Monday, October 17, 2011

The Paradox of the Outraged

The Paradox of the Outraged

Mises Daily: Monday, October 17, 2011 by

Time for Outrage!

A wave of social upheaval is shaking the world. In the West, the press has called the protesters "the outraged." The name is taken from the pamphlet Time for Outrage! (Indignez-vous!) by French intellectual Stéphane Hessel. The outrage by the political and economic situation in the Western world is justified. In Europe and the United States, the gap between financial elites and the rest has widened, while politicians have become a sort of modern nobility completely detached from the realities of the ordinary man. Democracies have failed to guarantee fair play among the different social actors, thus endangering their own existence.

The perception that something is fundamentally wrong in Western societies explains why Hessel has sold millions of copies of his brief and provocative pamphlet, triggering social movements in France and Spain. It also explains the emergence of Occupy Wall Street in the United States, a movement that officially declares itself to be inspired by the Spanish acampadas ("camper-protestors"). The galvanization effect of Hessel's pamphlet has reminded us that intellectuals and opinion leaders, as Karl Popper insisted, have to be particularly careful and responsible with the ideas they proliferate. One should never forget Isaiah Berlin's warning that "when ideas are neglected by those who ought to attend to them — that is to say, those who have been trained to think critically about ideas — they sometimes acquire an unchecked momentum and an irresistible power over multitudes of men that may grow too violent to be affected by rational criticism."[1] This is a lesson of the history of Marxism and National Socialism that we cannot forget.

Dangerously, Hessel has failed to recognize that he is endorsing the same attitude that ended up in Nazism and Communism: collectivism. Indeed, both National Socialism and socialism were derived from a rejection of the individualistic philosophy that laid the foundations of Western civilization.

Individualism means, in this context, that each person is considered unique, an end in himself as Kant would say, and must therefore be free to pursue his own goals. Accordingly, he is free insofar as he is not coerced by others to pursue alien ends. Liberty is thus, as John Locke famously put it, "to be free from restraint and violence from others."[2] This idea of freedom as the absence of coercion is the cornerstone of any prosperous and open society. Only where individuals are free to pursue their own ends by making the best possible use of the knowledge they possess can a civilized order of voluntary and peaceful cooperation exist. And only where coercion has been replaced by the voluntary arrangements of individuals can progress flourish. It is not an accident that the greatest achievements in history have been the product of freedom to pursue individual ends: no opera or major technological invention has ever been created under coercion.

The idea that men have to enjoy the freedom necessary to pursue their own ends is exactly what collectivism rejects. For the collectivist mind, individual interest has to be subordinated to the abstraction of the common good. Hessel's call for "a rational economic order in which the individual interest is subordinated to the general interest" perfectly summarizes the collectivist attitude. Once this idea is accepted there is no limit to government intervention. From then on, government can force individuals to follow predetermined courses of action, which are not their own, under the pretext of serving the common good, thereby undermining freedom and progress.

The Fiction of Government

The tragedy of honest left-wing intellectuals who encourage movements such as Occupy Wall Street is that, without realizing it, they are outraged by what is to a large extent the creature of their own thinking. The best example is Hessel himself. He argues that fundamental principles of a free, humanitarian, and democratic society have been replaced by a system in which maximization and uncontrolled financial capitalism prevail. A much better world, he insists, would be one in which individual interest is subordinated to the general interest. This can be best achieved if government plays a larger role in the economy.

One should first ask if there is any reason to believe that government really cares about the common good. Are bureaucrats and politicians not people like everyone else? Was Lord Acton wrong when he said that "power corrupts and absolute power corrupts absolutely"? And if he was right, is it reasonable to think that those who are in power — and therefore already corrupted — would put their own interest aside in order to serve an abstract ideal called the "common good"?

Even Hessel denounces that lobbyists have overtaken government in "the highest spheres." Nevertheless, he seems to believe that if government were to have more control over industries, corruption would not do its harmful work. In other words, for Hessel, if politicians and bureaucrats had more power than they currently have, the system would be less corrupt. History, however, shows that Lord Acton was right: the more power there is in the hands of the rulers the more corrupt the system becomes. The greatest failure of socialism was not that it brought about economic misery to the masses it was supposed to help but that it created a class system more violent and rigid than anything the Western world had ever seen. The central maxim of socialism — namely, equality — was betrayed as soon as the revolutionary leaders consolidated their power over the state. The new elite created a two-class system that rested on systematic coercion: on the one hand there were the party leaders and their friends who lived like kings enjoying all sort of luxuries, many of them imported from the capitalist world; and on the other hand there was everyone else, fighting for survival.

We may still ask what would happen if political leaders were not corruptible. Would Hessel's idea work then? Lets suppose for a minute that James Madison was wrong and that we were indeed governed by angels, that is to say, by incorruptible beings who would use their power only to seek the common good. Lets also suppose that these angels had all the material means necessary to achieve their noble ends. Now the question becomes, is the purity of intentions a guarantee for the quality of the results of someone's actions? Would morally superior and powerful men know better than we do what is best for us? And more importantly, would we be willing to accept honest men or even angels forcing us to do what they think is best?

Here it becomes even more evident that Hessel's argument rests on a falsehood: the idea that the common good or the general interest is something different from the sum of all individual interests, and that government is a separate entity that through coercion can elevate society to a higher degree of moral perfection and happiness. Few ideas in history have proved to be more appealing and at the same time more destructive than this one. Those who, like Hessel, endorse it, ignore the fact that the greatest evils are usually not the result of bad men trying to harm others but of good men trying to help others they do not even know. Henry David Thoreau fully grasped this when he wrote, "If I knew for a certainty that a man was coming to my house with the conscious design of doing me good, I should run for my life."[3] If angels were to govern humans, none of us would be spared from death for the greater good.

The fiction that government can safeguard a common good that transcends the diverse and irreducibly complex world of individual interests necessarily entails the idea that it can also provide for our necessities. This fallacy is the origin of the fatal myth of the welfare state — an idea brought about by French rationalist liberalism. This kind of liberalism, as Friedrich von Hayek noted, saw no limits in the power of human reason to plan social life and the economy, becoming thus the predecessor of collectivist movements such as socialism and fascism.

No one understood the implications of this myth better than Frédéric Bastiat, a French intellectual who is barely known in his own country. Writing shortly after the constitution of 1848 was created, Bastiat argued that unlike the Americans, who did not expect anything but from themselves, the French had transferred the province of social construction on to the abstraction of government. It was the responsibility of the state to elevate society to a higher level of morality, happiness, and material well-being. An example of this false belief, according to Bastiat, was to be found in the French constitution of 1848, which declared, "France has constituted itself a republic for the purpose of raising all the citizens to an ever-increasing degree of morality, enlightenment, and well-being." Bastiat observed that this new government was a "chimerical creation from which the citizens may demand everything." For Bastiat this could only lead to endless crisis and revolutions:

I contend that this deification of Government has been in past times, and will be hereafter, a fertile source of calamities and revolutions. There is the public on one side, Government on the other, considered as two distinct beings; the latter bound to bestow upon the former, and the former having the right to claim from the latter, all imaginable human benefits.[4]

The Causes of the Present Crisis

Bastiat' s words turned out to be prophetic. The myth of the welfare state spread from France and Germany to the rest of the Western world, leading to an explosion of welfare transfers and an equal explosion of the people's expectations with regard to their so-called social rights.

Self-reliance was progressively replaced by a mentality of rights with no duties. As a result, a gigantic disconnect arose between what people are willing to pay in taxes and what they expect in return in the form of government benefits. Because promising welfare is the easiest way to win elections, politicians kept expanding the size of government over the decades. And because the public would not have tolerated an honest increase in taxes to finance the new welfare programs, governments started borrowing the money necessary to finance them. Thus, governments became dangerously in debt. Then the financial crisis came, to a large extent caused by government actions: welfare programs to make true the progressive "homeownership-society" dream in the United States created the structural conditions. Government-sponsored entities like Fannie Mae and Freddie Mac, who bought and guaranteed around 50 percent of the total US mortgage market, offered the financial vehicle to transfer the wealth; and the Federal Reserve provided the easy money necessary to finance it. In addition, the US government was borrowing and spending money at an all-time record in order to finance its warfare/welfare policies.

Stephane Hessel
"For Hessel, if politicians and bureaucrats had more power than they currently have, the system would be less corrupt."

In Europe the situation was not that different. The creation of a single currency, again a government decision that in many cases was not even submitted to popular scrutiny through a referendum, enabled countries like Greece, Portugal, and Spain to borrow money at very low interest. The market rightly assumed that if some of these countries defaulted, Germany and France would rescue them. This explains why private investors considered Greek bonds to be as good as German bonds. Using this unique opportunity, politicians in southern countries started an orgy of credit. Their purpose was to win more elections through the promise of more welfare policies. Meanwhile, the European Central Bank was keeping interest rates artificially low, inflating housing bubbles in Spain and Ireland. For a time everyone was happy: politicians were being reelected, the people were getting new government benefits every year, bankers were making tons of money, and industries were booming. It was all an illusion. When the bubble burst in the United States, it quickly became clear that Europe's economic and fiscal situation was also unsustainable.

Now it's time to pay for the party. Inevitably, this means a dramatic reduction in our standard of living. Because people do not understand that the source of the crisis was government, as Bastiat predicted, they now go on the streets demanding even more of what caused the problem in the first place: government. That is the paradox of the outraged.

Hessel and those who join him show the same ignorance as those who demonstrate against spending cuts when they ask for more welfare programs and more government involvement in the economy. To support his claim, Hessel sustains that it cannot be true that there is not enough money for more government programs because our quality of life is now better than it was fifty years ago. True, there has been much progress brought about by capitalism despite all the problems previously mentioned. But what Hessel does not seem to understand is that it does not matter how rich a country is: if it lives beyond its means it will go bankrupt. That is the exact problem in Europe and the United States. Governments have spent too much money for too long, much more than they could collect in taxes. That is why they have so much debt. There is in fact almost no country in the EU that is respecting the debt limit of the Maastricht treaty, which established a 60 percent–of-GDP limit for public debt and a 3 percent–of-GDP limit for fiscal deficit.

The problem is not that governments do not have enough welfare programs, as Hessel argues, but that they have to many — so many in fact that if they do not start drastically cutting spending even Germany and France will be bankrupted like Greece. The welfare paradigm becomes even more dramatic when the unfunded liabilities are considered, that is, the benefits politicians have promised to pay to their constituencies in order to win elections. In the United States these liabilities are equivalent to seven times GDP, while in the EU they are over four times GDP.[5] There is little doubt that the United States and all European countries will default on their social obligations at some point in the future.

Regarding the "dictatorship" of the financial elites, denounced by Hessel and movements such as Occupy Wall Street, this is again mainly the product of government. We have a banking system that can only work the way it does because it is based on fiat currency and is supported by a central bank — that is to say, a government-created agency of monetary central planning. Central banks provide private banks with liquidity, allowing them to expand the money supply in a coordinated fashion, thereby creating financial and real-estate bubbles. But more importantly, banks take the money given at artificially low interest rates by the central bank and use it to speculate. The dramatic rise in the price of raw materials and agricultural commodities since 2008 is basically the result of the inflation created by central banks. The most perverse consequence of this government-induced inflationary process is that it redistributes wealth from the middle class and the poor to the rich financial elites and governments, for whom inflation works as a hidden tax. John Maynard Keynes, a champion of government intervention, understood this very well. Shortly after the First World War he wrote,

By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.[6]

Those who declare themselves outraged by the unequal distribution of wealth should pay more attention to government-created inflation, for this is by far one of its central causes and the origin of the "money power" they condemn. It is in fact striking that the "outraged" have overlooked the crucial and destructive role central banks play in the world economy. For they not only create money out of thin air (with which financial elites speculate); they also perform the function of the "lender of last resort." This means that whenever a bank has been irresponsibly or poorly managed, instead of allowing its bankruptcy, like any other enterprise in the real economy, the central bank rescues the irresponsible bank with newly printed money. In addition to this perverse incentive, banks work under a fractional-reserve system, which allows them to operate with very low capital reserves, so that their owners have little to lose if the bank goes broke. As a result, bank managers have a powerful incentive to engage in highly speculative activities that are extremely profitable for themselves and stockholders but equally damaging for the ordinary people who end up paying the bill through bailouts and inflation.

None of this can be blamed on the free market. In fact, the free market stands for the complete opposite: open competition among banks; no central monetary planning agency; bankruptcy of those enterprises that have been irresponsibly and poorly managed; hard currency, which ensures the purchasing power of the people's money; and no corrupt collusion between government and economic elites.

Another source of unequal income distribution and poverty is government taxation and regulation. High taxes and excessive regulation hinder productivity and destroy incentives for job creation as well as competition. While rich people can escape the immediate effects of these taxes by taking their money and investing it abroad, the middle class and the poor have to suffer the consequences of fewer jobs, less income, and a lower quality of life. Economic liberty, which also includes the rule of law and solid property rights among others, is thus a necessary condition for improving the very quality of life of the masses that Hessel longs for. It is no coincidence that poor people in the ten countries with more economic liberty have an average income ten times higher than the income of poor people in the ten countries with the lowest degree of economic liberty.

Inequality and Outrage

It has been argued that inflation and the lack of economic liberty are central causes of poverty and inequality. Hessel does not acknowledge this fact, declaring himself outraged by inequality in general. He says it is outrageous that in poor countries people live on less than two dollars a day. Two things have to be said in response to such claims. In the first place, there is a reason to be outraged only when inequality is the result of arbitrary confiscation, fraud of any sort, or bad economic policy. But when inequality is the result of freedom, there is no reason to be outraged at all, especially when everyone has enough. Only envious people can be outraged by the wealth some have legitimately gained. What the people who claim to seek "social justice" fail to understand is that those who have become rich by honest means have served society more than any one else.

Bill Gates for instance, for a long time the richest man in the world, has improved the lives of all of us with his inventions. We have freely decided to buy Microsoft products because they are useful; thus everyone has benefited. In the same manner, when we go to the baker next door and buy some bread, both parties to the transaction are benefiting: the baker because he has money to buy other goods and services he needs for himself and his family, and we who now have delicious bread to eat. It does not make any difference if this baker becomes a millionaire by selling his bread. Actually, it would mean that he is good at his job, so he expands his business in order to satisfy the demand. Why should we be outraged if he becomes rich in the process? We should celebrate the fact that he was prosperous. His prosperity means more jobs and more bread for more people. From every point of view, the millionaire baker is performing a social function. In the same fashion, Bill Gates's inventions increased productivity, bringing millions of people over the poverty line around the world.

Here we come to the second point Hessel makes. It is true that millions of people still live in poverty. What should also be said is that there is no period in history where fewer people — as a percentage of the total population — have lived under such conditions than today. In China alone, more than 300 million people have surpassed the poverty line in the last 30 years. India, Chile, Vietnam, Brazil, Russia, Peru and many other countries have also experienced dramatic reductions of poverty in the last decades. This is due to the free-market policies these countries have implemented, the same policies that explain the economic success of Japan, Europe, and the United States. In absolute terms, people in developing countries are not worse off but better off than before.

Finally, it has to be pointed out that there is nothing wrong with inequality per se. It is much better to have an unequal society where everyone is wealthy than an equal society where everyone is poor. Equality is not and end in itself as Hessel seems to suggest; if it were, we should destroy all our wealth so we would become all equally poor. Some poor African countries have a more equal income distribution than European countries. Does that mean their situation is preferable? The question is thus not how to prevent some people from having much more than others, but how to create the conditions to make everyone wealthier. This is the difference between a society based on true solidarity and freedom and one based on coercion and envy.

Informed Outrage

Hessel is right when he says that outrage is necessary for action and resistance. More important however is to understand the real reasons on which the outrage should be grounded. If people get outraged for the wrong reasons, they will inevitably demand the wrong solutions, making the problem worse. It is especially irresponsible, in these times of social upheaval, to call for outrage and resistance without first a clear examination of what is wrong and how the problem should be approached. This is the role of intellectuals and opinion leaders. If a false message sets in and people believe it, only ruin will come out of outrage. Hessel has done his best, yet the ideology he is promoting, rooted in old collectivist attitudes, can only lead to more serious trouble. He is right to denounce a situation that is indeed outrageous and unsustainable, but he is wrong about everything else.

What we need then is informed outrage. In order to demand the right solutions, people first have to understand how it is we have come so far. They have to be aware that giving more power to governments will only make things worse. The possibility of a better future lies not in the hands of bureaucrats and politicians but on self-reliance, creativity, and individual freedom. It requires courage to be responsible for oneself without expecting endless benefits from government. This is a much more dignified and fruitful path than the current one, and it is also the viable alternative to the present outrageous situation.


[1] Isaiah Berlin, "Two Concepts of Liberty," in Isaiah Berlin, Four Essays on Liberty (Oxford: Oxford University Press, 1969), p. 1.Download PDF

[2] John Locke, Second Treatise of Government (Indianapolis: Hackett Publishing Company, 1980), p. m46.

[3] Henry David Thoreau, Walden and Civil Disobidience (New York: Barnes & Noble, 2003), p. 61.

[4] Frédéric Bastiat, "Government," in The Bastiat Collection, Vol. II (Auburne, Alabama: Ludwig von Mises Institute, 2007), pp. 101–102.

[5] See Jagadeesh Gokhale, Measuring the Unfunded Obligations of European Countries, National Center for Policy Analisis, Policiy Report No. 319, January 2009.

[6] John Maynard Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace, and Howe: 1920), p. 92.


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