Professor G.R. Steele of England’s Lancaster University, writing in
the September 1999 issue of Economic Affairs, says that laissez-faire is
not enough for a robust, growing economy. That’s an important argument
to make because the enemies of liberty, at home and abroad, point to the
economic chaos in most of the former states of the Soviet Union as
evidence that capitalism and free markets do not work.
Steele says, “The absence of an adequate institutional structure
explains why entrepreneurial capitalism did not automatically follow the
collapse of central planning in the 1990s.” His analysis is especially
instructive for us because the very institutions needed for prosperity
in the former USSR states are the ones under increasing attack in our
Alan Greenspan, Federal Reserve Board chairman, points out, “There is
a vast amount of capitalist culture and infrastructure underpinning
market economies that has evolved over generations: laws, conventions,
behaviors, and a wide variety of business professions and practices that
has no important function in a centrally planned economy.” In our
country, a major part of this infrastructure includes a bill of rights,
whose main purpose is to protect citizens against arbitrary action by
government. Citizens of the former Soviet Union have no such protection.
Another part of capitalist or laissez-faire culture and
infrastructure is the rule of law and stability of the law. Rule of law
is where everyone obeys and is judged by the same set of rules. Laws
apply to government officials just as they apply to citizens. Outcomes
Baseball rules provide an excellent example of this process. In 1998,
Mark McGuire hit 70 home runs while other players hit 10 or less. Nobody
accuses McGuire of greed and exploitation. Politicians don’t call for a
redistribution of his home runs, or tell McGuire that he should give
something back. We just say to other players, “You had your chance.”
Stability of laws are also part of the infrastructure for prosperity.
When laws constantly change, people cannot plan well. After all, if you
make investment decisions based on an existing legal structure, it’s
possible that you could be wiped out by unanticipated changes in the
law. So what do people do in such an environment? They shorten their
investment time horizon and become more now oriented. Now-orientation is
not the way to prosperity.
In order to provide the institutional framework for a laissez-faire
economy, government must restrict its functions mostly to that of being
a “referee.” As such, it shouldn’t choose sides. Governments should
guarantee private property rights, enforce contractual terms (including
the provisions of criminal law), establish rule of law and provide for
certain public goods.
Going back to Alan Greenspan’s 1997 “The Virtues of Market Economies”
speech, “much of what we took for granted in our free-market system and
assumed to be human nature was not nature at all, but culture. The
dismantling of the central planning function in an economy does not, as
some supposed, automatically establish a free-market entrepreneurial
So how can the West help nations of the former Soviet Union? We can’t
help much with World Bank, International Monetary Fund and Agency for
International Development giveaways. In fact, these giveaways make the
status quo more politically viable.
If indeed we can help at all, we should encourage, preach and
admonish that they adopt the institutional and cultural infrastructure
necessary for a free-market economy. But just as importantly, and
perhaps even more so, we should halt the attack in our own country on
our institutional cultural infrastructure that explains why we are not
in the same boat with the people of the former Soviet Union and a good
part of the rest of the world.