulty, he identified objectionable planning as “a central direction of
all economic activity according to a single plan, laying down how the resources of society should be ‘consciously directed’ to serve particular ends in a definite way.” [Page 40, italics mine.] While this definition seems to make crystal clear at least one side of the argument, it still leaves loopholes in pure laissez faire theory that Hayek’s purported disciples have had difficulty accepting. If planning is bad only when “all economic activity” is controlled, the modern conservatives, with few pure socialist governments to criticize, have been deprived of most of their ammunition, which of course, hasn’t stopped them from criticizing any action of government which they find repugnant to their own beliefs.
But then, modern conservatives are not in the truest sense seeking to implement Hayek’s ideas. Having confused “economic activity” with any act of a central government, they find themselves enrolled in what appears to be a suicide club. They object to, and actively seek to defeat, measures designed to promote human health (Medicare), safety (the Pure Food and Drug Act), the health of the planet (the Clean Air and Clean Water Acts), and similar devices that are “economic” primarily because they have to be paid for.
But as I have said – and my tongue was no deeper in my cheek then as now – no one should blame these suicidal people (or any others) for seeking what they regard as their own best interest. That their measures may harm other people (and themselves) should be of no concern to us, since we all tend to do similar things, sometimes with equally suicidal results. But even as we ironically approve their destructive behavior, we should still hold them pejoratively accountable. They have, with increasing frequency, covertly used the power of government and abused the rule of law to satisfy their personal ambitions.
By way of setting up a contrast, consider that when the representatives of elderly people without health insurance sought to have the government institute a program to assist them, no one could (or should) have been in doubt about the objectives and main beneficiaries of the program. The way they went about seeking government assistance was open and above board. If there were cost problems with what they were asking – and by now it should be obvious that there were – the debate could have been (and was to a great degree) centered upon those problems.
But when corporate America, facing difficulties of its own, sought government’s assistance – by way of the North American Free Trade Agreement (NAFTA) – the debate was almost entirely deceptive. NAFTA’s sponsors claimed that the act would benefit American workers by creating more new jobs. They did not make it clear that those jobs would materialize only after the living standard of the Mexican people was raised to a level where they could afford American products. But the deception went deeper than a mere error of omission. To suggest that American jobs would be gained as a result of NAFTA was a lie, since even if the Mexican living standard were raised (in four decades or so) most of the market thus created would be satisfied by foreign and Mexican competitors of American companies. In the four-decades of the meanwhile, Americans would lose their jobs, and probably lose them permanently to cheaper labor.
In the famous NAFTA television debate between Al Gore and Ross Perot, when Perot suggested that the job losses in America would create a “giant sucking sound,” Gore’s response was (1) to repeat the lie (that jobs would be gained) and (2) to engage in a character assassination of Mr. Perot. I do not recall that Gore or any other of NAFTA’s proponents acknowledged the time frame in which the putative Mexican market would materialize, and they certainly never admitted the probability that, in the long run, foreign workers would benefit more than American workers from the improved Mexican economy.
But then, none of that really mattered. The true objective of NAFTA (and now the Central American Free Trade Agreement, CAFTA) had nothing to do with long term benefits for American workers or anyone else’s workers. NAFTA (and CAFTA even more so) provides American corporations a way around the environmental and fair labor laws they must obey if they do business in America. The international corporations could foresee that those laws were not going to go away, so they engineered a side-step around them. The cheap labor of the Mexican and Central American nations – to which health insurance and other benefits do not have to be paid – could more easily be exploited than the more informed and more strongly supported American workforce. I cannot offer an estimate of the damage that will be done to the world’s atmosphere and water supplies by the actions of the NAFTA/CAFTA beneficiaries; that’s for water and air quality experts to assess. I can say that the ethical considerations involved in deceiving the American public are evidence enough to conclude that Smith’s invisible hand is sometimes attached to the arms of self-serving prestidigitators. If the impetus behind NAFTA/CAFTA were actually the promotion of free market theory, why not concentrate on opening up the markets between us and places like Great Britain, Germany, Japan, and Italy, instead of only those places where cheap labor and weak environmental laws exist? And why load NAFTA/CAFTA with caveats protecting those aspects of the American economy where the Mexicans and Central Americans can already compete, like in the sugar market?
I do not wish to create the impression that the long range effects of NAFTA/CAFTA are “bad” from every perspective. If the proponents of those measures were as idealistic as Friedrich Hayek about the goodness of open market capitalism, and as honest as him in seeking the benevolences of free trade, they would have informed the American people straight out that, even though NAFTA/CAFTA would cost many American jobs, the long run effects of those programs would benefit the world. If rationally applied capitalist ideas do in fact work as well as Hayek said they would – and I believe they do – and if that form of capitalism were adopted by all the world’s nations, the supplies of goods coming into the market would increase so significantly that the worldwide shortages of life’s necessities would soon be satisfied.
But the corporations who purchased NAFTA/CAFTA from our Congress were not seeking to export rational capitalism. Neither the plight of workers nor the health of the planet were their concern. Performing their magic tricks, just as every dogmatic laissez faire capitalist ought to, they were working to increase the earnings of their companies. If the American people had to be distracted by sleight-of-hand tricksters in order for their objectives to be met, no problem. With the wool firmly in place over the public’s gullible eyes, even pollutions of the earth can be justified. In the long run polluted air and water will provide opportunities for other capitalists to mount profitable cleanup enterprises, and the world will be better off. (Hmmmm.]
I found laughable the Democrats’ pleas for “a level playing field” during the most recent presidential campaign. They wanted Mexico to enact environmental and fair labor laws similar to those in America. The candidates making those pleas were either ignorant of NAFTA’s true purpose or were merely shedding crocodile tears. The NAFTA/CAFTA laws were enacted precisely to create a slanted playing field.
NAFTA‘s chapter 11, which gives corporations supremacy over pre-NAFTA American, Mexican, and Canadian laws and courts, clearly indicates that those who crafted those provisions did not have America’s best interest at heart. Chapter 11 was (probably) designed to prevent the three governments – primarily Mexico – from nationalizing capital investments, but the law has, so far, never been used for that purpose.
[2] Instead, using NAFTA’s chapter 11, foreign companies have entered into litigation against American, Mexican, and Canadian taxpayers, seeking relief from the laws of those nations that inhibit their earnings. (They also seek compensation for the losses those laws have caused them.) The litigants are not suing in a formal American court or any other nation’s court. They are pleading their cases to a special tribunal created by NAFTA in which foreign companies can sue you and me for damages.
A company called Methanex, for example, incorporated in Canada, is suing us, claiming that California’s laws prevent the sale of the company’s gasoline additive.
[3] They want close to a billion dollars of our money. [Note, not just Californians’ money, yours and mine, and that includes Californians. The state of California actually has no standing in the NAFTA tribunal, so it has to depend on the Federals to plead its case – and ours.] The fact that California enacted its pollution laws to counter a problem peculiar to California would appear to be irrelevant to the company bringing suit. In fact, from the plaintiff’s point of view, those laws are the problem. Their eye is on their bottom line, not on California’s smog.
United Parcel Service (“Brown”), another NAFTA litigant, is suing the Canadian government in the same tribunal, claiming that Canada’s postal service, by delivering packages, is unfairly competing with its service.
[4] They want $160 million of Canadian taxpayers’ money.
CAFTA is worse. NAFTA elevated only foreign companies to the same level as sovereign nations. (Actually above them, since the NAFTA/CAFTA tribunal’s rulings supercede and render inoperative the laws of sovereign nations.) CAFTA will broaden that privilege, permitting the foreign subsidiaries of American companies to sue you and me in that same tribunal. Note well, that the NAFTA/CAFTA tribunal is not engaged in the adjudication of American law, or the law of any nation, ruling only upon the appearance that some law of ours (or some other sovereign nation’s) prevents or inhibits corporate profits.
[5]NAFTA/CAFTA, and similar broad-reaching economic measures, enacted by governments to benefit private economic ventures, violate the most fundamental principle of Hayek’s rule of law. They in fact closely resemble the fascist “laws” adopted before the Second World War by Germany and Italy. Those two Axis nations implemented a form of socialism, called corporatism, in which the state enters into partnership with the corporations to assure their partners’ profits. Hayek was writing against precisely those sorts of measures. Coupled with the neoconomics briefly summarized at the end of chapter three, the NAFTA/CAFTA coup clearly demonstrates the intentions of corporate America and its political agents in the Congress. They wish to own the world and are willing to sacrifice America’s sovereignty to reach their goal.
I do not, however, wish to suggest that no one in America other than the stockholders of America’s multinational corporations benefited from NAFTA. The almost two million American jobs lost because of NAFTA added a large supply of unemployed people to the workforce, effectively lowering (or constraining) the cost of American labor. Companies in the burger-flipping business thus benefited from the increased supply of cheapened labor. I’m sure you understand why this “benefit” was not advertised by those lobbying for NAFTA.
Those same pimps, in defending the esoteric (hidden) means by which the corporatists have sold their ideas try to put projects like NAFTA/CAFTA on the same footing as Medicare and Social Security, claiming the so-called “trade agreements” are just government programs aimed at promoting the general welfare. But NAFTA/CAFTA led to a loss of two-million American jobs, with no hope that those jobs will ever be recovered.
In making their case, the defenders of NAFTA/CAFTA will no doubt avoid speaking of those parts of the programs – like NAFTA’s chapter 11 – that by no means relate to the good of the American people. The NAFTA/CAFTA pimps may also avoid discussion of NAFTA’s real good. I spoke of the benefits that might accrue to the poor people of the world if liberal democratic capitalism were broadly adopted. But unlike the other programs I’ve named, even if those benefits were realizable – which is doubtful – NAFTA/CAFTA’s real goodness can only be appreciated from an international perspective.
The damage done by NAFTA/CAFTA goes far deeper than thievery. The nation has, since its founding, been suspicious of government. On the political front, nothing has happened since Vietnam to do anything but deepen that historical distrust. As the saying goes, we need further deceits about as much as we need “a hole in the head.” If American corporations need cheap labor markets to survive, then why don’t they just say so, and forget this shadowy game of deceit they are playing with the American people.
[1] Paul Johnson, in his book
Modern Times, claims, by curvilinear reasoning, that over 100 million people were killed in the 20th century as “unintended consequences” of social engineering projects. He’s contending, for example, that Germany’s socialist economic policies led directly, though not by intention, to the Holocaust. I contend that Hitler’s political tactics, fueled by ancient prejudices derived from the Christian gospels, led intentionally to the Holocaust. I do not aim to account for all of Johnson’s 100 million dead. I’ll just say it straight: Johnson’s claim is phony, a blatant example of the
post hoc ergo propter hoc logical error.
[2] Some observers believe the provisions of NAFTA’s chapter 11 have been abused by investors who saw a loophole in the law. If that were the case, the loophole could have been closed in CAFTA. It wasn’t. It was made wider.
[3] The details of this proceeding read like a James Bond spy novel, with Methanex accusing the officers of its American competitor, Archer-Daniels-Midland Inc, and California Governor Davis of actions (to put it in the words of the tribunal) “likely to offend any self-respecting person.”
[4] United Parcel Service is, to Canada, a foreign company.
[5] Additional information may be found at www.epi.org and www.tradewatch.org.
