6.1 Avoiding Undesirable Developments

Can we learn from history?

Evolutionary development does not stand still. It continues, albeit in very small steps, which often go unnoticed. Can we trace this development, identify it, and assign it a direction? Can we then project this trend into the future and hazard a forecast? Or was the past development random without any recognizable trend, making it impossible to make a prediction? We don’t know.

However, what we can do is perceive how humans change outwardly. With every generation the average height has increased so that today, a young person cannot walk upright through the doorways of medieval castles. Although it has not been statistically proven, it also seems that the willingness to engage in physical altercations is decreasing. At any rate, long-term observation indicates that crime is on the decline.Footnote 1 Apparently, in the past, insults and other affronts were met with brutal beatings, whereas today compensation will most likely be sought. The brain mass of Neanderthals was roughly one-third of the brain mass of modern humans. Will the size of the brain continue to increase? Will humans evolve into even more intelligent beings? Will they become more altruistic and peaceful? Are we evolving in the desired direction?

The market economy, at any rate, has continued to evolve. In combination with basic rights and democracy it has led us to enormous freedom and prosperity. In accordance with Hegelian dialectics, one value system follows the next, with each system building on the existing one and continuing from there. Liberalism is evolving and improving.

But, of course, a liberal system also makes mistakes. It creates misguided incentives and inequalities, which must be addressed. I will discuss potential improvements in the next chapters.

6.2 Erosion of the Middle Class

In some Western countries, middle class prosperity has decreased in recent years. This has affected Southern European countries (including France) and the USA. In Germany, the eastern part of the country has not yet reached the standard of the western part, which is causing dissatisfaction.

The purchasing power of the middle class is eroding because of the increased burdens being placed upon its members. They bear these by paying higher taxes. In the last 20 years many welfare states have doubled their expenditures. Policies have assigned more responsibilities to the state and these must be financed. This has led to an astonishing increase in tariffs and taxes, which have surpassed the “tithe” (usually 10%) that was paid to sovereigns in the Middle Ages. In some countries the level is already as high as 40% or even 50%.

Whenever the middle class has less and less, its loyalty to democracy and society decreases. A sense of community is lost and demands on the government increase. If these demands are not met, the tendency to fall for the promises made by autocrats or to try out other political systems or political parties increases. This can be seen in France where the Gilets Jaunes (Yellow Vests) are fighting against a decline in their standard of living. Or as seen in Italy (Spring/Summer 2019), when the Italian citizens no longer knew who they should vote for in order to stop a downward spiral. As a result, left-wing comedians formed a government with right-wing populists despite having very different views and no idea about economics. They both simply wanted power.

A free secular state thrives on conditions which it cannot guarantee.Footnote 2 It cannot use legal constraints and authoritarian dictates to prevent internal regulatory powers from moving in an anti-democratic direction without itself becoming an autocratic system. Admittedly, it is the task of a democracy to protect itself from such regulatory tendencies by enforcing its democratically adopted laws through the use of constitutional measures (courts, police). But what if the purpose of regulation is to limit the power of the rule of law and to undermine the separation of powers?

Because the middle class has such a strong majority, such situations endanger democracy. The middle class is democracy’s most important supporting pillar; therefore, the strengthening of this class must be a political and moral goal.

The erosion of the middle class can be attributed to misguided developments. These include government that is far too expensive with an excessively high government ratio, as well as over-regulation with excessive bureaucracy and too much redistribution. As a result, infrastructure and schools are neglected. I will address these issues in the following chapters.

6.3 Leaner Government

The government ratio expresses total government expenditures as a percentage of gross domestic product (GDP). It has risen continuously in all European countries. However, international comparisons are not relevant here because they are based on different statistics. What is more important is the development over the years in individual countries—the “track record”. This development shows the level of deterioration compared to earlier conditions and the resulting pressure which is put on the level of prosperity. One aspect becomes quite clear: there are not fewer people working for government and there are not fewer people who are financially dependent on it than in earlier times. Rather, each year there are more people who depend on the government for their existence. The state is not spending less, it is increasingly spending more. This government growth is being driven by an entitlement mentality, which is frightening and does not bode well for the future.

Governments should use revenue primarily to develop infrastructure and to ensure the safety of its citizens. These are the foundation of prosperity. Today, some types of infrastructure are considered basic human rights. This includes a good school system available to everyone. It also includes well-developed transportation routes, electricity supply, the best communication systems possible, a safe water supply, refuse collection and much more. Only when all of these things work well and efficiently can the level of prosperity grow.

Shifts in the balance of power between social groups having different views about government are fatal—especially if there is an increase among groups which are anti-competitive. These shifts occur when too many people depend on a “strong state” to guarantee their existence. One such example can be found in Italy. If about 60% of the gross national product flows into the government budget and is then redistributed within the state, it becomes almost impossible to push through reforms. Any reforms would be at the expense of the beneficiaries, who are in the majority. On the other hand, the minorities who are responsible for value creation—those working in commerce, industry and small and medium-sized businesses are being exploited. For them, the state is an enemy to which they owe no allegiance. Another example is seen in France, where age-old structures allow little room for reform.

Not all government expenditure is used for the administration of the state or is relevant for value creation (expenditure for infrastructure, etc.). A large part is transfer payments, which redistribute revenues generated in various economic sectors and include subsidies, tax incentives, and aid to entire segments of the economy, all of which are included in government expenditure. It is precisely these that have risen disproportionately and contribute significantly to increases in the government ratio.

6.4 Deregulation

Economic success depends on the business environment. This could not be more different in each country. Regulatory density makes up a part of this environment. Whether entrepreneurs have to observe a number of laws or only a few for their types of activity, or whether they have to obtain several or only a few permits, or whether they have to pay high or low fees will have an impact on business. Regulatory density is decisive when it comes to success or failure. It can also be said that in the meantime there are now so many laws it is impossible to obey them all.

How can regulatory density be reduced? A catastrophe creates the opportunity to build something new on the ruins. This was true when the dinosaurs became extinct. Thanks to their disappearance, it became possible for mammals and ultimately humans to evolve. The ancient Greeks depicted this as the “phoenix rising from the ashes” and the concept is still true today. If a region is destroyed by war, there are no structures or laws left to impede the fast and uncomplicated construction and development of a new and oftentimes more successful society. After the Second World War, government structures in Germany were largely destroyed. A new beginning could be made without obstructive, pre-existing regulations—the result of which was the German economic miracle. Victorious England, on the other hand, fell from being a world power to a regional one after Churchill was ousted as prime minister and the labor government began its long reign. A frenzy of regulations stifled the economy. It was only when Margaret Thatcher began rigorous deregulation that this changed.

Do we need a new catastrophe? Previously, every generation had its own war, which left behind ruins on which it was possible to rebuild. Long periods of peace lead to such a dense concentration of rules and laws that citizens and companies drown in paragraphs and fees, causing them to lose initiative and, as a result, prosperity begins to erode.Footnote 3 Let’s hope we can find a way out of this vicious regulatory cycle without a catastrophe. Politicians have long promised to fight over-regulation. However, their apparent inability and failure to do so is frightening. We do not need a war, but as a substitute, we do need peaceful periodic deregulation. Not only does material law play a role here but also procedural law. Procedural restrictions are constantly being put in place and an increasing number of economic activities are now subject to permits. Why is there no resistance to this? Have we already become too complacent? How about creating a committee to identify and eliminate all measures which inhibit economic growth?Footnote 4 What about a provision which requires that before a new law can come into force, the same number or even twice as many existing provisions be deleted at the same time (this could be based on the number of words or preferably based on the costs incurred). How about introducing a provision that says that a new permit regulation can only be implemented if a permit regulation is lifted in another area?

6.5 Redistribution

The burden of redistribution, which for a lengthy period has not been just from wealthy to poor, is no longer being borne by the rich, but primarily by the middle class.

A liberal welfare state lives from extreme redistribution—for pensions and pension schemes, homes for the elderly, for health care costs and social services, for daycare, for the agricultural sector, the energy industry, for environmental protection and much more. The revenue comes primarily from middle-class taxes. Other tax sources (e.g. a wealth tax) would be far too low. In the process, the redistribution apparatus swallows up a part of the revenues so that only a reduced amount (between 50% and 80%) of the money goes to the designated area.

The redistribution system needs improvement because it leads to dissatisfaction on all sides. The intention to promote the well-being of all has been successful to that extent that even the poorest people in highly developed countries benefit from the system and can afford to spend money on non-essential items. In many European countries, economic development has remained positive and the income gap between the rich and the poor has continued to decrease. (cf. Sect. 6.2). However, in other countries (in Southern Europe including France, and the USA) the income gap has begun increasing again in recent years. This has been especially true in European countries which are centrally organized, and whose central government (bureaucracy) grew overwhelmingly, resulting in a greatly increased government ratio. After all, someone has to pay for centralized government with the redistributions it entails.

Redistribution is necessary to maintain social order. However, it is not efficient. Too much money “evaporates” and, if the cost of redistribution is too high, it creates a dichotomy between those fleeing it and those who become complacent because of it. Misuse increases. In addition, when there is a high level of redistribution, it is often inefficient and results in a loss of community spirit among the middle classes. Expectations on the government rise—expectations which can hardly be fulfilled. As a result, more taxes are needed so that more can be redistributed.

Redistribution, in turn, creates discord and it is not the final stage with regards to developing a fair system. The poor only benefit if something is taken away from the rich. They do not create their standard of living by virtue of their own work or their own ideas, but rather to the “detriment” of others. This cannot be satisfying for anyone. The rich are forced to give away their wealth, which they usually find annoying regardless of the social justification behind it. Their resentment leads to countermeasures which do not contribute to a peaceful society as, for example, when billions of dollars are contributed to election campaigns to support the economic system of the rich (e.g. USA). And finally, redistribution involves tremendous bureaucracy, which no one wants at all.

The goal must be a society in which everyone can earn their own wealth. Wage systems have to allow each citizen to live decently and save for his or her retirement, pay for health insurance, and so on without redistribution and bureaucracy. We certainly feel it is fair to reward performance. Those who work more or contribute more to society should also earn more. We reject those profiteers, who only take from society (and thereby from those who contribute more) and contribute hardly anything themselves. A system of redistribution also harbors the danger of political dissatisfaction and disputes. Some people do earn too much, and others who work and contribute to society earn too little. This must be corrected. But calls for hatred of the rich do not help. Taking away from successful people and giving it to profiteers is not a long-term solution. Often the cries for redistribution do not help the poor who work and fight to get ahead. Rather they help profiteers who propagate envy and hate.

We must therefore seek a system in which fair wages are inherent without the need for additional state intervention and redistribution. We must create an economic system that pays fair wages so that the gap between rich and poor appears to be equitable, with each achieving his or her own standard. Redistribution will then be limited only to those who cannot take care of themselves (sick, disabled, etc.). The rich will gladly contribute money for these people.

An economic system which, by its very nature, has led to fair pay for all exists to some extent in the Nordic countries and in Switzerland. In these countries, the middle class is content and the gap between rich and poor continues to decrease. The system is not perfect, however, and I would recommend that research progress be made in this area as our future depends on the further development of liberalism.

6.6 A Good School System for Everyone (Equal Opportunity)

Equal opportunity is not always a reality even in highly developed countries. In the USA, for example, the gap between the rich and the poor has recently increased and the American dream in which it is possible for a dishwasher to become a millionaire is becoming increasingly more difficult to achieve. The educational system is probably to blame. Good schools must be paid for privately, which significantly improves the chances of children with wealthy parents compared to those whose parents are poorer.

Only where the educational systems are equally accessible to all is there also equal opportunity for all. Therefore, schools and universities should not be financed by tuition fees but by the state or by private educational organizations.

6.7 Excesses in Liberalism

Excesses in liberalism also exist—in two respects:

Some individual top executives earn a salary that is far in excess of their performance level. This disrupts peace within a political system. In fact, it actually destroys it. It is especially alarming when people obtain a high-ranking position, stay there for a few years, and become so rich they can resign. This gives the impression that they are only interested in increasing their own wealth over the course of a few years rather than working towards the good of the company and its employees.Footnote 5 Included in the list of grossly overpaid people are top athletes, for example in football or soccer, tennis, etc. although, these salaries tend to be more widely accepted than those of managers.

Another excess can be seen in “company trading”. Far too much money is “earned” in asset management, i.e. the buying and selling of large share packages or entire companies. Some of the richest people in the world today made their money as fund managers or in the building up and selling of companies. This includes young people who grow a startup company for a few years and then sell it for millions of dollars, as well as companies that do well during the startup phase and then are sold on the stock market sometimes for billions of dollars.

The liberal system needs correction in both these areas.

6.8 Income Distribution

Income inequality has been greatly reduced since the Middle Ages and in modern times the trend continues to be positive globally. According to the statistics used here,Footnote 6 the trend in Europe has remained stable over the past few years. However, there are some who are of the opinion that inequality is increasing again, especially in France, Italy and Spain as well as in the USA. This is an unfortunate development that must be corrected (see Sect. 6.5 above “Redistribution”).

The cause of this new inequality is the erosion of the middle class; as a consequence, both extremes—rich and poor—are increasing. The middle class must be made stronger by reducing the amount of government and the government ratio, reducing deregulation, and redistribution, etc. If the middle class is relieved of these tremendous burdens, they will become stronger and income disparities will decrease.

Some economistsFootnote 7 and even some international organizations such as the OECD call for just the opposite, specifically more government and higher taxes for redistribution. These opinions stem from an environment of excessive central government, which only knows of solutions provided by government intervention and which searches for new tax sources to fund them. They demand tax alignment, i.e. tax harmonization from more successful competing countries with leaner structures and lower taxes because tax competition impedes their high tax policies. They ignore the fact that these other countries are more successful in their fight against income inequality and that the middle class in these countries is more content.Footnote 8

Efforts by the OECD to tax international companies where their turnover is generated has also led to an “upward” tax harmonization because it helps high tax countries—which have lost business due to this—to increase revenues. These funds are then no longer available in the country where the business is domiciled. This in turn causes these countries to raise their taxes. Taxes are increased all around and countries with lean tax policies are penalized.

At the very most, the OECD’s call for tax harmonization would be appropriate if all countries pursued sensible policies concerning their national budgets and government ratios. Unfortunately, this is not the case. There are countries that have a disproportionately higher government ratio and excessive bureaucracy. Financing these governments via tax harmonization with leaner countries is not only wrong, it hinders those states with more inefficient bureaucracies from finally restructuring themselves.

Tax competition and the competition between various types of administrative systems in general (see Sect. 10.4) help to keep taxes low and force administrations to become and remain more efficient. To this end, the people or companies concerned must be given the opportunity to choose the best environment and the best system in light of the competition for themselves. This is also true for tax competition, where it is certainly appropriate to “vote with your feet”.Footnote 9

6.9 More Individual Responsibility

Today we enjoy the highest level of freedom and the highest level of prosperity ever experienced in history. These are unique achievements and they are based on economic liberalism in conjunction with civil liberties. Yet it is alarming to see how many people are no longer aware of the foundations of our prosperity. They continually whittle away at these foundations with new initiatives and by placing demands on the government and society—actions that could actually destroy these foundations. It is especially the numerous activists in various areas such as organic farming, animal rights, women’s rights, environmental protection, etc. who seem to know very little about or are completely unaware of these foundations. Do they not know that it is not always necessary to have new laws for everything? Wouldn’t organic farming or other environmental demands be just as efficiently supported if consumers used their freedom to buy only what they consider to be responsible? Each new regulation limits freedom. Each new regulation increases regulatory density and ultimately limits prosperity. Are additional regulations and new restrictions on freedom really worth it?

People who moralize claim morality for themselves. They claim to have the only morally impeccable reasons for doing what they do and they insinuate that the opposite is true of others. They know exactly what is good and what is evil, and they consider themselves to be the good guys. They want to use laws to enforce what is good—laws which must be obeyed by everyone—even the evil ones. But are they really the good guys? Doesn’t morality impose one-sided standards, which vary from culture to culture and person to person. Is morality considered to be so absolute that it can be claimed by everyone as a higher truth?