Account of the dinner-debate held on December 8, 2007 with Pascal Salin

The French social model is at the end of its tether, and more and more people are becoming aware of the fact. Our rate of growth is trailing at under 2%, while average growth in the world is at present at 5%. The unemployment rate is high, the young and the enterprising are emigrating. Politicians, who believe they "have tried everything", put the blame now on circumstances, now on oil, now on globalisation, whereas the enemy is within. They have tried everything, except escaping from socialism., which has reigned supreme since 1981, but which, it must be said, had started to exert its disastrous effects before that.

The failure of the French model is not only an economic failure, it is a moral failure. To begin with, there is a universal moral code, that of respect for individual rights – in particular for the right of property – a respect that is proper to non-conflicting societies. Beyond universal morals, we all have an ethical sense : to be generous in such and such a way towards this or that person, to respect fur-skinned animals etc. These personal ethics are not necessarily uniform and they may even be antagonistic.

The above remark enables us to understand the difference between two kinds of imaginable societies : a perfectly libertarian society that has no other morals than respect for individual rights and which is thereby non conflicting; or a society where the predominance of this or that individual moral code can be achieved only through coercion, as is the case in a socio-democratic society, or worse, a totalitarian society. Such societies are by nature conflicting. Failure to appreciate the above distinction is responsible for France's present state. When Chirac spoke to us of the 'social fracture', he was thinking of a struggle between social categories. To put an end to it, one had to increase transfers between those categories by constraint. The consequence was the destruction of social cohesion. The characteristic of the society in which we live is the hostility between different categories, for as Bastiat so rightly said (we always come back to him) : each person tries to live at the expense of others. And when one can live or improve one's lot, not through one's own efforts, but through a compulsory transfer from others, morals disappear, there is perpetual conflict, and that is what explains how our society is so aggressive, frustrating and frustrated.

When one returns to France after a trip abroad, one is struck by a certain bitterness and a loss of the sense of true morality. That is just one more motivation for wanting to put an end to this system and to make our way towards a libertarian society, a society of liberty and responsibility, which, at an economic level, implies freedom of enterprise and of investment, that is, capitalism. Yet capitalism arouses armed protest : it is accused of seeking profit, which is supposed to be immoral, and of creating economic instability. Whence it is inferred that the State has to intervene in order to "regulate" it.

We shall examine the two objections successively. As far as morality is concerned, capitalism is nothing other than a system of legitimate private property, that is to say, justified by an act of creation or of exchange. What happens in a soviet-style system? The members of the nomenklatura do indeed enjoy private property, but that property is the fruit of embezzlement. Therefore, capitalism is far more ethical.

It is shocking to hear people talking of the distribution of national revenue. For national revenue does not exist. There is no wealth created by the Nation which could then be distributed to individuals. The only wealth that exists is that created by the activity of individuals, who themselves may enter into partnership to form a firm. A firm is an assembly of contracts between individual persons. If one wishes to reason with a degree of rigour, one must not apply anthropomorphism to the firm : a firm does not act, it does not think. It is made up of people who act and think, and whose relations are governed by contract. The company manager signs contracts, with the salaried workers, the suppliers, the customers etc. And the ethics of a firm consist in respecting those contracts. That does not prevent the owner of the firm, with the money that is rightly his, from showing generosity or compassion for personal reasons. But his only duty with regard to universal ethics is to respect the contracts that he has signed. From that point of view, legislation on labour is open to criticism to the extent that, from outside the firm, it imposes arbitrary rules, often inspired by ideological, political or demagogic considerations.

In a free society , the most precious resource ultimately is the creative capacity of the human mind. And the role of a company manager should be to use this capacity in the best interests of the firm. When demand decreases in a declining sector, innovators give rise to new demands. Why then is there unemployment? Because there are obstacles between the potential employer and the potential employee. Among other obstacles, the fact that when a contract is signed between an employer and an employee, the State intervenes to take over about 80% of the substance of the contract. All the legislation on labour, all the financial red tape, is destructive of the contractual relation between the employer and the employee, and it is counterproductive to seek to balance those obstacles by forbidding the dismissal of employees.

Of course, capitalism is not perfect, no more than any human activity is. But freedom and competition spontaneously engender corrections of the imperfections. Thus, "regulation" is brought into play, and those who believe that the State should apply "regulation" to the market, confuse "regulation" with "making rules and regulations". When they say that markets should be "regulated", they mean that the State should make rules for them. In reality, the market regulates itself far better than the State can, because it is a process of learning by experience in a world where knowledge is never perfect. Bankruptcies, tampering with accounts, strategic errors are ultimately rare in a world where there are millions of firms, because the managers of those firms are responsible before their shareholders, their employees, their customers. One cannot say as much for those who manage the State.

The ruin of Arthur Anderson following the Enron business is revealing : the firm had a solid reputation. Strict respect of its code of ethics had long formed its stock-in-trade. It took no more than that a few of its thousands of employees seemingly sanctioned Enron's tampering with accounts, for the firm to disappear at world level! There we have a perfect example of the self-regulation – one would be tempted to say of the moral self-regulation – of capitalism. What a contrast with the world of administration and politics, where the same men, continuously, and without being penalized for it, practise corruption, the pillaging of the possessions of others and the distribution of undue privileges!

Now let us examine the objection that is made to capitalism of giving rise to economic instability. The true instability of our time comes from state action, which is unpredictable. One can insure oneself in our world against many ills, against many of the causes of instability. But you cannot insure yourself against the arrival of some new tax that will render an activity that you have launched non-profitable. Thus the variation of interest rates in the United States in recent years, determined by certain authorities and not by the market, has been the cause of many an instability.

In France, on several occasions, the electorate let it be known that they were dissatisfied with the socialisation of the economy. But the politicians proved unable to exploit that dissatisfaction, through lack of courage or conviction. Thus, in 1986, the new government did nothing but initiate a few timid measures, such as certain denationalisations. Let us imagine what would have happened if they had introduced the 'flat tax' or retirement pensions by capitalisation. Today we would have no discussions on pensions. Each person would have built up and invested enough to live on for their retirement.Special pension regimes would have been absorbed in the process. Our social relations would be far more peaceful.

There is a strong connection between freedom and prosperity. Every year, the Wall Street Journal publishes a rating of economic freedom for 157 countries, as well as various measurements of prosperity in the country concerned. Countries are divided into three groups : free countries, countries that are essentially free, and countries that are not free. While per capita revenue is $30 000 on average in the free countries, it is $13 500 in the "essentially free" countries, of which France forms part, ranking only 45th . An article in the same newspaper made this comment : "the countries that liberalise speedily and completely achieve resounding success, both politically and economically. On the contrary, gradualism leads to the risk of stagnation and even of a backward trend, for the benefits of the reforms are not obvious enough to impress electors and to give rise to a lasting movement in their favour". Let us look at a few examples.

Reagan began his mandate with the strike of the air traffic controllers, Thatcher with the miners' strike. They therefore liberalised the economy in difficult political conditions, but they had the courage to do so nevertheless, with the results that are known to everyone.

Reagan reintroduced into American society incentives to produce, to work, to save up. In 1981 the maximum rate of income tax was lowered from 70% to 50%, and in 1986 it was dropped to 28%. Tax revenues fell in '82 and '83. In '84, they had recovered their level of '82, and in '85 they had outstripped their level of 1981! It is a very clear illustration of what is known nowadays as the Laffer Curve, which for that matter should be called 'Bastiat's Law', for the phenomenon had already been described by Bastiat, as was shown by Jacques de Guenin in an article in the 'Journal des Economistes et des Sciences Humaines' in March 1996. The above law simply explains the fact that when the State leaves more money to individuals, the latter make far better use of it to develop riches than the State itself.

With Reagan, and up till now, the United States rediscovered the means of an ever increasing prosperity. More wealth has been created in the United States over the last quarter of a century than during the preceding 200 years. 43 million jobs and 30 000 billion dollars' worth of new wealth have been created.

The way in which Margaret Thatcher developed the English economy is sufficiently well-known for us not to dwell on it. It is more useful to refer to three other examples that are less well-known in France. That of New Zealand is particularly interesting because it was initiated by a socialist government. In 1985, the situation of New Zealand was very close to that of France : high deficit, unemployment, etc. The prime minister, David Lange, and his minister of finance carried out several very bold reforms, among them the lowering of the maximum rate of income tax from 66% in 1985 to 33% in 1988. Subsidies to agriculture were suppressed, protection was abolished. The following government decided to establish the priority of freely agreed labour contracts over labour legislation. The prosperity of the country soared considerably. Unemployment fell to 4%. In due course the budget showed a surplus.

As for Chile, the country took the plunge concerning retirement pensions. It switched to pensions through capitalisation, in 1981, at the instance of a very young minister of labour, José Pinera, who had been struck by the destitution of Chilean widows. He made an enormous effort to educate the population, following which 60% of Chilean workers let themselves be persuaded after six months and 90% after two years (switching to the new system was not compulsory). The result was a strong increase in the rate of savings, thus in the capital available for investment, and a lightning increase in the rate of growth of the economy, in the order of 7% annually in the years 1980 to 1990! Today, Pinera spends his time travelling the world to explain the advantages of pensions through capitalisation and the methods for switching from one system to the other. He has been received by most of the heads of state, but not by France. He was in Paris some time ago at the invitation of libertarian associations, but it was not possible to get him an appointment with any French authorities!

Estonia is another interesting case. It is a small country that was emerging from communism and experiencing an inflation rate of 1000% per year and unemployment at 30%, when a 32-year-old historian, Mart Laar, was appointed prime minister (from 1992 to 1995, and again from 1999 to 2002). He tells the story himself, "It was lucky that I had not studied economy when we were under the soviet regime. I had read only one book on economy, 'Free to choose' by Milton Friedman. I thought that what Friedman had written about privatisation, about non graduated tax (flat tax), and about the abolition of customs duties, was the transcription of the reforms that had been successfully implemented in the West. They seemed to me of obvious interest. It only remained for me to implement them in Estonia, despite the warnings of Estonian economists who said that it was as impossible as walking on water. We walked on water". Mart Laar introduced income tax and tax on company profits at a single rate of 26%. Development was almost immediate. The rate of growth, which was negative in 1994, progressed to 4.5% as early as 1995, even reaching 10.5% in 1999. And now, 11 formerly communist countries in Europe have adopted the flat tax, including Russia. Per capita revenue has risen from $3 950 in 2001 to $7 500 in 2004. Mart Laar had read only one book on economy, but a good one. A book based on simple and sensible principles. He acted following those simple principles.

To conclude, let us come back to the French case. The solution to the French problems consists in breaking definitively with socialist ideas. That implies reintroducing the discipline of responsibility and of contractual freedom. : suppressing progressive taxation, tax on fortune and death duties, which in turn implies reducing State expenditure, as other now prosperous countries have managed to do; introducing retirement pensions through capitalisation; simplifying rules and regulations, in particular labour legislation which should be replaced by a compulsory contract that is easy to understand between employer and employee; and to open up the social security system to competition. Yet what do they do? They wonder whether social contributions should not be replaced by social VAT. The debate is utterly pointless, because all taxes end up weighing on the riches created in the firm.

Unfortunately, it is once again to be feared that we shall find ourselves in front of an opportunity missed. As a candidate, Sarkozy used a language that broke with the past and was well received by electors, a language that even referred to morals. Yet what is being done now does not live up to the expectations of a part of the electorate. Very often, the decisions taken are oriented in the right direction. But they are terribly timid compared with what should be done. Now, a timid reform gives rise to as many objections as a major reform, and yields disappointing results. They did not dare do away with the 35-hour week because they were scared. They chose instead to set up a monstrous edifice for the payment of overtime, that is, to circumvent the reform, but not completely and without saying so. They apply the well-known formula of the Shadock cartoon, "why keep it simple when it can be made complicated?". The reforms that we referred to in other countries were simple, visible, understandable and speedy. Those that we have or are going to introduce are bitty, complicated, 'pragmatic', that is to say without principles. The principles advanced by the libertarians should be trusted because they are easy to understand and because they work wherever they are applied.

Vaclac Klaus, the president of the Czech Republic, said that communism rested on two pillars : "fear and faith", and when at least one of those two pillars collapsed, the whole system collapsed. In France, we have not reached that stage yet. We are frightened, but of the unknown, of strikes, of socialists, of public opinion. And we still believe in State intervention. And yet we should trust ideas that are right. Bastiat said : "Unity should result from the universal feeling of free conviction and from the natural attraction that truth exercises on men's minds". Hayek was less optimistic. He said : "The day France becomes libertarian, to be sure the whole world will have become so before then".

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