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Economic Liberty and Its Abandonment, Part 1


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With federal spending continuing to soar out of control, the obvious question arises: How do we get our nation back on the right track — toward economic prosperity and economic liberty? To answer that question, it’s helpful to examine basic principles, including the founding principles of our nation and how our country turned away from those principles. In that way, we can more easily understand what is necessary to restore freedom, peace, harmony, and prosperity to our land.

When the Constitution called the federal government into existence, the result was the most unusual economic system in history. While today we call it a “free-enterprise system,” it was actually no “system” at all. It was simply a way of life in which people naturally engaged in economic activity free from government control.

Americans were free to engage in any economic activity without a license and without being subject to government regulation or control. If a person wanted to start a business, he didn’t go to a government office and seek a permit. He just did it. If he wanted to practice law or medicine or any other trade or profession, he didn’t need to secure a license. He just opened up his office and hung out his shingle.

Of course, consumers were free not to patronize a particular establishment or retain the services of any particular lawyer or doctor or anyone else. Ultimately, consumers were in charge. Through the choices they made with their money, they decided who would stay in business and who would prosper.

It was this way of life that became known as “free enterprise.” What it meant was that enterprise was free from government regulation. It was a way of life that — it comes as no surprise — shocked the world because economic activity had always been subject to government control. Throughout history, it was just assumed that economic enterprise was subject to the sovereign powers of the government.

What was different about the United States? What was it that caused the American people to conceive of this revolutionary notion that economic enterprise should be free from government control?

Two things, both of which occurred in the same year, 1776: the issuing of the Declaration of Independence and the publication of An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith.

In the Declaration, Thomas Jefferson enunciated one of the most radical principles in history, one that was commonly held by the British colonists living in the New Land. He stated that all men had been endowed with certain fundamental, inherent rights.

Since those rights come from Nature and God, government had no legitimate authority to interfere with the exercise of them. In fact, as Jefferson observed, the only legitimate reason that governments are called into existence is to protect the exercise of these natural, God-given rights. Such rights included, he stated, life, liberty, and the pursuit of happiness.

People all the world over were stunned. They had never heard such a thing. In their minds, they were the servants and government was the master. As the sovereign authority, the government could regulate anything it wanted. Anyway, people believed, it was government regulation of economic enterprise that protected the poor from the rapacious practices of the rich. That’s why, for example, there were laws that prohibited financial speculation, middlemen, excessive profits, and exorbitant prices, along with laws that provided financial assistance to the poor, required businesses to pay “just” wages to their workers, and provided for monopolies whose supply of goods and services would not be threatened by competition.

Liberty and the cause of wealth

Along came Adam Smith, a Scottish philosopher, who turned all that thinking upside down. The reason that nations remain mired in poverty, he contended, was precisely that government was regulating economic activity and protecting the poor with a myriad of rules and regulations governing economic activity. The key to economic prosperity, he argued, was precisely the opposite of what had been going on for centuries. The key to prosperity, especially for those at the bottom of the economic ladder, was to stop government from regulating and controlling economic enterprise and “helping” the poor through economic legislation. The key was freeing enterprise from the grip of government.

Smith’s idea was as shocking to the world as Jefferson’s was. Why, there would be chaos if government wasn’t managing and directing economic activity, people believed. If people were left to their own devices, without any government control or management, how could anyone be certain that there would be enough sweaters and coats to sell to people and in the right sizes and colors? How could they be certain that enough food would be produced? And who would protect the poor from the rich?

By the time the Constitution called the federal government into existence in 1787, those two ideas — the idea of natural, God-given rights as expressed in the Declaration and the idea of economic liberty as expressed by Adam Smith in The Wealth of Nations — were married in the minds of the American people. People were free to engage in economic enterprise without government control because Americans believed that life, liberty, and the pursuit of happiness naturally encompassed what became known as economic liberty — and because they believed that economic liberty was the key to a prosperous and harmonious society.

That’s not to say that there weren’t exceptions. Of course they were. Given that this was the first time in history that such a radical social experiment had ever been attempted, it shouldn’t surprise anyone that it wasn’t perfect. There were two big exceptions — slavery and tariffs. And there were many minor exceptions. But no one can deny that, by and large, America was established as the largest free-enterprise zone in history.

But it actually was more radical than that. Not only was enterprise free from government regulation, Americans were also free to keep all the fruits of their economic enterprises, for there was no taxation on income. Imagine that: Everyone, including businessmen, employees, and investors, got to keep everything he earned. No income tax and no IRS.

Why? Because Americans believed that the right to keep the fruits of your labor was one of those natural, God-given rights to which Jefferson had referred in the Declaration. Engaging in economic enterprise and keeping what you earned from those enterprises were what life, liberty, and the pursuit of happiness were all about.

With the exception of such things as land grants to the railroads or to universities, there were no welfare programs. No Social Security. No Medicare. No farm subsidies. No education grants. No food stamps. No public housing. No foreign aid.

Our American ancestors believed that charity was no business of the government. Charity was instead the business of the people who were making the money through economic enterprise. Their attitude was that people should not only be free to engage in economic enterprise and to keep everything they were earning but also to decide what to do with it. It was their money, after all. For Americans, life, liberty, and the pursuit of happiness naturally encompassed deciding for oneself whether to help others through charity.

Sound money was something else that was vitally important to our American ancestors. They knew what governments had done to people throughout history with monetary debasement, especially with paper money. In fact, they had just recently experienced the ravages of paper money during the Revolution, when the Continental Congress had issued large quantities of paper money to pay its bills, debasing the value of money to such an extent that the phrase “Not worth a Continental” became a byword.

Americans wanted a way to protect their earnings and savings from that type of monetary debasement. The solution they came up with was making coins minted from precious metals the official money of the United States. The government could still debase gold coins and silver coins by lowering the quantity of gold or silver in the coins, but Americans figured that that risk was much smaller than the debasement risk that would come if they made paper currency the official money of the United States. They understood that it was much easier for government to print money than it was to debase the content of gold or silver coins.

Drug war? Our American ancestors would never have permitted it. Their philosophy was that life, liberty, and the pursuit of happiness entailed the natural, God-given right to ingest whatever people wanted to ingest. In fact, some of them even praised the consumption of drugs, as reflected by Benjamin Franklin’s famous pronouncement, “Behold the rain which descends from heaven upon our vineyards; there it enters the roots of the vines, to be changed into wine; a constant proof that God loves us, and loves to see us happy.”

The effects of prosperity

What was the result of this unusual way life? Only the most prosperous society in the history of man. When the fundamental rights of economic liberty and private property were protected from governmental infringement — when government was prohibited from regulating or managing economic activity — when economic enterprise was free from government control — the result was a society in which economic prosperity soared, especially for the poor.

In fact, that’s another fascinating aspect to this story. The poor from all over the world were free to come to America and participate in its radical social experiment — and they did. Countless immigrants chose to flee the lands of government control of economic affairs — lands where the government protected the poor through government management of economic activity — to come to the land where government lacked the power to do such things.

Why did our American ancestors open the borders to immigrants? Because of what Jefferson had said — that all men — not just Englishmen or Americans — had been endowed with fundamental, inherent, natural, God-given rights, and that the rights of life, liberty, and the pursuit of happiness naturally encompassed the right to move to a new land in the hope of sustaining one’s life through labor and even prospering.

Why was there so much economic prosperity through the 1800s? The reason was that people were free to engage in economic enterprise without government control, accumulate the fruits of their earnings, transact business with sound money, and decide for themselves what to do with their own money.

Here’s how the process worked. As people accumulated wealth, they would try to save a large portion of it as a nest egg for difficult times. Those savings would be placed in banks, which would pay interest to the depositors. The banks would then lend out that money to businessmen who wished to purchase equipment that would increase the productivity of their business.

That increase in productivity would increase the revenues and profits of the business. That, in turn, meant raises for the workers, the people who were saving some of their income and depositing it in the banks.

Thus, there was a natural harmony of interests between employers and employees. The more prosperous the business, the more prosperous the workers. Everyone had a vested interest in making the business more prosperous. In fact, the workers had a vested interest in widespread prosperity in society. More businesses meant not only more consumer choices but also more job opportunities.

I would be remiss if I failed to mention what happened in American society when people were free to keep everything they earned and were not forced to share it with others. The result of this unusual way of life was the greatest outburst of charitable activity that mankind had ever seen. When people were free to accumulate unlimited amounts of wealth, they spent it, they saved it, they invested it, and they also donated it. That’s how churches, universities, hospitals, museums, and opera houses got built — through the voluntary donations of people who cared about such things, and not because of an income-tax deduction because — remember — there was no income tax and no IRS.

Let’s now examine America’s turn away from its founding principles and the consequences of that choice.

Part 1 | Part 2

This article originally appeared in the November 2011 edition of Freedom Daily. Subscribe to the print or email version of Freedom Daily.

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    Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.