THEFREEMAN IDEAS ON LIBERTY

FEATURES 412 The Trouble with Keynes by Russell Shannon A dubious legacy ofpolitical activism and short-run solutions. 416 Macroeconomics Reconsidered by Kyle S. Swan Toward formulating a defensible theory ofcapital. 419 Cholecystectomy, How Is It Made? by LeonardA. Metildi A surgeon applies the lesson of"I, Pencil" to gall bladder surgery. 422 A Sales Pitch for Laissez-Faire Health Care by Daniel B. Klein The benefits of establishing freedom ofproperty, consent, and contract in medical care. 426 Is Environmental Pollution the Principal Environmental Problem? by Hugh Macaulay Rethinking pollution as an economic problem. 429 The Greening of the Cross by E. Calvin Beisner Misstatements of a new environmental movement. 433 The Rise of Market-Based Management by Jerry Ellig and Wayne Gable Looking to the free market system for business management insights. 439 The Economic Safety Net (a parable) by Jes Beard The dangers oftrading liberty for security. 444 Special Interests and the Internment of Japanese-Americans During World War II by Steven B. Caudill and Melody Hill National security was not the primary motivating factor. 448 Peace for Europe? by William J. Watkins, Jr. The centralizing effort ofthe European Union could generate the very conflict it seeks to avoid. 451 Economics 101: A True-False Test by Ralph R. Reiland How much do you know about the American economy ofthe 1980s? 452 Hail to Prices! by Jeffery G. Lee In Pangbae, as in Peoria, prices convey vital information about supply and demand. 456 Don't Believe the Hysterical Preservationists by James D. Saltzman Supplanting the aesthetic choices ofthe property owner with government edict is bad economics and bad political philosophy. 461 Free Banking and Economic Development by David Glasner Why free banking is so well suited for less-developed and former Eastern Bloc countries. 467 Thomas Jefferson's Sophisticated, Radical Vision of Liberty by Jim Powell A tribute to Jefferson's monumental accomplishments. 472 Forrest Gump: A Subversive Movie by Aeon J. Skoble A review of one ofthe year's most celebrated films.

COLUMNS Center NOTES from FEE-Degenerate Democracy by Hans F: Sennholz 424 IDEAS and CONSEQUENCES-Block Grants Are Not the Answer by Lawrence W Reed 442 A MAITER of PRINCIPLE-Beyond the Pale by Robert James Bidinotto 454 POTOMAC PRINCIPLES-Freedom from Taxes? by Doug Bandow 474 ECONOMICS on TRIAL-Sorry, Charley, But That's Not Capitalism! by Mark Skousen DEPARTMENTS 410 Perspective-James M. Buchanan, Randall G. Holcombe, Paul Heyne, Henry Hazlitt, Christopher DeMuth 476 Book Reviews -Cliches ofPolitics edited by Mark Spangler, reviewed by Robert Batemarco; Death by Government by R. 1. Rummel, reviewed by Doug Bandow; Beyond Politics, by William C. Mitchell and Randy T. Simmons, reviewed by Gregory P. Pavlik; Investment Biker by Jim Rogers, reviewed by Richard A. Cooper. THEFREEMAN IDEAS ON LIBERTY PERSPECTIVE Published by Liberty and Individual The Foundation for Economic Education Irvington-on-Hudson, NY 10533 Potential Phone (914) 591-7230 FAX (914) 591-8910 President: Hans F. Sennholz Man wants liberty to become the man he Managing Editor: Beth A. Hoffman wants to become. He does so precisely Guest Editor: Donald J. Boudreaux because he does not know what man he will Editor Emeritus want to become in time.... Man does not Paul L. Poirot Lewisburg, Pennsylvania want liberty in order to maximize his utility, Book Review Editor or that of the society of which he is a part. Robert Batemarco Marymount College, Tarrytown, New York He wants liberty to become the man he Assistant Editor Gregory P. Pavlik wants to become. Columnists -JAMES M. BUCHANAN Doug Bandow Cato Institute, Washington, D.C. "Natural and Artifactual Man" Robert James Bidinotto Lawrence W. Reed What Should Economists Do? Mackinac Center for Public Policy Midland, Michigan (Liberty Press, 1979) Mark Skousen Rollins College, Winter Park, Florida Contributing Editors Charles W. Baird Freedom and Responsibility California State University, Hayward E. Calvin Beisner Covenant College, Chattanooga, Tennessee In a free society, individuals should have Peter J. Boettke New York University the right to make choices, even if their Donald J. Boudreaux Clemson University choices might harm them. With freedom Clarence B. Carson comes responsibility, and if we tum our American Textbook Committee Wadley, Alabama responsibility over to the government, we Thomas J. DiLorenzo Loyola College, Baltimore, Maryland turn our freedom over at the same time. Joseph S. Fulda New York, New York -RANDALL G. HOLCOMBE Roger W. Garrison Auburn University Public Policy and the Quality ofLife Bettina Bien Greaves Resident Scholar, FEE (Greenwood Press, 1995) Robert Higgs The Independent Institute, Oakland, California John Hospers University ofSouthern California Theory into Practice Tibor R. Machan Auburn University Ronald Nash We can successfully ride [a bicycle] with­ Reformed Theological Seminary Maitland, Florida out knowing how we do it. Moreover, we Edmund A. Opitz Chatham, Massachusetts can hold a totally erroneous theory about James L. Payne Sandpoint, Idaho bicycle balancing without getting into any William H. Peterson trouble, unless we try to design the bicycle AdjunctScholar, Heritage Foundation, Washington, D.C. Jane S. Shaw in accordance with ourfaulty theory. That is PERC, Bozeman, Montana Richard H. Timberlake when we will get into trouble. In the econ­ University ofGeorgia Lawrence H. White omy, we can enrich one another without University ofGeorgia knowing how we do it. And we can maintain The Freeman is the monthly publication of The Foundation for Economic Education, Inc., Irvington-on-Hudson, NY 10533. FEE, completely fallacious views of how any established in 1946 by Leonard E. Read, is a non-political, educa­ tional champion of private property, the free market, and limited economy works without creating any great government. FEE is classified as a 26 USC 501(c)(3) tax-exempt difficulties for anyone. But if our practical organization. Copyright © 1995 by The Foundation forEconomic Education. success generates excessive confidence in Permission is granted toreprint any article in this issue, except''Thomas Jefferson's Sophisticated, Radical Vision ofLiberty," provided appro­ our erroneous theory, and we try to use that priate credit is given and two copies of the reprinted material are sent to The Foundation. theory to improve the operation of the The costs of Foundation projects and services are met through donations, which are invited in any amount. Donors of$30.00 or more system, we can do a great deal of damage. receive a subscription to The Freeman. Student subscriptions are $10.00 for the nine-month academic year; $5.00 per semester. Additional When we put faulty theories about bicycle copies ofsingle issues of The Freeman are $2.00. For foreign delivery, riding into practice, we are instantly refuted. a donation of $40.00 a year is suggested to cover mailing costs. Bound volumes of The Freeman are available from The Foundation Few of us are either stubborn or stupid for calendar years 1972 to date. The Freeman is available in microform from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. enough to persist in a faulty theory that is 410 PERSPECTIVE skinning our elbows or bruising our bot­ to cooperate more effectively with the buy­ toms. We admit our ignorance. There is ing public. And so, indirectly,-triangu­ nothing similar, however, to correct faulty larly, so to speak-General Motors and theories that are applied to the reconstruc­ Ford cooperate. Each makes the other more tion of economic systems. The links be­ efficient. tween causes and effects are too numerous -HENRY HAZLITT and too difficult to trace. The Foundations ofMorality -PAUL HEYNE "Why Johnny So Rarely Learns Any Eco­ The New Manifest Destiny nomics," in Richard M. Ebeling, Ed., Eco­ nomic Education: What Should We Learn Traditionally, the nation-state provided About the Free Market? (Hillsdale College two major benefits, both ofwhich tended to Press, 1994). increase with the state's territory ... phys­ ical protection against external enemies and Competition and Cooperation an extensive internal market. ... But the first. .. is becoming less important with the Now what the critics of economic com­ spread of democratic forms of government, petition overlook is that-when it is con­ because democracies are highly disinclined ducted under a good system of laws and to make war on their neighbors; and the a high standard of morals-it is itself a second is becoming less important with the form ofeconomic cooperation. ... General growth of international trade and com­ Motors and Ford are not cooperating di­ merce-some of it due to the liberalizing rectly with each other; but each is trying actions ofgovernments, some ofit due to the to cooperate with the consumer, with the emergence of technologies resistant to gov­ potential car buyer. Each is trying to con­ ernment control, all ofit tending to make the vince him that it can offer him a better car economic benefits of extended markets than its competitor, or as good a car at a available without regard to the geographic lower price. Each is "compelling" the oth­ size of the individual state. er-or, to state it more accurately, each -CHRISTOPHER DEMUTH is stimulating the other-to reduce its pro­ President of the American Enterprise In­ duction costs and to improve its cars. Each, stitute. The American Enterprise, Vol. 6, in other words, is "compelling" the other March/April 1995.

411 THEFREEMAN IDEAS ON L1BER1Y

The Trouble with Keynes by Russell Shannon

"In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again." -John Maynard Keynes (1923)1

eynes' remark about the inevitability of indulge in a drunken spree tonight, don't we K death is now famous. It is, however, a risk a considerable probability ofawakening statement not ofdefeat but ofdenial. Rather tomorrow to a wretched hangover? In econ­ than indulge in resignation and gloom, omists' stark terms, we must ask ourselves Keynes urges action. The market economy, if the benefits will outweigh the costs. Let he believes, may at least occasionally re­ us consider each of these matters in turn. quire some judicious nudging. If we can temper the impact of economic malaise, The Proclivities of Politicians why wait? At first glance, this position seems rea­ As to the role of the state in economic sonable. Why not use human intelligence matters, Keynes repeatedly expressed dis­ to alleviate problems? After all, isn't that illusion with, and even disdain for, laissez what we do with medicine? Then why not faire. In his most influential work, The let the doctors ofeconomics prescribe rem­ General Theory of Employment, Interest edies appropriate for our economic ills? Did andMoney, he plainly stated that he favored not the founder of modern economics, "a somewhat comprehensive socialization Adam Smith, suggest a strong dose of lais­ of investment" as "the only means of se­ sez faire? curing an approximation to full employ­ There are, however, at least two distinct ment. ,,2 problems with Keynes' activist approach. That remark is not unique. In an essay First is the question of whether or not we published in the Yale Review in 1933, can rely on the political system to act in the Keynes turned his back on economists' recommended way. In light of Keynes' traditional enthusiasm for free trade: "let comments on other occasions, his optimism goods be homespun," Keynes wrote, on this issue is both uncharacteristic and "whenever it is reasonably and conve­ unwarranted. niently possible. ,,3 Here, too, he suggested Yet if we put this critical matter aside, that the path to economic prosperity is another equally urgent issue emerges. To paved by government intervention. resolve today's problems, might we not Just how extensive Keynes wished this create or exacerbate future problems? Ifwe political involvement to be is a matter of question. He expressly repudiated wide­ Professor Shannon teaches at Clemson Univer­ spread government ownership of industry. sity. No question, he wrote in his essay "The 412 413

End of Laissez-faire," is "so really unim­ I have discovered, what previously I didn't portant, so irrelevant ... as the National­ believe possible, that politicians behave in ization of the Railways.,,4 And in the Gen­ private life and say exactly the same things eral Theory, he asserted that "it is not the as they do in public. Their stupidity is ownership of the instruments ofproduction inhuman.... [Most of them have] minds which it is important for the State to as­ and opinions as deplorable as their charac­ sume."s ters. ,,10 But Keynes did espouse active involve­ When Great Britain returned to the gold ment of government policy makers in eco­ standard following World War I, Keynes nomic matters. He held to what his early objected to the harm wrought by the over­ biographer Roy Harrod referred to as the valuation of the pound. He referred to "presuppositions of Harvey Road" -a ref­ statements made by the Chancellor of the erence to his childhood home as the son of Exchequer, Winston Churchill, as "feather­ a Cambridge don in England. "Reform," brained. ,,11 And during the Great Depres­ says Harrod, "was to be achieved primarily sion of the 1930s, Keynes was constantly and principally by the discussion of intelli­ frustrated that President Franklin Roosevelt gent people. ,,6 Thus Keynes offered sugges­ was not getting his message, even going to tions to make financial credit and job infor­ the extent of sending an open letter to him 7 mation more abundant. via the New York Times. 12 In fact, Herbert Stein, President Nixon's economic adviser, Trust Not in Politicians points out that it was not until well into Roosevelt's second term, and following ad­ Yet these proposals had to be imple­ ditional personal letters addressed from mented through the political process, and Keynes, that Roosevelt finally accepted the Keynes had abundant experience to warn Keynesian prescription of running deliber­ him against heavy reliance on politicians. ate budget deficits to alleviate the Depres­ After all, he attained prominence with the sion. 13 publication ofThe Economic Consequences One might argue, then, that the policy ofthe Peace, which denounced the arrange­ proposals that Keynes does make fall far ments political leaders had made in the short of state socialism because his faith in Versailles Treaty after the First World War. the political system was so limited. Reduc­ In this book, Keynes excoriated Woodrow ing interest rates to promote business in­ Wilson for acceding to the imposition of vestment and running federal budget deficits terms so harsh on Germany that, he pre­ were, after all, rather simple tasks requiring dicted, the entire European economy would no great deal ofintelligence. But even then, suffer. Wilson was, to Keynes, a "blind and matters can go awry. deaf Don Quixote. ,,8 Keynes' comments on Britain's leader, The Myopia of Meddling Lloyd George-''this goat-footed bard, this half-human visitor to our age from the hag­ Let us suppose that Keynes' fantasy is ridden magic and enchanted woods ofCeltic realized, so that we do get in responsible antiquity"9-were so strong that Keynes positions knowledgeable and caring people deleted them from the final manuscript. who seek to ameliorate economic problems. (They were published over a decade later.) What can we expect? If they refuse to sit Nor are these the only instances when back and wait for the economy to work out Keynes expressed dislike of pOliticians. In its long-run adjustments, what measures 1911, following a trip to Ireland, he wrote to might they take, and with what effects? his friend Duncan Grant, "You have not, I For example, consider Keynes' proposal suppose, ever mixed with politicians at in the Yale Review that we reduce our close quarters. They are awful. I think some dependence on foreign imports. If the gov­ of them must have been dregs anyhow, but ernment imposes tariffs and quotas to pro- 414 THE FREEMAN • JULY 1995 tect domestic industries from foreign com­ For another example, take Keynes' sug­ petition, what will happen? gestion that credit be made more abundant In the short run, we might expect a boost in order to stimulate investment and gener­ to our economy, as consumers switch from ate "multiplier" effects on the economy. In the now more-expensive imported products times of great recession, such a program to domestic ones. More jobs will be avail­ might obviously serve us well. But we run able for workers in these firms, so the the risk that monetary expansion will be unemployment rate will fall. excessive, either in amount or duration, But to see only these effects is to suffer thereby provoking inflation and a need to from acute myopia. Henry Hazlitt, one of reverse course, which will create unemploy­ Keynes' harshest and most outspoken crit­ ment. As Milton Friedman and Anna iCS,14 diagnoses this myopia in his small but Schwartz have documented, the monetary significant book, Economics in One Lesson. authorities may behave in perverse ways, as Hazlitt emphasizes that "The art of eco­ they did during the Great Depression ofthe nomics consists oflooking not merely at the 1930s, starving the economy.18 immediate but at the longer effects ofany Efforts to use compensatory budget pol­ act or policy,. it consists in tracing the icies, running deficits during recessions and consequences ofthat policy not merely for surpluses during periods ofexcessive activ­ one group but for all groups." 15 Hazlitt ity, have also foundered on the reefs of followed up this point in his larger work, The political reality. The tax cuts of the early Foundations of Morality, where he ad­ 1960s were almost impossible to reverse dresses the importance of developing rules when the sluggish economy became over­ that produce desirable long-run outcomes. 16 heated during the Vietnam War. Replacing Of course, when the United States the rule of an annually balanced federal adopted more restrictive trade policies in budget with the Keynesian version which the Smoot-Hawley Act of 1930, other na­ recommends balancing over the course of tions retaliated. This game of tit-for-tat de­ the business cycle has led to such persistent stroyed the benefits we hoped to gain from deficits that, in the 1990s, we may resort to higher trade barriers. 17 But such policies a constitutional mandate to restore the old may backfire even in the absence of retali­ rule of fiscal integrity. ation. To take one final example of the short­ If we reduce our purchases of foreign run versus long-run dilemma, consider wel­ goods, what happens to the people in foreign fare. Leaving children undernourished and countries who formerly used dollars to buy ill-educated will likely create long-run from us? Having fewer dollars, they will problems of dependence and crime which likely import fewer American goods, so our society would surely like to avoid. But export industries will suffer job losses, payments to parents of children in such a which will offset or even cancel the gains in plight encourages the production of more our import-competing industries. Further, if such children. Relieving parents ofthe need we restrict imports of raw materials or to provide for their families can also set an semi-finished products, such as steel, then example which their children may emulate. domestic firms that use these inputs, such as Here we exchange one long-run problem the automobile industry, will find them­ for another, yet in our sympathy for the selves at a competitive disadvantage with youth of today, we risk increasing the pop­ the foreign rivals who can still buy supplies ulation of such wretched people in years at lower prices. So, Ford will lose sales to to come. Nissan, and GM will be hurt by BMW. In the 1920s and 1930s, when Keynes And what about our poor? Keynes wor­ wrote, capitalistic countries passed through ried about them, but restricting imports of an era of malaise. Dramatic experiments in "cheap" products will be especially devas­ the Soviet Union and elsewhere had the tating to the poverty-stricken. allure of novelty. Keynes denounced Sta- THE TROUBLE WITH KEYNES 415 lin's system at the end of his Yale Review 3. John Maynard Keynes, "National Self-Sufficiency," Yale Review, 22 (June, 1933), p. 758. essay, but he did not eschew experiments. 4. John Maynard Keynes, "The End ofLaissez-faire," in Now, following the collapse of Commu­ Keynes, Essays in Persuasion (New York: W. W. Norton, 1963), p. 316. This essay was first published in 1926. nism and the retreat from socialistic policies 5. Keynes, General Theory, p. 378. in many nations, the superiority of the 6. R. F. Harrod, The Life ofJohn Maynard Keynes (New York: St. Martin's Press, 1963), p. 3. On this matter, see also market seems to be more widely accepted. James M. Buchanan and Richard E. Wagner, Democracy in The recent attempt to establish a system of Deficit: The Political Legacy of Lord Keynes (New York: Academic Press, 1977), pp. 78ff. comprehensive health care in the United 7. Keynes, "The End of Laissez-faire," p. 318. States indicates, however, that the activist 8. John Maynard Keynes, The Economic Consequences impulse is not dead. of the Peace (New York: Harcourt, Brace and Howe, 1920), p.41. In Alfred Hitchcock's witty movie, The 9. John Maynard Keynes, "Mr. Lloyd George: A Frag­ Trouble with Harry, a man is found dead, ment," in Keynes, Essays in Biography (New York: W. W. Norton, 1963), p. 35. This fragment was first published in 1933. lying in the woods on a bright New England 10. Harrod, The Life ofJohn Maynard Keynes, pp. 157-58. autumn day. During the course of the film, 11. John Maynard Keynes, "The Economic Consequences of Mr. Churchill," in Keynes, Essays in Persuasion, p. 246. there is much concern about how Harry got First published in 1925. into his present state, and what to do with 12. New York Times, December 31, 1933, Sec. 8, p. 2XX. When Keynes met Roosevelt at the White House in 1934, him. Eventually, he gets a properburial, and Roosevelt's Secretary ofLabor had the impression that the two the people are able to go about their normal men were mutually unimpressed. See Frances Perkins, The Roosevelt I Knew (New York: Colophon Books, Harper and lives. Row, 1964), p. 225. Keynes, of course, has been dead for 13. Herbert Stein, The Fiscal Revolution in America (Chi­ cago: University of Chicago Press, 1969), pp. 108fl'. almost 50 years. During his life, and since, 14. See Henry Hazlitt, The Failure ofthe "New Econom­ his writings did much to stimulate creative ics": An Analysis of the Keynesian Fallacies (Princeton: D. Van Nostrand, 1959 [Foundation for Economic Education, and useful thought among economists. In 1995]). some ways, the discipline is richer for his 15. Henry Hazlitt, Economics in One Lesson (New York: insights. But his preference for political MacFadden Books, 1961), p. 12. First published in 1946. 16. Henry Hazlitt, The Foundations of Morality (Los activism and short-run policies is a ques­ Angeles: Nash Publishing, 1972), pp. viii and Chapter 7. First tionable and even a dangerous legacy. For published in 1964; republished by the Foundationfor Economic Education, 1994. them a decent burial seems overdue. D 17. See Jude Wanniski, The Way the World Works (New York: Simon and Schuster, 1978), Chapter 7. Wanniski argues that the New York Stock Exchange reflected the adverse 1. John Maynard Keynes, Monetary Reform (New York: anticipation of the impact of Smoot-Hawley. Harcourt, Brace, 1924), p. 88. English edition published in 1923. 18. See "The Great Contraction" in Milton Friedman and 2. John Maynard Keynes, The General Theory of Em­ Anna Jacobson Schwartz, A Monetary History ofthe United ployment, Interest and Money (New York: Harcourt, Brace, States, 1867-1960 (Princeton: Princeton University Press, 1936), p. 378. 1963), Chapter 7. THEFREEMAN IDEAS ON LIBERTY

Macroeconomics Reconsidered by Kyle S. Swan

ark Skousen's reconstruction in The von Bohm-Bawerk countered these me­ M Freeman of the debate between the chanical theories by emphasizing the impor­ Austrian and Monetarist schools on the tance of time. Capital is the form multi­ trade cycle challenges the economics pro­ period plans take as these plans materialize. fession. In recent "Economics on Trial" Essentially the same debate was repeated columns, Skousen hands down the verdict years later between Frank Knight of the to modern economics: put capital back Chicago school and F.A. Hayek. into your macroeconomics. John Maynard Knight, who taught Milton Friedman, Keynes, ofcourse, took capital out of mac­ described capital as a self-perpetuating roeconomics, masking with crude aggre­ fund-as a stock generating a continual flow gates the micro foundation ofthe productive of output in perpetuity. Like the Energizer process. However, in the Austrian school, bunny, it keeps going and going and go­ capital never left. Austrians consistently ing. ... Ownership of capital assures a recognize the necessity of capital theory, steady income. This interest income can be especially one emphasizing the role oftime. saved in order that a capital good may be And capital and time are central to a proper replaced when its durability wanes. In this understanding of the trade cycle. sense, capital reproduces itselfand provides The standard story of capital theory be­ for its own maintenance. gins by defining capital as the total stock of Austrians have a very different view of productive wealth (identified in mainstream production. For Austrians, production us­ models as k and reckoned as a monetary ing capital is a process ofconverting higher­ value). Capital is increased by saving, and order goods (e.g., wheat) into lower-order the greater is the stock ofcapital, the greater goods (e.g., bread) to satisfy consumer de­ is output. An economy's rate of economic mands. In the broadest sense, the economic growth depends upon k. The marginal pro­ process refines and utilizes nature's re­ ductivity ofcapital is reflected in the interest sources for the fulfillment of individual rate; capital generates interest. In this me­ goals. Something is important and attains chanical system where k is (assumed to be) goods-character only if it is perceived to automatically productive, saving necessar­ contribute to the satisfaction of consumer ily generates growth. Consequently, plan­ demands. The production process, there­ ning for the future occurs only when indi­ fore, depends on the purposeful decision­ viduals make conscious decisions to save. making and planning of entrepreneurs and In his debate with the American econo­ investors seeking profits by using resources mist John Bates Clark, the Austrian Eugen and other inputs to better satisfy consumer Mr. Swan, a recent graduate of Grove City wants. Knight's vision of automatic capital College, is a member of FEE's staff and a maintenance ignores the very raison d'etre graduate student at New York University. of production: individual planning and de- 416 417 cision-making to satisfy consumer de­ value is imputed at different stages of com­ mands. Also, Knight ignores the central pletion. Hidden in these aggregates are the question ofeconomics in his capital theory: purposes and plans ofmillions ofpeople. An how does complex plan coordination take aggregate of purposes and plans makes no place, especially through time? sense. Knight saw no analytic advantage in em­ But the claims of the standard neoclassi­ phasizing time or multi-period planning. If cal approach must be addressed at even a you have the shirt on your back, seven shirts deeper level. Austrians who simply mock at the laundry, and seven at home, it takes and dismiss mainstream capital theory as no time at all to get clean shirts. You go to "breakfast-cereal theories ofcapital" (Spe­ the laundry with seven dirty shirts, hand cial K) miss an important point. Mainstream them over, and immediately get seven clean economists are not naive. They recognize shirts. If you have the productive stock that it takes a week for shirts to be cleaned. (15 shirts), there is no need to plan and time Mainstream economists are not mystics is irrelevant. If the average period of pro­ who believe that capital is a magical sub­ duction is calculated, the economic process stance that just is productive. Rather, they is synchronized. There is simultaneous pro­ maintain that there is no analytic advantage duction and consumption. In forestry, log­ in emphasizing mUlti-period planning; that it gers synchronize cutting and planting. Real is unnecessary to focus on this aspect. Time, time is zero. The forest is a permanent in this view, is analytically unimportant. source of wood. Why insist on emphasizing multi-period planning if doing so further complicates or The Importance of Time even invalidates neoclassical modeling and adds nothing to the analysis? Austrians resist this notion ofcapital as an Thus, to effectively respond, Austrians aggregate stock of productive wealth, al­ must expose the costs of ignoring time and ways emphasizing the importance of time. individual plans and preferences. They must Something is not capital in virtue of its show that the mainstream practice gener­ physical characteristics, but because of its ates error or oversight, while the Austrian economic functions; Le., the degree to "lens" brings relevant features ofeconomic which people perceive their dependence on . reality into fuller or sharper focus. command of it for the satisfaction of their Consider the Austrian trade-cycle theory. goals. It isn't the case that a person expects The capital combination at any time reflects seven clean shirts at the laundry merely the plans and preferences of individuals. because he brings in seven dirty shirts. Given current prices, expectations offuture Rather, a person takes seven dirty shirts to prices, and the interest rate, businesses the laundry in order that he may get them arrange their capital resources in ways that back clean in a week's time. Logging com­ hopefully will meet with the most favorable panies plant trees expecting that they will response from consumers. However, if the grow and be cut down many years later. central bank lowers the interest rate below Here, capital retains its subjective charac­ the natural rate by increasing the money ter. Rather than a stock of things, capital is supply or lowering the discount rate, this a manifestation ofhuman production plans. move sets in motion a self-reversing process Output does not flow automatically as in where the boom turns into the inevitable Knight's example of fruit from trees. Indi­ bust. viduals' plans initiate and drive a process Here's how. At first, production sched­ taking place in real time and subject not only ules are guided toward longer-term projects to imperfect foresight, but to human error as in response to the false price signals created well. by central-bank money creation. (Lower Furthermore, the conception ofan aggre­ market interest rates falsely promise a more gate stock ofk ignores the process by which generous supply offunds for capital invest- 418 THE FREEMAN • JULY 1995 ment in the future.) Projects are undertaken when false signals draw complementary today with the expectation that complemen­ goods away. tary capital goods will be available when A theory of capital that ignores time and needed tomorrow. However, these longer­ hides the relevant information in crude ho­ term projects do not reflect the true prefer­ mogeneous aggregates can't very well ex­ ences ofconsumers who, it turns out, don't plain the trade cycle. The Austrian emphasis save as much of their incomes as would be on the time structure ofproduction based on necessary to keep the interest rate as low as individual purposes and plans enriches the it was driven by the central bank. The entire story of boom-bust cycles. It should be no structure of production is distorted as cen­ surprise that Milton Friedman does not see tral bank policy directs resources away from any significant correlation between an infla­ projects consumers find more valuable to­ tion and a recession. His capital theory does ward projects of less value. The comple­ not allow him to see the process at the micro mentary goods of longer-term projects that level that makes the link. businesses have undertaken will be unavail­ However, work towards this kind of rec­ able. Therefore, not all ofthese projects will ognition has only barely begun as evidenced be completed. Businesses, finally seeing the by many of the experts quoted· by Dr. handwriting on the wall, must halt, regroup, Skousen. Moreover, Skousen's charge to recoup, and liquidate as the correction rethink capital theory is a big challenge. phase begins. Capital theory within the Austrian paradigm This explanation ofthe trade cycle hinges is probably the least developed area. on several key factors tied intimately to Hayek's Pure Theory ojCapital (1941) and capital theory. First, production takes time. Ludwig Lachmann's Capital and Its Struc­ In non-instantaneous production, error is ture (1956) are the only modern comprehen­ costly. The longer the malinvestment, the sive studies ofthe subject. 1 If we agree that greater the necessary correction. Second, capital is key to understanding phenomena capital goods are heterogeneous and are such as the trade cycle, we must devote often appropriate for only a small range of more effort towards formulating a defensible uses. Ifa business overinvests or malinvests capital theory. D in one period, it cannot easily divest or change production or investment projects in 1. A few excellent article-length treatments of Austrian the next. Third, capital goods have a limited capital theory exist. See Roger W. Garrison, "Time and Money: The Universals ofMacroeconomic Theorizing," Jour­ range of competing uses, and production nal of Macroeconomics, Vol. 6 (Spring 1984), pp. 197-213, plans often necessitate complementary and Garrison, "A Subjectivist Theory of a Capital-using Economy," in Gerald P. O'Driscoll, Jr., and Mario J. Rizzo, goods for their fulfillment. Because re­ The Economics of Time and Ignorance (New York: Basil sources are scarce, many projects must fail Blackwell, 1985), pp. 160-187.

Op-Ed Watch he Foundation for Economic Education continues to expand in its efforts to spread the message of liberty. Part of our important work is our newspaper editorial pro­ T gram. Special versions of our best Freeman articles are appearing in newspapers across the country-and around the globe. You can help us to monitor our work. If you see one of our articles in your paper, drop us a line or give us a call. THEFREEMAN IDEAS ON LIBERTY

Cholecystectomy, How Is It Made?

by Leonard A. Metildi

n the spirit of Leonard Read's essay on imager using conduction medium by I the pencil-how no one knows how pen­ Parker). Surgery is scheduled. For the pre­ cils are made-it is interesting to investigate operative laboratory work, the patient has an a surgical operation (a cholecystectomy­ EKG (Hewlett-Packard), chest x-ray (GE and removal ofthe gall bladder) to show that no Kodak), complete blood count (Coulter one knows how it is made. As the pencil is T890), chemistry profile 18 (Kodak Ekta­ a relatively simple item, yet its manufacture chern), and a urine analysis (Ames Multistix). and distribution are so hopelessly complex The patient is admitted to the hospital on that a centralized economy could not begin the morning of surgery. An Imed pump is to duplicate the market's efficient petfor­ used to start an intravenous of Ringer's mance ofthese functions, medical surgery is lactate (solution, polyvinyl bag, and tubing likewise so complex that no central-plan­ from Abbott, catheter from B-D Corpora­ ning authority could ever ensure that it is tion, alcohol pads from Kendall). The pa­ readily available at reasonable prices. tient is given a shot ofsubcutaneous heparin A few simplifying assumptions are useful: from Elkins-Sinn, a dose of Kefzol from 1. The clinical case is straightforward and E. I. Lilly, syringe and needle from B-D, and simple-the patient is otherwise healthy anti-embolic stockings from Kendall are put with single organ system involvement. on. In the operating room, the patient is 2. The diagnostic workup is done effi­ placed on a Skytron Elite 6001 table and ciently. given several medicines (sodium pentothal­ 3. The operation and the post-operative Abbott, fentanyl-Janssen, succinyl choline­ course are uneventful. Abbott, pavulon-Gensia) as well as oxygen 4. The standard surgical instruments (for­ by mask from a Narkomed 2 anesthesia ceps, scissors, knife handles, needle holders, machine manufactured by North American etc.) are made by the same manufacturer. Drager. (The mask is from Bay State Anes­ A 50-year-old male with symptoms of thesia.) He is then endotracheally intubated gallbladder disease is the patient. His med­ using a Welch Allyn laryngoscope, a Mal­ ical history is fine and he is on no medica­ lenckrodt Critical Care endotracheal tube, a tions. To confirm the diagnosis, the surgeon tongue blade from General Medical Corpo­ obtains an ultrasound of the gallbladder ration, and an oral airway from Sun Medical (done on a Accuson 128 with a Matrix video Inc. The patient is then given oxygen and Leonard Metildi, M.D., F.A.C.S., is a clinical nitrous oxide from MG Industries, and iso­ assistant professor ofsurgery in solo practice in tlurane from Anaquest. upstate New York. An open cholecystectomy with an intra- 419 420 THE FREEMAN • JULY 1995 operative cystic duct cholangiogram is per­ ments, cholangiocatheter, Foley catheter, formed using the following items: nasogastric tube, and electrocautery instru­ ments. The patient would then be dis­ 1. Bard Parker scalpel blade 2. Surgical instruments from V. Meuller charged within 24 hours. 3. Silk suture from Ethicon Of course, the engineering behind the 4. Vicryl suture from Ethicon design and manufacture of each of these 5. Skin staples from Richard Allen instruments is impossible to document­ 6. Ray-tee sponges from Kendall and this account ignores the multitudinous 7. Laparotomy pads from Medical Action 8. Saline irrigation from Abbott equipment and chemicals used to sterilize 9. Syringes from B-D and package the instruments. Questions 10. Valley Labs Electrocautery unit about the origin of all of the raw materials 11. Contrast material from Winthrop used to make the equipment and compo­ 12. Kodak x-ray film nents of the instruments, as well as the 13. General Electric portable x-ray machine 14. Cholangiocatheter from Duvall machinery needed to mine and manufacture 15. Dressing sponges from General Medical these materials, are even more complex. Corporation In addition, consider the companies that 16. Tape from 3M Corporation have sold the supplies to the hospital. Think 17. Operating lights from Angieneaux ofall the engineers, assembly-line personnel, 18. Betadine surgical scrub from Purdue Fre- derick salesmen, marketing representatives, and dis­ 19. Hebiclens from Stuart tributors employed by these companies. 20. Scrub brushes from Bectin-Dickensen Think of the men and women who invent, 21. Surgical gowns, caps, laparotomy sheets design, manufacture, and also create software from Kimberly Clark for the CT scanners and MR machines thatare 22. Face masks from General Medical Corpo­ ration used daily to improve the diagnosis and treat­ ment of disorders, frequently rendering un­ An anesthesiologist monitors the patient necessary costly open surgery with its atten­ using the following equipment: dant morbidity and mortality. 1. EKG monitor by Datascope Americans spend what they do on health 2. Oxygen saturation monitor by Datascope care because they have the wealth to satisfy 3. Carbon dioxide monitor by BOC Health the public's demand for high-quality medi­ Care cal and surgical specialty care. Third-world 4. Blood pressure monitor by Datascope. countries may have the demand for health During the two-day hospital stay following care as well as for food, clothing, housing, surgery, no other lab work or blood drawing and consumer goods, but they do not have is needed. The patient's pain is relieved with the supply. Americans could spend on a per­ shots ofdemerol from Elkins-Sinn and vistaril capita basis no more on health care than is from Lyophomed. Later, he gets oral pain spent by citizens of poor countries; that is, medication (percocet from Roxanne). The Americans could choose to purchase only first patient's skin staples are removed. (The aid and comfort care. But is this really what staple remover is from Superior Healthcare the public wants? To think that one is going to Group, Inc.) Steri-strips from 3M are ap­ get high quality general and specialized med­ plied to the wound using tincture ofbenzoin ical care whenever one needs it without hav­ from Humco on the day of discharge. ing well-paid doctors, nurses, technicians, Were the operation done laparoscopi­ paramedics, scrub techs, is delusional. cally, as most are today, the complexity of The only way to control costs and reduce the equipment used would have been much waste from costly and medically unneces­ greater: CO2 insufflator, 10-mm straight lap­ sary orlow-yield tests and treatments, is not aroscope, video camera, televisions, light to regulate from above, but to put the patient cables, operating trocars, suction irrigation in charge. Have the patient spend his own system, sequential compression stockings, money and the physician/patient relation­ grasping instruments, dissecting instru- ship will be instantly restored. The patient CHOLECYSTECTOMY, HOW IS IT MADE? 421 will demand to know the relative risks, work and all normal activity with minimal costs, and benefits for any proposed test or post-operative discomfort? Only he can an­ treatment. The patient will then decide to swer the question. proceed or not. Physicians will moderate The reader should ask: how are bureau­ their fees to attract patients. crats and administrators to decide who Patients today aren't very sensitive to makes the supplies and equipment, and how costs because the typical patient pays only much ofeach item, used for this operation? 15 cents of every dollar spent on his health Expand the query to include all areas of care. However, millions of patients footing medicine and surgery today and one can see their own medical bills would more effi­ that it can't be done in any way other than ciently determine which medical goods and through the market. Only through the pric­ services are available and in what qualities ing mechanism of free markets can the and locations. Whatever one's economic necessary information be speedily transmit­ philosophy, recent history shows that the ted everywhere so that proper decisions can rationing achieved by market forces is far be made by the manufacturers, suppliers, more benign than that achieved by govern­ and users of the goods and services used in ment or bureaucrats, no matter how noble modern medicine and surgery, just as only the intentions. through the pricing mechanism can pencils What does a cholecystectomy cost today? be manufactured and distributed in the I break it down into physicians' fees and proper quantity and at the proper price. hospital costs. I will not discuss hospital Market forces could best be employed in reimbursement and Diagnosis Related the health-care field by doing the following: Groups, nor Medicare or Medicaid prices. (1) enacting medical savings accounts com­ First, the physicians' fees: surgeon open­ bined with catastrophic insurance coverage; $1,500, laparoscopic-$2,000; assistant (2) allowing tax deductions for individual open-$375, laparoscopic-$500; anesthe­ insurance premiums in order to separate siologist-$800 for 1.5 hours. Hospital medical insurance from employment, thus charges: operating and post-anesthesia re­ making it personal and portable; (3) allowing covery room charges-$1,550; room choice so that individuals could choose charges open-$975, laparoscopic-$375; among HMO's, employer-based insurance, medicines used-$10; gowns, masks, etc.­ medical savings accounts, and fee-for­ $42; disposable equipment for laparoscopic service with and without managed care. In surgery-$473; lab costs-$480; dressings short, the best reform is to free market forces and syringe costs-$5. Thus, the cost for so that the pricing mechanism can work. open cholecystectomy with a six-week re­ There seems to be no shortage of arro­ covery time is $5,737; the cost for laparo­ gance from those who think that they can scopic cholecystectomy with a two-week direct everyone's actions, that they know recovery time is $6,235. what is best for the population as a whole, Which is the preferred procedure and for that they can singlehandedly solve "health whom? If government pays for it, then the care problems" by deciding what will and government will ultimately decide whether will not be available, and that simply by or not the patient has this surgery and, if so, forcing 50 percent of all medical students which kind he will have. Minimizing costs, into primary care, quality and access will be government will likely choose open chole­ improved. cystectomy. However, if the patient pays Such simplistic solutions are, of course, for his own surgery, then the markedly less woefully misguided. I sincerely hope that invasive but marginally more expensive lap­ the reader pauses to reflect on the complex­ aroscopic cholecystectomy will most likely ity of medicine and surgery, and on how be chosen. The operative word here is these services are best handled by the in­ choice, i.e., the patient's. Is the extra cost terplay of voluntary choices of affected worth it to this 50-year-old to get back to individuals within a free market. D THEFREEMAN expand and diversify drastically, perhaps IDEAS ON UBERtY even reaching down to basic training for lay people. The profile of practitioners would thus expand. It would permit practitioners the flexibility to adapt their human capital to the opportunities oftime and place. Costs A Sales Pitch to the consumer would drop considerably. To make sense of this blossoming of health services, people would rely on knower­ for Laissez-Faire intermediaries, information disclosures, brand names, and so on. Drug Development and Availability: Costs Health Care would plummet, timeliness would improve and the profile of drugs would expand. Strong safety and quality incentives would flow from the umbrella of the pharmaceuti­ by Daniel B. Klein cal brand name and the tort system. Knower-institutions-perfectly analogous to Underwriters' -Laboratories-would de­ velop to certify safety. Doctors and phar­ hat would it mean to establish liberty macists, acting as knowers and middlemen, W ofproperty, consent, and contract in would use their expert knowledge of drugs the area of health care? in advising the consumer. It would mean the repeal of FDA drug­ The market would serve as an experimen­ approval requirements, prescription laws, tation process-sometimes people would drug-development regulations, and restric­ be killed by unsafe drugs (and companies tions on the dissemination ofinformation. It would pay dearly), but such consequences would mean the repeal of state and local belong to a benign process. There is a saying regulations in the following areas: medical for people who frequently use air travel: If schools and hospitals, occupational licen­ I never miss a plane I know I'm spending sure, diagnosis and referral, the employ­ too much time in airports. At present, the ment ofdoctors by for-profit firms, nonphy­ FDA is the Chauffeur whose pre-eminent sician ownership of medical firms, the use incentive is to get the passenger to the of brand names, the operation of multiple airport on time. The consequence is that branch offices, the location of health-care it gets us to the airport three days before facilities, and marketing practices. For pre­ the flight, and charges us dearly for the ride. paid health plans and hospitals, it would The deaths of 100 children from Sulfanil­ mean the repeal of regulations on benefit amide in 1938 pale when compared with the packages, enrollment requirements, rate annual death toll from the FDA's curtail­ setting, and facility expansion. 1 ment of drug availability. One study cata­ Here I speculate on the desirable features logues 192 generic and 1,535 brand-name of such a regime. tested drugs available abroad but not ap­ Education and Training of Practitioners: proved for sale in the United States.2 How Private and public institutions would issue many thousands of deaths per year does degrees, certificates, and other credentials such delay cause? Sam Kazman of the to candidates meeting their requirements. Competitive Enterprise Institute estimates Many training programs would be intensive that the FDA delay of just two drugs, programs for specific skills. Training would misoprostol (which reduces gastric ulcers) and streptokinase (which dissolves blood Professor Klein teaches economics. at the Uni­ clots in heart-attack victims), has caused versity ofCalifornia, Irvine. thousands of deaths.3 422 423

Information and the Active Patient: Drug Independent Knower Organizations: Data information would be improved by freedom banks, consumer information bureaus, re­ to self-disclose in labeling and advertising. ferral services, reporting literature, drug­ At present, consumer access to medical testing facilities, and auditing firms would information is expanding, in the forms of evolve more swiftly. Local organizations health-care literature, medical libraries, on­ would emerge to rate health-care providers line information services like Internet, re­ through undercover monitoring, patient ferral services like Prologue, and services interviews, or treatment reviews. Such a like The Health Resource, which generates service might be supported by patients, for a fee thick packets of medical litera­ analogous to Consumer Reports, or by phy­ ture to customers specifying a diagnosis. 4 In sicians, analogous to Underwriters' Labo­ a freer market consumers would have easier ratories or Moody's. Consumers would re­ access to opportune and pointed knowledge. ward those organizations that help them Commercialization: Brand-name and fran­ assess credentials and discriminate among chised clinics, medical groups, hospitals, the array of available health services. and insurance·plans would flourish. Milton Lay Awareness: There would be medical Friedman prophesied in 1962: ' '[T]hey education without sacerdotal restraints. Ba­ could organize medical care efficiently, sic medicine could be part ofthe high school combining medical men [and women] of curriculum. All manner of health-care edu­ different degrees of skill and training, using cation and training could be offered in com­ technicians with limited training for tasks munity colleges and private institutes. En­ for which they were suited, and reserving trepreneurs have already developed medical highly skilled and competent specialists for software that responds to a list ofsymptoms the tasks they alone could perform. ,,5 Con­ with possible diagnoses and treatments.6 sumers would obtain at low cost gatekeeper This program is based on data that are more diagnosis, referral, and second-opinion. extensive, more accurate, and more current Friedman's early vision of "department than any doctor could hope to command. stores of medicine" would be proven pro­ Informal courses might teach lay people phetic. how to use such programs. People would Medical Groups and Insurance: Currently, have betterinformation to assess their needs medical groups employ utilization review and opportunities, and they would have the and peer monitoring to police quality. In­ power to self-medicate. termediaries (such as employers, member­ In 1963, the famed economist Kenneth ship organizations, and so on) serve as Arrow could write: "It is the general social middlemen and agents, shopping over med­ consensus, clearly, that the laissez-faire ical plans, helping large sets of ignorant solution for medicine is intolerable."7 Now­ consumers discriminate between better and adays there is no such general social worse health care. In a regime of freedom consensus. D and enforcement of contract, health plans and insurers could write better patient­ 1. Paul J. Feldstein, Health Care Economics, 4th ed., Albany: Delman Pub., 1993, p. 321. enrollment contracts and patient-perfor­ 2. Kenneth Anderson and Lois Anderson, eds., Orphan mance contracts. They could mitigate mem­ Drugs (Los Angeles: The Body Press), 1987. 3. James Bovard, "Double-Crossing to Safety," The Amer­ ber-selection problems by using more ican Spectator, January 1995, pp. 24-29. refined screening and pricing techniques. 4. Brigid McMenamin, "An Educated Consumer Is Her Best Patient," Forbes, June 21, 1993, p. 118. Perhaps firms would emerge to research, 5. Milton Friedman, Capitalism and Freedom (Chicago: compile, and verify individuals' medical University of Chicago Press, 1962). 6. Stephen S. Hyde, "The Last Priesthood: The Coming histories. Health plans and insurers could Revolution in Medical Care Delivery," Regulation, Fall 1992, mitigate moral-hazard problems by requir­ pp.70-74. 7. Kenneth J. Arrow, "Uncertainty and the Welfare Eco­ ing flu shots, check-ups, and other programs nomics of Medical Care," American Economic Review, 53, to promote prevention and early treatment. December 1963, p. 967. Ideas and Consequences by Lawrence W. Reed

Block Grants Are Not the Answer

f you want something done in your com­ requirements are determined not by some I munity, would it everoccur to you to send fixed appropriation the Congress decides it a check to Washington, D.C., first, so that wants to make, but by the "needs" ofthose the federal bureaucracy could take a cut whom the law says are "entitled" to the before sending back the rest? cash. Welfare-state proponents argue that Welcome to the new world of "block without an automatic entitlement written grants" -the latest fashion that has Con­ into the law, the amount the federal govern­ gress and state legislatures buzzing. The ment sends to the states may prove insuffi­ motivation is commendable: reduce federal cient to meet the "needs" of all the people micromanagement and allow states to inno­ who qualify for the programs. vate by giving them large dollops offederal The states respond by saying, "Give us money with few strings attached. In place of the money without all the expensive and failed, one-size-fits-all programs run rigidly ridiculous mandates and rules and we'll by Washington, the states would function make enough savings to do at least as good as 50 "laboratories," generating new ap­ ajob for even less money." All other things proaches that would work better because equal, they're probably right, but that's not states are closer to the people. Congress, the end of the story. before the year is out, may reorganize and If less federal meddling in how programs consolidate many federal programs this are locally run is the primary objective ofthe way-from welfare to crime control. block-grant approach, it may be easy to The block grant idea per se is not really achieve at the start but difficult to sustain. new, but now the Congress is moving to­ As the old saying goes,''He who pays the ward implementing it in a massive way. Less piper calls the tune." Congress will always than 20 percent ofthe $200 billion Washing­ be tempted to add conditions and clarifica­ ton sends back to the states now goes in the tions each time appropriations bills contain­ form ofblock grants, and all ofthat went for ing block grants come up. It is not hard to operating or capital expenses for local or imagine state and local officials complain­ regional projects. The congressional leader­ ing, a few years from now, "Where did all ship now wants to take the next step and these strings come from?" convert "entitlement" programs into block The truth is that block grants would do grants. These are programs whose spending little to address the inherent flaws in our current system of multi-layered bureau­ Lawrence W. Reed, economist and author, is cratic structures. Laundering the people's President of The Mackinac Center for Public Policy, a free market research and educational money through two or three levels of gov­ organization headquartered in Midland, Michi­ ernment is a make-work scheme for admin­ gan. istrators. One study showed that, of the 424 425

$226 billion spent by federal, state, and local work any better than federal welfare for governments on welfare in 1990, only 35 individuals? cents of every dollar ever made it into the In the 1980s, Congress debated a less hands ofthe poor. On the farm, that's called half-hearted reform known as "turnbacks." feeding the sparrows through the horses. Under that idea, the federal government Furthermore, block grants would actually turns back to state and local governments reduce the accountability of government both the spending responsibility for pro­ because they separate the raiser of the tax grams now run from Washington and the revenue (the federal government) from the revenue sources, too. Instead of "We'll raise spender ofit (state and local governments). it and you spend it," with turnbacks Wash­ If something goes awry, Washington will ington says, "You raise it and you spend it." blame the states for not spending the money Economist Dean Stansel of the Cato In­ wisely, and the states will blame Washing­ stitute points out, for example, that the ton for not providing enough money to do Reagan administration once proposed end­ thejob. Taxpayers and users ofgovernment ing federal responsibility for highways and services will be left wondering who is re­ repealing federal gasoline taxes, giving sponsible for what. states the option of raising their own gas It is generally true that because states and taxes. It wasn't enacted, but if it had been, municipalities are closer to the people than states like mine would not be sending nearly the federal government, they are more ac­ twice as much gas tax money to Washington countable and responsive to individual cit­ as it gets back each year. izens and local concerns-as long as they Of course, even the tumback idea as­ are spending local money. Not even the sumes from the start that transferring a most diligent of local politicians, however, program from one government to another­ will spend money from Washington as care­ federal to state, primarily-is the ultimate fully as they spend what they are account­ reform. We ought to be raising more funda­ able for raising themselves. mental questions with regard to everything Some of us in Michigan learned that the federal government does: Is this a legit­ lesson years ago. In the late 1980s, one imate function of any government? Why township with no downtown accepted fed­ should this activity be ceercively funded at eral block grant funds earmarked for all? Would it be more in accord with the "downtown revitalization." The money principles of individual liberty and sound went for a parking lot at the township hall. economics to leave this activity to the will­ The same officials accepted another block ing participation offree people who choose grant to construct "barrier-free improve­ to conduct it on their own? ments" on the same site, but used the IfCongress is serious about putting an end money not to assist the handicapped so to the billion-dollar paper blizzard that af­ much as to enhance their own work envi­ flicts federal programs, and restoring ac­ ronments. Fifteen of the 23 block-grant countability to our system of government, programs enacted by Congress since 1966 block grants are not the answer. Firing are still on the books, shoveling out $35 the federal middleman is. Once we do that, billion yearly and raising plenty ofquestions let's give a lot of thought to why we would about their wisdom in the process. What want a state or local middleman before we makes Washington think that federal wel­ authorize any level of government to take fare for state and local governments can our money. D TREmEEMAN IDEAS ON LIBERTY Is Environmental Pollution the Principal Environmental Problem? by Hugh Macaulay

ver since Rachel Carson published Si­ The environmentalists have largely pre­ E lent Spring in 1962, Americans have vailed. With cleanliness next to godliness, been actively concerned about environmen­ who could support dirty water, unclean air, tal pollution. Congress has enacted laws or any variation on these themes? Conse­ requiring clean water and clean air, and the quently, the Federal Water Pollution Con­ Environmental Protection Agency has been trol Act Amendments of 1972 required a established to enforce these laws. Activist zero level of waste discharged into the environmental groups, such as the Sierra nation's waterways by 1984, and the Clean Club and the Natural Resources Defense Air Act of 1970 forbade the discharge ofany Council, were organized to prevent pollu­ emission that would cause harm to citizens. tion and to ensure that laws prohibiting it Further, in many cases, the government are vigorously enforced. To accuse some­ prescribed just how these requirements one of polluting the environment is akin to would be met, such as by mandating scrub­ a charge ofracism; each is considered a sin bers on the smokestacks of electric utility against society. power plants. When the push for purity began soon after We are likely, however, to see the situa­ Miss Carson's book was published, the field tion differently and to arrive at a more was dominated by biologists and engineers efficient and acceptable solution if we think who saw the problem as simply measuring of environmental pollution as an economic impurities and then devising ways to remove problem. Economics deals with scarce re­ them. A few economists argued that a better sources and how we may best use them. solution would be to charge for the emission Water and air quality are scarce resources of impurities and then allow the polluters with many parties wanting to use them in either to decide best how to eliminate the different and mutually exclusive ways. emissions or to pay for any impurities they Some people want to use these assets to discharged into the environment. Early en­ carry away the smoke from their fires, the vironmentalists argued that charging for exhaust from their cars, the carbon dioxide emissions was merely paying to inflict injury from their breathing, the sewage from their on innocent parties and was immoral. homes, and the discharges from their facto­ ries, while other persons want to breathe Dr. Macaulay is Alumni Professor Emeritus of fresher air, see more distant mountains on Economics at Clemson University. more days, and swim and fish in streams and 426 427 lakes. The problem is not one of pollution decisions. Each of us wants a clean home. but of who will be able to use the environ­ The real question is whether we should have ment in his preferred way. Choosing among our home cleaned more thoroughly, or per­ alternative uses of the environment, not haps relax our standards. Will an additional pollution ofthe environment, is the principal visit by a home-cleaning service each week environmental problem. or month be worth its cost? Because few of We gain considerable insight by casting us use such a service daily, most ofus have the problem in terms ofanother natural asset decided that additional cleanliness in the with conflicting desirable uses: land. Many home is less valuable than the other things people want to use land as a site for their we could buy with the money daily home homes, gardens, parks, and hiking trails, cleaning would cost. For a more recogniz­ while others seek places for their factories, able case, we would all like our garage floors hospitals, schools, and garbage dumps. to be clean, but not to the extent that we Each of these uses competes with every could eatfood placed on the floor. We do not other use. We solve the problem by asking seek perfection in our other public expen­ each demander how much he will pay for his ditures on national defense, education, preferred use. Each particular site of land crime prevention, public welfare, ,or high­ goes to that user whose offer exceeds those ways. Nor should we seek perfection in the of other bidders. The decision is not made environment. on the political popularity ofa particular use There is another economic lesson in de­ but on the basis of its greater value to one ciding on how to use the environment. We user than to any other potential user. know that the more ofany good we produce, Ardent environmentalists, and many cit­ the more costly are additional units. Pro­ izens less concerned with environmental ducing additional wheat requires more land, questions, continue to see pollution as the labor, and capital than was required to principal problem and will argue that the aim produce earlier bushels. Stated different!y, is to prevent emissions and discharges that we would have to give up more corn, soy­ are inimical to the good health of the pop­ beans, shirts, and parking lots for each ulation. Clean air and water have been additional bushel of wheat produced. The concerns ofthe Public Health Service since things we give up for more wheat may be early in this century, and it has effectively more valuable than the added wheat we get. reduced water-borne pathogens and fatal air The Law of Diminishing Marginal Utility conditions such as that in Donora, Pennsyl­ also tells us that as we get more wheat, vania, in 1948. Public health is no longer shirts, television sets, or anything else, the seriously threatened by environmental qual­ less valuable another one of any of these ity. Still we have been concerned with the things is to us. Sometimes at restaurants we consequences of red dye no. 2, Chilean do not eat all the food on our plates; another grapes, Alar on apples, acid rain, and as­ bite ofthe food has now fallen below zero in bestos in ceiling tiles, none ofwhich can be value and is, literally, garbage. Once the characterized as a health problem, either water in our homes is clean enough to drink, public or private, of any consequence. there is little benefit from having it distilled. Our steam irons may prefer distilled water, Clean, Cleaner, or Cleanest? but the human body finds the improvement of zero benefit. The question of environmental cleanli­ The two forces just described give us our ness raises an important economic princi­ supply and demand curves and tell us that pie. All economic decisions are made at the there is a point beyond which it is not worth margin. Thus, the proper question is not producing more of a good. This principle is whetherwe shall have clean air, but whether also true of environmental purity: we can or not we shall have cleaner air. We practice have air and water that are wastefully clean. this principle of marginalism in our daily For most of us, common examples in other 428 THE FREEMAN • JULY 1995 goods, such as watches, cars, and haircuts, As it did for the polluters, a system of are Rolex, Rolls Royce, and Mr. Clinton's charges on users enjoying greater cleanli­ clipping on the Los Angeles airport tarmac. ness promises many advantages. If those These are all good products, indeed very desiring increased purity must pay for this good products, but most of us do not buy benefit, they will conserve on their demand them because the extra quality is not worth for it. Their love of purity and their moral the extra cost. Walter Williams astutely superiority in publicly pressing for it would observes that while we love genuine dia­ pale as it does for additional units of every monds of superior clarity, we more often other good they buy. Second, lovers of choose to buy costume jewelry. We should purity may find more efficient substitutes for apply this jewel ofwisdom to our purchases environmental cleanliness. Community and ofenvironmental quality as well. There is a private swimming pools may be much best level ofenvironmental cleanliness, and cheaper than making every stream swimma­ it is not perfect purity. ble. Third, environmental activists could The most important question in determin­ devote more time to producing saleable ing environmental quality involves the price goods desired by others so they could earn we pay for the use we enjoy. Environmen­ money to buy a cleaner environment. They talists have taken 25 years to agree that would then spend less time lobbying politi­ emissions charges should be levied on pol­ cians, organizing demonstrations, and sup­ luters. Many environmentalists, however, porting political pressure groups, none of argue that the charge should be set so high which activities produces goods being that there would be no emissions at all. This bought by others. We have no assurance, is not the price that most economists have in and we have many reasons to doubt, that mind. these activities result in environmental im­ A system of charges on polluters has provements that are worth their costs. several advantages. Polluters are willing to Adam Smith's invisible hand again will pay because they benefit from their use of guide us to a society with more goods, the environment. They will reduce emis­ including environmental cleanliness, that sions because each unit they discharge is people value highly. The lobbyist's visible costly to them. They will reduce these foot, extended to the politician, results in emissions in the most economical way, thus fewer goods that, also, are of questionable lowering the costs of greater cleanliness. value. There is less ill will and animosity toward We earlier noted that land is also an government and environmentalists because environmental resource. If we treated land polluters face a price for a service they use as we now treat air and water, we would rather than an arbitrary and inflexible stan­ price all land at zero and invite homeowners dard of purity imposed by politicians. to take all they want. Any land left over If we ask who uses the environment, would be allocated, orsold for a user charge, rather than who pollutes it, we must recog­ to business firms, but each firm would be nize that those who desire a cleaner envi­ restricted in the amount it received. Build­ ronment are also users, no less than are ings and factories erected on the land would polluters. Environmentalists want to enjoy be designed by government to minimize land cleanliness, as much as those who buy air use. These buildings would be small in area filters for their homes, bottled waterfor their and tall in height. We might produce steel tables, and yard services to make their in a factory occupying only one hundred lawns more attractive. In hundreds ofways square feet at ground level but rising forty­ every day we pay for greater cleanliness of two stories. The cost might be exorbitant, our homes, cars, stores, and parks. The en­ but it would provide cleaner land-meaning vironment is no different. Those who want a more land without the impurity of facto­ cleaner environment should pay for the addi­ ries-for use by homesite lovers. tional cleanliness they get, use, and enjoy. The lesson is clear. The environment is a THE GREENING OF THE CROSS 429 scarce, natural asset. Markets have been citizens who are happier with the uses they used for centuries to allocate scarce assets voluntarily pay for and enjoy. 1 Free markets and they can be used to allocate the use of can be extended to this new area to bless the the environment as well. The public-good population with the same benefits delivered nature of environmental purity is similar to in more common applications. We need only that confronting providers of lighthouses, see that the problem is not the pollution television programs, music rights, church of the environment, but the use of the services, fireworks displays, and hundreds environment. D of other goods. If we apply market princi­ 1. For a more detailed discussion, see Hugh H. Macaulay ples to environmental quality we can have and Bruce Yandle, Environmental Use and the Market (Lex­ a more efficiently used environment and ington: Mass.: Lexington Books, 1977).

THEFREEMAN IDEAS ON LIBERTY

The Greening of the Cross by E. Calvin Beisner

ately thousands ofpeople across Amer­ have all previous generations who have ever L ica, including me, have received a mail­ lived on the planet put together. We have ing asking us to become members of The used more than our fair share" (emphasis Christian Society ofthe Green Cross, a new original). Here's a new twist on an old organization addressing ecological prob­ complaint. Ordinarily we are told that lems. People should think hard before join­ Americans use "more than our fair share" ing or donating. of the world's resources because we use The recruitment/fundraising letter tries more per capita than people in other coun­ to establish the need for the organization tries. Now it is because we use more than by making claims about ecological crises. our ancestors used. In either case, the The claims are, without exception, subject argument is a classic non sequitur. to serious doubt. Americans do use more ofsome resources • "Since 1945, Americans have con­ per capita than people in most other coun­ sumed more of the world's resources than tries. And we do use more per capita than people of the past. But we also produce Professor Beisner is on the faculty at Covenant more resources per capita than people in College, Lookout Mountain, Georgia and the most other countries and than people of the author ofProspects for Growth: A Biblical View past. And, indeed, we consume no more of Population, Resources, and the Future (Wheaton: Crossway Books, 1990). He has done than we produce. The long-term downward research into global environmental trends for real price trends (for a truly representative over eight years. example, inflation-adjusted copper prices 430 THE FREEMAN • JULY 1995 fell by about 70 percent, and its price divided through erosion." We cannot know what by wages by about 99 percent, from 1801 to the Green Cross means by "wasting" an 1990) of extractive raw materials (mineral, "acre" of topsoil. 'Taken literally, their plant, and animal) show that our consump­ statement implies that every year erosion tion ofresources neither is outpaced by our eliminates about a million acres of usable production of them nor interferes with the agricultural land. But that is certainly not ability of others to consume' or produce true. them. In this case, the empirical claim (a Probably this clumsily worded claim is misleading one at that) is logically irrelevant meant to convey information about an to the moral charge based on it. amount of topsoil lost per year through • "Every day Americans turn 9 square erosion from all acres under cultivation. But miles of rural land over to development." it fails to communicate because topsoil is not Precisely what this means is difficult to measured in simple acres but in tons orcubic guess, since-depending on who uses the feet. (An acre of topsoil 1/16-inch thick, term-"development" might mean making after all, is considerably less by weight and anything from a housing tract to a park. volume than an acre of topsoil 5-inches Furthermore, such raw numbers become thick.) Nor does this statement tell us significant only when set in a larger context. whether this is gross or net loss. The United States comprise 3,536,338 The latter distinction is crucial. Because square miles of land, of which about 97 of routine erosion-control measures, on al­ percent is undeveloped ("developed" land most all cropland in the United States new being defined by the U. S. Bureau of the topsoil formation (from the combination of Census as including urban and built-up areas plant fiber decay and breakdown ofdeeper, in units of ten acres or greater, plus rural denser soil and rocks) roughly matches loss transportation). The conversion of9 square from erosion, yielding almost no annual net miles ofrural land each day therefore trans­ change in topsoil. This is consistent with the lates into 3,285 square miles per year. At fact that over the last 50 years higher and that rate, total undeveloped land would be higher percentage.s of U.S. cropland have reduced by only about 9 percent-to about met the "prime" grade according to the 88 percent oftotal land-in a hundred years. u.S. Soil Conservation Service and with Actually, the Green Cross's land-conver­ rising yields per acre. It should be no sur­ sion figure is probably low. From 1960 to prise. After all, soil is the farmers' most 1990 the conversion rate was about double important resource; it is to be expected that what the Green Cross claims as the present they would use that resource wisely. trend. But there is good reason to expect • "As there are more people, there is less that as U.S. population stabilizes and con­ farmland on which to grow food." The tinues to become more concentrated in cit­ implication is that there is a cause and effect ies the conversion rate will fall yet more. relation between the first and second halves Also, from 1960 to 1990, during the same of this sentence, but in fact there is not. period as the rapid conversion to developed American farmers plant fewer acres not land, the National Wildlife Refuge system because there are fewer acres available to meanwhile grew from about 15 million acres plant but because agricultural production is in 1960 to about 95 million acres in 1988; so high that prices won't support cultivating the National Parks system from about 20 more acres. While harvested U.S. cropland million to about 70 million acres; and total declined by 11 percent from 1978 through public recreation lands from about 225 mil­ 1987, total crop production rose by about lion to about 375 million acres. Certainly the 25 percent. Thus, total yield rose by about data do not indicate a crisis of land conver­ 40 percent. sion. • "We are using up our [agricultural] • "Every year, our agricultural practices resources in a way that cannot continue." waste over 1,000,000 acres of topsoil Rising yields, declining losses from erosion, THE GREENING OF THE CROSS 431 and rising quality ofour nation's agricultural carbon dioxide are 26 percent higher than soils indicate precisely the opposite. pre-industrial concentrations and continue • "Within the lifetime of a child born in to climb; the results will be higher temper­ this decade, virtually all of the world's atures." Perhaps (data for the past are petroleum will be burned." The same sort of debatable), perhaps (data for the future are predictions have been made about running not yet in and projections differ widely), and out of oil for nearly a century, and always perhaps (climatologists differ in their esti­ they have proved false. They are contra­ mates of how much and whether global dicted by (a) falling long-term real prices of average temperatures will rise based on petroleum (down about 70 percent from various assumptions of carbon dioxide in­ 1870 to 1990) and (b) rising world oil re­ crease). serves (up from about 100 billion barrels in But the letter does not mention (a) that 1943 to about 10 trillion barrels in 1989). roughly two-thirds of the apparent .45 de­ • "Still common minerals will be ex­ gree C. increase in global average temper­ hausted [in a lifetime], such as copper, tin, atures between 1880 and 1990 was attribut­ zinc, lead and nickel." But as for petroleum, able to natural causes, (b) that almost all of so also here falling long-term real prices and the total increase occurred before 1940, i.e., rising reserves indicate the opposite. De­ before the sharpest increases in carbon spite intervening consumption, known re­ dioxide, indicating that there is not a direct serves of copper rose by 179 percent from correlation between carbon dioxide and 1950 to 1970; of tin, by 10 percent; and of temperature, and (c) that the most recent lead by 115 percent. I don't have handy and refined models predict that most tem­ access to figures for nickel, or to more perature increase will occur in the winter recent figures for any ofthe minerals named, and at night, yielding little or no detrimental but I am confident, on historical and theo­ effect on ice caps, sea levels, and agricul­ retical grounds, that we face no reasonable ture, and at the same time yielding slightly prospect of exhausting any of these miner­ longer growing seasons, better agricultural als. yields with less water consumption (from • "Water is increasingly tainted with higher carbon dioxide concentrations, cru­ chemicals." But in fact, the vast majority of cial to photosynthesis and water retention), these chemicals are harmless, and the per­ and less need for heating in winter. centage ofthe world's people with access to • "The ozone shield in the upper atmo­ safe water has risen dramatically in the last sphere is thinning. .. ." There is a slight century and continues to rise with increas­ downward trend in stratospheric ozone con­ ing speed. centrations for the period 1957-1992, butit • "Over 60 percent of the world's great is not known whether that trend is down forests have been cut." Yes, and 100 per­ from historically normal levels or from his­ cent of last year's wheat crop was cut in a torically high levels. We simply don't know, single year! Yet next year there will be a and not knowing is not grounds for taking whole new crop. Forests and wheat are any particular action. (Data don't go back analogous; the principal difference is that earlier than the 1950s, and 40 years is trees grow larger and more slowly. What the statistically insignificant as a sample of a Green Cross alarmists don't mention is that dynamic system that is thousands or tens of total world forested area and total growing thousands-let alone millions or billions­ board feet of wood both are greater now of years old.) than they were 50 years ago-and on the • ". .. the result is increases in skin increase. And as plantation forestry increas­ cancers." No reliable data back this claim. ingly replaces harvesting natural forests, Furthermore, the skin cancer associated pressure on natural forests will decline even with increased ultraviolet B exposure (re­ more. sulting from ozone depletion) is mostly non­ • "Atmospheric levels of heat-trapping malignant, and the increased cancer risk 432 THE FREEMAN • JULY 1995 associated with the worst-case ozone deple­ species of its old, largely endemic, fauna tion scenarios is about equivalent with the can be regarded as extinct. Genetic ero­ increased risk involved in moving 60 miles sion has undoubtedly taken place, and the nearer the equator or a thousand feet higher reduced, remnant populations may be in elevation-a risk so small as not to figure much more vulnerable to future change, in the vast majority ofdecisions about where but the study illustrates the need for very to live. careful field documentation to compare • "Entire species of plants and animals with calculation in this and other situa­ are vanishing. " Perhaps, but the most thor­ tions. ough attempt at a worldwide study of field data on extinction rates-Tropical Defores­ Repeatedly the book's many authors state tation and Species Extinction, edited by that, expectations to the contrary, field T. C. Whitmore and J. A. Sayer (London evidence for extinctions in recent decades is _ and New York: Chapman & Hall, 1992), slight to non-existent. commissioned by the International Union None of the above implies either that for the Conservation of Nature and by no Christians have no stewardship responsibil­ means skewed by an anti-environmentalist ity for the earth or that real problems don't bias-generated this general reckoning (in exist. There are real problems, and Chris­ the foreword) by IUCN Director-General tians do have responsibility. But the assign­ Martin Holdgate: ment of stewardship over the earth was The coastal forests of Brazil have been given in the Garden ofEden; claims ofcrisis, reduced in area as severely as any tropical true or bogus, are unnecessary to remind forest type in the world. According to Christians of that calling. And when an calculation, this should have led to con­ organization cries "Wolf!" too frequently, siderable species loss. Yet no known it loses credibility. 0

Summer Course in Market Economics July 31-August 10, 1995

Lecturers: Dr. Ronald Nash on the philosophy offreedom Dr. Burt Folsom on American economic history Mr. Steve Moore on the growth of government in the 20th century Dr. John Robbins on principles of economics

he Freedom School at College of the Southwest is sponsoring an inten­ Tsive two-week course in economics for both the general public and stu­ dents who wish to earn three hours toward a degree. Tuition is very low: $390. For more information contact Dr. John Robbins at 1 (800) 530-4400 or write The Freedom School, College of the Southwest, 6610 Lovington Highway, Hobbs, NM 88240. THEFREEMAN IDEAS ON UBERTY

The Rise of Market-Based Management by Jerry Ellig and Wayne Gable

"Survival is very uncertain in an environment filled with risk, the unexpected, and competition. Therefore, a company must have the commitment of the minds of all of its employees to survive.... We know that the intelligence of a few technocrats-even very bright ones-has become totally inadequate to face these challenges." -Konosuke Matsushita l

magine a history class in the year 2095­ Experts constantly debated how to im­ I perhaps some kind of''virtual class. " The prove these two types oforganizations. For instructor is comparing two basic kinds of society, the twentieth century produced two organizations prevalent 100 years earlier. alternative models: the hierarchical, author­ One involved hundreds of millions of peo­ ity-driven command model, and the decen­ ple; the other usually involved hundreds tralized, self-organizing free enterprise of thousands at most. One had no specific model. By 1995, the command model had purpose; the other had a specific mission. failed miserably in every society that tried One had no official "management"; the it. For the corporation, the command model other had a president, profit centers, and dominated management thinking for most of lots of managers. One had no bank ac­ the century. But by 1995, the command counts, no owners, no legal identity-it was model had failed in business too. By the end called a "society.', The other had all of of the century, corporations organized ac­ these things-it was called a corporation. cording to the command model were recog­ Despite these major differences, the two nized as suffering from many of the same shared some similarities. Both were made problems as command-based societies. But up of people who wanted to live and work where would business leaders look for a new together in harmony to accomplish their paradigm? individual goals. In both, the people had to We believe history will show that a grow­ coordinate their actions to accomplish their ing number ofexecutives looked to the free goals. market system for new management in­ Dr. Ellig is an assistant professor at George sights. Centrally planned economies col­ Mason University's Program on Social and Or­ lapsed because they failed to use the knowl­ ganizational Learning, where he teaches courses edge that is dispersed in the heads of many in market-based management and economic individuals and often hard to communicate regulation. Dr. Gable is president ofthe Center to the central planners. Centrally planned for Market Processes, a nonprofit research or­ ganization that develops and applies market business firms face a similar fate, for similar process analysis to problems in business and reasons. Just as socialism lost the allegiance public policy. of most of its citizens, so too have "com- 433 434 THE FREEMAN • JULY 1995 mand-and-control" management principles efficient pig-iron handler than any man lost the allegiance of many executives. can be. Yet it will be shown that the Companies both at home and abroad are science ofhandling pig iron is so great and searching for a new management paradigm amounts to so much that it is impossible to replace the old view based on hierarchy, for the man who is best suited to this type top-down planning, and the giving oforders. of work to understand the principles of Over the years, a growing number of this science, or even to work in accor­ businesses .have shifted to organizational dance with those principles without the forms and management methods based on aid of a man better educated than he is. 3 the principles of a free society and market economy. This emerging management ap­ This situation was not unique to pig-iron proach, which we call "Market-Based handling; "in almost all ofthe mechanic arts Management," promises to outperform the science which underlies each work­ older management paradigms for the same man's act is so great and amounts to so much reasons that free economies have out­ that the workman who is best suited actually performed planned economies: it makes to do the work is incapable (either through better use ofthe knowledge that is dispersed lack of education or through insufficient among many people in the organization. mental capacity) of understanding this sci­ ence. ,,4 Taylor's methods generated signif- The Old Paradigm: icant productivity increases when applied to uneducated workers doing repetitive tasks. Scientific Management But followers tried to develop his ideas into and Central Planning a universal approach to be used in contexts quite different from the ones Taylor origi­ For years, American business was dom­ nally studied. A school of thought, "Scien­ inated by a central-planning paradigm cred­ tific Management," emphasized that man­ ited to Frederick Taylor. 2 Taylor argued agement's job is to give orders, while labor that management is a science that can be should follow these orders. This worldview taught. In search of higher productivity, has shaped labor-management relations for Taylor advocated systematic study to im­ most of the twentieth century. prove upon the best prevailing production Advocates of Scientific Socialism also practices of his day. Aided by time-and­ cited Scientific Management in support of motion studies, managers would ascertain their grand vision for society. In the Soviet the best way to perform each task, select the Union, both Lenin and Trotsky admired best people for each task, and teach them Scientific Management and thought it was the one best way. Taylor laudably sought to one of the important features of capitalism increase business productivity so that both that socialists should imitate. In their view, wages and profits would rise. Thus, he centralized planning of the entire economy sought to replace labor-management con­ was just a logical extension of centralized frontation with a harmony of interests planning within the factory. 5 founded on greater productivity. In democratic countries, advocates of In Taylor's view, managerial direction greater government planning also seized on was key to enhancing productivity, because Scientific Management in support of their manual laborers were generally incapable of views. Rexford Tugwell, a prominent ad­ understanding the best way of doing their viser to Franklin D. Roosevelt, declared jobs. In a discussion ofhandling pig iron, for that the greatest economic event of the example, Taylor noted, nineteenth century occurred when Taylor This work is so crude and elementary first timed some shovelers in a steel plant so in its nature that the writer firmly believes that he could instruct them how to do their that it would be possible to train an job more efficiently. Tugwell and many intelligent gorilla so as to become a more other New Deal intellectuals believed that THE RISE OF MARKET-BASED MANAGEMENT 435

Scientific Management "would, in the work teams use their local knowledge to hands of the state, provide the tools for the improve production processes.9 renovation of the economy at the practical • In the steel industry, large integrated organizational level, for the overall rational­ steel mills lost enormous ground in the 1980s ization so long awaited to repair the damage to "mini-mills" like Nucor Corporation, done by an unplanned business order.,,6 based in Charlotte, North Carolina. Nucor In 1932, H.S. Person, managing director rewards its teams of plant workers with of the Taylor Society in New York, en­ weekly performance-based bonuses, and dorsed the employment of Scientific Man­ workers apply their own tacit knowledge to agement to plan society as efficiently as get more output from production machinery industrialists planned factories. Taylorism, than even the machinery's manufacturer he believed, ushered in a "surplus econo­ thought was possible. my" of material abundance. The Great De­ • In the oil industry, Wichita-based Koch pression occurred because industrialized Industries grew into a $24 billion company nations had not yet adopted the appropriate while many major oil companies experi­ social-management techniques. Policymak­ enced massive layoffs. The firm's chairman ers needed to enunciate a social objective of and CEO, Charles Koch, leads a company­ "production for measured demand at the wide effort to apply the insights of Ludwig least social cost" and institute conscious von Mises, Friedrich Hayek, and other organization to accomplish the objectives.7 free-market scholars to all aspects of the Though motivated by humanitarian con­ firm's business. 1o cern, Scientific Management possessed a For 50 years, management researchers major blind spot: it ignored the importance have criticized Scientific Management, pro­ of dispersed and tacit knowledge. In an posing alternatives under such varied names organization of any significant size, author­ as "human relations," "Theory Y," "The­ itarian managers can be little more effective ory Z," and even "Liberation Manage­ than central economic planners, because ment. ,,11 Market-Based Management pro- they lack the requisite knowledge. Much poses anew, alternative model thoroughly relevant knowledge is dispersed in the heads grounded in the principles of a free market of many people in the organization, and and free society. To some extent, market­ much of it cannot be communicated to a based management is consistent with earlier central point for processing. Firms built on critiques, but it also adds anew, systemic the central-planning model suffer from the approach that allows managers to identify same "fatal conceit" that afflicts centrally the concepts and tools most consistent with planned economies.8 market principles.

The Reckoning Elements of Market-Based Management Given the commonalities between Scien­ tific Management and central planning, it Several key elements account for the is no surprise that authoritarian firms en­ superior quality oflife in a free society, and countered trouble when challenged by rivals analogous elements exist inside organiza­ using management methods more consistent tions. The accompanying table identifies with the principles of a free society: significant elements contributing to the • In the automobile industry, American health of both market economies and orga­ companies found themselves out-competed nizations. by Japanese companies during the 1970s and • Comparative Advantage and early 1980s. The principal reason was that the Firm's Mission System quality improvement methods pioneered by In 1776, Adam Smith argued that the Japanese firms required them to reorganize fundamental factor explaining economic the workplace in ways that let workers and prosperity is an advanced division of labor. 436 THE FREEMAN • JULY 1995 Six Key Systems in Market Economies and Organizations Market Economy Organization Specialization through Mission system comparative advantage Rules of just conduct Values and culture Property rights Roles and responsibilities Price system Internal markets Market incentives Compensation and motivation Free flow of ideas Generation and use of knowledge

Many economists have elaborated this dent decisions. The compass metaphor is theme into the theory of comparative ad­ especially apt, because the mission does not vantage, which demonstrates how each in­ direct people to do specific things; rather, it dividual can expand the wealth of society helps them orient their activities to those of by specializing in activities in which he can everyone else in the organization. create the most value at the lowest sacrifice • Rules of Just Conduct, Values, of alternative products or services. F.A. and Culture Hayek added another dimension by empha­ Investment, production, and exchange do sizing the division of knowledge: every not occur in a vacuum. A society's "rules individual is an expert on something, and ofjust conduct" that define acceptable and overall prosperity depends crucially on each unacceptable behavior exercise a powerful person's ability to make the decisions that influence on economic activity. 13 Where he alone has the best knowledge to make. 12 plunder is practiced and lying goes unpun­ The organizational equivalent of special­ ished, people have strong incentives to re­ ization by comparative advantage is the frain from productive activity and long-term "mission system." This system includes commitments. On the other hand, if a soci­ strategic planning-an understanding of ety's formal and informal rules are grounded how the firm's core competencies allow it in respect for the individual, they unleash to create value, and at what cost. But the tremendous creative forces. Values that mission system also includes a dissemina­ promote prosperity-in societies and in or­ tion of this understanding to every individ­ ganizations-include respect for personal ual in the organization, such that every dignity and property, intellectual honesty, person knows how his actions advance the humility, openness to new ideas, and the mission of the organization. Like special­ freedom to question established practices. ization in a market economy, the mission These values may sound like "mother­ system creates situations allowing individ­ hood and apple pie," but the real challenge uals to simultaneously serve society while is implementing them in practice. A Brazil­ serving themselves. ian-based company called Semco provides Koch Industries is one company working some examples ofmanagement's respect for to implement a strong mission system. Var­ spontaneous order. The company abolished ious business units develop their own mis­ time clocks and official work hours in its sions that are broadly consistent with the· plants. Instead, groups of employees set overall corporate mission. Individual em­ their own work hours, based on their own ployees are also expected to develop per­ preferences. When group members need to sonal missions linking their own knowledge, be in the plant at the same time, they all skills, and aspirations with the mission of show up, even though no manager tells them their business. In this sense, the mission is to do so. Work groups are measured on the less an inspirational device than a compass amount they produce, rather than the hours guiding thousands of employees' indepen- they work. The company's principal owner, THE RISE OF MARKET-BASED MANAGEMENT 437

Ricardo Semler, argues that adults manage charging other employees prices for prod­ to coordinate their activities outside the ucts and services inside the firm. And in­ workplace without managerial supervision, deed, an internal price system is one critical so spontaneous coordination of work hours element of market-based management. and other matters in the workplace should Private property rights give individuals be no big surprise. 14 the opportunity to exercise their own judg­ • Property Rights, Roles, ment, and the price system helps ensure that and Responsibilities one individual's independent decisions are In a free market, property rights play a coordinated with those made by millions of key role in both mobilizing knowledge and other people. The informational benefits of providing incentives. Private property di­ prices in markets are well known, but the vides control over resources into distinct benefits of pricing inside the firm are often spheres, within which individuals can use less fully appreciated. In reality, many parts their own knowledge and judgment. Those of large business firms operate much like who find better ways ofusing their property bureaucracies: top management provides to serve consumers tend to earn profits, gain resources for services like accounting, pub­ control over resources, and hence make lic affairs, and information services, and more significant decisions as time passes. these departments are then sent forth to do Those with poor judgment tend to lose good for the company. Since the internal control oftheir property and, hence, lose the customers for these services pay no prices, ability to make decisions about the use of the results are predictable: shortages, queu­ resources. ing, and growing overhead as top manage­ Companies too can employ these princi­ ment shovels more money into enterprises ples in thinking about roles, responsibilities, that are effectively giving away their ser­ and authorities. In many companies, a per­ vices. son's ability to make decisions depends on A wide variety ofcompanies have decided his position on a hierarchical organizational to change this system by making internal chart, length of service, corporate politics, customers pay prices for the "overhead" or pure luck. In a market-based firm, one's services they formerly consumed for free. ability to hire, fire, spend money, and man­ Companies using internal prices for corpo­ age a~sets depends on a past track record, rate services include Bell Atlantic, Koch much as a homeowner's ability to borrow Industries, Clark Equipment, Weyerhaeu­ money depends on a credit record. ser, and Pump Systems. These companies Tamko Roofing Products, based in Joplin, range from small to large, and they span a Missouri, puts these principles into practice wide range ofindustries. Companies adopt­ when it decides who can spend how much ing internal pricing cite several benefits, money. The company has never used bud­ including reduced overhead expenses, gets to plan how much will be spent or what closer relationships between internal cus­ it will be spent on. As Ethelmae Hum­ tomers and suppliers, and continuous phreys, the company's CEO, puts it, "Ifwe "rightsizing" as voluntary transactions re­ need to spend money, we spend it. If we veal which corporate services can be better don't, we don't." Managers and employees acquired on the outside market. 15 throughout the organization have spending • Market Incentives and Motivation authorities that allow them to exercise wide Entrepreneurs earn profits by thinking up discretion about corporate purchases. As new ways to create value for others. Noone successful people take on new responsibil­ orders them to be creative; they simply find ities, they may well receive new levels of that they can make themselves better off by spending authority needed to do the job. making their customers better off as well. • The Price System and Internal Markets In business, though, employees fre­ -The- term "market-based management" quently get raises and promotions for fol­ often conjures up the image of employees lowing orders, building political skills, at- 438 THE FREEMAN • JULY 1995 taining a specific rank, or simply hanging mation from all of an employee's major around for a long time. Some of this occurs "customers" ? because of union contracts, but such incen­ An organization that can answer''yes" to tives are also widespread in managerial these questions is fundamentally channeling compensation schemes. As one corporate information to the decisionmakers at the top executive noted, "There must be better of a pyramid, instead of letting employees reasons for giving raises than the fact that make decisions based on their own local the earth went all the way around the sun knowledge. again. " Nucor Corporation has found a better Concluding Comments way. At Nucor, substantial employee bo­ nuses, paid weekly, are tied to production The failure of command-based societies results that specific teams ofemployees can provided one of the most powerful lessons directly affect. Higher output leads to higher of the twentieth century. The downfall of bonuses, and bonuses can easily exceed a Soviet central planning confirmed the flaws worker's base pay. As a result, workers in the command paradigm. The striking show up for work early to ask the previous differences in living standards between shift how the equipment is running. They West and East Germany, or mainland China take extra care in maintenance and discour­ and Hong Kong, should persuade any skep­ age each otherfrom taking unnecessary sick tic that socialism's failure was not due to days. In short, the incentives of Nucor's unique aspects ofRussian history orculture. work teams are so well aligned with the Instead, the blame rests with fundamental corporate mission that little "management" flaws in the command approach-an ap­ of employees is required. 16 proach that bears striking similarities to the • Free Flow Ideas and the dominant corporate management paradigm Use 0.1 Knowledge of the twentieth century. Freedom of action and freedom of ex­ Human experience has shown that market change are critical elements of a market economies produce prosperity through the economy, and so is freedom of speech. interaction of specialization, rules of just Prices summarize a great deal of informa­ conduct, private property, the price system, tion, but because real-world markets are incentives, and open communication. Given disequilibrium markets, prices do not sum­ the size of many business organizations, it marize everything entrepreneurs and cus­ seems logical to adaptfree market principles tomers need to know. As a result, individ­ to improve management practice. uals need the freedom to exchange ideas, The idea of market-based management is debate new suggestions, and advertise their part prediction and part prescription. The products and services to potential custom­ prediction is that firms will become more ers. market-based to compete in the global econ­ Most corporations today espouse these omy. The prescription is that firms can ideals, but many would do well to ask shorten their learning process by applying themselves questions like the following. lessons already learned in free societies. D • Do operating units supply detailed op­ erating data to headquarters? 1. Konosuke Matsushita, "The Secret is Shared," Man­ ufacturing Economics (February 1988), p. 15. • Are employees directed because they 2. Frederick W. Taylor, Principles ofScientific Manage- lack access to information they need to ment (Easton: Hive Publishing Company reprint, 1985 [1911]). 3. Taylor, pp. 40-41. make business decisions? 4. Taylor, p. 41. • Are accounting systems designed for 5. Peter J. Boettke, The Political Economy of Soviet Socialism (Boston: Kluwer Academic Publishers, 1990), pp. management control instead of furnishing 105-6. information to operating personnel? 6. Judith A. Merkle, Management and Ideology: The Legacy ofthe International Scientific Management Movement • Do performance evaluations include (Berkeley: University of California Press, 1980), pp. 260-61. only the views of the boss, instead of infor- 7. H.S. Person, "The Approach ofScientific Management THE ECONOMIC SAFETY NET 439 to the Problem ofNational Planning," Annals ofthe American 1I. See Chris Argyris, Integrating the Individual and the Academy ofPolitical and Social Science Vol. 162 (July 1932). Organization (Transaction Publishers, 1990 [1964]); William 8. Friedrich Hayek, The Fatal Conceit (Chicago: Univer­ Ouchi, Theory Z (Reading: Addison-Wesley, 1981); Tom Pe­ sity ofChicago Press, 1988); Don Lavoie, National Economic ters, Liberation Management (New York: Ballantine, 1992). Planning: What Is Left? (Cambridge: Ballinger, 1985); Peter 12. See Friedrich Hayek, Individualism and Economic Boettke, Why Perestroika Failed (London: Routledge, 1992). Order (Chicago: University of Chicago Press, 1980). 9. James P. Womack, Daniel T. Jones, and Daniel Roos, 13. Friedrich Hayek, Law, Legislation, and Liberty, Vol. The Machine That Changed the World (New York: Rawson II: Rules and Order (Chicago: University of Chicago Press, Associates, 1990). 1979). 10. Charles Koch also coined the term "market-based 14. Ricardo Semler, "Managing Without Managers," Har­ management" and is the first CEO we know of who has vard Business Review (Sept.-Oct. 1989), pp. 76-84. explicitly tried to adapt market principles to change his 15. Formore information, See Jerry Ellig, "Internal Pricing organization across the board. For more information, see for Corporate Services," Center for Market Processes Work­ Wayne Gable and Jerry Ellig, Introduction to Market-Based ing Paper (Sept. 17, 1993). Management (Center for Market Processes, 1994) and Tyler 16. Bill Nobles and Judy Redpath, "Market-Based Man­ Cowen and Jerry Ellig, "Market-Based Management at Koch agement: The Secret to Nucor's Success?," Profiles in Market­ Industries," Center for Market Processes Working Paper Based Practices, Center for Market Processes (forthcoming (1993). study).

THEFREEMAN IDEAS ON LIBERTY

The Economic Safety Net (a parable) by Jes Beard

nce upon a time, far, far away, people everyone on Economy knew of the sharks Olived in a village on an island where life and the quicksand, almost no one went to was difficult. But the people were good and the lagoon. They stayed away even though worked hard and the village grew. The it was the most beautiful place on the island, people called their island "Economy" and where the sun was always bright and the they were happy. birds gave their songs in wondrous and On one side oftheisland ofEconomy was enchanting voices. a big lagoon. The lagoon had warm, crystal At first, life in the village of Economy clear blue water and beautiful beaches, but was so hard almost no one ever had time to the lagoon also was home to dangerous do anything but work, and no one thought sharks. And the beach had quicksand that about the lagoon. When they did think about could swallow a person clean away, so fast the lagoon they always thought about how they could not be pulled out before they dangerous the sharks and quicksand were vanished, never to be seen again. Because and stayed away. People saved and planted crops and made buildings where they could Mr. Beard is an attorney in Chattanooga, Ten­ work better. Life became easier, but only a nessee. little. 440 THE FREEMAN • JULY 1995

By and by, the people in the village came to the lagoon. Forthe first time some parents to have enough food and shelter that they also went there. All who saw the lagoon did not need to work unceasingly. Some­ were amazed by its beauty and wanted to times one of the foolish young men of return. Economy went to the lagoon, never to be But the new safety net was imperfect. As seen again. Each time it happened, perhaps ever more people went to the lagoon, still once or twice a year, people of Economy greater numbers disappeared into the quick­ would be sad and would cry about their loss. sand. Some people slipped right through the Then they warned their young again of the safety net, though the net still made the dangers of the lagoon. beach safer than ever before. Some people And it came to pass that the village had felt so safe they went to the very edge ofthe a great leader who promised to make life lagoon's water. From the water's edge, better and safer for all on the island. The some found the crystal clear blue water so great leader said Economy was too rich and beautiful they felt they had to go in. too strong to let young men be lost to the Once in the water, the sharks often ate the lagoon. He had a plan to stop it from people. happening. The great leader could not tolerate shark He would cover the quicksand holes with attacks. He called on the village ofEconomy safety nets to catch anyone who strayed to protect everyone from quicksand and upon the quicksand. Parents would still tell sharks. their children to avoid the lagoon, ofcourse, The great leader said Economy could do but the great leader's nets would save the more to protect those going to the lagoon. foolish who did not listen. He called his plan He said he would make the whole lagoon the Economic Safety Net. safe. The people needed to give him more The people applauded the plan. They said money for stronger nets. The biggest and that it proved the great leader's greatness. strongest men of the village also needed to Everyone said it was good to save foolish stop their village work so they could be young men who went to the lagoon. special lifeguards at the lagoon. The special In the following years, his Economic lifeguards would fight off sharks that attack Safety Net caught many young men before villagers going into the water. they slipped into the quicksand. But each Some villagers didn't like the new plan. year, young men became less afraid of the They said it cost too much. The biggest and lagoon because of the efforts to keep them strongest men of the village did not want safe. And each year more and more young to give up their work to be lifeguards. They men went to the lagoon. For the first time, said their families needed them on their after the Economic Safety Net, some young farms and in their shops. women also strayedfrom the village to enjoy But the great leader said he was disap­ the beauty of the lagoon. pointed that people of Economy wanted to As more young people visited the lagoon, put a price tag on lives. He said that if his more also slipped into uncovered quick­ plan saved only one person it was worth­ sand. This happened even though the great while, and he convinced his people that no leader forever increased areas of the beach price was too great to save even one life. covered by the Economic Safety Net. The great leader moved on with his plan, The great leader said Economy could not assuring all villagers that together they let this happen. He promised to cover the could make the lagoon safer. whole beach with a new safety net to protect The biggest and strongest men of the everyone, but he said parents should still village trained to fight the sharks, and Econ­ remind children of the lagoon's dangers. omy spent great sums to improve the Eco­ The next year, after the great leader's new nomic Safety Net. Economic Safety Net was in place, ever Then the great leader said the improved more· curious young men and women went safety net would save more villagers than THE ECONOMIC SAFETY NET 441 ever, both from quicksand and sharks. He Economy built special shark-fighting boats repeated his warning that people should for the lifeguards. The lifeguards could use avoid the lagoon. But those who did go the boats to lower wooden shark-protection would be safer than anyone had thought cages around swimmers in danger. The great possible. leader said his long years at building safety Now ever greater numbers of villagers nets showed only that Economy merely than before went to the lagoon. The great had not done enough to keep villagers safe. leader's Economic Safety Net saved many, If Economy only again redoubled its efforts but with the large crowds now at the lagoon the Economic Safety Net would work. ever more still slipped away into the quick­ The other choice was to give up efforts to sand. The lifeguards also saved countless make the lagoon safe. The great leader villagers, but the sharks grew fat both from insisted that it was simply too cruel for the villagers swimming in the crystal blue water good people of Economy to let those going and from lifeguards. to the lagoon fend for themselves with no By now hard times returned to the village. Economic Safety Net. More and more shops and fields lay idle By now many villagers said all ofthe great because those who worked in them did not leader's safety-net efforts were useless. comebackfrom the lagoon. Other shops and Some even said the safety net was actually fields lay idle as the biggest and strongest bad. They said more people were lost now men who had been working in them worked to the lagoon than ever before, more than instead as lifeguards. when the village ofEconomy did nothing at Years had passed since the great leader all to make the lagoon safe. Critics said started the safety net. He was now weak and Economy should return to doing nothing. old. From his sickbed he said the village now They said it was better to have no safety net. had but two choices. With no safety net, they would tell their The great leader said Economy was close young that the beauty ofthe lagoon might be to completing his dream of a real Economic tempting, but that it hid terrible dangers Safety Net. He said Economy could make from which there is no protection. the island safe by fully protecting everyone The great leader was now near death, but from the terrible dangers of the lagoon. said Economy had changed since the simple Economy just needed to cover the beach days of the past and could not possibly more completely with yet heavier nets. return. He said too many people now went Economy also needed more men as life­ to the lagoon to end the Economic Safety Net. guards and needed to payfor betterlifeguard With that the great leader died, and the training for fighting the sharks. The safety people were left to decide between the two net would then make the water safe if options. 0 A Matter of Principle by Robert James Bidinotto

Beyond the Pale

hose of us who cherish freedom may were stunned. How could Americans do this T disagree about many things, yet still to fellow Americans? we wondered. consider ourselves allies. But ifour positive We have since learned something about philosophy ofindividual rights and liberty is the suspects, their associates, their sym­ to survive, we must distance ourselves from pathizers-and their motives. We have anyone whose aim is to undermine the rule learned that the prime suspects are alienated oflaw upon which rights and liberty depend. loners and losers-socially marginalized In the early 1970s, I joined several orga­ and rootless men, with thwarted personal nizations whose avowed purpose was to ambitions and spoiled private lives. limit taxation and halt governmental viola­ Philosopher Eric Hoffer once described tions of individual rights. One day, the these sorts as perfect candidates to become leader of one of the groups leaned forward fanatical, nihilistic' 'True Believers": individ­ in a gleefully conspiratorial manner, and uals who, unable to fulfill constructive roles in confided: "My goal is to make people cyn­ society, are drawn to hate groups, anti-social ical about government." cults, and revolutionary crusades. As Hoffer I was disturbed by his negative focus. explained it, such "causes" provide them Cynicism, I knew, was a destructive emo­ with excuses for their personal frustrations tion; mere "anti-govemmentalism" was an and failings. Self-hatred can then be projected empty substitute for a positive political phi­ outward. Certain groups, or society and its losophy and constructive agenda. I under­ institutions, become their scapegoats; tortu­ stood even then that hostility toward govern­ ous socio-political rationalizations are con­ ment was not the same thing as defending cocted to fuel their fantasies of "revenge." individual rights. These misfits thrill to the grandiose delu­ If anyone still needs to have that lesson sion that social institutions, such as govern­ driven home, let him consider the atrocity in ment agencies, have specially targeted them Oklahoma City last April 19th. That horri­ for destruction. This not only explains their fying event constitutes the dead end of own failures; it also inflates their sense of cynical, mindless anti-governmentalism. importance, while simultaneously granting When evidence mounted that the Okla­ them permission to strike back in "self­ homa killers were homegrown, .most of us defense." Lost in nihilistic fantasies, such malcontents-like theirleft-wing precursors Mr. Bidinotto is a long-time contributor to Read­ of the 1960s-fancy themselves as "sol­ er's Digest and The Freeman, and a lecturer at diers" at war with American society. That is FEE seminars. Criminal Justice? The Legal Sys­ tem Versus Individual Responsibility, edited by why they can target innocent citizens with­ Mr. Bidinotto andpublished by FEE, is available out qualm ... why one suspect gave offi­ at $29.95 in cloth and $19.95 in paperback. cials only his name, rank, and serial number. 442 443

Hoffer's explanation is not only consistent else? Need it be pointed out that one does not with what we know ofthose arrested, but also avenge the violation of individual rights by with the statements of their excuse-making violating individual rights? sympathizers. Within days of the blast-and The cowardly Oklahoma bombing dem­ despite mounting evidence against the native­ onstrates the utter bankruptcy of a purely born suspects-leaders of one private militia negative, "anti-governmental" focus. group speculated publicly that the real perpe­ Whether motivated and rationalized by cyn­ trators were "the Japanese." Not to be icism, hatred, paranoia, philosophical anar­ outdone, others voiced suspicions that the chism, or conspiracy theories, attacking killers were actually sinister U.S. govern­ government per se only undermines the rule ment agents provocateurs, who had blown of law-and is thus a carte blanche for the up their own government building solely to arbitrary, private initiation of force. provoke a public backlash against private Exaggeration? In the aftermath of the gun ownership and militia groups. bombing, one talk show host felt obliged to Some commentators, instead of con­ instruct his listeners in the fine points ofhow demning the bombing as pure murder, felt to shoot federal agents during raids. Another, obliged to couple muted criticisms of the attributing the Oklahoma blast to "CIA con­ atrocity with excuse-making for the perpe­ tractors," told an audience that "what they trators. While mumbling perfunctory con­ won't allow us at the ballot box can be won at dolences to the families of the slaughtered the bullet box." Meanwhile, a militia group and injured, they also suggested that the out West has been threatening to hang any perpetrators were probably just decent, pa­ judges or other public officials who fail to triotic Americans, provoked to act in self­ uphold the Constitution-as they interpret it. defense against a "tyrannical" federal gov­ Does anyone really believe that individual ernment. The mass murders in Oklahoma rights would be more scrupulously observed City, they explained, were intended to by such self-appointed vigilantes than by the avenge alleged governmental "mass mur­ officials they denounce? (Personally, given ders" during the 1993 Waco, Texas, trag­ a choice, I'll gladly take my chances with the edy, and the 1992 shootout with the Randall BATF.) Weaver family in Ruby Ridge, Idaho. Our nation's Founders were not anti­ The gist oftheir" explanation"? Govern­ intellectual opponents of government as ment interventions and improprieties were such. Through our Constitution, they in fact somehow driving otherwise upright citizens established one with the positive aim of to desperate acts of violent reprisal. preserving and protecting individual rights. What, ultimately, is the difference be­ That's because they understood the vital tween the "left-wing" argument that com­ connection between individual rights and mon criminals are "driven" to steal and kill the rule of law. Undermine the latter, and due to past social or economic repression, you jeopardize the former. and this "right-wing" argument-that the We in America do not live under pure Oklahoma terrorists were "driven" to bomb laissez-faire; far from it. But we also do not a day-care center due to past governmental live under tyranny. To contend otherwise oppression? trivializes the full horror of real tyranny. I confess that any subtle distinctions be­ Here, we can write, speak, and vote freely. tween these two camps continue to elude me. Regulated we are, but not enslaved. Call me simplistic; but as I see it, the only As long as we have the freedom to address results in both cases are the bloodied bodies of imperfections, even evils, in our political innocents. Even ifinnocent children in Waco, system with ballots, there is no justification Texas, had been deliberately murdered for resorting to bullets. And there is never (which they weren't), how could that atrocity any justification for deliberately violating be set right by the murder ofadditional inno­ the rights of the innocent-nor in excusing cent children in Oklahoma City, or anywhere the violators. Such is beyond the pale. D THEFREEMAN IDEAS ON UBERTY

Special Interests and the Internment of Japanese-Americans During World War II by Steven B. Caudill and Melody Hill

n February 19, 1942, President Frank­ the lists contained 250 to 300 suspects, only Olin Roosevelt signed Executive Order 40 or 50 were considered real threats. 1 9066, approving the en masse relocation of Within two days ofthe attack on Pearl, all of Japanese and Japanese-American citizens the suspects and many others were de­ from the West Coast into the interior of the tained. The FBI contended that these mea­ country. The order was signed amid the sures adequately controlled any threat of hysteria following the Japanese attack on espionage, and that the relocation of Japa­ Pearl Harbor. The reason given at the time nese and Japanese-Americans was unnec­ for the evacuation was concern about espi­ essary.2 As additional evidence that secu­ onage, or so-called "fifth-column," activi­ rity was not the reason for the internment, ties ofJapanese and Japanese-Americans on note that no mass detainment of people of the Coast. But according to the govern­ Japanese ancestry occurred in Hawaii, ment's own intelligence service, this con­ which is closer to Japan and home to many cern over espionage was misplaced. That is, Japanese and Japanese-Americans. In Ha­ concern for national security was not the waii, only suspect Japanese individuals true reason for interning Japanese and Jap­ were incarcerated. Ifespionage was not the anese-Americans during World War II. In­ reason for the evacuation in California, what stead, this internment was motivated by was the reason? The answer: special­ nothing other than interest-group politics. interest groups seeking protection from the When war erupted in Europe, FDRplaced competition of Japanese and Japanese­ J. Edgar Hoover's FBI in charge of the Americans residing on the West Coast. nation's internal security. Before the attack Labor unions and farmers wanted the Jap­ on Pearl, the FBI and· Naval Intelligence anese out of California and off the land long maintained lists of alien suspects. Though before the attack on Pearl. World War II and the bombing of Pearl Harbor provided a Professor Caudill teaches economics at Auburn handy opportunity for these groups to com­ University and Ms. Hill is an undergraduate plete a task that they started several years student. earlier. 444 The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 July 1995 Degenerate Democracy hen all the mysticism is No matter what the origin of govern­ stripped away, the people who ment may be, the democratic form ren­ W comprise the government (the ders an important service that is lacking legislators, administrators, judges, and in all others forms. It provides a proce­ policemen), are guided by human inter­ dure by which individuals acquire ests, desires, beliefs, notions, and preju­ power and are removed from power. dices, just like other people. They have Democratic government makes lawmak­ neither superhuman wisdom nor extra­ ers dependent on the people's wishes, ordinary virtue. Nevertheless, they are and thereby facilitates peaceful changes expected to render an important service: if conflict should occur. Changes are to protect the life and property of each subject to majority rule. Yet, rule by and every individual. They are to "simple majority" differs from"constitu­ restrain wrongdoers, meet force with tional democracy" that recognizes cer­ force, and punish peace-breakers. tain individual rights and gives them Toward that end, they are entrusted with some form of constitutional protection, the necessary instruments of coercion: thereby placing limitations on the whims the armed forces, police, and prisons. and wishes of the majority. Governments maybe democratic or Majority rule inevitably raises the totalitarian, pluralistic or monistic, question of the scope and extent of republican or monarchical. The form majority power. Should the vote of a springs from the common notions of simple majority always prevail over the human behavior in society. Belief in a opposition? The advocates of majoritari­ propensity to strife and conflict as a nor­ anism readily answer in the affirmative; mal condition of human existence gives any other rule, they argue, enables a rise to authoritarian government. If minority to frustrate the majority and social life consists of unending conflict, thus, in a sense, rule and prevail over it. of war of all against all, society is in need Requirement of more than a simple of an authoritarian government as the majority, they maintain, places undesir­ best means of regulating the conditions able obstacles in the way of government. of conflict. In contrast, belief in a harmo­ The opponents of unlimited majority ny of interest of all members of society power are quick to reply that Congressional tends to give rise to limited government representatives may not express the will of that merely seeks to restrain the peace­ the majority of their constituents; guided by breakers. their own interests, they may not vote the wishes of the majority, but rather their violence. After all, people differ in own and those of their supporters. They capacity, skill, strength, industry, and may represent the interests of the largest health, which necessarily results in bloc of voters who may actually consti­ unequal income and wealth. Individual tute a minority of the population, or they inequality, in fact, is a great advantage to may not even know the majority opinion both the individual and society, bringing because few voters may bother to form forth man's division of labor and social an opinion, which is probably true in cooperation. To enforce equality is to most issues confronting legislators. deny human nature and work evil on Strict majoritarianism tends to destroy everyone including those it is supposed the conditions of its own existence wher­ to benefit. ever the majority routinely violates the A policy designed to enforce econom­ basic rights of individuals. It may sup­ ic equality opens the doors for dema­ press the basic freedom of expression goguery and politics at its worst. It and association, deny the minority any invites expedient politicians to stir up consideration and weight, deprive it of the resentment of the poor against the the right to participate in the political rich so that they may elect the dema­ process, and refuse it fair treatment and gogues to positions of power and "due process." It may even relegate largess. It appeals to envy and covetous­ minorities to inferior positions in politi­ ness, and elevates demagoguery to an cal, social, and economic life, assign important device of democratic politics. numerous duties and liabilities, and In the end, politics is likely to become an extract from them an inordinate share of art of promises, evasions, and systematic their income and wealth. In possession pursuit of expedience, making the body of all the powers of coercion, majoritari­ politic the primary source of social con­ an government may blithely ignore and flict and strife. All democratic societies defy the moral laws that proscribe all have foundered on the rocks of moral forms of harm to any and all individuals. decay and domestic strife. Social peace and harmony can be pre­ Envy is more irreconcilable than hate. served only if all members of society are It is the most corroding of all political free to participate in democratic institu­ vices and also a great power in our land. tions and are treated equally before the The friends of freedom are content to be law. Yet, many champions of majoritari­ envied, but envy not. anism never tire of criticizing this politi­ cal and legal equality for being inade­ quate; they would extend the scope of equality to economic life through "fair­ er" distribution of income and wealth. They would forcibly reduce economic inequality, although their efforts would necessitate the use of much coercion and Hans F. Sennholz INDEPENDENCE DAY SALE Jacob Burckhardt Regular Sale Reflections on History $12.95 $10.95 Written in the 1890s but published nearly 50 years later under the title Force and Freedom, this volume is notable for its uncannily accurate predictions of the all-devouring state. Introduction by Gottfried Dietze. Clarence B. Carson The American Tradition 12.95 9.95 A profound and exciting social history of the United States and its foundations. The Flight from Reality 15.95 12.95 A brilliant analysis of our intellectual flight from economic and political reality. Richard M. Ebeling, editor Disaster in Red: The Failure and Collapse of Socialism 24.95 19.95 A brilliant exposition of the causes that lead to tyranny and oppression. Burton W. Folsom, Jr., editor The Spirit of Freedom: Essays in American History 14.95 10.95 An anthology of essays and articles on the freedom movement throughout American history. 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Sale Ends August 31, 1995 Postage and handling: Please add $3 per order of $25 or less; $4 per order of $26-$50; $5 per order of more than $50. Send your order, with accompanying check or money order, to FEE, 30 South Broadway, Irvington-on-Hudson, New York 10533. Visa and MasterCard telephone and fax orders are welcomed: (800) 452-3518; fax (914) 591-8910. Light a fire for freedom! Launch a Freeman Society Discussion Club! oin the growing ranks of Freeman readers who have become part of FEE's net­ j work of Freeman Society Discussion Clubs. More than 80 clubs have been orga­ nized in the 27 states and 5 foreign countries. Leonard E. Read once observed that rancid intellectual soil nurtures an unend­ ing variety of socialist fallacies and that "finding the right is the key to salvation." FEE is making the right both known and prevalent by launching discussion clubs nationwide, and by providing free literature and speakers to improve understand­ ing of the moral and intellectual foundation of a free society. Club members receive a number of special benefits, including discounts on FEE publications and invita­ tions to special FEE events. For more information about starting a discussion club, or joining a Freeman Club that may already be meeting in your area, write Felix R. Livingston, Vice President and Director of Freeman Services, 2814 Hilsdale Harbor Way, Jacksonville, FL 32216, or callifax (904) 448-0105.

Last Call 1995 Summer Seminars At FEE or the 33rd consecutive summer, FEE will conduct its noted seminars in the Pfreedom philosophy and the economics of a free society. Here, in the company of like­ minded individuals, with experienced discus­ sion leaders, and in a setting ideal for the calm exchange of ideas, is an opportunity for those who believe that the proper approach to eco­ nomic problems is through the study of indi- vidual human action. Each seminar will consist of 40 hours of classroom lectures and discus­ sions in economics and government. In addition to the regular FEE staff, there will be a number of distinguished visiting lecturers. The FEE charge for a seminar-tuition, supplies, room and board-is $400. A limited number of fellowships are available. First session: July 23-28, 1995 Second session: August 13-18, 1995 Write or call Dr. Barbara Dodsworth, The Foundation for Economic Education, 30 South Broadway, Irvington-on-Hudson, NY 10533; Tel. (914) 591-7230 or Fax: (914) 591-8910. 445 The Historical Backdrop to that the Japanese might leave Hawaii for California. Consequently, on February 26, Japanese Internment 1885, the U.S. Congress enacted a bill to The story of the internment is really the "prohibit the importation and migration of story ofimmigration in California. A pattern foreigners and aliens under contract or was repeated, first with Chinese immigrants agreement to perform labor in the United and later, Japanese immigrants. The state of States, its territories, and the District of California, through various laws, initially Columbia." made it difficult for immigrants to enter the California on its own took steps making state and then, if they managed to enter, Japanese immigration difficult. The Con­ unattractive to remain. The main difference gressional Act ofAugust 3, 1882, imposed a between the Japanese and the Chinese in head tax of fifty cents on all immigrants. California was the strong Japanese desire to Soon afterward labor union leaders turned own land. This difference led to special their attention to the "Japanese problem." land-use legislation aimed at the Japanese. In 1905 the Asiatic Exclusion League was Between 1850 and 1882, over 280,000 formed. Initially this group consisted mostly Chinese entered California. 3 The influx of of union leaders and workers, but support Chinese occurred because the enormous eventually was widespread: growth in the California economy required a On the second Sunday in 'May, 1905, dele­ cheap labor source and the Chinese pro­ gates from sixty-seven local and nearby labor vided a solution. The Chinese were wel­ organizations met to form what became the comed at first, but by 1869 the railroad Asiatic Exclusion League. From the day ofthe opened up California to the eastern half League's formation on May 14, 1905, until of the United States, and a recession was after the end of World War II, there was in beginning. Organized labor argued that the California, an organized anti-Japanese move­ Chinese were no longer needed and lobbied ment that would eventually draw support from for an end to Chinese immigration. As early all segments of the state's population. In the as 1875, California enacted legislation halt­ beginning, the organized movement was an ing Chinese immigration into California extension of San Francisco labor unions. The (though this statute was later declared un­ most prominent labor leaders attending the initial meeting of the league were Patrick constitutional by the U.S. Supreme Court). Henry McCarthy, head ofthe Building Trades California and organized labor then turned Council of San Francisco, and Andrew Furu­ to Washington for help. Their efforts were seth and Walter MacArthur, both of the Sail­ rewarded when, on May 6, 1882, the first or's Union. A satellite of McCarthy, Olaf Chinese Exclusion Act went into effect. Tveitmore, was named its president. All four This act eliminated the immigration of Chi­ of these men were immigrants from Europe. 5 nese laborers for a period of 10 years; it also barred the Chinese from becoming natural­ Immigration Restrictions ized citizens. The agitation leading up to the Chinese Exclusion Act made it clear to In an effort to reduce tensions, Japan many that something drastic regarding Chi­ attempted to voluntarily restrict immigra­ nese immigration was about to occur, and tion to the United States. In 1900 the Japa­ even before passage of the Act, labor re­ nese government stopped issuing passports cruiters began visiting Japan to find replace­ for laborers headed for the United States, ments for the lost Chinese.4 but continued to allow immigration to Ha­ The first large numbers of Japanese la­ waii. In California there was again concern borers who came to the U.S. territory were that Japanese would enter through Hawaii. contract laborers. In 1884 and 1885 several Consequently, the Asiatic Exclusion hundred contract workers landed in Hawaii, League prompted the legislatures of other which at the time was a protectorate of the Pacific Coast states to adopt resolutions United States. Californians were concerned restricting Japanese immigration from Ha- 446 THE FREEMAN • JULY 1995 waiL In light of this agitation, the Japanese sures. Most proposals dealt with the holding government started to limit immigration to of agricultural land. Out of this session Hawaii, and in April 1905 Japan temporarily emerged the Heney-Webb Alien Land Law suspended all immigration. of 1913, tying land ownership to citizenship. Other legislation was designed to make This statute also provided that aliens ineli­ life in California unattractive to Japanese­ gible for citizenship could lease land for no Americans. In April 1905 the union-domi­ more than three years. State Attorney Gen­ nated San Francisco Board of Education eral Webb, co-sponsor, was not shy about submitted a plan to the board ofsupervisors its intent, stating, to segregate Japanese public-school chil­ It is unimportant and foreign to the ques­ dren. On October 11, 1906,with part of the tion, whether a particular race is inferior. The city still in ruins from the earthquake, the single and simple question is, is the race board of education passed the segregation desirable.... It [the law] seeks to limit their order. The move outraged Japan, and the presence by curtailing their privileges which U.S. government attempted to intervene. A they may enjoy here: for they will not come in compromise was reached and the problem large numbers and long abide with us if they was resolved with the passage of the Immi­ may not acquire land. And it [the Actlseeks to gration Act of 1907. The Act listed 20 limit the numbers who will come by limiting the opportunities for their activity when they different classes of workers, collectively 6 called contract labor, who were prevented arrive. from immigrating. The provisions of this The 1913 Act prohibited aliens from ac­ legislation succeeded in keeping Japanese quiring, possessing, enjoying, transmitting, laborers from entering the United States and inheriting real property. Japanese­ through a third country or territory. Americans began to put .land titles in the The next political issue was direct immi­ names oftheir U.S.-born children who were gration. Restrictions on direct immigration citizens and thus entitled to hold property. of Japanese were achieved through the In 1919, state senator J. M. Inman intro­ "Gentleman's Agreement" of 1908. Japan duced an alien-land law designed to plug this agreed to limit immigration to "relatives," loophole. The heart ofthe new act was that "former residents," and "settled agricul­ it was now illegal for an alien to provide turalists." The term, "settled agricultural­ funds to purchase land if the title was held ists" is defined to mean "a person who had in the name of another person and if the invested capital in the enterprise, and whose intent was to avoid the law. The act also share in its proceeds, if it is carried on in prohibited leasing any land to persons inel­ partnership, will be in proportion to the igible for citizenship. The measure was amount of his investment." placed on the ballot in the general election of The Gentleman's Agreement achieved an 1920 in the form ofan initiative. On Novem­ immediate decline in immigration. Soon, ber 2, 1920, the measure passed by a vote of departures exceeded arrivals. This changed 668,483 to 222,086. in 1913 when large numbers of "picture Still, white Californians were unsatisfied. brides" immigrated. The number of Japa­ They hoped to put an end to all Japanese nese entering the country slowed to a immigration (as they had done earlier with trickle. Efforts now focused on legislation the Chinese). That goal was achieved when making life in California unattractive to on May 15, 1924, a bill that became known Japanese-Americans. A large part of this as the Japanese Exclusion Act of 1924 effort was aimed at land-ownership restric­ passed the House of Representatives. tions. Despite this anti-Japanese legislation, the During the 1909 legislative session in growth of the Japanese involvement in ag­ California, at least 17 anti-Japanese bills riculture during this period was impressive. were introduced, and the 1913 session was By 1940 Japanese farmers produced at least flooded by more than 30 anti-Japanese mea- 90 percent of snap beans, celery, peppers, THE INTERNMENT OF JAPANESE-AMERICANS 447 and strawberries. Japanese farmers also Ifit were not for the "white-skinned Japs" produced 50 to 90 percent of artichokes, in this country there wouldn't be any Japanese celery, cucumbers, fall peas, spinach, and question. What can you suggest I do and tomatoes for canning, and 25 to 50 percent thousands of Californians be led to do, that ofthe asparagus, cabbage, cantaloupes, car­ may make it possible to get rid of all Japs, sending them back to Japan either before or rots, lettuce, onions, and watermelons.7 after the war is won. I am convinced that if it is not done or at least the action completed Agitation Increases before the war is over, it will be impossible to get rid of them.... The Japanese cannot be It is not surprising that when the attack on assimilated as the white race [and] we must do Pearl Harbor heightened agitation against everything we can to stop them now as we the Japanese-Americans, the Caucasian have a golden opportunity now and may never farmers of California were eager for intern­ have it again. 9 ment as well as for the land held by the As a consequence of the evacuation, Japanese. Austin Anson, the managing sec­ farms owned by Japanese-Americans were retary ofthe Grower-Shipper Vegetable As­ sold for a few cents on the dollar to Cauca­ sociation, a farm organization, is quoted as sian farmers. One estimate of the value of saying: Japanese farmland in 1940 was over $72 We're charged with wanting to get rid ofthe million. After the war, internees were paid Japs for selfish reasons. We might as well be only a small fraction of the value of their honest. We do. It's a question of whether the losses. Attempting to remedy this situation, white man lives on the Pacific Coast or the the government passed a bill in 1988 that brown men. They came to this valley to work, did two things. First, the government apol­ and they stayed to take over. They offer higher ogized to Japanese-Americans for the in­ land prices and higher rents than the white man can pay for land. They undersell the white man ternment, also admitting that the relocation in the markets. They can do this because they was not justified for security reasons. Sec­ raise their own labor. They work their women ond, the bill provided that each ofthe 60,000 and children while the white farmer has to pay internees or their descendants be paid a wages for his help. Ifall the Japs were removed lump sum of $20,000. Perhaps these funds tomorrow, we'd never miss them in two should have come not from the taxpayers·of weeks, because the white farmers can take this country at large, but from the farmers over and produce everything the Jap grows. who benefited directly from the land and And we don't want them back when the war crops taken from the Japanese-Americans in 8 ends, either. 1942. [] The fact that Japanese farmers were not welcomed back after the war contradicts the 1. See Roger Daniels, The Decision to Relocate the Japa­ nese Americans (Philadelphia: Lippincott, Co., 1975). security arguments given for the evacua­ 2. See also Roger Daniels, The Decision to Relocate the tion. Security concerns certainly did not Japanese Americans. 3. See Frank Chuman, The Bamboo People: The Law and exist after the war. It is quite clear that some Japanese-Americans (Del Mar, Calif.: Publisher's Inc., 1976). viewed the situation in California immedi­ 4. See also Frank Chuman, The Bamboo People. 5. See Roger Daniels, The Politics ofPrejudice (London: ately following the attack on Pearl Harbor Cambridge University Press, 1961). as a unique opportunity to get rid of com­ 6. See also Frank Chuman, The Bamboo People. 7. See Theodore Salutos, "The Immigrant in Pacific Coast petitors. In May 1942, O. L. Scott, another Agriculture, 1880-1940," Agricultural History 49 (January member of the Grower-Shipper Vegetable 1975), p. 192. 8. See Morton Grodzins, Americans Betrayed (Chicago: Association wrote to Congressman Ander­ University of Chicago Press, 1949). son: 9. See also Morton Grodzins, Americans Betrayed, p. 20. THEFREEMAN bourg) are pushing for a stronger union in IDEAS ON LIBERTY which they hope Germany will be content and contained. However, their centralizing efforts could generate the very conflict they seek to avoid as diverse peoples are forced together in unnatural political arrange­ Peace for ments.

Europe? Voices from Past The threat ofcentralization and socialism by William J. Watkins, Jr. to peace in Europe is not new. The guns of the Axis and Allies had hardly fallen silent before Eu~opean socialists were holding ~onclav~s In London and Paris regarding Int~gra~lon ince the end of the Second World War to promote "a socialist Europe WhICh IS economically and politically inde­ there has been much discussion about S pendent. ,,2 Little did these intellectuals re­ European integration. What began as the ~lize that Europe once was economically Europea.n Coal and Steel Community Integrated (though protective tariffs did (ECSC) In 1951 developed into the Euro­ cause stress) by a shared metallic monetary pean Union (EU) with the ratification ofthe ~tandar~ before World War I. This early Maastricht Treaty in 1992. Unfortunately, Integration emerged naturally "without su­ the trend thus far has been toward central­ per-plans, super-planners, super-bureau- ization, but there is one more opportunity to cracies, super-conferences, and without a restore the balance between the member super-state and 'High Authority.' ,,3 ?ations an? the ever expanding bureaucracy In the end, Europe's economic integra­ In the EU s capital, Brussels. tion was" destroyed by an economic foreign The year 1996 will witness an intergov­ policy which had its roots ... in ... col­ ernmental conference on the future of the lectivist-inflationary policy ... that sailed EU and problems arising with the Maas­ under the flag of 'planned economy,' 'full tricht treaty's one-size-fits-all remedies. If employment,' 'cheap money,' and deficit Europe is to develop a system that operates spending. ,,4 smoothly and secures the peace, next year Some things seem never to change. offers perhaps the last chance to settle major Though there is much talk offree markets in constitutional issues. Europe today, many ofthe same old collec­ Since the early post-war discussions tivist policies of the welfare state remain in about integration, Europe's explicit goal has place. For instance, in EU countries, each ?een to bind Germany's future and prosper­ 1~O workers now labor to support 40 pen­ Ity to peace on the Continent. Hans-Dietrich SIoners. By 2004 each 100 workers will Genscher, Germany's former foreign min­ support an additional 10 pensioners on top ister, called the EU's structure "a living of the current 40. 5 model for a peaceful European order, with Unfortunately for Europe, the techno­ Franco-German cooperation as its centre­ crats in Brussels, see "No discernible as­ piece. ,,1 In light of the results of Prussian sociation ... between either the level or militarism in this century, it is understand­ growth ofsocial spending in member states, able why France and the Benelux nations on the one hand, and their trade perfor­ (Belgium, the Netherlands, and Luxem- mance, employment or unemployment, on Mr. Watkins is an assistant editor for The the other." 6 This attitude explains why Freeman. one-tenth ofthe workers in the EU are now 448 449 jobless and why during the first year of the they violate the Treaty of Rome (which much vaunted single market the EU's GDP formed the European Economic Commu­ shrank by 0.3 percent.7 Wilhelm Roepke's nity in 1957). From American history we prediction that in any proposed European learn the danger of a Supreme Court that economic union "the highest degree of in­ claims final say over the constitutionality of flation in any member country will be state and national legislation. In the early adopted by the others along with the longest days of the American republic, Thomas paid vacations and the greatest measure of Jefferson saw the danger that the Supreme intervention or planning," has fast become Court posed and correctly predicted that it a reality.8 would be "the engine ofconsolidation. ,,9 It Because of the collectivist attitudes in should be a priority in 1996 to ensure that a Brussels, there will certainly be future trou­ European John Marshall will not have the ble as member nations seek to revive their power to alter the balance between Brussels economies by abandoning the policies ofthe and the member nations. The nations should past. And if mechanisms are to be designed have final say concerning the legitimacy of to allow a peaceful transition to noninter­ EU as well as their own legislation because vention, the 1996 intergovernmental confer­ they retain their sovereignty and have en­ ence is the proper place to begin. Decisions tered the compact as equal partners. made there will shape the future power Such a power of nullification does, how­ arrangements of Europe for years to come. ever, pose serious risks and could be deter­ Unfortunately, the French and the Ger­ imental to the very idea of a common mans-both with strong centralizing ten­ market. Individual nations could nullify dencies-along with the power-hungry Eu­ free-trade initiatives, which were the impe­ ropean Parliament will make most of the tus for the EU in the first place, in order to Conference preparations. Nevertheless, protect local economic interests. Though there is an opportunity to curb the foolish­ this is a possibility and it would be regret­ ness in Brussels that has led to edicts table if nations used their power of nullifi­ regarding everything from subsidies to the cation for frivolous purposes, the risk is curvature of cucumbers. worth taking. A national government with exclusive power to judge the constitution­ National Veto ality and breadth of its powers will tend, as in the United States, to become consoli­ Ever since French recalcitrance over ag­ dated. A single consolidated government ricultural policy sparked the''Luxembourg would be deleterious to the peculiar local Compromise" in 1965, nations have enjoyed habits and customs that are at the heart of a national veto in the Council of Ministers. European culture. This veto applies to areas such as taxation, treaties, the acceptance of new members, Opt-Outs and foreign policy. Britain successfully used her veto to strike at plans for further cen­ Along with the precedent of a national tralization last year when she vetoed the veto, since Maastricht a precedent has been appointment of Jean-Luc Dehaene to the set for nations to opt out of certain EU presidency of the European Commission. programs that they feel are detrimental to Nonetheless, if each member nation is to their national welfare. For example, Britain retainher national sovereignty, the national has been exempted from Maastricht's oner­ veto must be strengthened against en­ ous social chapter and any future European croachments. Monetary Union (EMU). Denmark is ex­ Encroachments will most likely come empted from the final phase of the EMU, from the courts. The European Court of European citizenship, and common defense Justice claims the power to declare acts of and legal policies. Even Germany, a self­ member states and EU institutions void if described "core ofthe hardcore" regarding 450 THE FREEMAN • JULY 1995 union, insists that her parliament have final already eats half ofthe EU's budget with its say-so regarding the replacement of the guarantee ofminimum prices to farmers. As mark with a common currency. the EU expands and admits the poorer Nevertheless, opt-outs, in their current nations of Eastern Europe, transfer pay­ form, have drawbacks. For instance, since ments will skyrocket. Under current poli­ opting out of the social chapter of the cies, admitting Poland's five million farmers Maastricht treaty, Britain has lost the power to the CAP would require a boost in the to block trade unions' demands for worker­ EU's budget of$74 billion. 12 Such transfers consultation councils and other pro-union can and will breed only contemptfrom those measures. These councils demand that who have their earnings confiscated by the workers be consulted about such things as technocrats in Brussels. restructurings, closings, or changes in pro­ Tragedy looms ahead for Europe as in­ duction methods. Though British firms op­ compatible cultures are thrust together in erating domestically are unaffected, British unnatural centralized arrangements. Once multinational firms operating in the EU are the intoxicant ofpolitical unity wears off, the at the mercy of Brussels. nations of Europe must be able to coexist To check such excesses, member nations peacefully in a loose confederation orgo their must retain their veto power overlegislation separate ways. The 1996 intergovernmental emanating from Brussels whether they have conference offers perhaps the lastopportunity opted out ofthe particularlegislation or not. for ED nations to secure constitutional guar­ Member states should be allowed to retain antees ensuring their sovereignty and future. their voices concerning any EU legislation For Europe to prosper, it must soon abandon that could affect them adversely. the impoverishing policies of the welfare state. Because such an edict is not likely to be Secession issued from the mismanagers in Brussels who thrive on power wrought from consolidation, The EU has already caused much tension the future ofEurope rests on the power ofthe and is held in disrepute by citizens of many people acting within their nation-states to do member nations. In fact, 60 percent of the so when the ideological climate finally EU electorate.opposed the Maastricht treaty changes. [] and 65 percent of Europeans are against abandoning their national currencies. 10 Nor­ man Lamont, former chancellor ofthe British 1. "Genscher calls for an end to European separation," Manchester Guardian Weekly, May 7, 1989, p. A4. exchequer, predicts that Brussels' centraliz­ 2. For an excellent discussion of the early socialist ing tendencies "may mean one day contem­ schemes regarding European integration, see Hans F. Senn­ holz, "TheSocialist Movement for a United States ofEurope," plating withdrawal" from the EU. 11 in How Can Europe Survive (New York: D. Van Nostrand When nations finally decide to abandon Company, Inc., 1955). 3. Wilhelm Roepke, "How to Integrate Europe," The welfarism and planning in favor of a more Freeman, May 18, 1953, p. 594. liberal alternative, such a decision will ne­ 4. Ibid., p. 594. 5. "Ajob-destroying machine," The Economist, October cessitate a withdrawal from the EU and its 22, 1994, p. survey 5. massive schemes of redistribution. And if 6. European Commission report quoted in "The enlight­ ened welfare-seeker's guide to Europe," The Economist, the nation choosing withdrawal is not a net March 12, 1994, p. 57. recipient ofredistributed wealth (as will likely 7. "A singular market," The Economist, October 22, 1994, p. survey 15. be the case), then the beneficiaries will no 8. Wilhelm Roepke, "European Economic Integration doubt try to stop their victim from escaping. and its Problems," Modern Age, Summer 1964,p. 237. 9. Jefferson quoted in Albert Jay Nock, Mr. Jefferson The EU's Common Agricultural Policy (Delavan, Wisc.: Hallberg Publishing Corporation, 1983), (CAP) is already causing divisions similar to p. 163. 10. "No Shortcuts on the Way to a Closer Europe," The the American sectional conflict of the nine­ Christian Science Monitor, August 3, 1994, p. 19. teenth century. However, in Europe's case 11. "European Unity Policy Splits Tories in Britain," The New York Times, October 12, 1994, p. A6. it is the agricultural interests that are ex­ 12. MarkM. Nelson, "ExtraAccommodations," The Wall ploiting the commercial interest. The CAP Street Journal, September 30, 1994, p. R13. THEFREEMAN IDEAS ON LIBERTY

Economics 101: A True-False Test

by Ralph R. Reiland

ere's a quiz. Which of the following 7. Real family income increased each H statements about the American econ­ year from 1983 through 1990 in every in­ omy during the 1980s are true? come group (from the poorest fifth ofhouse­ 1. From 1982 to 1989, 19 million net new holds to the richest fifth), while median jobs were created in the United States (more family income fell by 1.9 percent in 1993. than the number ofjobs created in Europe 8. The real income in the bottom fifth of and Japan combined), two-thirds of them the income distribution increased by 12 high- or middle-paying, resulting in the low­ percent in the 1980s, reversing a 17 percent est unemployment rate in 16 years. slide between 1979 and 1983. 2. The economic growth unleashed by 9. Eighty-six percent of the tax filers in tax cuts increased federal tax revenues in the poorest fifth of families in 1980 moved the 1980s by $1.1 trillion. out of that bottom quintile by 1988 (16 3. These additional federal tax revenues percent moved all the way to the top fifth of contributed to the reduction of the federal income earners). deficit from 6.3 percent of GDP in 1983 to 10. Looking at income distribution as an 2.9 percent in 1989. (A Congress loaded with individual matter, not as a group compari­ pork peddlers blocked greater spending son, real median income increased by 5 cuts.) percent between 1982 and 1988 for those 4. Presidents Kennedy and Reagan both who started in the top fifth of income earn­ enacted supply-side tax cuts on top income ers, and increased 77 percent for those who earners and job creators and produced the started in the bottom fifth (primarily by two longest economic expansions in Amer­ moving out of that bottom quintile). ican history. 11. Real family income declined each 5. The Reagan tax cuts "trickled down" year from 1979 until 1982, and has declined to produce a 76 percent jump in new busi­ each year since 1991-the years sandwiched ness investment in real (adjusted for infla­ between these two periods of shrinking tion) dollars in the 1980s and tripled the rate income, produced a real increase of $4,877 of productivity growth. in median family annual real income. 6. Real per capita after-tax income rose 12. Since 1988, the typical American by 19 percent in the 1980s, nearly double the household has lost $2,344 in real annual rate of the 1970s. income, and the degree ofincome inequality Professor Reiland, associate professor of eco­ is now at a post-World War II high. nomics at Robert Morris College, owns Amel's 13. Aftergrowing nationwide by 7 million Restaurant in Pittsburgh. people during the late 1970s, the poverty 451 452 THE FREEMAN • JULY 1995 population declined by 4 million during the rate during that period. The number of new 1980s: reversing the downward trend, pov­ Hispanic-owned businesses soared by 81 erty in the '90s is rising again with over a percent. million Americans falling into poverty in 17. The median weekly earnings of fe­ 1993. male workers grew 8 percent faster than 14. The top income-tax rate was reduced male earnings in the 1980s, and women from 70 percent to 28 percent in the '80s, but entrepreneurs ended the decade employing the top 5 percent of all earners paid more more people than all of the Fortune 500 taxes, increasing their share of all federal companies combined. The number ofwom­ income taxes paid from 36 percent in 1980 to en-owned firms expanded by 57 percent in 43 percent in 1990. the '80s and the sales volume of these firms 15. In the 1980s, the percentage of Afri­ tripled. can-American families earning more than 18. Following the double-digit annual in­ $50,000 in real dollars doubled from 7 to 14 flation rates of 11.3 percent, 13.5 percent, percent, the unemployment rate for black and 10.3 percent during the Carter years, the teenagers fell by 21 percent and black em­ annual inflation rate averaged 3.9 percent in ployment in professional and managerial the two Reagan terms. jobs expanded by one-third. After declining 10 percent between 1978 and 1982, the real Scoring: Each of the above statements is median income of black families increased True. All information is based on Labor by 17 percent between 1982 and 1989. Department and Census Bureau studies. 16. From 1982 to 1987, the number of Readers missing more than 12 questions black-owned businesses increased by 38 are eligible for. Rhodes Scholarship percent, triple the overall business growth assistance. D

THEFREEMAN IDEAS ON LIBERTY

Hail to Prices!

by Jeffery G. Lee

ecently in South Korea I had an expe­ separate directions, I said goodbye and R rience that bodes poorly for propo­ prepared to flag down a taxi. D.J., however, nents of price controls. During my stay, a knew something I didn't and stayed with me Korean friend, D.J., took me to a bar to soak despite my assurances that I could handle up a bit oflocal flavor. After a good time, my myself. I'm thankful he stayed. friend and I left the barjust before midnight I was completely unprepared for what in search of a cab. As we were going in happened. Crowds ofpeople began creeping dangerously far out into the street. D.J. Mr. Lee resides in Long Beach, California. joined the fray, facing the oncoming taxis HAIL TO PRICES! 453 like a modern-day matador. Cabs slowed portation, the most we suffered was the just enough for D.J. and others to yell their indignity of standing in the middle of the desired destinations into the open window road, in addition to a few lost hours ofsleep. (Pangbae Station in our case). Without fail, Raise the stakes from the taxi scenario and after hearing the places we and others were consequences are more devastating. Instead intent on going, cab after cab sped off of commuters, picture physically ill folks leaving us in clouds of exhaust and bewil­ clamoring for health-care professionals. derment. "Pangbae double!" might suffice as a po­ After about 20 minutes, it was apparent tential solution when negotiating for some­ that it might take a while to actually get thing as simple as a ride. I don't imagine, picked up. Interestingly, D.J. "upped the however, an equally likely "heart attack ante" for the ungracious drivers. "Pang­ double!" would be a very amenable strat­ bae!" -in endless repetition-had been all egy. that I had heard for nearly a half-hour when Low prices might appear to the uniniti­ my friend began yelling "Pangbae DOU­ ated as desirable. But prices are no culprit. BLE!" He even yelled "Pangbae TRIPLE!" at Prices provide ready information on the a driver who stopped only long enough to availability of goods and services, and on flash four fingers hoping for four times the the values ofgoods and services to compet­ normal fare. Later, we stopped a taxi with a ing would-be users. Attempts to artificially "triple." We got in, only to be told to get out alter prices are tantamount to removing when the driver reconfirmed our destina­ signs from dangerous roads. Prices fairly tion. He said he had misunderstood us and balance the amounts ofa good available and wouldn't go to Pangbae Station. the amounts demanded. Of course, prices Later I discovered the reason for this are also the most visible and easily targeted black market in transport. Taxi rates are set feature ofa market economy. Unfortunately, by the government. Ostensibly to protect politicians, eager to placate their benefactors, the consumer, the government limits the have more influence than economic truths on price taxi companies can charge. The con­ the formation of public policy. sequence of such myopic legislation should I do not mean to insinuate any backward­ be obvious to any first-year economics stu­ ness on the part of Korea (which would dent. The artificially low fare not only re­ upset my Korean wife immeasurably). It duces the supply oftaxis, but decreases the just so happened that this experience re­ incentive of remaining drivers to provide minded me of the endless gas lines of the good services to passengers. Full of good 1970s and of the recent debate over health but misdirected intentions, government of­ care in the United States. As economically ficials have taken it upon themselves to enlightened as we are in America, we are not protect the consumer. Ironically, the result immune to a "calculated reversion" to the is just the opposite. As with all examples of illogic ofprice controls. Symptomatic cures price control throughout history, demand for what some may see as the pestilence of exceeds supply when an artificially low prices are misdirected. Hopefully, people price is mandated, resulting in various de­ can now see through quick-fix solutions to grees of chaos. economic problems. If not, maybe some­ After an hour and a half we flagged down thing as simple as a taxi ride in Korea would a willing driver and made it home. Because be sufficient to cure their economic our quest was limited to cross-town trans- myopia. D Potomac Principles by Doug Bandow

Freedom from Taxes?

WASHINGTON-Income tax day may be government outlays. And Cost of Govern­ behind us, but the pain is not over. We are ment Day, when citizens were finally free of still working for government, and we won't the total expense _of government, including be finished until the middle of this month. regulation, is still to come, on July 9. According to the Tax Foundation, the In short, the average American spends average American had to labor 126 days-to more than half of every year working for May 6-to pay his or her taxes this year. government. Did you feel liberated after Looked at another way, people devote two April 15? You shouldn't have-you had hours and 46 minutes of every workday to nearly three more months to go before the government. This is the latest Tax Freedom money you earned was truly your own. Day ever, as a result of the 1993 tax hikes. This is unconscionable-feudal serfs were And May 6 is just the national average. If treated better than taxpayers today. People you live in Connecticut or New York, you have a moral right to more oftheir incomes. labor for government till May 28. Residents But you wouldn't know it from the debate of Washington, D.C., and New Jersey start in Washington. A few legislators freely ad­ working for themselves only on May 18. mit that they want to keep on spending, so Residents ofHawaii are indentured servants they prefer tax hikes to cuts. The more until May 17. The least taxed citizens of subtle-seen as "responsible" politicians America work three and one-halfmonths for by the opinion-making elite-say that deficit the government. Far more people labor four reduction must take first priority. Ofcourse, to five months for politicians before earning many of them are convenient converts to a penny for themselves. budget responsibility, having never before Even these horrible numbers understate found a federal program they didn't like. the impact ofgovernment on taxpayers. The Even many ofthe defenders oftax reduc­ Tax Foundation only looks at tax collections. tion seem half-hearted. Rather than simply The federal government, however, relies on returning money to people, letting them deficits to expand its outlays and regulations decide how to use it, they promote supply­ to control even more private activities. Thus, side engineering: proposals for specific the Washington-based Americans for Tax credits and the like. Moreover, even some Reform estimates that while Americans may tax-cutters fear being perceived as, hor­ have finished with their taxes on May 6, rors!, favoring the rich. Thus, they advocate Spending Freedom Day didn't occur until denying any benefits to high earners. May 16, when people stopped paying for Alas, no one in the nation's capital is Mr. Bandow is a Senior Fellow at the Cato making the basic moral case: government is Institute and the author ofThe Politics of Envy: taking far too much of everyone's income Statism as Theology (Transaction). and Congress should just cut overall tax 454 455 rates. Such an approach would also help Ultimately, the only way to stop the special serious tax-cutters confront their opponents' interest looting that occurs daily in Wash­ shameless attempts at class war. The 1980s ington is to cut off the money. have beenattacked as the decade ofgreed, but Consider the conventional wisdom that it appears that the 1990s will end up as the irresponsible tax cuts caused the massive decade of envy. People don't so much want deficits ofthe 1980s. Good try, but no cigar: more money for themselves as they want to federal revenues rose (in inflation-adjusted take it away from those with more. Greed is 1987 dollars) from $766.6 billion in 1981 to bad enough, eating away at a person's soul. .$894.7 billion in 1991, a hefty 16.7 percent Envy is far worse because it destroys not only increase. Unfortunately, spending rose individuals, but also communities, poisoning more-from$867.7 billion to $1,123.2 billion relations as everyone attempts to use the state over the same period, ajump of29.4 percent to live off of everyone else. (after inflation). Every extra dollar in taxes Even today, the much maligned "rich" is an extra dollar for legislators to spend. are paying a huge proportion of their in­ Taxes are unlikely ever to catch up with comes in taxes. Many people face a marginal outlays because politicians simply can't be rate of roughly 50 percent in federal taxes trusted with someone else's credit card. alone-income, Social Security, and Medi­ Ofcourse, advocates oftax cuts also need care. Added to that are state and local to propose serious budget cuts, killing agen­ income taxes, real estate taxes, sales taxes, cies and subsidies for Republican and Dem­ county business fees, and a host of other ocratic allies alike. There's little gain in taking levies. By what right should transient ma­ nicks out ofprograms: interest groups will still jorities and influential minorities be able to resist and the public won't care enough to divest people oftwo-thirds or more ofevery voice its support. Instead, legislators need to extra dollar they earn? take great whacks at spending, and let the Not just the rich are subject to such public know·that serious tax relief depends extraordinary levies. The National Taxpay­ upon voters backing those great whacks. ers Union reports that a family with an Finally, if people want everyone to be average median income of $52,895 pays an better off, they should support policies to extraordinary $26,689 in taxes, more than expand the nation's economic pie rather half. Is that fair? than steal more from those who are eco­ Particularly .scandalous have been at­ nomically successful. Yet the sort of class tempts to treat the 1981 across-the-board warfare represented by attempts to "soak income tax rate reductions as unfairly the rich" actually reduces employment. skewed to the rich. That 25 percent cut Higher marginal rates discourage people provided more in tax cuts to the rich because from working and investing; confiscatory the rich were paying so much more in taxes. taxation reduces the availability of private It was simple fairness to give someone who investment capital. Indeed, it is the wealthy paid, say, ten times as much in taxes more tax who provide much of the capital that busi­ relief. Given the half dozen major tax hikes ness uses to employ people and expand passed by Congress over the past decade, a operations. While large, investment-based new round of rate cuts would be the fairest incomes may seem scandalous to the envi­ reduction of all by offering benefits propor­ ous, they help create the jobs that employ tional to what people are already paying. low- and middle-income Americans. How to sell sizable tax cuts to a deficit­ How to tell if last November's electoral wary public? Tax reductions would help earthquake makes a real difference? The starve government, forcing it to be more simplest test next year will be whether Tax responsible fiscally. Every tax hike in the Freedom Day and Cost ofGovernment Day 1980s was followed by higher, not lower, have shifted backward. Then we will know spending, irrespective ofthe promises made the truth of legislators' claims to have the by successive Congresses and presidents. taxpayers' best interests at heart. D THEFREEMAN IDEAS ON LIBERTY Don't Believe the Hysterical Preservationists by James D. Saltzman

hould it be illegal to hang shutters on ervation placed the entire state of Vermont Syour old house without your city's per­ on the Trust's annual list of the 11 most mission? Or to add vinyl siding to your home endangered places in America and followed without first checking with a local panel of in 1994 by putting Cape Cod onthe same list. political appointees? Or to adorn your own In some cases, state and federal agencies land with a fence made of wood instead ofa can already direct changes to "historic" more costly fence made of stone? buildings and sites. Believe it or not, approximately 2,000 city And preservationists have no qualms and county governments across America about annihilating owners' freedom of have acquired this much clout over changes choice when it conflicts with preservation­ to private property by adopting historic­ ists' wishes for the appearance of proper­ preservation ordinances.! These statutes al­ ties. For example, a recently proposed low a local government to regulate the ap­ historical preservation ordinance for Hous­ pearance or possible demolition ofa property ton called for fines of up to $500 per day by declaring it a historic landmark or by for violating any article of the ordinance, a mapping it into a historic conservation dis­ penalty the local Preservation Alliance crit­ trict, all without the permission ofthe owner. icized as too weak to "provide an effective Instead, the owner cannot alter the look of deterrent"3 against unacceptable changes his property without the permission of his to "historic" buildings. Meanwhile, the Na­ local government. For Dennis Foley that tional Trust for Historic Preservation ad­ meant being told by the Arlington County, vises: "The stiffness of the penalty varies Virginia, Historic Review Board in 1993 that with each community depending on the he could not hang wood-grain vinyl shutters likelihood of non-compliance. ,,4 on his home. Because he lives in an histor­ According to this thinking, local police ically protected community, only the more powers are needed to protect a "historic" expensive kind made from genuine wood property from the whims of its owner. As will do. 2 the Houston Preservation Alliance claims, Even with this much say-so over changes "historic landmarks are landmarks no mat­ to private property at the local level, pres­ ter what an owner might think and should be ervationists want even more control. In designated and protected accordingly. ,,5 In 1993, the National Trust for Historic Pres- other words, successful preservation can­ not occur unless the owner of a "historic" Mr. Saltzman teaches American Literature at St. John's School, Houston, Texas. He also volun­ building or site can be forced to let others teers as a Policy Analyst for the Houston Prop­ manage changes to the appearance of his erty Rights Association. property. 456 457 Preservation Without Coercion toric preservation appeared in the Summer 1991 issue of the Journal of the American But the coercive preservationists are Planning Association and concluded that wrong. Successful preservation does occur "gentrification rarely proceeds by central voluntarily. In Great Britain, for example, direction, but rather, through the individual private and voluntary conservation societ­ investment decisions of hundreds of thou­ ies-including the National Trust and Na­ sands of people.,,13 Preservation rules usu­ tional Trust for Scotland, the Historic ally arrive only after an area has achieved Houses Association, and the Landmark fashionability and stirred investor interest. Trust-useprivate donations and some gov­ For example, renewal preceded local dis­ ernment grants to acquire, restore, and trict rules in the Woodland in Waverly maintain over 1,800 historic properties, al­ neighborhood of Nashville. This locale was most all in the British Isles.6 Recently, the first developed between the 1890s and the Landmark Trust has purchased sites in Italy 1930s. Mter declining through the 1950s and the United States.7 And the Trust gets and 1960s, the area revived in the 1970s. 14 one third ofits annual budgetfrom leasing its Local historic district controls on demoli­ properties for holidays or vacations. tions and design arrived in 1985 once a Uncoerced preservation is also common in petition was signed by 80 percent of neigh­ America. For example, Kykuit, the Rocke­ borhood property owners. So before the feller family estate near Tarrytown, New controls, Woodland in Waverly had already York, was given over in 1992 to the (Amer­ become a magnet for buyers serious about ican) National Trust for Historic Preserva­ fixing up old buildings. tion, so that the Trust could display the Restoration has also preceded regulation estate's house, gardens, and art collection to in Houston, which adopted its first preser­ the public.8 Just last February, the Heritage vation ordinance in 1995. 15 Prior to that, Society of Houston received the circa-1870 some of the city's oldest neighborhoods house of the Reverend Jack Yates, a nine­ have enjoyed a spontaneous revival since teenth-century African-American civic the 1970s. Perhaps the best example is the leader. The Society will spend $300,000 Houston Heights, a neighborhood of four renovating the building, turning it into a square miles first developed before the tum museum.9 In 1989, the National Trust for of the century. Historic Preservation and Successful Farm­ Formerly one of Houston's most desir­ ing magazine teamed up in a project called able locations, the Heights deteriorated in "Bam Again!" to advise farmers on how the early sixties. Crime soared. Neverthe­ to restore old barns and gave prizes ofup to less, a surplus of Victorian homes and $1,000 for the best results. 10 quaint bungalows, available at bargain Offering prizes can encourage preserva­ prices, began attracting buyers in the early tion, but even better urging comes from 1970s who sought to settle only minutes market incentives. According to Time, from downtown and from the city's other "Bam Again!" prizewinners "spent an av­ major employment centers. erage of$11,000 on their projects, compared What began as a trickle ofnew investment with a $25,000-to-$35,000 cost for a new in the Heights soon became a deluge. Be­ metal building. ,,11 In general, rehabilitating tween 1970 and 1980, the price per square an old structure is cheaper than building a foot of single family homes in the Heights comparable new one, especially when the increased 17.5 percent, equal to or better cost of tearing down the existing building than the increases in the more fashionable is included. 12 Houston neighborhoods of Bellaire and Thus, common sense leads investors to West University Place. 16 Between 1990 and restore old buildings conveniently located in 1994, average prices rose 25 percent in the or near a downtown. A comprehensive re­ Heights while dropping slightly in Bellaire view of modem economic research on his- and moving up slowly in West University. 17 458 THE FREEMAN • JULY 1995

Preservationists argue that controls are hotel is of historic significance. If the necessary to draw investors by offering building is labeled as historic, then the them assurance that a neighbor won't do planned rehabilitation is sometimes sub­ something distasteful with his property. But ject to lengthy and costly approval pro­ investment has flooded the Heights even cesses to ensure authenticity of appear­ while the area has lacked the "protection" ance. In other cases, where a building is ofpreservation mandates. Most good homes in a historic district or has been individ­ are restored, not torn down for gaudy re­ ually designated as historic, energy­ placements, and much ofthe new construc­ efficient enhancements such as replace­ tion is architecturally compatible with the ment of windows and doors or drilling of old, all without a nudge from the heavy hand holes into side walls for the injection of government. ofinsulation may be blocked on the basis of strict adherence to preservation stan­ 23 The Real Enemy of dards. Preservation As one developer testified in the report, a dispute between local and state landmark In fact, when the hand ofgovernment gets groups over his plans to renovate three older involved with old buildings, it usually homes in Louisville "consumed about pushes them down or blocks their recovery. $20,000 more than I originally planned, in For example, in his 1966 report, "The Fed­ increased carrying costs and lost time, and eral Bulldozer,,,18 Martin Anderson decried added considerably to the price of the fin­ federal urban-renewal schemes ofthe 1950s ished product. ,,24 Not surprisingly, the 1991 and 1960s for leveling tens of thousands of report in the Journal ofthe American Plan­ sturdy inner-city homes. No doubt, this ning Association offers the speculation that scheme destroyed many structures that prese~vation rules shift small-scale invest­ would now be cherished as "historic" build­ ment to areas with comparable properties ings. not covered by the rules. 25 Today government interference in pres­ ervation continues. Stringent building codes Correlation Is Not Causation discourage the restoration of older proper­ ties. 19 In addition, zoning laws requiring But coercive preservationists maintain excessive parking and setbacks while re­ that their rules encourage investment. For stricting mixed uses complicate efforts to proof, they point to thriving conservation districts. A favorite example is the Lower revive older areas. 20 Transportation policies 26 favoring street and highway construction in Downtown (Lo-Do) area of Denver. the suburbs subsidize the flight of people There, say the preservationists, restrictions and their money from inner-cities. 21 Fur­ enacted in 1988 on demolitions and design in thermore, when taxes in the central city are Lo-Do .transformed the 20-block area in higher than those in surrounding jurisdic­ little more than five years from a run-down tions, people move from the former to the warehouse district into a trendy locale for latter,22 reducing investment in older build­ restaurants, bars, shops, small offices, and ings at the urban core. condos. Historic rules, boast the preserva­ And don't forget obstacles created by the tionists, are good for business. preservation rules themselves. As a 1991 But correlation should not be confused federal report found: with causation. Investment picked up after the installation of preservation controls but Regulations governing the preservation not because ofthem. Yes, the Lower Down­ of buildings can also block rehabilitation town Business Support Program attracted of older structures. A project may be more than $15 million in new investments slowed while a determination is made as and 500 new jobs between 1987 and 1991. 27 to whether an old elementary school or Yet these changes occurred, according to DON'T BELIEVE THE HYSTERICAL PRESERVATIONISTS 459 reports written in 1990 and 1992 for Den­ ver's planning department, as the city was speeding the regeneration of the area with $114 million in street and sewer improve­ ments between 1988 and 1993.28 As devel­ opers know, private investment dollars tend to flow in the direction of such large public outlays for infrastructure. Lo-Do's surplus of sturdy old buildings, available for low prices just as Denver crept out ofa local recession,29 also made the area ripe for investment, regardless ofpreserva­ tion controls. In fact, the 1990 report says that the renovation of Lo-Do buildings was 25 to 30 percent cheaper than new construc­ tion. 30 And a new major-league baseball stadium just outside Lo-Do has strength­ ened the area as a location for bars and restaurants. Thus, public subsidies and mar­ ket opportunities, not preservation rules, accelerated Lo-Do's redevelopment. Lo-Do isn't unique. Scratch a preserva­ tion district "success story" and you're likely to find public subsidies, tax breaks, or zoning bonuses,31 with one or more ofthese Preservation by choice, not by edict, channeling investment toward areas favored in the Houston Heights. by the preservationists. Thus, preservation awards may profit some targeted businesses property values around the country in the or apartments by giving them an unfair 1970s and 1980s. In the Park Slope neigh­ advantage over their local competitors out­ borhood of Brooklyn, "the greatest prop­ side the district. If preservation rules were erty value increases occurred prior to des­ beneficial in themselves, tax breaks and ignation. ,,33 Meanwhile, several "blocks other public assistance would not be needed in Galveston's Strand historic district ... to funnel investors into historic districts. experienced an annual growth rate of only about 11 percentfrom 1974 to 1977, although Property Values city values overall rose by 28 percent per year. ,,34 In five Washington, D.C., neigh­ Preservationists also argue that their rules borhoods, the rate of increase in property serve the public by raising the value of values actually slowed after the imposition designated properties. How? "Properties of local historic controls.35 with such designation tend to receive a Despite the preservationists' beliefs, as­ higher degree ofmaintenance due to pride of sets do not become more valuable because ownership and thus maintain or increase in the government has gained more control value better than those ofcomparable actual over them. A study in the May 1994 issue of age without a designation of historical sig­ the Journal of Real Estate Finance and nificance,' ,32 explains the National Trust Economics, explains how stringent preser­ for Historic Preservation. vation rules in Philadelphia weakened the But the facts say otherwise. The study in value of small apartment buildings by 24 the Summer 1991 issue ofthe Journal ofthe percent relative to comparable apartments American Planning Association reviewed without the rules. 36 And according to the the impact of local historic designation on 1992 report written for the Denver planning 460 THE FREEMAN • JULY 1995 department, preservation controls on dem­ 13. Dennis E. Gale, "The Impacts of Historic District Designation; Planning and Policy Implications," Journal ofthe olition and design in Lower Downtown American Planning Association, Summer 1991, p. 327. created a "cap on expectations' ,37 for finan­ 14. "Districts Make the Difference," op. cit. 15. On February 22, Houston adopted a limited ordinance, cial returns to investors in the district by allowing the city to designate properties as historic without the prohibiting high rises and new parking fa­ owner's permission but also providing some opportunities for the owner to alter or demolish his "historic" property as he cilities. Only the preservationists would sees fit after a 9O-day waiting period. equate progress with scaling back the future 16. Meredith H. James, "The Effect of Zoning on Resi­ dential Values," privately published, 1991. value of property. 17. "Tracking Houston's Home Prices," The Houston Post, June 12, 1994, p. D-6. 18. Martin Anderson, "The Federal Bulldozer," Urban Censoring Our Choices Renewal, The Record and Controversy, 1966, pp. 491-508. 19. "Not in My Back Yard; Removing Barriers to Afford­ able Housing," Advisory Commission on Regulatory Barriers The economic arguments for historic to Affordable Housing, The Department ofHousing and Urban preservation rules-that they foster com­ Development, 1991, p. 3-3. munity benefits like urban renewal, local 20. Richard Moe, in "All Adding Up to Noplace; How Transportation Polices Affect Communities," (Vital Speeches, business growth, and rising property val­ May, 15, 1994, p. 468) explains how such zoning rules com­ ues-falsely presume that a political elite plicate efforts to proceed with new development patterned after older downtown areas. knows better how to manage property than 21. Bennet Roth, "Inner city could be big loser in roads do the individuals who actually own the improvement funding," The Houston Chronicle, January 15, 1991, p.1A. properties. And supplanting the aesthetic 22. "Most Cities Surveyed Have Raised Revenues," In- choices of the property owner with the sight, February 25, 1991. 23. "Not in My Back Yard," op. cit., 3-2 to 3-3. edicts ofthe historical commission isn'tjust 24. Ibid., 3-3. bad economics; it's censorship. The gov­ 25. Dennis E. Gale, op. cit., p. 333. 26. Nora Richter Greer, "Preserving Preservation," Ar­ ernment has no more business imposing chitectural Digest, March 1991, p. 88. aesthetic controls on our buildings than it 27. Karen Weintraub, "Downtown Houston ripe for dra­ matic turnaround; Denver's success a model for Market Square does on our clothes or our cars. D District," The Houston Post, July, 24, 1994, p. A-26. 28. Thomas M. Roelke, "Impact of Historic District Des­ 1. "Districts Make The Difference," Southern Living, ignation, Lower Downtown, Denver, Colorado, Second Anal­ November 1989, p. 164. ysis, April 1, 1990- March 31,1992," Denver Office ofPlanning 2. "Property owner dramatically demonstrates absurdity and Community Development, p. 25. of 'historic' preservation rules," Land Rights Letter, April 1994, p. 1. 29. William Hathaway, in "Rocky Mountain High, Lessons 3. The Greater Houston Preservation Alliance, "Policy from a real estate market that climbed out of a slump" (The Hartford Courant, August 8,1993, p. J-1), says that the Denver Statement Regarding Proposed Historic Preservation Ordi­ nance and Motions to Amend, Placed Before City Council, economy ended its slump and "improved slowly between 1987 September 28, 1994," p. 3. and 1989." 4. Constance Epton Beaumont, "A Citizen's Guide to 30. "Lower Downtown: Economic Impact of Historic Protecting Historic Places: Local Preservation Ordinances," District Designation," Hammer, Silber, George Associates, The National Trust for Historic Preservation, May 1992, p. 8. July 1990, p. 9. 5. Greater Houston Preservation Alliance, op. cit., p. 2. 31. See "Zoning Strengthens Character," Southern Living, 6. Francis Golding, "Keeping Britain's Past Alive," a November 1990, pp. 104-105. Developers following preserva­ publication of the British Foreign and Commonwealth Office, tion and other guidelines in Coral Gables, Florida were 1993, pp. 5-6. ' "eligible for square footage beyond what normally would be 7. Leslie Geddes-Brown, "Checking in to an English allowed under standard zoning." landmark," in House Beautiful, June 1992, p. 50. 32. Bridget Hartman, "Public Benefits," The National 8. Susan Mary Alsop, "Legend ofKykuit," Architectural Trust for Historic Preservation, p. 36. Digest, May 1992, pp. 136-147. 33. Dennis E. Gale, op. cit., p. 327. 9. Norma Martin, "Yates historic home dedicated down­ 34. Ibid., p. 326. town," The Houston Chronicle, February 21, 1995, p. 41A. 35. Ibid., pp. 328-332. This slowing coincided with slowing 10. J. D. Reed, "On the Farm: Barn Again!" Time, property values at this time for the entire city. February 20, 1989, pp. 88-89. 36. Paul K. Asabere, etal., "The Adverse Impacts ofLocal 11. Ibid., p. 88. Historic Designation: The Case of Small Apartment Buildings 12. Donovan D. Rypkema, "Preservation Under (Devel­ in Philadelphia,', Journal ofRealEstate Finance andEconom­ opment) Pressure; We Have Consumed Enough ofSomebody ics, May 1994, pp. 225-234. Else's Assets," in Vital Speeches, February 15, 1990, p. 269. 37. Roelke, op. cit., p. 5. THEFREEMAN IDEAS ON LIBERTY

Free Banking and Economic Development by David Glasner

b~ut five years ago I published a book, a reform of this magnitude. The potential AFree Banking and Monetary Reform, benefit from such a reform is not big enough that proposed a radical reform of our mon­ to outweigh the perceived risk in trading the etary system. Competing banks, I argued, monetary system we know for one we should be free to supply any monetary don't. 1 I have therefore concluded that my instrument, including currency or bank­ proposals for free banking are less relevant not.es, while the government would perform for the United States and other developed the limited but vital function ofestablishing countries with stable monetary systems a currency unit (e.g., the dollar) in terms of than for less developed and former Eastern which privately supplied monetary instru­ Bloc countries now lacking the monetary ments could be defined. And to ensure stability necessary for economic develop­ optimal stability ofthe purchasing power of ment. Without secure monetary institu­ the currency unit, I proposed a mechanism tions, these countries have far less to lose of indirect convertibility tied to a price (or, than do advanced countries by experiment­ preferably, a wage) index. ing with free banking. Nor, for reasons that I have been disappointed but not sur­ will become apparent, can less developed prised to detect no groundswell of popular countries simply copy the monetary sys­ support either for free banking or for any of tems of the advanced ones. Free banking my specific proposals. I do not believe that is, therefore, ideally suited for overcoming this lack of enthusiasm betrays any short­ the systemic problems that now frustrate comings with free banking or my proposals. the attempts of less developed countries to What the indifference to free banking re­ achieve monetary stability. flects is rather a salutary, "ifit ain't broke, To understand why free banking is so well don't fix it" sort ofconservatism. As long as suited to the circumstances of less devel­ inflation remains low and the banking sys­ oped and former Eastern Bloc countries, we tem is not collapsing, practical people will must first consider how money and banking not undertake the effort required to effect can contribute to economic development. Dr. Glasner, an economist with the Federal The role of money is familiar and obvi­ Trade Commission, is the author of Free Bank­ ous-it is a medium of exchange. Money ing and Monetary Reform (Cambridge University facilitates exchange by allowing us to trade Press, 1989) and the editor ofThe Encyclopedia without having to identify, as we do in barter of Business Cycles, Panics, Crises, and Depres­ transactions, a double coincidence ofwants. sions (Garland, forthcoming 1995). The views expressed in this article do not necessarily reflect Reducing barriers to trade promotes eco­ those of the Federal Trade Commission or of nomic progress by allowing resources to be individual Commissioners. shifted from less to more valued uses. Such 461 462 THE FREEMAN • JULY 1995 shifts create new opportunities and new whether money is acceptable is a matter of demands for resources, triggering an up­ degree, not a simple yes or no question. 2 ward spiral of output and wealth. It is, at any rate, clear that money cannot It is worth observing that the capacity of function well as a medium of exchange money to perform this extraordinarily valu­ unless people are confident that it will be able social function poses something of a acceptable at roughly its current value in the puzzle. The existence ofan instrument that future. Whatever undermines people's con­ serves only as a medium of exchange, pro­ fidence or trust in the future value ofmoney viding no real services, seems to contradict threatens its capacity to serve as a medium the usual assumption of economists that of exchange. The delicate web of mutually self-interest motivates economic decisions. supporting expectations that allows a me­ Why do people accept money, which (de­ dium of exchange to function can easily spite its social utility) has no direct use for unravel or collapse if the trust underlying them individually, in exchange for real com­ those expectations is eroded-or betrayed. modities or services that do have direct use In primitive conditions, the medium-of­ for them? The acceptability of money is exchange role of money can be performed sometimes attributed to an implicit under­ without the aid of banks. Money could standing among people to act in the common circulate hand-to-hand, either in the form good rather than pursue selfish goals or to a ofprecious metals, coins, or currency (con­ command by the sovereign imposed through vertible or fiat) issued by the state. How­ legal-tender laws. But neither recognition of ever, the transfer of deposits within or the common interest in having a medium of between banks through checks (and now exchange nor laws commanding that an electronically) is an exceptionally efficient instrument be accepted as legal tender could way to convey money in trade. To engage make people use as money an instrument in monetary exchange through banks, peo­ that they would not have otherwise, in their ple must hold deposits with them. By hold­ narrow self-interest, chosen so to use. ing bank deposits instead of some other form of money or wealth, people lend Self-Interest and Exchange banks capital which the banks then lend to borrowers (who typically borrow to fi­ How then does self-interest cause anyone nance investment, not consumption). Thus, to accept a money that has no use except to by providing a convenient way for the public be exchanged for something else? Whether to hold money and execute transactions, it is in my self-interest to accept money in banks channel the savings represented by exchange for real goods and services de­ the public's deposits to investors. As inter­ pends critically on whether I expect other mediaries between ultimate savers and ul­ people to accept money in exchange for real timate borrowers, banks increase the return goods and services. IfI expect other people to savers from savings and reduce the cost to refuse money that I offer in exchange for to borrowers of borrowing, promoting eco­ their goods and .services, then my self­ nomic development within the areas they interest is to refuse money in exchange, too. serve. But ifI expect other people to accept money that I offer in exchange for their goods and Creating and Maintaining services, then my self-interest may dictate Confidence accepting money in exchange for the goods and services that I supply, because doing so Having considered how money and bank­ may allow me more easily to sell what I want ing promote economic development, we can to sell and more easily to buy what I want to now ask which institutions will support a buy than ifI try to barter. The less confident stable system of money and banking. Since I am that it will retain its value, the less money cannotfunction well as a medium of willing I shall be to accept it in exchange. So exchange unless people have confidence in FREE BANKING AND ECONOMIC DEVELOPMENT 463 its future value, the fundamental task of obligate themselves to redeem their IOUs monetary institutions is to create and main­ on demand in terms ofsuch an asset. But no tain that confidence. How can such confi­ private bank has ever issued irredeemable dence be created and maintained? The an­ money without a state edict declaring the swer for a private supplier of money, i.e., a money legal tender and acceptable for dis­ competitive bank, is very different from the charging tax liabilities. Moreover, the the­ answer for a state that supplies money. And oretical argument denying that a private it is on that difference that I am going to rest bank can issue irredeemable money is com­ the case for free banking as the solution for pelling. The magic a bank performs by chronic monetary instability in less devel­ creating money is to impart a value to oped and former Eastern Bloc countries. something whose only use consists in being Why does it matter whether money is valuable. The bank performs this conjurer's supplied privately or by the state? When a trick by legally committing itself to redeem private bank creates money, it does so by instantly its IOUs in terms ofanother asset issuing a special type of IOU against itself. whose value it cannot control. That credible The IOU allows the owner of the IOU or promise allows the bank's IOU to take on a anyone he assigns to demand its instant value identical to that of the redemption redemption in terms of a fixed amount of a asset. But without the promise, people, specified asset. Forexample, when Citibank recognizing the potential profit from issuing creates a demand deposit, it is promising to valuable IOUs and redeeming them for redeem that deposit in terms of an equiva­ nothing, would never place a value on such lent amount of U.S. currency to the depos­ IODs any higher than their expected final itor or to anyone to whom the depositor redemption value, namely, zero. Inconvert­ writes a check up to the amount of the ible bank IODs must be worthless.4 deposit.3 A bank's contractual obligation to redeem Inside and Outside Money its IOUs on demand does not automatically create the confidence in their future value It may be helpful to distinguish here required for them to function as money. If between inside and outside money. The the bank is widely expected to default on its money private banks supply is called inside IOUs, those IOUs, regardless ofthe bank's money because it represents a debt the bank net worth or financial soundness, will not creates against itself. Outside money can be function as money, because IOUs that peo­ a physical commodity (e.g., gold) that has ple do not expect to be honored will be become acceptable as a medium of ex­ unacceptable in exchange. For a bank to change, or a fiat currency issued by the state create confidence that it will continue re­ that has become acceptable as a medium of deeming its IOUs, it must convince people exchange. Like gold, outside money is an that it would lose more by defaulting than asset without being anyone's liability. Pri­ it would gain. Whether people will trust vate banks cannot create outside money; banks with a substantial net worth to honor they can only create inside money which, to their contractual obligations depends in make acceptable, they promise to convert large part on the legal consequences of on demand into some outside money. default for the bank. If the legal system A sovereign may choose to issue inside under which banks operate strictly enforces money by committing itself, like a private contractual obligations and penalizes de­ bank, to convert its money on demand into fault, default will appear unlikely. some asset whose supply and value are One might question whether, if they were beyond its control, or to issue outside not legally required to make their moneys money in the form of fiat currency. Should convertible into an asset whose supply or it do the former, its IOUs are apt to be less value they could not control (e.g., currency acceptable than those ofa private issuer for or gold), private banks would voluntarily one very powerful reason: while the default 464 THE FREEMAN • JULY 1995 by a private bank on its obligation to redeem paper it's written on. A legal-tender law that its IOUs triggers immediate insolvency, al­ requires fiat currency to be accepted in the lowing creditors to seize its assets, a sov­ discharge ofdebts doesn't, by itself, impart ereign is immune from such sanctions when any value to the fiat currency. It simply it defaults. Indeed, a sovereign's default, provides a way for some people to discharge isn't even called a default, but a devaluation. debts that they previously incurred but does People would therefore have much better not compel anyone to accept legal tender in reason to expect a sovereign to default on exchange for real goods and services. So its obligations than to expect a private bank why would anyone prospectively supply to do so. something of value in exchange for fiat Should the sovereign seek to issue an currency? If what the State declares legal inconvertible fiat currency, it faces credibil­ tender is not acceptable, people can avoid ity problems of a different sort. Sovereigns accepting debt instruments that could be have, indeed, successfully issued fiat cur­ discharged by the proffer of legal tender. rencies in numerous instances, so fiat cur­ A more powerful way to create a demand rencies can maintain their value for long to hold fiat money is for the sovereign to periods of time. However, there have been require its currency to be used in discharg­ more unsuccessful than successful fiat cur­ ing tax liabilities. If the public owes the rencies. So it certainly is not the case that a sovereign enough at certain times ofthe year sovereign, just by declaring a fiat currency (e.g., April 15), then the demand to hold legal tender, can ensure its acceptability in currency may be sufficient (even during exchange. periods of zero or negative net tax liability) A sovereign wishing to issue a fiat cur­ to give the currency positive value through­ rency must overcome two problems. First, out the year. how can it create a demand to hold the But though feasible, such a strategy may currency it is issuing? Why should anyone still be impractical, which raises our second sacrifice any real goods or services just to problem. Even if government tax certifi­ hold pieces of paper that have no use other cates have a positive value, what would than to be exchanged for something else? create a sufficient consensus about the ex­ Forthe pieces ofpaper to be used as money, pected future value of these tax certificates people must want them enough to sacrifice for them to serve as money? Without such something else ofvalue for them. To assume consensus, a positive value will not enable that such pieces ofpaperhave value because them to serve as money. Indeed, there are they are money begs the question why people few ifany historical instances in which a fiat accept them as money in the first place. currency was successfully introduced with­ Second, a positive demand to hold an out its first having been made convertible asset clearly does not ensure its acceptance into another money. Thus, although requir­ as money. As I explained above, for an asset ing taxes to be paid using a fiat currency to be accepted as money, people must share seems to be necessary to prop up its value expectations about the stability ofits future after convertibility has been suspended, value. So even if the sovereign can create a acceptability as payment for taxes may not demand for fiat currency, how does it create suffice to enable a sovereign to create a new sufficient consensus among the public about fiat currency.5 the currency's future value for people to use To sum up: A private issuer of inside it as money? money has more credibility than a sovereign issuer of inside money, because people Creating Demand generally understand that a sovereign has for Fiat Money less to lose than a private bank by reneging on a convertibility commitment. A default­ Let us consider first how the State can ing bank forfeits its assets to its creditors make its currency more valuable than the while a devaluing sovereign forfeits only its FREE BANKING AND ECONOMIC DEVELOPMENT 465 reputation. On the other hand, a private is alike, so that there is a given demand for bank cannot issue outside money, while a money, which any instrument so designated sovereign can. But a sovereign's capacity to can satisfy. Second, they assume that total issue a fiat currency without first making it output is independent of the amount of convertible into some other money or asset money. But not all moneys are equal and an may be quite limited. Even if requiring its inferior money in which people have no currency to be used in paying taxes gives the confidence cannot perform the services that currency a positive value, the currency may a superior money could. Moreover, money still not be an acceptable money. Unless the serves as working capital for households currency, upon introduction, is made con­ and businesses adding to their productivity, vertible into an accepted medium of ex­ while monetary stability provides a kind of change, the consensus about its future value intangible infrastructural capital that adds to required for a fiat currency to serve as the productivity of all economic agents in­ money may be lacking. dependent ofthe amount ofmoney they hold My argument thus far has two basic im­ individually. Policies aimed at achieving plications for less developed and former monetary stability in developing countries Eastern Bloc countries. First, such coun­ by restricting the quantity of the available tries cannot create stable monetary systems fiat money treat a minor symptom but ignore based on inconvertible fiat currencies, be­ the fundamental problem, which is that cause their political regimes lack the credi­ distrust of the available money makes it bility to impose stable monetary institutions useless and deprives the economy of des­ by fiat. Lacking a widely accepted money perately needed monetary services. about whose future value expectations are Thus, the second implication is that in secure, such regimes cannot create an ac­ such circumstances the only feasible way to ceptable money out ofthin air, because they create a consensus about the future value of cannot impose a consensus about the future a currency is to make it convertible into value of a fiat currency. another money, e.g., the dollar, about Creating a new fiat currency inevitably whose future value expectations are secure. creates a hyperinflationary environment, But governmental commitments to establish because with no public confidence in the and maintain convertibility, as the recent future value ofthe currency, the public will Mexican fiasco has shown yet again, are be willing to hold very little ofit. This does obviously not credible, because a sovereign not mean that the demand for money ofany that defaults on such a commitment faces no kind is small. The demand for a stable effective sanction. Devaluations are a dime money in which people had confidence a dozen. would be much greater than the demand for Nevertheless, given sufficient reserves, a new fiat money. An attempt to force more and given some institutional constraints on than this small amount into circulation, say, money creation and on government borrow­ to finance the government deficit, causes ing, governments can maintain a fixed ex­ rapid inflation. And the inevitable attempt to change rate for a period of time. With overreach the limits of that revenue source sufficient resolve, they may do so indefi­ by printing even more money triggers a nitely. However, such pegs are extremely vicious inflationary cycle that causes a com­ fragile. Once an economic orpolitical shock plete monetary breakdown. occurs, the expectation of a future devalu­ ation becomes almost irresistible even for a All Moneys Are Not Equal developed country. One way a government could increase Conventional monetary models make two confidence in its commitment to maintain unwarranted assumptions that lead to disas­ convertibility is to create a currency board trously misguided policies for developing whose sole function would be to issue do­ countries. First, they assume that all money mestic currency in exchange for an equiva- 466 THE FREEMAN • JULY 1995 lent amount of some foreign currency in rive more tax revenue from the profits ofthe terms ofwhich the domestic currency would competitive banks than they could have by be defined. Such a system, if maintained, issuing fiat currencies and seeking to exploit converts the domestic currency into a de­ their monopolistic control over those cur­ nomination ofthe foreign currency in terms rencies. But even this gain would be of which it is defined. However, even a dwarfed by the general increase in tax rev­ currency board cannot prevent a govern­ enue that would result from an economic ment from devaluing if that is what the boom triggered by the provision of sound government decides to do. and stable money by a system of free com­ It is now clear why free banking is so well petitive banking. 0 suited for less-developed and former East­ ern Bloc countries. By making the commit­ 1. Yet, as I pointed out in my book, continuing financial ment to maintain convertibility one which innovation and technological progress toward a cashless econ­ holders of money can enforce through legal omy will, like it or not, gradually lead us over the long term at least part of the way toward free banking even with no means against private banks instead of one deliberate redesign of our basic monetary institutions. The that can be abrogated by the sovereign at same point has been emphasized by Sir Samuel Britten in two will, free banking avoids the barrier that recent columns in the Financial Times, June 9, 1994 and June 16, 1994. sovereign irresponsibility places in the way 2. A money can survive even if there is some expected of creating monetary confidence.6 depreciation in its value, but the more depreciation is expected the less useful and the' less acceptable money becomes. Under free banking, private banks would Because of the positive feedback effects between your will­ be allowed to issue currency (banknotes) ingness to accept money and my willingness to accept money (now referred to as a network externality), monetary collapse and create deposits denominated in units of can come very suddenly in response to a seemingly small their own choosing. Thus, if the public change in expected depreciation. 3. The legal restrictions requiring U.S. banks to hold wished to use dollars, free banks would be reserves ofcurrency orotherwise restricting their behavior are, willing to. create money denominated in for purposes ofthis discussion, irrelevant. What matters is that in creating deposits, banks are offering an IOU that they are dollars. However, since there would be legal contractually obligated to redeem in terms of an asset (U.S. problems in issuing banknotes denominated currency) whose supply or value they cannot control. Ifbanks were legally allowed, as they once were and as they would be in dollars, free banks would instead define under free banking, to create banknotes circulating from hand new denominations (say, the crown) in to hand as currency, the legal status of banknotes could be similarly characterized, except that the bank's obligation to terms of dollars (one crown equals one redeem would be to the bearer of the banknote not to the dollar), so that prices could be quoted in­ original holder of the deposit. 4. I have explained this point more fully in my article, "The terchangeably in either dollars or crowns. Real Bills Doctrine in the Light ofthe Law ofReftux," History Because it would allow private banks to ofPolitical Economy, Winter 1992, pp. 885-86. 5. On the role of prior convertibility in establishing a fiat supply the hand-to-hand currency needs of currency, see G. Selgin, "On Ensuring the Acceptability of a the public, free banking would be preferable New Fiat Money," Journal of Money, Credit and Banking, November 1994, pp. 808-26. to simple dollarization which would require 6. The government might still profit from devaluation by a country to import the dollars required for reducing the real value of debt denominated in terms of the domestic currency, but it is not clear that the government so hand-to-hand circulation by means of a circumstanced would have anything to gain by denominating costly export surplus. debt in terms of its domestic currency rather than the foreign standard currency since denominating in terms of the foreign By setting an appropriate tax rate on bank standard currency would enable it to borrow at a reduced profits, governments would, in the end, de- interest rate. THEFREEMAN IDEAS ON LIBERTY

Thomas Jefferson's Sophisticated, Radical Vision of Liberty

by Jim Powell

hen Virginians reflect on the Ameri­ retary ofState, Vice President and President W can Revolution, they often like to of the United States. describe George Washington as its sword, With his gifted pen and meticulous script, Patrick Henry as its tongue, and Thomas Jefferson drafted more reports, resolutions, Jefferson as its pen. legislation, and related official documents Jefferson expressed a sophisticated, rad­ than any other Founding Father. Above all, ical vision of liberty with awesome grace Jefferson wrote letters, probably more than and eloquence. He affirmed that all people his illustrious contemporaries, and a larger are entitled to liberty, regardless what laws number of these letters survive-some might say. If laws don't protect liberty, he 18,000. He corresponded with many leading declared, then the laws are illegitimate, and lights of liberty, including Thomas Paine, people may rebel. While Jefferson didn't John Adams, Benjamin Franklin, Patrick originate this idea, he put it in a way that set Henry, Marquis de Lafayette, James Mad­ afire the imagination of people around the ison, George Mason, Jean-Baptiste Say, world. Moreover, he developed a doctrine Madame de Stael, and George Washington. for strictly limiting the power of govern­ He had a reserved manner, even with his ment, the most dangerous threat to liberty children, but he was a steadfast friend. His everywhere. friendship with James Madison endured for Jefferson was among the most learned a half-century. Jefferson's tact enabled him men of his time. He understood historic to maintain relationships with prickly-pear struggles for liberty. He drew on his prac­ patriots like Thomas Paine and John Adams. tical experience serving as a representative In an affectionate letter, Adams commended in the Virginia House of Burgesses, the him for''friendly warmth that is natural and Virginia Convention, Continental Congress habitual to you." and Confederation Congress, and as Gov­ Jefferson was an instantly recognizable ernor of Virginia, Minister to France, Sec- Founding Father. He stood about six feet two inches tall, was thin, had reddish hair, Mr. Powell is editor ofLaissez-Faire Books and hazel eyes, and a freckled complexion. As a Senior Fellow at the Cato Institute. He has writtenforThe New York Times, The Wall Street young man, he was a snappy dresser, but in Journal, Barron's, American Heritage, and more later years he neglected his appearance. His than three dozen other publications. hair turned gray and flopped around his 467 468 THE FREEMAN • JULY 1995 head. When President, he reportedly Some historians revived Federalist charges greeted morning visitors in worn slippers that Jefferson fathered children with his and a worn coat. attractive young slave Sally Hemings. And Jefferson's intellectual legacy has been of course, many historians expressed dis­ hotly contested. For four decades after he gust that Jefferson owned slaves, bred left the White House, his ideas dominated slaves, gave away slaves as wedding pre­ U.S. government policy, and he was re­ sents and never liberated any slaves-he vered as the "Sage ofMonticello. "Thenthe reportedly owned 180 slaves when he wrote Civil War changed everything. Some the Declaration of Independence and had 620,000 people died amidst that struggle to 260 slaves when he died. Historian Page preserve the Union, turning public opinion Smith claimed that because Jefferson didn't against Jefferson who had defended the right always live up to his expressed ideals, he ofsecession and independence. He fell even was a fraud, and his ideals were no good. further out offavor during the "Progressive Though Jefferson had personal fail­ Era" when reformers imagined that every ings-in the case of slavery, a monstrous problem could be fixed by giving the federal one-they don't invalidate the philosophy government more power. President Theo­ of liberty he championed, any more than dore Roosevelt scorned Jefferson as a Einstein's personal failings are evidence "scholarly, timid, and shifting doctrinaire." against his theory of relativity. Moreover, Hamilton, apostle of government power, everyone of Jefferson's adversaries, past became the most revered Founder. and present, had personal failings, which The bicentennial of Jefferson's birth, means that if ideas are to be dismissed 1943, prompted many Americans to think because of an author's failings, Jefferson about his life, and his reputation experi­ and his adversaries would cancel each other enced a comeback. It was marked by con­ out. When historians finish dumping on struction ofthe Jefferson Memorial in Wash­ Jefferson, they still won't have cleared the ington, D.C., emblazoned with his stirring way for Karl Marx or whomever they ad­ oath: "I have sworn upon the altar of God mire. Jefferson's accomplishments and phi­ eternal hostility against every form of tyr­ losophy of liberty must be recognized for anny over the mind of man." As historian their monumental importance. Merrill D. Peterson explained the come­ back: "The man glorified in the monument Early Life had transcended politics to become the hero of civilization. He had come to stand for Thomas Jefferson was born April 13, ideals ofbeauty, science, learning, and con­ 1743, at a plantation named Shadwell, along duct, for a way of life enriched by the the Rivanna River. He was the third child of heritage of the ages yet distinctly American Peter Jefferson, who seems to have been a in outline. The range ofhis appeal, if not its self-educated, enterprising man-surveyor, intensity, increased with the disclosure of plantation operator, judge, and representa­ his varied and ubiquitous genius." tive in the Virginia House ofBurgesses. His Since about 1960, Jefferson has again mother, Jane Randolph, brought aristocratic come under attack. Constitutional historian. blood from a prosperous Virginia family. Leonard Levy, for instance, cited episodes While Thomas expressed admiration for his when Jefferson suppressed civil liberties, father, he hardly evertalked about his mother. especially during his terms as Virginia Gov­ Jefferson was tutored by Anglican minis­ ernor and U.S. President. Historian J.G.A. ters in Latin, Greek, science, and natural Pocock portrayed Jefferson as a backward­ history. For two years, he attended William looking country aristocrat who feared cities and Mary, America's second-oldest college and commerce, out of touch with the mod­ (after Harvard), located in Williamsburg. ern world. Historian Bernard Bailyn called Then he began studying English common Jefferson an unthinking "stereotype." law and opened a successful law practice. THOMAS JEFFERSON'S SOPHISTICATED, RADICAL VISION OF LIBERTY 469

Jefferson loved books. Among the titles that would influence his understanding of liberty: John Locke's Two Treatises on Government, Adam Ferguson's An Essay on the History ofCivil Society, and Baron de Montesquieu's complete works. His library would eventually exceed 6,000 volumes. Jefferson was in the thick of things polit­ ically because Williamsburg was the capital of Virginia, the largest and richest colony. His political career began in December 1768 when he was elected to the Virginia House of Burgesses. The hot issue was Britain's persistent effort to defray its war debts by taxing colonists.. Jefferson helped form a committee ofcorrespondence for coordinat­ ing tax resistance. In 1774, Jefferson wrote his first published work, a 23-page pamphlet called A Sum­ mary View ofthe Rights ofBritish America. It was a legal brief which boldly declared that Parliament didn't have the right to rule the colonies. The work established Jefferson as a man who had a way with words. By March 1775, Jefferson was named a Thomas Jefferson delegate to the Second Continental Con­ (1743-1826) gress in Philadelphia. He met people he had probably scratched away with a goose quill heard much about, especially John Adams, pen, a writing implement which is quite Samuel Adams, and Benjamin Franklin. difficult to use. By habit, he did most of his After meeting the Virginian, John Adams writing between about 6:00 PM and mid­ remarked: "Writings of his were handed night. The Declaration took him 17 days. about, remarkable for their peculiar felicity Like A Summary View of the Rights of of expression. . .. [Jefferson] was so British America, the Declaration was mostly prompt, frank, explicit and decisive upon a legal brief listing a succession of com­ committees and in conversation ... that he plaints against England-revolution wasn't soon seized upon my heart." to be undertaken lightly. In the Declaration, On June 7, 1776, Richard Henry Lee however, Jefferson directed his case against urged the Continental Congress to adopt George III rather than Parliament, and he his resolution for independence. Debate provided more of a philosophical justifica­ was scheduled for July 1st, while Jefferson, tion for the Revolution. Franklin, John Adams, Roger Sherman, and With just 111 words, he expressed ideas Robert R. Livingston were assigned to pre­ which would inspire people everywhere: pare a statement announcing and justifying "We hold these truths to be self-evident: independence. that all men are created equal; that they are Thirty-three-year-old Jefferson drafted endowed by their Creator with certain in­ the Declaration of Independence on the alienable rights; that among these are life, second floor ofa Philadelphia home belong­ liberty and the pursuit of happiness; that to ing to bricklayer Jacob Graff, where he secure these rights, governments are insti­ rented several rooms. They were at Market tuted among men, deriving theirjustpowers and Seventh streets. Jefferson wrote in from the consent of the governed; that an armchair pulled up to a dining table. He whenever any form ofgovernment becomes 470 THE FREEMAN • JULY 1995 destructive ofthese ends, it is the right ofthe dured shocks at home. He and his wife people to alter or abolish it, and to institute Martha had three children die in infancy. On new government, laying its foundation on September 6, 1782, Martha died at 33­ such principles, and organizing its powers in complications from childbirth. They had such form, as to them shall seem most likely been married 10 years. Deeply depressed, to effect their safety and happiness." he stayed in his room for three weeks. Then, This was radical stuff. It was radical for for several more weeks, he spent nearly Jefferson's day, as subsequent struggles every day alone, riding his horse through the with Federalists made clear. It was too woods around Monticello. It was fellow radical for Abraham Lincoln who forcibly Virginian James Madison who coaxed Jef­ resisted the secession of Southern states. ferson back into public life. Today, it remains a radical creed, since few Jefferson went on to do much more for Americans talk much about the right of liberty during his phenomenal career. He armed rebellion against government. represented American interests in Paris As Jefferson later explained his aims: "to while the Constitutional Convention con­ place before mankind the common sense of ducted its epic debates, but through corre­ the subject, in terms so plain and firm as to spondence he helped convince James Mad­ command their assent, and to justify our­ ison, architect of the Constitution, to selves in the independent stand we are support adoption of a bill of rights. As compelled to take. Neither aiming at origi­ Secretary of State in George Washington's nality of principle or sentiment, nor yet cabinet, Jefferson was horrified at Alex­ copied from any particular and previous ander Hamilton's scheming to subvert the writing, it was intended to be an expression Constitution, and expand federal power. of the American mind, and to give to that This convinced Jefferson that he must seek expression the proper tone and spirit called the Presidency. He won in 1800, cut taxes, for by the occasion." cut spending, and paid off a third of the All colonial delegates except those from national debt. When Spain blocked access New York, who initially abstained, voted to the Mississippi and ceded it to Napoleon, for Lee's independence resolution on July then conquering Europe, Jefferson moved 2nd. Then came a three-day debate on to purchase the Louisiana territory, even Jefferson's draft of the Declaration. Con­ though he couldn't defend the policy on gress voted to cut about a quarter ofthe text constitutional grounds. Unfortunately, his and insisted on many minor changes. De­ presidency closed on a sour note-frus­ ferring to delegates from Georgia and South trated by British seizures of American sail­ Carolina, and perhaps delegates from some ors and goods, he declared a trade embargo Northern colonies that had engaged in that backfired. the slave trade, Congress cut Jefferson's After his second term, Jefferson retired to extended attack on George III for not out­ Monticello, his beloved mountaintop man­ lawing the slave trade. sion near Charlottesville, Virginia. Here he Congress approved the Declaration of planned the University of Virginia, played Independence on July 4th. On July 19th, 56 with his 13 grandchildren, struggled with his men officially signed what was to become money-losing properties, and wrote many the most important document in American luminous letters. history. Jefferson explained his exhilarating vision Jefferson served as Revolutionary War ofliberty, perhaps his most precious legacy Governor of Virginia, raising money and to the world. He insisted that liberty is cobbling together defenses against the Brit­ impossible without secure private property: ish. Moreover, thanks to his efforts, Virginia "aright to property is founded in our natural became the first state to achieve -complete wants, in the means with which we are separation of church and state. endowed to satisfy these wants, and the Amidst these public crises, Jefferson en- right to what we acquire by those means THOMAS JEFFERSON'S SOPHISTICATED, RADICAL VISION OF LIBERTY 471 without violating the similiar rights ofother ofJefferson's Virginiafriends visited Adams sensible beings...." and heard him declare: "I always loved How gracefully he rejected envious ap­ Jefferson and still love him." Word got back peals to seize wealth: "To take from one, to Jefferson who was thrilled. because it is thought his own industry and Adams ended up writing the first letter on that of his fathers had acquired too much in January 1, 1812, and Jefferson replied: "I order to spare to others who, or whose now salute you with unchanged affections fathers have not exercised equal industry and respect." Soon correspondence was and skill, is to violate arbitrarily the princi­ flowing between Quincy and Monticello. ple of association, the guarantee to every­ The two men talked about their health, one a free exercise of his industry and the books, history, and current affairs. They fruits acquired by it." touched on past political disagreements, Jefferson urged Americans to pursue Adams' persistent pessimism and Jeffer­ peace through free trade. "It should be our son's enduring optimism. Above all, they endeavor," he wrote, "to cultivate the talked about the American Revolution peace and friendship of every nation ... which both men were immensely proud of. Our interest will be to throw open the doors "Crippled wrists and fingers make writing ofcommerce, and to knock off all its shack­ slow and laborious," Jefferson confided les...." in October 1823. "But, while writing to you, Personally, the most heartening experi­ I lose the sense of these things, in the ence of Jefferson's last years was the rec­ recollection of ancient times, when youth onciliation with John Adams. Itwas the idea and health made happiness out of every of Benjamin Rush, a Philadelphia physician thing. " and fellow signer of the Declaration of Before Jefferson slipped into a coma on Independence. In January 1811, Dr. Rush July 3, 1826, he asked: "Is it the Fourth?" wrote Jefferson, reminiscing about Revolu­ He died on the Fourth, about 12:20 PM, a tionary days and Adams' contributions. Al­ half-century after the glorious Declaration. though Jefferson and Adams became bitter Meanwhile, in Quincy, Massachusetts, rivals for the presidency, Adams had later some 500 miles away, John Adams was defended Jefferson against attacks from fa­ fading, too. Around noon on the Fourth, natical Federalists. Jefferson, almost 69, some six hours before he died, he managed told Dr. Rush that while he was wary ofthe a few words: ''Thomas Jefferson survives. " suspicious and envious Adams, then 76, he Indeed he does, in the hearts and minds recognized what Adams had done for Amer­ of millions everywhere who cherish ican liberty. Not long afterwards, a couple liberty. D THEFREEMAN are outstanding. Hanks adds another finely IDEAS ON LIBERlY crafted petformance to his resume. The film's narrative structure is tight, and strikes the right balance between serious drama and light comedy. Indeed it is truly an excellent film, in the sense that it tells a story well and Forrest Gump: conveys a message. But the values por­ trayed, like a box of chocolates, are too sweet and not entirely healthy. A Subversive This film is subversive. It doesn't subvert the Constitution of the United States, but rather it is subversive of the human spirit. Movie This claim will come as a spoilsport voice­ in-the-wilderness to the many who are trum­ peting the film as a triumph of the human spirit. Forrest Gump is unambiguously anti­ by Aeon J. Skoble intellectual, and subversive in its power to make one enjoy it anyway. The naive innocent who prospers in a wicked world is an old standard, and a very Hollywood movie is like a box of seductive device. Even Wagner, after an­ A chocolates: it tastes good, but it's nouncing the coming ofthe superman, found really bad for you. Ofcourse, it isn't bad to refuge in this archetype in Parsifal. Here eat a small amount of chocolates; likewise, Hanks portrays a man with an I.Q. of75 who not all Hollywood movies are bad for you. becomes a national hero and a millionaire But after seeing Forrest Gump, the charm­ through... what? The purity of his spirit ing aphorism that was central to the film and the grace ofGod, or something like that. (''My momma says that life is like a box of The message is that intelligence, indeed chocolates'') metamorphosed in my mind ability generally, are unimportant.Provi­ in this fashion. I caught myself enjoying dence will watch out for those without gifts, the film while realizing that I was enjoying therefore everyone is gifted. Some of something unhealthy. As time passes since Gump's achievements are due to his being the film's release, it not only grows in a nice guy. He wins the Medal ofHonor for popularity, but the associated merchandis­ rescuing his company because he is unwill­ ing increases. One can buy collections of ing to abandon his friend. But he becomes a Gump sayings, tins of "BubbaGump great runner by divine fiat. His shrimp boat Shrimp," Gump t-shirts, and so on. As the survives a hurricane. He becomes a cham­ film's appeal grows, so does the need to pion ping-pong player simply by not taking examine its message. The movie won six his eye off the ball. It's not quite like Being Academy Awards (including Best Picture and There, to which this film is frequently com­ Best Actor for Tom Hanks)-so the film is pared. The character Chance in Being There clearly an influential social and cultural item. receives his fortunes through the misinter­ Before criticizing the film's vices, I first pretations of his idiocy by a sick society, praise its virtues. It is very well executed. hence the satire. Gump is satire-free. But The by-now-well-known special effects that the film makes us ask, what's the point of make Tom Hanks appear in old newsreel having talents if talent is unimportant? footage and play championship ping-pong, The film not only portrays talent as un­ and that make Gary Sinise's legs disappear, important, but literally as an impediment to the good life. Consider the intelligent and Dr. Skoble teaches philosophy at the University intellectually curious Jenny. She is an inde­ ofCentral Arkansas. pendent thinker who questions authority 472 473 and social standards, and who is experimen­ In real life, people must earn their achieve­ tal and adventuresome. Jenny is punished ments. Of course, some steal and some in­ with a series of abusive relationships; she herit, but in general, people have to achieve finally dies of AIDS. I've rarely seen a through their efforts. At any rate, that would characterization so hostile to inquiry. It is be a better lesson to teach, I submit, than that revealed that the roots of her eagerness to ifyoujustblunder about, God orfate will take question authority and think independently care ofeverything. No ability is necessary to are having a dysfunctional family. So an evil make a fortune in the shrimp business-just force drives her to independence ofthought, make sure that your shrimp boat is the only and the results of the consequent life are one left intact after a hurricane. No ability is drugs, abusive boyfriends, and AIDS. necessary to be a football hero-just run until The contrast with Gump is clear enough. they tell you to stop running. His mother loves him. He always does as Of course, all these bits in the film are he's told, and prospers as a result. In re­ funny and charming. I laughed and smiled on sponse to the command, "just run," he is cue with everyone else. Hanks is always able to score touchdowns. This trait also likable, and Gump especially so, being the makes him a natural for military service. To sweet innocent that he is. But I am disturbed be sure that we do not interpret all this as that a film could attain such popularity and anti-Christian, Jenny, despite her sins, is appeal by advancing the view that ability is forgiven and rewarded in the afterlife in the not an important component ofbusiness suc­ form of a perfect child conceived with For­ cess and that critical thinking is not essential rest. When Lieutenant Dan loses his legs, he to achieve prosperity. Despite Gump being a rails against God, but when he makes his successful businessman, the film thereby con­ peace with God, he walks again. veys a tacit anti-commerce message. Gump's mother, played well by Sally The anti-commerce message derives from Field, keeps admonishing him that he's no the more general anti-ability theme. Ifintel­ different from everyone else. The film insis­ ligence and analytic ability are not portrayed tently advances the idea that there is "noth­ in the most popular film of the year as ing wrong with being stupid." Honestly, important components of the good life, an could there be a more dangerous message to intellectually lazy generation will tacitly promulgate? It should go without saying that take this as support for their disengaged people should not be cruel to those with less condition. The majority ofteens cannotlocate ability, and we may indeed wish to care for the Pacific Ocean on a world map, orthe Civil those incapable of taking care of them­ War by half-century. The fastest growing selves. But is there really nothing wrong trend in criminal defense is diminished re­ with being less able, less smart? This is not sponsibility. Books are out, MTV is in. Crit­ about self-esteem for the disabled, it is ical reasoning is on the decline not only as a actually about radical leveling, a devaluation skill but as a desideratum. And now comes of ability. How is Gump no different from Forrest Gump to reinforce the idea that we are anyone else? This claim seems innocent not responsible for our destinies, that intelli­ enough, and might follow from the· idea that gence is not important, that independent those ofless ability are still humans deserving thought will be punished. That's dangerous. respect and dignity. But of course he is Forrest Gump is not a bad film, but it is different-he is a great runner, a football star, subversive. The film is subversive because a war hero, a millionaire. Most ofus are none it is so well made and enjoyable. I enjoyed of those things. And he has a 75 I.Q., which it even as I was aware of the unhealthiness most of don't have either. So he is different ofits message. Ifanyone tells me that it was from most people. By downplaying that, the a good film, or that he or she enjoyed it, I critique of ability is made more subtle. won't disagree. Butif anyone tells me that There's no secret to excelling, the film it was profound or that it changed his life, I tells us,just do what you're supposed to do. shall weep. D Economics on Trial by Mark Skousen

Sorry, Charley, But That's Not Capitalism!

"All economic transactions involve a win­ new tide, Cliches ofPolitics (Foundation for lose proposition.. Every gain involves a Economic Education, 1994). Unfortunately, loss." some cliches die slowly. -Charley Reese, Orlando Sentinel Let me respond to each one of these May 22,1994 commonly held criticisms ofthe free market. ord Acton once said, "There is no error Voluntary Exchange L so monstrous that it fails to find defend­ Is Win-Win ers among the ablest men." That was my reaction to a series of articles recently First, is the free market similar to a written by national columnist Charley sporting event, where one team wins and the Reese. Over the years, Reese has made a other loses? Not at all. In every voluntary reputation as a strong defender ofindividual transaction, both the buyer and seller gain. rights against a growing Leviathan, the fed­ Here's a simple proof: Suppose I sell an eral government. So it was all the more apple to a student for $1. The student buys perplexing when I read some of his claims the apple because he would rather have the about free-market capitalism: apple than the dollar bill. Thus, by purchas­ "Two people can't eat the same bean. ing the apple, he improves his situation. On That's the essence of economics." the other hand, I sell the apple because I'd "All economic transactions involve a rather have the dollar bill than the apple. I win-lose proposition." too am better off. "The historically visible trend [in capital­ In Das Capital, Karl Marx popularized ist societies] is always for the rich to get the view that all exchanges under free­ richer and the poor to get poorer." enterprise capitalism involved an equality of "Only the youngest, the strongest can put values and therefore one person's gain must stock in pure capitalism." be another person's loss. But now we see Statements like these were demolished that just the opposite is true: All transac­ years ago in Leonard Read's classic little tions in a voluntary exchange involve an book, Cliches of Socialism, which was re­ inequality of values. In fact, without an cently updated by Mark Spangler under the inequality ofvalues, no voluntary exchange would ever occur. Dr. Skousen is an economist at Rollins College, Because of an inequality of values, both Winter Park, Florida 32798, and editor ofFore­ the buyer and seller gain in every transac­ casts & Strategies, one ofthe largest investment newsletters in the country. For more information tion. The only exception to this law is when about his newsletter and books, contact Phillips fraud or deception is involved. When that Publishing Inc. at (800) 777-5005. happens, one party gains at the other's 474 475 expense. But in a voluntary exchange, richer and the poor get richer too. Histori­ where full and honest information is re­ cally, citizens of capitalistic nations have vealed, everyone benefits. enjoyed higher real wages and steady ad­ vances in the quantity, quality and variety of The Essence of Capitalism goods and services. Only government, the politics of coercion, causes a decline in the Reese says that the essence ofcapitalism standard of living. is contained in the statement, "Two people Moreover, the free market does not only can't eat the same bean." Not so fast, benefit the young and the strong, as Charley Charley. Afree market is notjustan "either­ Reese suggests, but the weak, the poor, and or" proposition. Capitalism is also a highly the discriminated. Contrary to popular be­ cooperative system. Ifthere are two people lief, capitalism is not a dog-eat-dog jungle and only one bean, the free market provides where only the fittest surNive. As the clas­ a better alternative: plant the bean and sical economist David Ricardo demon­ harvest enough beans to feed both people! strated, the market is characterized by com­ That's the true essence of capitalism. parative advantage, not just absolute Granted, natural resources are limited. advantage in the division of labor. There­ But the beauty offree enterprise is its abil­ fore, opportunities abound for people of all ity to multiply these resources into goods abilities, talents, religions and races. The and services that people can use to increase less fortunate may not earn a high wage, but their standard of living. What really mat­ they can and do benefit from the blessings of ters is not so much the amount ofresources a technologically advanced capitalistic so­ in their natural state but the supply of ciety. Today practically everyone, rich and economically useable natural resources, poor, enjoys the benefits ofelectrical power, which are limited only to the extent of our the telephone, the automobile, television know-how and physical ability to transform and radio, books and newspapers, and a these inputs into useable wealth. In that myriad other goods and services. Such ev­ sense, there is virtually no limit to further eryday products were available only to the advances in our standard of living. In real­ wealthy less than a century ago. ity, nature isn't scarce, only the productive A free society is by no means peIfect. capacity of labor to change nature into real People make mistakes, employers some­ wealth is. times take advantage ofworkers, sometimes workers shortchange their employers, and Capitalism Can Improve salesmen may deceive the public. But the Everyone's Standard of Living strength of the market is that bad business, deceptive practices, and shoddy merchan­ Finally, Charley Reese is wrong in sug­ dise are constantly being overwhelmed by gesting that capitalism breeds inequality, good business, accurate information, and that the rich get richer and the poor get quality products. On net balance, there is no poorer. Under the free market, the rich get substitute for the free-enterprise system. D 476

boost in the employment-killing minimum wage. Only someone enamored ofthe shop­ BOOKS worn assertion that, "government should guarantee freedom from want," could con­ Cliches of Politics tend that ceasing to subsidize out-of-wed­ lock births is somehow punishing people, edited by Mark Spangler "justbecause they happen to be poor." Paul The Foundation for Economic Education. Poirot's critique ofthat cliche in these pages 1994 • 314 pages. $15.95 paperback is shaped by the insight that subsidizing failure breeds even more failure. Reviewed by Robert Batemarco Characteristic of the FEE approach to economic issues is its willingness to go here's much truth in the old saying that beyond mere cost-benefit considerations to T it's not so much what people don'tknow focus as well on the morality of the actions that hurts them, as what they know thatjust imposed. Entry after entry in this book isn't so. Indeed, when things we know that serves as evidence of this. Thus, Cecil aren't so are used to shape public policy, it Bohannon's refutation of the cliche that hurts not only those who harbor the misin­ "food is a right" rests not only on the formation, but virtually everyone falling recognition that government attempts to under the jurisdiction of such misguided guarantee a right to food invariably destroy policy. The Foundation for Economic Ed­ the incentives to produce food, but that they ucation counters such superficially plausible do so at the expense of the rights of food but fundamentally wrong-headed ideas in producers. Similarly, Robert Higgs Cliches ofPolitics. Edited by Mark Span­ counters the claim that, "in a national emer­ gler, it lists and refutes 83 economic fallacies gency, government must control the econ­ which have proven to be leech-like both in omy," by alluding to the inevitable distor­ their tenacious hold on the public mind and tions created by such control, but he their proclivity to drain the life-blood ofour clinches his argument by declaring that, economic prosperity. While most of the 83 "even if the government were more capa­ appear here for the first time, 27 "classic ble, it would not be justified in using its cliches" originally appeared in FEE's 1970 coercive powers for any and all purposes." volume Cliches ofSocialism. This volume leaves no doubt, as ifthere ever Just how much of a stronghold these were any, which side FEE is on in what nuggets of misinformation have attained Murray Rothbard calls "the eternal struggle was evident in President Clinton's 1995 between morality and immorality, between State ofthe Union Address, which included liberty and coercion." either explicitly or implicitly no fewer than Cliches of Politics challenges the statist six of the cliches debunked in these pages. conventional wisdom on every front. Had the President read, understood, and Whether the false notion under consider­ taken to heart Tibor Machan's expose of ation involves the nature ofrights or foreign national service as, "a ploy, once again, to trade, regulatory policy or income inequal­ extract unpaid work from unsuspecting and ity, health care or political philosophy, it gullible folks, another type of involuntary is handled with dispatch. For the uniniti­ servitude," which is at best, "a wasteful ated, this book is a virtual crash course in way to give direction to human works" (p. FEE's freedom philosophy. For those al­ 289), he would not continue to regard it as ready well acquainted with these ideas, it the accomplishment of which he is most provides clear, concise, and quotable artic­ proud. Had he not swallowed hook, line, ulations of them. Anyone who learns the and sinker the cliche that, "the government lessons putforth in this book need neverfear must set standards for living and working entering the battle of ideas unarmed. conditions," he would not have proposed a Not only was Spangler judicious in his 477 selection of the most harmful and well­ absolute Power kills absolutely." Ofcourse, entrenched bromides to attack, but he has this problem is not new. Rummel estimates assembled a veritable "all star team" of that some 133 million people were murdered free-market thinkers past and present to over the first several thousand years of assist him in that effort. Among the most human life. China's emperors were partic­ prominent are FEE founder Leonard Read, ularly brutal, killing 33.5 million; the Mon­ current FEE president Hans Sennholz, gols ran a close second at 30 million. Henry Hazlitt, Murray Rothbard, John While the State long ago demonstrated its Hospers, Llewellyn Rockwell, Robert democidal nature, the political experiment Higgs, and Tibor Machan. I'll take them on has, unfortunately, taken a much deadlier my side any day. D turn this century. Indeed, the twentieth In addition to editing the book review section of century demonstrates the utterly disastrous The Freeman, Dr. Batemarco is a senior project results of what historian Paul Johnson calls manager for a marketing research firm in New the Age of Politics. Unique to this century York City and teaches economics at Marymount has been the marriage of sinful men, all­ College in Tarrytown, New York. powerful governments, and technological progress. As a result, 20 death states have Death By Government killed 170 million human beings. The greatest system of mass murder be­ by R.J. Rummel longs to the Soviet Union-the "Soviet Transaction. 1994 • 496 pages. $49.95 Gulag State," as Rummel refers to it. Some 62 million, "Old and young, healthy and Reviewed by Doug Bandow sick, men and women, even infants and the infirm, were killed in cold blood." What he line, "I'm from the government and makes this slaughter particularly mystifying T I'm here to help you," takes on new is the fact that most of these victims were, meaning after reading R.J. Rummel's dev­ as Rummel puts it, "guilty of ... nothing." astating Death By Government. This cen­ Anyone who has read Robert Conquest tury, estimates the University of Hawaii knows the details of Joseph Stalin's perse­ policial scientist, the State has killed almost cutions, but even Rummel's much shorter 170 million people. account provides more than enough infor­ The numbers are so horrifying, so unfath­ mation to turn anyone's stomach. There was omable, so unbelievable-it is tempting to genocide, such as the slaughter of the Don dismiss them as meaningless statistics. But Cossacks, Ukrainian peasants, and Esto­ consider: this century, politicians have nians. There were the mass purges of the killed, for matters of ideology and policy, Communist Party. And there were killings the equivalent of the entire population of to fulfill quotas. At least the other murders Russia. With the slaughter averaging fulfilled a horrific, perverse logic. But these? roughly 1.8 million people a year, in effect Explains Rummel: every resident of Houston or Philadelphia [M]urder and arrest quotas did not work well. has been buried year in and year out. Where to find the "enemies of the people" Rummel calls these murders" democide" they were to shoot was a particularly acute rather than "genocide," because the latter problem for the local NKVD, which had been focuses on the elimination ofspecific ethnic diligent in uncovering "plots." They had to groups, while the former includes mass resort to shooting those arrested for the most killings for any number ofother reasons. He minor civil crimes, those previously arrested readily acknowledges the difficulty in devel­ and released, and even mothers and wives who oping an accurate death toll, but no one has appeared at NKVD headquarters for informa­ done better: Rummel offers 72 pages of tion about their arrested loved ones. references. The basic problem, he explains, Who can doubt that this was, as Ronald is power. Writes Rummel: "Power kills; Reagan opined, an evil empire? 478 THE FREEMAN • JULY 1995

Then there are the Communist rulers of as a "Centi-Kilomurderer," responsible for China, Mao Zedong, Deng Xiaoping, and an estimated 816,000 deaths, primarily from company, who were long feted in the West. its World War II aerial campaign, which Their victims roll was modest only when exceeded anything attempted by Nazi Ger­ compared to that of the Soviet Union: 35 many. million. Given such a record, Rummel asks, Death By Government is a depressing, why was anyone surprised at the murder of unnerving book. For this very reason, it students and workers in Tiananmen square? should be read in history classes not just China's history is, in many ways, more across America, but around the world. The tragic than that of Russia. Rummel figures problem of power, as Rummel terms it, that various emperors killed 33.5 million remains with us today-just ask residents of people. Nearly a million died at the hands of Angola, Bosnia, Chechnya, Georgia, and warlords early this century. Chiang Kai­ Rwanda, among many, many other lands. shek's nationalists, backed so enthusiasti­ Only if we learn from the past can we ever cally by many Westerners, slaughtered ten hope to end state-sanctioned murder. The million, putting Chiang in fourth place be­ case for human liberty and limited govern­ hind Adolf Hitler in the pantheon of mega­ ment has never been made more effectively murderers. And then came the Communists. than by this fearsome book. D As revolutionaries, Mao Zedong's forces Mr. Bandow, a Freeman columnist, is a Senior killed millions under their control. Once in Fellow at the Cato Institute and the author of power throughout China, the new regime The Politics of Envy: Statism as Theology. liquidated millions more opponents. The "Great Leap Forward" resulted in a famine that left as many as 27 million dead from Beyond Politics starvation. Millions more were murdered by William C. Mitchell and during the Cultural Revolution. Almost as Randy T. Simmons inconceivable as this endless slaughter was The Independent Institute/Westview Press • the fact that so many Western leftists could 1994. 234 pages. $17.95 paperback, $49.50 have promoted so vile a system for so long. cloth Mass murderer number three was Hitler, along with his criminal gang ofanti-Semites, Reviewed by Gregory P. Pavlik misfits, misanthropes, and racists. Rummel numbers the Third Reich's victims at 21 ithin the last 30 or so years some million. Germany's killings were heavily W advocates of limited government weighted toward genocide-ofJews, Slavs, have begun promoting public choice eco­ and Gypsies, for instance, though few peo­ nomics. This small but increasingly influen­ ple escaped the Nazi jackboot. Hitler also tial school ofthought applies assumptions of deserves blame for igniting the worst war neo-classical economics about human be­ in history, with generous help from Stalin havior to public employees, elected or not. and others. Public choice economists insist that politi­ Rummel goes on to chronicle more mod­ cians and bureaucrats are motivated by est killers, like Japan, Cambodia, Turkey, rational self-interest, and the manifestations Vietnam, Poland, Yugoslavia, North Ko­ of that self-interest result in perverse and rea, and Mexico. What makes his analysis disastrous consequences for the public. particularly useful is its impartiality. His Many of their insights buttress earlier so­ book forces us to remember mass killing by ciological and political analyses of both the the supposed good guys in World War II. State and the political class, echoing the Even Great Britain and the U.S. come work of such theorists as Franz Oppenhei­ under criticism for their terror bombings of mer, Vilfredo Pareto, and Ludwig von Mises. civilian populations during the same con­ William Mitchell and Randy Simmons flict. Rummel goes so far as to list Britain have written an interesting and informative BOOKS 479 work on political interventionism in the onstrating as superior to the various economy from a public choice perspective. schemes involving the State. Occasionally The book, Beyond Politics, begins with a lost in the long discussions of the personal discussion of welfare economics, that interests of politicians and bureaucrats and branch ofthe dismal science that deals with, the economic consequences ofintervention­ among otherthings, issues ofmarket failure. ism is the fact that the most precious cost of Market failure refers to the divergence of growth of the State can be measured in real markets from the assumptions of per­ terms ofhuman liberty. The loss offreedom fect competition. may be one of the unseen costs for econo­ One of the most troubling of market mists, but it is the heaviest of burdens fpr failures in the eyes of the general public is civilization. monopoly. On this issue and others, the Beyond Politics is flawed by an over­ authors approach the" market failure" from reliance on equilibrium models to illustrate a public choice point of view, showing that points in the text. A free economy is dy­ the incentives of government officials are namic and constantly changing. Many ofthe structured in such a way as to exacerbate the authors' points could be made using eco­ very problems, real or imagined, that the nomic laws based on apodictic principles State is being used to solve. that do not presuppose static conditions in For example, politicians in a democracy the economy. But this caveat should not must seek popular re-election. The easiest preclude an appreciation of the devastating and most effective means ofstaying in office critique of statism, government interven­ is often the use ofpublic power to benefit an tion, and the pretensions of the political electorally powerful interest or constitu­ classes found in this book's pages. Beyond ency. Why then the absurd belief that pol­ Politics is a cogent defense ofthe economic iticians can be relied upon to eliminate system of a free society and a firm rebuttal monopolies? For one thing, a genuine mo­ to some ofits most vociferous critics among nopoly is impossible to maintain against the the economics profession. It deserves the forces of a competition in a free market attention of anyone interested in the great economic system. Politics is the only means economic controversies of our day. D of creating a sustainable monopoly through Mr. Pavlik is director of The Freeman Op-Ed artificial barriers to competition. More im­ program at The Foundation for Economic Edu­ portantly, it is in the interest ofpoliticians to cation. structure regulatory mechanisms that in­ hibit competition and lead to consolidation, since this creates a wealthy and grateful Investment Biker backer for the politician. by Jim Rogers In a similar fashion, Mitchell and Sim­ mons argue convincingly that market fail­ Random House. 1994 • 402 pages. $25.00 ures are often ill-defined and almost never warrant the degree ofcriticism they invoke. Reviewed by Richard A. Cooper To drive the point home, the authors show thatprivate solutions are invariably superior im Rogers autographed my copy of In­ to public solutions. In fact, most ofthe book Jvestment Biker with the words, "Life is deals with what the authors call "public short; Ride hard and far." Rogers closes his failure," the inability ofthe public sector to highly readable account of the round-the­ live up to the vision of an efficient and world motorcycle trip he and girlfriend benevolent government handling the flaws Tabitha Estabrook accomplished with more of the marketplace. words of wisdom: "More important, I've The book ends with a call for a return to also learned that if you've got a dream, you a free and unfettered economy, something have to try it; you must get it out of your which the authors have succeeded in dem- system. You will never get another chance. 480 THE FREEMAN • JULY 1995

If you want to change your life, do it." cies. The conflict between statism and en­ Motorcycles, markets, and musings make trepreneurial capitalism is one of Jim's key this book bothprovocative and entertaining. themes. Where statism reigns, decay in­ Viewers ofthe CNBC show Mutual Fund creases and opportunity decreases. Tied to Investor will recognize his blend of down­ that conflict is the burden ofwar frustrating home Alabama folksiness, savvy invest­ the achievements of peace. ment insights, and shrewdly biting public Jim observes that "Ireland is a victim of policy comments. Those viewers and other statism, which my dictionary defines as the readers will marvel at the observations of concentration of economic controls and· Jim riding about China, Russia, Africa, planning in the hands ofa highly centralized South America and elsewhere, as he records government, and which I further define as his impressions and predictions about eco­ the belief that the state is the mechanism nomic policies and investment prospects. best suited for solving most if not all of Often he saw how bad economic policies society's ills, be they health related, natural and wars had squandered great natural en­ disasters, poverty, job training, or injured dowments and the labor of the inhabitants. feelings. Statism is the great political disease Why does Jim Rogers want to see and of the twentieth century, with Communist, know the world? He hails from the small socialist, and many democratic nations in­ town of Demopolis, Alabama. His family's fected to a greater or lesser degree. When phone number was 5. Just 5. As he says, if the political history ofour century is written you are from somewhere that small you its greatest story will be how a hundred either stay there your whole life or you want variants of statism failed. "I would say this to get out and make your mark in the wider is the story that should be written, but I world. Despite the folksiness, Rogers is a expect that the story told will be how the well-educated and sophisticated man. From historians' preferred brand of statism was Yale he went to graduate school at Oxford not tried with enough rigor or was mishan­ with a summer stop on Wall Street along the dled. way. He was a partner in a hedge fund after Unlike economists, Rogers is not merely going to Wall Street full time. Jim left Wall interested in economic policy oranalysis but Street in 1980 with millions of dollars. in scouting out investment prospects. He is Jim and Tabitha's trip-intellectually and none too optimistic about the United States. geographically-began in Ireland. Let Jim Bright spots include Botswana. Botswana? tell this part: "Riding through this part of Yes, and he tells a great story about why Ireland was wonderful, great for motorcy­ he is optimistic about this small African cles, the roads curvy and small and convo­ country. luted, green and beautiful. All my life, from Investment Biker shows you a world my history courses at Yale to my work at through a unique pair ofeyes-badly main­ Oxford and lateron Wall Street, I've studied tained roads and sweeping natural vistas, geography, politics, economics, and history economies wrecked by statist mismanage­ intensely, believing they are interrelated, ment, and countries torn by renewed trib­ and I've used what I've learned to invest in alism. All this with a country boy's way with world markets. I was on the lookout for words and a Wall Streeter's eye for invest­ investment opportunities, for some coun­ ment opportunities. You can enjoy the ride try-and its investment market-about to with Jim Rogers, and think ofyour gasoline take off, where I could jump in and make savings. D five, ten, fifteen times what I put in." Unfortunately, Ireland could not meet Jim's tests. He worried over its instability Mr. Cooper is an export/import manager and but was most concerned about statist poli- freelance writer.