During hard times there are few phrases as frequently heard
as, "Something must be done!" And what is usually meant by the
phrase is that governmental action is needed to cure the
economic woes of society.

In other words, government spending should be increased to
raise the demand for goods and services; interest rates should
be lowered to stimulate investment activity; protection should
be given to domestic producers to insulate them from the
unscrupulous "poaching" of foreign producers; public-works
projects should be used to guarantee a job at a "living wage"
to all of those desiring to work.

We live in an era that has seen the bankruptcy of socialism,
the failure of the welfare state, the corrupting influences of
governmental regulatory activity, the irresponsibility of
government deficit-spending and the unprincipled political
pandering to every conceivable special-interest group. And yet
still the cry is heard: "Something must be done!"--by the

Fifty-five years ago, the English economist John Maynard
Keynes published his book The General Theory of Employment,
Interest and Money. He ended the volume by pointing out to his
readers, "The ideas of economists and political philosophers,
both when they are right and when they are wrong, are more
powerful than is commonly understood. Indeed the world is
ruled by little else. Practical men, who believe themselves to
be quite exempt from any intellectual influences, are usually
the slaves of some defunct economist."

At the end of the twentieth century, Americans, and indeed
practically the entire world, are the slaves of defunct
collectivist economists of half a century ago. Faced with the
trauma and tribulations of the Great Depression, intellectuals
of almost every stripe came to the conclusion that individual
freedom and free markets could not be trusted to either
deliver the goods or the jobs that seemed to be so desperately
needed. Their only disagreements were over the form which
government management should take.

Marxists looked to Moscow and Stalin's five-year plans. A
socialist command economy might be harsh and lacking in some
of the "bourgeois" freedoms, they believed, but at least
everyone had a job; and planning assured that society's
resources would not stand idle.

Fascists looked to Rome and Berlin. Even though Hitler's
racial policies in the 1930s became an uncomfortable
embarrassment, fascism, as an economic system, still appealed
to many. Here, government did not have to nationalize
industry. It could instead plan the economy in partnership
with business and labor--setting wages and prices and
establishing employment and production targets for growth and

Keynes and his "New Economics" seemed to offer a third way.
Government did not have to nationalize or directly plan an
economy. By use of government deficit spending and
manipulation of interest rates through control of the money
supply, government planners could influence the demand for
goods and services and the amount of private investment
activity. By using these policy tools, government could
indirectly manage an economy for "full employment."

Over the last fifty years, just about every variation on the
collectivist economic theme has been tried. And every one has
turned into disaster.

Central planning has twisted men's souls and ravaged their
bodies. Both communist and fascist forms of planning have
denied human beings their most basic freedoms and produced
nothing but poverty and terror.

And while Keynesian economics and neo-mercantilist trade
policies have appeared less visibly destructive of freedom and
prosperity, their effects have been no less detrimental.
Moreover, in the name of "full employment" and "economic
stabilization," the economic power of governments in the
Western world has become immense. Governments in America and
western Europe now absorb anywhere from twenty-five to
seventy-five percent of all of the wealth produced by the
people in these nations. Governmental regulations intrude into
every corner of economic life. Government determines who can
work and under what conditions, how products may be produced
and in what manner they may be marketed, what kind of profits
may be earned, and what level of wages must be paid.

Nor have Keynesian "demand management" policies brought
economic stability. The post-World War II period has seen
nothing but unending cycles of booms and busts, inflations and
recessions. And with every enlargement in the size of
government has come an increased number of groups in the
society dependent upon the continuation of governmental
spending and protection. The corruption of our legislative
processes is merely one aspect of the political consequences
of Keynesian economics put into practice.

During the first half of this century, many economists and
political philosophers were drunk with the idea of power. They
suffered from what the Austrian economist Friedrich A. Hayek
has called "the pretense of knowledge." They were convinced
that they had the wisdom and ability to plan, guide and direct
the lives of millions. Their minds had given them the insight
and knowledge to know how to "set things right."

Market demand was too low? They knew just the right amount of
government spending to rectify the problem. Wealth was
unfairly distributed? They knew just the right amount of
taxation and redistribution of wealth to assure "economic
justice." Industry and jobs were not where they should be in
the economy? They knew just where industry should be located
and where jobs should be created.

Through the public educational process and other forms of
government propaganda, Americans were brainwashed into
believing them. And even though every economic intervention
has failed and continues to fail, Americans still believe
them. Why? Because they have been conditioned to believe our
government masters and brainwashers when they tell us that
next time "they will get it right," that they have learned
from their mistakes, and that Americans should just continue
to trust them.

But they are not to be trusted. Not only because power
corrupts, but also because they can never know how to do all
of the things they promise to do. No mind or group of minds
can ever have the ability or capacity to master all of the
knowledge and information that is required to plan, direct or
guide an economy.

The value of a market economy is that it leaves each
individual free to plan his own affairs and to use his own
knowledge as he sees fit. But if he is to benefit personally
from that knowledge, he knows that he must use it in a way
that serves the ends of society. He can earn a living only by
using his knowledge to fulfill the wants and desires of others
in the peaceful social order of voluntary exchange.

Competitively established market prices, both for resources
and commodities, transmit across the entire economy
information about the ever-changing supply-and-demand
conditions to which each member of the society must adjust if
he is to go about his business of earning a living. The market
incorporates and encapsulates more knowledge and information
than any economic planner or interventionist can ever hope to
know or master.

But if the market is to fulfill its informational tasks, it is
vital that we return to first principles. By protecting and
respecting individual life and property, government can help
to secure the conditions for prosperity; but government cannot
create that prosperity. Prosperity comes only from men
applying their minds and the means available to them for
various desired ends. Prosperity, therefore, can only come
from freedom, because only when men are free do they have the
interest and the incentive to set their minds to work.

What does this mean in terms of economic policy? The exact
opposite of what the economic planners and social engineers
desire. Government's role in society must be reduced to the
much ridiculed "night-watchman state." And government
expenditures must be lowered to only those needed to protect
individual liberty and private-property rights.

This means: no governmental subsidies; no governmental
protectionist privileges; no governmentally sponsored
monopolies or cartels; no governmental licensing of
occupations or professions; no governmental regulation of
industry or the workplace; no governmental setting or
influencing of wages or prices; no public-works projects; no
governmental "demand management" policies; no governmental
control of money.

As we approach the end of the twentieth century, we are at a
dead end with collectivist and interventionist economic
policy. Something must be done! But not by the government! The
place to start is to recognize that we are the intellectual
victims of defunct economists and political philosophers of a
bygone era and, more important, to recognize that governmental
policies are the cause, not the cure, of our economic

Professor Ebeling is the Ludwig von Mises Professor of
Economics at Hillsdale College, Hillsdale, Michigan, and also
serves as vice-president of academic affairs at The Future of
Freedom Foundation.

From the May 1991 issue of FREEDOM DAILY,
Copyright (c) 1991, The Future of Freedom Foundation,
PO Box 9752, Denver, Colorado 80209, 303-777-3588.
Permission granted to reprint; please give appropriate credit
and send one copy of reprinted material to the Foundation.