FOURTEEN

THE FOUNDATIONS
OF A FREE SOCIETY

(1988)

Herbert Giersch’s reference, in his splendidly comprehensive talk, to the first meeting of the Mont Pelerin Society developed in me an irrepressible urge to introduce a few comments, before the remarks I had intended to make, about the contrast between the situation as we saw it on top of that mountain in Switzerland and the situation as it is today. In drawing that comparison I am less optimistic about what has happened between then and now than Herbert is. What is true and clear is that the problem those of us who are determined to defend a free society face is very different now than it was in 1947. As we met there in Mont Pelerin, the place that gave the name to our society because we couldn’t agree on any other—disagreement is a long tradition in the Mont Pelerin Society, I’m glad to say, and I’m delighted to see that it continues to flourish—the problem that we regarded as preeminent was how to avoid comprehensive central planning. That was the danger that we thought would undermine freedom. Our countries had come out of war, whether on the defeated side or on the victorious side, with a great panoply of central control of the major resources of society. There was widespread intellectual belief that central control was inevitable and necessary for an efficient use of human and natural resources. With respect to that problem, we can say it no longer exists. It would be hard to find anywhere in the world today someone who would say that the road to prosperity is through detailed, comprehensive central control and direction of economic resources. Surely there are no such people in either Russia or China, let alone in Britain, the United States, or Germany.

However, another problem emerged. If the state was not to be used for comprehensive central planning, that did not prevent a drive to use the state for something else. That something else quickly turned to be how to use the state to take money from some and give it to others. Redistribution of income and wealth turned out to be the overwhelming problem and agenda of the next forty-odd years. Herbert said, and correctly, that our ideas have been victorious. They have in a sense. They have in the area of belief, in the area of intellectual climate. The spread of the notion of greater use of market forces is a tribute to those ideas. However, suppose you ask yourself a different question: Are governments weaker today or stronger, not in ideas, not in their hold upon people’s intellectual allegiance, but in practice, than they were in 1947? The answer is abundantly clear. I doubt that there is a country in the then free world or today’s free world in which government spending as a fraction of income is not higher today than it was forty years ago. In that area we have lost the battle, not won it. We still have the battle to win. We tend to look at things from the point of view of the immediate past. There is an inevitable tendency to regard what is as somehow the appropriate base, the appropriate starting point, but that way lies defeat.

We have, and now I am getting into the substance of what I intended to say, a lot of talk—Herbert contributed some of it—saying that we have a more open society today than we did in the immediate postwar period. In one respect we do. There is no doubt whatsoever that advances in computers, in communication, in satellites have made the world more open to information and that securities trading is more open and can be conducted on a twenty-four-hour-a-day basis around the world. But are we more open in other respects? Is our trade more open in people and in goods? Very doubtful.

If we really want to get a picture of what openness means, what are the foundations of a truly free and open society, I suggest that we will do well by looking back to a much earlier date. Let me quote two statements about the way the world was some seventy-five years ago, when it was far more open than it is today. The first is a quote from John Maynard Keynes, from his 1919 book on The Economic Consequences of the Peace. Before August 1914, “the inhabitants of London . . . could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, . . . could then proceed abroad to foreign quarters, without knowledge of their religion, language or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and surprised at the least interference.” Let me give you another quote, this one from the late Bertram Wolfe, a longtime fellow at the Hoover Institution who Glenn was so eloquent about and who served with Glenn. In his autobiography, he wrote:

How remote now seems that world into which I was born, in which one could buy a ticket to anywhere on the face of the earth—except Turkey or Russia—without presenting an identity card, a passport, or a visa. . . . Up to 1914 a passport was a luxury, a privilege of the envoy or of the wealthy traveler, in which his government introduced him and commended him to the hospitality of foreign officials, never a necessity for the humbler citizen or the refugee seeking some spot on the planet where he might come to rest and resume his full status as a human being.

My existence in my young manhood was attested to by my mere physical presence, without documents, forms, permits, licenses, orders, lists of currency carried in and out, identity cards, draft cards, ration cards, exit stamps, customs declarations, questionnaires, tax forms, reports in multiple, or authentications of my birth, being, nationality, status, beliefs, color, creed, right to be, enter, leave, move about, work, trade, purchase, dwell.[1]

Now those are descriptions of a truly open society, and they are very, very far indeed from where we are today.

What are the basic components of a truly open society? I believe we can classify the basic components of a truly free and open society under three headings: first, individual freedom—free speech, free press, free assembly, freedom of religion. Even in those countries today in which those freedoms are greatest, they are very far from being what they were a hundred years ago. Consider my own country, the United States, which prides itself on its freedom and rightly so. Among at least the large countries, it is the freest country in the world. Yet a world in which government distributes well over 40 percent of the national income is not a world in which people speak freely. How many heads of corporations, let alone how many professors in universities, really feel free to come out and criticize governmental arrangements that provide their daily bread? Some courageous people are willing to take chances, but in the main we are very far from having truly free speech. Just look at the advertisements that used to be put out, signed by the heads of all the major banks in the country, telling people to buy US savings bonds. Every person who signed that advertisement knew that the savings bond was a bad deal, that when it matured would buy less than the money paid for it would have had at the time of purchase. I asked many of them, “Why did you sign that advertisement?” They all told me the same thing: “The Federal Reserve wouldn’t like it if we didn’t.” So individual freedom is more than statements in the Bill of Rights that you are free, that Congress shall make no laws interfering with freedom of speech or religion. That is certainly important and desirable, but it is more than that, which cannot be maintained effectively in a society in which government controls a very large fraction of total resources.

The second major component is a rule of law, a relatively stable, well-defined, impersonal body of rules that people can count on, interpreted by an independent judiciary. That is to be contrasted with rule by people, arbitrary control of some people by others. We speak of the rule of law rather than the rule of men. Again, in principle, we have the rule of law in our free societies. But do we in the same sense in which we had it a hundred years ago? I do not believe so. I speak again of the United States because that’s what I’m most familiar with. Does anyone who faces an Internal Revenue agent believe he is being ruled by impersonal law? Hardly. Does he when he applies for a license from a governmental bureau that can be judge, jury, and executioner? And so on down the line. So here again we have a great deal to achieve.

The third essential component is the market economy, which itself in my opinion can be expressed as a trinity. (Everything comes in three parts. There was once an article in the Journal of the American Statistical Association, “Why Do Jesuits Die in Threes?”) This trinity is, first of all, free private markets, which includes free trade about which Herbert spoke so eloquently, so that the bulk of economic activity is organized through voluntary cooperation. Fundamentally, it also consists, second, of the free movement of people. Again, the United States, at least when my parents came there, had essentially free movement of people. There were some limitations, but in the main it was free. You cannot have free movement of people in a welfare state. Unfortunately, those two principles conflict. Third, the free movement of money requires either a truly unified currency or truly floating exchange rates. We have neither. Within the continental United States we have unified money, but between countries we have nominally floating exchange rates that are in practice manipulated by governmental central banks, again a subject about which Herbert spoke very well and with which I am in full agreement. We do not need international coordination among central banks. What we need is the abolition of the central banks, not a likely immediate prospect. I say this as no derogation of the people who are in those central banks. Some of them have been my very best friends. Simply listing these requisites shows how far we have yet to go to achieve a truly open society, even in those countries that we tend to lump into the free world.

All three components are both required for and supported by two basic elements. One is limited government and the other is private property. You cannot, in my opinion, have a truly open and free society unless those two basic elements are there. Governments must be limited and property must be private. Those are unduly simple terms. Limited to what? Limited how narrowly? We have discussed that a great deal in our Mont Pelerin meetings, and many of you in this room have written about that. It clearly is not an easy problem. Yet I believe there is no one who will deny that when government after government—local and central—spends through the treasury 40 to 50 percent of the national income, that’s hardly a limited government. When it gets up to 80 percent, as it does in some countries, or over 100 percent, which seems an impossibility but is due to the accounting anomalies involved in computing national income, we surely do not have a limited government.

And private property. Unfortunately, that too is not a simple term; one of the functions of government is to define what private property means. It is very tempting to think that somehow it is a natural right that requires no definition, but it is very far indeed from that.

What about political structure? The word “democracy” is a popular word, and it is a popular word because it means so many different things to so many different people. But the fact is that, if we look over history, a wide variety of political structures have proved consistent with open societies. The open society of which Keynes talked was a constitutional monarchy. His country, Britain, was a constitutional monarchy. The open society that ruled in the United States was a republic. The open society that has been ruling in Hong Kong to a greater extent perhaps than in any other place in the world in the past fifty years has been a colonial enclave. So no manner of political structure has proved incapable of maintaining an open society. That is true both ways. A society can be ostensibly a democracy and yet closed, as has clearly been true in some Latin American countries. A colonial society can be closed. A monarchy can be closed. While we are all acculturated to have particular respect for particular kinds of political structures, the maintenance of an open society depends much more on the beliefs, understanding, and character of the people than it does on the form of institutional structure. The institutional structure does, of course, play a role. I do believe that the existence of the Constitution and the Bill of Rights has played a role in maintaining the United States as a free society. Yet that same Constitution, adopted word for word by some Latin American countries, has not proved capable of maintaining a free and open society. So institutional structure is important, but far more important in my opinion ultimately are the beliefs, understanding, and the character of the people.

In what direction is the world currently headed? There are many hopeful signs, particularly the one I emphasized at the outset, the change in the intellectual climate of opinion that is partly manifested by our having two-hundred-odd people at a Mont Pelerin meeting in the remote country—relatively remote to most of them—of Japan, something that would have been inconceivable thirty or forty years ago. Nonetheless, it is by no means clear in what direction we are currently headed—whether toward a more open society or toward a more closed society. There is a worldwide movement to privatization, a very good sign, but there is also a worldwide movement to increased protectionism. There is little doubt that protectionism is on the rise and has been for some years now. Herbert emphasized the great leap in world trade and the reduction of barriers during the early postwar decades. But is that going on now? Hardly. If I may take one of his main examples, it is hardly a good sign, as I understand it, that in Germany, which demonstrated the miracle of the market first under Ludwig Erhard, socialist, collectivist, and leftist ideas are again very much on the rise and very important. It is no hopeful sign that in that country, too, government spending is nearly 50 percent of national income.

There is a worldwide move toward lower marginal income tax rates but unfortunately accompanied by what may be even worse systems of taxation. I have in mind two in particular: first, the value-added tax, which economically has much to be said for it but which is politically invisible, and hence inevitably subject to increase and multiplication, so that to the best of my knowledge every country that has a value-added tax has a higher level of government spending relative to income than any country that does not among the advanced countries; second, a form of taxation that is now coming to the fore in the United States, taxation by mandating obligations on private institutions. Senator Kennedy has given up on the hope of national health insurance because President Reagan’s unwillingness to raise taxes has produced downward pressure on spending, but he and his fellow resident of Massachusetts, Governor Dukakis, now hope to get national health insurance by mandating that employers provide it. That is a particularly vicious form of taxation because not only is it concealed but it is directed toward a single objective.

There is a great deal of reason for optimism, but there is very little reason for complacency. The task that the Mont Pelerin Society set for itself, that Friedrich Hayek set for the Mont Pelerin Society, is very far indeed from having been completed. The task remains and it can demand the best efforts, the best judgment, the best faith of all of us. Thank you.

Note

1. A Life in Two Centuries (New York: Stein & Day, 1981), p. 39.