January/February 2000

The Future of Liberty

Dan Griswold and William H. Lash, III Dan Griswold, associate director of Cato's Center for Trade Policy Studies, explains why the World Trade Organization is not well suited to manage labor and environmental issues at the center's conference "Seattle and Beyond: The Future of the WTO." George Mason University law professor William H. Lash III listens.
It is estimated that, in 1772 when there were 775,000,000 people inhabiting the world, only about 33,000,000 of them lived under relatively free governments. Some 95 percent of humanity lived lives described by historian Arthur Young as those of "miserable slaves of despotic tyrants." As late as 1848, according to Stanley Engerman, in Austria serfs were about 72 percent of the population, and in Hungary about 50 percent. From that perspective, we've come a long way.

Another measure: worldwide per capita income (in constant dollars) was $100 in 1800; by 1900 it was about $500; next year it will be about $5,000; and by the end of this century some estimates put it in excess of $40,000, or higher than the average Western income of today. It could, of course, turn out to be much greater even than that.

In addition, any long-term assessment of human liberty has to take into account the collapse of communism. Hundreds of millions of people today are free from the yoke of communist totalitarianism under which they labored just a decade or so ago. The change has been dramatic, even in Russia, despite all its difficulties. For those nations that have really moved toward capitalism, the past decade has been nothing short of exhilarating. As Business Week noted a couple of months ago, for instance, "Poland has enjoyed brisk economic growth for most of the decade because it chose radical reform, and despite the pain, stuck with it."

The only remaining communist country of any consequence is China, which for all its human rights failings is nevertheless clearly headed in a capitalist direction. The Associated Press recently distributed a photo of a protester in Tiananmen Square sporting an umbrella painted with the slogan "Privatize. Give all state property to the people." He was arrested, to be sure, but when such subversive ideas are alive in the land, the end is near for the thugs in Beijing.

And not all of the Chinese leaders are thugs. A couple of years ago in Shanghai José Piñera and I met with an official from Beijing who had been charged with responsibility for creating a public pension system in China. Sun Jianyong convinced us that he was a great admirer of the Chilean system because of the higher income at retirement, the economic boost from increased savings, and, he said, because it gave people the dignity of not depending on the state for their retirement income. Some communist he!

Speaking of the collapse of communism, I think one of the clear indications that liberty has the long-term momentum today is the so-called Third Way. Because, believe me, Bill Clinton, Tony Blair, and those other European politicians wouldn't be adopting that phrase—the Third Way—if socialism wasn't as thoroughly discredited as it is. They are leftists who are trying desperately to hide that fact from the voters. To a large degree they've succeeded. But such deceit won't be successful over the long haul as it becomes increasingly evident that, whatever they call themselves, they always end up promoting more state intrusion into civil society. The Third Way politicians are trying to sugarcoat statism in the rhetoric of free markets and reinventing government, but in the Information Age they are sooner or later—sooner, probably—going to be exposed for the statists that they are.

Domestic Policy Reform

I mentioned the interest in China in setting up a private, individually capitalized pension system. There is, of course, tremendous interest in doing so in the United States as well, in large part because of the work of the Cato Institute, the Heritage Foundation, and the National Center for Policy Analysis, each of which is indebted to the incredible work of the Johnny Appleseed of pension reform, José Piñera. Even if we live in an era of Bill Clinton and George W. Bush, the fact is that, by any objective standard, classical liberal ideas are making remarkable progress in the national policy debate. Privatizing Social Security is supported by two-thirds of the population of the United States, and people under 50 support it nearly unanimously. Men and women; Republicans, Democrats, and Independents; union workers; blacks, whites, Asians, and Hispanics all overwhelmingly favor replacing Social Security, the centerpiece of the New Deal. When asked whether government or individual workers should invest the funds in a privatized system, by a margin of nearly five to one Americans say individuals should be allowed to invest on their own. They also say the present government-run pay-as-you-go system is riskier than the market. This is all from a Zogby International poll that Cato released in September 1999.

In looking over those poll results, by the way, I was reminded of a 1998 poll from the Pew Research Center that asked government officials this question: "Do Americans know enough about issues to form wise opinions about what should be done?" Here are the results: Thirty-one percent of members of Congress said yes, 47 percent said no. Thirteen percent of presidential appointees said yes, and 77 percent said no. Civil servants also are disdainful of the American people, with 14 percent saying the public can form wise decisions and a whopping 81 percent saying no, they can't. The huge gulf between the political class and the people in the United States, it seems to me, is another advance indicator of political change.

Getting back to Social Security, it's true that neither political party has yet had the courage to call for complete privatization, but that's what the people want and Social Security reform may well turn out to be a decisive issue in the presidential campaign. Piñera, who is working with Cato in our efforts in that regard, has already succeeded in bringing some form of privatization to pension systems in no fewer than eight Latin American countries. To achieve such a thing in the United States would not only dramatically change our political dynamics in a very favorable direction; it would also put tremendous pressure on the European Union and Japan to follow suit. They cannot survive forever with public pension systems that feature unfunded liabilities of 200 or 300 percent of gross domestic product.

There are other significant policy gains evident in the United States today—which is not to say that we've attained all our goals, but progress is clearly being made. Today the education monopoly is under attack as never before. The teachers' unions are in rapid retreat, throwing charter schools at the discontented masses in the hopes of placating them before they tear down the walls of the monopoly. Ten years ago the unions were impervious to criticism.

In the area of health care, there is a growing understanding that it's the third-party-payer system, whether government or low-deductible insurance coverage, that's to blame for bureaucratized and expensive health care in America. Hillary Clinton's effort to sell the Canadian system as the model for the United States broke down when it became common knowledge that Canadians travel south when they have serious health problems, despite the deficiencies of the U.S. system. There is a serious effort under way now to expand medical savings accounts and, indeed, to separate health insurance from employment through equal tax treatment, something a growing number of major corporations in the United States now favor. All of this undermines efforts to socialize medicine in the United States.

On other policy fronts, the welfare establishment has never really recovered from the assault on its hegemony by Charles Murray's Losing Ground and today lives with the reality that welfare is no longer a federal entitlement. People clearly understand the counterproductive nature of the dole and are determined to hold their fellow citizens responsible for their own actions, as they largely did before the advent of the paternalistic Great Society programs of the 1960s.

Taxes and Trade

There is also a growing consensus that scrapping the 9,000-plus-page U.S. Internal Revenue Code would be a good thing to do. Tax simplification is something to which all politicians now must at least pay lip service. At Cato we frequently have forums on the flat tax or replacing the income tax altogether with a retail sales tax. It is virtually impossible to get politicians or even someone from the IRS to defend the current system at these events. Radical simplification of the tax code not only would be good economically; it would also end the patronizing policies of politicians who now use the tax code to socially engineer citizen behavior. Simplification would increase support for the movement to sharply reduce taxation in America. We are making progress in this area, including creating a consensus to abolish both the capital gains tax and the death tax.

Finally, trade policy has clearly been on a positive trend in the United States for decades. Free traders have won the intellectual battle. The United States today has lower tariffs, as measured by the ratio of tariff income to the value of imports, than at any time in our history. In 1929 with the Smoot-Hawley tariff, that number stood at nearly 60 percent. Today it is less than 4 percent. Furthermore, trade and foreign investment income as a percentage of the GDP of the United States is at an all-time high of 30 percent, when as recently as 30 years ago it was only 15 percent of GDP. Internationally, a large number of countries—ranging from Chile to Mexico, Argentina, Australia, New Zealand, the transition countries of Central and Eastern Europe, and even, to a certain degree, India—are following suit, as, indeed, they must if they're to prosper in the new global economy.

One other positive development in the United States has been a series of court decisions that may portend the end of a very sorry history of jurisprudence dating back to 1937 when Franklin Roosevelt threatened to pack the Supreme Court unless it agreed to ignore its clear constitutional responsibilities and capitulate to his grand social schemes. In a sort of early Public Choice analysis, Thomas Jefferson once wrote, "The natural progress of things is for government to gain ground and for liberty to yield." Jefferson and most of the American Founders understood very well that there is an inherent tendency for the state to expand—the statist imperative, if you will. Without some kind of institutional constraints, in our case the Constitution, the majoritarian instinct in a democracy would naturally lead to the tendrils of the state reaching into every corner of civil society.

As, indeed, they pretty much have since 1937. But that all may be changing. The father of the Constitution, James Madison, said that the courts were to be the "bulwark" of our liberties against the inevitable majoritarian onslaught from the two political branches of the national government. In recent years the federal courts have once again started defending property rights; have been firm in support of free speech rights; have told Congress not to delegate its power to unelected bureaucrats; and have even resurrected the essence of the Constitution, the Doctrine of Enumerated Powers, according to which, if a power is not specifically delegated to the national government, it is reserved to the states or to the people. A renaissance of respect for the Constitution, which seems to be taking place, is imperative if the prospects for liberty are to be positive.

The Information Age

So, in conventional terms, the prospects for liberty are, if you stand back far enough, pretty bright. But there are at work other forces that augur even more brightly for a global future with far less political society and far more civil society. I speak, of course, of the Information Age and the two most dramatic things it brings to society: widespread, diversified, and instantaneous knowledge and, on the financial side of the ledger, what Richard McKenzie and Dwight Lee call "quicksilver capital"—the ability of capital to move anywhere in the world with the click of a mouse.

At the Cato Institute we prefer to discuss the political battle—that is, the individual's relationship to the state—in terms of civil society versus political society, rather than liberal versus conservative or even libertarian. In a civil society you make the choices about your life—how to spend your money, where to send your children to school, and so forth. In a political society, based as it is on coercion, somebody else—a politician or a bureaucrat—makes those decisions. The goal, it seems to us, should be to minimize the role of political society consistent with protection of our individual liberties.

Well, it turns out that political society historically has derived its power from three main sources: geographic territory, which is to say land; control of the flow and nature of information because knowledge is power; and control over capital flows and the value of a nation's currency. The Information Age is eating away at those three sources of power just as surely as the sun rises in the east.

Geographic territory and natural resources, as Hong Kong let anyone who was paying attention know decades ago, become increasingly irrelevant with the advent of the new global economy made possible by the information revolution in knowledge and finance. Indeed, the computer-challenged Soviet Union ended up finding geographic territory a liability in its contest with the information-rich West. A book called The Lexus and the Olive Tree by the chief foreign correspondent of the New York Times, Thomas Friedman, spent several months on the bestseller list in 1998. Friedman is something of an Al Gore Democrat, and his policy prescriptions range from more money for the International Monetary Fund to more environmental regulation. But the first half of the book is really terrific. He says countries today face the "Golden Straitjacket," by which he means that, in order to benefit from the new global economy, nations must play by certain rules. Here's what he writes:

To fit into the Golden Straitjacket a country must either adopt, or be seen as moving toward, the following golden rules: making the private sector the primary engine of its economic growth, maintaining a low rate of inflation and price stability, shrinking the size of its state bureaucracy, maintaining as close to a balanced budget as possible, if not a surplus, eliminating or lowering tariffs on imported goods, removing restrictions on foreign investment, getting rid of quotas and domestic monopolies, increasing exports, privatizing state-owned industries and utilities, deregulating capital markets, making its currency convertible, opening its industries, stock, and bond markets to direct foreign ownership and investment, deregulating its economy to promote as much domestic competition as possible, eliminating government corruption, subsidies and kickbacks as much as possible, opening its banking and telecommunications systems to private ownership and competition, and allowing its citizens to choose from an array of competing pension options and foreign-run pension and mutual funds... As your country puts on the Golden Straitjacket, two things tend to happen: your economy grows and your politics shrinks.

Not bad for a liberal Democrat. Friedman's analysis of the nature of the new global economy is brilliant. So brilliant, in fact, that much of the analysis is reminiscent of Walter Wriston's wonderful 1991 book, The Twilight of Sovereignty. That book, written in anticipation of the Internet, has to be one of the most thoughtful, prescient books of all time. Wriston simply saw things the rest of us couldn't.

In it he writes: "Intellectual capital is becoming relatively more important than physical capital. Indeed, the new source of wealth is not material, it is information, knowledge applied to work to create value. The pursuit of wealth is now largely the pursuit of information." And in competition with the private sector today, government can't possibly keep up in the pursuit of information. Individuals are being empowered irrespective of borders; irrespective of what politicians have done throughout the sorry history of government domination of society, which is happily coming to an end—hence Wriston's title.

One of the great sources of power for the state has been its ability to control capital flows by regulating major financial institutions. But one of the great aspects of the information revolution has been disintermediation—the decreasing need for middlemen—and the increasing ability of people to deal with one another directly, anywhere on the globe. Consider, for instance, the fact that in 1997 the singer David Bowie raised $55 million in capital on the basis of his projected royalties. The ability of capital markets to securitize virtually any future income flow, combined with the ability of companies to set up operations virtually anywhere on the globe, means that developing nations are in for explosive growth in the next century and that the IMF and World Bank bureaucrats can start looking for honest work.

Richard Rahn writes in his book The End of Money, "The world's people will be neither truly prosperous nor free unless governments retreat from their seemingly never-ending desire to control the production and use of money." He then goes on to persuasively demonstrate that governments have no choice but to give up that control. Private, digital, encrypted money is already a reality, and it will become the norm early in the 21st century. Nations that wish to preserve their sovereignty will do so only in a superficial sense, and then only by pursuing policies of very low taxation and free and open trade.

Information Age Politics

We live in interesting times. When the Agricultural Age turned into the Industrial Age, virtually no one was aware of what was happening. But as the Industrial Age turns into the Information Age, by definition virtually everyone is aware of it. It was estimated that by the end of 1999 some 100 million Americans would be plugged into the Internet. Wired magazine has dubbed "Netizens" those individuals who participate on the Net. In a classic 1997 article in Wired, Jon Katz wrote:

The Digital Nation constitutes a new social class. Its citizens are young, educated, affluent. They inhabit wired institutions and industries—universities, computer and telecom companies, Wall Street and financial outfits, the media... Some of their common values are clear: they tend to be libertarian, materialistic, tolerant, rational, technologically adept, disconnected from conventional political organizations—like the Republican or Democratic parties—and from narrow labels like liberal or conservative... The digital young, from Silicon Valley entrepreneurs to college students, have a nearly universal contempt for government's ability to work; they think it's wasteful and clueless. On the Net, government is rarely seen as an instrument of positive change or social good. Politicians are assumed to be manipulative or ill-informed, unable to affect reform or find solutions, forced to lie to survive.

Katz went on to suggest that the Netizen community will fuse technology with politics in such a manner as to advance civil society. I think he's right. The twilight of sovereignty means the dawning of a new age of liberty and the empowerment of the individual. The world is moving toward pluralism, capitalism, and civil society. That will take time, but it will happen. It will happen because as the world community grows, as we get to know one another and work with one another around the globe, independent of the political process, civil society will flourish. Increasingly, citizens groups and policy institutes, not political parties, will lead the way. I'm reminded of that famous quote from the French politician Alexandre Ledru-Rollin, who said during the Paris revolt of 1848, "There go the people. I must follow them, for I am their leader." Politicians and political society are not the answer. The great American experiment in civil society, predicated on respect for the dignity of individual human beings, free from the grasping hands of politicians, is the answer.

This article originally appeared in the January/February 2000 edition of Cato Policy Report.

Edward H. Crane is the founder and president emeritus of the Cato Institute.