A Tale of Two Futures

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

The reader will recognize this quote from Charles Dickens classic “A Tale of two Cities”. This quote comes to mind every time I ponder the prognosis of our economic future provided by two different schools of free market economics.

I have been perplexed for some time now by opposite conclusions reached by two very different types of free market thinkers.  This is something that I have been following closely since the late 1980’s and have found myself torn between the two.

In the first category is what some would consider the “Prophets of Doom”.  These are free market economists, the Austrian School in particular, who point to government policies, which keep moving toward ever-bigger government and prophesy economic doom. There is a lot of ammunition to back up their claims. We are spending money at a rate unprecedented in American history. The comparison is often made to the Weimar Republic in Germany. They spent money at a rate that economic production could not support and ending up devaluing their currency to the point that it took a whole wheelbarrow full of Deutsche Marks to buy a loaf of bread. The American government is also spending and printing money at a rate that has many economist predicting hyperinflation and economic collapse a year from now.

The other groups consist of what one might refer to as the perpetual optimists, characterized by people like George Gilder.  They are also free market economists, but the focus on human creativity and see that we are in the early stages of a technological shift from an Industrial Age economy to an Information Technology Age economy.  They note that such shifts in technological paradigms have historically resulted in spurts of economic growth.  One example was the shift from the Agrarian Age economy to an Industrial Age economy.  They forecast great economic growth.

Both of these groups agree that human action and creativity are the engines of economic growth and that excessive government intervention is a hindrance.  The first group focuses most of its attention on what the government is doing and draws very pessimistic conclusions about our economic future.  The second group focuses on what they see happening in the private sector and are optimistic about economic growth in spite of what government is doing.

A question that has long interested me, is which factor should be considered to be the greater determinant?  Are they of equal weight?  In short, will the increase in technological creativity counter balance the political direction we have set a course for? If so, will it have to create a significant underground economy? This last possibility is the one I see as more likely. The innovation will be driven underground if we continue on our current course politically.

That is the conclusion, which James Dale Davidson and William Rees-Mogg came to in their book entitled “The Sovereign Individual: Mastering the Transition to the Information Age”. Written in 1996, it concludes that the Information Age is going to render obsolete the ability of governments to control the flow of information and capital.  Encryption technology makes it possible for non-traceable electronic financial transactions to cross State and National boundaries without anyone being able to keep track of them.  Financial transactions that can not be tracked, can not be taxed.  The title of the book refers to those individuals who are able to carry on commerce and other activity without being tracked by Government.  This is mobility of capital on steroids.  If this trend grows, could we see the collapse of the welfare State as it becomes increasingly unable to collect funds disappearing into a growing underground digital economy? If so, this will be the “best of times” for those few who are able to escape the clutches of the welfare state and participate in the new underground economy, but it will be the “worst of times” for those who will be left behind trapped in dependency on the bureaucratic welfare sate. The only way to avoid this extreme dichotomy of wealth and poverty is to reverse course and return to the pro freedom approach favored by our founding generation and give ALL people a chance to strive. The current attempts to gain control over the global underground economy by global regulations and taxation will ultimately fail. Relaxing controls will bring the underground economy above ground.