The Revolution

by Ron Paul

  The real history of regulation is not so straightforward. Businesses have often called for regulation themselves, hopeful that their smaller competitors will have a more difficult time meeting regulatory demands. Special interests have helped to impose utterly senseless regulations that impose crushing burdens on private enterprise--far out of proportion to any benefit they are alleged to bring--but since those interests bear none of these burdens themselves, it costs them nothing to advocate them.

  When Senator George McGovern retired from public life, he became the proprietor of a small Connecticut hotel called the Stratford Inn. Two and a half years later, the inn was forced to close. After his experience running his own business, former Senator McGovern had the honesty to wonder about the merits of all the regulations that, truth be told, he himself had helped to implement. "Legislators and government regulators must more carefully consider the economic and management burdens we have been imposing on U.S. business," he said. He continued:

  As an innkeeper, I wanted excellent safeguards against a fire. But I was startled to be told that our two-story structure, which had large sliding doors opening from every guest room to all-concrete decks, required us to meet fire regulations more appropriate to the Waldorf-Astoria. A costly automatic sprinkler system and new exit doors were items that helped sink the Stratford Inn--items I was convinced added little to the safety of our guests and employees. And a critical promotional campaign never got off the ground, partly because my manager was forced to concentrate for days at a time on needlessly complicated tax forms for both the IRS and the state of Connecticut.

  "I'm for protecting the health and well-being of both workers and consumers," McGovern went on. "I'm for a clean environment and economic justice. But I'm convinced we can pursue those worthy goals and still cut down vastly on the incredible paperwork, the complicated tax forms, the number of minute regulations, and the seemingly endless reporting requirements that afflict American business. Many businesses, especially small independents such as the Stratford Inn, simply can't pass such costs on to their customers and remain competitive or profitable."

  He concluded: "If I were back in the U.S. Senate or in the White House, I would ask a lot of questions before I voted for any more burdens on the thousands of struggling businesses across the nation." That is an important lesson: government intervention into the economy cannot be assumed to be good and welcome and just.

  But that is how it is portrayed in too many of our American history classrooms. It is not unusual for American students to find their textbooks telling them that injustice was everywhere before the federal government, motivated by nothing but a deep commitment to the public good, intervened to save them from the wickedness of the free market. Alleged "monopolies" dictated prices to hapless consumers. Laborers were forced to accept ever-lower wages. And thanks to their superior economic position, giant corporations effortlessly parried the attempts of anyone foolish enough to try to compete with them.

  Every single aspect of this story is false, though of course this version of our history continues to be peddled and believed. I don't blame people for believing it--it's the only rendition of events they're ever told, unless by some fluke they have learned where to look for the truth. But there is an agenda behind this silly comic-book version of history: to make people terrified of the "unfettered" free market, and to condition them to accept the ever-growing burdens that the political class imposes on the private sector as an unchangeable aspect of life that exists for their own good.

  An argument we hear even now is that a hundred years ago, when the federal government was far smaller than it is today, people were much poorer and worked in less desirable conditions, while today, with a much larger federal government and far more regulation in place, people are much more prosperous. This is a classic case of the post hoc, ergo propter hoc fallacy. This fallacy is committed whenever we carelessly assume that because outcome B occurred after action A, then B was caused by A. If people are more prosperous today, that must be because government saved them from the ravages of the free market.

  But that is nonsense. Of course people were less prosperous a hundred years ago, but not for the reason fashionable opinion assumes. Compared to today, the American economy was starved for capital. The economy's productive capacity was minuscule by today's standards, and therefore very few goods per capita could be produced. The vast bulk of the population had to make do with much less than we take for granted today because so little could be produced. All the laws and regulations in the world cannot overcome constraints imposed by reality itself. No matter how much we tax the rich to redistribute wealth, in a capital-starved economy there is an extremely limited amount of wealth to redistribute.

  The only way to increase everyone's standard of living is by increasing the amount of capital per worker. Additional capital makes workers more productive, which means they can produce more goods than before. When our economy becomes physically capable of producing vastly more goods, their abundance makes them more affordable in terms of dollars (if the Federal Reserve isn't inflating the money supply). Soaking the rich works for only so long: the rich eventually wise up and decide to hide their income, move away, or stop working so much. But investing in capital makes everyone better off. It is the only way we can all become wealthier. We are wealthier today because our economy is physically capable of producing so much more at far lower costs. And that's why, just from a practical point of view, it is foolish to levy taxes along any step of this process, because doing so sabotages the only way wealth can be created for everyone.

  Prosperity comes not just from economic freedom at home, but also from the freedom to trade abroad. If free trade were not beneficial, it would make sense for us to "protect jobs" by buying only those goods produced entirely in our own towns. Or we could purchase only those goods produced on the streets where we live. Better still, we could restrict our purchases to things produced in our own households, buying all our products only from our own immediate family members. When the logic of trade restriction is taken to its natural conclusion, its impoverishing effects become too obvious to miss.

  Frederic Bastiat once wrote a satirical petition to the French parliament on behalf of candlemakers and related industries. He was seeking relief from "ruinous competition of a foreign rival who works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price." The "foreign rival" he was speaking of was the sun, which was unfairly giving away light for free. The relief sought was a law requiring the closing of all blinds to shut out the sunlight and thereby stimulate the domestic candle industry. That is what so many fallacious arguments against free trade amount to.

  In spite of my strong support for free trade, I have felt compelled to oppose many of the trade agreements that have appeared in recent years. For instance, although I was not in Congress at the time, I opposed both the North American Free Trade Agreement and the World Trade Organization, both of which were heavily favored by the political establishment. Initial grounds for suspicion was the sheer length of the text of these agreements: no free-trade agreement needs to be 20,000 pages long.

  Many, though not all, supporters of the free market supported these agreements. Very different was the situation nearly six decades ago when the International Trade Organization was up for debate. At that time, conservatives and libertarians agreed that supranational trade bureaucracies with the power to infringe upon American sovereignty were undesirable and unnecessary. Businessman Philip Cortney, a close friend of the great free-market economist Ludwig von Mises, led the charge against the WTO with his book The Economic Munich. Henry Hazlitt, author of the libertarian classic Economics in One Lesson, included Cortney's book against the WTO in The Free Man's Library, his annotated reading list of books important to the study of freedom.

  In 1994, Newt Gingrich, who supported the WTO, spoke with rare candor about the amount of authority the United States
was transferring to a supranational organization:

  I am just saying that we need to be honest about the fact that we are transferring from the United States at a practical level significant authority to a new organization. This is a transformational moment. I would feel better if the people who favor this would just be honest about the scale of change. . . . This is not just another trade agreement. This is adopting something which twice, once in the 1940s and once in the 1950s, the U.S. Congress rejected. I am not even saying that we should reject it; I, in fact, lean toward it. But I think we have to be very careful, because it is a very big transfer of power.

  To establish genuine free trade, no such transfer of power is necessary. True free trade does not require treaties or agreements between governments. On the contrary, true free trade occurs in the absence of government intervention in the free flow of goods across borders. Organizations like the WTO and NAFTA represent government-managed trade schemes, not free trade. The WTO, purported to exist to lower tariffs, is actually the agency that grants permission for tariffs to be applied when complaints of dumping are levied. Government-managed trade is inherently political, meaning that politicians and bureaucrats determine who wins and loses in the marketplace.

  Granting quasi-governmental international bodies the power to make decisions about American trade rules compromises American sovereignty in dangerous and unacceptable ways. Congress has changed American tax laws for the sole reason that the World Trade Organization decided that our rules unfairly impacted the European Union. I recall a congressional session in which, with hundreds of tax bills languishing in the House Ways and Means Committee, the one bill drafted strictly to satisfy the WTO was brought to the floor and passed with great urgency.

  In one case, the WTO sided with the Europeans against American tax law, which offered tax breaks to American companies doing business overseas. According to the European Union, the Foreign Sales Corporation program, established under President Reagan in 1984, is now an "illegal subsidy," a view that a WTO appellate panel shared. The WTO's Orwellian ruling declared that allowing a company to keep more of its own money through lower taxes was a "subsidy." As a matter of fact, the program was moreover really just compensating (and only partially at that) for unfair U.S. taxes on corporations for profits earned overseas, a disability that our foreign competitors do not have to confront from their own governments.

  What this meant, in plain English, was that high-tax Europe, upset at lower-tax America, decided that the way to level the playing field was to force America to raise her taxes. Pascal Lamy, the trade czar of the European Union, actually visited with influential members of Congress in order to determine whether a new tax bill was being crafted to his satisfaction. If Mr. Lamy, a member of the French Socialist Party, had been unsatisfied with the changes made to our tax code, he threatened to unleash a European trade war against U.S. imports. In effect he was a foreign bureaucrat acting as a shadow legislator by intervening in our lawmaking process. And to no one's surprise, Congress raced to comply with the WTO ruling that American tax rules must be changed in order to bring them into harmony with "international law."

  This outrageous affront to our national sovereignty was of course predictable when we joined the WTO. During congressional debates we were assured that entry into the organization posed no threat to our sovereignty. A well-known libertarian think tank, where you might expect some skepticism of a supranational bureaucracy managing trade, offered us this rosy description: "The WTO's dispute settlement mechanism helps nations resolve trade disputes without resorting to costly trade wars. The system relies on voluntary compliance and does not compromise national sovereignty." That was nonsense. A Congressional Research Service report was quite clear about the consequences of our membership: "As a member of the WTO, the United States does commit to act in accordance with the rules of the multi-lateral body. It is legally obligated to insure that national laws do not conflict with WTO rules."

  The WTO has given us the worst of both worlds: we've sacrificed national sovereignty by changing our domestic laws at the behest of an international body, yet we still face trade wars over a variety of products. If anything, the WTO makes trade relations worse by providing our foreign competitors with a collective means to attack U.S. trade interests.

  And let us not forget that the Constitution grants Congress, and Congress alone, the authority to regulate trade and craft tax laws. Congress cannot cede that authority to the WTO or any other international body. Nor can the president legally sign any treaty that purports to do so. Our Founders never intended for America to become entangled in global trade schemes, and they certainly never intended to have our domestic laws overridden by international bureaucrats.

  Now, while free trade should be embraced, foreign aid should be absolutely rejected. Constitutional, moral, and practical arguments compel such a view. Constitutional authorization for such programs is at best dubious. Morally, I cannot justify the violent seizure of property from Americans in order to redistribute that property to a foreign government--and usually one that is responsible for the appalling material condition of its people. Surely we can agree that Americans ought not to be doing forced labor on behalf of other regimes, and that is exactly what foreign aid is.

  For those who find arguments like these abstract and remote, there is a more practical argument against foreign aid. International welfare has not worked any better than domestic welfare, despite the trillions spent in each case. Foreign aid, however pure the intentions that may have motivated it, has been a reactionary device by which truly loathsome leaders have been strengthened and kept in power. Trillions of dollars later, the results of development aid programs are so bad that even the New York Times, which admits nothing, has acknowledged that the programs haven't worked. No wonder Kenyan economist James Shikwati, when asked about development aid programs to Africa, has been telling the West, "For God's sake, please just stop."

  The greatest prophet of the foreign aid debacle, who was ignored until his predictions came true--as inevitably as night follows day--in the 1980s and beyond, was the late Peter Bauer of the London School of Economics. It is to his extraordinary corpus of work that I refer anyone who actually cares about helping people in need, as opposed to repeating mindless slogans or reflexively giving government programs the benefit of the doubt.

  On the other hand, the economic success stories of the past half century have arisen not from foreign aid but out of the extraordinary workings of the free market, the great engine of human well-being that everyone is taught to hate. I would choose freedom even if it meant less prosperity, but thankfully we do not face such a choice. Look at the countries that have risen from poverty to affluence and you will find places where economic freedom has a fighting chance, and contracts and property are respected. Look at Botswana, which has one of the freest economies--and among the most prosperous people--on the African continent. In South America look at Chile, whose people enjoy a standard of living of which most peoples elsewhere on the continent can only dream. Look at the economic miracle in Ireland, or the fantastic growth rates in Estonia. Let's quit pretending that we don't know how to make people prosperous, when the evidence is all around us.

  The ideas of liberty and a free economy have not spread with equal force everywhere in the world; nor have they been implemented with consistency. The results have been overwhelming all the same. Between 1980 and 2000, India's real GDP per head more than doubled, and in China real income per capita rose by 400 percent. Poverty in China went from 28 percent in 1978 to 9 percent in 1998. In India, it fell from 51 percent in 1977-1978 to 26 percent in 1999-2000. "Never before," writes economist Martin Wolf, "have so many people--or so large a proportion of the world's population--enjoyed such large rises in their standards of living."

  Poverty has also been reduced throughout the world as a whole. In 1820, over 80 percent of the world's population lived in what the literature calls "extreme poverty." By 1950 that figure was 50 percent
. By 1992 it was down to 24 percent. (In the United States, poverty declined consistently from 1950 until 1968, when supposedly antipoverty programs first began to receive significant funding. Since then, the poverty figures have stagnated in spite of trillions of dollars spent.)

  Never before in the history of the world have so many people seen such an improvement in their living standards. And these wonderful results have come about quite in spite of official development aid programs devised in the West. They are, instead, the natural result of the market economy. Forget about all the propaganda, the sloganeering, the misinformation, the willful misunderstanding of how the market works, all of which characterize fashionable opinion on the subject. These are facts--and they should not be unexpected facts, if we understand sound economics.

  If Americans knew the real story of foreign aid and how it has deformed recipient economies, aided repressive regimes, and even contributed to violent strife, they would oppose it even more strongly than they already do. If they knew about the record of the International Monetary Fund and the World Bank when it comes to helping developing countries, they would be similarly appalled. At long last, these seemingly untouchable programs need to be called into question, and then, in the name of liberty and humanity, discarded forever.

  Mine is an "isolationist" position only to those who believe that the world's peoples can interact with each other only through their governments, or only through the intermediary of a supranational bureaucracy. That unspoken assumption is dangerous and dehumanizing. There is nothing isolationist about opposing coercive government-to-government wealth transfers. Individuals who wish to contribute directly to some worthy cause abroad--and Third World governments whose destructive policies have kept their peoples in miserable poverty are not such a cause--should be perfectly at liberty to do so. In fact, a recent Hudson Institute study found that in 2006, American citizens voluntarily contributed three times more to help people overseas than did the United States government. Freedom works.