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Was the New Deal Really a War on Free Enterprise? It's Complicated

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Cornell University historian Lawrence Glickman has mined an impressive volume of documents and diversity of sources in order to understand the meaning of a potent political idea in his recent book Free Enterprise: An American History. He details the overriding political dichotomy of the 20th century, which pitted advocates of bigger government opposite those of limited government and free markets—a conflict that both transcended, and ultimately played an important role in redefining, party affiliation in the U.S.

Glickman gives us a detailed history of how conservatives and libertarians used the concept of free enterprise to oppose expansion of government power, but ultimately leaves readers wondering why they did so with such frequency and passion. He argues that “free enterprise” owes its modern meaning to the large but loose coalition of Americans who opposed the ideological shift in governance represented by the New Deal. But by insisting that the 1930s-era definitions of free enterprise had few meaningful historical precedents in American political thought, he suggests a weirdly ex nihilo origin story.

We learn that there were 19th century political writers, in particular abolitionists, who used various formulations of the phrase “free enterprise” with an emphasis on the idea that workers should be free to labor for their own benefit. But Glickman tells us that this early use of the term was discontinuous with the pro-business meaning it had acquired by the 1920s—one which was cemented in place after the Republican Party lined up firmly in opposition to Franklin Roosevelt’s New Deal agenda.

He draws on a great deal of textual evidence for his main thesis that “free enterprise” was a reactionary anti-government construct of the early 20th century that, contra the emphatic insistence of its promoters, was not part of a consistent philosophical tradition stretching back to the nation’s founding. But if that were true, then it begs the question of why half the political spectrum of the United States, for several decades, made it their shorthand and touchstone for what America should represent.

In short, Glickman attempts to sever 20th century free enterprise advocacy not just from centuries of legal and political tradition, but from the more immediate past of 19th century history as well. The central economic planning promoted by New Dealers couldn’t possibly be a violation of the American political tradition, he suggests, because Nineteenth century advocates generally saw the promotion of free enterprise as a state project.

But government efforts to promote business activity during the 19th century generally included constitutionally sanctioned and relatively uncontroversial activities like adjudicating patent and copyright disputes, producing a stable currency, punishing piracy, building roads and post offices, and protecting merchants from internal trade barriers erected by individual state governments.

In truth, there is a long tradition of suspicion of big government in American life, including suspicion of the government intrusively controlling the economic activities of its citizens. Many of the New Deal critics who charged the Roosevelt administration with assaulting free enterprise wrote eloquently about the evolution of the Anglo-American tradition and how the progress of liberty can be seen not just in explicitly political terms, but in the ability of a citizen, or group of citizens, to make their own living and fortunes without government interference.

In the English tradition—of which many of those critics saw themselves as inheritors—economic freedom started as a series of concessions forcibly extracted or explicitly purchased from the Crown—including granting city charters, recognizing trade guilds, authorizing market fairs, and issuing import licenses. These privileges, once granted, were jealously guarded and needed frequent defending from rulers who would have preferred not to be bound by the edicts or contracts of their predecessors.

The importance of these liberties was entrenched in English law so early that, by the time that King John affixed his seal to the Magna Carta in 1215, it was considered to be restating and guaranteeing, among other things, the “old Liberties and Customs” of the City of London and other towns and boroughs—liberties that included the right to conduct their own commerce and not be subject to undue taxation.

Because independent political movements are difficult to organize when you have no money, the ability of people to make their own living and not have their earnings punitively seized by agents of the state has long been considered an essential part of political liberty. The Revolutionary War was sparked in large part by King George III laying excessive taxes and blockading ports in the colonies—that is, interfering with their commerce. As the Declaration of Independence complained, He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance.

The threat to the rights and freedoms of colonial-era Americans was both political and economic; assaults on their economic freedom diminished their ability to exercise their political rights. This is why the founders insisted that the Constitution ban quasi-judicial legislative practices like Bills of Attainder (which often included forfeiture of property) and directed that the compensation of federal judges “shall not be diminished during their Continuance in Office.”

Both the political rights of private citizens and the independence of judicial officers—who could decide when other government officials were exceeding their authority—were guarded by protecting both their accumulated wealth and annual income against threats and retaliation by those with political authority. The Bill of Rights also protects our rights to property, in part, so that the government isn’t able to intimidate and abuse us for unpopular political opinions by seizing our papers (Amendment IV) or assessing unreasonable bail or fines (Amendment VIII).

Thus, limitations on the state from interfering with one’s financial affairs were widely viewed, both in colonial times and afterward, as essential components of political freedom. Consequently, the evolution of those limitations from privileges to rights represented one of the most cherished achievements of centuries of political struggle. But you’d never know it from Prof. Glickman’s account, which treats opposition to increasing government control over private economic activity as something a handful of greedy (and probably racist) factory owners dreamed up for their own purposes just as the era of silent film was ending.

Government policies regulating economic activity in the New Deal era and afterward were categorically different both in type and scope than those that went before; earlier government actions generally attempted to encourage commercial activity rather restrain and punish it. Using tax money to finance a canal, which businessmen would later have equal access to (and pay to use) is dramatically different from government agencies mandating prices, work hours, and production levels for every workplace in America.

I doubt supporters of, say, the Homestead Act of 1862—which provided 160 acres of land to any adult citizen who agreed to cultivate and improve it—would have considered it akin to the Agricultural Adjustment Administration, which the Supreme Court ruled unconstitutional in 1936 (though much of it snuck back in 1938 via new legislation).

There are differing opinions today on the wisdom of the much-vaunted “internal improvements” that were financed by taxes in the 1800s, but we can at least say that broadening access to commercial activity via infrastructure finance was very different from later systems of regulation, which both proscribed a long list of forbidden business activities and prescribed many other required ones.

That said, the 19th century was no laissez-faire Eden, and Glickman is right to call out the rose-colored nostalgia peddled by many 20th century free marketers. Even when denying that they wanted a “return” to a laissez-faire economy, far too many free enterprise advocates have portrayed pre-New Deal America as a kind of unregulated paradise, while ignoring both the high tariffs and other trade barriers that were common at the time and the legal injustices that limited the freedom, political as well as economic, of anyone who was not white and male.

The author generally exhibits a praiseworthy commitment to letting the free enterprise advocates of the 20th century speak for themselves via quotation from primary sources, but still manages to leave out some of the most important discussions of the role of free enterprise as a distinctly American concept. As the American Institute for Economic Research’s Phil Magness wrote in his own review, Glickman’s history is very thin on how often free enterprise advocates (including many prominent Democrats) praised economic freedom in the U.S.—and “free enterprise” explicitly—and contrasted it with the state-controlled economies of the Soviet bloc.

Glickman understandably rolls his eyes when citing critics who claimed that left-leaning policies at home were a bigger threat than our enemies abroad. But he spends more time quoting people who saw mid-century economic prosperity as an enervating weakness than the far more numerous voices who held up free enterprise as one of the nation’s strongest bulwarks against the Cold War threat.

While he lets the free enterprisers have their say, the author is himself obviously on the side of the New Dealers, and argues with notable chagrin that the Age of Reagan allegedly killed off the enlightened tradition of ever-growing government taxation, spending, and regulation.

Free Enterprise could have been a straightforward history of the rhetoric of economic freedom, but is significantly complicated by the fact that, by the end of the book, its purpose has clearly split from describing how various factions talked about the contested virtues of American business to making the case against market-based economic policy in general. There are plenty of politicians, academics, and popular writers out there making exactly that case, of course, but if that was Glickman’s real goal, he probably should have written a different book.

Fortunately for the author, his chagrin is largely misplaced. Glickman suggests that New Deal policies ceased to be politically acceptable during the administration of Ronald Reagan, writing that “Public spending funded by progressive taxation” only “remained robust through the early 1980s.” The idea that either government spending or progressive taxation has withered away will come as something of a shock to anyone who has studied economic policy or public administration in the past forty years.

It is true that the top marginal income tax rate dropped from 70 percent to 28 percent during the Reagan administration and the number of federal income tax brackets dropped from 16 in 1980 to two in 1988, but we are back up to seven brackets with a top marginal rate of 37 percent for 2020. More to the point, despite wildly rising and falling top marginal rates over the decades, the federal government has consistently collected an average of about 19 percent of GDP per year in taxes since the end of World War II.

But while tax revenue, as a share of the economy, has remained roughly constant, the same cannot be said of government spending. Total federal debt (in nominal dollars) was $909 billion on 1980 and is projected by the Office of Management and Budget to be $24 trillion this year. That is an increase from less than a third of the size of the U.S. economy at the time Ronald Reagan was first elected president to over 107 percent of GDP today. If this is austerity, I’d hate to see what runaway spending looks like.

This explosion of government spending and debt is, of course, partly due to Republicans who claim to love free enterprise and vote enthusiastically for tax cuts, but run away from spending cuts. But regardless of the legislative dynamics that brought us here, it is painfully clear that Bill Clinton’s famous 1996 declaration that “the era of big government is over” was hardly accurate. Prof. Glickman laments that free-market ideology has supposedly trounced the philosophy of “public investments” and social welfare spending, but we search in vain through the OMB and CBO spreadsheets for any evidence of such a victory. If the limited government advocates of the 20th century had really won the war of ideas, we should be seeing a government that is actually getting, you know, smaller. No sign of that yet.

Originally published at The Foundation for Economic Education.