by Gary North
by Gary North
In my previous report, I wrote of the United States as a dowager nation. But it is also a honeymooner nation politically. Here is why.
When an American over age 60 hears the word "honeymooners," he thinks of Jackie Gleason, fist in front of Audrey Meadows' face: "One of these days, Alice, one of these days . . . to the moon!" The honeymoon had ended long before. The show lasted for a mere 39 broadcasts, but we think of it as the family comedy show second only to "I Love Lucy." There is a reason for this. The honeymoon always ends, but marriages survive. Anyway, they did in 1955.
Honeymoons are great things. They are rare events, but most people, especially newlyweds, would hate to give them up.
The honeymoon phenomenon is the best known of a more fundamental psychological phenomenon. If we are to keep from making mistakes, we need to recognize its existence, and then learn to identify it when politicians promise us a honeymoon.
THE HEDONIC RATCHET
The broader phenomenon in the field of economics is called the hedonic ratchet. Let me describe how it works.
Someone inherits a great deal of money. He is now rich. For years, he may have dreamed about how his life would be better if he were rich. Then, without warning, he finds that he is rich. We all know the story from this point on: money cannot buy happiness. But it buys unhappiness in a unique way: by psychological adjustment. Unexpected wealth is a lot like a honeymoon.
There used to be a popular television program called "The Millionaire." Each week, a billionaire would write a check for $1 million to be handed to a designated person by his assistant, Michael Anthony. The show would focus on how this money would change the person's life. It was popular because people dream of getting $1 million ($8 million in 1958), tax free, which the television show always qualified the money would be. As viewers watched the program, they learned that the money would produce a whole series of new problems in the person's life. This comforted them for the fact that no one had given them $1 million. Because the show was geared to the late 1950s, it always had a happy ending. Anyway, that is the way I remember it. But in the real world, enormous riches inherited overnight produce stories of unhappy endings. Those are the stories that make it into the media.
Why is it that the new wealth does not fundamentally change the degree of happiness experienced by the recipient? One reason is that with greater wealth comes greater responsibility. This is inescapable. Wealth has a social function. If you own something, you must make decisions about how to use it. Consumers are always bidding for either ownership or the use of your assets. Ownership therefore has a price. If you do not respond to the offer, you are paying this price. You are paying the price in the form of forfeited opportunities. Whatever you do with the wealth, you could be doing something else with it. You cannot escape the responsibility of not doing something else with whatever you own.
But the honeymoon effect of the new wealth is more than just the added responsibility, although added responsibility is at the heart of the post-honeymoon reality. It appears that the human psyche adjusts to new conditions, whether good or bad. If we tend to view the world as a glass that is half full, it doesn't matter how much goodness gets poured into the glass, we will still view it as half full. Psychologically speaking, the glass grows with every drop of goodness that gets poured into it. Similarly, if we view the world as a glass that is half empty, no matter how much gets siphoned out of the glass, we still view it as half empty. We adjust downward.
Let me offer another example. Anyone with two good legs hates to consider what his life would be like if he lost the use of both legs. He does not like to think about it. He does not like to think about all the adjustments that he would have to make. He imagines that his life would be miserable if he did not have the use of both legs. But, from time to time, people lose the use of their legs. What we find is that most of them adjust psychologically after a year or two. In the early stages of their affliction, they are not sure how they will learn to cope with their new burden. But, as they come to grips with their new condition, they adjust. They find ways to compensate for their loss. While they would like to get their legs back, they don't regard the loss of their legs as the end of their lives. They don't think of themselves as complete losers. They think of themselves as overcomers. While there are some people who do not make the adjustment, most people do.
This is one of the great advantages of the human psyche. We do adjust to bad conditions, and we learn to remain productive under these new conditions. We may even become more productive, because we are forced to work more intensely on improving our job skills, our relationships, and everything else that we thought we would have lost with the loss of these legs. If this were not true, then major losses would be disastrous for humanity. What we find, in the familiar phrase, is that man is a foul-weather creature. He seems to do better under adversity than he does with life on a bed of roses.
In the field of economics, we labor under a major perceptual disadvantage. First, economic change comes slowly. It comes at the margin. A fast-growing economy grows at 5% per year, and an economy does this only if it is recovering from near disaster levels. Much more common is 3% a year or 2% a year. When anything changes at 2% a year, we do not perceive it. The change comes, day by day and month by month. It comes at such a slow rate that we do not recognize that our lives are steadily getting better. Only when we look back at what life was 20 years ago or even 40 years ago do we understand the enormous power of 2% per year growth compounded. But our memories fade. We tend to forget how much worse off we were back in the good old days of our youth. We remember the good things, but we forget the bad things. We remember the good things, but we do not remember the bad things that we did not perceive at the time, precisely because we had no experience with something that is much better.
This illusion of stagnation — the same old rut — leads people to make a false conclusion. They look at the benefits that the free market economy has given them, and these benefits do not appear to be coming fast enough. This allows critics of the free market to come before the general public and tell them that things are actually getting worse. They tell them that nothing is ever going to change for the better unless they vote for a new form of economic ownership. They tell the public that the economy needs more regulation, or more low-interest loans, or more money to pay off old debts. They tell the public that the environment is getting much worse. The government needs to intervene in order to save the environment.
So, the constant improvement in our lives that comes as a result of free-market voluntarism is dismissed by the critics. In its place, voters are told to pressure the government to make things better.
This phenomenon combines with another aspect of the hedonic ratchet. We get used to a particular level of government interference in our lives. We adjust to it. It is really like losing the use of a limb. We find ways to compensate for what we have lost. We do not recognize that we are steadily losing our freedoms. The public gets used to the loss of a particular freedom, and then is persuaded to accept the loss of another, all in the name of greater security, or greater economic growth, or whatever the favored slogan is at the moment.
If we were to get into a time machine and move forward a hundred years, we would probably find that — in the absence of nuclear war or biological warfare — the world is much more abundant in terms of economics, yet more limited in terms of the loss of freedom. We would find ourselves initially overwhelmed by the abundance, but we also would find ourselves annoyed or even appalled by the loss of freedom. Then, we would adjust to both. We would assume that the greater abundance is normal, but we would also assume that the loss of freedom was a necessary price we paid for the greater abundance.
This is why the economics of government intervention never loses its appeal. No matter how much growth is generated by the free market economy, there are always critics of the free market who insist that we need new government regulations in order to sustain economic growth. We are constantly being asked to surrender our political liberty in the name of some great breakthrough in economic development.
Problem: there are no great breakthroughs in economy-wide economic development. There are constant improvements generated by free men who raise capital in free markets. Invention by invention, improvement by improvement, our lives get better at the margin. But because this is a slow process, and because of the hedonic ratchet, we do not perceive that this is a happening. We therefore do not attribute are improving economic conditions to the free-market social order.
We are told by teachers in tax-funded schools, and we read in textbooks whose market is tax-funded schools, that Franklin Roosevelt saved capitalism from itself. We are told that the free-market economy is self-destructive. We are told that ever-increasing numbers of government regulations are mandatory to keep the free market from self-destructing.
We are never asked to read a single page in the Federal Register. This publication is published every weekday, and it usually is 200 pages long. Each page has three columns of fine print. These are new regulations imposed by the Federal government on the American economy. We adjust. We surrender our liberties day by day without a whimper or a protest.
While the free market delivers the goods, the critics of the free market deliver the propaganda. While we get richer as a result of the voluntarism of the free market, we are told we get richer because of the active government intervention into the voluntarism of the free market. We are told that government coercion in the name of the People is what makes our lives tolerable.
We don't believe this when we are the direct victims of this coercion, but this happens rarely except at the margin. It happens invisibly. We do not perceive the extent to which we are the victims. This is a result of the hedonic ratchet. We get used to our level of regulation, and we do not perceive the steady effects of increased regulation in reducing the rate of economic growth. We also do not perceive the rate of economic growth. The rate of growth is simply a statistical artifact reported at the end of the quarter or the end of the year.
This makes it very difficult for defenders of the free market to get the message to the vast majority of voters. The argument in favor of the market is sophisticated. It involves long chains of reasoning. Only a handful of economists ever come up with a truly brilliant image that is understood by the public, remembered by the public, and advances the public's understanding of the benefits of the free market social order. The greatest master of these images was a French economist and politician named Frédéric Bastiat. He died in 1850. No one has come close since then.
THE BATTLE FOR LIBERTY
The battle to preserve our liberty is a long one. The best way to win the battle is to shrink the state. This de-funds the propagandists who control most universities and the vast majority of pre-university education. We have not achieved this goal yet. We have not come close to achieving this goal.
Yet there are breakthroughs. There was surely a breakthrough in the Soviet Union in 1991. That breakthrough came as a result of national bankruptcy. Overnight, the long build-up of bureaucracy finally led to the collapse of the economy. The hedonic ratchet had worked to expand the state, and finally the state achieved its inevitable result: the destruction of productivity. This is not its official goal, of course, but this is the result. Ludwig von Mises taught that the effect of every government intervention into the economy is to produce the opposite of the official goal which justified the intervention. This built up in the Soviet Union from 1917 to 1991. It finally broke the Soviet economy.
This is the great defect of the ratchet-up of political coercion. It is like a drug which addicts the user, and then ultimately kills him. Heroin addicts say the initial rush is never matched again. They try, but fail. Then they become addicted. This is what the politics of government intervention does to its victims. The heroin effect is the honeymoon effect is the hedonic ratchet effect. So is the loss of liberty.
Let me give you another example. Special-interest groups pay for the following public opinion poll: "Are race relations getting better today in the United States?" I think these polls are conducted annually. The media always report them dutifully. The result is always the same: whites think that race relations have improved, and blacks think that race relations have not improved.
The pollsters never seem to ask the opinions of illegal immigrants. First, it is hard to track them down. Second, they speak Spanish. Third, they don't think talking to Anglos who write down their answers on a piece of paper is a good idea. But there is no need to poll them. Illegal immigrants could solve their problem by returning to their countries of origin. If things were not better here, they could go back where they came from. The fact that they do not go back where they came from indicates that their level of satisfaction has improved in the United States, and this improvement is permanent.
I live in Mississippi. Five decades ago, race relations were very good from the point of view of the whites. They were not good from the point of view of the blacks. Today, the Ku Klux Klan is defunct. Nobody burns crosses on the lawns of blacks. There are mixed neighborhoods throughout the state. When you drive into most of these neighborhoods, you cannot tell who owns the house from the appearance of the lawns. In my northern Mississippi town, this is assured because there is a lawn policeman. The lawn policeman drives up and down the streets and looks at the condition of the yards. Anyone whose yard offends him is given a notice. The notice tells him that he must cut his lawn. If he does not cut it within three days, the city comes in and cuts it, and sends them a bill for $150. This is a great incentive to cut your lawn. Even without the lawn police, the neighborhoods look pretty much the same. Whites and blacks live next door to each other in peace. Since in modern American life, nobody knows the name of his neighbor two doors down, nobody cares one way or the other.
This would be perceived as an improvement of race relations by people who have moved into Mississippi since 1970. It is not perceived as an improvement by rednecks who lived here as young adults in 1958. Blacks who lived here as young adults in 1958 do regard race relations as improved, and they may even tell their grandchildren about the bad old days. But stories about the bad old days among blacks or whites or Asians are regarded as an annoyance by the teenagers being told the stories. Every society tells the younger generation that things are a lot worse than they used to be in terms of good manners of young people. Good mannered young people listen politely, and ignore it.
All this comes as a result of the hedonic ratchet. We get used to the good, and we get used to the bad. We don't recognize the constant increase in the good, and we don't recognize the constant increase of the bed. We adjust.
The crisis comes, as it came to the Soviet Union in 1991, when the compound growth of the bad finally overcomes the compound growth, if any, of the good. Then there is a breakdown. This is painful at the time, but the result is liberation. Economic growth in the Soviet Union since 1991 has been phenomenal. The Soviet Union went bankrupt in 1991 because it owed less than $100 billion to the West. Today, the central bank of Russia has over $500 billion in Western currencies, and this is growing constantly because Russia is sitting on top of enormous quantities of natural gas and oil. It is fat city in Russia today. But, if you were to do a survey of the Russian man in the street, and ask him if things are better this year than they were last year, he would probably tell you that things are worse. After all, he is a Russian. Things are always worse in Russia. This is been true for as long as there has been public opinion in Russia. If we had winters like Russia has, things would be bad for us, too.
This is why we need organizations like the Ludwig von Mises Institute. The Mises Institute constantly publishes materials showing the benefits of economic freedom and the dangers of the loss of political freedom. It makes these materials available free of charge to the general public you can download these materials, print them out, and read them. They are changing people's minds. A similar organization is the Liberty Fund. It also publishes lots of online books that defend the concept of economic liberty and political freedom.
There is no question that in this regard, the World Wide Web has created a revolution. It is much easier to get across to people the idea of liberty than it was in 1995. Furthermore, 1995 was vastly superior to 1965. The number publishing houses had risen. The number of books and materials defending the free market order was vastly larger than it was in 1965, and in 1965 it was much better than it was in 1935. There has been enormous progress in the development of literature defending freedom. Nevertheless, the Federal government just keeps getting bigger. We keep losing our liberties. What will be the result?
Unless we see a breakdown of the Federal government due to its own monetary policies and tax policies, my grandchildren will live in a world of reduced political liberty. The best thing I can hope for regarding their futures is that the free market will have provided far more ways around the bureaucrats that it has today. It has done this over the past 225 years, so I think the process will continue. The bureaucrats will pass their regulations, and innovative people will find ways of evading the regulations. We will become a nation of lawbreakers, but rich lawbreakers. This is what we've become over the past two centuries, and I don't think it is going to change.
In terms of political liberty, the United States Constitution was a major setback compared to the Articles of Confederation. Yet we are all much richer than Americans were in 1788. We have ways of circumventing the bureaucrats that would not have occurred to the men who gathered in Philadelphia in 1787 to establish a new government.
The only reason they were able to do this in 1787 is because they had control of the media. They locked out the media for three months and swore every member of the convention to secrecy. No word leaked out of what was going on inside the room where the debates are being conducted. The Framers moved to the room to the second floor to make certain that nobody could listen to the debates by sticking his ear up against the window on the first floor. In other words, with today's communication system, there is no way in the world that the Constitutional convention could never been pulled off. So, there was a great centralization of political power.
That centralization has continued unabated since 1788. It escalated dramatically in 1861, and it escalated again in 1914 and 1942. We do not perceive this, because the textbook writers are paid to propagandize for the loss of political liberty. They blame the increased economic growth on the increase of political centralization.
We are richer today that anyone was in 1787. That is because of the effects of the free market. We have far less liberty today than we had in 1787, but we have more ways of getting around the restrictions.
I have good news and bad news. The good news is that we are getting richer, and a recession, while painful, is not going to stop the advance of economic growth. The bad news is that the Federal government will continue to spend more, interfere in our lives more, and take away more of our privacy.
Both phenomena have gone on since 1787, and it would be naïve to believe that either of them is going to stop in the near future. But we can always hope that the second process will stop, and even be reversed. The trouble is, the most likely scenario for producing such a reversal is the complete collapse of the international economy and the bankruptcy of the nation-state.
The good news is you are going to get richer. The bad news is this won't make you happier. Economists who have studied people's responses to increases in wealth well find that very poor people do experience a permanent increase of satisfaction when they gain a new stream of income that is permanent. Their lives do become much better, and this remains a permanent aspect of their perception. But any increase in income beyond what is probably regarded as a lower middle class level of income does not permanently change the level of satisfaction that the individual says he has achieved.
My recommended strategy is to improve your personal economic circumstances, and to get out of the way of the Federal government whenever you can. It's not that this will make you happier. It is that you will be more productive.
July 23, 2008
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