I had just finished reading a speech by George W. Bush in which he calls for creating a Compassion Capital Fund whereby the federal government would finance a wide variety of local social initiatives that "worked" when I received a letter from Milton and Rose Friedman asking me to give a speech at the upcoming Vancouver Mont Pelerin Society meeting making the optimistic case for the future of liberty. I didn't know whether to laugh or to cry. After all, when the leading candidate of the so-called market-oriented party in the U.S. thinks that federal bureaucrats could or should engage in such activities, one despairs for the future of liberty. But one also doesn't turn down Milton and Rose Friedman, so here I am.
Which is fine, because the truth be known, I genuinely am optimistic about the future for liberty in the world and, specifically in the United States of America. I apologize in advance, by the way, to our non-U.S. members and guests for the mostly provincial nature of my comments, but I think there is generally a universal applicability to the points I'll be making. To begin with, what do we mean by liberty? To this audience the definition won't be as contentious as it is for most of society, because as Hayek points out in the beginning of The Constitution of Liberty, Abraham Lincoln said, "The world has never had a good definition of the word liberty ... We all declare for liberty: but in using the same word, we do not mean the same thing." Which is true, of course, but Hayek typically cuts quickly to the chase, saying we should seek "that condition of men in which coercion of some by others is reduced as much as possible in society." He contrasts liberty to slavery by saying that liberty involves "the possibility of a person's acting according to his own decisions and plans, in contrast to the position of one who was irrevocably subject to the will of another."
By that standard the march of freedom that Milton described on Monday has indeed been impressive. And Milton said something else in his talk that is equally important in terms of assessing the prospects for liberty. He talked about the overwhelming support for socialism and the "tiny pockets of people who believed in freedom" back in 1947 when our Society's founders met on Mont Pelerin. Everything must be put in perspective. My friend and one of the great champions of liberty in the Twentieth Century, the late Julian Simon, was keenly aware of this fact. Whenever a left-wing environmentalist would point to some trend starting in, say, 1985, the first thing Julian would ask was, Why 1985? Why not 1975 or 1875?
In a debate with environmentalist Hazel Henderson in 1996 Julian was confronted with a with a chart purporting to show the decline in pollution levels in London since the passage of London's Clean Air Act of 1956. In his rebuttal, Julian produced his own chart showing the smoke levels in London dating back to the 1800s and, as reported in a great Wired magazine profile of Simon, "the line from the 1920s on showed a constant and uniform downward slope. 'If you look at all the data,' Julian said, 'you can't tell that there was a clean-air act at any point.'"
And so in projecting the prospects for liberty, it's probably useful to stand back a bit from the Compassion Capital Funds of 1999 and put things a bit more in perspective. In 1772 when there were 775,000,000 people inhabiting the world, it is estimated that 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 "miserable slaves of despotic tyrants." As late as 1848, according to Julian Simon, the share of serfs among the population of Austria was about 72 percent, and in Hungary about 50 percent.
By another measure, worldwide per capita income in 1800 was $100; by 1900 is was about $500; next year it will be about $5000 and by the end of the next century some estimates put it to be in excess of $40,000, or higher than the average Western income of today. It could, of course, turn out to be much greater than even 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. In 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, as Milton has pointed out, for all it's human rights failings is nevertheless clearly headed in a capitalist direction. The Associated Press distributed a photo recently 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 in Beijing are thugs. A couple of years ago in Shanghai Jose Pinera and I met with an individual from Beijing who has been charged with responsibility for creating a public pension system in China. His name is Sun Jianyong and as he approached us in the lobby of the Peace Hotel, Jose remarked, "But you are much younger than I had anticipated." To which Sun, who appeared to be in his late thirties, replied, "But you were only thirty when you privatized Social Security in Chile." At the meeting Sun 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.
Speaking of the collapse of communism, I think one of the clear indicators of the fact that liberty has the long-term momentum today is what Vaclav Klaus and John O'Sullivan talked about on Monday. 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. Bill "The era of big government is over" Clinton, for instance, offered no fewer than 95 new or expanded federal interventions in his January State of the Union Address. The Third Way politicians are trying to sugar-coat statism in the rhetoric of free markets and reinventing government, but in the Information Age they will sooner or later -- sooner, probably -- be exposed for the frauds that they are.
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 also, in large part, because of the work of the Cato Institute, the Heritage Foundation and the National Center for Policy Analysis, each of which, in turn, is indebted to the incredible work of the international Pied Piper of pension reform, our good friend Jose Pinera. Even if we live in an era of Bill Clinton and George W. Bush in the U.S., the fact is that by any objective standard, classical liberal ideas are making remarkable progress in the national policy debate there. Privatizing Social Security is supported by two-thirds of the population in the United States, and if you talk to people under 50, it's nearly unanimous. Men and women, Republicans, Democrats and Independents, union workers, blacks, whites, Asians, and Hispanics all overwhelming favor junking Social Security, the centerpiece of the New Deal. When asked if when a system is set up to allow the purchase of stocks and bonds government or individual workers should be allowed to invest the funds, 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 we commissioned recently that will be released in a week or so. In looking over those poll results, by the way, I was reminded of a poll from the Pew Research Center last year 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. Among members of Congress 31 percent said yes, 47 percent said no. Among Presidential appointees, 13 percent 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. This huge gulf between the political class and the people in the U.S., it seems to me, is another cause for optimism.
Getting back to Social Security, it's true that neither political party has had the courage to call for complete privatization today, but that's what the people want and it may well turn out to be a decisive issue in next year's presidential campaign. Dr. Pinera, who's working with Cato in our efforts in that regard, has already succeeded in bringing some form of privatization to pension systems in no less than eight Latin American countries and, most recently, Poland. To achieve such a thing in the U.S. would not only dramatically change our political dynamics in a very favorable direction from a classical liberal perspective, I believe it would also put tremendous pressure on the European Union and Japan to follow suit. They cannot compete with the U.S. or survive forever with public pension systems that feature unfunded liabilities of two or three hundred percent of GDP.
There are other significant policy gains evident in the U.S. today -- which is not to say that we've won them -- but that 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 snarling masses in the hopes of placating them before they tear down the walls of their monopoly. Ten years ago, not to mention when Milton Friedman first wrote about school vouchers, the unions were impervious to criticism.
In the area health care, there is a growing understanding that it's the third party payer system, whether government or first dollar insurance coverage, that's to blame for bureaucratized and expensive health care in America. Hillary Clinton's effort to sell essentially the Canadian system as the model for the U.S. broke down when it became common knowledge that people in this country travel south when they have serious health problems, despite the deficiencies of the U.S. system. There is a serious effort underway 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 U.S. now favor. All of this undermines efforts to socialize medicine in the United States.
In 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. Most people clearly understand the counterproductive nature of the dole and are determined to hold their fellow citizens responsible for their own actions, as they did prior to the advent of the paternalistic Great Society programs of the Sixties.
There is also a growing consensus that scrapping the 9000-plus page IRS code in the U.S. would be a good thing to do. Tax simplification is something all politicians now must at least pay lip service to. At Cato we frequently have forums on the flat tax or replacing the income tax altogether, not with a VAT, but with a retail sales tax. It is virtually impossible to get a politician 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, but it would end the patronizing policies of politicians who now use the tax code to socially engineer citizen behavior. It would also create some taxpayer solidarity in the movement to sharply lower 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.
Further, trade policy has clearly been on a positive trend in the U.S. 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 GDP in the U.S. is at an all-time high of 30 percent, when as recently as three decades 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 survive 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 in the U.S. dating back to 1937 when Franklin Roosevelt threaten to pack the Supreme Court unless it agreed to ignore its clear constitutional responsibilities and capitulate to FDR's grand social schemes. Thomas Jefferson once said that "The natural progress of things is for government to gain ground and for liberty to yield." Kind of an early Public Choice analysis. What Jefferson and most of the American Founders understood so well was that there is an inherent built-in bias for the state to expand. The statist imperative, if you will. Without some kind of institutional constraints -- in the case of the United States, 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 they pretty much have since 1937. But, as I say, 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 challenged Congress not to delegate its power to unelected bureaucrats, and even have resurrected the essence of the Constitution, the Doctrine of Enumerated Powers, whereby if the 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 in the States, is imperative if the prospects for liberty are to be as positive as they should be.
So, in conventional terms, the prospects for liberty are, if you stand back far enough, pretty bright. But as the people in this room are well aware, there are other forces at work which 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 access to knowledge, and on the financial side of the ledger, what economist Richard McKenzie accurately calls "quicksilver capital" -- the ability of capital to move anywhere in the world with the click of a mouse. An ancillary benefit of the financial revolution that is occurring, and to which Milton briefly referred, is what our colleague Richard Rahn refers to as "the end of money." There are brochures on his book of the same name at the Cato table outside and I highly recommend that you order a copy of the book, which must be giving central bankers around the world severe cases of heartburn.
At the Cato Institute we prefer to discuss the political battle, that is, man'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 the protection of our individual liberties.
Political society, of course, has historically derived its power from three main sources: Geographical 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.
Geographical 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 geographical territory a liability in its contest with the information-rich West. Let me read to you from a book that's been on the New York Times bestseller list for four months now. It's called The Lexus and the Olive Tree and it's written by the Times' chief foreign correspondent, Thomas Friedman. Friedman, I should say, unlike our Friedmans, is a liberal in the bad sense of the word -- an Al Gore Democrat. But the first half of the book is really terrific. He refers in the following quote to 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 Straightjacket 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 Straightjacket," he writes, "two things tend to happen: your economy grows and your politics shrinks."
Not bad for a liberal Democrat, is it? Before you Americans decide to vote for Al Gore, however, I should point out that the second half of The Lexus and the Olive Tree is truly awful -- full of mush-minded environmentalism, bleeding-heart calls for more funding for the IMF and World Bank, and more taxing of the rich. So, he doesn't really get it, but Friedman's analysis of the nature of the new global economy is brilliant. So brilliant, in fact, that I think much of the analysis came directly from 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. Walt Wriston simply sees things the rest of us can'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: The twilight of sovereignty, as Walter puts it.
And as Walter knows so well, one of the great sources of power for the state has been its ability to control capital flows by regulating major financial institutions, among other means. But one of the great aspects of the information revolution has been disintermediation -- the decreasing need for the middleman, for major institutions -- and the increasing ability of people to deal with one another directly, anywhere in the globe. Consider, for instance, the fact that in 1997 the singer David Bowie raised $55 million in capital based on 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 can expect explosive growth in the next century and that IMF and World Bank bureaucrats can start looking for honest work.
Richard Rahn writes in his book, "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 they 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 next century. It is likely that those nations that wish to preserve their sovereignty in the future will do so only in a superficial sense, and then only by pursuing policies of very low taxation and free and open trade.
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 virtue of the age it's turning into, virtually everyone is aware of it. It's estimated that by the end of the year 2000 some 100 million Americans will be plugged into the Internet. Some even suggest that the Internet may come to Canada. Wired magazine has dubbed those individuals who participate on the Net, Netizens. In a classic article from 1997 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....and 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 this 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 individual choice. The world is moving toward pluralism, capitalism, and civil society. It will take time, but it likely will happen. But 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, it will be groups like the Mont Pelerin Society, and not political parties, that lead the way. I'm reminded of that famous quote from the French politician Alexandre Ledru-Rollin, who was quoted while among the mob during the Paris revolt of 1848 as saying, "There go the people. I must follow them, for I am their leader."
Politicians and political society are not the answer. The Mont Pelerin Society, uncountable other voluntary organizations and civil society are the answer. Thus, let me conclude with the same plea my colleague Bill Niskanen made at last year's meeting in Washington, D.C. We do live in the information age today. There clearly was a time in 1947 and through the Fifties when the idea of secret, off-the-record talks at MPS made sense, given the intellectual climate of the time. But my goodness, our members win Nobel Prizes now. We should be celebrating the fact that classical liberals from dozens of nations attend these events. We should invite the media in and drop the conceit that we have something to hide, or something for which the outside world is somehow not worthy. The future of liberty does indeed look bright, but it won't happen automatically. It will require leadership and openness. I trust we can all work together toward that goal. Thank you very much.