Dear Friends,

Why do we need a massive Congressional investigation of Enron? If Enron, or Andersen CPA, has broken the law — and I believe they both have — should that not be cause for a trial in the normal court system? The alleged reason for the Congressional investigation is to determine whether any new laws should be passed, to keep the situation from being repeated. However, the "court" (Congress) that is trying Enron is the very body that was bought by Enron with its contributions. Now we have the fox guarding the chicken coop.

In a classic liberal society, those harmed by Enron would take Enron to court. Such a society would require a new national outlook, in which individuals and groups take care of themselves instead of entrusting their "protection" to government. It would beef up labor unions, so they would keep watch over how their members may be bilked by management. It would teach banks to examine how well their loan clients are audited and to refuse loans to companies that do not hire external auditors with integrity. It would teach stockholders (or mutual funds) that they can't rely on improperly audited companies, and if they do, they take the consequences.

All this boils down to: We have entrusted to the government to look after our interests in multiple ways, and then we have allowed a major company to "buy" the government. Now we are looking to the government to regulate that company.

Many look on Enron and Andersen as deficiencies in our capitalist system. I look upon them as a case study in how capitalism evolves. Many firms are now looking at themselves, to make sure they do not become another Enron. So are the CPA firms.

The alternative society that we seek will evolve out of the present society.

The Exclusion of the Poor

In TQE #33 I wrote of how the poor are excluded from modern institutions. "In most of the world, the poor live in a society distinct from the affluent — different institutions, organizations, and customs, and little communication between the two. The poor are looked down on and denied the courtesies available to others." How and where has this happened? Mainly in less developed countries (LDCs), not so much in more developed countries (MDCs).

The poor have far more access to modern institutions in MDCs than they do in LDCs. MDCs are the very ones in which power has become diffuse (though still more diffusion is desirable) and trade has been mostly free. In Hong Kong, Singapore, Taiwan, and South Korea — where enterprise and trade have also been free — the poor have raised themselves from Third-World poverty to wages and respect on a par with Europe, in only one generation.

If the United States and Europe were to open their markets to the textile, clothing, shoe, and other basic industries in the LDCs; if the elitist governments of LDCs would open the economy to the initiatives and inventiveness of all people; and if the poor were to gain property rights to the land they till (which is now owned mostly by governments), they would find jobs, borrow by mortgage, and start their own enterprises. It would take some doing, but all this would gradually lift them out of their poverty.

It is by concentration of power in LDCs (in overwhelming regulations, state enterprises, property ownership by government, and other restrictions) and in protective tariffs of MDCs that the world's poorest are kept in their poverty.

Again, let us evolve toward an alternative society. I propose classic liberalism.

What is a Classic Liberal?

Classic liberalism is the liberalism of the seventeenth century, the period in which Quakerism was born. Being free of the king's commands was a central focus of early Quakers. Over the three centuries that followed, the term "liberalism" became associated with progressive ideas, such as a public school system, antitrust laws, social security, and regulations to make corporations behave like "good" citizens. As these rules were made by government, "liberalism" became identified with interventionism, the exact opposite of its classical meaning.

If our society today were classic liberal, the Enron scandal could not have occurred. There would have been no favors for government to sell, so Enron could not have bought any. Consumers, bankers, stockholders, creditors, and employees would all have formed private agencies to look after their interests and bring to court any person or company that violated them. Environmentalists are doing this already. But over the last 150 years we have eroded most of these pressure groups by entrusting our protection to a government that can be bribed to betray us.

A classic liberal is one who would leave the people free to decide which goods and services they will produce and how they will produce them, with sales at prices voluntarily agreed between buyer and seller. The classic liberal does not want the government to choose or regulate or set prices.

How then does a classic liberal society prevent scandals, environmental orgies, and deception? First, it has rules (for trading, paying debts, property ownership, violations of the environment, etc.) that are enforced in courts of law. "Liberal" does not mean "license." The rules are made primarily by those who must abide by them rather than imposed by a ruler. Second, class action suits are undertaken by those who suffer from violations of the rules. In these ways, the plethora of government regulations is supplanted by private actions of those who suffer from abuses.

A classic liberal society is one of balance of power. Consider the world as a giant jigsaw puzzle, solved and sitting on a table. Each piece represents an individual or organization (unions, employers' associations, consumers, bankers, etc.). The power of each piece is represented by its size. Each is trying to increase its power by pushing against other pieces, which push back if they can. "Power expands until other power stops it." The various groups and organizations, by holding each other in place, keep each other from exerting too much power. The bankers' associations, creditors' associations, employee unions, and similar groups that would have sued Enron are pieces in the puzzle. So are Quakers, wanting to empower themselves, better to protect the underclass.

For example, the classic liberal society would not depend on government to bail out banks that make bad loans. This would encourage banks to put pressure on external auditors to give correct opinions. It would encourage stockholders to invest in properly audited companies, to avoid taking losses. Stockholders are better placed than government, and have more incentive, to perform this regulatory function.

Tragically, the greatest classic liberal of our day, Professor Robert Nozick of Harvard, has just died of stomach cancer at age 63 (the same disease that took Robin's and my beloved daughter, Cindy, at age 37). In his obituary (1/24/02), the New York Times stated: "In his first book, Anarchy, State, and Utopia, ... Professor Nozick starkly and vigorously attacked the forms of paternalistic government that 'forbid capitalistic acts between consenting adults.' "

Classic liberalism is the basis for classical economics, as developed and taught by the great economists, beginning with Adam Smith in 1776, continuing through John Stuart Mill, David Ricardo, and Léon Walras in the nineteenth century, and culminating in Alfred Marshall in 1890. Joseph Schumpeter (in whose classes I studied) elaborated on it in the twentieth century. It is mainstream micro-economic thinking today.

The classical economists were pragmatic, but (except for Mill) not particularly compassionate. Although not all classic liberals agree, I believe some amendments are necessary to make for a compassionate, classic liberal society. I will write about these in TQE #36.

I repeat (from a previous TQE) what my interpreter told me after I had given a talk in Ukraine: "All our lives the government has taken care of us. Now that the government has failed us, we do not know how to take care of ourselves."

But a classic liberal society alone won't do it

Historically, classic liberalism has correlated with the freedom of "lower" social classes to innovate. This freedom has propelled economic development and more egalitarian distributions of income and wealth in northwestern Europe, North America, Oceania, and Japan than anywhere else in the world.

But classic liberalism merely opens the way. Institutions (education, banking, production, collective bargaining, and others) are more likely to embrace the poor in classic liberal societies than they are in societies where the elite wield power, as they do in LDCs today. The process will be gradual.

In MDCs, the resumption of responsibility by organizations of consumers, stockholders, bankers, employees and others will be gradual in a society where we have become accustomed to leave our protection to the government. More fiascos like Enron will be suffered before the idea of group responsibility at the lower levels sinks in.

In the next TQE Letter (#36), I will outline my suggestions to make a classic liberal society more compassionate, and how a classic liberal society might prevent environmental degradation and help those unable to fend for themselves.

Sincerely your friend,

Jack Powelson

Readers' Comments:

I do not mean to flatter you, but I must say that in reading about your work, and in reading your work, I have found many chords that ring with my own beliefs. As I am only 26 my beliefs are still in their formative stages. When I come across ideas that articulate what are my nascent urgings I get excited. This is the sentiment I had in coming across your web site. I am just now exploring the Society of Friends and have been a free-marketer/libertarian since my college days. To see that you attended both Wharton and Harvard was very interesting, as I will be applying to both MBA programs next year.

— Adam Jones, who is considering attending Palo Alto or San Jose Meeting, Sunnyvale CA

There has been so much government intervention in the economy that most alternatives have been forced out of the market. So people see government as the only source of solutions, only because government action has caused other solutions to fail.

For example, the Long Island Motor Parkway was a private road. It was the first concrete limited-access highway. It charged tolls, and stayed in operation until 1938. Why did it go out of business? Because the government out-competed it! The Northern State Parkway, which travelled over much the same route, was "free" (translation: paid for by tax dollars). How can private parties compete with solutions given away by government?? It can't — dumping is illegal when a private company does it to another, but is not illegal when the government does it!

— Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

A fair bargain requires that both sides have comparable access to information and power (options).

— Vici Oshiro, Minneapolis (MN) Meeting.

I have a problem with your concept: "in a classic liberal society, those harmed by Enron would take Enron to court," because such a court would necessarily pass judgment based on laws, and who would create those laws, if not some kind of representative government — which is what we have now. Fixing the problem of government corruption will not be easy, but taking money out of the election process would be an important first step. This is, in priciple, the aim of the campaign finance bills. However, these run so much counter to the self-interest of the incumbent politicians, that it is hard to see how these will pass unless there is an enormous popular movement to "throw the rascals out" and replace them with a set of less self-serving individuals. Let's hope that the Enron affair, and others like it, will be the seed for such a development.

— Tom Selldorff, Weston (MA).

About 10 years ago my friend, the late Phil Stern wrote a book, "Still the Best Congress that Money Can Buy. I recommend it to you.

— Lee B. Thomas, Jr., Friends Meeting of Louisville (KY)

I'd be interested in hearing more about regulation, and why you are against it. Do we want rancid meat, unbreathable air, dangerous cars and water with E-Coli? Take your pick.

The air pollution position seems to be a classical "commons" situation, where a company can simply make more money by not cleaning their effluent. In Fox's day, industry was only able to pollute something directly down wind, at short range.

— Jim Caughran, Toronto (Ontario) Meeting.

Reply: There are many ways in which these malignancies are overcome. On rancid meat, dangerous cars, and pure water, pass laws to designate the permissible limit on these events, and have consumer organizations file class action suits when the they are violated. On air pollution, sell tradable permits to pollute up to but not exceeding the limit that will be cleaned naturally (by the wind, for example). Actually, we do all these things now.

In a classic liberal society, the prohibition is against the event - cars may not pollute beyond a certain amount. Make your gasoline however you will, but there is a pollution limit. In a regulatory society, the prohibition is usually against the method. Make your gasoline this way, not that. Usually the manufacturer, not the regulator, is the one who knows the least expensive way to achieve the result.

— Jack

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PUBLISHER AND EDITORIAL BOARD

Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

Editorial Board

• Roger Conant, Mount Toby Meeting, Northampton, MA.
• Virginia Flagg, San Diego (CA) Friends Meeting.
• Merlyn Holmes, Boulder, Colorado.
• Janet Minshall, Anneewakee Creek Friends Worship Group, Douglasvillle (GA).
• Jack Powelson, Boulder (CO) Meeting of Friends, Principal Editor.
• J.D. von Pischke, a Friend from Reston, VA.
• Geoffrey Williams, Attender at New York Fifteenth Street Meeting.

Members of the Editorial Board receive Letters several days in advance for their criticisms, but they do not necessarily endorse the contents of any of them.

This newsletter was formerly known as The Classic Liberal Quaker.

Copyright © 2002 by Jack Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction.