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The most telling evidence against Stigler's assessment, however, is the performance of stock markets, because this tells us how capitalists have fared over the last two decades. The magnitude of the calamity that has taken place in equity markets since the mid-1960s is one of the best kept economic secrets of all time. The real (after-inflation) value of the Dow Jones stocks fell by 62 percent over the 18-year period from December 1964 to the end of 1982. The real rate of return on all common stocks on the NYSE in the 40-year period from 1926 to 1965 was about 8.6 percent per year. If stocks included in the Dow Jones Index had risen in price in the 1965-1982 period to provide that same 8.6 percent inflation-adjusted rate of return, the index would have had to be about 5,600 on January 1, 1983, instead of 1,047 as it actually was.
Incidentally, these results are not very sensitive to the choice of time-period nor to the selection of stocks included in the sample, so long as randomness and sample size meet statistical standards. The market was not particularly high on December 31, 1964, nor particularly low on December 31, 1981. Moreover, there were no catastrophes, wars, or other cataclysms to account for such a dismal performance. Nor is the experience of the stock market in the United States a special case. Equities have performed badly in most of the Western world over this same period.
When the dismal performance of shares is considered along with burgeoning government expenditures, deceleration of economic growth, creeping socialization of private industry, the communalization of land and other natural resources, and the general proliferation of restrictions on freedom of exchange and freedom of contract-and when we recognize the extent to which these phenomena pervade the world-it is hard to understand how anyone can seriously argue that capitalism is at high noon.
Stigler is interested in where American capitalism currently stands, of course, not for its own sake but for the implications his assessment has for the future of American capitalism. As he puts it, "The fundamental question, remains, Where is the American economy headed?" His answer is characteristically direct: "There is no sound evidence that high noon is rapidly passing for semiprivate enterprise." Thus Stigler concludes not only that American capitalism is flourishing, but that we can expect it to continue to bloom generously into the foreseeable future. If we place any confidence in the stability of trends, however, the measures of the health of capitalism discussed above offer no support for such a rosy forecast. Quite the contrary.
The growth of government and the concomitant decline in the importance of markets has been going on for many years. While the rate of growth of government ownership and regulation fluctuates through time, the outcome is never in doubt.
A realistic appraisal of current domestic trends, coupled with the overwhelming historical and present dominance of authoritarian governments around the world, suggests that the long-run equilibrium level of government is much more like what exists in the USSR, China, Yugoslavia, etc., than it is like what we have even now in the United States. Freedom on the scale we have experienced it here appears to be a disequilibrium phenomenon, and the erosion of freedom that is gradually undermining capitalism reflects the drift towards long-run equilibrium. In the end, political democracy-which, incidentally, is not the same as freedom-is also likely to be a casualty of the process.
I do not enjoy delivering this doleful message. While the practice of chopping off the heads of messengers bearing bad news has been abandoned, experience has taught me that society has not yet moved to the other extreme: it does not receive such messengers with open arms, either. At best, they are likely to be dismissed as prophets of gloom and doom-as some of those prognosticators who have suddenly made the momentous discovery that scarcity exists, and then stir up crises ad nausea with dire perspectives on various resource-utilization issues such as energy, food, land, air, and water.
Despite my concerns about the fate of the messenger, I am delivering the message because I believe it is the most important social problem of our day; in a real sense, it is the only game in town. Nothing is more important to human welfare than what happens to capitalism, and not simply because of the material benefits which capitalism bestows. What is at stake are institutions we value much more dearly, namely, human freedom and political democracy.
Before we can hope to arrest the decline of capitalism, we have to understand why the decline is taking place. The explanation lies in the realm of political science. Capitalism is being eroded by government, which in the Western world means political democracy. Understanding what is happening in the Western world means devising a theory of democratic political processes which explains why we get the kind of government we get.
Those of us fortunate enough to have been born in the United States have learned from earliest childhood to revere political democracy. The emotion inspired by the story of our founding is enough to induce most of us to place great value on democracy as a social institution. The preeminence of the United States, until very recently, in permitting economic progress for its inhabitants gave us little reason to question either the viability or the efficacy of our political institutions.
But the truth is that most of us have been lulled into a totally uncritical attitude about our form of political democracy. One evidence of this is the corruption of the term democracy by some of its ostensible advocates who use it as a label for whatever cause they happen to be promoting. In the extreme, this has included labeling the most undemocratic governments one can imagine as "democratic republics." Such advocates realize that if they simply append the word democratic to their favorite crusade, many people will, like Pavlov's dog, react favorably.
Let's look closely at one aspect of democracy-legislatures, and particularly Congress. I would suggest that the representative nature of legislative bodies is one major source of the growth of government and the concomitant decline in capitalism.
The distinguishing feature of government, be it democratic or authoritarian, is the power to decide what the law is. The power to make laws is nothing more than the power to decide the purposes for which the police powers will be exercised. Governments provide a variety of services-defense, highways, education, etc. It is not the production of such services, however, that distinguishes government from other organizations. The one function which is uniquely reserved to government is lawmaking.
Statutes are enacted by duly elected legislative assemblies ranging from Congress to town councils; common law evolves out of judicial processes; administrative law is laid down by regulatory commissions and various executive offices. Our focus is on the first of these, statutory law and the legislative assemblies which create that law.
Once any organization is assigned the right to determine for whom the police powers will be available, the door is opened to supplicants who want to have those powers used on their behalf. Whenever anyone, or any group such as a legislature, is granted the right to make law, the potential for selling the use of the police powers is an automatic consequence. Even if the lawmakers were somehow forbidden to invoke the police powers on their own behalf, they would naturally be inundated by offers from others eager to have the police powers invoked on their behalf.