Whatever Happened to Free Enterprise?

The following is excerpted from a speech delivered on November 10, 1977, on the Hillsdale College campus as part of the Ludwig von Mises Lecture Series. Originally published in Imprimis in January 1978, the speech was reprinted in Educating for Liberty: The Best of Imprimis, 1972-2002 (Hillsdale College Press, 2002).

G overnment, by going outside its proper province, has caused many, if not most, of the problems that vex us.

How much are we to blame for what has happened? Beginning with the traumatic experience of the Great Depression, we the people have turned more and more to government for answers that government has neither the right nor the capacity to provide. Unfortunately, government as an institution always tends to increase in size and power, and so government attempted to provide the answers.

The result is a fourth branch of government added to the traditional three of executive, legislative and judicial: a vast federal bureaucracy that is now being imitated in too many states and too many cities, a bureaucracy of enormous power which determines policy to a greater extent than any of us realize, very possibly to a greater extent than our own elected representatives. And it can't be removed from office by our votes.

More than anything else, a new political economic mythology, widely believed by too many people, has increased government's ability to interfere as it does in the marketplace. Profit is a dirty word, blamed for most of our social ills. In the interest of something called consumerism, free enterprise is becoming far less free. Property rights are being reduced, and even eliminated, in the name of environmental protection. It is time that a voice be raised on behalf of the 73 million independent wage earners in this country, pointing out that profit, property rights, and freedom are inseparable, and you cannot have the third unless you continue to be entitled to the first two. Even many of us who believe in free enterprise have fallen into the habit of saying when something goes wrong: "There ought to be a law." Sometimes I think there ought to be a law against saying that there ought to be a law.

In spite of all the evidence that points to the free market as the most efficient system, we continue down a road that is bearing out the prophecy of Tocqueville, a Frenchman who came here 130 years ago. He was attracted by the miracle that was America. Think of it: Our country was only 70 years old and already we had achieved such a miraculous living standard, such productivity and prosperity, that the rest of the world was amazed. So he came here and he looked at everything he could see in our country, trying to find the secret of our success, and then went back and wrote a book about it. Even then, 130 years ago, he saw signs prompting him to warn us that if we weren't constantly on the guard, we would find ourselves covered by a network of regulations controlling every activity. He said if that came to pass we would one day find ourselves a nation of timid animals with government the shepherd.

It all comes down to this basic premise: If you lose your economic freedom, you lose your political freedom and, in fact, all freedom. Freedom is something that cannot be passed on genetically. It is never more than one generation away from extinction. Every generation has to learn how to protect and defend it. Once freedom is gone, it is gone for a long, long time. Already, too many of us, particularly those in business and industry, have chosen to switch rather than fight. We should take inventory and see how many things we can do ourselves that we have come to believe only a government can do.

The most dangerous myth is that business can be made to pay a larger share of taxes, thus relieving the individual. Politicians preaching this are either deliberately dishonest or economically illiterate, and either one should scare us. Business doesn't pay taxes, and who better than business could make this message known? Only people pay taxes, and people pay as consumers every tax that is assessed against a business. Passing along their tax costs is the only way businesses can make a profit and stay in operation.

The federal government has used its taxing power to redistribute earnings to achieve a variety of social reforms. Politicians love those indirect business taxes, because it hides the cost of government. During the New Deal days, an undersecretary of the treasury wrote a book in which he said that taxes can serve a higher purpose than just raising revenue. He said they could be an instrument of social and economic control to redistribute wealth and income and to penalize industries and economic groups. We need to put an end to that kind of thinking. To win this battle against Big Government, we must communicate with each other. We must support the doctor in his fight against socialized medicine, the oil industry in its fight against crippling controls and repressive taxes, and the farmer, who hurts more than most because of government harassment and rule-changing in the middle of the game. All of these issues concern each one of us, regardless of what our trade or profession may be. Corporate America must begin to realize that it has allies in the independent businessmen and women, the shopkeepers, the craftsmen, the farmers and the professions. All these men and women are organized in a great variety of ways, but right now we only talk in our own organizations about our own problems. What we need is a liaison between these organizations to realize how much strength we as a people still have if we will use that strength. We have had enough of sideline kibitzers telling us the system they themselves have disrupted with their social tinkering can be improved or saved if we will only have more of that tinkering or even government planning and management. They play fast and loose with a system that for 200 years made us the light of the world and the refuge for people all over the world who yearn to breathe free. It is time we recognized that the system, no matter what our problems are, has never failed us once. Every time we have failed the system, usually by lacking faith in it, usually by saying that we have to change and do something else. A Supreme Court Justice has said the time has come, is indeed long overdue, for the wisdom, ingenuity, and resources of American business to be marshaled against those who would destroy it.

What specifically should be done? The first essential for the businessman is to confront the problem as a primary responsibility of corporate management. It has been said that history is the patter of silken slippers descending the stairs and the thunder of hobnail boots coming up. Back through the years we have seen people fleeing the thunder of those boots to seek refuge in this land. Now too many of them have seen the signs, signs that were ignored in their homeland before the end came, appearing here. They wonder if they will have to flee again. But they know there is no place to run to. Will we, before it is too late, use the vitality and the magic of the marketplace to save this way of life, or will we one day face our children, and our children's children, when they ask us where we were and what we were doing on the day that freedom was lost?

Copyright © 2004. Permission to reprint in whole or part is hereby granted, provided a version of the following credit is used: "Reprinted by permission from IMPRIMIS, the monthly journal of Hillsdale College (www.hillsdale.edu)."

Will we, before it is too late, use the vitality and the magic of the marketplace to save this way of life

Perhaps the author has failed to notice that his magical marketplace and the ever growing bureaucracy have since become virtually one and the same. Where would corporate America be without its farm bills, its medical transfer system, or its endless mandatory liability coverage. Insurance companies would be instantly reduced from glass towered corporate monoliths to the shady door to door salesman of our youth; and they would have to share the door knockers with medical profession returning to the concept of making house calls. Without our bureaucracy, farmers would have to farm, and manufacturers would have to innovate and manufacture rather then just live off the generosity of our legislatures and central bank.

We wish we had a business environment that could stand in contrast to our ever burdensome spread of socialism. But, given the number of well fed lobbyist, and the quality of the legislation that they are supporting, it is safe to say that our "free market" has attached itself to the bureaucracy like so many ramora.

http://www.cybereef.com/Mabul/Images/ramorashark_lg.jpg

What specifically should be done?

One might consider moving to a tax system more in line with what Von Mises himself recommended to Austria to encourage business and economic growth after the ravages of WWII on the Austrian economy and infra-structure.

Ludwig von Mises as Policy Analyst: Monetary Reform, Fiscal Policy, and Foreign Exchange Controls by Richard M. Ebeling
Heritage Lecture #754

http://www.heritage.org/Research/PoliticalPhilosophy/hl754.cfm#pgfId-1023417

"Austria, Mises said, would be a poor country. The destruction of war, the consumption and misuse of capital, the destruction of a large portion of the Austrian entrepreneurial class due to the expelling or murder of so many Jewish businessmen and financiers, and the debilitation of the labor force from death and permanent injury in battle would require Austria to turn its back on its socialist, interventionist, and welfare-statist past. Only economic freedom and hard work could restore Austria from a condition that we might nowadays loosely refer to as "third world" status.
Fiscal policy, therefore, would have to be designed to do everything possible to unleash private sector incentives and opportunities for investment, capital formation, and entrepreneurship. Virtually all taxes, Mises suggested, should be skewed toward consumption and away from production. What type of broadly based consumption taxes? He proposed:

(1) excise taxes on alcoholic beverages, tobacco, and related tobacco products;
(2) a sales tax exclusively on the sale of goods and services to the final consumer; there should be no explicit or hidden value added taxes;
(3) a progressive consumption tax based on housing expenditures, but with an exemption for housing expenditures for those in the lower income brackets;
(4) a tax on luxury automobiles for private or personal use;
(5) a tax on lottery winnings;
(6) a stamp tax on playing cards;
(7) administrative fees for certain government services, such as issuing patent rights, brand name registrations, determination of weights and measures, and "official stamps" to cover the cost of providing various types of documentation;
(8) a wage tax paid by employers that was not deducted from the employee's salary to fund existing social insurance programs; and
(9) a moderate net profits tax on shareholders and limited liability partnerships when annual disbursements exceeded 6 percent of the enterprise's capital assets; retained earnings by the enterprise would be exempt from taxes so as not to discourage capital formation.

Except for the net profits tax and the wage tax for social insurance costs, all income and business earnings would be completely tax-exempt. And a perusal of Mises' proposed list of taxes clearly shows that he thought that, besides the general sales tax, the fiscal burden should primarily be in the form of what nowadays would be classified as "sin taxes" and a narrow selection of "luxury" expenditures. Mises' long recognized advocacy of "laissez-faire" did not mean a hands-off indifference to the path taken by the market economy. What would be produced, where and how goods would be produced, and for which segments of the consuming public would be determined by the pattern of market demand and the profit-driven entrepreneurs. As Mises expressed it in the early 1940s, "If there is any hope for an new [economic] upswing [at the end of the war] it rests with the initiative of individuals. The entrepreneurs will have to rebuild what the governments and politicians have destroyed."

***
It should be mentioned that Mises' apparent concession to the welfare state in his listing among his fiscal suggestions of an employer's tax for social insurance expenditures did not mean his belief in their desirability or necessity. This was clearly an admission that, given the political currents, not everything could be reformed at once. For example, in 1942 Mises was invited to lecture in Mexico for six weeks during which he had the opportunity to studying the economic conditions in the country. The following year, in 1943, he prepared a lengthy monograph for an association of Mexican businessmen on "Mexico's Economic Problems." His recommendation was to not establish social insurance programs in the first place. If part of the cost of such social insurance schemes falls on the shoulders of the employers, it would only succeed in raising the cost of employing workers, with the negative effect of pricing some members of the work force out of the job market. At the same time, such government-mandated insurance policies restricted the freedom of the employee to weigh the opportunity costs of allocating his income in various ways more reflective of his own preferences and that of his family.

The problem I have with his proposal is 8 & 9, they essentially do tax the earnings of a business.

Agreed, read that last paragraph. Von Mises would have agreed with you.

The key point of the Austrian changes was they were moving from a totally socialist system with income taxes, payroll taxes and the whole ball of wax. His recommendation to the Austrians should be taken with his recommendations to Mexico covered in that last paragraph in firmly mind:

"The following year, in 1943, he prepared a lengthy monograph for an association of Mexican businessmen on "Mexico's Economic Problems." His recommendation was to not establish social insurance programs in the first place. If part of the cost of such social insurance schemes falls on the shoulders of the employers, it would only succeed in raising the cost of employing workers, with the negative effect of pricing some members of the work force out of the job market. At the same time, such government-mandated insurance policies restricted the freedom of the employee to weigh the opportunity costs of allocating his income in various ways more reflective of his own preferences and that of his family. "

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