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Don’t Blame the Thermometer for the Fever


When communism collapsed a few years ago, people thought that the last grand ideological debate over political economy had finally ended. Supposedly, we were all capitalists now.

But this is clearly not the case. The world’s political leaders show no signs of a commitment to capitalism, if by that term we mean truly free markets and individual liberty. On the contrary, President Clinton and his colleagues are embarked on a course of global economic intervention such as no one has attempted before.

The economic woes in Asia and Latin America are the pretext for this power grab. But make no mistake about it: the control of our economic activities contemplated by the bureaucrats has long been on the political agenda. These folks have never been comfortable with free markets and they have yearned for the elusive “third way” between capitalism and full socialism. The current downturn gives them the opportunity to realize their long-held ambition-egged on by the usual gang of anti-capitalist intellectuals who absurdly blame today’s economic problems on “market worship.”

Observe: In early October, President Clinton led 20 other countries in endorsing new restrictions on the international movement of capital. This is a typical case of blaming the thermometer for a fever. The premise of the new restrictions is that the sudden withdrawal of capital from a particular country’s stock or bond market wreaks economic havoc in that country. But this reasoning reverses cause and effect. Capital flees a country to avoid havoc, which occurs when government pursues irrational economic policies, such as monetary inflation, credit expansion, confiscation, and subsidy. The policies, not the capital exodus, are to blame. Why would investors take money out of a country that had a sound economy?

A free worldwide capital market is a vital check on governments’ ability to enact bad policies. The agreement to restrict capital movements is designed precisely to cancel that check. It’s an outrageous cartel arrangement by governments to prevent or limit policy competition among themselves. Until now, if a government enacted measures that violated economic freedom and stifled growth, investors could take their money elsewhere. Tomorrow that may not be the case. This step toward the worldwide centralization of government power must not be taken lightly.

A day after the cartel agreement was announced, President Clinton went further and called for worldwide economic regulations similar to those imposed during the New Deal of the 1930s. He said that such a global regime is necessary to “temper the volatile swings of the international marketplace.” It is hard to think of a more ridiculous proposal. First, volatility is not intrinsic to the marketplace. Like the Great Depression itself, big fluctuations result from government mismanagement of money and credit. Let it not be forgotten that the Great Depression occurred 16 years after the Federal Reserve was set up. The problem is central banking, and the solution is a fully market-based monetary system, including free, competitive banking and the private issuance of currency. Second, the original New Deal did not rescue America from depression. Five years after Franklin Roosevelt became president, the economy was in nearly as bad shape as it was under Herbert Hoover. As historian Robert Higgs has documented, the economy did not recover until after World War II.

Strangely, in his speech calling for a global New Deal, President Clinton warned against international capital controls-the very thing he had endorsed the day before. Is something interfering with his concentration?

Capital controls and a new New Deal are terrible ideas. In light of the real causes of inflation and depression, what we need is the repeal of central banking everywhere, deregulation of capital, and full respect for property rights, without which no human rights are possible.

The world today suffers not from too much capitalism, but too little.

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    Sheldon Richman is former vice president and editor at The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.