November 25, 1946 my grandfather, Garfield V. Cox, Professor of Finance and Dean of the School of Business at the University of Chicago, gave an address, Is Socialism the Wave of the Future?, at the installation of Thomas Elsa Jones as new President of Earlham College.
The following year he published a re-worked version of the speech as the article Free Enterprise vs Authoritarian Planning in The Journal of Business, Volume XX, April 1947. I've since discovered a third version of the same speech. What follows is mostly excerpts from the speech with a few parts of the article mixed in.
You can read the first page of the article here to get a feel for his introduction of the topic and the problem as he saw it:
"One of the outstanding developments of our time has been the world-wide increase of government control and direction of economic life."
And the question he posed in the speech:
Is this country destined for socialism?
IS SOCIALISM THE WAVE OF AMERICA'S FUTURE?
He provides a little background on capitalisms outgrowth from mercantilism.
The year in which our fathers signed the Declaration of Independence was marked also by the publication of that early classic in economics, Adam Smith's Wealth of Nations. In that work Smith recognized that the basic principle of the industrial revolution was the progressive division of labor. There was emerging an interdependent society of specialists brought into unconscious cooperation through the social mechanism of the market. The free market was as indispensable a part of the new system of production as the labor, the materials, and the machines.
... snip...
In the decade in which Earlham College was founded [my note: 1847] Great Britain adopted free trade, and liberals everywhere looked forward hopefully toward an increasingly peaceful and prosperous international society.
He then discusses how this trend away from the government control of mercantilism toward capitalism began to slow down and in doing so begins to describe the inherent problems of capitalism.
But by the fourth quarter of the 19th century the liberal faith in individualism had faltered and the drift toward collectivism had begun. The emphasis in public policy shifted from the freeing and perfecting of the markets to the imposition of restrictions, piecemeal or general, upon their operation. There seems to have been two important reasons for this change. First, in an era of swiftly changing technology the market, in showing where and how labor and capital should be invested to meet demand, deals harshly with many persons. Economists speak of the insufficient mobility of labor and capital in the face of shifting and fluctuating market demands. In human terms this means that not all men can or will learn new trades or leave their homes and friends, or even change investments, as quickly as the free market would require. Those who misjudge the future trend of the market pay for their errors with loss of property, shrinking wages, or loss of jobs.
He also describes the intellectual failures of those he sees as the forbearers of his (and this) generations free market capitalists.
A second reason for the swing away from competitive enterprise and toward collectivism was a failure of insight on the part of able and sincere devotees of individualism. Intellectual liberals, from the philosopher John Stuart Mill to the Quaker statesmen, Richard Cobden and John Bright seem to have made the mistake of assuming that there were two separate realms, one of laws in which the state held dominion, and one of natural freedom in which the competitive market functioned. But the laissez-faire in matters economic which they tried to defend was an illusion, for the whole system of private property and contract, of enterprise by individuals, partners and corporations depended for its maintenance upon the supporting power of the state. But liberals came to take for granted, as given by God or natural law, the particular common-law rights, immunities and privileges which the Englishmen and Americans of their generation enjoyed. Therefore, they argued, even the bad things that happened under the system must be less bad than would be the ultimate fruits of state interference. This conception diverted them from efforts to improve the common law and to perfect the functioning of markets. Instead they found themselves defending the status quo.
Here I take a few lines from this section of the article as he nailed the point much stronger in these lines then the ones from the speech.
Extremists went so far as to argue that the state should not violate the right of young children to work in mill or mine. Even the wisest and best-informed liberals failed to sense the amount of intelligent positive action necessary to maintain the satisfactory functioning of free enterprise.
Didn’t we just hear Rep. Mike Lee using the same extremists ideology to say that child labor laws were unconstitutional?
With those problems and failures cited he now states why the trend toward socialism or collectivism, and the restrictions on the free market began.
So liberals for the most part abandoned to others the field of positive action. Some reformers have attacked the problem of great economic inequality by price-and wage-fixing rather than by such methods of taxation and of government spending as are consistent with the maintenance of a free-market economy.
Obviously he has just taken a position drastically at odds with his descendants, today’s so-called conservative free market capitalists. They agree, as I do, about wage and price fixing but today’s extremism would never allow for the idea that the governments powers to tax and spend are "consistent with the maintenance of a free-market economy."
The speech and the article then vary a bit from each other but one of the primary points in each can be summed up in a couple sentences extracted from the speech.
... partly to self-serving interests that contrived for themselves protection from the market, or control of its behavior in their own behalf.
And...
Each special interest urges that the general welfare will be served by exercising the power of government in its behalf.
With the result being...
Unfortunately most such measures have the effect of using the power of government, or of state-encouraged private monopoly, to win for the beneficiaries more income for less service.
And the interesting correlation that...
The most persuasive teacher of collectivism has been neither Marx nor Lenin, but the example of men who through tariffs, subsidies, trade unions, favorable franchises, or price fixing have shown that the help of the state can be successfully invoked to increase their own incomes.
Which he sums up...
Both groups are, in effect, collectivists.
In collectivism he sees the inevitability of an even greater problem.
In a society in which we have long regarded individual selfishness as something to restrain, it has become the fashion to encourage and to sanctify the selfishness of the group. There seems little ground for the current faith that, by organizing more and larger economic groups, a just and efficient working balance can be achieved among them. In our highly interdependent society of specialists are numerous organized interests any one of which may exert great and irresponsible power. The gravest risk to which we are exposed by this development is not that their behavior may retard material progress. It is that, because they must be brought under control, warrant is thus found for concentrating ever more power in the state.
That final sentence is written a little differently in the article.
The gravest risk to which we are exposed by this development is not that their behavior may retard material progress; it is that these pressure groups are in process of acquiring strength so great that only an omnipotent state will have the power to discipline them.
The trends that were active when my grandfather wrote were very different than today but so often, I find, the principles he states are just as applicable today even if at times in a seemingly opposite direction.
He goes on for a couple paragraphs about the examples some people were pointing to of the strength of the Nazi economic mobilization prior to WWII and the Soviet one afterwards as "a mandate to undertake a planned economy." As no one is seriously proposing such things today I’ll skip them except to say that he points out the totalitarianism that went along with those (of a sort only approximately allowable in a democracy during wartime) and this very insightful observation:
The popular fear or hatred of the enemy provides the psychological basis for evoking enthusiasm for the plan and for the suppression of dissent.
And in a statement that he aims at the communists of his day he makes this point which strikes me as equally applicable to the propaganda of the free market extremists of our own day.
The propaganda of communists and revolutionary socialists has always stressed the class war and not the blue print of a socialist society. It calls the faithful to war against the capitalist class, but brands as "utopian" or "unscientific" efforts to describe the structure and functioning of the order that is to supersede the capitalist economy.
The free market extremists of our day tell us that the market will solve all ills; that government is the problem; that government can do nothing right. But they fail to provide a solution to the ills we face today other than to wave the magic wand of the market place in our face.
Another interesting principle that strikes me as applying as equally in reverse today as it did in his day:
Both those... seem to attach undue significance to the transfer of titles to property from private interests to the state. To shift... privately owned corporate properties to that of public works is supposed... greatly to enhance the capacity of men to govern efficiently and disinterestedly. But the vesting of government with title deeds and authority to appoint managers does not assure that these managers will serve primarily the general welfare. Neither private nor public property held in trust for others is necessarily handled in the best interest of the legal beneficiaries. In many private corporations managers serve largely their own ends ahead of those of the scattered stockholders.
And because the last sentence sums it up so clearly I separate it out.
The transfer of title holds no magic to transform men's hearts.
Yet the free market propagandists tell us that privatization is the magic cure-all for every problem. Private enterprise will solve all ills while government solutions never work.
He later makes a point that has really set me to thinking about our political structure.
To those of us who prefer a system in which economic initiative and responsibility are widely diffused and are in most fields separate from the political power, the outlook is dark.
Our Constitution defines a separation of powers between the executive, legislative and judicial powers. It sets up a system of checks and balances within and between those powers. As frustrating as this can be at times this structure works fairly well.
What our Constitution does not do (harkening back to the failure of insight of liberal thinkers mentioned above) is provide for a separation of economic powers from political powers nor for enumerated checks and balances of the political powers upon economic powers.
As the Wealth of Nations was published in 1776 and "capitalism" as we know it wasn’t really recognized at the time this is somewhat understandable. They viewed economic issues very differently. As a result the relationship of the political and economic realms has grown haphazardly. The Citizens United decision along with the concepts of corporate personhood and money equaling speech are the obviously insane results of the relationship between the political and economic realms and the separation of the political and economic powers not being clearly, constitutionally defined.
In the article he includes this line in a section talking about the dangers of socialism and central control of the economy.
The transfer from business to politics of the entire struggle for power and the fruits of power bodes ill for both efficiency and freedom.
Which again works both ways. The transfer of political power to the business powers bodes ill for both individual freedom and economic efficiency.
To conclude I’ll draw together a few lines from both the speech and article.
The emphasis of the nineteenth-century liberals was upon the removal of restrictions upon private enterprise. This was important, but it was not enough. To minimize the rule of men required improvement and extension of the rule of law.
They sought ways of limiting the power of both private and public bodies to act arbitrarily.
The difficulties, both domestic and international, that are set for free government by the developments of technology and their cultural and social accompaniments, are enormous. Some of these require federal administrative action on an expanding scale.
What we need most of all is a theory of appropriate state action to improve the rules of the game.
Most government is by nature central planning. But there is great difference between enforcement of general laws, analogous to rules of the game or to traffic regulations, and saying who is to play or to travel and where, when and how.
I offer these writings up as food for thought. Obviously he was addressing a different time and a different set of problems. But he articulates a set of principles for t free market capitalism that is worthy of consideration.
Can it be made to work?
What we are doing today quite obviously isn't working. The dangers to our economy and to our democracy are grave. Clearly we need "a theory of appropriate state action to improve the rules of the game." And a way to separate the economic from the political power.