The great debate: democratic capitalism still has not vanquished the idea of collectivism. As proof, merely look at how our government embraces the concepts of socialism at the expense of free trade and other economic truths.

• Author: Forbes, Steve
• Position: Economics - Essay

THE GREAT ECONOMIC debate of the 20th century was between collectivists and free-marketers. In one sense, the free-marketers won: When the Berlin Wall fell in 1989, it widely was acknowledged that Soviet socialism had been a catastrophic, not to say murderous, failure. In another sense, though, the debate continues. Democratic capitalism still has not vanquished the idea of collectivism. Far from it.

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At the beginning of the last century, free markets seemed to be on the ascendancy everywhere, but two events gave collectivism its lease on life. The first was World War I. In addition to the slaughter--and to breeding the ideologies of communism, state fascism, Nazism, and even the Islamic fascism we are battling today--World War I served as an intoxicating drug to those in the West who believed that a handful of people in government could manage affairs better than the messy way in which free peoples tend to do so. Massive increases in government powers, coupled with an overwhelming rise in taxation, gave many the idea that large increases in production can be achieved by commandeering the financial resources of society.

The second event was the Great Depression, widely seen as a flee-market failure. This view was--and is---false. Misguided government policies were at fault--the Smoot-Hawley Tariff, for instance, which dried up the flow of capital in and out of the country. If the stock market crash of 1929 is tracked, it parallels the course of this bill through Congress. When Smoot-Hawley arose in the fall of 1929, the markets fell; when it looked like the tariff was sidetracked in late 1929, the markets revived (the Dow Jones went up 50% from its November lows); in the spring of 1930, it was signed into law, and the rest is history. There were other factors at work during the Depression, of course, such as Pres. Herbert Hoover's gigantic tax hikes of 1931. Yet, despite the fact that these also involved bad policies, the lesson taken away by many was that economies will implode unless the government manages them. John Maynard Keynes, the intellectual guiding light behind New Deal economics, believed that an economy is like a machine: If you put doses of money into it or pull money out at the right times, you can achieve an equilibrium. This idea that government can drive an economy as if it were an automobile has had baleful consequences.

Other leading economists at the time, such as Joseph Schumpeter, recognized that an economy is an aggregate of disparate activities--thus, the idea of achieving equilibrium, while it makes for a neat theory, is nonsense in the real world. A vibrant economy is full of constant disequilibria: New enterprises rise up; old ones decline, etc. Snapshots of such economies mean very little. In the real world, therefore, flee markets operate rationally and efficiently in a way that government regulators simply cannot. Here in the U.S., we came to this realization at the end of the 1970s. Following World War II, we largely bought into the idea that government must play an active role to prevent the economy from going off a cliff. In the late 1970s, the devastation of inflation and high taxes brought about a reassessment. With the election of Ronald Reagan as president, the country took a step back from Keynesian economics. Since then, as Western Europe has...