The Bankruptcy of the Mixed Economy

Today's economy faces a long list of problems. We hear daily about high gas prices and inflation, of a battered stock market, of a growing number of people unable to afford their mortgages, even of banks failing and huge companies facing bankruptcy. What explains this predicament?

According to editorials, congressional speeches and opinion polls, the cause of our economic woes is the failure of the free market. They point to the market as the source of problems like crashing real estate prices, rising unemployment and inflation. They urge the government to “do something” to fix them.

Their encouragement of the government to "do something" to solve economic problems shows Americans' support for the mixed economy. If a fully government-controlled economy (socialism) is at one end of the spectrum, and a fully free-market economy (capitalism) is at the other, the mixed economy is somewhere in between. As an economic system, it is largely uncontroversial. In historian Eric Rauchway's words, "Nobody in this country really believes in unfettered free markets, and nobody really believes in socialism." Rather, they believe in the combination of the two.

But how did the mixed economy become so uncontroversial? In the 19th century, when the Industrial Revolution brought America to the forefront as the preeminent wealth producing nation in the world, the American system closely approximated pure capitalism. Why have we moved away from that over time? Was it necessary or prudent—and if so, why?

According to mixed economy advocates, economic intervention is necessary for two reasons, both stemming from deficiencies in capitalism. The first alleged deficiency, and one that has dominated recent headlines, is the supposed failure of the free market to guard against "excess." Capitalism’s critics argue that the free market is economically suboptimal—that individuals in a free market behave like teenagers at the wheel of a car, overzealously going faster and making erratic decisions that eventually lead to a crash and subsequent economic harm. Government control is needed, they say, to serve as a safety mechanism restraining people just enough to keep the economy cruising along at an optimal rate. Hence the litany of economic regulations dictating in thousands of ways how businesses and individuals are allowed to operate and what decisions they are permitted to make. In the same vein, the government subsidizes failing businesses using money taken from those with "excess" profits. These billions of dollars are "redistributed," we are told, in order to smooth out a market that has allowed some to get too far ahead while others lag behind.

This economic argument against capitalism ignores the vast array of evidence showing that, rather than increasing prosperity, government intervention is a direct cause of economic harm. One recent example is the record-setting price of corn that followed soon after the government began huge subsidies to encourage ethanol production. Another is the series of insurance companies that have been forced to stop offering insurance in some states after regulations made offering policies at a profit impossible. History is littered with similar examples of the "unintended consequences" of policies like rent controls and price ceilings that lead to shortages of basic goods.

It is no accident that intervention has damaging results. Stripped of all the complexity of modern finance and technology, the economy is at bottom a collection of people using their minds to accomplish chosen tasks. Whether those are complex tasks, like engineering an iPod, or easy ones, like mowing a lawn, they all require a basic condition in order to be accomplished: freedom. Government intervention necessitates some loss of freedom. Removed of all freedom, we become economically impotent, unable to perform the myriad activities that make possible the creation of wealth (observe the poverty under socialism). Removed of only some freedom, we are economically handicapped to the degree we are restrained. A large scale demonstration of this effect is the annual Index of Economic Freedom, which consistently finds that the more economic freedom the citizens of a nation enjoy, the wealthier they become—and conversely, the more freedom they are denied, the poorer they are.

The idea that capitalism is economically deficient not only flies in the face of empirical data, but also contradicts the very nature of economic action. Far from being like oil to the economic engine, government intervention is like sand in every case, interfering with the free, productive activity of individuals. In fact, many advocates of the mixed economy, such as neoconservative writer Irving Kristol, readily admit this and concede that overwhelmingly, current and historical evidence shows that free markets lead to the greatest economic result. But like Kristol, they only give "Two Cheers for Capitalism," advocating government intervention to remedy capitalism’s other perceived flaw: its moral shortcomings.

This second, "moral argument" for the mixed economy concedes that capitalism may lead to prosperity, but only for some; the rest are "left behind" to suffer. To the advocates of the mixed economy, this is morally intolerable – after all, doesn’t everyone deserve to have their needs met? Why should some enjoy the benefits of capitalism and others not? To resolve this disparity, supporters of the mixed economy suggest the government use its "resources" to "assist" the less fortunate. In plain language, of course, this means the government uses its coercive power to seize property or freedom from some for the benefit of others. Hence, not only do we find ourselves relieved of part of our income to provide a "safety net" for countless strangers, but also find ourselves told what we can and cannot do—not because it would violate someone else’s freedom, but because it would violate their desires.

This infringement of freedom and property rights has become so routine, even expected, that it’s rarely questioned. For many, it is seemingly a fact of life that a substantial portion of their earnings do not belong to them and that a considerable degree of their freedom may be denied to further the "greater good." But the idea that morality demands we sacrifice those things is flawed. As Ayn Rand showed, there is nothing rational or moral about a theory that requires us to sacrifice our rights to life, liberty, and the pursuit of happiness in order to satisfy the wishes of others. Every individual has a moral right to achieve success without paying a penalty to those who do not. This is the vision represented in the founding of America and is the essence of capitalism: a society of individuals free to pursue their chosen ends, not bound to one another except by voluntary choice and to mutual benefit.

The advocates of the mixed economy are wrong on both counts: capitalism and free markets are neither economically nor morally faulty. Economically, laissez-faire capitalism enables the flourishing of productivity and material success; morally, it protects the inalienable rights to freedom and property that make the pursuit of happiness possible. Americans vigorously defend freedoms such as speech, religion, marriage, and association. Yet by endorsing the mixed economy, they abandon the principle of freedom when it comes to economics—even though freedom is both moral and practical. There is no justification for tainting capitalism with government coercion of any kind, for any alleged economic or social gain. Instead, it is time for a truly free market, not only to recover from current economic troubles, but to reach heights of prosperity not yet seen.

Noah received his BS in Computer Engineering in 2005 from Iowa State University, and is working towards his MS in Information Assurance. He works in the defense industry as a software engineer in St. Petersburg, Florida. As a weekly opinion columnist for the Iowa State Daily campus newspaper, Noah wrote more than 70 articles from an Objectivist viewpoint on a wide variety of cultural and political topics. He is currently entering his third year in the Objectivist Academic Center’s undergraduate program.