minor edits made, January 3, 2013
In October of this year I had the interesting experience of attending a lecture at the U.S. Constitution Center in Philadelphia by Arthur C. Brooks, Executive Director of the American Enterprise Institute. His message to the audience was one of great importance and seriousness – the moral case for the system of socio-political arrangements and institutions he believes supports “free enterprise.”
At the conclusion of this lecture, all in attendance were given the opportunity to leave with a free copy of the new book by Mr. Brooks, The Road to Freedom. This book essentially expands on the case made by Mr. Brooks, whose thinking is strongly influenced by the perspectives of F.A. Hayek.
I found myself in considerable agreement with the perspectives offered by Mr. Brooks — up to a point. His fear that government is far too intrusive in our lives and a real danger to our liberty is a fear I share. What is unclear to me is whether Mr. Brooks has thought very deeply regarding the line that divides “liberty” from “freedom.”
As I listened to him and later read this book, I kept thinking about John Locke’s use of the term “licence” to describe behaviors that fall beyond the moral bounds of “liberty.” And also, Mortimer J. Adler’s definition of “liberty” as ‘freedom constrained by justice.” All, then, hinges on a consensus over the meaning of “justice.” In a sense, this is the challenge accepted by Mr. Brooks. For the reasons I provide below, I must conclude he has failed in his quest.
Arthur Brooks has reached the conclusion that “America has been in decline” for many years, “the product of nearly a century of accumulated policy.” He sees the growth in the reach and size of our government as the primary cause:
“Americans today are experiencing a low-grade, virtual servitude to an ever-expanding, unaccountable government that, starved for tax revenues, has appropriated for itself funds that entrepreneurs could have used to grow the economy, has created a protected class of government workers and crony corporations that play by a different set of rules than the rest of America, and has consequently left the nation in hock for generations to come.”
At a time when many of us worry as much or more about the power of corporations over public policy, Mr. Brooks takes the moral high ground in his attack on “crony corporations.” I wondered listening to him whether financial contributions to the American Enterprise Institute from individuals engaged in business were going to decline or increase. More controversial for me is his definition of “free enterprise.” He writes:
“Free enterprise requires trust in markets to produce the most desirable outcomes for society. It is the opposite of statism, which is the belief that the government is generally the best, fairest, and most trustworthy entity to distribute resources and coordinate our economic lives.” 
For markets to function in this manner requires that all forms of artificial advantage (i.e., what John Locke might include in a list of privileges or licences granted by government yielding economic benefit) be removed. I may be overly optimistic about my countrymen, but I do not believe there is more than a very small minority who embrace statism as described by Mr. Brooks. What most Progressives I know recognize is that wealth must first be produced before it can be taken via taxation or other fees for services to pay for public goods and services. Most people understand that government is not an efficient producer of goods, that a strong private sector is necessary to support the public goods and services they believe are essential in a social democracy.
What does not occur to Mr. Brooks is to examine both the historical record and the contemporary experience of the extent to which what we produce is claimed (i.e., redistributed) by non-producers as a result of force, fraud or theft. Social democrats make a half-hearted attempt to achieve a rebalancing but without a thorough understanding of the distinction between income flows that are “earned” versus “unearned.”
I see this as pivotal to a deeper understanding of “the moral case” Mr. Brooks recognizes is the key to a broad demand for free enterprise. Here, he refers to the original intent of the “Founders” and the final language included in the Declaration of Independence, which he states “came from the philosopher John Locke, who believed that all men had the natural rights to acquire, protect, and dispose of property.” Of course, Locke had much more to say regarding the rights we possess, and he was careful to distinguish between property in production and the privilege of owning land. Locke leaves no ambiguity:
“Whether we consider natural reason, which tells us that men, being born, have a right to their preservation, and consequently, to meat and drink and other such things as nature affords for their subsistence; or revelation, which gives us an account of those grants God made of the world to Adam, and to Noah and his sons; it is very clear that God … ‘has given the earth to the children of men’, given it to mankind in common.”
Locke then addresses the practical matter of how all men are to be guaranteed access to nature in order to sustain their preservation:
“The earth and all that is therein is given to men for the support and comfort of their being. And though all the fruits it naturally produces and beasts it feeds belong to mankind in common, as they are produced by the spontaneous hand of nature; and nobody has originally a private dominion exclusive of the rest of mankind in any of them, as they are thus in their natural state; yet, being given for the use of men, there must of necessity be a means to appropriate them some way or other before they can be of any use or at all beneficial to any particular man.
“Though the earth and all inferior creatures be common to all men, yet every man has a property in his own person; this nobody has any right to but himself. The labour of his body and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. …” 
Equally important and insightful, Locke acknowledges the fact that nature is finite and that the places on the planet capable of adequately supporting human life are far fewer and not evenly distributed. Thus, he attaches a proviso to our individual claims to nature:
“For this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to, at least where there is enough and as good left in common for others.” 
Locke would have concurred with the observation made by Gerhard E. Lenski in his classic 1966 book, Power and Privilege:
“[E]mpirical evidence strongly suggests that prestige is largely, though not solely, a function of power and privilege, at least in those societies where there is a substantial surplus.” 
The implication is unfortunate: privilege yields power, which yields more privilege, which is looked to by those without privilege or power not with moral indignation but too often with admiration and desire for a similar life experience.
Just as Locke has been selectively championed and ignored, so have the moral principles advanced by another thoughtful analyst pointed to by Mr. Brooks — Adam Smith. The “moral case for freedom” made by Adam Smith was consistent with Locke’s characterization of nature as the common property of all. What Smith saw was that the free access to nature was limited by population growth but also by law that granted privilege to a portion of the population who came to control nature:
“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must give up to the landlord a portion of what his labour either collects or produces.”
Adam Smith did not publicly condemn the private appropriation of the rent of land by the landowning class or use his influence for changes in law. But, he at least acknowledged this was a deeply-entrenched form of economic license:
“The landlord demands a rent even for unimproved land, and the supposed interest or profit upon the expence of improvement is generally an addition to this original rent. Those improvements, besides, are not always made by the stock of the landlord, but sometimes by that of the tenant. When the lease comes to be renewed, however, the landlord commonly demands the same augmentation of rent, as if they had been all made by his own.”
Trained in mainstream, neo-classical economics, Mr. Brooks reveals only a modest working knowledge of the great moral philosophers who devoted their energy to the subject of political economy. From Richard Cantillon on political economists universally described nature (i.e., land) as the first factor of production with characteristics very different from the other two factors — labor and capital goods.
As he examines the causes of the most recent financial and economic crash, Mr. Brooks joins most other mainstream economics professors in mistakenly describing the collapse of many of the nation’s land markets as “the housing crisis.” In fact, there is much to say in response to his assertion that:
“Misbehavior on Wall Street was spawned by the predatory government-sponsored enterprises that started the housing crisis.”
The United States economy has never been immune to boom-to-bust cycles. Previous generations have experienced periods of intense land speculation fueled by the monetary system as operating at the time and followed by panic, recession or depression. These occurred when government was small and not able to enforce either law or regulation. These occurred after economists convinced those in government that economies could be held relatively stable by fiscal and monetary tools they provided. A dysfunctional institutional environment was made more dysfunctional during the last two property market cycles by wrong-headed, ideologically-driven deregulation of the financial services sector. Think, for example, of what happened to the nation’s savings institutions following the legal and regulatory advantages granted to money market funds. The subsequent closing of thousands of these institutions and the consolidation of the credit markets into a smaller and small number of bank holding companies and Wall Street firms has been the result.
The evidence also reveals that Mr. Brooks overstates the extent to which “the ability to create value” drives individual decisions and actions. Those who have long enjoyed positions of privilege are easily convinced they have earned their success. The cost, Mr. Brooks observes, is their general unhappiness because deep down they realize their success is shallow and unearned. A similar outcome occurs when “government gives people rewards they did not earn — welfare checks, make-work jobs, or whatever.” There is a certain common sense truth to his observation that “[f]or most Americans, work in a free enterprise system that matches our skills and talents is essential to happiness…” More philosophically, he worries that because “[e]arned success requires sacrifice … a system that dedicates itself to expunging the challenge and risk from people’s lives is immoral.”
Mr. Brooks lists the National Flood Insurance Program and the creation of Fannie Mae and Freddie Mac as government efforts to “protect citizens from the consequences of the risks they take.” The list is obviously much longer. When markets are functioning well, risks are understood and appropriately priced for. But, that is not necessarily the entire story, as is the case with regard to flood insurance.
Most of the early villages that grew into towns and then into cities were established along navigable rivers, lakes or ocean harbors. These locations were in harm’s way of multiple potential natural disasters. Settlers and business owners faced the additional challenge of negotiating with the local rent-seeking landholding elite. With the cost of the best locations forced up by so much land held off the market, people lived and worked and did business at locations prone to periodic flooding. They had little choice. Insurance companies generally refused to provide coverage at any price because of the high level of risk. What appeared to be a program to assist homeowners and small businesses located in areas prone to floods was in reality a program benefiting landed interests. Absent the ability to obtain flood insurance coverage, land prices would reflect the risk and be quite low.
I would hope that as part of his formal studies in economics Mr. Brooks at some point read a paper or two on rent-seeking; or, better yet, came across some of the writing by David Ricardo, Henry George or any one of the many contemporary economics professors on rent theory. What all of these analysts show is that land owners are more than happy to claim as rent what is produced by others without any good or service provided in exchange. With the societal collection of rent, as advanced by Henry George, Mr. Brooks would be safe to write what he did write:
“If you earn what you have, most people think you have a right to keep it, even if others end up with less.”
The key is the existence of true equality of opportunity as fundamental to a society’s socio-political arrangements and institutions. Or, as Henry George described the conditions, “a fair field with no favors.” And, has George argued, with a society’s rent fund as public revenue there would be no need for “some redistribution … to pay for a functioning government.”
Mr. Brooks unknowingly provides a remarkable insight into the human experience when he relates the story of his great-grandparents, “who emigrated from Denmark … to earn their success. They wanted to start a farm, and to be rewarded if they worked hard.” What we do not know is whether his family received a grant of land under a special government program. Or, perhaps, they were able to purchase land with borrowed funds the payment of which was guaranteed to the bank by government. At any rate, the cost of fertile land in late 19th-century rural United States was in most areas far lower than could be obtained in the Old World (and still naturally very fertile). Yes, “[g]eneration after generation of immigrants came to America for the same reasons” his family did: for free or highly affordable land.
Solve the land problem and we will have come a very long way toward the equality of opportunity Mr. Brooks hopes for. We will have the fundamental basis for meritocracy. Absent removal of landed privilege the time will come — and come soon — when the shift from “a culture of aspiration to a culture of envy” will become firmly entrenched with all that this brings. Tragically, what is all too true is this:
“Politicians have offered one policy compromise after another, from a government subsidy here to a hidden tax there. Slowly, people have become anaesthetized to the cumulative result.”
What awakened the public to the underside of the American System, weighed down by privileges, subsidies, monopolies and unenforced law was the loss of financial security and opportunity resulting when property markets reached the end of their upward cyclical climb. Mr. Brooks adds his voice to those who provide a superficial analysis of what happened. He tells us:
“The housing crisis occurred because people borrowed too much to buy houses, with down payments that were too low. Without a sufficient down payment, people had an incentive to walk away from their mortgages when their home values fell below what they owed…”
Thirty-five years in the real estate development and financing sector taught me rather different lessons. Property markets are driven by land market dynamics. And, speculation in land is handsomely rewarded because of the widespread low effective rate of taxation on the potential rental value of land. Sprawling development is a response strategy by developers in the face of rising land acquisition costs. And, those developers who possess sufficient financial reserves bank land for future use, reducing the supply of land available to other developers, driving prices upward and forcing development further out.
What began to occur during the 1990s was organized community resistance to new, sprawling development. Local governments issued bonds to purchase development rights from farmers. Others raised funds to purchase land as permanent open space. The price of vacant land started to skyrocket, so that purchasers of residential property eventually paid more for their land parcel (or location value in a high-rise condominium) than for the actual housing unit. As the median price of property climbed, mortgage loan investors such as Fannie Mae and Freddie Mac annually raised the maximum loan limit to accommodate speculation-driven land markets. They were also forced to lower buyer cash contributions to these transactions because of the difficulty many homebuyers had meeting even a 5 percent down payment. Property appraisals in many markets indicated land-to-total value ratios consistently above 50 percent. These steps had to be taken for three basic reasons: (1) to keep up transaction volume; (2) to maintain market share; and (3) to satisfy Wall Street’s demand to produce earnings gains. None of this could be sustained for long under the stress of speculatively-priced land.
When he moves on to the challenge of balancing public budgets, Mr. Brooks offers real food for thought and a strong case for making changes to Social Security, Medicare and Medicaid. He supports simplification of the tax code and elimination of exemptions for mortgage interest payments and employer-paid health care premiums. After eliminating most loopholes available to corporations, he argues for lowering the tax rate on business profits. He also urges us to consider both the flat tax and a tax on consumption as alternatives to the current system.
I side with Mr. Brooks in his commitment to free enterprise principles. Unfortunately, his analysis of our society and the diverse interests at play is flawed. So long as wealth, once produced, is claimed by landed interests as a fundamental redistribution our problems will only worsen.
[References are provided in the version archived in the online library of the School of Cooperative Individualism – www.cooperativeindividualism.org]