Primer for Obama

Prof. Richard Epstein explains to Obama the difference between 'Social Darwinism' (mostly supported by Progressives) and laissez-faire economics:

President Obama’s recent speech to the American Society of Newspaper Editors signaled the opening of a political gambit in the upcoming presidential election. In dealing with the proposed budget of Representative Paul Ryan, the president sought to discredit nineteenth-century laissez-faire economics by linking that movement to Social Darwinism: Ryan’s plan, the president said, “is thinly veiled Social Darwinism. It is antithetical to our entire history as a land of opportunity and upward mobility for everybody who is willing to work for it.”

The president’s well-crafted reference to the term ushered in a fierce political dispute between his supporters and detractors. In the midst of the din, no one has undertaken the essential task of sorting out the theoretical differences and similarities between Social Darwinism and laissez-faire.

Charles Darwin’s Origin of the Species was published in 1859. Darwin’s tome offered the first complete view of evolution, which in two words boils down to “natural selection.” Random variation is found in all attributes of any large population of species. Those members that have variations that prove successful win out over their less successful rivals. In nature, this process takes place by a bloody process of competition for scarce resources. Individual organisms stop at nothing in order to satisfy nature’s imperative of self-preservation. The familiar expression “nature red in tooth and claw” spelled death for the losers in the Darwinian race for survival.

The social contract theory that projects the same grim fate for human beings is found in Thomas Hobbes’s Leviathan, which envisions life in the state of nature as “solitary, poor, nasty, brutish and short.” Only state power could supply the needed antidote. The critical question became, what kind of state? The standard laissez-faire answer has always been a state that is strong enough to prevent aggression and fraud.

Even if government did nothing other than control those twin perils, there would still be an enormous gulf between biological and social competition. With biological evolution, death follows from the failure to marshal resources. In social settings under laissez-faire, bankruptcy is the fate of the individual or firm that is unable to succeed in competitive markets. It has long been understood that the unregulated operation of the market can produce major inequalities of wealth. To listen to President Obama speak, one would conclude that that is just about the only thing that markets do.

Put otherwise, open markets under laissez-faire have made this country a “land of opportunity.” Markets work through voluntary exchange. State enforcement of these exchanges improves the odds that they will produce joint benefits for all parties involved, regardless of their relative wealth. A state that adopts laissez-faire, therefore, commits itself to a regime of freedom of contract, meaning the government will not intervene to set prices, wages, and terms and conditions in competitive markets. The basic intuition is that contract terms set by the state will always reduce the gains from trade, even if they do not destroy the transaction in its entirety.

The question is whether laissez-faire requires more than the faithful enforcement of ordinary contracts. Of course it does. In particular, it was widely understood that the creation of public infrastructure and the organization of national defense are government functions, given that the government can’t coordinate the behavior of private actors without the use of state-based coercion.

But unlike the proponents of the modern social democratic state, the defenders of laissez-faire understood that state powers had to be tightly limited, so that they tended to favor flat taxes for general revenues and just compensation for property taken for public use. Put otherwise, only the critics, and never the supporters, of laissez-faire claimed that private markets could operate without public support.

The above account is a thumbnail sketch of laissez-faire given over fifty years ago by the great economic historian Jacob Viner, one of its most thoughtful critics. To Viner, laissez-faire fell short on one dimension: Namely, it did not provide for any redistribution of wealth from rich to poor, which forms such a large part of the Obama tax crusade.

Yet Viner’s criticism is overstated when set against the behavior of the champions of laissez-faire, who in the late nineteenth century understood much about the diminishing marginal utility of wealth even without government prompting. On their own, many of the richest people of that age acted in the same generous way as the financial titans of our own age. The theoretical foundation for their actions lay in the elusive notion of an “imperfect obligation,” or an obligation that was binding on conscience and enforceable by informal social sanctions even if not enforceable by law.

It is tempting to pooh-pooh the force of a fuzzy notion like “imperfect obligation” by claiming that it subjects the welfare of the poor to the whims of the rich. But putting the point in perspective changes the focus from income to consumption. At this point, we should think of robber-barons such as John D. Rockefeller, Cornelius Vanderbilt, and Leland Stanford, who founded the University of Chicago, Vanderbilt University, and Stanford University respectively. In modern days we can think of the Sloan-Kettering Foundation, the Gates Foundation, and the Buffett Foundation as organizations whose founders acted in accordance with deeply ingrained principles of philanthropy.

The rest here.