Depressing as it is, politics usually trumps economics. There's nothing new in that, but free-market advocates ought to learn some lessons and adjust their strategy accordingly.
The politicians who run the government—and think they run the country—are afraid to appear as though they are doing nothing. We saw this when the recession hit. They were particularly worried about seeming to put party above the public good.
As the Wall Street Journal put it back then, "The speed with which Washington hashed out the [stimulus] plan was driven mostly by the drumbeat of bad economic news. Behind the scenes, it was greased by other powerful motivations. Congressional Democrats needed to demonstrate they were capable of results after a year of gridlock. Republican lawmakers, up for re-election, wanted to show sensitivity to voters' economic woes. And the White House didn't want 'recession' added to its legacy."
Political interest was universally aligned against good economic sense. The politicians could get away with this because most of the public is economically illiterate. The "seen" overshadows the "unseen." Such is how we get economic policy. It's happening now.
As free-market economists point out, government cannot affirmatively stimulate what we misleadingly call "the economy." (It's not a machine; it's people using their property to engage in transactions.) All government can do is move money around. To make some people able to spend more it must make other people spend less. Politicians imply that they know who ought to have more and who ought to have less, but beside the obvious injustice of the matter, they simply can't know.
Economists Fall Short
I said the government can't affirmatively stimulate the economy, but it can encourage productive activity. How? By not discouraging it. Here is where some free-market economists fall short in shaping the public debate. Too much of what they say is along these lines: "The economy is fundamentally healthy. Recessions are a necessary correction of errors. So just let the economy work through its current problems. The government need do nothing."
That message should make advocates of individual liberty squirm because it implies that the market today is essentially as free as it needs to be. For example, a few years ago the news media proclaimed that gasoline prices were at historic highs. In fact, when adjusted for inflation they were not. But the economists pointing this out sounded a little too defensive, as though they were the defending the free market's honor against its critics. What should we say if next week gasoline does hit a historic high and the anti-market folks blame the free market? I know what I'd say: What free market? (With all the subsidies and regulations on the books, can there possibly be a free market?)
The same defensiveness can be seen whenever a left-statist charges that the gap between rich and nonrich has widened or income mobility has ceased. Whatever the truth of these charges, libertarians shouldn't react as though the free market's honor is being assaulted. The critics may think it's the free market they're attacking. But—I say again— we have no free market.
Similarly, if economic activity slows down, it can't be the free market's fault.
What we have—and have had for a long time—is corporatism, an interventionist system shot through with government-granted privileges mostly for the well-connected–who tend to be rich businesspeople. This system is maintained in a variety of ways: through taxes, subsidies, cartelizing regulations, intellectual "property" protections, trade restrictions, government-bank collusion, the military-industrial complex, land close-offs, zoning, building codes, restrictions on workers, and more. As a result, people can get rich at the expense of the government's victims. Even some who have prospered apparently by market means have actually done so through government intervention, such as transportation subsidies and eminent domain. Wealth can be transferred in many ways besides welfare and Medicaid, some of them quite subtle. Most transfers are upward.
Free-market economists know this, but they often seem to forget it, such as when they indiscriminately defend firms (such as oil and pharmaceutical companies) in today's corporatist economy. These economists convey the message that since in a free market people get rich and companies get big only by serving consumers, anyone who is rich today and any company that is big today must have gotten that way by serving consumers. The flaw in the argument should be obvious.
Given the corporatist nature of the economy, it is a mistake—as well as strategically foolish—to say the government should do nothing when a recession might be coming on or when recovery is disappointingly sluggish. There's much it should do—or rather undo. Freedom's advocates must spell this out in detail, revealing how existing government privilege harms the mass of people who have no political connections. In contrast, when an economist who proclaims his support for the free market says the current economy will fix itself, he brands himself a defender of the statist quo and turns his back on the State's victims.
The freedom philosophy is a radical idea that looks ahead, rather than to some mythical golden era or Panglossian present. Every time we pass up an opportunity to make this point, we alienate potential allies who are concerned about those who are having a tough time of things. Yes, living standards have improved for decades and being poor in the United States is not what it used to be—thank goodness. That only shows that even a marketplace hampered by government privilege can produce astounding wealth. But to be satisfied with that is to be willing to trade freedom and justice for a mess of pottage.
What we lack is a liberal Utopia, a programme which seems neither a mere defence of things as they are nor a diluted kind of socialism, but a truly liberal radicalism which does not spare the susceptibilities of the mighty (including the trade unions), which is not too severely practical and which does not confine itself to what appears today as politically possible….Those who have concerned themselves exclusively with what seemed practicable in the existing state of opinion have constantly found that even this has rapidly become politically impossible as the result of changes in a public opinion which they have done nothing to guide. Unless we can make the philosophic foundations of a free society once more a living intellectual issue, and its implementation a task which challenges the ingenuity and imagination of our liveliest minds, the prospects of freedom are indeed dark. But if we can regain that belief in power of ideas which was the mark of liberalism at its best, the battle is not lost. [Emphasis added.]
Hayek wrote that over 60 years ago. We haven't progressed as much as we like to think.