Has Libertarianism Failed?

In a four-part series I presented the current state of the U.S. economy. Overall, things look relatively good here: growth is moderately good, private consumption is moderately healthy, business investments are stabilizing at a good rate and government consumption and investment spending is under control.

Generally, the private sector of the U.S. economy is in fairly good shape. So what is there to complain about?

First of all, the growth rates that I refer to as “moderately good” are at least a full percentage point below what we should have at this stage of a recovery, even from a deep recession. There are reasons why we are not at higher growth, one of them being the kind of government spending that does not show up in GDP: entitlements. Another reason is the Obama administration’s affinity for regulations. Without big entitlements and invasive regulations we could easily be growing at 3.5-4 percent per year.

Secondly, the biggest strength of the U.S. economy is relative, not absolute. As I continuously report on this blog, Europe is in a perennial state of stagnation and industrial poverty. The Chinese economy is in what looks like a relatively serious recession; add to that a real estate bubble that they still don’t know how to handle and the growing trend of job migration from China to lower-cost countries like Vietnam. Japan is fledgling but not much more than that.

And third – well, there is always Obamacare… Fortunately it looks like that reform, well-intended as it was, is being reshaped into something more palatable and manageable. It takes time, though, and while the president understandably holds on to his trademark legislative achievement he, too, must come to the conclusion that not all is good in America’s most complicated piece of legislation ever. When that happens, another ball and chain around the ankle of the American economy will fall off and allow free-market Capitalism to grow even bigger.

Bottom line: the U.S. economy is not very impressive when compared to itself a couple of decades ago, but at least from an international perspective it is the best place to be for job seekers, families and businesses.

The big question is why we can’t do better. What is holding us back? As a libertarian my conclusion is “big government”. As an economist my conclusion is “it depends, but big government is a strong candidate”. But that does only begs another question: how is it that the United States, a constitutional republic born from the yearnings of freedom, has fallen for the temptation of the big welfare state?

This is a big question to answer. A good way to start is to ask what has happened to the most freedom-loving movement in recent American history – the libertarian movement – and why it has failed to turn the tide on big government. After all, modern libertarianism is now almost half-a-century old. The intellectual groundwork was laid in part by economists like Milton Friedman and Friedrich von Hayek (who, by the way, allegedly did not get along with one another…) and partly by the great moral philosopher Robert Nozick. In his Anarchy, State and Utopia, originally published in 1971, Nozick challenged the prevailing wisdom of redistributive justice and – by implication – the theoretical foundations of the welfare state. His vision of the minimal state was close in theory to the small government that would be necessary for Hayek’s and Friedman’s free-market Capitalism to work.

The Reagan presidency marked a surge for libertarianism in America. Similarly, the Thatcher era unleashed libertarian thinking and activism in Britain. While its success on continental Europe was more limited, the libertarian movement made its footprints, especially in Scandinavia and eastern Europe, where it helped inspire the liberation from the Soviet empire.

But what looked like a success story back then never translated into policy success. Why?

The question is highly relevant. In a world where government consumes 40 percent or more of GDP; when taxes can take away more than half of a man’s earnings; when government controls or wants to control the education of all children and the health care of all citizens; in that world, libertarianism seems to be little more than a topic for esoteric dinner conversations.

Where are the libertarian victories? Can libertarianism even be saved?

Yes, it can. But only under some very important conditions. For more on this, check in tomorrow.