by Bryan Caplan
[Won 1st prize in the Independent Institute's 1995 Garvey Essay competition. Appeared in January, 1996 issue of the Freeman. Footnotes omitted.]
"[F]reedom is undoubtedly the indispensable condition, without which even the pursuits most congenial to individual human nature can never succeed in producing such salutary influences. Whatever does not spring from a man's free choice, or is only the result of instruction and guidance, does not enter his very being, but still remains alien to his true nature; he does not perform it with truly human energies, but merely with mechanical exactness."
--Wilhelm von Humbolt, The Limits of State Action
1. The Varieties of Human Welfare
Let us begin with a thought experiment inspired by Charles Murray. Imagine that you discovered that you would be unable to raise your child yourself, and would have to entrust him to the guardianship of someone else. Naturally, your concern with the child's happiness would be paramount. But what does that actually mean? Your first concern would be for the child's material well-being; but would that be the only consideration? What if certain wealthier guardians would not instill the same strength of character that other parents of more modest means would provide?
The point here is that human welfare is more than material well-being. When we compare the ability of markets versus government to advance human welfare, we should consider not just their ability to produce consumer goods. That is one important and much-explored facet of human welfare, but it is at least as important to examine the broader effects of these institutions on the human personality.
2. Economic Well-Being
The connection between markets and economic well-being is best illustrated empirically. The recent histories of Germany and Korea provide the equivalent of two controlled experiments demonstrating the link. In both cases, what scientists would call "exogenous" forces suddenly split homogeneous nations into two parts. In both cases, one government adopted market-oriented policies, whereas the other imposed a rigid state-run economy. In both cases, the living standards in the more capitalist nations became so far superior to those in the "control" nations that ruthless emigration restrictions were imposed to prevent a steady population drain.
Korea and Germany offer the best experiments in alternative economic systems that we are ever likely to observe. But other good examples exist, all pointing in the same direction. Both Hong Kong and Taiwan can be profitably contrasted with mainland China (at least prior to China's move toward market policies). India's success could be measured against Japan's, or most of Latin America against Chile. In case after case, we have the spectacle of culturally similar peoples lifting themselves out of poverty under free market policies, while stagnating, regressing, and even starving in state-run economies.
Some may doubt the validity of this induction: just because market economies do better than government-run economies, why should we assume that a mixture of the two types of policies won't do even better? Almost every nominally "capitalist" nation has adopted extensive regulations and transfer programs. How can comparisons between Hong Kong and China show something wrong with the modern welfare state?
Nevertheless, it would be a mistake to dismiss such comparisons completely. In statistics, it is well-known that you learn more about a population if its members vary significantly in the dimensions in which you are interested. If you want to study the effect of a drug, but the dosage ranges only from .99 mg to 1.01 mg, medical researchers will be unable to figure out how much of the difference it due to the drug, and how much to chance. In contrast, if the researchers observe the whole range of dosages, from none to a lot, it becomes much easier to rationally generalize. In the same way, if we compare hard-core free market regimes to mildly socialistic regimes, it will be much harder to infer the economic importance of markets than if we broaden the comparison to include economic systems which reject the market altogether.
In any case, many arguments can be turned on the modern welfare state directly. Their most pervasive and expensive policies involve government pension programs and government supply of medical care. What is most curious about these policies is that they generally pay out to everyone, rich and poor alike. The result is that in the majority of cases, they tax citizens who could easily have paid for their retirement and medical care by themselves, at least before they were taxed. Similar complaints could be lodged against the regulatory wing of the welfare state, which frequently restricts and prevents competition with one bureau while a second agency tries to correct the market for insufficient competition.
Along the dimension of economic well-being, markets work extremely well, and there are good reasons to think that moderately market-oriented policies are worse than extremely market-oriented ones. To people who live near the subsistence level, this is extremely important: their welfare is primarily a function of their ability to satisfy their daily needs. But does this really matter for the citizens of the industrialized democracies, who live far above this meager level? Summarizing the psychological literature on wealth and happiness, Murray writes that "Happiness is very low until subsistence is reached, rises very steeply immediately thereafter, but quickly levels off as subsistence is left behind." Later it will be argued that the indirect value of wealth even for affluent nations is greater than we might expect. But now we shall turn to some other components of human welfare which are apt to be very important in economically well-off countries.
3. Character and Well-Being
People don't just want to have things; they want to be somebody. To be happy, a person needs to see something valuable about his or her character. This is no easy matter because it is often difficult to develop a virtuous character. Aristotle explains that "Neither by nature, then, nor contrary to nature do the virtues arise in us; rather we are adapted by nature to receive them, and are made perfect by habit." We develop a good character by practice, by actually living through difficult experiences and learning to master them. The problem is that in the short run, weakness of will may lead people to develop vices instead of virtues, even though they would be happier in the long-run if they developed a character they could be proud of.
But what does this have to do with the relative abilities of government and the free market to promote human welfare? Though not immediately obvious, the connection is interesting. Governments have two sorts of policies with profound effects on the development of virtue. On the one hand, governments typically favor paternalism - using the threat of punishment to discourage self-destructive and vicious behavior. At the same time, governments often take care of people who are suffering because of their own irresponsible behavior. The free-market policy, naturally, is simply the negation of both.
Can one or both of these brands of state action help develop the human character and thereby enrich human well-being in non-economic terms? The problem with the paternalistic variety is that at best it merely compels good outward behavior. But internal strength of character tends to atrophy due to lack of opportunity to practice self-regulation. For example, if it were possible to successfully ban alcohol, alcohol abuse would cease to exist. But virtues like temperance and moderation would fall into disuse. Despite its association with an emphasis on moral character, paternalism tends to replace the development of virtue with shallow public displays thereof. If people's happiness depends on actually developing their character rather than merely seeming to do so, the paternalistic route is a dead-end. Or as Thomas Szasz observes: "Paternalism is the mortal enemy of dignity: How can a person feel dignified vis-a-vis a medical profession, a judiciary, a government that never says to him: 'I don't know. It's none of my business. It's your problem. You deal with it.'"
Other common government policies aim to shield individuals from the effects of their lapses of character. Of course, many problems are a combination of bad luck and bad choices, but the role of choice - especially habitual choice - is much neglected. The problem with government policies aiming to soften the blows of ill-fortune is that it is nearly impossible to do so without rewarding bad character as well. Consider the case of a young man who says he is unable to find work and deserves government help. The difficulty is that by the time he requests help it may be impossible for him to extricate himself from his situation. Just making different choices won't save him now, so it appears that his problem is due to bad luck. And yet, from a broader perspective, his condition may be largely due to his habitual choices - in short, his character. When considering human welfare, it is tempting to consider merely the man's current distress. But this perspective overlooks the harm that this sort of bail-out will prospectively do to the character of the young man in question as well as others in comparable situations. Lacking the natural guidance of cause-and-effect, of poor choices gradually leading to intolerable situations, other young men may fail to develop their characters, and in the long-run lose the happiness that comes from self-respect.
The market doesn't have any perfect way to develop character either, but at least avoids the pitfalls of these two breeds of state policy. Character won't spring up on demand under any system. But the market environment does tend to foster it by simultaneously giving people the freedom to test their strength of will along with the discipline of the natural rewards and punishments of virtue and vice.
4. Autonomy and Well-Being
A close link exists between discontent and government decisions. Every time that the government makes a decision, a dissatisfied minority necessarily feels oppressed and ignored. When the government makes a wide range of decisions, almost every citizen is going to frequently land in the position of the unhappy minority.
Consider how the typical consumer feels in contrast to the typical citizen. The jazz aficionado rarely feels "out-voted" by the lovers of opera. The buyer of a luxury sedan doesn't feel that the drivers of compact cars are taking advantage of him. What is it about markets that creates the across-the-board satisfaction that no government policy seems able to evoke?
The crucial difference stems from what we could call a need for autonomy, or self-determination. It is degrading to feel that other people make your important decisions for you; and the happiness of getting to turn the tables and decide for them is poor compensation. When you are in the minority, it might seem like it would feel glorious to assume the position of control; but attaining it just cements the realization of how precarious your dominant position is. In short, the minority feels humiliated by its powerlessness, and the majority feels threatened by the voices of discontent which will strip it of its power at the first opportunity. Political decision-making - government decision-making -fails to respect individuals' autonomy and thus reduces happiness along another non-economic dimension.
The opposite holds for market decision-making. Its crucial feature is that people make decisions for themselves, not for others. The objects of choice are not aggregate policies for everyone, but personal decisions for oneself. There is something deeply satisfying about this: one can participate in society while holding one's individuality intact.
Undeniably, many people want to control those who differ from them; but taking aggregate choices away makes it easier to accept the need to respect the rights of others. Thus, when the state determined the lawful religion of all of its subjects, the majority felt it unbearable to leave dissenters in peace. Privatize religion, take it out of the public realm, and gradually the contrary practices of others grow less painful to endure. Tolerance is, as it were, another virtue which we acquire by practice. In contrast, no amount of practice makes it easy to endure the denial of self-determination involved in political decision-making.
Imagine how people would feel if the free market in magazines were replaced with democratic collective choice. No longer do we have a marketplace where widely differing interests can be simultaneously satisfied. No longer can an individual independently decide which periodicals he or she would like to read. The result is that only publications that win majority approval get printed. However intense the preferences of minorities, the majority will ignore them. We can now control others' reading, as we could not under the free-market regime. But this opens up the ability of others to control your reading.
The point of this mental experiment is to show what different economic systems mean for autonomy, and why the destruction of autonomy tends to destroy human welfare in the process. The harm done to autonomy cannot be removed by making collective choice democratic - the harm lies in collective decision-making itself. While this does not show that government action is on balance worse in every case, the need to respect human autonomy is a much-ignored consideration which augments the case for the free market.
5. The Interaction of Economic and Broader Well-Being
The second section argued that free markets are the best system for creating economic prosperity, but added that after a point greater economic satisfaction may not be very important. The third and fourth sections considered other facets of human happiness, and argued that laissez-faire principles were just as beneficial from a non-economic perspective. A final issue to consider is the relationship between these two aspects of happiness.
Charles Murray may be correct that greater wealth alone has little effect on happiness after a certain point. But this considers only the direct effects of wealth on happiness. Far more important, however, are the indirect effects: greater wealth means that we need to spend less time satisfying our physical needs, creating the option to pursue loftier concerns. Philosophy, literature, and art have always flowered in the world's centers of wealth: in Athens and Rome in ancient times, in Italy and Holland during the Renaissance, down to the development of motion pictures in the United States. A priori, you would expect that only after people can rest from the desperate struggle for survival would they turn to other activities. The effect of greater economic prosperity is greater comfort, leisure, and surplus wealth which permit the development of the human personality. Of course, wealth only creates the option to strive after non-economic ends, which is why the correlation between prosperity and civilization is imperfect. The point is that wealth is the critical "enabling condition" which makes the development of civilization possible.
Nor are the indirect effects of wealth confined to scholarly and artistic achievement. Prosperity is what allows every individual to develop his unique personality and potential. Imagine a struggling peasant in pre-capitalist society: his trials are so onerous that he lacks the leisure to explore his potential. Even more clearly, since greater wealth leads to a vast extension of the length of the human life, economic prosperity gives us the time to find fulfilling work, search for true love, or try to satisfy any other ambition. Before the Industrial Revolution, lifespans of thirty or forty years were common. After you subtract the years of dependence spent in childhood, just imagine how short your horizon and how limited your goals would have to have been. This indirect effect of prosperity dwarfs the importance of the obvious direct benefits of riches.
Critics of the free market have often correctly pointed out how narrow-minded it is to equate human welfare with material possessions alone. The strategy here has been to accept this insight and show that free markets advance human welfare along non-economic dimensions as well. Whether we consider the raw ability of capitalism to "deliver the goods," its tendency to foster virtue, or its implications for human autonomy, the answer is the same. Moreover, those who belittle capitalism's material achievements are doubly in error; for in addition to its positive, direct effect on non-economic welfare, the free market's seemingly infinite multiplication of primitive man's economic well-being is precisely what has made all of our other cultural, intellectual, and personal accomplishments possible.