More than a century ago, Nietzsche announced the death of God. Behind the drama of its presentation, this statement was intended to suggest that the omnipresence of God no longer served as an organizing principle for the lives of individuals or for the rules of their association, one with another. If we can disregard the revival of fundamentalism, notably in Islam, we can refer to this Century as one ‘without God.’ And, indeed, many of the horrors that we have witnessed find at least some part of their explanation in the absence of human fear of a deity's wrath.

I want to suggest here that, since Nietzsche, we have now passed through an interim period of history (roughly a century) during which, in one form or another, the God pronounced dead was replaced in man's consciousness by ‘socialism,’ which seemed to provide, variously, the principle upon which individuals organised their lives in civil society. And I want to match Nietzsche's announcement with the comparable one that ‘socialism is dead’. This statement seems much less shocking than the earlier one because it has and is being heard throughout the world in this year, l990. I suggest, further, that the gap left by the loss of faith in socialism may, in some respects, be equally significant in effects to that which was described by the loss of faith in the deity. In a very real sense, the loss of faith in socialism is more dramatic because it is at least traceable to the accumulation of quasi-scientific evidence. The god that was socialism took on forms that were directly observable; there were no continuing unknowns waiting to be revealed only in another life. And the promised realization of the socialist ideal could not be infinitely postponed in time. In other words, the god that was socialism is demonstrably dead; there could have been no comparable statement made subsequent to Nietzsche's announcement.

These are strong claims, and I intend them as such. Socialism promised quite specific results; it did not deliver. It failed in the straightforward meaning of the word. And those of us who are in positions to think about ideas and their influence can only look back in amazement at the monumental folly that caused the intellectual leaders of the world, for more than a century, to buy into the ‘fatal conceit’ that socialism embodied — ‘fatal conceit’ being the wonderfully descriptive appellation recently introduced as the title of Hayek's last book, (Hayek, l989). How did we, as members of the academies and intelligentsia, come to be trapped in the romantic myth that politically organised authority could direct our lives so as to satisfy our needs more adequately than we might satisfy them ourselves through voluntary agreement, association and exchange, one with another? I suspect that, literally, thousands of man-years will be spent in efforts fully to answer this question. I shall return to the question briefly later in this lecture. But first I want to emphasise that the ‘fatal conceit’ was almost universal. Let us now beware of current attempts to limit acceptance of the socialist myth to those who were the explicit promulgators and defenders of the centrally-planned authoritarian regimes of the USSR and its satellites. There were socialists among us everywhere, in all societies, at all levels of discourse, and, even in the face of the evidence that continues to accumulate, there are many who still cannot escape from the socialist mind-set. And even for those of us who have, somehow, shifted away from the mind-set of socialism, and who acknowledge, however begrudgingly, that the socialist god is dead, there may not have emerged any faith or belief in any non-socialist alternative. We may accept socialism's failure; we may not accept the alternative represented by the free market or enterprise system, even as tempered by elements of the welfare or transfer state.

II. Socialism and Individualism

I shall, first, try to define socialism, lest we allow those who enjoy the exploitation of our language to shift the meaning of terms before we realise what is happening. Socialists everywhere, confronted with the evidence that economies organised, wholly or partially, on socialist principles cannot deliver the goods, are now making desperate efforts to redefine the term ‘socialism’ to mean something quite different from its received meaning, either in its historical development or in modern reality. To counter all such efforts at the outset, we can perhaps do no better than to consult the source books. The entry on ‘socialism’ in The New Palgrave: A Dictionary of Economics, and published as recently as l987, is by Alec Nove, a distinguished British scholar, who is himself a socialist.

Nove's definition is as follows:

Let us provisionally accept the following as a definition of socialism; a society may be seen to be a socialist one if the major part of the means Of production of goods and services are not in private hands' but are in some sense socially owned and operated, by state, socialised, or cooperative enterprises.

Alec Nove (1987), ‘Socialism’, The New Palgrave: A Dictionary of Economics, Macmillan, London, p.38.

As Nove emphasises, the key elements in this definition are summarised in the shortened statement that ‘the means of production … are not in private hands.’ Socialism, as a guiding principle for organization, is opposed directly to ‘individualism,’ which could be summarised in the statement that ‘the means of production are in private hands.’ A more extended definition would include the corollary statement that the means of production, the resource capacities to produce that which is ultimately valued by persons, are owned by individuals, that is, privately, and that such ownership carries with it the liberty, and the responsibility, to make the relevant choices as to how, when, where and to what purpose these resource capacities will be put.

Only in an economy that emerges out of the Complex exchange interrelationships among persons who privately own and control resource capacities can the incentives of resource suppliers be made compatible with the evaluations that persons as final demanders place on goods and services; only in such an economy can the resource suppliers, separately and independently, fully exploit the strictly localised information that emerges in the separate but interlinked markets; only in such an economy can the imaginative potential of individuals to create that which other persons may value be allowed to operate.

It is now, in l990, almost universally acknowledged that such an economy ‘works better’ than a socialised economy in which decisions on resource use are made non-privately, that is, by state or cooperative agencies. And the meaning of ‘works better’ is quite straightforward; the private-ownership, individualised economy produces a higher valued bundle of goods and services from the resource capacities available to the individuals in a politically organised community. The only proviso here is that the value scalar, the measure through which disparate goods and services are ultimately compared, must be that which emerges from the voluntary exchange process itself. If the value scalar is, itself, determined by the centralised socialist planners, there is, of course, no reason to think that the private ownership economy will ‘work better’ in generating more ‘value’ along this measure.

III. Classical Political Economy

It is sometimes too easy to overlook the simple principles in our headlong rush to get into the Complexities. Let me pause, therefore, to emphasise what I have already said here. The private-ownership, market economy ''works better'' than the socialised economy; it produces more goods. But, and at the same time, it allows individuals more liberty to choose where, when and to what purpose they will put their capacities to produce values that they expect others to demand. should we be surprised, therefore, when our history texts tell us about the genuine excitement that the discovery of the principles of classical political economy generated. Only with the philosophers of the l8th century did it come to be understood, for the first time, that the private-ownership economy could,

indeed, make nations wealthy, but, at the same time, could insure persons the liberty to make their own choices. These were heady ideas; it is little wonder that several generations of intellectual and political leaders were so aroused. Persons could be free from coercion by other persons and get rich at the same time, provided only that the state organised the legal-political framework for protection of private properties and for the enforcement of voluntary contracts. This discovery of the complementary values of freedom and well-being that the market order makes possible did indeed seem wonderful. And of course we know that this same complementarity is now being rediscovered all over again in so many lands.

Why, then, did the principles of classical political economy, which seemed so strongly to suggest the relative superiority of a market or free enterprise economy, why did these principles lose their persuasive powers so quickly? Why did the intellectual leaders and social philosophers abandon laisser faire from roughly the middle of the l9th century and throughout most of this century?

IV. Socialism Triumphant

We must, I think, appreciate the rhetorical genius of Marx in his ability to convert arguments advanced in support of market organization into what could be made to appear to be support for a particular distributional class, the capitalists. By clever substitution of emotion-laden terminology, the market system became capitalism, and the search of every persons for his own advantage became the profit seeking of the greedy capitalists. This rhetorical genius, coupled with totally erroneous economic analysis embedded into pseudo-scientific jargon about the laws of history, was highly successful in elevating the distributional issue to centre stage, to the relative neglect of the allocational and growth elements that were central in the classical teachings. And, further, the whole Marxian-socialist challenge was introduced into the political arena in the middle of the post-Hegelian epoch, during which the state was conceptualised only in a romantic vision completely divorced from the observable reality of politics.

(Let me pause to say here that I do not intend to present the socialist defense in caricature. I speak as one who shared fully in the socialist mind-set, from which, thanks to Frank Knight, I escaped relatively early in my career. But I appreciate the appeal Of the Marxist-socialist ideas even if, now, I cannot explain it.)

There is no need to review in detail the history of the socialist century and one half. Governments everywhere resumed their natural proclivities to interfere with the liberties of persons to make exchanges, and now supported by arguments that politicised control of economic decisions was necessary to correct for market failures.

Lenin exploited the chaos of Russia to introduce the first fully socialist system of organization, the consequences of which we now know too well. But recall that during the early decades, the Soviet Union was held out as paradise by socialists in the West, both in Europe and America. After world War II, socialism reigned triumphant; Eastern Europe was absorbed into the Soviet political orbit; countries in Western Europe socialised their economies, to greater or lesser degrees. Even where economies were largely allowed to remain free of politicised interferences, Keynesian-inspired macromanagement was supported by arguments about the tendency of capitalism to generate massive unemployment.

V. Socialism in Retreat

The triumph of socialism, either in idea or reality, was never complete. There were isolated residues of understanding of classical political economy, and some markets were allowed to remain free from politicised direction, and particularly in Western countries. Nonetheless, it remains accurate to describe the central and generalised thrust of politics as ‘socialist’ up to and including the decade of the l980s and early l960s.

Between the early l960s and today, the early l990s, socialism became ill and died. What happened? There were two sides to the coin, which may be succinctly summarised as ‘market success’ and ‘political failure.’ The accumulation of empirical evidence must ultimately dispel romance. And the evidence did indeed accumulate over the three decades to demonstrate that free market economies performed much better than politically directed or planned economies. The German wirtschaftwunder should not be overlooked in this potted history. The economic reforms that Erhard implemented were based on an avowed acceptance of the principles of a market economy, and the principles were demonstrated to work. Germany achieved economic recovery rapidly in the 1950s and 1960s. By contrast and comparison, the socialist experiments tried out in Britain in the late 1940s and early 1950s proved to be demonstrable failures. Nationalization did not produce the goods that had been promised. The sputnik showpiece that seemed to suggest rapid Soviet development proved to be just that, a showpiece and nothing more. Honest evaluation suggested that the centralised economies of the Soviet Union, China and East European countries were not successful in producing goods and services. In the United States, the extended overreaching of the welfare state in the 1960s set off predictable citizen reaction.

Ideas also matter. And here the record of the academic economists remains, at best, a very mixed bag. The great debate about the possible efficiency of the centrally planned economy, the 1930s debate over socialist calculation, between Mises and Hayek on the one hand, and Lange and Lerner on the other, was judged by economists to have been won by the socialist side. Furthermore, the theoretical welfare economists of the early and middle decades of this century were primarily, indeed almost exclusively, concerned with demonstrating the failures of markets, with the purpose of providing a rationale for political interferences. But the public-choice revolution in ideas about politics, and political failures, was also sparked primarily by academic economists. When the very elementary step is taken to extend the behavioural models of economics to apply to public choosers, to those who participate variously in political roles, as voters, politicians, bureaucrats, planners, party leaders, etc., the romantic vision that was essential to the whole socialist myth vanishes. If those who make decisions for others are finally seen as ordinary persons, just like everyone else, how can the awesome delegation of authority that must characterise the centralised economy be justified? I do not suggest here, in any way, that public choice theory set off the reaction against politicisation, socialism and other variants of the controlled economy. The reaction, which has now extended over the whole world, was surely triggered directly by the many decades of the observed record of political failures. Public choice, as a set of ideas, was, I think, influential in providing an intellectual basis which allows observers to understand better what it is they can directly observe. Political failure was everywhere observed; public choice supplied the explanation as to why the observations were valid.

VI. The Absence of Faith

I stated earlier that there were two sides to the coin; market success and political failure. Both the observations and the ideas that have been developed over the period of socialist retreat have concentrated on the second of these, that is, on political failure. There now exists widespread scepticism about the efficacy of politics and political solutions to achieve economic results. Bureaucracies are mistrusted; politicians are not the heroes of legend. The socialist principle of organization is not expected to work well. The faith in political and government nostrums has all but vanished, as a principle.

This loss of faith in politics, in socialism broadly defined, has not, however, been accompanied by any demonstrable renewal or reconversion to a faith in markets, the laisser faire vision that was central to the teachings of the classical political economists. There remains a residual unwillingness to leave things alone, to allow the free market to organise itself (within a legal framework) in producing and evaluating that which persons value. We are left, therefore, with what is essentially an attitude of nihilism toward economic organization. Politics will not work, but there is no generalised willingness to leave things alone. There seems to be no widely shared organizing principle upon which persons can begin to think about the operations of a political economy.

VII. The Natural Emergence Of Leviathan

It is in this setting, which does seem to be descriptive of the era into which we are so rapidly moving, that the natural forces which generate the Leviathan state emerge and assume dominance. With no overriding principle that dictates how an economy is to be organised, the political structure is open to maximal exploitation by the pressures of well-organised interests which seek to exploit the powers of the state to secure differential profits. The special-interest, rent-seeking, churning state finds fertile ground for growth in this environment. And we observe quite arbitrary politicised interferences with markets, with the pattern of intervention being dependent strictly on the relative strengths of organised interests.

This setting, which I have referred to as Leviathan, has much in common with the mercantilist-protectionist politics that Adam Smith attacked so vehemently in his great book in 1776. Hence, in two centuries we seem to have come full circle. The self-same barriers that Adam Smith sought to abolish are everywhere resurging, as if from the depths of history. And the self-same arguments are heard in the land, both in support and in opposition. The arguments for Leviathan's extensions are not versions of the socialist's dream; they are, instead, simple efforts to claim a public interest in a single sector's private profit.

VIII. Toward Constitutional Limits

There will be no escape from the protectionist-mercantilist regime that now threatens to be characteristic of the post-socialist politics in both western and Eastern countries so long as we allow the ordinary or natural outcomes of majoritarian democratic processes to operate without adequate constitutional constraints. We have learned to understand interest-group politics; we no longer have a romantic vision as to how the state operates. If we have not rediscovered, and do not rediscover, and understand the precepts of laisser faire, as organizing principles, it will be necessary to address that which we do know and have learned. If we know that politics fails and that its natural proclivity is to extend its reach beyond tolerable bounds, we may be led to incorporate constraints into a constitutional structure. Depoliticised economic order is within the realm of the politically-constitutionally possible, even if the accompanying faith in market organization is not fully regained. We can protect ourselves against the appetites of the monster that the Leviathan state threatens to become without really understanding and appreciating the efficiency-generating properties of the market.

A threshold was crossed in the l8th century when we learned how the rule of law, stability of private property and the withdrawal of political interference with private choices, could unleash the entrepreneurial energies that are latent within each of us. The modern age was born. Humankind seemed near to the ultimate realization of its socially organised potentiality only to have this future threatened and in part forestalled by the emergence of the socialist vision, a vision that has now been shown to be grounded in romance rather than in scientific understanding. The central flaw in the socialist vision was its failure to recognise the limits of politicised organization.

Recognizing the limits in order to avoid harm is as important as recognizing the potential that may be achieved within those limits. The organised polities of the nation-states, and the associations among those states, must be kept within constitutional boundaries. The death throes of socialism should not be allowed to distract attention from the continuing necessity to prevent the overreaching of the state-as-Leviathan, which becomes all the more dangerous because it does not depend on an ideology to give it focus. Ideas, and the institutions that emerge as these ideas are put into practice, can be killed off and replaced by other ideas and other institutions. The machinations of interest-driven politics are much more difficult to dislodge. Let us get on with the task.

References

Hayek, F. A. (1989), The Fatal Conceit, University of Chicago Press, Chicago.

About the Author:
James Buchanan is Harris Professor of Economics at the Center for Study of Public Choice, George Mason University, Fairfax, Virginia. In 1986 he was awarded the Nobel Prize for Economics in recognition of his work on political processes. He has authored many works on public choice including The Reason for Rules (1985; co-authored by Geoffrey Brennan), and Liberty, Market and the State (1986). He contributed the essay 'The Limits of Taxation' to the 1982 CIS collection The Constitutional Challenge.