VOLUME 60, NO 3 APRIL 2010 Features 8 Legends of the Fall: The Real and Imagined Sources of Our Bubble Economy by Richard W.Fulmer 13 The End of Medicine: Not With a Bang, But a Whimper by Theodore Levy 17 A Health Insurance Criminal Pleads His Case by James L. Payne 19 The Wisdom of Nien Cheng by James A. Dorn 24 Botswana: A Diamond in the Rough by Scott Beaulier 27 The Improbable Prose of Nassim Nicholas Taleb by Robert P.Murphy Page 17 31 Government Moonshine by Michael Heberling 34 How Shall We Live? by Paul Cleveland and Art Carden

Columns 4 Ideas and Consequences ~ Anti-Force is the Common Denominator by Lawrence W.Reed 15 Thoughts on Freedom ~ On the Rule of Law by Donald J. Boudreaux 22 Our Economic Past ~ Private Consumption: Another Downside of the Wartime “Miracle of Production” by 29 Peripatetics ~ Opaque by Design by Sheldon Richman 37 Give Me a Break! ~ Let’s Take the “Crony” Out of “Crony ” by 47 The Pursuit of Happiness ~ ObamaCare and Unions Page 6 by Charles W.Baird

Departments 2 Perspective ~ by Sheldon Richman 6 Government Must Stimulate to Avoid a 1937-Style Recession? It Just Ain’t So! by Ivan Pongracic, Jr. 39 Capital Letters

Book Reviews 41 The Beautiful Tree by James Tooley Reviewed by Max Borders 42 Capitalism at Work: Business, Government, and Energy by Robert L. Bradley, Jr. Reviewed by Michael Beitler 43 Herbert Hoover Page 44 by William E. Leuchtenburg Reviewed by 44 End the Fed by Reviewed by George Leef Perspective Murray Rothbard

Published by n 1946 the fledgling Foundation for Economic Educa- The Foundation for Economic Education Irvington-on-Hudson, NY 10533 tion published a pamphlet titled “Roofs Phone: (914) 591-7230; E-mail: [email protected] or Ceilings: The Current Housing Problem” www.fee.org I (www.tinyurl.com/cpluwy), a brief against rent control President Lawrence W.Reed written by two unknown young economists: Milton Fried- Editor Sheldon Richman man and George Stigler. They would go on to win the Managing Editor Michael Nolan Nobel Prize in in 1976 and 1982, respectively. Book Review Editor George C. Leef That’s a remarkable story. But just as remarkable is Columnists Charles Baird David R. Henderson what that pamphlet led to. When it was issued, Stigler, Donald J. Boudreaux Robert Higgs then teaching at Columbia University (his University of Stephen Davies John Stossel Chicago days still lay ahead), told a young student about Burton W.Folsom, Jr. Thomas Szasz it, perhaps changing American intellectual history. Walter E.Williams The student was Murray Rothbard. Contributing Editors “Rothbard,” writes Brian Doherty in Radicals for Peter J. Boettke Dwight R. Lee Wendy McElroy Capitalism: A Freewheeling History of the Modern American Thomas J. DiLorenzo Libertarian Movement,“was delighted to learn of an Joseph S. Fulda Andrew P.Morriss organization promoting his political and economic Bettina Bien Greaves James L. Payne William H. Peterson values. ...By 1948, had already noted Jane S. Shaw young Rothbard’s deep knowledge of market econom- Raymond J. Keating Richard H.Timberlake ics and libertarian principles (and their history) and Daniel B. Klein Lawrence H.White began to lean on him to vet articles for FEE.” Foundation for Economic Education On visits to FEE Rothbard met ,the Board of Trustees, 2009–2010 prolific libertarian author who edited the Wayne Olson, Chairman first year after Read acquired it. “Chodorov helped Harry Langenberg Walter LeCroy introduce Rothbard to the works of [Albert Jay] Nock, William Dunn Frayda Levy Jeff Giesea Kris Mauren Herbert Spencer, Garet Garrett, and Isabel Paterson, Ethelmae Humphreys Roger Ream among others,” Doherty reports. It wasn’t long before Edward M. Kopko Donald Smith he encountered , an adviser to Read. The Foundation for Economic Education (FEE) is a Thus Rothbard, who went on to become one of the nonpolitical, nonprofit educational champion of great natural-law libertarian figures in history and an , , the , indefatigable advocate/elaborator of Misesian (Austrian) and constitutionally . economics in method and substance, can be said to have The Freeman is published monthly, except for combined January-February and July-August issues. Views expressed by received vital intellectual nourishment at FEE’s Irving- the authors do not necessarily reflect those of FEE’s officers ton-on-Hudson estate. and trustees. To receive a sample copy, or to have The Freeman Rothbard, who died 15 years ago, was at once a come regularly to your door, call 800-960-4333, or e-mail [email protected]. beloved and controversial figure. He was one of the very The Freeman is available electronically through products and serv- few who shaped the modern freedom move- ices provided by ProQuest LLC, 789 East Eisenhower Parkway,PO ment at its start. Even advocates of the freedom philos- Box 1346, Ann Arbor, 48106-1346. More information ophy who never read a word he wrote have been can be found at www.proquest.com by calling 1-800-521-0600. Copyright © 2010 Foundation for Economic Education, influenced by him.With a passion nonpareil, Rothbard except for graphics material licensed under Creative Commons set out to create a self-conscious libertarian movement, Agreement. Permission granted to reprint any article from this issue, with appropriate credit, except “Let’s Take the ‘Crony’ which he accomplished through his activism and Out of ‘Crony Capitalism’.” charisma, as well as through his writings—from the

THE FREEMAN: www.thefreemanonline.org 2 PERSPECTIVE: Murray Rothbard scholarly to the popular—in economics, history, politi- will change subtly and gradually,but patients will even- cal philosophy, and social criticism. For one man to tually notice the degradation in service. Such is where have turned out Man, Economy, and State/Power and “reform” will lead, says Theodore Levy. Market; America’s ; The of Liberty; All during the debate over the reinvention of med- Conceived in Liberty (four volumes on American history ical insurance, it was taken for granted that individuals through the Revolutionary War); — should be forced to buy coverage. James Payne, who and so much more—is something astounding.We prob- refuses, is ready to accept his status as a criminal. ably won’t see his likes again. (See David Gordon’s Nien Cheng suffered unimaginable oppression at Freeman article, “Murray Rothbard’s Philosophy of the hand of the Chinese communist regime but went Freedom,” www.tinyurl.com/ycfbybb.) on to be a passionate spokeswoman for freedom. On I feel lucky to have known Murray. He was always a the occasion of her death, James Dorn offers a tribute delight to be around, whether talking about some to this heroic woman. obscure historical figure, traditional jazz (before the When people think of Africa, sadly, they think of electric guitar intruded), classic movies, or the future of poverty and oppression. But that has not been true for liberty.He was unfailingly optimistic and ever ready for Botswana. Scott Beaulier explains this little-known suc- a laugh. He was what he called H. L. Mencken (whom cess story. he treasured):“the joyous libertarian.” Nassim Nicholas Taleb is a provocative writer who To say that he was controversial even within the free- scoffs at the idea that human affairs can be predicted dom movement is an obvious understatement. His appli- scientifically. Robert Murphy introduces us to the man cation of libertarian and market principles to even the who popularized the term “black swan.” “traditional functions” of limited government—that is, Ethanol is still in our gasoline, and besides all the bad his belief that the free market can and should provide things you’ve heard about it, it also harms engines. all legitimate services competitively—stirs heated debate Michael Heberling has the details. today. While his originality in the matter he called Broadly speaking, there are only so many ways for “anarcho-capitalism” is clear, he himself might say he was society to be organized, and only one is in harmony simply picking up the baton carried by the pioneering with freedom and human nature. Paul Cleveland and nineteenth-century free-market economist Gustave de Art Carden elaborate. Molinari, whose seminal essay,“The Production of Secu- Here’s what our columnists have whipped up: rity,” Rothbard first brought to American libertarians. Lawrence Reed says he doesn’t care what you call Whatever one thinks of Rothbard’s answer to the yourself as long as you oppose aggressive force. Donald question raised therein, there can be no doubting the Boudreaux defines the rule of law. Robert Higgs dis- of the question itself; it forces one to examine the cusses capital consumption during World War II. John contours of liberty, the nature of the State, and there- Stossel dissects crony capitalism. Charles Baird antici- fore the very possibility of limiting its powers. pates how health care “reform” will help labor unions. Those who cherish liberty cannot calculate their And Ivan Pongracic, Jr., reading Paul Krugman’s claim debt to Murray Rothbard. that more government spending will fend off a 1937- * * * style recession, responds,“It Just Ain’t So!” We lead off with the winning essay in the second Books on private schools for the poor, political cap- annual Eugene S.Thorpe writing competition: Richard italism, Herbert Hoover, and the Federal Reserve Fulmer’s “Legends of the Fall:The Real and Imagined occupy our reviewers. Sources of Our Bubble Economy.” Of the 182 entries In Capital Letters, Thomas Szasz answers a reader’s addressing the causes of the current housing and finan- concerns about religious identification and George cial debacle, Richard Fulmer’s was judged the best. Schwappach explains how carrying less health insur- Congratulations, Richard! ance saved him money. As the practice of medicine becomes more bureau- —Sheldon Richman cratized by government intervention, the profession [email protected]

3 APRIL 2010 Ideas and Consequences

Anti-Force is the Common Denominator

BY LAWRENCE W. REED

llow me to alter something the great humorist happily labeled myself a latter-day “Locofoco” Will Rogers said: “I’m not a member of any (www.tinyurl.com/ycvq6b3). Aorganized group. I’m a libertarian.” I wince a bit Each person’s order of values, focus of attention, and as I say that, though. Let me explain. expertise are unique to him—so one can be a libertar- Labels such as “libertarian” aren’t always illuminat- ian, broadly speaking, and still call himself an Objec- ing. Sometimes they serve as expedient substitutes for tivist or an Austrian or a voluntaryist or a classical thought—as in, “Oh, he’s one of those!” When pressed liberal or a Christian or an atheist or a moralist or a to cough up a label to describe myself, I sometimes conservative or even two or more of those things. employ “libertarian” but not without adding a caveat or Blessed with many friends in all these camps, I two so no one assumes I’m referring to a political party endeavor to make enemies in none. I lament those or that my position on certain hot-button issues must occasions when disagreement leads to hostility between be this or that. On other occasions I call myself a people who are otherwise allies on most issues. If you “classical liberal,” but unless I have aim to make progress for the larger time to explain it, confused listeners Labels such as cause, then tolerance, bridge-building, wonder how that differs from the and finding common ground (none “liberals” of today.“Voluntaryist” (of “libertarian” aren’t of which necessitates compromise the British philosopher Auberon on fundamental principles) seem Herbert variety) describes my polit- always illuminating. more appropriate than picking fights. ical, ethical, and economic lean- Sometimes they What’s the point of self-righteous ings most accurately—unfortunately, breast-beating? though, few people have ever heard serve as expedient While I don’t label myself an the term. substitutes for Objectivist, I love this quote (and I am also other things as well. I’m many others) from : “When an “Austrian” economist (while thought. you see that trading is done, not by appreciating numerous positive con- consent, but by compulsion—when tributions from other schools of thought). I’m a Chris- you see that in order to produce, you need to obtain tian who is also a rationalist because I believe reason in permission from men who produce nothing—when an ordered universe is a divine gift. Though I don’t you see money flowing to those who deal, not in embrace Ayn Rand’s , like her I am a fervent goods, but in favors—when you see that men get richer advocate of capitalism who endorses man’s inalienable by graft and pull than by work, and your laws don’t rights, the roles of the producer and entrepreneur, and protect you against them, but protect them against the magnificence of the creative mind. I’m a conserva- you—when you see corruption being rewarded and tive in the sense that I value many time-tested tradi- honesty becoming a self-sacrifice—you may know that tions, even if I oppose mandating them by legislative your society is doomed.” fiat. I’m a moralist because I think moral principles like Afriend posted this on Facebook recently: “If FEE honesty, independence, courage, and self-discipline are and other libertarian-leaning orgs would drop all their both good and indispensable ingredients for a free soci- ety. Readers might recall that in the January issue I Lawrence Reed ([email protected]) is the president of FEE.

THE FREEMAN: www.thefreemanonline.org 4 Anti-Force is the Common Denominator religious baggage, I could support them wholeheart- A mature, responsible adult neither seeks undue edly.” I felt compelled to reply,“No one at FEE claims power over other adults nor wishes to see others that you must be ‘religious’ to value and support liberty. subjected to anyone’s controlling schemes and fan- We respect all people of faith, or no faith, so long as tasies: This is the traditional meaning of liberty. It’s they do not initiate force against their fellow citizens. the rationale for limiting the force of government in And because we judge people for the individuals they our lives. In a free society the power of love, not the are, not for the ‘group’ someone says they’re in or by love of power, governs our behavior. the label somebody attaches to them, we don’t con- Consider what we do in our political lives these demn all people of faith for the wrongs of a few any days—and an unfortunate erosion of freedom more than we would condemn all becomes painfully evident. It’s a atheists for the wrongs of a Stalin or a commentary on the ascendancy of Mao.A person’s faith or lack thereof is I don’t much care the love of power over the power of just that—personal—and not a require- what you call love. We have granted command of ment to support property rights.” over 40 percent of our incomes to I wasn’t trying to convert that per- yourself, but if you federal, state, and local governments, son to my faith, nor did I seek to esca- want to see a hefty compared to 6 or 7 percent a cen- late the exchange into a parting of the tury ago. And more than a few ways. I attempted to defuse it by reduction in the Americans seem to think that 40 emphasizing what I thought was percent still isn’t enough. friendly territory: Both of us would initiation of force We claim to love our fellow citi- like to see much less initiation of force in society, then you’re zens while we hand government in society. We live in a world where ever more power over their lives, lots of misguided people are not satis- an ally. hopes, and pocketbooks. We’ve fied that there’s enough of it yet.They erected what Margaret Thatcher advocate more initiation of force, as evidenced by their derisively termed the “nanny state,” in which we as desires to deal with every problem under the sun by adults are pushed around, dictated to, hemmed in, creating another tax-supported government program. and smothered with good intentions as if we’re still I saw this Facebook acquaintance as an ally not an children. enemy. And that’s the way it ought to be, it seems to me, if those of us who believe in liberty really want to It boils down to this: I don’t much care what you win. call yourself, but if you want to see a hefty reduction in Allow me to share with you a few paragraphs from the initiation of force in society, then you’re an ally I my May 2007 Freeman column (www.tinyurl.com/dltnal). want to collaborate with. Let’s focus not on our differ- They might form a basis for more amicable relations ences but on changing the ideas of those who are between factions that now see themselves as opponents: working in the other direction.

5 APRIL 2010 Government Must Stimulate to Avoid a 1937-Style Recession? It Just Ain’t So!

BY IVAN PONGRACIC, JR.

t is rather unfortunate that the Royal Swedish stimuli have been too small and more stimulus is Academy of Sciences’ Economics Prize Committee urgently need. This is just another round of the same- Ichose to award the 2008 Nobel Prize in economics old same-old. to Paul Krugman. It is not that Krugman did not Krugman’s article exhibits the most simple-headed deserve the prize—his contributions to international and mechanistic view of Keynesian economics: If the trade theory were indeed substantive and valuable.The economy is in the doldrums, it must be because aggre- problem is that by 2008 Krugman had long ceased to gate demand is too low, and therefore it is up to gov- be a serious economist, becoming ernment fiscal and monetary policy to instead a common pundit. Thus the raise it to its proper level. The only Nobel Prize gave his ideological and mistake that the government could highly partisan New York Times col- possibly make is to not do enough fast umn an imprimatur of economic enough. credibility that it certainly does not What Krugman fails to tell his deserve. Over the past ten years the readers is that it is widely accepted economic analysis found in his col- among modern economists that the umn has regressed to Keynesian cari- 1937 recession was primarily caused cature, bereft of the depth or subtlety by another kind of government mis- that one would expect from a Nobel take. The Fed did indeed start tight- laureate. Instead, the purpose of his ening in 1936, but the problem column is quite clear: to justify was how it did it. Instead of using expansion of government control of open-market operations to gradually the economy under all circumstances, increase interest rates in order to con- facts and good economics be damned. Paul Krugman tain any inflationary pressures, it chose Prolineserver (commons.wikimedia.org) instead to use its new power (granted A Broken Record by Congress the previous year) to set “ hat 1937 Feeling” (January 14; www.tinyurl.com/ the banks’ reserve requirements—the percentage of Ty9etge7) is an excellent example. Krugman deposits that banks must hold either in their vaults or at argues that the recent signs of economic recovery are the Fed. We now know that changing the reserve very likely deceptive and therefore the government requirements is highly disruptive to bank operations should not even think about easing up on the fiscal and and is simply too blunt of a monetary tool—even small monetary gas pedals anytime soon. He points to the changes can have a great impact on money supply. 1937 recession as an example of the awful conse- Ivan Pongracic, Jr. ([email protected]), is an associate professor of quences of premature tightening. For the past year economics at Hillsdale College, and the author of Employees and Krugman has insisted that the government’s economic Entrepreneurship.

THE FREEMAN: www.thefreemanonline.org 6 Government Must Stimulate to Avoid a 1937-Style Recession? IT JUST AIN’T SO!

Rushing like fools where wise men fear to tread and the Fed, all together adding up to nearly $3 trillion, or clearly oblivious to the destructive potential of this new more than 20 percent of GDP—the economy is still far tool, the Fed engaged in three back-to-back increases in from healthy.Unemployment is stuck at 10 percent, and reserve requirements between August 1936 and May nobody is expecting a quick recovery. But we did get 1937, causing a severe tightening of the money supply the record federal budget deficit of $1.4 trillion (10 in a very short time. It is no surprise that the American percent of GDP) in fiscal 2009, bringing the gross economy, just as it appeared poised for a modest recov- national debt to a record $12 trillion-plus, on track to ery, was plunged into a serious recession—within the hit 100 percent of GDP in 2011 and calling into ques- depression! tion the future fiscal viability of the U.S. government. Add to the mix the unfunded liability time-bombs A Terrible Record of Medicare and Social Security, and it becomes obvi- he moral is not that the Fed shouldn’t be tighten- ous that sky-high tax—or inflation—rates are Ting now. Rather, it is that when the Fed makes inescapable. In addition, every one of the proposed a mistake in monetary policy, the consequences are government interventions—and many others being often dire. And the Fed’s record over the past nearly bandied about today—is likely to increase taxes on hundred years is disastrously bad, with even its defend- individuals and businesses, as well as significantly esca- ers admitting that it has often been a major destabiliz- late regulatory oversight, making it more difficult and ing force in the economy. riskier to run a business. How many Krugman also fails to note that the of these acts will pass into law and U.S. government is repeating other The Fed’s record what forms will those laws take? No mistakes committed in 1935-36: over the past nearly one can know. It is easy to see why attempting to radically reorganize key entrepreneurs, who in the end are the economic sectors, pursuing new soak- hundred years is ones creating economic growth and the-rich taxes, and vilifying business- jobs, would be worried enough men and financiers in the process.The disastrously bad. about the future to simply stop economy may be forced to fundamen- investing. tally change how the health care sector operates, creat- The dynamic at work here has been labeled “regime ing another enormous unfunded liability for the federal uncertainty” by economist and Freeman columnist and state governments and possibly a major burden on Robert Higgs in his article “Regime Uncertainty:Why individuals and businesses. The Obama administration the Great Depression Lasted So Long and Why Pros- has also vigorously pursued carbon cap-and-trade legis- perity Resumed after the War”(The Independent Review, lation, which would drive up energy costs, potentially Spring 1997). Higgs defines regime uncertainty as a by large amounts. On top of this, there has been much state of “pervasive uncertainty among investors about talk of completely revamping and tightening banking the security of their property rights in their capital and and financial regulation. its prospective returns . . . [due to] government actions.” In short, we are in the middle of the most ambitious Higgs shows how the “Second from 1935 to government-enlargement agenda since probably the 1940” scrambled the rules of the game to such an New Deal. Does it come as much of a surprise that we extent that many entrepreneurs simply withdrew from are getting similar results? the economy rather than continue to attempt to create After pouring massive amounts of money into the wealth. economy in the past two years—two fiscal stimuli total- Krugman needs to read Higgs’s brilliant and detailed ing $952 billion, the $700 billion TARP program, the historical and theoretical analysis to understand the real $102 billion increase in discretionary domestic spend- reason we should worry about repeating the 1937 reces- ing by the federal government in the 2009 fiscal year, sion: government’s doing too much rather than not and the $1.2 trillion increase in the monetary base by enough.

7 APRIL 2010 Legends of the Fall:The Real and Imagined Sources of Our Bubble Economy

BY RICHARD W. FULMER

Preface tional. It’s not what people do with or to the system— he Foundation for Economic Education is it’s the system itself. pleased to announce that Richard W.Fulmer of The selection committee thanks all the contestants THumble, Texas, is the winner of the second for their contributions. The rules allow for only one annual Eugene S.Thorpe writing competition. Mr. Ful- winner, but special recognition and honorable men- mer holds a bachelor’s degree in mechanical engineer- tions are in order for several of the runner-up contrib- ing from New Mexico State University and for over 20 utors. Erin Mundahl of Independence, Minnesota, years has worked as a systems analyst in the energy wrote of government policies that disrupted the natural industry.With Robert L. Bradley, Jr., he is the author of brakes on risk taking: “Free-market policies naturally Energy: The Master Resource. His article, limit risk exposure. Regulations which encouraged or “Legends of the Fall: The Real and Imagined Sources even mandated an expansion of risk counteracted this of our Bubble Economy,” is published below. natural limitation.”The risks were ultimately socialized We have for the better part of a century now lived to the taxpayers. The returns accrued to the congres- in a world of fiat money, and fiat monetary systems are sional and bureaucratic elites that benefited both finan- sophisticated versions of central planning. The belief cially and politically. Government operates outside the system that supports them carries an inherent hubris confines of the natural constraints imposed by profit that the planner’s vision of the future is sufficiently pre- and loss, and grants political rewards based on the social cise to chart the path of the chaotic interaction of vari- choices valued by bureaucratic actors. ables that made up an economy. It is a recurring myth, Charles N. Steele of Hillsdale, Michigan, observed with consistent historical outcomes. Mr. Fulmer’s paper that government not only did what it shouldn’t; gov- goes directly to first causes and discusses the real estate ernment also failed to do what it should. A free mar- bubble as a predictable consequence of our central- ket cannot function without the supportive banking system. infrastructure of the rule of law, and one of the legiti- One hundred eighty-two authors responded to mate functions of government is to prosecute criminal FEE’s call for papers in competition for the 2009 activity.Mr. Steele observes that “Deception, false rep- Eugene S. Thorpe Award, and many wrote eloquently resentation of products, and failure to live up to con- of multiple secondary causes. The unintended conse- tractual terms are not legitimate methods of quences of the Community Reinvestment Act? Fannie, competition in the free market. They are criminal Freddie, Ginnie, and assorted ill-conceived cousins? activity, and the free market requires that such activi- Zigging instead of zagging by our central bankers? ties be policed.” Just so. Political opportunism and legalized graft? All surely true. Greed and other venal motives? Of course. But it Richard Fulmer ([email protected]) is a senior fellow with misses the point to blame either human motivation or the Institute for Energy Research and coauthor (with Robert L. Bradley, Jr.) human error. The problem is systemic and founda- of Energy:The Master Resource.

THE FREEMAN: www.thefreemanonline.org 8 Legends of the Fall

From Nero to FDR, emperors and their kin have The Monetary Cycle listened to the sirens of monetary manipulation. The upply and demand regulate prices in a free-market voices are enchanting and sing of wealth without work. Seconomy. Increased borrowing (demand for loanable But the ships of many states have foundered on the funds) or decreased saving (supply) leads to rising interest rocky shores to which such fantasies inevitably draw rates (prices). Conversely, lower interest rates stem from them. Real wealth creation cannot be manipulated; it less borrowing, more savings, or both. More saving means results from increased efficiencies of resource allocation that consumers favor future consumption over current and production. A drunken Saturday night party may spending. Banks, with rising deposits on hand, drop their be fun while it lasts, but the Sunday morning hangover interest rates to compete for borrowers. Capital invest- that follows is a predictable consequence of the short- ments deemed infeasible when interest rates were higher sighted behavior that created it. Unless and until our now appear attractive. Companies borrow to expand pro- system of monetary creation and control is redesigned ductive capacity, anticipating future rising demand made to benefit from the power of market pricing mecha- possible by rising present consumer saving. nisms, we can expect the recurring cycle of boom and Suppose, however, that the government intervenes bust to continue. to artificially lower the price of money. Reduced inter- Congratulations to Richard W. Fulmer on his win- est rates make saving less attractive and consumption ning article. more so. At the same time businesses, taking advantage Karl Borden of lower rates, borrow to fund expansion. Prices rise Professor of financial economics, University of Nebraska-Kearney as consumers and producers compete for scarce Chairman, Eugene S. Thorpe Writing Competition Committee resources—a sack of seed corn cannot be both eaten and planted. Sales increase and markets boom. Eventu- ally, however, the central bank must raise interest rates * * * to prevent inflation, and the boom goes bust. Businesses find that they have overinvested or invested in the wrong things. usinesses, competing for consumer dollars in a Such malinvestment is an unsustainable allocation of free market, must deal with the world as it is in scarce resources to create goods and services for which Border to survive. Politicians, competing for con- there is insufficient demand. A correction occurs when stituent votes, spin facts to recreate the world as they resources are reallocated to produce what people actu- want it to be in order to gain support for their policies, ally want. Corrections can be very painful as industries hide mistakes, and shift blame. In this world of spun that overexpanded during the boom now downsize, reality, the failure of government intervention provides shedding employees and suppliers. Avoiding the adjust- the rationale for still more intervention. So spins the ments, however, simply postpones the pain. Resources endless cycle in which legislatures create unintended often continue to be poorly invested, compounding the consequences, condemn “market failure,” and demand damage and making the inevitable correction that further legislation. Government grows in crisis, even if much more agonizing when it comes. it created the crisis. Boom and bust cycles nearly always result from mon- Our current financial problems provide an illustration etary expansions that disrupt the price signals regulating of this all-too-familiar pattern. In response to the hous- an economy. Such expansions preceded Holland’s Tulip ing bust, politicians hid behind long-discredited myths, Mania in 1636–1637, the nineteenth-century banking moving swiftly to lay blame variously on Wall Street panics in the , the Great Depression, the greed, oil speculation, investors’ animal spirits, deregula- dot-com bubble, and the current housing debacle. tion, unrestrained capitalism, predatory lending practices, Ironically, these monetary cycles are called “business and, of course, the business cycle.Yet even a brief look cycles,”as if they were an inherent part of the free mar- at the facts reveals government intervention throughout. ket. Proponents of some business-cycle theories believe

9 APRIL 2010 Richard W. Fulmer that, left unregulated, businesses will overproduce, cre- based on other vehicles that were, in turn, based on ating a glut of unwanted goods. Factories must then mortgages. reduce production or even shut down until the glut is The complex system that resulted was inherently eliminated. unstable and was made more so by regulations that Yet what mechanism would drive businesses in dif- coerced lending institutions into making home loans to ferent industries across an entire nation to produce borrowers who could not afford to repay them. In addi- unwanted goods? How could, to cite the most recent tion, Congress encouraged Freddie Mac and Fannie example, home builders in California, Nevada,Arizona, Mae to buy trillions of dollars worth of these “sub- Florida, and markets in between have simultaneously prime” loans, enabling lending institutions to engage in misread local demand to such an extent? A nationwide even more such dangerous lending with little (or spike in greed? Irrational exuberance? Bankers’ reduced) incentive to vet borrowers. bonuses? A simpler, more rational explanation is that Credit-rating agencies, members of a cartel created they were misled by government policies that artifi- by the Securities and Exchange Commission, gave cially inflated housing prices, giving the appearance of unrealistically high ratings to packaged debt containing greater demand than was actually there. Overproduc- subprime loans. Basel II, an international banking tion is a symptom, not a primary cause. accord, similarly understated the associated risks and encouraged The Housing Bubble Government policies banks to hold mortgage-backed arly in the new millennium, the artificially inflated securities by requiring them to keep EFederal Reserve slashed interest smaller cash reserves to back such rates in response to the dot-com col- housing prices, instruments than it required for tra- lapse and the 9/11 attacks. Other leading builders ditional loans. Implicit government nations’ central banks soon followed support for Freddie Mac and Fannie suit. Now awash in liquidity, investors across the country to Mae and the “Greenspan put” (an from around the world needed invest- believe that consumer unstated Federal Reserve policy of ments that would yield returns higher injecting liquidity into the economy than the rate of inflation. Coinciden- demand was greater in response to any serious difficulty) tally, American local and federal poli- encouraged investors to take risks in cies—including land-use restrictions, than it actually was. the belief that the government preferential tax treatment, buyer subsi- would cover any losses. dies, and regulations favoring low-income buyers—had Speculators exploited zero-down loans and made investing in residential housing more attractive “adjustable-rate mortgages,” intended for disadvantaged than other options. Housing prices rose as homeowners home buyers, and began “flipping” homes (buying houses upgraded and renters became owners. only to quickly resell them at a profit). In some cases, Home loans were sold in the secondary mortgage houses were built strictly as investments—built to be sold market, which is dominated by the government-spon- and sold again, not to be occupied. Such overbuilding sored enterprises: the Federal Home Loan Mortgage could not be sustained and, when the Federal Reserve Corporation (Freddie Mac) and the Federal National raised short-term interest rates—contracting the money Mortgage Association (Fannie Mae). Mortgages were supply—the bubble burst.The value of investments based then bundled into “packages” in order to diversify risk. on bundled home mortgages quickly plummeted. Individuals and institutions worldwide purchased these Mark-to-market accounting rules enforced by the packages as investments. “Derivatives” such as credit- Securities and Exchange Commission (SEC) com- default swaps (essentially insurance against bond or, in pounded the problem. SEC rules required financial this case, loan failure) and other such securities created instruments to be valued at current market prices, a “multiplier effect,” as these investment vehicles were amplifying the effects of both boom and bust. Mort-

THE FREEMAN: www.thefreemanonline.org 10 Legends of the Fall gage-based securities, overvalued when housing prices about the same way. Central bankers cannot see into soared, became undervalued as the panic grew and the future.They see only dimly where they are, and it is financial institutions saw their assets become virtually only in hindsight that their vision is clear. The impact worthless almost overnight. of adjustments they make to the money supply may not The key intervention and primary cause of the be fully felt for a year or more. Such a system, like our entire cycle of events, however, was the Fed’s initial car, is inherently unstable. monetary expansion. Government policies all but dic- In response to the bust the Federal Reserve has tated that the resulting boom would be concentrated in moved quickly to re-inflate the economy, just as it had residential housing and that the eventual bust would be done after the dot-com collapse. The result is being far worse than it would otherwise have been. Even termed a “recovery,” but more likely it is another over- without these policies, though, a boom would still have correction, the beginning of yet another boom and bust occurred. Perhaps it would have been concentrated in cycle, and a further misallocation of scarce resources. another sector of the economy; or perhaps there would We cannot spend our way into prosperity. Production, have been a general rise in capital investment. Either not consumption, creates wealth. way, once the Federal Reserve triggered the expansion, a boom was inevitable. And, because The Road Back the boom was artificial (that is, the In response to the bust e face two basic issues: How credit expansion was not based on Wdo we recover from the cur- real savings), a bust had to follow. the Federal Reserve rent recession, and how do we stop Government control of a nation’s monetary boom and bust cycles? The money supply guarantees boom and has moved quickly to answer to both is to increase eco- bust cycles. To illustrate this, imagine re-inflate the nomic freedom. a car with some very special features. Our immediate problem stems Its windshield is frosted so that the economy.The result from an imbalance between money driver cannot see where he is going, is more likely another and goods and from resource misallo- and its side windows are just clear cation resulting from government enough to allow him only a vague overcorrection than a interference with the market. The idea of where he is.The rear window money-goods balance can be restored alone affords an unobstructed view. “recovery.” by shutting off the federal money Finally, the steering linkage is on a spigot. This requires reining in gov- 30-second delay.The car will not change course until ernment spending (which competes with the private half a minute after the driver turns the steering wheel. sector for scarce resources), cutting taxes, and freeing Now imagine trying to drive such a car.You steer a markets. Correcting the misallocation of resources straight course as long as you see the highway stretched requires eliminating the policies that favor residential out behind you in the rear view mirror.When the road housing over other consumer needs. curves, you realize it only after the fact.You turn the The longer-term problem of taming boom and bust wheel to get back on the highway, but nothing cycles can be addressed only by eliminating the Federal happens. So you turn the wheel some more. Again, Reserve’s money monopoly. Repealing legal tender nothing happens, so you turn the wheel still farther. laws (which grant a monopoly on the creation of media Suddenly, the steering kicks in, and the car veers of exchange to the Federal Reserve) would free Amer- wildly. Desperately, you swing the wheel in the other icans to choose forms of money that both meet their direction, but the car continues turning the other way. needs and maintain their value. What follows is a series of violent overcorrections end- Before any of this can happen, though, the myth of ing in a crash. the “business cycle” must be dispelled. Legends are lux- Trying to regulate a nation’s money supply works uries we cannot afford. Reality is not optional.

11 APRIL 2010 THE FREEMAN: www.thefreemanonline.org 12 The End of Medicine: Not With a Bang, But a Whimper

BY THEODORE LEVY

ocial change can be revolutionary, sudden, and curiosity. More and more people who cannot tolerate swift, but more commonly it moves at a glacial bureaucracy will be weeded out. Questioning author- Space. Yet glaciers work great change, and great ity will become as dangerous in medicine as it is in damage, given enough time. policing or the military.The 40-hour physician work There has been much talk of people leaving the week, on the other hand, will become commonplace, medical profession if government further bureaucratizes and the type of person attracted to medicine will not health care. But the odds are great that there won’t be be the type who is willing to work any longer, or any any dramatic job stoppage. No medical “Galt’s Gulch” harder. will form where masses of physicians on strike will live Health care will be less a service than a . in peace and solitude, some building cars and others All your complaints will have answers, if not always the mining copper, all vowing never to return right answers. Workups will be standardized to medicine until their demands are met. by “expert panels” allegedly educating physi- Such is the stuff of fiction. But the reality is cians as to “best practices.” And if the “best much worse. practice” is to not treat you because it is not What will happen is more insidious, cost-effective to society,the fact that you want though over time no less damaging. There and are willing to pay for the treatment will will be an increase in early retirement, as be seen as a problem rather than a solution. more physicians tire of their jobs. More These panels are designed to save money physicians will take time off and let their by making workups more efficient and uni- practices suffer at the margin. Patients will form, but the reality is different. More expen- have slightly more difficulty making appointments . . . sive imaging tests routinely substitute for less expensive each year . . . year after year, though never so quickly as physical exams because the quality of physical exams to lead to mass complaints or a recognition that things varies and doctors have little incentive to improve their are obviously worse. own abilities at examination. Not only is it becoming Coverage will be shunted to physicians’ assistants, something of a lost art (“Why use a stethoscope to listen nurse practitioners, emergency department physicians, for a heart murmur when we can just see it on a cardiac hospitalists, and partners. Fewer patients will feel they ultrasound exam?”), but it takes time.And since doctors have their own doctors. This will not necessarily be are paid by third parties more concerned about effi- worse—I don’t feel I have my own McDonald’s, yet the ciency than quality, taking time with patients—improv- food remains as I expect—but it may be worse, to the ing one’s diagnostic exam skills—is a luxury fewer and extent quality of care depends on background knowl- fewer physicians can afford. edge of individuals. The filter of who gets into medical school will Theodore Levy ([email protected]) is a physician practicing in the change. Fewer will enter the field due to intellectual Southwest.

13 APRIL 2010 Theodore Levy

Does this sound unbelievable? It is happening There is already a spectrum of quality available in already. In the 1990s the Office of Inspector General medicine, and those with means can obtain better med- investigated major teaching hospitals in America. Tax- ical care than those without, just as O.J. Simpson was payers are billed by such institutions for training new able to obtain better legal services than your average generations of physicians. PATH (Physicians at Teach- defendant—the first time. But that spectrum risks ing Hospitals) audits found patients in these hospitals becoming more rigid, more settled. What has been, in were commonly evaluated by medical students or America, health care for the poor will become health interns only. Attending senior physicians were fraudu- care for all but the very rich. But the cost curve will lently simply “signing off,” saying, “I agree,” without bend downward. ever seeing the patient.The University of Pennsylvania Or will it? Medical salaries will bend downward, Hospital settled a PATH dispute for $30 million, and certainly, but administrative costs associated with gov- Thomas Jefferson University Hospital did so for $12 ernment programs are always huge, and always underes- million. Anecdotes describing such problems abound, timated. Medicare spending now is an order of including hospital charts saying, “Physical exam shows magnitude higher than the projections in 1965 of what both pupils equally reactive to light,” when the patient it would be now. But we do know this: Bending the had actually been blind in one eye for decades, a mis- cost curve of medical care in either direction comes take much more easily attributable to the exam’s never with costs. having been done than to error. If it’s bent downward people will wait longer for Slowly and gradually community health care that is not as good as it hospitals will come to resemble VA could have been.We often buy things hospitals. Centers of excellence will Slowly and gradually “not as good as they could have be advocated in theory—evidence- community hospitals been,”Chryslers rather than Cadillacs, based medicine will be the byword to Range Rovers rather than Rolls “bend the cost curve downward” by will come to resemble Royces, but those choices are made at eliminating “inefficiencies.” But will VA hospitals. the individual level, not forced on us they really be excellent, or will they by “society.” And those choices are, merely be better than whatever else is well, choices—not a byproduct of a available? Will they be free to innovate? Will they be system we cannot control. free to profit if their innovations are successful? Will Or the cost curve can bend upward, perhaps due to they simply be the medical equivalents of the best cars hidden governmental administrative costs, perhaps on the road in Cuba? because AARP is a strong lobby. And we’ll feel the Pharmaceutical innovation, produced by those evil pinch in other areas, as our debt grows, as our prosper- for-profit companies that even doctors love to ity lags and falters and becomes a quaint piece of his- denounce, will drop off. Not precipitously, but eventu- tory we teach our children (or perhaps, in our guilt, ally. And people will die, as they have died since time hide from them). immemorial, without anyone ever knowing what drugs We’ll pride ourselves, as we do now, on “the best might have improved or extended their lives, if only health care system in the world,”even while we also brag there had been greater incentives to produce them. that we have universal care, just like the great nations of As noted, imaging studies will become more impor- Europe. And we’ll suffer with double-digit unemploy- tant but will also become more difficult to schedule. ment, just like the great nations of Europe.And we’ll have And the quality spectrum between optimally inter- lower growth in productivity,just like the great nations of preted exams and standardly interpreted exams will Europe. And we’ll have smaller houses and cars, just like continue to widen. The Current Procedural Termi- the great nations of Europe. But it will be all right, nology (government billing) codes are the same, inde- because we’ll be able to wait . . . and wait . . . and wait pendent of the quality of the interpretation. ...for our turn at the health care that is our right.

THE FREEMAN: www.thefreemanonline.org 14 Thoughts on Freedom

On the Rule of Law

BY DONALD J. BOUDREAUX

veryone agrees that the rule of law is good, both Law in fact emerges from the everyday actions of morally and economically. Almost no one— men and women in their ongoing efforts to thrive and Eregardless of political ideology—dares to ques- to keep from bumping disruptively into each other. tion the great goodness and importance of the rule Law becomes embedded in the predominant expecta- of law. tions of persons in a community. I certainly don’t question it. To pick an extreme example, the unprovoked But what exactly is the rule of law? In answering this killing of a peaceful person is not unlawful because question we uncover reasons why persons with vastly government has declared the act illegal. Such an different views on the appropriate role of government action is unlawful because it violates deeply held all sincerely proclaim allegiance to the rule of law. community norms and expectations. Striking from Here is what is not of the essence of the rule of government’s statute books all proscriptions against law.The rule of law does not exist simply because the murder would not in the least make murder lawful. government that issues commands and enforces the law In principle, in a classically liberal world, a govern- is legitimately and democratically ment formalizes laws against mur- elected. The rule of law does not exist der, and uses some of its resources simply because commands and laws are Almost no one— to police against murder, because enforced according to their letter, with- regardless of political government is the organization in out bias or exception or corruption. society that has the comparative The rule of law does not exist simply ideology—dares to advantage at performing such polic- because everyone in society, including question the great ing. For much the same reason that those with political power, is subject to Starbucks specializes in retailing the government’s commands. goodness and coffee, government specializes in Each of those traits of a decent polit- importance of the enforcing law. And just as Starbucks ical and legal system is desirable, but responds to prevailing consumer neither separately nor collectively are rule of law. demands—just as Starbucks is not they the essence of the rule of law. in business to tell consumers what they want and don’t want, but instead is in business to Rules and Laws serve consumers according to their specific tastes for he rule of law exists when, and only to the extent coffee and pastries—a genuinely classical-liberal gov- Tthat, the rules enforced by government are in fact ernment is not in business to foist its demands and dic- law. tates on citizens, but instead to serve citizens by My definition might sound like a tautology.After all, enforcing laws that exist independently of government. don’t rules become laws precisely by being enforced by Only by understanding law in this way can we make government? sense of the familiar stricture that “ignorance of the law No. But confusion over the meaning of “rule of law” springs from the widespread but mistaken belief Donald Boudreaux ([email protected]) is a professor of economics at that it is by virtue of being enforced by government George Mason University, a former FEE president, and the author of that rules become law. Globalization.

15 APRIL 2010 Donald J. Boudreaux is no excuse.” Because true law is always embedded in be—a defense against failure to behave as the legislature prevailing community expectations, society is happier commands. and more peaceful the more people act lawfully—that is, the more people act consistently with these expecta- Undeserved Respect tions. So the rare person who in fact does not know nfortunately, because legislative and bureaucratic what these expectations are is not permitted to violate Udiktats are mistakenly called “laws,”they too often the law simply by pleading—or even by proving—that receive a degree of respect and esteem that they do not he really didn’t know that, say, it’s unlawful to take deserve. another person’s purse without permission. One genuine feature of the rule of law, therefore, There’s no sense of injustice in punishing such a that common parlance does get right is that the rule of purse-snatcher.The laws that are violated in such cases law is indeed contrasted with the “rule of men”—that are not in any way arbitrary; they grew organically is, with the rule of specific persons. The rule of law is within the community and are important to its contin- the rule of norms that have evolved into widely held ued peaceful existence. Also, because expectations. No person, no commit- the expectations that are “law” are in tee, no Congress or Parliament or fact so widespread, the probability of Because legislative even court created these norms— any given law-breaker really being and bureaucratic these laws. Like market prices and pat- ignorant of the law is so slim that it’s terns of production, true laws (to use not worthwhile to let his alleged diktats are mistakenly one of Hayek’s favorite phrases) “are ignorance stand as a potential defense called “laws,” they the result of human action but not of against his prosecution. human design.” Contrast this expectations-based too often receive a The rule of law means general def- understanding of law with the mod- erence to those norms and expecta- ern myth that laws are only those degree of respect that tions that emerge out of decentralized commands issued by the State.Would they do not deserve. human action. The opposite—rule by most of us be sanguine punishing, in diktat—always means rule by individ- the latter case, a law-breaker who uals exercising coercive power to really and truly was ignorant of the State’s dictate? I override these norms and expectations. The fact that think not. these individuals who exercise this power might be While it’s highly unlikely that, say, a purse-snatcher elected in no way transforms the diktats they impose is unaware that purse-snatching is unlawful, it’s not at into true law. all unlikely that, say, a property owner is unaware that Law as it is defined here is never perfect. It can be, the legislature or a bureaucracy has declared it a crimi- and historically has been, infected with any number of nal offense to fill in a small water hole in his backyard. imperfections. But it has the great virtue of seldom Also, the fact that community norms do not proscribe being a tool of power-seeking, or power-wielding, property owners from filling in their water holes is human beings. The diktats that power-hungry rulers strong evidence that filling in such holes does little or create—and which these rulers call “law” in order to nothing to disrupt the smooth functioning of society. drape their diktats with faux legitimacy—are almost So while ignorance of the law, as it is embedded in always tools to further the specific ends of the rulers norms and expectations, truly is no excuse for violating without much regard for the long-run welfare of ordi- the law, ignorance of legislative diktats is—or ought to nary men and women.

THE FREEMAN: www.thefreemanonline.org 16 A Health Insurance Criminal Pleads His Case

BY JAMES L. PAYNE

f mandatory health insurance goes through, it will savings and can afford medical expenses out of pocket. turn me into a criminal. I don’t have health insur- (Census Bureau figures for 2000 show that over 18 mil- Iance. I don’t want it. And I will refuse to buy it lion households had assets in excess of $250,000). Our even though I can afford it. Before they lead me to the savings make it possible for my wife and me to decline cell, perhaps the prisoner may be allowed to say a few both private insurance and Medicare (we are 70).Those words in his defense. without savings are in a different situation:They proba- It’s understandable that politicians are eager to elim- bly need insurance, or a subsidy, or charitable help. My inate the medically point is that if you uninsured. For years can handle your own they’ve been told that medical bills through we are the flies in the savings and personal ointment of health responsibility, this is care policy. It is said a sound approach. we are either a) Politicians should wrecking the system encourage this state by using services we of self-reliance, not don’t pay for, or b) criminalize it. deprived of needed There are many medical care and advantages to being therefore objects of insurance-free. The pity and subsidy. first is flexibility. These points may Several years ago, my apply to some unin- wife had a serious sured but not to all. bout with cancer. Some of us belong in ©iStockphoto.com/Andrejs Zemdega The successful treat- what might be called ment involved sur- the “successfully uninsured” category.We are not free- gery and local radiation therapy. After much study she loaders.We believe we have an obligation to pay for the refused the more massive radiation treatment recom- medical care we receive, and we always pay for it. I put mended by the doctor and pursued alternative thera- no financial burden on doctors, hospitals, or taxpayers, and politicians are wrong to assume I am part of the Contributing editor James Payne ([email protected]) has taught political country’s health care problem. science at Yale,Wesleyan, Johns Hopkins, and Texas A&M. His latest book is A History of Force: Exploring the Worldwide Trend Against Politicians are also wrong to assume that I am an Habits of Coercion, Bloodshed, and Mayhem. This article first object of pity. Like many Americans, I have significant appeared at TheFreemanOnline.org.

17 APRIL 2010 James L. Payne pies, including acupuncture, nutritional therapy, mas- lists so that some patients die before their opportunity sage, and naturopathic medicine. Every decision was for treatment comes up.They ban the use of expensive made in terms of what seemed best to treat this illness. treatments and alternative therapies. And, without We were not drawn into using inappropriate therapies exactly saying so, they underfund medical facilities, so because they were “free,” nor did we pass up desirable that patients wait in the halls of emergency wards, for therapies because they were “not covered.” example. In commercial insurance plans rationing is The second advantage of being insurance-free is we implemented by restricting coverage to specific proce- avoid bureaucracy.We don’t fill out insurance forms; we dures and specific doctors—and by setting upper limits don’t make phone calls trying to find out what’s covered; to coverage. and we don’t play games (with the collusion of doctors) Paying your own medical bills is simply another way trying to get things we need paid for by someone else. If of limiting consumption: If a treatment costs too much, an aching back suggests the need for a different mattress, you don’t buy it. The advantage of self-rationing is it we go out and buy one and don’t waste time and money is frank and open, and thus avoids the whining and trying to prove to some clerk that it’s covered.When the blaming that characterize bureaucratic systems. government offered a new piñata of benefits in the form of prescription Spending my own No Blame Game drug coverage, we entirely escaped aying your own medical bills also the frustration of figuring out how to money on health care Plets you see that there are more deal with its staggering confusion. helps me set a socially constructive ways to use funds While other seniors were closeted than spending on health care. Suppose with lawyers trying to decide what to rational limit to that to fix your limping gait requires sign up for, we went hiking. complicated care costing hundreds of Refusing health insurance may medical spending, thousands of dollars. If others pay for have advantages, but what will hap- even on spending to this care, you might accept it. But sup- pen if I face a medical problem that pose you are paying for it with your requires more than my savings? To preserve my life. own savings. Now you might think understand my answer, consider a twice about spending the money on parallel question about some other commodity—say, yourself.You might know of a school for autistic chil- housing. I announce that I believe in paying for hous- dren that could put the money to good use. Or you ing from my own financial resources. Someone points might have a grandchild who needs the money to start out there might be a house I want that costs more than a business. I can afford. That’s just too bad: I don’t get to buy it. Such decisions are indeed difficult, but we need to I limit my housing consumption according to my face them if we are to make sensible choices about resources. health care.Today we are not facing them.We are hid- I look at medical care the same way: If something ing behind the confusion of a tangled government/cor- costs too much, I do without.This position, so obvious porate system that pretends we can have all the medical and sensible in other areas, is considered untenable care we want. when it comes to medical care. In this realm the pre- Spending my own money on health care helps me vailing assumption is that everyone is entitled to all the set a rational limit to medical spending, even on spend- health services he needs or wants. ing to preserve my life. Not buying health insurance It’s one thing to announce this entitlement as an and not allowing politicians to force others to fund my ideal, but quite another to make it work. In the real needs helps me keep my consumption of medical world medical resources are limited, and therefore all resources within fitting bounds. approaches to health care funding employ rationing. This way of looking at health insurance may be old- In tax-based systems administrators establish waiting fashioned, but should it be a crime?

THE FREEMAN: www.thefreemanonline.org 18 The Wisdom of Nien Cheng

BY JAMES A. DORN

ien Cheng, author of Life and Death in forever in 1980 and settled in Washington, D.C., Shanghai (1986), died in Washington last in 1983. NNovember at the age of 94. She was an Anyone who knew Nien Cheng could immediately incredibly courageous woman and the embodiment of see that she was special—even the doctor at the No. 1 grace and wisdom. Detention House said he never met a more “truculent She loved traditional Chinese culture, but her world and argumentative” prisoner. When she learned of her was shattered on August 30, 1966, when the Red imminent release, she refused to leave the prison unless Guards ransacked her home and, on September 27, the authorities declared, in writing, that she was “inno- arrested her. She spent the next six and a half years in cent of any crime or political mistake.”She insisted that Shanghai’s No. 1 Detention House, in they offer “an apology for wrongful solitary confinement. arrest” and called the official statement “a Communist Party interrogators sham and a fraud.” accused Cheng of being a spy, but her In that statement she was accused of real “crime” was that she was viewed as a conspiring with the British government “capitalist roader.” She had attended the because in a letter she signed in 1957, London School of Economics (LSE) in shortly after she joined Shell, “she the 1930s, where she met her husband, divulged the grain supply situation in Kang-chi Cheng, who later became gen- Shanghai.”That accusation was ludicrous. eral manager for Shell Oil in Shanghai. Her secretary was merely conveying When he died in 1957, Nien Cheng common knowledge to the incoming became a special adviser to the new gen- general manager, who was still in Lon- eral manager. She was the highest-ranked don—namely, that “the Shanghai govern- Nien Cheng outlasted Maoist torture, businesswoman in China at the time. Her theft, and the murder of her only ment allows everyone twenty catties of skills in dealing with party officials were daughter. grain per month.” invaluable and helped Shell stay in China After nearly seven years in prison she until the start of the in 1966. declared,“I shall remain here until a proper conclusion During her imprisonment Cheng refused to admit is reached about my case.”The authorities refused, and any wrongdoing. She was tortured and nearly died, but two female guards had to drag her out of prison. It was her determination to survive and her deep faith gave not until later that Cheng learned that her interrogators her the strength to persevere. She was released from were trying to get her to confess to being a spy so that prison on March 27, 1973, only to find that the had murdered her only child, Meiping, for fail- James Dorn ([email protected]) is a China analyst at the and professor of economics at Towson University in Maryland.A shorter version ing to “confess” and denounce her mother as a “class of this article first appeared in the South China Morning Post, November enemy.” Cheng’s one hope in life was gone; she left 15, 2009.

19 APRIL 2010 James A. Dorn

Jiang Qing (’s wife) and other radicals “Though the salary of a member of the was could oust Premier , a moderate who no more than eight or ten times that of an industrial favored allowing foreign firms like Shell to operate in worker, the perks available to him without charge were China. comparable to those enjoyed by kings.” It was only after Mao’s death in 1976 and Deng The under Mao’s iron Xiaoping’s decision to open China to the outside world fist destroyed civil society and traditional culture.A new that Cheng was officially declared innocent of any China was created after the Communist victory in crimes against the State and “rehabilitated” in Novem- 1949, but it was not the socialist ideal Cheng had envi- ber 1978. sioned. Rather, the party created “mindless robots, unburdened by the capacity for independent thinking The Realities of Communist Rule or a human conscience.” t is ironic that Cheng became enticed by Success depended on power, and justice vanished. Iduring her studies at LSE. In her essay “The Roots of “The result was a fundamental change in the basic val- China’s Crisis” (in Economic Reform in China, which I ues of Chinese society,” she wrote. edited along with Wang Xi), she Mao’s mantra was, “Strike hard wrote, “When I read a book on the What Cheng against the slightest sign of private by Sidney and Beatrice property.” Nien Cheng’s property, Webb, I thought,‘How wonderful and painfully discovered including her priceless porcelain col- idealistic socialism sounds.’” was when individuals lection, was confiscated. Her daughter Later, after her husband had served was murdered and her freedom in Australia as a diplomat for the have no economic destroyed by the State. Nationalist government, the Chengs made the fateful decision to return to freedom and no Crony Capitalism China in late 1948.They and many of genuine rule of hile in jail, in 1971, the their Western-educated friends were Winmates were assembled and an seduced by Mao’s call for democracy law, no one is safe official announced, “Many of and wanted to help build a new from the power of you are here precisely because you China. worshiped the capitalist world of In her essay Cheng notes that the State. the imperialists and belittled socialist while she had learned about socialist China. You placed your hope in the ideals at LSE—including the apparent success of Soviet capitalist world and believed that one day capitalism , central planning, and state ownership— would again prevail in China.” her professors never mentioned “class struggle” or “the Today, mainland China is perhaps more capitalist realities of communist rule.”What she painfully discov- than any other country, but it is “crony capitalism.” ered was that in a society where individuals have no The nation lacks full-fledged private property and no genuine rule of law, no one rights, especially in land; there is no independent is safe from the power of the State. Economic life judiciary to protect persons and property against is politicized, corruption is endemic, and inequality the party’s monopoly on power; and freedom of of power reigns, in stark contrast to promises of egali- religion and expression are sharply curtailed. The tarianism. battle for justice that Cheng fought has not yet been As Cheng wrote in her book, “The fact is that the won. Communist government controls goods, services, and In her book Cheng recognized the significance of opportunities and dispenses them to the people in President Nixon’s visit to China in 1972 and the unequal proportions.” During the Maoist regime one’s importance of engaging China. She witnessed the rank in the party determined one’s economic status. progress the mainland has made since

THE FREEMAN: www.thefreemanonline.org 20 The Wisdom of Nien Cheng began to liberalize markets in 1978. She understood I can hardly believe I have lived so long. I think it the critical role of trade and investment in linking is mainly because I am never angry nor am I ever China to the West. But she also understood that worried. I believe in “constant change,” so I always “Unless and until a political system rooted in law, think a bad situation will change into a good situa- rather than personal power, is firmly established in tion or not so bad after all. In any case, there is China, the road to the future will always be full of always a solution. As for being angry, after what had twists and turns.” happened to me in China, I think I have used up all the anger inside me. There is simply nothing to be Seeking Truth and Justice angry about in America. ien Cheng’s journey from an idealistic Marxist Nliberal at LSE in the 1930s to a realistic All Americans should be proud Nien Cheng chose market liberal—after living through Mao’s upheavals to make America her home. She believed that here she and seeing the end of private property and the would be and that her person and prop- uncertainty and injustice caused by arbitrary and erty would be protected by the law of the land. unlimited State power—gave her a great appreciation Today, as the U.S. government grows in size and of America. power, it would be well to remember the wisdom of Near the end of her life, in a personal letter, she Nien Cheng—and the danger to personal freedom wrote, when the State erodes economic freedom.

21 APRIL 2010 Our Economic Past Private Capital Consumption:Another Downside of the Wartime “Miracle of Production”

BY ROBERT HIGGS

lthough the so-called miracle of production in war some of the facilities were sold to their wartime the United States during World War II per- operators or other private parties. Much of the govern- Asuaded many economists and others to accept ment-financed capital would prove to be ill-suited to the validity of the basic Keynesian model, this interpre- the profitable production of civilian goods in the post- tation rests on important errors of commission and war economic environment, however, and hence its omission to which I have called attention over the postwar value was much less than the amount the gov- years. (See especially the studies brought together in my ernment had spent to build it during the war. 2006 book, Depression,War, and Cold War.) Among these In any event, the official figures overstate the errors, one that has yet to receive adequate attention is increase in the privately owned or operated capital the wartime consumption of private capital—as it were, stock during the first half of the 1940s because the a drawdown of the economy’s private standard formulas for computing stock of seed corn to feed the soldiers. For the four war depreciation fail to take into account Although official macroeconomic certain extraordinary conditions, data for the war years have many years combined, the especially “the accelerated deprecia- problematic aspects, we may consult tion resulting from intensive plant use them as a point of departure. These private capital stock and scarcity of replacement parts” to data show that net private domestic fell by $6.9 billion, which economist Glenn McLaughlin investment plunged from $9.1 billion called attention in the American Eco- in 1941 to $0.3 billion in 1942, and or by an amount nomic Review for March 1943. for each of the following three years half-again greater than According to a 1945 War Produc- the amount (in billions of current tion Board report, dollars) was negative: –4.1, –2.9, and the amount added –0.2, for 1943, 1944, and 1945, during best year of Plant utilization in the munitions respectively. Thus for the four war industries increased sharply after Pearl years combined, the private capital the 1930s. Harbor . . . . [T]he average utilization stock fell by $6.9 billion, or by an of facilities in the metal products amount half-again greater than the amount added dur- industries late in 1944 was about two-thirds above ing best year of the 1930s (namely, 1937).This showing the prewar level, after having reached nearly twice seems bad enough, but the actual decline was greater the prewar level in the spring of 1943; the increase than the official data indicate. in the remaining industries, though smaller, was still While privately owned capital declined during the substantial. . . . [T]he increased utilization of existing war, privately operated capital increased because the gov- facilities contributed nearly as much to the increase of total ernment spent more than $17 billion for manufactur- industrial output during the war as did the construction of ing plants, equipment, and reconversions between July new facilities;though the contribution made by more 1940 and June 1945—an amount equal to almost two years of net private investment at the 1941 rate. These Robert Higgs ([email protected]) is senior fellow at the Independent Institute (www.independent.org), editor of The Independent Review, plants were operated for the most part by private cor- and author of Neither Liberty nor Safety: Fear, Ideology, and the porations under management contracts, and after the Growth of Government (Independent Institute).

THE FREEMAN: www.thefreemanonline.org 22 Private Capital Consumption

intensive utilization was much more important in correct for inaccuracies in the price indexes. In a situa- the earlier part of the period, particularly in 1940 tion of pervasive price controls, even if a firm tried to and 1941, than it was in 1943 and 1944. [Emphasis make adjustments for the declining purchasing power added.] of money, the dollar amounts it allowed for deprecia- tion understated the actual amounts it needed to set Double-shift and even treble-shift operation of plants aside in order to replace its worn-out plant and equip- became much more common during the war. ment later, in the postwar environment, when prices Writing in the Survey of Current Business in 1963, would no longer be suppressed and actual market (that Murray Foss reported that in a comparison of condi- is, higher) prices would prevail. The statisticians at the tions in 1940–44 with those in 1934–39, hours of usage Commerce Department apparently took the official per year increased by 53 percent for railroad freight price indexes at face value even for the years when cars, by 54 percent for freight locomotives, and by 34 price controls were in effect. percent for passenger locomotives. Hours of usage per According to official estimates published in the Sur- year per spindle in the cotton textile industry increased vey of Current Business in April 1970, the private stock by about two-thirds during the war of fixed business capital lost more years. than 7 percent of its real value While the capital between 1941 and 1945.After inclu- Repairs Forgone stock was being used sion of the government-financed hile the capital stock was being additions to the industrial capital Wused far more intensively, the far more intensively, stock, the privately operated total lack of replacement parts and repair increased in value by an estimated 15 materials kept producers from doing the lack of percent. even normal upkeep on their prop- replacement parts and However, by taking into account erty. In the housing sector, rent con- the measurement errors in the trols induced landlords to forgo repair materials kept wartime depreciation estimates ordinary repairs. For apartment houses producers from doing incorporated into the official fig- and small structures, index numbers of ures—errors caused by inaccurate repair and maintenance expenditures even normal upkeep price indexes and by the inappropri- fell some 20 percent during the war. on their property. ate application of uniform, standard According to a 1945 report of the depreciation schedules during a director of war mobilization and period of accelerated actual depreci- reconversion, the motor-carrier industry during the ation—we may conclude that the true drop in the pri- three peak war years obtained “only 195,000 new vately owned stock of capital was even greater than the trucks and buses,” which amounted to “less than 10 official figures show during the war years and that the percent of the number it would normally require for increase in the stock during the second half of the replacements and expansions,”while increasing its loads 1940s was greater than shown. Moreover, depreciation each year and hastening wear and tear on its fleet of figures applied to the industrial capital stock the gov- vehicles. For the overall economy, this report con- ernment financed during the war are too low for the cluded, “wear and tear on plants has been far above same reasons. Thus for the capital stock, as for the normal, while repairs and replacements have been economy’s real output, the official data have misled us below normal.” by making the wartime expansion appear bigger than it In addition, official depreciation estimates fall short really was and the postwar expansion smaller than it of the truth during the war years because they fail to really was.

23 APRIL 2010 Botswana:A Diamond in the Rough

BY SCOTT BEAULIER

ver the past 40 years Botswana has been sub- rule of law. As historian Robert Guest sums up Saharan Africa’s fastest-growing country and Botswana’s postcolonial policies, “Since independence, Oone of the fastest-growing countries in the Botswana has been governed sensibly, cautiously, and world.Though it started off as one of the poorest coun- more or less honestly.” tries in the world, its per capita income now compares The honesty in policy described by Guest has favorably with many Mediterranean counterparts. Like helped Botswana escape the so-called “African tragedy” most countries, the financial crisis has slowed of poverty. By conventional standards the country is an Botswana’s recent economic growth, and large “stimu- upper-middle-income country, and throughout my lus” packages have ostensibly been introduced to time in Botswana a few years ago I was struck by how reverse that direction, but, even normal the country seemed. It is with Botswana’s poor economic safe to walk around after dark, and performance in 2008 and 2009, its violent crime rates are quite low. contrast with the rest of sub-Saha- The drinking water is generally ran Africa is stark.As the graph on fine. Its capital city, Gaborone, is the next page shows, sub-Saharan buzzing with commerce, and a Africa (SSA) as a whole (with number of shopping malls there Botswana included) has seen dis- have high-end merchandise and mal growth since 1965, while quality restaurants similar to those Botswana has enjoyed more than a found in any Western country. 15-fold increase in real gross According to government officials, domestic product. no Batswana (the appropriate term While many attribute the for people of Botswana) has ever Growth and development in every direction. country’s success to diamond rev- Geof Wilson died from the country’s frequent enue and a homogenous popula- droughts, and basic education lev- tion, Botswana’s success actually has resulted, first and els and public road networks are far superior to those foremost, from economic freedom. Until last year in neighboring countries. As one tourist put it, “This Botswana was the most economically free sub-Saharan place is really quite boring.”(To which I replied,“Yeah, African nation in the Fraser Institute’s Index of Eco- maybe that’s an idea for a paper: “Botswana: The nomic Freedom; Mauritius has nudged ahead of Beauty of Being Boring.”) Botswana in the most recent report.The country’s mar- ginal tax rates are some of the lowest in the world; its Scott Beaulier ([email protected]) is the BB&T Distinguished borders are more open than those of many other Professor of Capitalism and department chair of economics in Mercer University’s Stetson School of Business and Economics in Macon, Georgia. African countries; and the government has a long tradi- He has written a number of academic and policy articles on Botswana’s tion of respecting private property and upholding the growth miracle.

THE FREEMAN: www.thefreemanonline.org 24 Botswana: A Diamond in the Rough

racial harmony and welcomed the advice of British expatriates. Rather than follow the lead of most other African leaders and embrace , Khama and his majority coalition in the Botswana Democratic Party (BDP) chose to sit down with British expatriates and minority stakeholders when formulating policy. The small, informal meetings held by the BDP made poli- cies more legitimate and served as an implicit compact between the BDP and other important interest groups. The tolerance and cosmopolitanism of Khama and the BDP were more than lip service.When it came to border issues, for example, the government welcomed thousands of refugees being persecuted by racist regimes in Rhodesia and elsewhere. The official posi- Source: World Development Indicators, 2008 tion of the government was to recognize the basic dig- nity of all individuals and maintain open borders. In 1965 the country, a former protectorate of Great Tolerance also shaped domestic policy, as the new Britain, was a newly independent nation of desert land government was careful to incorporate traditional and cattle herders. Its future was deemed grim by the indigenous institutions throughout the reform experts, and many expected Botswana to remain poor process. For example, its kgotla system, which predated and heavily dependent on South Africa.Yet much like colonialism and encouraged dissent in the public the Asian “tigers,” Botswana’s success stands out as one realm and unanimity in decisions, remains part of of the truly exceptional sustained growth runs in the modern-day Botswana. Its precolonial tribal system of twentieth century. It has averaged 7 percent annual law and dispute resolution was brought into modern- growth in per capita income since independence. day institutions to some extent through the House of Chiefs, which serves as an advisory body to the Racial Harmony legislature. While the postcolonial reforms did not ttempts to explain Botswana’s development as the completely embrace the traditional institutions of Aresult of a relatively homogeneous culture are the precolonial and colonial periods, steps were taken flawed. If cultural and ethnic homogeneity played such a to preserve valuable parts of Botswana’s history and crucial role in promoting development, why then was culture. By contrast, in many other sub-Saharan Botswana so poor at the time of independence? It prob- African nations so-called “modernization” meant the ably did not hurt reformers to be dealing with a homo- complete dismantling and elimination of all things geneous population during the postcolonial period, but traditional. culture in and of itself was not enough to guarantee Botswana’s growth explosion. Becoming free from Great Tight Spending Control Britain and subsequently promoting sound economic s the new government was being formed in the policies were the additional and far more important Amid-1960s, few resources were available for signif- ingredients of Botswana’s success. icant “public” spending. Rather than tax people exces- Botswana’s pursuit of racial harmony,however, did help sively, the government kept tax rates low and it avoid the turmoil that other sub-Saharan countries saw. predictable. Low taxes encouraged entrepreneurial In the early years of Botswana’s postcolonial devel- activity and reduced tax evasion and corruption. opment the leadership behaved much differently from Khama and the BDP could have borrowed substantially, many other African leaders. Botswana’s first president, but they had a fear of accumulating debt and instead Seretse Khama, was a charismatic leader who sought kept spending on traditional government programs like

25 APRIL 2010 Scott Beaulier defense and education to minimal levels. The govern- Thus Botswana has not grown because of, but rather ment could not afford a national defense force early on despite, its diamond wealth. in the reform process, so the country simply went To be sure, Botswana faces some serious chal- nearly ten years without it. lenges. First, government spending as a percentage of The government sought to constrain longer-term GDP in Botswana is too high and it has been grow- spending by introducing five-year National Development ing rapidly.The “hands off” approach of leadership in Plans (NDPs) to set government spending priorities. the early years has largely been forgotten and given Once agreed on, they can only be amended with over- way to big government. Botswana’s large, bloated whelming support from parliament. In addition to estab- government now funds a large national defense, cov- lishing NDPs, the government constrained spending by ers education through college, and has extended applying strict cost-benefit standards to expenditures. health care coverage in the wake of a serious The generally free-market approach to economic HIV/AIDS crisis. The government’s steadily increas- development taken by Botswana’s leadership in the early ing scale and scope has made Botswana a less eco- years had the effect many pro-market economists would nomically free country in recent years, and it could predict: rapid growth and serious quality-of-life be stifling to future growth. improvements for average Batswana. This development Second, Botswana’s courts and property rights have was most rapid during the first ten not been free from interference. The years as an independent nation—years When given a rule of law, in particular, has some- that predated most of the diamond discover- times been relaxed in cases involving ies and extraction. Moreover, diamonds chance, economic government officials. Indigenous are not normally viewed as a boon to freedom can produce groups, such as the Kalahari Bush- development. In much of the “natural men (also known as the Sans, among resource curse” literature in econom- beneficial long-run other names) have consistently been ics, things like diamonds are said to oppressed by the government and hamper development because they lead growth results in unfavorable legal rulings. And the to weak institutions and rent-seeking. poor African government’s attitude toward for- As Fareed Zakaria puts it in his popu- eigners, particularly Zimbabweans, lar book, The Future of Freedom, countries. has grown increasingly xenophobic. Continued shifts away from the cos- Why are unearned riches [like oil, diamonds, and mopolitanism of Khama in recent years make gold] such a curse? Because they impede the develop- Botswana’s future growth far from certain. ment of modern political institutions, laws, and The chief lesson to take from Botswana’s postcolo- bureaucracies. Let us cynically assume that any gov- nial success is the following:When given a chance, eco- ernment’s chief goal is to give itself greater wealth and nomic freedom can produce beneficial long-run power. In a country with no resources, for the state to growth results in poor African countries. Many leaders get rich, society has to get rich so that the govern- in sub-Saharan Africa dismiss good policy stories like ment can then tax this wealth. In this sense East Asia the one being told here as “Western ideas and models” was blessed in that it was dirt poor. Its regimes had to unsuitable for Africa. From where they sit, Africa’s his- work hard to create effective government because tory is unique and different.The differences are signifi- that was the only way to enrich the country and thus cant enough to make “standard approaches,” such as the state. Governments with treasure in their soil have economic freedom, futile endeavors. While there is it easy; they are “trust-fund” states. They get fat on much to be said for not imposing external institutions revenues from mineral or oil sales and don’t have to on people, Botswana is a case of Africans finding eco- tackle the far more difficult task of creating a frame- nomic freedom on their own.As a result, Batswana have work of laws and institutions that generate wealth. enjoyed higher living standards.

THE FREEMAN: www.thefreemanonline.org 26 The Improbable Prose of Nassim Nicholas Taleb

BY ROBERT P. MURPHY

s I get older and more cynical, I tend to look for its occurrence after the fact, making it explain- down on the latest “hot” idea or person. Sure, able and predictable. Ateenage pop stars and the novelist Dan Brown are talented, but they’re not nearly as extraordinary as Both of Taleb’s books are filled with “fun facts,” just their popular status would suggest. Every once in a as Malcolm Gladwell fills his own (bestselling) work.Yet while, though, something impresses me despite such the difference is that Gladwell—in such romps as The cynicism. Nassim Nicholas Taleb, for example, lives up Tipping Point and Outliers—never has much of a coher- to the hype surrounding him. Libertarians—especially ent theory for which his amazing anecdotes are rele- those versed in Austrian economics—will find Taleb vant. well worth reading. Taleb, on the contrary, tells us his thesis up front, Taleb is the author of the international bestseller then draws on his vast knowledge to illustrate his Fooled By Randomness and the blockbuster points. One of his central claims is that The Black Swan: The Impact of the Highly people place too much confidence in their esti- Improbable. The books largely overlap, but mates.Taleb stresses that the issue is not the second (the focus of the present arti- how smart or how dumb people are. “We cle) is less liable to misunderstanding, certainly know a lot, but we have a built- probably because of confusion among in tendency to think that we know a little readers of the first. bit more than we actually do, enough of The black swan is a metaphor for the that little bit to occasionally get into serious limits of our knowledge and, perhaps more trouble.” important, our unfounded confidence in Taleb strings together sentences of sur- our knowledge. The metaphor draws on prising profundity while packing his prose the familiar notion that before discovering Nassim Nicholas Taleb. with interesting statistics and stories.When counterexamples in Australia, people in Sarah Josephine Taleb reading The Black Swan,I had to stop not- the Old World would have been certain ing every “interesting” paragraph in the that all swans were white. To be more precise, Taleb margins, lest I fill them up. lists three attributes of the black swan event his book The book’s prologue alone is an interesting essay, addresses: containing such standalone gems as the following:

First, it is an outlier, as it lies outside the realm of Robert Murphy ([email protected]), an adjunct scholar of the regular expectations, because nothing in the past can and a faculty member of the Mises University, runs the blog convincingly point to its possibility. Second, it car- Free Advice (www.consultingbyrpm.com/blog) and is the author of The Politically Incorrect Guide to the Great Depression and the ries an extreme impact. Third, in spite of its outlier New Deal, the Study Guide to Man, Economy, and State with status, human nature makes us concoct explanations Power and Market, and the Human Action Study Guide.

27 APRIL 2010 Robert P. Murphy

What is surprising is not the magnitude of our contributor to the field of quantitative finance;Taleb (and a forecast errors, but our absence of awareness of coauthor), for example, offered a more intuitive derivation it”;“We do not spontaneously learn that we don’t of the Black-Scholes formula for option pricing. learn that we don’t learn....Metarules (such as the Far more important to some readers,Taleb (allegedly) rule that we have a tendency to not learn rules) made a boatload of money as a trader.True to his philo- we don’t seem to be good at getting”;“Who gets sophical views, one of his strategies involved using rewarded, the central banker who avoids a reces- options that went up in value when the underlying asset sion or the one who comes to ‘correct’ his pred- fell in price. If people really do systematically underesti- ecessors’ faults and happens to be there during mate the likelihood of improbable (but significant) some economic recovery? events, as Taleb claims,then it should be possible to make long-run profits by losing small amounts of money on Taleb openly despises those in “suits”—very often most wagers but earning large payoffs on a few outliers. mainstream economists or students of finance—who Other Austrian-oriented writers such as Gene make predictions without bothering to study the Callahan have criticized Taleb for throwing out the record of their previous forecasts.Taleb declares, “Any- baby with the bathwater.Taleb seems to think that the one who causes harm by forecasting should be treated fabric of reality itself is governed by randomness; that as either a fool or a liar. Some forecasters cause more much is true.Yet as his discussions of Poincaré’s “three damage to society than criminals. Please, don’t drive a body problem” and modern chaos theory make clear, school bus blindfolded.” the central lessons of the book don’t depend on Of perhaps most interest to the Austrian reader, whether the world is “really” determinist or “really” Taleb champions and mocks Paul uncertain. It is enough that from a human actor’s lim- Samuelson (who died in December). In a section titled, ited knowledge, he can never truly predict what is “They Still Ignore Hayek,” Taleb lauds the Austrian coming down the pike. focus on the pretense of knowledge.Yet of Samuelson, Finally,Taleb does not simply throw up his hands in the epitome of the neoclassical mainstream,Taleb issues despair. “We cannot truly plan, because we do not harsh judgment indeed: understand the future—but that is not necessarily bad In orthodox economics, rationality became a news. We could plan while bearing in mind such limita- straitjacket. Platonified economists ignored the fact tions. It just takes guts.” that people might prefer to do something other than By focusing on the extremely improbable outlier, maximize their economic interests. This led to Taleb isn’t warding off theoretical explanations—he is mathematical techniques such as “maximization,” or merely rejecting the regrettable tendency of overgeneral- “optimization,” on which Paul Samuelson built ization in our theories, where we overfit based on a much of his work. ...I would not be the first to say limited sample size.As Taleb says:“If you want to get an that this optimization set back social science by idea of a friend’s temperament, ethics, and personal ele- reducing it from the intellectual and reflective disci- gance, you need to look at him under the tests of severe pline that it was becoming to an attempt at an “exact circumstances, not under the regular rosy glow of daily science.” By “exact science,” I mean a second-rate life. Can you assess the danger a criminal poses by engineering problem for those who want to pretend examining only what he does on an ordinary day?” that they are in the physics department—so-called There are many areas where the typical libertarian physics envy. In other words, an intellectual fraud. reader might take issue with Taleb, but this doesn’t detract from the value of his work. For what it’s worth, Coming from a philosopher (or an academic Austrian in response to our correspondence on Benoit Mandel- economist, for that matter), such criticism would not mean brot’s work in economics,Taleb sent me a signed copy much to the so-called experts in various fields.Yet Taleb’s of his book.The inscription read: “Hope freedom pre- criticisms come with a harsh sting, for he is a respected vails—Nassim.”

THE FREEMAN: www.thefreemanonline.org 28 Peripatetics

Opaque by Design

BY SHELDON RICHMAN

“ he House and Senate plan to put together the Medicaid bill, there was genuine disgust—even in final health care reform bill behind closed Nebraska.The payoff to Louisiana Sen. Mary Landrieu T doors, according to an agreement by top got a similar reception. But that was just the tip of the Democrats.” iceberg. Did you hear that under the Senate bill (now That less-than-startling piece of news was delivered dead) companies with fewer than 50 employees would by House Speaker Nancy Pelosi back in January. She have been exempt from the health-insurance man- was at the White House when she said it,so it looks like date—except for construction companies? There the it’s okay with President Obama. threshold would have been five. It was a little favor to Thus, as the CBS News headline had it, “Obama the construction trade unions. According to the New Reneges on Health Care Transparency.” York Times: Anyone who is really shocked (shocked!) that this is happening should avoid talking to Labor unions that have negotiated strangers on the street.You’ll wind up health benefits for construction work- believing you own a bridge. The phrase ers lobbied for the provision.Without In other words, no one really “transparent it, they said, small nonunion employ- thought Obama and his cronies were ers would have an unfair competitive going to make government trans- government” is just advantage over companies that they parent by conducting business on say do ‘the right thing’ by providing C-SPAN. As the head of the Council this side of a logical health benefits to plumbers, electri- on Foreign Relations said admir- contradiction.A really cians, carpenters, roofers and other ingly about Obama in another con- workers in the building trades. text, “He’s learned the difference transparent between campaigning and govern- government would This sort of thing happens every ing.” Indeed. Even if he wanted to, day.As Michael Kinsley once said, the there was no way Obama was going barely qualify as a real scandal in Washington is the legal to get our misrepresentatives in Con- government at all. stuff, not the illegal stuff, that goes on. gress to do it. We can’t say we weren’t warned.A The phrase “transparent govern- few years ago a great scholar named ment” is just this side of a logical contradiction.A really Charlotte Twight explained it all in her book Dependent transparent government would barely qualify as a gov- on D.C.:The Rise of Federal Control over Ordinary Ameri- ernment at all. Imagine if you could witness all the cans. I’m a huge fan of this book, and everyone con- backroom dealing, logrolling, outright bribery, and the cerned with liberty should read it closely.What I said rest of the shenanigans that go on under the laughable about it in 2003 still holds: rubric of “governing.” It wouldn’t last a week. Once in a while we get a glimpse of what goes on. When Sen. Ben Nelson’s vote on the health-insurance takeover was cynically bought with the promise that Sheldon Richman ([email protected]) is the editor of The Freeman and everyone but Nebraskans would pay Nebraska’s new TheFreemanOnline.org.

29 APRIL 2010 Sheldon Richman

If I may be blunt, this is a subversive book—in engage in. Keep in mind that any one person’s clout is the sense that if average Americans were to read and small, so the payoff from absorbing the costs and engag- grasp it, they would turn into libertarian revolution- ing in the monitoring is also small. That results in a aries.Why? Because Twight documents the ways that government watched closely by those who stand to officials systematically mislead us about what gov- gain a lot (the special interests) and not so closely by ernment does. In many cases, she uses their own those who stand to pay, in the aggregate, a lot (the mass words to convict them of mass of taxpayers). deception aforethought. For some Contrived Costs The key to her thesis is the con- unfathomable reason, wight points out that there are cept of political transaction costs. In T“natural” transactions costs, as economics, transactions costs are the most pundits don’t with any economic activity, but also expenses one accepts to engage in “contrived” transactions costs—the exchanges. To use Twight’s example, want us to worry our ones “deliberately created by government if you hire someone to plant a tree little heads knowing officials to increase our costs of assess- in your yard, the transactions costs ing and responding to government include any expenses you would not that politicians may policies” (emphasis added). have incurred had you planted the intentionally make it You’re not apt to read about these in tree yourself. textbooks or the establishment apolo- There are transactions costs asso- more difficult for us gies on most newspaper editorial and ciated with politics too. These, to see what’s really op-ed pages. For some unfathomable Twight says, are “the costs to indi- reason, most pundits don’t want us to viduals of reaching and enforcing going on or to do worry our little heads knowing that political agreements regarding the politicians may intentionally make it role and scope of government . . . anything about it. more difficult for us to see what’s really [t]he costs to each of us of perceiv- going on or to do anything about it. ing, and acting upon our assessment of, the net costs of But it’s hard to conclude the politicians would want particular governmental actions and authority . . . of it any other way. How else to explain 2,000-page bills learning the likely consequences of proposed govern- laden with impenetrable legislatese—which no mem- ment programs and taking political action in response ber of Congress will read in their entirety—and 800- to such programs. . . .” page amendments? Have you tried reading the federal We could sum up the idea with the phrase “eternal budget? Such output mocks the ideal of an “informed vigilance,” which takes time, effort, and money. Or as citizenry.”That’s the last thing the misleaders in Wash- others have put it,“freedom isn’t free.” ington would want. Of course the higher the political transactions costs, As Oscar Wilde said,“Nowadays to be intelligible is other things equal, the less monitoring people will to be found out.”

THE FREEMAN: www.thefreemanonline.org 30 Government Moonshine

BY MICHAEL HEBERLING

rom its minor role as an oxygenate additive for On average, E-10 gas is 10 cents per gallon cheaper gasoline, ethanol has become the darling of at the pump than regular E-0 gas. E-85 is even FWashington. Politicians embrace ethanol as a cheaper—70 cents per gallon less.This cost-per-gallon miracle elixir.All the fashionable energy buzzwords can comparison is, unfortunately, very deceptive. A more be applied to it. It is “green power”; it’s “renewable” and telling measure would be to compare the cost per mile will provide “energy independence” for America. Leg- driven for each fuel type. Craig Clough notes that a islation has been promoting ethanol nonstop. The “flex-fuel” 2007 Chevy Tahoe (capable of handling Energy Policy Act of 2005 required that our fuel supply any ethanol-blend fuel) averages 14 MPG on regular have four billion gallons of ethanol in 2006 and then E-0 gas and 10 MPG on E-85 gas.What would it cost increase to 7.5 billion by 2012. Next came the Renew- to go on a thousand-mile trip using these two differ- able Fuel Standard Act of 2006 calling ent types of gas? The cost of the trip for even more ethanol in our fuel sup- using regular E-0 gasoline (at $3.70 ply.Building on the old adage that you Ethanol is an inferior per gallon) would be $264.29. Using can never have too much of a good energy source. the cheaper E-85 gas (at $3 per gal- thing, the Energy Independence and lon), the same thousand-mile trip Security Act of 2007 increased the E-85 is 25 to 30 would cost $300—that’s $35.71, or ethanol requirement even more. It percent less efficient 13.5 percent, more. Translation: mandates using 36 billion gallons of Because of the lower energy content biofuels in our gasoline by 2022. than regular, in ethanol, consumers actually pay Given the euphoria over ethanol, it more because they will need more is hard to imagine that there could be ethanol-free gas. gallons to go the same distance. So if a downside. Unfortunately,ethanol has a gallon of ethanol burns cleaner numerous and significant problems. than a gallon of regular E-0 gasoline, but you need to For starters, ethanol is an inferior energy source. burn more gallons of the ethanol-blended gasoline to Ethanol has 35 percent less energy by volume than go the same distance, how does this result in less pol- regular unleaded gasoline. One gallon of E-10 gasoline lution? Or does it? Ethanol has another pollution (which contains 10 percent ethanol) is 3.6 percent less problem. It is more volatile than gasoline (meaning it efficient than pure gasoline (ethanol-free, E-0). In other evaporates far more rapidly), making it a major con- words, as the percentage of ethanol in a gallon of gas tributor to smog. goes up, the realized miles per gallon go down. As a Ethanol also has some nasty properties that politi- result, E-15 is 5 percent less efficient than E-0 gasoline cians and the Big Corn lobby would rather not talk and E-20 is 7.7 percent less efficient. E-85 gas is between 25 and 30 percent less efficient than pure E-0 Michael Heberling ([email protected]) is president of the Baker gasoline. College Center for Graduate Studies in Flint, Michigan.

31 APRIL 2010 Michael Heberling about. For starters, ethanol is corrosive to some metals, the new ethanol/water compound sinks to the bot- rubber, fiberglass, and plastic.This leads to higher main- tom of the fuel tank. This process is called “phase tenance costs and the need to replace parts sooner than separation.” would otherwise be the case. Older car engines, boat If we continually drive our cars (or cut our grass engines, motorcycles, snowmobiles, and small gas-pow- every week or so) these ethanol-unique characteristics ered tools (chain saws, snow blowers, lawn mowers, and will not normally be an issue. But after about 90 days weed whackers) are especially vulnerable to ethanol (the shelf life of E-10 gasoline), problems begin to corrosion. Fine particles of rubber, plastic, or metal flow manifest.The result:“bad gas.”The engine won’t start or through the fuel system.These particles eventually clog there will be “missing” or “sputtering” problems.This is the engine’s fuel lines, fuel filter, carburetor, and fuel the reason you don’t want to leave gas containing injector. Ethanol can also cause an engine to burn out ethanol in the lawn mower over the winter. because it runs hotter. Because of the separation and corrosion problems, Later-model cars and trucks were ethanol cannot be transported supposed to have been re-engineered through pipelines. It requires its own to mitigate the corrosive properties of Ethanol also has some separate and costly distribution chan- the E-10 ethanol-laced fuel. Ed Wal- nel dominated by rail and trucks to lace, writing in Business Week, finds nasty properties that keep it apart from the gasoline as long that this is not necessarily true. “Not as possible before retail. only is ethanol proving to be a dud as politicians and the a fuel substitute, but there is increasing Big Corn lobby Unconscionable Burning of Food evidence that it is destroying engines thanol’s biggest problem is in large numbers.” He goes on: “It would rather not talk Elargely ignored. Burning food as now appears that in just a few years about. For starters, an energy source is unconscionable since the government forced ethanol in these circumstances. Using corn to use on the country, engine and fuel ethanol is corrosive feed humans and livestock, and to system failures caused by ethanol are to some metals, fuel cars, is having obvious negative causing major damage to more and implications. In 2007 we burned 15 more new and used vehicles.”Wallace rubber, fiberglass, percent of our corn crop as ethanol. concludes: “Sadly, when a truly bad According to the Investor’s Business idea is exposed today, Washington’s and plastic. Daily (IBD), “Ethanol and its subsi- answer is to double-down on the bet, dies amount to a hidden and nefari- mandate more of the same, and make ous tax on food. The higher use of the problem worse. Only this time around motorists ethanol accounted for up to 15 percent of the rise in will be able to gauge the real cost of ethanol when it food prices between April 2007 and April 2008.”Con- comes time to fix their personal cars.” gressional mandates to increase the use of ethanol even Ethanol has two other properties that further com- more will only exacerbate this problem. To meet the plicate the process. Ethanol and gasoline do not bond massive artificial demand for corn created by this gov- chemically. They simply coexist in the fuel system in ernment energy program, we can either: 1) switch an “oil and vinegar” relationship. While ethanol may crops (soy to corn) and keep the cropland acreage the hate gasoline, it loves water. The term to describe this same (which will cause all food prices to skyrocket) or is “hygroscopic,” or “water soluble.” Ethanol attracts 2) increase the amount of acreage available through and absorbs water. As long as the amount of water large-scale pristine habitat destruction. Neither is satis- in the fuel system is small, this can be a good thing: factory. In the winter it limits the possibility of a fuel line According to IBD,“[I]t takes about 1,700 gallons of freeze-up. However, as the water content gets higher, water to produce one gallon of ethanol. Each acre of

THE FREEMAN: www.thefreemanonline.org 32 Government Moonshine corn requires about 130 pounds of nitrogen and 55 from Brazilian sugar cane is nearly double that derived pounds of phosphorous. Increased acreage means from U.S. corn. increased agricultural runoff, which is creating aquatic Even with all this help, the industry asks for still ‘dead zones’ in our rivers, bays, and coastal areas.” more. Last year the ethanol producers’ association, Ironically, a case could be made that ethanol is not Growth Energy, petitioned the EPA to allow ethanol really “renewable green power” at all but rather a “fossil blends as high as 15 percent. For the majority of the cars fuel” in disguise.You don’t just squeeze corn to make and trucks in the United States, the highest ethanol level ethanol.The distilling process to convert corn starch to allowed by the EPA is the 10 percent blend. Anything ethyl alcohol is energy intensive.According to Matthew above that could void existing car warranties. The Wald in the January 2007 Scientific American, to create exceptions are flex-fuel/dual-fuel vehicles, which can 100 units of ethanol energy in the distillation process, use E-85 gas because they have special stainless-steel fuel you need 45 units of fossil-fuel (coal tanks and other upgraded fuel system or natural gas) energy. Michael Wang, Ironically, a case parts. Besides the overused environ- an environmental scientist at the mental and energy independence Argonne Laboratory, calculated that could be made that angle, Growth Energy claims that this the amount of fossil fuels is even ethanol is not really change will create thousands of new greater if you look at the whole jobs. process (planting, fertilizing, harvest- “renewable green Revealingly, there is always one ing, and distillation). According to reason missing from the case for Wang, to produce 100 units of ethanol power” at all but ethanol. We always hear that it is energy, you need 74 units of fossil rather a “fossil fuel” good for the environment, or it’s fuels. good for family farmers, or it creates in disguise. jobs. But no one ever says that Hide the True Cost ethanol is good for the consumer. iven all these expenses—energy to make energy That’s because it isn’t. At the pump the consumer pays Gand a separate logistic system—how does the more to get fewer miles per gallon than with gasoline. ethanol industry make any money? It doesn’t. Behind the scenes the consumers’ tax dollars are used Were it not for the massive government tax prefer- to shore up a failing industry that drives up the cost of ences (a 51-cent-per-gallon tax break) and government food and of maintenance of all engines that ethanol protection (a 54-cent tariff on imported ethanol), this touches. It is time to admit that promoting ethanol as industry could not survive.That’s in part because coun- a fuel source has been a catastrophic mistake.We need tries like Brazil—the world’s largest ethanol producer— to cut our losses and let the free market, not the gov- can produce it more efficiently using sugar cane. On a ernment, determine winners and losers in the energy yield-per-acre basis, the amount of ethanol produced sector.

33 APRIL 2010 How Shall We Live?

BY PAUL CLEVELAND AND ART CARDEN

hat is civilization and how is it to be tarism in it. Rather, there is only forced sacrifice, which achieved? How can we live together in is the essence of theft. Wpeace and social harmony? What is wealth Fundamentally, the welfare state is a type of social and how do we acquire it? Why are so many people organization in which some people subsist off the fruits poor and why do they remain poor? Finally, are there of other people’s labor by the use or threat of force. objective standards of behavior that There are three ways to enjoy the must be respected if societies are to fruits of others’ labor. The first is to thrive? receive legitimate charity. In this These questions are fundamental case, the producer has voluntarily to human life. In this essay we parted with his product for the discuss some ways societies have benefit of someone else. The sec- organized themselves and consider ond means is through voluntary the consequences of such efforts. exchange. In this case someone must This allows us to conclude that a make an attractive offer of some- society based on secure private thing desired by producer.The third property rights, trade, and the divi- method is to use violence or the sion of labor is not only economi- threat thereof to appropriate the cally efficient, it is morally superior product. This form of getting what to all other types of organization. you want is especially pernicious when it is perpetrated by govern- The Welfare State ment, for then the victim has little et us first consider the welfare recourse. (Fraud is a subtle form of Lstate. In theory it aims to use theft—that is, of obtaining someone government force to redistribute else’s product on terms other than property in order to achieve a more those he would agree to.) equal consumption of economic Legitimate charity requires someone to part Theft and fraud cannot be logical voluntarily with his money. goods. Advocates of this manner of Donald Macleod foundations for economic behavior social organization argue that it is because they suffer from the fallacy based on the ideal of charity. However, this cannot be of composition. It is possible for a single individual to so since the logical implication of this form of organi- prosper as a looter, and indeed it may be possible for zation is not the promotion of charity but the promo- tion of theft. Genuine charity involves the voluntary Paul Cleveland ([email protected]) is an associate professor of economics at Birmingham-Southern College in Alabama.Art Carden sacrifice of the giver.When the force of government is teaches in the department of economics and business at Rhodes College employed to redistribute property, there is no volun- in Memphis.

THE FREEMAN: www.thefreemanonline.org 34 How Shall We Live? many people to prosper as a robber band. However, it is Mooching too is unsustainable because it presup- impossible for everyone to prosper as thieves since all poses that something has been produced.Therefore, we thieves must have someone to steal from.The problem cannot all expect to live this way. Mooching as such with thieves is that they do not produce anything, and provides no way for goods to be produced and in fact if everyone is a thief then there is nothing to steal. encourages the wasteful use of resources. If someone For this reason the welfare state rests on a very sandy wishes to depend entirely on the kindness of strangers, foundation. It assumes there will always be something he or she must invest in ways to elicit that kindness. In that can be looted from a productive class. Moreover, it his 2007 book, Discover Your Inner Economist,Tyler assumes the productive class will continue to produce Cowen points out tragic examples of places in India valuable goods and services even as they are being vic- where people fight over begging turf or actually pay to timized. Pay-as-you-go entitlement programs like have limbs amputated in order to increase their begging Social Security and Medicare are built on this shaky income.To borrow the terminology of William J. Bau- assumption. It relies on the notion that future genera- mol, these are exercises in destructive entrepreneurship. tions will rise to meet the claims of older generations. They create no new value; instead, they destroy value in In other words, to use Ayn Rand’s metaphor, the wel- an effort to appear more dependent and helpless so as fare state assumes that the harder it presses down on to effectively attract the sympathies of others. Atlas’s shoulders, the harder Atlas will This has implications for how we work to hold the world aloft. understand what is known as paternal- As an alternative, people can live The welfare state ism. As we have already seen, proper as the beneficiaries of charity, but this assumes that the charity treats people with dignity and too is unsustainable. There are cer- directs them toward independence tainly legitimate cases in which char- harder it presses rather than dependence. Examples ity and gift-giving are appropriate, from fatherhood (or motherhood) are such as when someone suffers some down on Atlas’s appropriate.The right goal for a father unforeseeable calamity or when shoulders, the harder is not to give his children everything someone wishes to promote the they want or to see that they are bliss- interests of his friends and family Atlas will work to fully happy all the time. Rather his members. When people get married hold the world aloft. goal is to help his children flourish as or begin their families, for example, independent, responsible people in an gifts are often very helpful and much imperfect world. At every stage in appreciated.There are limits, however, to our charitable their development, he is trying to help them achieve impulses, limits to our ability to discern need, and lim- new levels of independence. When a young adult is its to our ability to feed others before we feed our- capable of interacting socially through the process of selves. In addition, it should be noted that the purpose voluntary exchange—thereby increasing his own range of true charity is to promote the independence of the of opportunities by increasing opportunities for oth- recipient. In this regard, charity is a noble, benevolent ers—then the parenting has been a success. In other institution that is quite appropriate to a society of free, words, proper human life includes production and responsible, flourishing people. exchange. While there are cases when such autonomy But even charity can be carried too far.When some- cannot be achieved due to severe disability, neverthe- one expects to enjoy his bread by the sweat of another’s less, the affirmation of human dignity and independ- brow, he becomes what Rand called a moocher. Such a ence remains the goal as far as it can be achieved. person claims the right to the fruits of others’ labor solely on the basis of his alleged need. He seeks to make Production, Autarky, and Trade himself dependent on someone else’s labor and is not nother way to acquire wealth is to produce it interested in his own independence. Ayourself and ask your neighbors for nothing; how-

35 APRIL 2010 Paul Cleveland and Art Carden ever, total individual autarky is impossible in its logical Lapin made this point explicitly by considering the limit. There is no such thing as an autonomous, self- economic and social function of peddlers, people who made person in a market economy, and people are would go through towns buying and selling.The good social creatures not because of disposition only but out peddler was better off when he left town, but he only of necessity.It is not a psychological propensity to truck found himself in this happy circumstance by making and barter that leads us to exchange, but a praxeologi- the townsfolk better off as well. To borrow Lapin’s cal truth regarding the vast increase in productivity that example, a peddler might show up at a house and ask if arises from specialization, division of labor, and division the residents had anything they were willing to sell. of knowledge. Suppose for a moment that they said yes and pointed to Leonard E. Read’s classic example showed that no an old table with a wobbly leg that they were planning single individual knows how to make something as sim- to throw away.The peddler might offer to buy it for $5, ple as a pencil (www.tinyurl.com/98wl7b).This funda- which they would gladly accept. They would now be mental insight applies to a vast range of goods.Any kind better off by $5. At this point the peddler could repair of existence greater than that of the lowest animals the table and find another family that was planning to requires exchange, and as exchanges increase, so too do buy a similar table for $20. If the peddler offered to sell the division of labor and division of knowledge. them the repaired table for $15, they would find them- Even before Adam Smith, economic thinkers had selves better off. And so it goes:With every transaction been well aware that trade creates the peddler makes people better off wealth by making us more productive. Even before Adam and enables them to feed and clothe We argue, however, that this is only part themselves. In a word, the peddler of the story.The criticism of homo eco- Smith, economic makes a direct contribution to their nomicus as an autistic and antisocial ability to flourish. maximizer of pecuniary profit to the thinkers had been Of all the ways for societies to exclusion of all else is simplistic and well aware that trade organize themselves, the free market naive.The economic person cannot take is the only system that is simultane- care of himself without taking care of creates wealth by ously sustainable, prosperous, and others; indeed, the person who wishes making us more conducive to human flourishing. to maximize his own profit can only do We cannot live together as a com- so by thinking constantly and deeply productive. munity of thieves, nor could we about the needs and wants of others.To sustain ourselves as a community of be sure, homo economicus does not have to care about the beggars, moochers, or wards of charity. Further, any- people with whom he interacts in a deep moral sense. thing that can be properly defined as a human existence But this does not stop him from caring about them in a must necessarily rely on specialization, trade, and divi- practical sense. sion of labor.This has the happy consequence of maxi- The enjoins us to feed the hungry and clothe mizing our ability to do well and do good by our the naked, among other charitable endeavors. We do neighbors.When we focus our attention on production this most effectively through the market process. and trade, we necessarily feed the hungry and clothe Indeed, the very act of buying low and selling high the naked because self-interest properly understood moves resources to areas where they are more valuable. requires a degree of focus on the wants and needs of While the entrepreneur does not have to know about others that is conspicuously absent from other forms of the people he serves, he can only expand his own set of social organization. To adapt a phrase from Harvard opportunities by creating opportunities for them. economist Claudia Goldin, life in the pre-market world In a lecture at the 2009 Austrian Scholars Confer- was nasty, brutish, and short. In the world of free enter- ence at the Ludwig von Mises Institute, Rabbi Daniel prise, life is long, healthy, and rich.

THE FREEMAN: www.thefreemanonline.org 36 Give Me a Break! Let’s Take the “Crony” Out of “Crony Capitalism”

BY JOHN STOSSEL

hen Judge Richard Posner, the prolific Crony capitalism is as old as the republic itself and conservative intellectual, released his book we don’t have to look far to see how crony-domi- WA Failure of Capitalism: The Crisis of ’08 nated American capitalism is today. The politically and the Descent Into Depression last year, you might connected tire and steel industries get government have thought the final verdict was in: Capitalism relief from a “surge” of imports from China. (Who caused the economic downturn and high unemploy- cares if American consumers want to pay less for Chi- ment. nese steel and tires?) Crony capitalism, better known That this verdict was pronounced by someone like as government bailouts, saved General Motors and Posner, who is associated with the free-market law Chrysler from extinction, with Barack Obama cronies and economics movement, gave moral support to all the United Auto Workers getting preferential treat- the politicians who were intent on exploiting the reces- ment over other creditors and generous stock holdings sion (as they exploit all crises) to increase government (especially outrageous, considering that the union control of the economy. helped bankrupt the companies in the first place with But what exactly is this “capitalism” that is blamed? fat pensions and wasteful work rules). Banks and The word “capitalism” is used in insurance companies (like AIG) are two contradictory ways. Sometimes bailed out because they are deemed it’s used to mean the free market, or too big to fail. Favored farmers get laissez faire. Other times it’s used to The word “capitalism” crop subsidies. mean today’s government-guided is used in two If free-market capitalism is a private economy. Logically, “capitalism” profit-and-loss system, crony capitalism can’t be both things. Either markets contradictory ways. is a private-profit and public-loss sys- are free or government controls tem. Companies keep their profits them.We can’t have it both ways. when they succeed but use govern- The truth is that we don’t have a ment to stick the taxpayer with the free market—government regulation and management losses when they fail. Nice work if you can get it. are pervasive—so it’s misleading to say that “capitalism” It’s time we acknowledged the difference between caused today’s problems.The free market is innocent. the free market, which is based on freedom and com- But it’s fair to say that crony capitalism created the petition, and crony capitalism, which is based on privi- economic mess. lege. Adam Smith knew the difference—and chose the What is crony capitalism? It’s the economic system free market. in which the marketplace is substantially shaped by a What’s taking us so long? cozy relationship among government, big business, and big labor. Under crony capitalism, government bestows a variety of privileges that are simply unattainable in John Stossel hosts Stossel on Fox Business Network and is the author of Myths, Lies, and Downright Stupidity: Get Out the Shovel—Why the free market, including import restrictions, bailouts, Everything You Know is Wrong. Copyright 2010 by JFS Productions, subsidies, and loan guarantees. Inc. Distributed by Creators Syndicate, Inc.

37 APRIL 2010 THE FREEMAN: www.thefreemanonline.org 38 Capital Letters

Who Is a Mormon? Thomas Szasz replies: As a long-time reader and supporter of The Freeman, I thank Mr. Clegg for his kind words about my Free- I express my enjoyment in reading the articles by Dr. man columns. His letter highlights the inherently and Thomas Szasz. I appreciate his critical thinking and his pervasively rhetorical character of everyday language. skill in constructing the written word in a most effi- Understandably, Mr. Clegg is concerned that the cient and powerful style. Smart story casts Mormonism in a poor light, an However, I take issue with part of his December unavoidable consequence of any reference to it. My 2009 article, “The Shame of Medicine: Conviction by comments had nothing to do with the Mormon or any Psychiatry.” He states that Brian David Mitchell is a other religion.A Hungarian proverb wisely cautions,“If “devout Mormon.” The word Mormon is a nickname it’s not your shirt, don’t put it on.” for members of the Church of Jesus Christ of Latter- Every act of classifying a person—as Mormon or Day Saints. Given that Dr. Szasz claims to have obtained Muslim or atheist or whatever—enhances his or her his facts “as reported in the press,”he apparently did not image in the minds of some and diminishes it in the bother to read the reports of Mr. Mitchell having been minds of others. Accuracy and fairness require that the excommunicated from the Church well before the writer inform the reader whether the classificatory cat- Elizabeth Smart saga. He therefore was not and is not a egory is an identity the subject assumes voluntarily or is “Mormon” at all, let alone a devout one.Whatever Mr. one that the writer or others attribute to him. I should Mitchell is devoted to, it is obviously not the practices have characterized Mitchell as a “self-styled devout or teachings of The Church of Jesus Christ of Latter- Mormon.” Day Saints, which openly speaks out against child abuse Mr. Clegg asserts that because the Church of in any of its forms, whose tenets deny the validity of Jesus Christ of Latter-Day Saints had excommuni- self-appointments to the ministry,and which believes in cated Mitchell, “He therefore was not and is not a obeying and sustaining the laws of the land without ‘Mormon.’...”Was Baruch Spinoza, famous in part exception. for having been “excommunicated” (an act for which My statements are easily vertified at there is no authority in Jewish law), not a Jew? http://tinyurl.com/byx5zv and http://tinyurl.com/ Characterizing Mitchell’s excommunication as hav- yb2qyso. ing occurred “well before the Elizabeth Smart saga” is So Mr. Mitchell was denied his day in court. If that also an overstatement. From the evidence available, it is is a failure of the legal system and of psychiatry, Dr. not clear when the excommunication occurred, not Szasz’s attempt to vilify Elizabeth Smart is unfair. that it matters for the subject of my column. (See the The Freeman is great. Our country needs it now official website of the Church of Jesus Christ of Latter- more than ever. Keep up the good work. Day Saints, www.tinyurl.com/y9pdfzd, as well as www. tinyurl.com/ycfhwsl and www.tinyurl.com/yb2beda). —LAVAR CLEGG Mr. Clegg’s conclusion requires close attention. He Scottsdale,AZ states: “So, Mr. Mitchell was denied his day in court. If that is a failure it is a failure of the legal system and of psychiatry. Dr. Szasz’s attempt to vilify Elizabeth Smart is unfair.” I neither vilify nor glorify Ms. Smart. I am skeptical about her belated account of her life in “cap- tivity,” as I am skeptical about nearly everything else about this baroque tale.

39 APRIL 2010 Capital Letters

Mr. Clegg does not question my claim that icaid or insurance). We negotiated a trade with the “Mitchell was denied his day in court” and attributes OB/GYN to do the delivery. The surprise was the that outcome to “a failure of the legal system and of prime rib dinners we each enjoyed after the baby was psychiatry.” Institutional systems are set in motion and born—a special the hospital was promoting to attract are operated by individuals with their own agendas. more deliveries. These individuals are moral agents responsible for their For #6, we hired a midwife and had the baby at actions. home. For me, that was the most fantastic of all six Calling the denial of Mitchell’s Sixth Amendment deliveries I’d attended; [my wife] delivered our son sit- rights an institutional “failure” misses the point I have ting on my knees while I sat on the edge of the bed.At long tried to make: namely, that “therapeutic jurispru- ten minutes old, he was in bed with his mom and his dence”—the name given to the psychiatric subversion brothers. (As a side note, the OB/GYN who cared for of the law by persons who approve of that arrange- her had to dismiss her as a patient before the midwife ment—is inherently flagitious. delivery as a requirement of his malpractice insurance). Having this high-deductible, catastrophic policy has proven a boon for me and the health care industry. Kudos to Stossel Incidentally, I have changed jobs three times since I got I would like to congratulate John Stossel [regarding it, and each time, after I had negotiated my salary, I got his] point on competition saving medicine (“Com- an additional $500 or $600 per month in compensation petition Would Save Medicine, Too,” September, for not taking the employer’s insurance. www.tinyurl.com/lxtzgv). I am living proof that this works. In 1996 I moved my family to a high-deductible —GEORGE SCHWAPPACH catastrophic policy that did not include baby delivery Dade City, Fla. (rightfully so, the insurance doesn’t see this as a medical accident; we know where babies come from). Already having four children, my wife and I didn’t see any reason to stop. For child #5, I went to each of the hospitals in the area (there were two) and explained We will print the most interesting and provocative letters we that we had no insurance for deliveries and would pre- receive regarding articles in The Freeman and the issues they raise. Brevity is encouraged; longer letters may be edited pay for a reasonable amount.Well,the hospital closest to because of space limitations. Address your letters to: The Free- our home agreed to our use of the labor and delivery man, FEE, 30 S. Broadway, Irvington-on-Hudson, NY 10533; facility, the nursing staff, and a 24-hour stay for $350 e-mail: [email protected]; fax: 914-591-8910. (which was probably more than they got paid by Med-

THE FREEMAN: www.thefreemanonline.org 40 schoolchildren.Their quality is higher than that of gov- Book Reviews ernment schools provided for the poor—perhaps not surprisingly given that they are businesses dependent on fees to survive and hence are directly accountable to The Beautiful Tree parental needs.” by James Tooley Tooley’s work suggests that the deep yearning par- Cato Institute • 2009 • 302 pages • $19.95 ents have to give their children the very best is nearly universal. Unfortunately, it also reminds us just how Reviewed by Max Borders much education can be fetishized by those who would n the poorest parts of the world like it to be removed from the market utterly—which Iyou’ll find private education. also means removed from the entrepreneurial environ- From Ghana to India to China, pri- ment that yields both quality and innovation.Again and vate schools are sprouting up every- again we encounter “experts” who say that education where. There are new schools must be under government control and who get in the opening where none were before. way of educational entrepreneurs who think otherwise. There are also new schools where A common obstacle faced by private-school entre- government “free” schools already preneurs is government regulation used to protect spe- exist but languish.Why? Simple: Par- cial interests. “We find it possible to meet all of their ents want the best for their children. They realize that regulations,” says plaintive Nigerian educator Bawo one of the keys to escaping poverty is a good educa- Sabo Elieu, “but we can’t possibly afford them all.” tion. The best education, they understand, comes from Elieu is one of many among the world’s private educa- entrepreneurs who offer higher quality to stay in busi- tors who are trying to do something for poor children, ness and prosper. despite the encroachment of the regulatory (and in But how can desperately poor people afford it? How Nigeria, predatory) state. can the education market work in countries rife with Rather than dwelling on the well-known reasons corruption and institutional barriers to innovation? why government schools serve students so poorly,Too- Why haven’t we heard about this phenomenon before? ley concentrates on the innovations that are possible And if private education can rapidly spread in the when the passions and preferences of human hearts to developing world, couldn’t it also in the rich West? educate the young go unsatisfied. Parents work extra In The Beautiful Tree, James Tooley answers those and scrimp to afford the modest fees at makeshift questions. He offers readers a firsthand account of schools. School founders and teachers continually schools all over the developing world. The book isn’t search for ways to do better. Tooley reports that in his just academic research; it is also a kind of travelogue.We visits to these schools, he was usually asked for advice meet the real teachers, students, and parents who con- on ways to improve them—when he had come to learn stitute the delicate educational ecosystems under con- from them! We should take inspiration from the stories stant threat from bureaucrats, do-gooders, and of parents, teachers, and kids unwilling to settle for naysayers. Tooley, a former university professor who ineffective government schools despite the many obsta- now works full-time to help start free-market schools, cles to educational freedom. tells their stories as if at our side, coloring straightfor- Many of Tooley’s third-world stories echo the issues ward prose with rich stories and quotations from peo- we face here in the United States. Private schools for ple he has met. the poor must compete with “public schools” that In the end he arrives at what many may think is a charge nothing.Teachers’ unions engage in favor-seek- highly counterintuitive conclusion:“Private schools for ing and protectionism. Government officials and the poor are burgeoning across the developing world. experts argue that schools that charge fees cannot, by In many urban areas they are serving the majority of definition, be “for the poor.” Regulations make it hard

41 APRIL 2010 Book Reviews for educational entrepreneurs to challenge the status rather a badly deformed mutation.When critics blame quo. The politics of guilt and envy are played to the capitalism, they’re blaming an innocent bystander. It’s advantage of the educational elites and at the expense political capitalism they should indict. of ordinary people who know that government schools Bradley, who worked for 16 years at Enron, becom- handicap their children. ing a confidant of CEO and Chairman Ken Lay, If caring parents and educators can build private devotes many pages to the company, perhaps the most schools that work in Kenya, Nigeria, and other poor spectacular business failure in American history. Many nations, we can do the same here in the United States. readers will be surprised to learn that Enron was Our circumstances are different, but the desire to have extraordinarily dependent on political favors, a perfect the best for our children is universal. No government example of crony capitalism. Bradley digs deep to can quell that desire. expose the real causes of Enron’s demise, but he goes The Beautiful Tree has a profound and universal mes- much further, showing that Enron was but one sage: Freedom works in education. It’s time for Ameri- instance of the ruinous relationship between govern- cans to follow the example of the poor people Tooley ment and business. writes about and invest in private schools, growing that Bradley makes his case in three parts: Heroic Capi- sector enough to hasten a brain drain from “public” to talism, Political Opportunism, and Energy and Sustain- private. The contrast between high-cost, ineffective ability. government schools and low-cost, effective private Each chapter in Part I is devoted to an individual schools will be too great to ignore. Tooley’s book whom Bradley considers a heroic, as opposed to a polit- deserves a thunderous round of applause for showing ical, capitalist—that is, an advocate of free markets. that the government education empire can be out- Readers of The Freeman will be familiar with Adam flanked by determined people. Smith and Ayn Rand, but most likely will be unfamiliar with the Scottish moralist Samuel Smiles, whom Max Borders ([email protected]) is executive editor at Free to Choose Network. Bradley calls “the father of the self-improvement move- ment.” Bradley’s profiles help delineate the positive moral ground of capitalism: self-reliance, respect for the Capitalism at Work: Business, Government, rights and property of others, cooperation, abiding by and Energy one’s contracts, and so on. by Robert L. Bradley, Jr. In Part II Bradley drives home the point that politi- M & M Scrivener Press • 2009 • 502 pages • $39.95 cal capitalism is the “intersection of business opportu- nity and political opportunism.” Here he vividly Reviewed by Michael Beitler contrasts the positive features of free markets with the apitalism at Work by Robert grubby, furtive nature of political capitalism, which C L. Bradley, Jr., looks at the hinges on “connections,” favoritism, and secret deals destructive force of cronyism (or to make profits, injure competitors, and pin losses on what Bradley calls “political capi- taxpayers. talism”) in America.Though peo- Bradley throws a wider net than we usually see in ple keep saying—especially in the the pro-market literature. In chapter 4, for example, he wake of the bursting housing discusses the influence of business writers such as Gary bubble and subsequent financial Hamel, Peter Drucker, and Jim Collins. He even meltdown—that “capitalism failed,” includes a well-informed section on accounting princi- the book makes the exceedingly ples, where he warns against the “invited manipulation” important point that what prevails in the United States of fair-value accounting. And chapter 6, “U.S. Political is not true capitalism (free enterprise, no government Capitalism,” includes numerous examples of industry impediments to success nor bailouts for failure), but representatives scheming with politicians to establish

THE FREEMAN: www.thefreemanonline.org 42 Book Reviews government rules and regulations (and entire agencies) Herbert Hoover to limit competition for the benefit of the current by William E. Leuchtenburg members of the industry at the expense of new com- Times Books • 2009 • 208 pages • $22.00 petitors, consumers, and taxpayers. The alarming truth Reviewed by Jim Powell is that political capitalism is slowly strangling heroic capitalism. illiam E. Leuchtenburg is In Part III Bradley enlightens the reader on many Wamong the last surviving issues relating to the production of energy.“The Dark literary lions who played a major Decade,” for example, focuses on the foolish govern- role shaping the reputation of mental meddling in energy from Nixon to Carter. It’s Franklin Delano Roosevelt. His an especially timely topic, given the Obama administra- book Franklin D. Roosevelt and the tion’s infatuation with “green energy” schemes that New Deal (1963) stood out amidst require government financial support. the postwar deluge of worshipful At the end of the book Bradley turns to Enron. He works about FDR, including describes its founder, Ken Lay, as a “Ph.D. economist, those by James MacGregor Burns, interested in the big picture and the ways of political Arthur M. Schlesinger, Jr., Frank Freidel, and Kenneth power. His résumé was top-heavy with Washington S. Davis. Leuchtenburg, professor of history emeritus at experience, acquired at three federal jobs, the last two the University of North Carolina, is an engaging author regulating the energy industry.”As Enron’s CEO he was who knows how to tell a good story. the master of the government-favor game. This new biography of Herbert Hoover is a prelude Bradley gives examples of how Enron played both to the morality tale that Leuchtenburg has already pre- sides of the political aisle and how it “politicized”its tax sented—namely, the heroic New Deal narrative. and accounting systems to create the illusion of prof- According to Leuchtenburg, the 1920s were a failure, itability. Bradley states that Enron “was a logical, albeit and the worst failure was Herbert Hoover. He was a grotesque, outcome of the mixed economy writ large.” “heartless” man, a “dogmatic reactionary,” “a right Most Americans think that Enron’s collapse shows winger of deepest dye” who preached “minimalist” some inherent weakness in capitalism, but what Bradley government. Hoover wouldn’t spend enough money shows is that it rose only because Lay and others in the on relief because of his unwarranted “faith in volun- firm knew how to game the political system. Equally tarism.” important, Enron’s collapse came about because Ye t Leuchtenburg provides evidence aplenty that investors in the world of real capitalism finally discov- Hoover wasn’t quite the laissez-faire champion he has ered that the company was a hollow shell and dumped been made out to be. While criticizing Hoover for its stock. wanting to balance the federal budget, Leuchtenburg Bradley’s Capitalism at Work is actually the first book acknowledges that Hoover “was running a historic in a planned trilogy called Political Capitalism. The deficit—nearly a billion dollars.” Leuchtenburg men- forthcoming volumes are titled Edison to Enron and tions how Hoover’s Grain Stabilization Corporation Enron and Ken Lay: An American Tragedy. I’m looking tried to help farmers by purchasing agricultural com- forward to both of them. modities at above-market prices, only to find that farm- ers responded by producing more. Overwhelmed with Michael Beitler ([email protected]) is the host of “Free Markets With Dr. Mike Beitler,” a libertarian Internet radio show, and the author of unwanted surpluses, the Corporation dumped these Rational :A Moral Argument for Limited commodities on the market, driving farm prices even Government and Capitalism. lower than they had been before. Furthermore, Hoover’s Reconstruction Finance Corporation bailed out banks, railroads, insurance companies, and building and loan associations, but still the depression deepened.

43 APRIL 2010 Book Reviews

In 1932 Hoover signed the Norris-LaGuardia Act, giv- years of his presidency, then why weren’t FDR’s poli- ing labor unions immunity from antitrust laws, private cies a reason that high unemployment dragged on for lawsuits for damages, and injunctions from federal seven years of his presidency? If Hoover is viewed as courts, which enabled union bosses to push aggressively having failed to get America out of the Great Depres- for monopoly bargaining power and forced dues. sion, why shouldn’t FDR similarly be viewed as having I would agree with Leuchtenburg that two of failed to get America out of it? The main difference Hoover’s biggest blunders were signing the Smoot- between Hoover and FDR might be that FDR went Hawley tariff in 1930 and tax hikes in 1932.The prob- on to win World War II, and probably many people lem is that it’s impossible to square all of this federal ignore or forgive his depression-era bungling because activism with the notion that Hoover believed in “min- of that. imalist” government. The key to Hoover’s and FDR’s failures during the Nor does Leuchtenburg comment on the striking Great Depression was their “progressive” ideas. Both similarity between the policies of his demon Hoover men grew up on those ideas and took them to heart and his hero FDR. Hoover and FDR both raised taxes. when they served in Woodrow Wilson’s wartime Both spent money on public works that didn’t provide administration.The depressing thing about this book is many jobs for unskilled people. Hoover signed the that instead of debunking the myth that Hoover and trade-stifling tariff. FDR effectively embraced it; he FDR were philosophical opponents, it attempts to keep never spent any of his formidable political capital trying it alive. to repeal it, which he might have been able to do soon Jim Powell ([email protected]), a senior fellow at the Cato Institute, after he was sworn in, when a desperate nation was at is the author of FDR’s Folly, Bully Boy,Wilson’s War, Greatest his feet waiting for leadership and inspiration. Powerful Emancipations,The Triumph of Liberty, and other books. protectionist interest groups would have opposed FDR, but he had an appealing personality and formidable communications skills, and was a political genius. I End the Fed think he could have exploited the deep resentment by Ron Paul against Hoover to eliminate his monstrous tariffs and Grand Central Publishing • 2009 • 224 pages • $21.99 taxes, providing a much-needed stimulus for the econ- Reviewed by George Leef omy. Apparently, he was content with Hoover’s anti- trade policy. f all the blunders in Ameri- FDR, like Hoover, spent much effort trying to prop Ocan history, perhaps the up wages and prices.This prevented markets from fully greatest was the decision to put adjusting to the severe contraction. Maintaining above- control of money and banking in market prices discouraged consumers from buying, and the hands of a cabal of big bankers above-market wages discouraged employers from hir- operating under the highfalutin ing. Also, like Hoover, FDR expanded the power of title “Federal Reserve System.” labor bosses (especially with the 1935 National Labor Unfortunately,few among us know Relations Act). Unemployment dragged on under anything about the Fed, much less Hoover, and it dragged on even longer under FDR— have any inkling of how badly it has damaged the until 1940, when the government began mobilizing for nation.Without it we’d have a smaller government and World War II and conscripting young men. economic stability. These striking similarities create more than a few And yet the Fed enjoys almost sacred-cow status. problems for the heroic New Deal narrative. If Hoover Most Americans have been led to believe that modern was bad and FDR was good, then why did FDR adopt nations absolutely must have some government institu- Hoover’s major policies? If Hoover’s policies were a tion to “manage” the economy, provide money and reason that high unemployment dragged on for three credit, and control interest rates. Blinded by that

THE FREEMAN: www.thefreemanonline.org 44 Book Reviews notion, they assume that if we didn’t have the Fed, we’d One thing most people have heard is that it is the be stuck in the horse-and-buggy age, plagued by terri- Fed’s job to give us price stability. Paul shatters the idea ble boom-and-bust cycles. that it does so by noting that goods costing one dollar Over the near-century since Congress established in 1913 now cost $21. Nor does the Fed give us eco- the Fed (in 1913), it has had many critics, but never one nomic stability. Paul points to the numerous recessions with the moral and political stature of Representative we’ve had since it was established. Ron Paul.The congressman from Texas is not a politi- Drawing on his study of Austrian economic the- cal hack who takes positions just to please constituents ory, Paul demonstrates that the boom-and-bust cycle and get reelected. He has made a lengthy, serious study is generated by the Fed’s penchant for tampering of economics, especially our monetary institutions, and with interest rates. When it drives them artificially his book End the Fed puts his knowledge on display.But low, it stimulates a temporary boom that must even- it’s more than just a display of knowledge. The book tually end in recession or depression, with high shows Paul’s passionate commitment to the cause of unemployment and many bankruptcies among over- establishing the honest, dependable monetary system stretched firms. the United States was supposed to have. Furthermore, the Fed makes it easy for the federal That’s why Paul wants to end the Fed. It gives us a government to finance its extravagant (and usually dishonest and easily manipulated monetary system that unconstitutional) spending. It can purchase government we can only depend on for constant inflation. Abolish- bonds through “open market operations” and magically ing the Fed, he writes, “would be the single greatest turn federal debt into new money.What a scam. Politi- step we could take to restore American prosperity and cians get to spend without explicitly raising taxes and freedom and guarantee that they have a future.” then blame the resulting depreciation of money on The financial turmoil and prodigious deficits of others. recent years have people wondering about the future. So the Fed is a bad institution, but what alternative For them, this book will be like finding an oasis when is there? We can’t go back to some antiquated system you’re desperate for water in the desert. like gold, can we? Paul shows that a monetary system Paul begins by explaining how the Fed came to be. based on precious metal is both feasible and much to be The United States survived without it for more than a desired, precisely because, unlike paper, government century, although the nation suffered from periodic can’t manipulate gold. recessions and “panics.” Those episodes, Paul makes The book ends with an excellent list of suggested clear, weren’t due to any flaw in the free market, but readings. I predict that End the Fed will lead to quite a were caused by bad government monetary policy and few knowledgeable and zealous opponents of govern- banking regulation. The Panic of 1907, however, was ment economic intervention, and not just regarding seized on by banking interests to push for the cartel money. they had long desired. Congress obligingly created the Ron Paul’s book is a timely cry of the heart. With National Monetary Commission in 1908. It was domi- our economy in tatters, opportunistic scoundrels in nated by big bankers who said that the country needed Washington are calling for vast, freedom-killing expan- an “elastic” currency and a “lender of last resort” to sions of government power. Paul stands athwart their backstop banks that got themselves into deep trouble. plans.This brave book is a rallying point for Americans The legislation was drafted in 1910 at a secret meeting who know that we’re on a path to ruin. on Jekyll Island, Georgia, at a resort owned by the biggest banker of all, J. Pierpont Morgan. Congress George Leef ([email protected]) is book review editor of The Freeman. passed it in 1913.

45 APRIL 2010 THE FREEMAN: www.thefreemanonline.org 46 The Pursuit of Happiness

ObamaCare and Unions

BY CHARLES W. BAIRD

ast November 7, the House of Representatives become quasigovernment employees. At the behest of passed H.R. 3962, crafted by Speaker Nancy Andy Stern and his Service Employees International LPelosi and whimsically titled the Affordable Union (SEIU), politicians in several states—including Health Care for America Act (AHCAA). It was the California, Illinois,Washington, and Missouri—are try- House’s version of ObamaCare.American labor unions, ing to classify home health care workers who are paid whether representing government- or private-sector with taxpayer money as state government employees workers, enthusiastically endorsed the measure.Yet most who may be unionized and forced to pay union dues. unions have been effective at securing good health care Home health care workers tend to disabled and chron- benefits for their members, and they frequently cite this ically ill people, often senior citizens, in their homes as a reason for workers to unionize. So why are they so rather than in health care facilities. Section 2589 of the eager for government to expand its role in American AHCAA creates a “Personal Care Attendants Workforce health care? The short answer, as illus- Advisory Panel” on which labor trated by several provisions of the unions are guaranteed representation. AHCAA, is that government-run Increased government “Personal care attendants” is another health care would enable union bosses intervention in health name for home health care providers. to capture large numbers of hitherto Union representatives on this panel union-free workers into forced-dues care increases the will inevitably push for forced union- subservience. ization of such workers. Increased government interven- number of health The conversion of private-sector tion in health care increases the num- care workers who workers into government workers ber of health care workers who are, or benefits unions because govern- who could be classified as, govern- are, or who could ment workers are easier for unions to ment employees. In a single-payer sys- be classified as, capture than private-sector workers. tem all health care workers are The percent of government workers government employees. When gov- government who are unionized far exceeds the ernment increases its subsidies and employees. corresponding percent in the private regulation of nominally private health sector. care facilities, they become much less In 2009 unionization in govern- private. Their employees derive more of their income ment was 37.6 percent while in the private sector it was from government and are subjected to government- only 7.3 percent. Moreover, government-employee dictated workplace rules.They become more and more unions now have more members than private-sector like government employees. This gives government- unions. In 2009 government-employee union members employee unions grounds for trying to intrude where comprised 51 percent of all union members, although they do not belong. Politicians who receive organized government workers were only 16.9 percent of all pecuniary and in-kind election support from the workers (www.unionstats.com). unions are all too happy to comply. Similarly,as individual private health care practition- Charles Baird ([email protected]) is a professor of economics ers receive more of their income from taxpayers they emeritus at California State University at East Bay.

47 APRIL 2010 Charles W. Baird

The principal reason unions are more successful One might think that federal oversight of the myr- among government workers than private-sector iad details of American health care would make the workers is that government-sector employers have no medical provisions of collective bargaining contracts reason to resist unionization. They and the unions irrelevant. Not so. Union-owned politicians are loath to with which they “bargain” sit on the same side of the do anything to make any of the games unions play bargaining table. They each seek more and more irrelevant. Section 254 of the AHCAA provides that money from taxpayers. Bureaucrats seek larger budgets “Nothing in this [legislation] shall be construed to alter for their agencies, and the unions are helpful in organ- or supersede any statutory or other obligation to izing support for those larger budgets. Government engage in collective bargaining over the terms or employees know their paychecks are determined by conditions of employment related to health care.” Sec- political clout, and they recognize the value of unions tion 424 guarantees that any union-negotiated health as effective lobbyists against the interests of taxpayers. plan automatically meets “health care participation For example, in Canada, which has a single-payer requirements.” medical system, almost all registered There are other ways that the nurses are government employees. AHCAA benefits unions. Section 111 Sixty-two percent of Canadian Since government creates a $10 billion trust fund to bail registered nurses are unionized employees are out unions and employers that now (www.tinyurl.com/y8alsrf). The have unfunded health care liabilities to corresponding figure in America receptive to the early retirees between 55 and 64. The in 2008 was 19.8 percent United Auto Workers (UAW), General (www.unionstats.com). In brief, blandishments of Motors, and Chrysler are among the ObamaCare would create more unions, unions big beneficiaries of this “reinsurance” government employees; and since scheme.The government and the UAW government employees are recep- support ObamaCare. have already taken over General Motors tive to the blandishments of unions, and Chrysler, but AHCAA would unions support ObamaCare. throw even more taxpayer money at them. Section 110 AHCAA also helps private-sector unions because it prohibits any postretirement health care benefit reduc- imposes health care costs on union-free employers who tions in the private sector. Taken seriously, this would otherwise may not offer medical benefits to their make the accumulation of future unfunded health care employees. It is elementary economics: If your com- liabilities illegal. Inasmuch as the federal government petitor has a cost advantage over you, you can either cut itself continues to accumulate trillions of dollars of your costs or lobby government to increase your com- unfunded liabilities in Social Security and Medicaid, this petitor’s costs. AHCAA does the latter through is shameful hypocrisy. employer mandates and tax penalties imposed on There are more goodies for unions sprin- employers who do not comply. Compensation includes kled throughout the 2,016 pages of the AHCAA, but wages and nonwage benefits such as health insurance.A the subterfuge is clear. In a 2008 campaign speech union-free employer can tailor compensation packages before the SEIU, Barack Obama promised Andy Stern to fit the preferences of individual employees. He and his subjects that “Your agenda is my agenda” thereby obtains the services of his employees at the (www.tinyurl.com/ygllo6c; note: audio begins immedi- lowest cost. Unionized employers with union contracts ately at high volume).Whatever else may be said about that require uniform health care benefits do not have the president’s attempt to take over American health that ability. care, it is obvious that he is keeping that promise.

THE FREEMAN: www.thefreemanonline.org 48